TOPEKA — Kansas Corporation commissioners indicated today that they will take a long hard look at Westar Energy’s claim that the company needs at least a 10 percent shareholder return to keep its investors happy.
Toward the end of two days of hearings on a proposed Westar rate increase, Commissioner Ward Loyd and Chairman Mike Sievers pressed their chief rate analyst on how much Westar would really need to attract the investment money necessary to run the utility in a profitable and reliable manner.
At issue is the so-called “return on equity,” the money Westar gets to provide a profit to its stockholders.
A settlement reached between Westar, the KCC staff and the company’s large commercial and industrial customers would set the return at 10 percent of company revenue.
Overall, Westar would get a $50 million rate hike if the settlement is approved.
The Citizens’ Utility Ratepayer Board is challenging the settlement, saying it is not fair to the residential and small-business utility consumers it represents.
The three corporation commissioners could accept the settlement as is, make changes to it, or throw it out entirely and set the rates themselves.
On Monday, Westar’s chief executive officer, Mark Ruelle, testified that nothing less than 10 percent would do in keeping Westar competitive with other utilities. As part of his testimony, he displayed charts showing that most midwest utilities whose rates have been set in the past 13 months got more than 10 percent.
“I was bothered a little bit yesterday by a statement that was made by Mr. Ruelle when he was talking about Westar’s concern about the return on equity and how it could not for the good of the company be anything lower than 10 percent,” Loyd said. “If you read the literature over the course of the last year or so, talking about the fallout from the worldwide financial meltdown and the Great recession, my impression from what I hear coming from corporate financial officers is that the cost of equity for a typical US corporation is around 8 percent.”
Noting the volatility of investment markets and the high national debt, Sievers indicated he would rather try to look ahead to what Westar might need in the future, rather than what other utilities have gotten in the past.
“Are we living in, I guess, in unique times, and because by virtue of that, we need to kind of think out of the box?” he asked.
The commissioners’ managing financial analyst, Adam Gatewood, had testified earlier that he didn’t see 10 percent return as a magic number to keep Westar healthy.
“I don’t see any indication that something below 10 percent causes a dire consequence or would raise capital costs to an electric utility,” Gatewod testified.
Later, under direct questioning from Sievers, he added: “I do disagree with the (Westar) view that 10 percent is a bright line we have to never touch.”
Gatewood’s own analysis had said an acceptable return could fall anywhere between 9 and 10 percent, and he recommended 9.5.
A one percent swing in Westar’s return represents about $30 million in rates.
Westar spokeswoman Gina Penzig said the company stands by its position that anything less than a 10 percent return could discourage investors and reduce the company’s stock price, if only because other utilities have gotten that much.
“If you start to fall noticeably below the pack, it’s going to raise some eyebrows,” she said.
Earlier, Westar did agree to a key concession on how customers will pay for environmental improvements to the company’s power plants.
In doing so, it created a potential rift between the company and businesses who allied with Westar on the proposed settlement.
Westar lawyer Martin Bregman told the commission that the company would not object if commissioners roll existing environmental costs — which customers now pay as a separate line item on their bills — into basic rates.
CURB has argued that the environmental costs should be included in basic rates rather than continuing on customer bills as a separate “environmental cost recovery rider,” or ECRR. At present, the ECRR generates about $56 million a year for Westar.
The change in handling of environmental costs will probably not immediately benefit consumers, it could help keep rates down in the future, Springe said.
With or without the change, Westar is guaranteed to get back all its costs for environmental improvements, whether through base rates or a separate bill line.
However, the formula used to divide the environmental costs between customers currently favors large commercial and industrial customers over small businesses and homeowners, Springe said.
The big customers could lose that favored treatment if the environmental improvement costs are rolled into base rates, where the formula for allocating rates between customer classes is more favorable to residential and small-business consumers, Springe said.
Dick Rohlfs, Westar’s director of rates, disagreed with Springe’s analysis that small customers could end up better off with the environmental improvement costs in the rate base.
“At the end of the day, does it really matter?” I don’t think it does,” Rohlfs said.
However, several of Westar’s big-business allies in the rate settlement seemed to think it does matter.
Lawyers representing Wal-Mart, Tyson Foods, Dillons, the Wichita school district and the state school board association, all told the commission that they would see it as a “material change” if the commission alters the rate allocations in the settlement.
That would allow them to abandon the settlement and further litigate the case.
Attorneys in the case are now scheduled to file a final round of written briefs and the commission is required to set Westar’s new rates by April 23.