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Power Price Puzzle

The electric energy in the wall outlet in your Kentucky kitchen is exactly the same as the power in kitchens in California and Kansas. Three identical coffee pots, plugged in and ready for breakfast in each state, cost exactly the same.

But the price of the electricity to operate the coffee pots is not the same everywhere. Kentucky’s electricity prices are usually among the lowest in the nation.

Same power, same coffee pot, different prices for the electricity. How does that happen?

The short answer is coal. In one kind of power plant, a fuel heats water to make steam to turn the turbines that produce electricity. About 90 percent of Kentucky’s electricity is produced using coal, one of the cheapest fuels available today.

But there’s more than one way to generate electricity, and each method has cheap parts and expensive parts. The power price puzzle includes many factors in addition to the source of the electricity.

Many pieces, big and little
Looking at the power industry as a whole, the U.S. Energy Information Administration says that different parts of the nation’s energy system play different roles in determining prices for electricity. Each year the agency publishes a summary. The most recent statistics available are for 2008.

Looking behind the price tag for each hour of electricity shows three key expense areas:

• Generating the electricity
(68 percent)

• Distributing the electricity
(24 percent)

• Transmitting the electricity
(8 percent)

These numbers are based on national averages.

But the nation’s power system is not a single business. Information about electricity prices and expenses comes from hundreds of different businesses within the industry. Some companies focus only on generating electricity, and sell that power to others who get it to the consumer. Other companies do two jobs, generating and transmitting electricity over long distances. Others focus simply on distributing power in local areas. Some companies combine generating, transmitting, and distributing electricity into one multi-purpose business.

Individual electric utility companies serve different size areas, too. A small utility may have customers in a single town, while medium-sized utilities may serve consumers in several counties. A giant company may serve millions of consumers in many states.

No matter the size, purpose, or location of a business within each section of the electric utility network, each has certain common expenses that influence the price it charges for its product and service. These include construction costs, maintenance costs, and employee wages.

These factors can mix together in so many ways there is no such thing as an average or typical electric utility.

Geography also plays a key role in the power price puzzle. An electric utility that can buy low-cost electricity from a nearby coal-based generating station might have very low expenses. Another electric utility in the same state might also be able to buy low-cost electricity from the same source, but spend a lot more money getting the power to its customers due to more hills and valleys in its service territory. That’s why power prices often vary from place to place within a single state.

Rules and rates
The unique and variable circumstances of each electric utility business already make figuring energy prices a complicated puzzle.

Add in the individual state laws and federal regulations that govern different parts of the industry, and the situation gets even more complex.

In Kentucky and many other states, a public service commission keeps watch over regulated utility companies’ business practices and the prices they set for electricity. On top of these local and state regulations, the federal government has its own set of rules for certain electric utilities.

Requirements in the Clean Air Act of 1970 to add new emissions control features to existing power plants, or build only certain kinds of new ones, affect electricity prices in each state. A recent ruling about the Environmental Protection Agency’s role in regulating power plant emissions has complicated the situation even more.

New energy laws being considered today could add even more parts to the energy price puzzle. Special rules about using renewable fuels to
generate electricity could make a big difference in the part that generation and transmission costs contribute to the price consumers pay.

In early May, electric cooperative leaders from around the nation gathered in Washington, D.C., to discuss today’s energy issues among themselves and with their congressional delegations.

Bill Corum, president and CEO of the Kentucky Association of Electric Cooperatives, says, “One of the big issues about renewable energy from wind or solar in Kentucky is that it’s not readily available here. Due to geography, the total amount received will not produce enough kilowatt-hours to make any significant difference to the reduction of fossil fuels. The supply of electricity from these two renewable resources would have to come from somewhere else. There will be a price to pay to get that electricity to Kentucky.”


Although Kentucky’s geography and weather patterns do not favor solar and wind energy, a third renewable resource, biomass, has potential for large-scale electricity generation. Using plant materials such as switchgrass or elephant grass could fit in well with Kentucky’s agriculture.

Research and demonstration projects are in progress now to figure out how to:

• Harvest, transport, store, and process biomass.

• Modify existing power plants to use biomass.

If the experiments lead to the widespread use of biomass fuel instead of coal, the costs for each step will affect the price consumers pay for electricity.

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