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If Congress passes legislation to reduce global-warming emissions, Westar Energy customers in northern Kansas could be on the hook for twice as much in rate increases as consumers in southern Kansas, analysts say.
That could become a key issue as the Kansas Corporation Commission ponders whether to equalize the rates for the two regions.
At issue is a plan in Congress called “cap-and-trade,” which would force utilities to reduce their emissions or pay extra for pollution credits.
In Kansas, it’s like an electric civil war.
The primarily coal-powered north argues that no one predicted utilities would have to pay a premium to fight global warming and it wouldn’t be fair to expect their region to shoulder the burden alone.
Southerners say they’ve faced higher electric rates for years to pay for a clean nuclear plant and it’s unfair to expect them to pay for northern Kansas’ coal pollution.
North and south have paid different rates since 1992, when Kansas Power & Light merged with Kansas Gas & Electric to form the company now known as Westar.
The rates for Westar’s Northern and Southern divisions are divided along the old KPL and KGE boundaries.
Analysts say a cap-and-trade system — which appears to be the most likely scenario in Congress — would likely mean higher bills for everybody. But the difference between rates in north and south Kansas could be tens and possibly hundreds of millions of dollars.
Cap-and-trade is the centerpiece of President Obama’s efforts to reduce carbon dioxide, a greenhouse gas scientists consider a major factor in global climate change.
The House of Representatives passed a cap-and-trade bill by a thin margin. It now awaits action in the Senate, where negotiators are trying to hash out legislation that can garner a filibuster-proof majority of 60 of the 100 senators’ votes.
Rate gap reverses>
The dominant utility in the state, Westar serves about 675,000 customers.
Historically, Westar South customers have paid substantially more for power than their northern cousins.
The reason is that the baseload power plant for Westar South is the Wolf Creek nuclear plant at Burlington, while Westar North’s main plant is the coal-fired Jeffrey Energy Center near St. Marys.
For years, Wolf Creek power was more expensive because of the cost of building it.
The plant was originally planned as a virtual twin of Pennsylvania’s Three Mile Island nuclear plant. But when that plant suffered the worst nuclear accident in U.S. history in 1979, federal regulators required Wolf Creek to be redesigned and partially rebuilt to take advantage of safety lessons learned.
The result more than doubled the plant’s cost, to $1.5 billion. About $700 million of that fell to KGE, which owns 47 percent of the plant.
In recent years, the gap in rates between Westar North and Westar South has steadily closed, as nuclear plant debt was paid down and restructured and coal costs rose.
Today, Westar South customers pay slightly less per kilowatt-hour for electricity. Residential bills for north and south are within pennies of each other.
Westar says now is the time to equalize the rates, before they diverge again.
But the Wichita school district has intervened in the case and argues that rate parity now would be unfair to Westar South customers.
“South rate area customers are just beginning to realize the benefits of paying for one half of the investment costs in Wolf Creek,” said an analysis by James Daniel of GDS Associates, who testified for USD 259. “The north rate area customers would begin to receive the Wolf Creek low fuel cost benefits, yet they have not paid one dollar towards the high investment costs.”
Westar and the commission staff argue that they have worked hard to reduce southern bills over the years and that Westar is one company operationally.
“They are dispatched as one system of generators, decisions about transmission treat the two areas as one system, and capacity expansion planning treats both service areas as one service area,” said Robert Glass, chief of economic policy and planning for the commission. “This has been true since the merger of KPL and KG&E became effective.”
Costs shifting north>
As the commission considers whether to combine the rates for the two systems, about the only certainty is that cap-and-trade costs would fall harder on Westar North than Westar South if the rates remain separate.
The main reason is that the Jeffrey power plant emits about 16 million tons of carbon dioxide a year, while Wolf Creek emits none.
Analysts for the Citizens’ Utility Ratepayer Board and Kansas Industrial Consumers both estimated that about two-thirds of the cost of cap-and-trade would fall on Westar North.
The two consumer groups are usually allies, but in this case, CURB favors rate consolidation and the industrial group opposes it.
If the cost of CO2 emissions after cap-and-trade is $10 a ton, it would work out to about $181 million a year for Westar North and $90 million a year for Westar South, according to estimates by Donald Gruenemeyer, president of Sawvel and Associates.
At $25 a ton, the cost would be $451 million annually for Westar North and $226 million for Westar South.
Gruenemeyer is working as a consultant to the industrial group, which includes major Wichita manufacturers such as Spirit AeroSystems, Cessna Aircraft and Hawker Beechcraft.
If rates remain separate, Gruenemeyer estimates that southern Kansas would pay lower bills than the north for the next 10 years and that cap-and-trade would only widen the gap.
Westar has yet to file detailed public testimony on the potential impact of cap-and-trade on system rates.
“I wish I knew,” said Dick Rohlfs, Westar’s director of retail rates. “Something will happen someday, we just don’t know what.”
He said he’s not disputing the calculations by the industrial group or CURB, which reached similar numbers.
But he said the costs could shift dramatically depending on what Congress does in terms of granting carbon credits for companies like Westar that already have made substantial investments in nuclear and wind power.
“Hopefully, they’re both wrong as far as total impact,” he said.
If the government grants a large offset for nuclear power, it could be a huge boon to Westar South consumers.
But he said just as no one saw cap-and-trade coming, Westar South could face unforeseen costs.
For example, bills would skyrocket if there’s nuclear accident somewhere else in the country and Wolf Creek has to be shut down for inspection or modifications.
In addition, Rohlfs and Westar say that the South’s advantage will be partially offset by costs to extend the life of Wolf Creek and to install environmental upgrades at the La Cygne power plant in Missouri, which is half owned by Westar and supplies power for Westar South.
The Wolf Creek upgrade is estimated to be in the $500 million range, with Westar on the hook for slightly less than half.
Estimates on La Cygne upgrades were not available.
City absent in debate>
Former Wichita Mayor Bob Knight crusaded for rate parity in the early 2000s, when Westar South customers paid about a third more for electricity than northern customers.
Knight said it’s amusing to hear the same arguments he made in favor of rate parity now being used by Westar and the commission staff, who firmly rejected them in the past.
“And the world turns,” he said, chuckling. “Now it’s kind of a novel concept, this idea that the energy doesn’t know where it’s coming from or where it’s going.”
Rohlfs said that when Knight was arguing for parity, the difference in rates was too big to close all at once. That’s no longer the case, he said.
The city of Wichita has been notably absent from the current discussions on rate parity.
Early in the decade, the city intervened constantly in cases affecting Wichita electric rates. But city interest in the subject has waned since Knight left office in 2003 and rates have moved closer together.
“The rising cost of energy is an ongoing concern for the City of Wichita, especially in these current times of economic stress,” said a written statement from Mayor Carl Brewer issued in response to an Eagle inquiry.
“We have been monitoring the current rate case before the Kansas Corporation Commission and will respond appropriately if circumstances dictate. We will continue to evaluate whether the proposed rate increase is a proper balance of consumer fairness and the business requirements of Westar.”
BY DION LEFLER
The Wichita Eagle
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