Companies have complained for years that electricity rates run higher in Kansas than in surrounding states.
That gives manufacturers and retailers in other states an edge, they say, and discourages businesses from moving to Kansas.
Now the Legislature wants to know what’s causing such a disparity.
To appease anxious lawmakers, executives at Westar and Kansas City Power and Light filed a report with state regulators justifying their higher-than-average rates.
It blamed electricity prices on a decade of spending to meet environmental regulations, not being able to take advantage of cheap natural gas, and a decline in how much electricity people are using.
Large companies in the state aren’t buying the excuses.
“That’s no justification whatsoever,” Jim Zakoura of the Kansas Industrial Consumers Group said.
Utility companies’ heavy reliance on coal power pushed the rates up. What once was the cheapest source of electricity, coal, has now cost the companies and their customers more. Companies that relied more heavily on natural gas have reaped the savings when the price of that fuel dropped.
But Westar and KCP&L executives say their investments will eventually pan out as natural gas prices rise after falling to record lows.
Meanwhile, the Kansas Industrial Consumers group wants the Legislature to force prices lower and fix what they see as a broken regulatory system.
Rate case history
Since 2007, KCP&L has had eight rate cases go before state regulators at the Kansas Corporation Commission. In six of those cases, the KCC approved a rate increase.
Westar has had seven rate cases in that time period, six ended with a price hike.
The only case that ended with a reduction was a concession granted in the merger of Westar and Great Plains Energy, the parent company of KCP&L, to form Evergy.
The companies sold the merger on the basis that a combined company would be more efficient, cost less to run, and save their customers money.
Critics say the steady pattern of rate increases suggest regulators too easily bend to what utilities want.
Spending on environmental regulations
There’s nothing simple about how state regulators set utility rates. But let’s start with the basics.
State regulators add up all of a company’s costs (employees, operations and maintenance, new spending). They then look at how much electricity it sold in a previous year. A rate, when multiplied by the sales number, is intended to let the company cover its costs. Expenses equal rates. Sort of.
Regulators then add between 9 and 10 percent on top of that number to allow the company to make some profit from investments.
That means the more investments a utility can justify to regulators — larger power plants, new transmission lines, renewable energy sources — the more it can ultimately both charge customers and return to shareholders.
And that’s what Westar and KCP&L have been doing since the mid-2000s. Spurred on by stricter environmental regulations, the two companies spent hundreds of millions of dollars to upgrade their coal-fired power plants.
Coal power had traditionally been the cheapest form of electricity. The investments were meant to keep those assets viable.
Oklahoma Gas and Electric Company has some of the lowest rates in the region.
It waited to make environmental upgrades at two of its coal plants until last year. It’s now asking Oklahoma regulators to increase rates to recover $609 million they spent.
“They’re doing now, what we did 10 years ago,” Evergy Vice President Chuck Caisley said.
Evergy predicts that utilities in other states will have to do the same thing. The added costs means they’ll eventually catch up with Kansas’ rates. Some industry analysts see other dynamics.
“That sounds like fantasy to me,” Steve Cicala, an expert on public policy at the University of Chicago said. “The surrounding states are shutting down their coal powered plants because gas and wind are much cheaper alternatives.”
He said Westar and KCP&L simply made a bet on coal that isn’t paying off.
Cheap natural gas
The report doesn’t contradict that analysis. It argues that Westar and KCP&L’s reliance on coal hurt them more than neighboring states with more natural gas plants because of how cheap natural gas became in the 2010s. Before then, coal had been the cheapest option. Record low natural gas prices changed the equation.
Evergy executives still believe they’re in a good position for the future. They expect the price of natural gas will soon go up.
“Which makes our wind, our nuclear, and our coal look a lot more competitive,” Caisley said.
Declining energy use
Another potential cause of higher than normal rates in Kansas is a stagnant economy.
The lack of growth means large industrial users aren’t using as much electricity as projected. Those big power customers underwrite residential users. If their numbers go down, the slack has to be picked up by businesses and homeowners.
The less electricity is used, the more it will cost. That’s because rates aren’t based on how much electricity is sold, but on making sure utilities can meet their expenses.
So, if electricity use is down, the rate has to go up to make up the difference.
This could lead to a death spiral, where higher rates lead to even less electricity use, which lead to higher rates, and so on.
There’s no immediate solution on the horizon, either. Electricity use isn’t expected to increase by much in the near future. People are using more energy efficient appliances and light bulbs. Large companies are getting smarter about how to control their use.
If demand for electricity stays on the same course, the pressure for rates to go higher will only increase.
If that happens, the traditional way of thinking about regulated utilities and how they set rates could face tough political backlash.
“It’s keeping a lot of utility folks up at night,” Cicala said.
Brian Grimmett reports on the environment and energy for KMUW in Wichita and the Kansas News Service, a collaboration of KMUW, Kansas Public Radio, KCUR and High Plains Public Radio covering health, education and politics. Follow him on Twitter @briangrimmett.
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