Electric Utility Rates

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 enacted 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 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 enacted 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 was 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 required input from residential, commercial, and industrial customers, electric utilities, and other stakeholders. The study was conducted in two parts, with the first portion completed by January 8, 2020, and the second portion 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 noncontract 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 Energy and Great Plains Energy (the parent company of KCP&L) approval to merge as equals. Under the agreement, the two companies became wholly owned subsidiaries of a new parent company 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 was in the public interest. That determination was 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 required 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 ensured 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 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 or more burdensome requirements.

Areas for Improvement

• Residential rates of IOUs are high compared with 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 they evaluated, noting that each option could target different revenue components, such as generation, transmission, or distribution costs. They advised implementation would depend on numerous factors that would require careful consideration, indicating further analysis would be necessary to provide estimates of the costs and benefits of each option. Ultimately, LEI concluded there is no simple means of reducing electricity rates, but 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 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 nine 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 areas of focus on economics, technology, and electric markets. The 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 increases 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 with 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.

2021 Senate Sub. for HB 2072

In 2021, the Legislature enacted Senate Sub. for HB 2072, which creates the Utility Financing and Securitization Act (UFSA), and allows for the securitization of utility assets to recover energy transition costs for electric public utilities whose retail rates are subject to the jurisdiction of the KCC. The UFSA also allows electric and natural gas public utilities whose retail rates are subject to the KCC to pursue securitization to help finance qualified extraordinary expenses, such as fuel costs incurred during extreme weather events. The bill amends the provisions of the Kansas Energy Security Act and the Uniform Commercial Code to conform to the new provisions created in the UFSA.

The bill allows an electric public utility, in its sole discretion, to apply to the KCC for a financing order for the recovery of energy transition costs. In applying for the financing order, the electric public utility can file an application to issue securitized utility tariff bonds in one or more series; impose, charge, and collect securitized utility tariff charges; and create securitized utility tariff property related to the recovery of energy transition costs.

The bill also allows a public utility, in its sole discretion, to apply to the KCC for a financing order for the recovery of qualified extraordinary costs. In applying for the financing order, the public utility can file an application to issue securitized utility tariff bonds in one or more series, charge and collect securitized utility tariff charges, and create utility tariff property related to the recovery of qualified extraordinary costs.

The bill requires customer bills of a public utility that has obtained a financing order and caused securitized utility tariff bonds to be issued to explicitly reflect that a portion of the charges on the customer bill represents securitized utility tariff charges approved in a financing order issued to the public utility. If the securitized utility tariff property has been transferred to an assignee, a customer bill must include a statement that the assignee is the owner of the rights to the securitized utility tariff charges, and the public utility or other entity, if applicable, is acting as a collection agent or servicer for the assignee. The tariff applicable to the customer must indicate the securitized utility tariff charge and the ownership of the charge. The public utility is required to also include on the bill the securitized utility tariff charge on each customer’s bill as a separate line item and include both the rate and the amount of the charge on each bill.

2023 HB 2225

In 2023, the Legislature enacted HB 2225, which amends law authorizing a KCC-regulated utility to recover costs associated with the transmission of electric power through a transmission delivery charge (TDC), and it requires public utilities to evaluate the regional rate competitiveness and impact to economic development in rate proceedings. [Note: The bill only applies to electric utility companies that are under KCC jurisdiction.]

Applications for Rate Changes

The bill amends law relating to applications for rate changes to include a new section that requires any general rate proceeding of electric public utilities serving more than 20,000 customers to evaluate and include assessments of the following for any application for a rate change:

• The regional rate competitiveness of the electric public utility’s current and proposed rates; and
• The impact of the electric public utility’s current and proposed rates upon economic development within the state.

Transmission Delivery Charges

The bill allows a for-profit, investor-owned electric utility serving more than 20,000 customers in the state that elects to recover transmission-related costs through a TDC to include the following as a component of the TDC:

• All transmission-related costs associated with transmission facilities that are constructed as a result of a notification or directive to construct from a regional transmission organization (RTO) or independent system operator (ISO) that is regulated by the Federal Energy Regulatory Commission (FERC) or its successor agency;
• All fees and costs imposed on the electric utility in connection with the operation of wholesale power markets by an RTO, ISO, or other entity that is regulated by FERC, other federal agency, or any successor federal agency

Cost Recovery

The bill requires a utility, in order to recover costs as a component of a TDC and to facilitate KCC and KCC-authorized intervenor review, to make a compliance filing with the KCC prior to the time period provided for the KCC to adjust the return on equity (ROE) relating to such costs.

If an ROE was not explicitly established during the utility’s last general rate case, the KCC is required to determine an appropriate ROE from the record of the last general rate case to establish the revenue requirement for such costs.

The bill states the KCC’s authorized ROE does not impact any project that was constructed as a result of a notification to construct or similar directive from an RTO or independent system operator that is regulated by FERC or any successor agency.

In any TDC update filing, a utility electing to recover the costs through a TDC is required to utilize the KCC’s authorized ROE that was used to set the utility’s base rates in effect at the time of the update filing or that was stipulated and approved by the KCC for use in the TDC if an ROE was not explicitly set during the last general rate case, to determine the utility’s TDC update.

by Luke Drury
Senior Fiscal Analyst
785-296-7250