Dispute could lead to higher rates for many Missouri customers of KCP&L

A Mississippi power plant used by KCP&L is at the center of a dispute that threatens to roil the electric utility industry — and raise rates on a big chunk of KCP&L’s Missouri customers.

The dispute, which may reach the U.S. Supreme Court, goes back to a decision by Kansas City Power & Light to sell power from the Mississippi plant to customers in Missouri. KCP&L acquired the plant when it bought Aquila Inc., a Kansas City utility company that went out of business in 2008.

In 2011, the Missouri Public Service Commission approved including the plant in customer rates as long as KCP&L customers didn’t pay for the cost of transmitting the electricity from Mississippi. That cost amounted to roughly $5 million a year.

KCP&L disagreed with the PSC decision, and the tiff has developed into a full-fledged legal battle. KCP&L went to court to get approval to recover the transmission costs by increasing rates but lost in two courts, including the Missouri Court of Appeals.

Because the dispute involves the transmission of power across state lines, KCP&L has asked the U.S. Supreme Court to take the case as an important test of federal authority on energy issues.

The utility contends that because a federal agency, the Federal Energy Regulatory Commission, is in charge of setting interstate transmission rates and the agency had approved the rates for transmitting from Mississippi, the Missouri Public Service Commission had no right to interfere.

“This case presents an important constitutional issue,” the utility said in a brief filed with the Supreme Court.

Utilities nationwide have always assumed that transmission costs across state lines could automatically be recovered from customers, and the Missouri case has rattled them.

The trade group Edison Electric Institute warns in a filing to the Supreme Court that “the Missouri loophole is uniquely positioned to spread like a virus to other states.”

Utilities could lose billions, with shareholders absorbing the cost.

The flip side is that utility customers could save billions, but that would depend on how each state’s regulators viewed the recovery of interstate transmission costs.

A U.S. Supreme Court decision about whether to accept the case could be announced at any time. But it apparently has gotten the justices’ attention. The court earlier this month requested the views of the solicitor general, the federal government’s lawyer to the Supreme Court.

To cover the transmission costs from the Mississippi plant, KCP&L wants to raise rates on its 309,000 customers in the former Aquila territory in Missouri through the year 2032. An average residential customer would pay roughly an extra $200 over that period. The average business customer would pay more than that.

Though that seems a slight increase per customer, over that period it would total $100 million.

The former Aquila electric utility in Missouri, which was called Missouri Public Service and St. Joseph Light & Power, covered much of western Missouri and some Kansas City suburbs, including most or all of Lee’s Summit, Blue Springs and Grandview.

KCP&L’s role in the Mississippi plant stretches back to 2008 when it acquired Aquila’s electric utility in Missouri along with some other assets.

Aquila had been a high-flying Kansas City company that had been a regulated utility. It jumped into unregulated businesses that included energy trading and “merchant” power plants that were free to sell power around the country for higher profits.

The company’s results, after some initial years of prosperity, were disastrous — especially once the unraveling of the much larger company Enron collapsed the unregulated energy trading sector.

Aquila stock, worth $37.85 a share in 2002, four years later had sunk to $4 after Aquila posted billions of dollars in losses. The company didn’t declare bankruptcy but liquidated the business, often at bargain prices.

One of those assets was the Crossroads power plant near Clarksdale, Miss., which was a merchant plant and the kind of complex deal Aquila liked to cobble together. Technically, the 300-megawatt plant fueled with natural gas is owned by the city of Clarksdale, which allows it to avoid some taxes. Revenue bonds were also raised to pay for the facility built in 2002.

But essentially it was an Aquila enterprise, with Aquila covering the plant’s operating costs. Aquila signed a 30-year contract to buy all the plant’s electricity capacity. The same business relationship exists with KCP&L.

“It’s been OK with us, it’s been OK with them,” said Bill Luckett, the mayor of Clarksdale.

KCP&L at first tried to sell the plant. Then it decided that instead of selling the electricity on the open market, it wanted to include the plant in the rates charged to customers in the former Aquila electric territory.

The Missouri Public Service Commission, against the advice of its staff, approved the request to include the plant in rates. And in an unusually worded order, it seemed to throw a lifeline to KCP&L.

It described the plant as a relic of Aquila’s tortured history, which raised the question of how long regulators should “visit the sins of the predecessor (Aquila) on the successor (KCP&L).”

But the commission refused to let the utility collect the transmission costs, saying they would far outweigh the benefits of the plant as a low-cost producer. It added there were other options to provide electricity that would be less costly for the utility’s customers.

KCP&L believes power from the plant, even including transmission costs, is cheaper than other in-state options.

“The facility benefits our customers in two ways: price and reliability,” the company said in an email response to questions.

The case hinges in part on the doctrine that interstate transmission rates approved by a federal agency are considered just and reasonable.

Another issue is the U.S. Constitution’s Supremacy Clause, which allows the federal government to trump state authority. It can come into play when federal law explicitly pre-empts state law, in areas when federal law is pervasive or when there is a conflict between federal and state laws.

Richard Levy, the J.B. Smith distinguished professor of constitutional law at the University of Kansas, said state regulators can believe they are in the best position to determine what is in the best interest of utility customers, but federal prerogatives and interest in interstate transmission of electricity will be important in the KCP&L case.

“I do feel there is a question lurking in the background about how much (the selling of electricity) is a national business,” he said.

So far, Missouri regulators in a state circuit court and court of appeals have won the argument. They acknowledged the doctrine that rates approved by the Federal Energy Regulatory Commission are deemed just and reasonable. But they argued what is unreasonable is having ratepayers cover the cost of sending electricity 500 miles from Mississippi to Missouri.

Two previous Supreme Court rulings slapped down states that tried to stop the recovery of transmission costs approved by the federal agency. But Missouri argued that those cases are different because they involved federal mandates to import the electricity. KCP&L’s decision was voluntary.

“We have no difficulty understanding the basis for the PSC’s decision to disallow the excessive transmission costs from recovery of rates,” the Missouri Court of Appeals said in its ruling.

This story was originally published March 27, 2014 at 7:49 PM with the headline "Dispute could lead to higher rates for many Missouri customers of KCP&L."