Westar's Rate Consolidation Proposal

CURB tells KCC: if you consolidate Westar rates, do it now

On Friday, June 26, CURB filed testimony with the Kansas Corporation Commission that is generally supportive of Westar’s request to eliminate the difference in rates between its former KPL and KGE territories. If the KCC approves rate consolidation, rate parity between Westar’s northern and southern customers will finally be achieved.

The rate disparity has its origins in the merger between KPL and KGE, which formed Western Resources (now known as Westar Energy). At the time, KGE customers were paying significantly higher rates than KPL customers, largely because of the high costs of building the Wolf Creek nuclear plant. KPL customers wanted protection from rate increases that could result from the merger, so the KCC approved keeping the rates in each territory separate. Although the separate rate structures have been maintained since the merger, the Commission stated at the time that the ultimate goal would be to achieve rate parity for all Westar customers.

Despite the split between north and south, Westar has operated the two divisions as one electric system, dispatching energy from its plants on an economic basis rather than on the basis of the territorial allocation of plants. Thus, for example, although Wolf Creek is allocated to Westar South, the plant serves all Westar customers. Most of the company’s administrative and business functions have been integrated over the years, as well. The split between north and south is now largely a fiction that has been maintained to assure customers in each territory that they were being treated fairly after the merger.

The difference in rates over the years has been minimized through the efforts of Westar and the KCC. When one includes all of the various surcharges as well as base rates, the gap between Westar North and Westar South is now minimal. CURB’s consultant Andrea Crane conducted an analysis that concluded that achieving parity in the residential and small business rates of the two Westar divisions would require lowering Westar North’s residential rates by roughly 3.4% and small commercial rates by 1.5%. The residential and small commercial rates of Westar South would need to be increased by a similar amount. Although consolidating would immediately result in a small increase for Westar South, Ms. Crane concluded that Westar South faces increasing costs in the foreseeable future that are likely to push rates upward, and that it was more equitable to all customers to spread the major costs coming up across the entire system, given that all customers are served by the same set of plants.

Ms. Crane noted that the rates of Westar North would be impacted twice as much by carbon taxation than Westar South if the rates remained separate, but predicted that Westar South faces the expenses of major upgrades at Wolf Creek and the LaCygne generating station in the near future, as well as the need for additional capacity. Given that Westar’s generation and distribution systems are operated as one system, Ms. Crane concluded that it would be fairer to all Westar customers if the costs of carbon mitigation, major upgrades and new plants were borne system-wide.

The members of the CURB board faced a tough decision in deciding whether to approve consolidation. However, the board concluded that if consolidation is ever to be accomplished, the evidence supports doing it now. The small increase to the southern customers that would result now from consolidation may save the southern customers in the future from having to bear the entire costs of upgrades and environmental improvements that need to be made in Westar South. Likewise, spreading the cost of carbon taxation over all of Westar’s customers will help ease the cost burden of achieving a cleaner atmosphere in Kansas. And since CURB has always been a strong adherent to the time-honored principle of “like cost for like service,” consolidation would promote that principle by ensuring that the various rate classes of Westar North and Westar South will pay the same rates for the same type of service, regardless of where they live in Westar’s territory.

No one can predict with certainty what will happen to the rates of the two territories if they remain separate, nor can anyone predict with certainty what will happen to Westar’s rates if they are consolidated. However, given the forecasting evidence available, and the likelihood of some form of carbon taxation in the near future, CURB concludes that if rate parity is to be achieved without customers suffering rate shock, then now is a good time to do it.

Ms. Crane recommended that consolidation be implemented in conjunction with the rate increase to be granted by the Commission at the conclusion of Westar’s current abbreviated rate case. In that case, Westar has requested recovery of the costs of the new Emporia Energy Center and several wind farms, which were put into service shortly after the conclusion after its last major rate case. Implementing the change at the time of the increase would minimize the confusion that would occur if rates were consolidated in stages, she said.

On the advice of Ms. Crane, and with the support of the board, we therefore have recommended that the Commission grant Westar’s request to consolidate rates, with the caveat that it should not be done in stages, nor delayed.

For information on the proceedings in this docket, please see: http://estar.kcc.ks.gov/estar/portal/kcc/PSC/DocketDetails.aspx?DocketId=00cc25f5-5c27-44a5-ba24-0c232792e079