State regulators have agreed to changes that they report are likely to lead to a hike in local electric rates for customers of South Kentucky Rural Electric Cooperative. Typical monthly residential bill will increase by about $5.60, according to officials.

The Kentucky Public Service Commission (PSC) announced this week that it has accepted a settlement that permits East Kentucky Power Cooperative, Inc. (EKPC) to raise its wholesale rates in order to increase its annual revenue by $59.5 million, or about 7 percent.

When the increased wholesale rates are passed through to customers of the distribution cooperatives which purchase power from EKPC, they will increase typical monthly bills for residential customers by about $5.60, according to the agency's figures.

The generation and transmission cooperative agreed to the settlement, which was $15 million less than it had said it needed, after negotiating with the Office of Attorney General and the Kentucky Industrial Utility Customers, Inc.

EKPC applied to the state officials for the rate increase on Oct. 31, 2008. A public hearing on the proposed settlement was held March 27 on the negotiated settlement.

The new rates took effect April 1.

EKPC provides electricity to and is owned by 16 distribution cooperatives serving about 500,000 customers in 89 Kentucky counties. The PSC also issued orders approving the pass-through rates for 15 of the 16 distribution cooperatives, also effective April 1.

Because Grayson Rural Electric Cooperative Corp. has a retail rate adjustment case pending before the PSC, its pass-through rates will be adjusted separately.

The new rates take effect at the same time as EKPC is slated to begin producing power from its newest generating facility, a 280-megawatt unit at its Spurlock plant in Mason County. According to the agency, the increased rates are intended in part to pay for the new unit.

The PSC reports that in recent years, a shortage of generating capacity and unscheduled shutdowns at its generating facilities have forced EKPC to purchase large amounts of power from outside sources.

Because the costs of most outside power the cooperative was forced to is passed on to retail customers, the new unit at Spurlock is expected to result in cost savings for customers that will partly offset the rate increase, according to the PSC public statement.

Substantial penalties and environmental compliance costs imposed by the U.S. Environmental Protection Agency and higher interest expenses due to the need to borrow money to build new facilities, have left the utility in precarious financial condition.

The PSC in December 2008 directed EKPC to submit to a comprehensive management audit, saying that the utility's worsening financial problems raise questions about its continued viability. Selection of an independent consultant to conduct the audit is underway.

In May 2007, EKPC filed a "plan of remedy" intended to restore compliance with certain requirements of its loan agreement with the Rural Utilities Service (RUS), the federal agency which lends money to electric cooperatives at favorable interest rates. The plan anticipated applications for multiple rate increases over several years.

The settlement approved today represents the first of those planned increases, which was to be tied to the start of operations at the new unit at the Spurlock plant.

The settlement also includes changes to credits received by industrial customers served under rates that allow their service to be interrupted at times of high demand for power.

The order and other documents in the case are available on the PSC Web site, psc.ky.gov. The case number is 2008-00409.