On Jan. 8, London Economics International LLC (LEI) released its study of retail electric rates in Kansas as authorized by the Kansas Legislature in 2019. The enabling legislation, Sub. SB 69, included 29 topics that could assist future legislative and regulatory efforts toward regionally competitive rates while providing the best practicable combination of price, quality and service.
The study was divided into two sections with different deadlines. LEI’s 324-page report covered about two-thirds of the topics and one of the subjects was whether electric co-op ratemaking processes are “in the public interest.” Our January issue of Kansas Country Living described the self-governance ratemaking authority granted to not-for-profit electric co-ops in 1992 by the Kansas Legislature. Co-op boards, elected by their fellow members, conduct a thorough process to set rates that recover only the cost of power supply and expenses to build, maintain and operate the delivery infrastructure. Beyond that, any margin is allocated back to the consumer-members on a patronage basis.
LEI validated our ownership nature and rate-setting process as a benefit to the members stating that “ … there are sufficient organizational and economic incentives for co-ops to set rates in a way that prioritizes the public interest.”
In addition, because co-ops evolved to serve less populated areas, more infrastructure investments are needed to reach load centers, and the consultants recognized the economic realities of providing reliable rural service.
The report does recommend several near-term steps the consultants believe would improve the competitive position of electric rates in our state.
The first recommendation is to establish a state energy plan. LEI correctly notes that Kansas lacks a collaborative strategy on energy development and policy. This is a shortcoming the electric co-ops identified last year and, in fact, introduced SB 181 that calls for appointment of a task force consisting of legislators and other stakeholders to develop just such a plan. Apparently, we were a year ahead of our time because, besides the consultant’s pitch, Gov. Laura Kelly has also called development of an energy policy a priority for her administration.
The study also recommended that utilities produce an Integrated Resource Plan (IRP) to meet overall state objectives once those are established. LEI suggests that a part of the IRP process should include review of competitive procurement for new, large-scale generation or transmission assets.
The report notes that some of the tax rates on Kansas utilities are relatively high compared to our neighboring states. For example, Kansas assesses the value of utility property at a rate of 33% and the regional average is 23%. Of course, all state and local taxes are passed along through rates.
The report also recognizes the rate impact of environmental regulation. “The increase in electricity rates in Kansas can be attributed to several key drivers, namely, flattening demand, investments in environmental retrofits at fossil fuel-fired plants to meet federal regulations, and increasing transmission costs.”
The report touches on industry restructuring or customer choice, but we believe it did not fully comply with the legislature’s call to examine the impacts of retail competition on “all” customers.
Too often, residential and small consumers are losers under retail choice and other states have experienced countless consumer protection issues in their competitive markets, some of which we have documented on the website KSEnergyFacts.com.
Nevertheless, the report notes that “most stakeholders seem averse to the notion of retail competition. Of the options to be assessed as part of this study under Sub. for SB 69, retail choice is seen as the least viable option by some. Others are cautious, pointing to the lack of consensus in research showing that retail competition benefits residential customers. As a whole, the overwhelming perception among stakeholders is that implementing retail competition is a time-consuming, complex process, and that it may not be as good of a fit in Kansas as it has been in other states that have implemented it.”
AECOM Technical Services of Los Angeles is conducting the second phase of the study, due by July 1, 2020. It is too early to predict what the legislature does with the LEI recommendations but it seems logical that the complete report would start the agenda for the energy policy task force electric cooperatives envisioned in SB 181.
Bruce Graham is Chief Executive Officer of Kansas Electric Cooperatives, Inc. in Topeka.