Lower approved rates for Kansas utilities could save millions

The Kansas Corporation Commission has approved a lower-than-usual return for investors in one Kansas utility and challenged another before a federal agency, leading to millions in possible savings for customers.

The KCC recently filed a complaint with the Federal Energy Regulatory Commission, arguing Westar Energy is charging too much return on equity for its transmission projects. Westar currently charges 11.3 percent, and the KCC argued it should be 9.37 percent. While a 1.9 percent decrease may seem small, it could reduce rates by $15.8 million annually.

The three commissioners also recently approved up to a 9.1 percent return on equity for a rate case involving Atmos Energy, which provides gas service to the Kansas side of the Kansas City area, much of the southeast portion of the state and a few counties in the western half of the state. Prior cases typically had a rate of about 10 percent. A 9.1 percent return in the Atmos case would lead to a roughly $4.2 million rate increase, but a 10.5 percent return would create an increase of about $6.3 million, according to estimates in KCC documents.

Jesse Borjon, spokesman for the KCC, said the return approved for Atmos and the Westar challenge doesn’t represent a policy shift, and each application is considered based on its merits.

“They take each application that’s filed with the commission on its own,” he said.

Return on equity is the built-in profit for shareholders who invest in one of Kansas’ regulated utilities. It is one of a variety of costs that are passed on to customers that the KCC must approve when utilities want to change their general rates. In some cases, such as transmission charges, FERC decides on the return on equity, but the KCC still can make arguments before the federal body.

In recent years, the commissioners have approved returns of about 10 percent, though they did drop to 9.5 percent in a case involving Kansas City Power & Light, said David Springe, consumer counsel for the Citizens Utility Ratepayer Board, which represents residential and small business customers in KCC rate cases.

The rate of 9.1 percent in the Atmos case is low compared to averages in Kansas and across the country, Springe said, but it accurately represents the cost of raising capital for that type of project, because gas utilities are a low-risk business. The lower returns benefit consumers because the utility doesn’t have to raise rates as much to fulfill commitments to investors, he said.

“These are on-the-bill issues,” he said. “I’m optimistic that the commission is going to continue these very consumer-oriented policies.”

James Bartling, spokesman for Atmos Energy, said the company hadn’t decided if it would appeal KCC’s decision, so he couldn’t comment on the issue. Atmos had asked for a 10.53 percent rate of return.

A brief Atmos had filed with KCC argued returns on equity were actually rising across the country, with an average rate of 9.84 percent approved in the second quarter of 2014, up from 9.68 percent in all of 2013. It said the 9.1 percent rate would by the lowest one set recently by any state commission and out of line with similar gas utilities.

In general, riskier businesses have to offer higher returns through bond interest or stock dividends to entice investors to risk possibly losing their whole investment, and stabler businesses can offer lower returns because investors are confident they will get paid. The KCC sets return on equity based on the return on investments with a similar level of risk, overall business conditions and how much money is necessary for utility’s financial health, according to documents in the Atmos case.

Gina Penzig, spokeswoman for Westar, said the 11.3 percent rate in question had been established several years ago, and the company and the KCC have been unable to reach an agreement so far on transmission return on equity. The issue will have to be settled through the process at FERC, she said.

“We can’t go and say we’d like to lower our rates without a process, just like we can’t go and say we’d like to raise our rates without a process,” she said.

Penzig said a lower rate of return could make investors reluctant to buy stocks or bonds from Kansas utilities. Kansas already has the 14th-lowest average return on equity, so lowering the rate could make it harder to attract capital and build needed projects, she said.

“We just worry about the unintended consequences,” she said.

Springe said utilities do need to be competitive to attract investors, but states have different regulatory environments, so some utilities may not need as much return as others.

“If everyone is basing the numbers on what their neighbor got, there’s no validity” based on actual costs, he said.