Big Rivers Electric Corporation Business Information, Profile, and History

History of Big Rivers Electric Corporation

Big Rivers Electric Corporation is a cooperative engaged in providing electric power to over 80,000 customers in western Kentucky. Consisting of four member systems (Henderson-Union Electric Cooperative, Meade County Rural Electric Cooperative Corporation, Jackson Purchase Electric Cooperative Corporation, and Green River Electric Corporation), Big Rivers serves portions of 27 Kentucky counties and ranks third among all American power cooperatives in sales of kilowatt hours. Moreover, Big Rivers maintains over 11,000 miles of transmissions lines, through which electricity is channeled to local households and industrial facilities, including coal mines, paper mills, and aluminum smelters.

The origins of Big Rivers Electric may be traced to the mid-1930s, when Kentucky's first rural electric cooperative was founded. Although electric power had become available in most U.S. cities by this time, the country's farming communities were largely without the service. Only about ten percent of America's nearly 6.8 million farms had access to electric power by 1935. Lacking the convenience of electricity--which was used increasingly to power such new appliances as the washing machine and the radio--farm families also experienced severe losses of property and lives, due to the flammability of the kerosene on which they relied to fuel lamps.

Supplying the country's rural areas with electricity became a focus of relief projects in the aftermath of the Great Depression. On May 11, 1935, by order of President Franklin D. Roosevelt, the Rural Electrification Administration (REA) was formed as a division of the U.S. Department of Agriculture. The REA was a nonprofit agency dedicated to providing rural areas with inexpensive electric service. Through an initial investment of $75,000 from the Emergency Relief Appropriation Act of 1935, as well as other subsequent government loans, the REA, according to Roosevelt's official executive order, sought "to initiate, formulate, administer, and supervise a program of approved projects with respect to the generation, transmission, and distribution of electric energy in rural areas."

The first company to provide electric power to rural Kentucky was the Henderson Electric Cooperative, founded in the northwestern county of Henderson on May 30, 1936. In October of that year, Henderson Electric began providing service to its first customer, Frank T. Street, who owned and operated the Cardinal Farms outside the city of Henderson. In June of 1937, the Rural Electric Cooperative Corporation (RECC) system in western Kentucky was expanded to include Meade County RECC, Union County RECC, and Green River RECC. The Union County co-op was later merged with Henderson Electric to form Henderson-Union RECC.

For more than 20 years, the western Kentucky co-ops obtained their electrical power from previously established utility companies that served cities and towns. Entering into agreements with these utilities for purchasing wholesale power, the co-ops retained responsibility for overseeing the transmission of electrical power to farming communities. During this time, much of rural Kentucky received electric power services, helping area farmers compete on a national level and helping residents realize a higher standard of living. However, the co-ops soon recognized that economies of scale could be achieved by constructing their own power plants and transmission lines, which would improve their services and decrease their service rates.

Toward that end, in 1961, representatives from the Henderson-Union, Green River, and Meade County RECCs held a meeting at which they agreed to establish a cooperative that would maintain its own electrical generation facility. The new organization was incorporated in November of that year under the name Big Rivers Electric Corporation, reflecting the fact that several large rivers ran through its service area.

After briefly considering a move to continue the practice of contracting for electricity through a new power plant near Owensboro, the founders of Big Rivers opted to proceed with their original plan of establishing an independent facility. Their proposal included the construction of a coal-fired power plant with a net capacity of 65 megawatts, as well as nearly 266 miles of transmission lines. Funding for the project was readily granted by the REA, which approved an $18 million loan to Big Rivers in July of 1962.

However, in seeking to obtain the required certificate of convenience and necessity from Kentucky's Public Service Commission (PSC), Big Rivers encountered resistance. Strong objections to the Big Rivers plan from existing utility companies compelled the PSC to schedule hearings on the matter. Specifically, utility companies--including Owensboro Municipal Utilities and Kentucky Utilities&mdashgued that Big Rivers was proposing to serve an area already adequately supplied with power and that their plans for a new facility had been not been properly disclosed to the public.

Nevertheless, Big Rivers contracted with manufacturers for the boilers, turbines, and other machinery necessary for the power plant; since the company had yet to achieve PSC approval, these contracts all carried cancellation clauses. Moreover, Big Rivers designated a site for the plant in a location that would straddle the border of Henderson and Webster counties.

In September of 1962, the first in a series of PSC hearings was held. Subsequent hearings during the next six months resulted in PSC approval of the required certificate on April 5, 1963. Big Rivers had successfully argued that although adequate power was available in the area, the quality of service among existing utilities was unsatisfactory and the rates charged were exorbitant. Moreover, Big Rivers had procured several previously published articles on their plans as proof that they had not operated in secrecy. Although the opposing utilities filed an appeal, the PSC approval was eventually upheld in February 1965. The new Big Rivers power plant, which had been under construction for two years and had incurred costs of $11 million, was completed in October of 1965. Named the Robert A. Reid generating plant, after one of the Big Rivers founders, the facility became operational on January 1, 1966.

During this time, demand for electricity in western Kentucky was steadily increasing. Big Rivers' rural and small business market averaged an annual growth rate of more than ten percent. Furthermore, demand for electricity was augmented by the region's emerging aluminum industries, which maintained smelters and other facilities requiring large amounts of electricity. Such companies as Anaconda Aluminum and National Southwire were attracted to the competitive rates offered by Big Rivers. To service the power needs of National Southwire's aluminum smelter operations, as well as the mills of the National Aluminum Company, Big Rivers began construction on another facility, the Kenneth C. Coleman plant, situated in Hancock County on the banks of the Ohio River. Consisting of three separate units with a total net capacity of 455 megawatts, the Coleman plant became fully operational in 1972. Big Rivers also entered into an agreement to operate a new power plant constructed by the city of Henderson, Kentucky. The Henderson Municipal Power and Light Station Two was erected adjacent to Big Rivers' Robert A. Reid plant and consisted of two units, generating 315 megawatts, which became operational in 1973 and 1974.

Studies indicated that dramatic increases in the need for electric power in western Kentucky would continue well into the 1980s. According to a 1977 forecast, electricity usage among residences, farms, and small businesses in the Big Rivers service area was expected to realize a nearly ten percent annual growth rate into the late 1980s. In order to meet the projected demand, Big Rivers devised an aggressive plan for expansion that included building another major two-unit power plant. Located in Ohio County, Kentucky, and named after D. B. Wilson, who had served on the board of the Meade County RECC since 1966, the facility would increase the company's total capacity to 1,235 megawatts. Receiving loans from the REA, Big Rivers began construction on the Wilson plant in 1980, designating a completion date in 1984.

However, unexpected declines in the demand for electricity soon proved problematic. New studies indicated that demand had been overestimated by as much as seven percent. Moreover, economic recession in 1982 and 1983 led to severe slumps in the American aluminum industry, a major Big Rivers customer. In 1981, Big Rivers was forced to terminate its plans for the second unit of the Wilson plant. Nevertheless, encouraged by Anaconda Aluminum's plans to purchase 100 megawatts of power for a new smelting operation, Big Rivers continued construction on the first unit of the Wilson plant. In addition, in 1984, the Jackson Purchase Electric Cooperative--a member of the Big Rivers co-op since 1977 serving the far western part of Kentucky around the city of Paducah--began purchasing its power from Big Rivers, as its purchase contract with another supplier expired.

However, as cooperatives marked the fiftieth anniversary of rural electrification in 1985, many such operations, including Big Rivers, encountered severe financial problems. Economic recession and slumps in the power industry had devastated many co-ops, which had much smaller client bases than did the urban utility companies; according to the REA, co-ops at that time averaged five customers per mile of transmission line, while public utilities reported nearly 50 customers per mile of line. Moreover, during this time, as part of an attempt to cut federal spending and the national deficit, the Reagan administration introduced a proposal to terminate the REA and discontinue its low-interest loan program for co-ops. Although the REA survived these efforts, the financial condition of the country's power co-ops remained weak. At Big Rivers, sales of the electricity generated by the Wilson plant were slow, creating an excess supply. Moreover, although construction of the Wilson plant had been completed in 1984 for under the budgeted amount, the company carried a heavy debt load, totaling $1.1 billion, with no apparent means of repayment. In January of 1985, Big Rivers defaulted on a $19 million payment on an REA loan, and a foreclosure suit against the company was filed by the U.S. Justice Department, an unprecedented move in the industry.

Later that year, Big Rivers was granted a reprieve from the foreclosure suit, which was suspended while the company strove to find a means of recovery. During this time, Big Rivers considered filing for bankruptcy or selling off its operations. The company also sought to implement rate increases, a plan that was ultimately rejected by the Kentucky PSC, which found that such increases would not be in the best interest of Big Rivers' largest customers, the struggling aluminum industries.

Denied the rate increases, Big Rivers encountered further problems when National Southwire petitioned the government for a decrease in the rates it was then paying to Big Rivers. The aluminum smelter argued that Big Rivers' rates were higher than those charged to any other aluminum producer and that, given the industry's heavy reliance on electric power during a period of strong foreign competition and weak domestic markets, these higher rates could eventually force National Southwire to close down. National Southwire was joined by Alcan Aluminum in its petition.

The aluminum companies' hearings continued for much of 1986--87, which proved particularly difficult years for Big Rivers, despite government audits determining that the co-op's rates were fair, given the economic distress in the industry, and that charges that Big Rivers general manager William Thorpe received an unreasonably high salary were unfounded. Still, Big Rivers remained engulfed in heated negotiations over its proposed means of recovery. In March of 1987, the company's plans for rate increases and debt restructuring were again rejected by the PSC, which suggested that Big Rivers continue negotiations with the REA, its other creditors, and the aluminum companies. In response, the REA temporarily halted any further financing to all electric and telephone co-ops in Kentucky, a widely criticized move prompted by the agency's concern over the potential for similar default situations in the future.

By August of 1987, some resolutions were reached regarding the future of Big Rivers. First, the PSC finally approved a rate increase that would affect all Big Rivers customers, including the aluminum companies, which would be charged on a flexible rate basis reflecting fluctuations in the price of aluminum. Second, after making some revisions ordered by the PSC, Big Rivers arrived at an acceptable debt restructuring program, expected to save the company $1.2 billion in interest charges and other debt service fees. In September, Big Rivers implemented its first rate increase since 1981. That month, the company also completed its first debt refinancing of $250 million, which reportedly would result in annual savings of $900,000 for Big Rivers. Another refinancing, of a $319 million REA loan, was completed in February of 1988.

The following year, Big Rivers was granted a second rate increase, and although the aluminum companies again protested, negotiations resulted in a settlement. Having found a solution to its economic problems and having reached an agreement with National Southwire and Alcan, Big Rivers looked forward to more stable, prosperous years. A rate increase totaling $6.9 million, or about two percent per customer, was granted Big Rivers in 1990.

By 1991, the thirtieth anniversary of the company's incorporation, Big Rivers plants were generating over 1,700 megawatts of power and using nearly 5 million tons of coal annually in the process, bolstering sales among the mining companies of western Kentucky. Moreover, Big Rivers anticipated further rate increases to offset the costs involved in rehabilitating its facilities to comply with the Clean Air Act of 1990. Just as the company's economic condition appeared to be improving, however, a scandal began to emerge that would again prove challenging to the future of Big Rivers.

Prompted by a lawsuit involving bribery charges filed in 1991 by a Kentucky coal company against its top officials, a federal investigation of several individuals in western Kentucky and southern Indiana business communities was undertaken by the FBI and IRS. The following year, evidence surfaced targeting William Thorpe for accepting bribes from a mining company that had sought contracts to supply coal to Big Rivers. Although Thorpe denied the allegations, he was replaced as general manager at Big Rivers by Paul A. Schmitz, who had served the company for 15 years.

Criminal investigations and indictments involving Thorpe and several other local businessmen were ongoing in 1994. Moreover, a 1992--93 audit of Big Rivers performed by the PSC alleged that the co-op had overcharged its customers for electric service by a total of $13 million over the previous two years. Thus, Big Rivers faced the possibility of having to refund large amounts to its ratepayers, including area aluminum companies. Under the leadership of Schmitz, however, Big Rivers contested the allegations of overcharging and strove to keep the co-op afloat in order to continue providing electric power to rural western Kentucky.