Bundling up in Paducah

The Courier Journal - “While people in Paducah bundle up in Snuggies as temperatures plummet and power bills skyrocket, political leaders in Kentucky need to rethink the wisdom of letting municipal power providers operate outside of state consumer protections.

The Kentucky General Assembly in 1936 exempted municipally-run operations like Paducah Power System from rules under the Kentucky Public Service Commission. That helped allow the terrible predicament in which Paducah, along with Princeton, find themselves, Together, a decade ago, the western Kentucky communities bought hook, line and sinker what Peabody Energy was selling: a coal mine with lousy coal, and a boondoggle of a power plant that cost twice as much as planned and hasn’t run very well.

Paducah, Princeton and dozens of other communities across the Midwest, in fact, gambled and bought into the Prairie State Energy Campus in southern Illinois, and are now paying the price.

As The Courier-Journal reported on Sunday, some Paducah business leaders fear their rising electricity rates and $555 million in long-term debt (about $25,000 per customer) are hammering the local economy.

Paducah customers’ bills are now 60 percent higher than those of customers of the state’s four main investor- owned, regulated utilities.

‘I can’t imagine a bigger mistake that was made,’ said Paducah businessman Ronnie Goode, owner of Cole Lumber Co.

‘People are going to bed cold because they can’t afford to turn the heat up,’ added Princeton businessman Don Hancock. He closed his Princeton grocery store last year because, he said, his power bills went up $5,000 per month….”

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Ex-PPS chairman has regrets

By Steve Wildon, Paducah Sun  – “Last September, when the community’s resentment over Paducah Power’s electric rates was reaching a peak, a column of mine took a shot at the utility’s board chairman, Ray McLennan.

I cited a 2005 quote of his predicting the utility’s investment in the Prairie State Energy Campus would provide ‘an immediate savings of at least 10 percent annually and even more in future years.

‘A man with that kind of vision badly needs new glasses,’ I wrote. “He also needs to be replaced.’

The next day, McLennan, who spent 18 years on the board including 12 as its chairman, resigned.

We had not met then or in the weeks that followed. But when I sent him an email last week asking if he would be willing to stop by to talk about Paducah Power, he surprisingly agreed.

This was not the Ray McLennan I expected to meet. More than one person had described the retired Internal Revenue Service agent as a bully who pushed to invest in Prairie State to become an energy entrepreneur and satisfy his ego.

I anticipated bluster and defiance, but McLellan, 69, came across as intelligent, straightforward, and well-aware of the harsh impact of the utility’s pricey power.

Early in our talk, I asked what he would say to ratepayers who accuse him of being the man most responsible for decisions that have stuck Paducah with the state’s highest electric costs.

‘I would have to agree with them,’ he said matter-of-factly. ‘But I’m pretty thick-skinned. After 29 years with the IRS, I don’t think anybody could call me anything I haven’t been called before.’

While conceding some of the board’s decisions turned out to be costly, he said they had a rational basis. The energy market 10 years ago was far different than it is today. The economy was humming; demand for power locally and nationally was rising. The decision to leave TVA was based on projections that its rates would climb and on expectations the new Prairie State plant would provide reliable power at a lower cost.

The Paducah Power board didn’t make decisions on its own, McLennan said, and relied heavily on advice from R.W. Beck, one of the nation’s leading energy consultants.

‘Beck liked Prairie State, and when we went to New York and met with the ratings agencies and bond insurers, they all thought Prairie State was a sound investment.’

Even so, he believes the board made three regrettable decisions and holds himself accountable.

One was making a second, smaller investment in Prairie State when offered the option to buy an extra 10 megawatts of power after another municipality withdrew. PPS did not need the additional power, and the additional buy helped push PPS’ long-term debt to $580 million.

‘I blame myself for not being as verbal as I should have been in questioning that purchase,’ he said.

A second mistake was investing $170 million to build a larger, gas-fired peaking plant that can produce 120 megawatts of power but has been scarcely utilized.

‘I thought we needed a much smaller plant that could help us meet peak demand in the summer,’ he said. ‘I was persuaded that a bigger one would be a good investment.’

A third was Paducah Power’s decision to buy 15 megawatts from an Ohio River hydroelectric project involving dams at Smithland and four other sites. That decision, he said, was driven by anticipation that the General Assembly would soon require municipal utilities to get at least 5 percent of their power from renewable sources. Such a requirement has not come to pass.

When the hydro plants come on line in the next year, PPS will have a total capacity of 239 megawatts – three times its average energy load of 80 megawatts and well above its peak load of 160 megawatts. Its current rates are between 50 and 60 percent higher than rates charged by the state’s four largest utilities.

Going forward, McLennan believes PPS should sell a large part of its ownership of the peaking plant, and if it can’t find a buyer, mothball it to cut costs. He also thinks the utility should unload its hydro investment.

Still, he foresees brighter days for Paducah Power, especially if it can lighten its debt load and if Prairie State continues to operate at more than 80 percent of capacity. The plant has worked out its operating problems caused by the low quality of its coal, he said, and should prove to be a solid long-term investment.

McLennan expects PPS rates will decline modestly in the next two years, and ‘the rates of other state utilities will creep up and be close to Paducah’s by the end of 2016.’

Let’s hope his current crystal ball isn’t the same one he used a decade ago.”
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U.S. Illinois Power Plant at Center of Midwest Rate Fights

By Julie Carr Smyth, ABC News – “High electric bills and environmental skepticism in towns across the Midwest are causing customers to wonder if they’ve been duped as power suppliers work to recoup investments in a financially troubled Illinois generating plant and coal mine.

Rate increases and equipment breakdowns were the opposite of what dozens of municipalities that invested in the Prairie State Energy Campus were promised: low-cost, reliable energy for decades to come.

Now, customers in Galion, Ohio, have threatened ballot action. They want the city to repay overcharges they allege were amassed to mask high electricity costs from the Washington County, Illinois, project.

In Batavia, Illinois, another group of customers filed class-action litigation alleging city-paid consultants misrepresented financial risks associated with the complex, constructed by coal producer Peabody Energy.

The municipal power provider in Paducah, Kentucky, contemplated bankruptcy after its customers blamed its decision to invest in Prairie State for some of the state’s highest electricity rates.

When Prairie State’s 1,600-megawatt generating operation, mine and landfill went on line in 2012, its development had cost $4.9 billion — more than twice the original estimate. That forced rate hikes and fees called power adjustments in many of the 217 municipalities and 17 electric cooperatives that invested in the project.

Prairie State’s defenders say it was expensive because it’s one of the country’s cleanest, most efficient power plants. As one of the few coal plants built in the U.S. in 30 years, it faced unanticipated costs in meeting tough, modern carbon emissions standards proposed by the Environmental Protection Agency that have vexed older coal-fired plants….

On Wall Street, the unbreakable nature of the take-or-pay contracts has been viewed as the strength of the Prairie State deal. However, the U.S. Securities and Exchange Commission has been investigating the financing deal after complaints from members of Congress and local officials across the region.”

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BAD MOVE PPS pay increases a slap to ratepayers

Posted: Saturday, January 31, 2015 12:24 AM Paducah Sun Editorial

By JIM PAXTON

“The Paducah Power System board’s decision to give the utility’s employees a 2 percent raise retroactive to July 1 is simply tone deaf.

Just a month ago, the local utility had its credit rating slashed two notches to two levels above junk grade by Fitch Ratings Inc. Its ratepayers endured rate increases of 21 percent over 17 months in 2013 and 2014, plus a power cost adjustment that at times pushed the total rate increases into the 40 percent range.

The pay increase will cost Paducah Power $87,000 annually. PPS says it hopes to offset the cost of the increases with as yet unidentified savings from administrative costs related to Kentucky Municipal Power Agency, a partnership between PPS and the Princeton Electric Plant Board.

PPS board Chairman Hardy Roberts says the pay increases equate to about 33 cents per meter per month for the utility’s ratepayers. He said, ‘I think it is well worth it, to have a reliable system, which we have here.’

PPS does have good employees, and in ordinary times we would not begrudge them a raise. But to grant across-the-board raises in these circumstances is simply irresponsible, and we suspect it will further enrage ratepayers.

Paducah Power’s soaring rates, among the highest if not the highest in Kentucky, are the result of disastrous investment decisions by the utility. PPS invested more than a half-billion dollars in the Prairie State Energy Campus and a local peaking power plant that it uses infrequently if at all. It also has committed to buy very expensive hydro power from American Municipal Power.

Collectively, PPS has much more power than it needs. Its purchase commitments to Prairie State alone equal 120 percent of its power needs. PPS had hoped to sell the excess power on the open market at a profit to reduce rates. Instead, it finds itself selling power at a loss, with ratepayers making up the difference and then some.

Last year PPS board members assured customers they were attuned to their plight. They launched into a ‘rate recovery plan’ designed to stabilize rates during the first half of 2015 and reduce them modestly after that. But the verdict is still out as to whether that plan is working. A key part of that plan is to add $2 million to the utility’s income statement in the first half of 2015 through better management of its power portfolio. But the rate recovery plan predates the collapse of oil and gas prices, which has put downward pressure on open market prices for power.

The timing of this move by PPS is terrible, given the pressure on its bond rating and the doubt that remains about whether its rate recovery plan can be successful. If PPS were a private company, and the ratepayers were shareholders, the board would be facing a rebellion.

Average citizens well remember the layoffs, pay freezes, unpaid furloughs and other austerity undertaken in the private sector when the Great Recession put many employers under financial pressure.

Raises just are not given in such circumstances.

The city of Paducah has its fingerprints on this decision as well, by virtue of City Manager Jeff Pederson’s membership on the PPS board.

The vote to grant the raises was unanimous.

All of this seems to send the message that the PPS board and perhaps city officials as well think the crisis at PPS has blown over and ratepayers have resigned themselves to the status quo. We think that’s a serious miscalculation. We think the ratepayers will see the board’s action as a slap, and we suspect board members and city officials are going to hear about that from an unhappy public.”

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Energy industry analyst offers suggestions, ideas for PPS rate relief

Neither the Fine Print Nor a Review by Moody’s Shed an Honest Light on Prairie State’s Dark Finances

Prairie State Energy Campus

By Tom Sanzillo, The Institute for Energy Economics and Financial Analysis 

Ratings-agency reviews this week of new debt offerings associated with Prairie State Energy Campus, and the fine print in the bond offering itself, simultaneously illuminate and obscure the financial and operational failures of the power plant in southern Illinois.

The reports by the ratings agencies — one by Fitch Ratings, the other by Moody’s — take very different views of Prairie State’s tangled finances, and of its prospects for recovery.

Both agencies see the municipalities that are stuck with high rates for Prairie State electricity most likely continuing to pay those rates. The question is for how long.

Fitch takes the deeper, more serious look, peering into the books of 21 participating Ohio communities and finding weakening finances. Moody’s, by contrast, skips the local research and concludes everything is fine. So, stable is the outlook at Moody’s; negative is the view at Fitch.

Fitch, much to its credit, holds Prairie State to its original electricity-price estimates, and notes that those estimates have long been vastly exceeded, implying that the customers who are tied into long-term contracts with the plant simply cannot continue to see rates keep going up. Fitch finds that high rates are already draining local cash reserves and hurting municipal credit ratings. Moody’s, to its discredit, concludes that the high cost of Prairie State electricity is competitive, and it takes no note of the deteriorating financial condition of customer cities.

Debt documents submitted for review by AMP Ohio, the largest participant in the Prairie State portfolio and the link between Prairie State and many member communities, are also supposed to shed light on Prairie State’s dark finances. But they don’t. The documents put 2014 rates for electricity at $73.66 per megawatt hours and assert that they will drop in 2015 to $71.38 megawatt hour. These numbers are presented by AMP after an almost incomprehensible explanation of how various internal subsidies are being used to depress rates that would otherwise be even farther off the chart than they are now. While it’s clear that the rates Prairie State is charging are not based on the real cost of electricity from the dysfunctional plant, it would take a team of auditors to figure out the full truth behind AMP’s many tangled cross-subsidies.

As for the rates being competitive, nothing could be further from the truth. The communities tied to Prairie State — if they weren’t locked into such ill-advised contracts — would be able to get electricity off the open market for about half what they’re paying for Prairie State’s. Prairie State’s rates for electricity are captive, to put it bluntly, not competitive.

Moody’s relies nonetheless in its review of the new bond offering on a vague standard of competitiveness that muddies the kind of clear and concrete information investors deserve. Crucial facts that go overlooked include that Prairie State produces electricity at far above market prices and far above the original estimates used to encourage local governments to sign on.

Fitch—again to its credit—is worried about shrinking cash reserves of member municipalities now and in the future. Moody’s—again to its discredit—seems to suggest a simplistic way forwarding in which communities presumably cut other services to keep up with electricity-rate increases.

Meanwhile in Illinois, some of the same people who put out the Moody’s report on Prairie State have incongruously placed the municipality of Batavia, Illinois, on a negative credit watch due in no small measure to its exposure to the Prairie State plant. Citing rate pressure from Prairie State debt, Moody’s outlook for Batavia is decidedly negative.

Moody’s notes, too, that Batavia’s trouble is rooted also in off-balance-sheet debt, something Batavia is trying to correct — and a problem faced by every community in the Prairie State consortium. If those many debts were brought onto the books, significant numbers of communities would violate state debt standards.

The people are restive, and at least some officials and their citizenry are starting to wonder. Residents of Batavia have started litigation. The SEC has subpoenaed AMP and Peabody Energy. Paducah has fired the head of its power agency and brought in new board members.

Any truly independent look at Prairie State would raise eyebrows. Yet last year, when several elected officials from AMP communities asked Ohio Attorney Genera Mike Dewine for an investigation, he demurred. Dewain and Moody’s are in the same camp, it seems, the one that can’t be bothered with hard questions.

Tom Sanzillo is IEEFA’s director of finance.

Utility bonds downgraded to BBB rating

By BY DAVID ZOELLER, Paducah Sun

“Fitch Ratings, one of three bond rating agencies Paducah Power System officials met with last week, has downgraded the utility’s revenue bonds from A-minus to BBB. The bonds in question include $153 million in revenue bonds, series 2009A, and $1 million in refunding revenue bonds, series 2010.

“The ratings downgrade reflects PPS’ constrained financial position resulting from several years of inadequate rate recovery and Fitch’s expectation that the utility’s medium-term financial metrics will be supported by planned, one-time actions to bolster liquidity,” according to a Fitch news release Wednesday.

The agency said it views the actions, however necessary, “as stopgap measures more consistent with the lower rating until improved asset performance at the Prairie State Energy Campus provides longer-term relief through lower purchased power costs.”

Mark Crisson, PPS interim general manager, called the move disappointing but not totally unexpected. “I don’t want to give the impression this is a catastrophe,” Crisson said.

“It’s not good.” Though the news is not positive, “Triple B is still investment grade,” he said.

In a trip to New York City last week, PPS officials met with Fitch and rating agencies Standard & Poor’s and Moody’s, in addition to three bond insurance companies to discuss a surety bond to free up debt service reserve funds as part of their rate recovery plan.

The recovery plan calls for freezing, then lowering the power cost adjustment, as one method of providing rate relief to customers.

Back in September, the board chose not to raise the PCA even though its rate formula called for it. “We explained (to Fitch) what we were doing to offset that, but apparently they discounted that,” Crisson said.

According to Fitch, “while the utility’s financial position and recovery plan support an investment-grade rating, its weakened metrics; planned, one-time measures to generate liquidity; and modest projected debt service coverage ratios from cash flows are more consistent with the BBB category.”

The downgrade could increase the fee PPS will have to pay for a surety bond, Crisson said, “but it doesn’t mean we can’t move forward.”

The interim general manager said PPS should know about the surety bond sometime in January.

“This is the challenge we’ve talked to the board about,” Crisson said. “We’re trying to walk a fine line to maintain strong credit on one hand and (provide) rate relief on the other. That’s difficult to do.””

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Sanzillo and Schlissel: There’s a Better Way Out of This Mess Than What Paducah Power Proposes

By Tom Sanzillo and David Schlissel — 

The recent plan proposed by Paducah Power System to reduce high electricity costs for residents and businesses will neither bring rates down to a manageable level nor stabilize the utility’s finances.

The good news: There’s a better way forward.

To see through the bad offer on the table, it’s helpful to understand some of the background on how Paducah today has the highest electricity rates in the state and pays far more than it should.

For most of the history of Paducah Power, ratepayers were charged reasonable rates. That all began to change when the utility agreed in 2005 to buy more power than it needed from the Prairie State Energy Campus in a deal that locked the utility-and its customers-into an expensive long-term commitment that benefitted the builders and financiers behind Prairie State at the expense of PPS’ customers.

Natural gas is abundant and inexpensive today, and power prices are low and affordable in regional competitive power markets-which is where Paducah should be buying its electricity. Paducah residents and businesses, by all rights, ought to be paying much lower rates now and into the foreseeable future.

That’s not what’s happening, though, because Prairie State is producing absurdly expensive electricity, and through deals like those it has with Paducah, has pushed ratepayers into bearing the brunt of that expense.

The rate-reduction plan Paducah Power rolled out last month might provide some relief, but that relief will be small, temporary and costly in the long run. It pushes short-term costs onto future ratepayers, and it kicks the can down the road by promising-through unproven assertions-that millions of dollars can be saved just by bringing in a new salesman to help PPS sell its share of the excess and overpriced electricity it has to buy from Prairie State.

The heart of Paducah Power’s problem is that it has too much debt. That’s because the utility was recruited into investing in Prairie State with promises of stable, low-cost power.

Paducah was enticed somehow into buying too big of a stake in the plant, which was constructed at a cost of $5 billion, twice what was initially estimated. Paducah Power’s electricity is unaffordable today because of those overruns and because of Prairie State’s fundamentally weak business model.

What to do?

Paducah Power executives, and some of the city’s elected leaders, want citizens to shoulder the burden themselves. That’s the core of the utility’s recent proposal.

This is wrong.

Peabody Energy, Bechtel Corp., various investment bankers, assorted bond dealers, bondholders and several law firms have profited or continue to profit from what was plainly a mistake.

They can afford to share this load. The bondholders who own the debt Paducah is paying for have assets worth a combined $6.7 trillion.

Three of those bondholders—Invesco, Franklin Templeton and Nuveen Investments—hold approximately 66 percent of the debt. They and their subsidiaries are worth $2.4 trillion. Peabody, even with its recent dismal financial performance, is worth $2.4 billion. Bechtel, which billed for the cost overruns, is one of the largest companies in the world, with annual revenues of $37.9 billion in 2013.

The underwriters for the bonds—those who engineered the deal and collected big fees on it—included Hilliard Lyons, J.P. Morgan & Co., Wells Fargo, Raymond James Securities and Edward Jones.

Paducah Power took a risk, to be sure, but so did the other players. Anytime a public power project is financed, it has many stakeholders by design, so that risk is distributed equitably. The way forward in Paducah is to implement a debt-relief plan that requires all parties to contribute and that offers an honest assessment of Prairie State’s operating viability.

While workouts like these are rare, they do occur. Just in the past two years, for example, Jefferson County, Alabama, and the city of Stockton, Calif., have gone through bankruptcy proceedings in which bondholders in each case ended up forgiving some of the principal value of debts.

In the 1990s, Troy, N.Y., renegotiated lower interest payments with bondholders to avoid bankruptcy, and the distressed Washington State Public Power Supply System worked out a deal in which bond investors received between 10 and 40 cents on the dollar. There are many other instances of public entities reaching new arrangements with creditors to spread financial fallout fairly.

The Prairie State plant is not producing affordable electricity for Paducah, even though that’s what the city was supposed to get for its multi-decade commitment to the plant through 2041.

It was, and is, a bad deal for Paducah, and those who have gained from it should be compelled to join the public dialogue on how to find a solution. The idea that residents and businesses alone should bear all the costs of a shared mistake is hogwash.

Tom Sanzillo is the director of finance for the Cleveland-based Institute for Energy Economics and Financial Analysis. David Schlissel is IEEFA’s director of resource planning analysis.

[This op-ed first appeared in the Paducah Sun on December 15, 2014]

PPS optimistic about NYC meetings

“Paducah Power System officials may not know how successful this week’s trip to New York to meet with bond insurance companies and rating agencies was until next month.

Interim General Manager Mark Crisson said he believes the meetings were productive and the utility will be treated fairly.

Crisson, Board Chairman Hardy Roberts and Dave Carroll, director of finance and administration, will return today from New York, where they met with six firms.

‘What we hope to accomplish is to get competitive bids or proposals from one or more bond insurance companies for a surety bond to free up our debt service reserve, and reaffirm and/or maintain our current bond rating,’ Crisson said by phone.

‘All of the meetings went well,” Crisson said. “They had a lot of questions.’

Crisson said Paducah Power will probably hear from surety companies in January.

‘I feel optimistic about the outcome there,’ Crisson said. ‘What we don’t know is what the fee might be.’

The officials met with bond insurance companies Build America Mutual, National Public Finance Guarantee and Assured Guaranty Corp., and the three main rating agencies: Fitch Ratings, Standard & Poor’s, and Moody’s.

Crisson likened the meetings to appearing before a judicial panel, in that “it’s not always easy to read which way they’re leaning based on what they say.”

In their meetings with the credit rating agencies, with the last one scheduled this morning, ‘We made it clear we’re taking steps both to provide some rate relief and strengthen our finances,’ Crisson said, referring to the PPS board’s rate recovery plan.

‘One of the (rating) companies wanted to know the likelihood of obtaining a surety bond, and when that’s going to happen,’ Crisson said. ‘Based on those questions, they may wait to see what happens with the surety bond (before addressing the rating).’

Before the officers left for New York on Tuesday, the board passed a resolution reaffirming its commitment to the rate recovery plan approved Nov. 12 and its intent not to seek Chapter 9 bankruptcy relief.

‘If you’re contemplating bankruptcy, they’re not interested in providing any funding or help with your credit rating,’ Crisson said.

The Paducah group went through the rate recovery plan in detail in the meetings, as it did at the Nov. 12 board meeting in Paducah.

‘I don’t think there were too many surprises,’ Crisson said of the discussions.

‘There were a lot of questions on Prairie State. Some of them were more well-versed than others’ on the operations of the Prairie State Energy Campus, PPS’ chief supplier of power, Crisson said.

He said the discussion indicated the rating agencies felt Prairie State was a ‘good asset, and you’ve got to take a long-term view.’

By David Zoeller, Paducah Sun

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Commissioners discuss PPS

City leaders discussed some of the latest developments in addressing Paducah Power’s high electric rates at the Paducah City Commission meeting Tuesday.

Three months following the commission meeting where leaders from Prairie State Energy Campus and Paducah Power System made a presentation regarding the campus’ operation and the system’s rates, commissioners talked about what has been done since then to remedy the power problem.

Commissioner Richard Abraham brought up Friday’s editorial in The Paducah Sun, which criticized Paducah Power’s choice in using Louisville-based financial consulting firm Hilliard Lyons for advice on PPS’s options. The company was involved in Paducah Power’s bonding for the Prairie State Energy Campus project.

“I’m not sure if bankruptcy is the way to go, but we passed a resolution the night that Prairie State was here … that everything was on the table and (Paducah Power) was to always move in a way that is transparent,” Abraham said.

Paducah Power Board Chairman Hardy Roberts addressed the issue in a letter to the editor that was published in Monday’s edition of The Sun. Roberts stated PPS sought bankruptcy advice from a legal firm with bankruptcy experience. Commissioner Sandra Wilson suggested that the commission invite PPS interim general manager Mark Crisson for an update on the status of a rate recovery plan and options for PPS. Paducah Power officials flew to New York on Tuesday for meetings this week. They are set to meet with different companies and discuss issues such as an insurance policy and bond ratings relating to the rate recovery plan.

In November, the Prairie State campus performed at its highest operating capacity to date. City Manager Jeff Pederson, who is a member on the PPS Board, said over the past three months combined the capacity of the plant was the highest of any three-month period. “Those are encouraging notes,” he said. “Those are very strong and very encouraging indicators, and that’s a part of the financial recovery too, the improved operation of that plant. Combined with other things that we’re doing, clearly things are looking positive and the ship appears to be turning in the right direction.”

At Monday’s PPS Board meeting, the board approved a plan to provide no- or low-cost energy audits for residential customers. The audits provide customers with suggestions on ways to save energy. Mayor Gayle Kaler said Tuesday that PPS should offer the audits at no cost. “There are many ways you can save power,” she said. “I think it should be provided at no cost.”

Pederson said he would invite Crisson to attend next Tuesday’s commission meeting.

 

By Lauren Duncan, Paducah Sun. No Link. Subscription required