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Kansas City Power & Light Suggests a Way Forward for Utilities, Both Private and Public

January 22, 2015
Lisa Hamilton

Kansas City Power & Light is making a smart move in reducing its coal-fired electricity generation by 19 percent over the next seven years.

The investor-owned utility, which has about 800,000 customers in 47 counties in northwest Missouri and eastern Kansas, announced the move on Tuesday, coincidentally—perhaps— just ahead of President Obama’s State on the Union speech.

One of Obama’s core themes when he spoke on Tuesday night was the global economy’s continuing transition to cleaner, more sustainable energy, and the president’s remarks were timely: the EPA is in the midst of reviewing more than four million public comments on the pending expansion of its carbon-emission rules for power plants.

Kansas City Power & Light CEO Terry Bassham recognizes the reality of the changing energy economy, and acknowledged it explicitly in announcing the plan to curb the utility’s use of coal.

“For decades, coal has been a reliable, very low cost way to provide power to our customers, and is one reason why our rates are lower than the national average,” Bassham said. “However, as our nation moves to a cleaner, more sustainable energy future, our industry is facing increasing environmental scrutiny and regulations, many of which are focused on coal-fired generation. Our commitment and focus is to move to a cleaner energy future for our region while balancing the cost impact to our customers.”

Utility companies, whether they’re privately or publicly owned, would do well to follow Bassham’s lead.

But I’d like to talk here about public utilities in particular—about some of the immediate challenges they face and about how they might best navigate those challenges without hurting their ratepayers. Public utilities include municipal utilities, generators and distributors of power.

First, public utilities are no small presence. They account for approximately 61 percent of the total number of utilities in the U.S. and 15 percent of electricity sales and of course they provide power to millions of customers. Their first duty is to deliver reliable, affordable power to ratepayers but they also have a fiduciary duty to their bondholders.

It’s a fine line to walk, maybe, especially as the EPA’s next round of emission-control regulations unfold. The release of those new rules have been delayed recently by several weeks, and are now expected by mid-summer. The rules will undoubtedly face legal challenges, which will further delay implementation. While this isn’t great news for the environment, it does allow utilities to get their houses in order.

And get their houses in order they must.

While credit analysts at Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings said consistently throughout 2014 that that the combination of low natural-gas prices and captive customer bases will enable public utilities for the most part to weather the impact of new EPA rules, nobody thinks they can kick back and operate on auto pilot. Any of the hundreds of utility companies that burn coal today are vulnerable to costs associated with the pending carbon emission rules. And coal generation is not the only target. Fuel diversity is also a concern where there is an over-dependence on natural gas. Public power systems overexposed to natural gas face the risk of price volatility in those markets and are susceptible to supply interruptions caused by insufficient pipeline infrastructure.

The core challenge facing public utilities in general is whether their current “cost-recovery mechanisms”—industry-speak for how much and how quickly they can collect revenue through the rates they charge customers—can recover enormous debt service tied to past investment in aging power plants and the likely cost increases that will come out of the pending federal pollution rules.

The new-energy train is leaving the station, and for utility companies to avoid raising rates too much and too quickly, they will have to follow Kansas City Power & Light’s example and begin to prepare now for a future that is fast approaching.

Lisa Anne Hamilton is an IEEFA regulatory consultant.

Lisa Hamilton

Regulatory Consultant Lisa Anne Hamilton has provided legal support to Skadden Arps Meagher Slate & Flom and the Financial Institutions Group of Davis Polk & Wardwell. She is a member of the legal bar in New York, Maryland, and the District of Columbia.

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