Electric Utility Rates

The Kansas Legislature has sought to address the issue of increasing electricity rates in recent legislative sessions. An overview of measures undertaken by stakeholders and legislative leaders to study and make recommendations on rising electricity costs follows.

How Electric Utility Rates Are Set

Electric utilities under the jurisdiction of the Kansas Corporation Commission (KCC) must receive KCC approval to change their rates or terms of service. The KCC’s role, according to KSA 66-101 et seq., is to ensure utilities establish rates that are just and reasonable while also ensuring efficient and sufficient service from the utility. In determining an appropriate rate for a regulated electric utility, the KCC must first determine the utility’s annual revenue requirement considering five factors:

• The cost of capital invested in assets (also called a rate of return) that reflects the actual cost of debt and a reasonable return or profit the utility has an opportunity to earn on shareholders’ equity;
• The total investment, or rate base, upon which a return will be earned;
• The accumulated and ongoing depreciation of plant(s) and equipment;
• The company’s reasonable and prudent operating expenses; and
• Income taxes.

After determining the revenue requirement, the KCC must design rates that will collect the utility’s revenue requirement from the utility’s customers in an efficient and equitable manner.

Legislative Activity Affecting Rates

2015 House Sub. for SB 91

The 2015 Legislature passed House Sub. for SB 91, providing that after January 1, 2016, a voluntary goal replaces the renewable energy portfolio standard (RPS) that required affected utilities to achieve net renewable generation capacity equal to at least 20 percent of the utility’s peak demand by the year 2020. The bill continues all rules and regulations of the KCC in effect on June 30, 2015, that allow a utility to recover costs incurred to meet the RPS. In addition, the KCC is required to allow affected utilities to recover reasonable costs that have been committed to be incurred to comply with the RPS prior to its repeal or incurred as a result of meeting the 20 percent goal.

2018 SCR 1612

In the 2018 Legislative Session, the Senate introduced a concurrent resolution (SCR 1612) urging the KCC to lower electric rates to regionally competitive levels. Proponents of the concurrent resolution stated electric rates in Kansas are much higher than those in surrounding states. Opponents stated the resolution was unnecessary as rate reductions would be realized through a pending merger of Westar Energy (Westar) and Kansas City Power & Light (KCP&L). The resolution passed the Senate Committee of the Whole but died in the House Committee on Energy, Utilities and Telecommunications.

2019 Sub. for SB 69

In 2019, the Legislature passed Sub. for SB 69. The bill directs the Legislative Coordinating Council (LCC) to authorize a study conducted by one or more independent organizations that have experience evaluating electric utilities. The purpose of the study is to provide information that may assist future legislative and regulatory efforts in developing electric policy that includes regionally competitive rates and reliable electric service. The study also requires input from residential, commercial, and industrial customers, electric utilities, and other stakeholders. The study was conducted in two parts, with the first portion to be completed by January 8, 2020, and the second portion to be completed by July 1, 2020.

2020 Senate Sub. for HB 2585

The bill exempts certain public utilities subject to rate regulation by the KCC from paying Kansas income tax. The bill also requires a utility that includes expenses related to income taxes as a component of its retail rates to track and defer into a regulatory asset or liability, as appropriate, any overcollection or undercollection of income tax expenses that is a result of any change to a utility’s income tax rate by state or federal law. The bill allows certain utilities to apply for adjusted retail rates due to this change in income tax expenses.

The bill also allows the KCC to approve, for a term of up to ten years, contract rates not based on the cost of service to a facility or on the incremental cost to a facility, if certain conditions are met. The bill also authorizes the KCC to approve, for a period of up to five years, discounts from standard rates for electric service for new or expanded facilities of industrial or commercial customers that are not in the business of selling or providing goods or services directly to the general public, if certain requirements are met.

For both contract rates and discounted rates, the bill requires the KCC to approve a mechanism to track the utility’s reductions in revenue as a result of the contract rate or discounted rate from the date the rate becomes effective, and requires such reductions in revenue be deferred to a regulatory asset. The balance of the regulatory asset is included in the rate base and revenue requirement of the utility in each of its general rate proceedings, through an amortization of the balance over a reasonable period, until fully collected from the utility’s non-contract rates and discount rate customers.

Other Developments Affecting Rates

Westar/KCP&L Merger

On May 24, 2018, the KCC approved a settlement agreement giving Westar and Great Plains Energy (the parent company of KCP&L) approval to merge as equals. Under the agreement, the two companies will become wholly owned subsidiaries of a new parent company, Evergy, and serve more than 1.5 million customers in Kansas and Missouri. As the regulator of public utilities in the state, the KCC was charged with determining if the merger is in the public interest. That determination is made largely on the satisfaction of eight merger standards previously established by the KCC. In its review of the standards, the KCC found the merger, as modified by the Settlement Agreement plus one additional condition, was in the public interest. The additional condition requires the companies to develop and submit to the KCC an Integrated Resource Plan (IRP) reporting process within three months of the close of the transaction. The implementation of the IRP will ensure the merger maximizes the use of Kansas energy resources.

Westar/KCC Rate Studies

In order to address the concerns about Westar and KCP&L’s rates, the parties to the Settlement Agreement agreed that the utilities and KCC staff would complete separate studies comparing the prices of KCP&L and Westar Energy with other utilities in the region and explain the major differences between surrounding states rates.
In September 2018, the KCC approved a $66.0 million rate cut for electric customers of Westar, resulting in a decrease of $3.80 per month for the average residential customer.
In December 2018, the KCC approved a settlement agreement that would cut electric rates for KCP&L customers by $10.7 million dollars annually, as well as provide $36.9 million in bill credits.

2019 Sub. for SB 69 Rate Study

Part 1

On July 29, 2019, the LCC approved a bid submitted by the consulting firm London Economics, Inc. (LEI) to conduct Part 1 of the rate study authorized by Sub. for SB 69. This phase of the study addressed the effectiveness of current Kansas ratemaking practices and evaluated options for making retail electricity prices in Kansas regionally competitive.

With respect to the effectiveness of current Kansas ratemaking practices, LEI identified both strengths and areas for improvement, as highlighted below.

Strengths

• Policies for investor-owned utilities (IOUs) attract adequate capital investments;
• Electric cooperatives and municipal utilities are effective at providing reliable electric services at a reasonable cost; and
• Relative to surrounding states, Kansas does not have an unusual institutional framework nor more burdensome requirements.

Areas for Improvement

• Residential rates of IOUs are high compared to similarly regulated utilities in regional states;
• Ratepayers continue to pay for utility investments that are underutilized;
• IOU cost recovery through surcharges and riders without a comprehensive ratemaking process is contributing to rising costs to ratepayers; and
• Kansas lacks a mandated IRP process, as found in other states.

With respect to steps that could be taken to make retail electricity prices in Kansas regionally competitive, LEI identified costs and benefits for each option that they evaluated, noting that each option could target different revenue components, such as generation, transmission, or distribution costs. They advised that implementation would depend on numerous factors that would require careful consideration, indicating that further analysis would be necessary to provide estimates of the costs and benefits of each of the options. Ultimately, LEI concluded that there are no simple means of reducing electricity rates, but that Kansas should adopt a multi-faceted approach.
They offered four near-term recommendations, as follows:

• Adopt a state energy plan;
• Create a competitive procurement framework and require regulated utilities to submit integrated resource plans at regular intervals;
• Allow KCC to explore the development of performance-based regulation mechanisms to incentivize efficiency and alignment with customer benefits and state policy objectives; and
• Establish a framework for the retirement and securitization of assets where cost-benefit analysis demonstrates clear benefits to customers.

Part 2

The LCC entered into a contract with the infrastructure firm AECOM on January 7, 2020, to provide the Kansas Legislature a report on other consequential issues materially affecting Kansas electricity rates. On July 1, 2020, AECOM submitted both a public and confidential report to the KCC. The public version was heavily redacted due to the confidential information provided by the electric public utilities. Subsequently, the KCC entered an order on July 14, 2020, directing staff and AECOM to identify the basis for each redaction and confirm that the information redacted is confidential. On September 29, 2020, a less- redacted version of the study was filed by AECOM. Both versions, along with Part 1 of the study, may be found at https://kcc.ks.gov/electric/kansas-electric-rate-study.

As directed by Sub. for SB 69, Part 2 of the study examined 13 topics, which AECOM divided into 9 categories: Electric Vehicle Charging, Advanced Energy Solutions, Transmission, Rates, Economic Development, Cost Causation, Security, Resource Planning, and Fuels.

AECOM broke down its review and assessment into economics, technology, and electric market areas of focus. Economics review included covered areas of service, electricity rate design, and integrated resource planning. The technology area of focus examined potential benefits of advanced energy solutions, cyber and physical security, and transmission investments. Review of electricity markets analyzed Kansas’ regional economy and competitiveness, including regional electricity markets and electric vehicle charging station market trends. Highlights of some key findings are listed below:

Electric Vehicle Charging

• Costs of building and operating electric vehicle (EV) charging stations are not being recovered from ratepayers;
• Deregulation of EV charging stations may increase support services; and
• Kansas’ current EV charging service rate is competitive with other states.

Transmission

• Regional transmission costs do not explain the relatively high electric rates in Kansas as compared to other regional states;
• Benefits of transmission investments include job creation and therefore increased earnings and tax revenue; and
• Localized marginal price has been decreasing, which shows the benefit of a regional electricity market.

Economic Development

• Current retail electric rates in Kansas might have a slight impact on Kansas’ economic competitiveness as evidenced by some industrial sectors experiencing less growth than in peer states; and
• Although Kansas does offer Economic Development Rates to new and expanding businesses in Kansas, other states also offer such rates at a larger discount and for a longer time period.