Ongoing litigation over EPA rules raises compliance risks and costs. North Carolina utilities, however, benefited from the state’s forward thinking.
Iatan 2: A New Coal Model
KCP&L breaks ground on a novel structure for billion-dollar plant investments.
The precise rate of return on the new assets would be established in future rates cases as each of the new facilities went into service.
In exchange for pre-approval, KCP&L agreed to reduce its ROE rate for authorized Allowance for Funds Used During Construction (AFUDC) by 250 basis points. For example, instead of a return on equity of 10.8 percent, the utility would accept an 8.3 percent ROE for Iatan 2’s costs. The plant carries an estimated $1.6 billion price tag, with KCP&L taking a 55 percent ownership position.
Further, regulators allowed KCP&L to introduce an amortization component into its rate requests to protect the utility’s investment-grade rating.
“After meeting with analysts and credit-agency representatives, it was clear there were changing Wall Street expectations around the issue of maintaining our credit quality,” Deggendorf explains. “Over the five-year period, the CEP will represent a 60 percent increase in our rate base. The amortization component gives us the ability to cover costs and maintain our credit quality during an aggressive investment period. It makes sense for all the parties.”
The amortization approach allows KCP&L to accelerate the rate of depreciation on the CEP assets. That, in turn, allows the utility to recover additional cash through rates—thereby increasing its cash flow—to maintain credit- rating ratios.
“We’re increasing rates and accelerating the depreciation of the assets,” says Chris Giles, KCP&L’s vice president of regulatory affairs. “Accelerating the depreciation—in a sense paying more up front now—will result in lower rates later on. While the approach benefits the company in the short run, our customers benefit in the long run.”
Since its initial approval by regulators in 2005, the CEP is thus far proceeding on schedule. In September 2006, the first wind facility, the $166 million Spearville Wind Energy project, went fully operational. Its 67 wind turbines are capable of producing 100.5 MW of electricity.
Then, in December 2006, regulators in both states approved rate increases that took effect in 2007. The Missouri Public Service Commission approved a $50 million, or roughly 10 percent, rate increase; the Kansas Corporation Commission (KCC) approved $29 million, or roughly 9 percent increase.
Then, in 2007, the utility installed a selective catalytic reduction (SCR) system to reduce flue-gas nitrogen oxides (NOx) at its La Cygne plant. In April, it issued a request for proposal for another 300 MW of wind power, with a 100 MW plant to be built in 2008 and the balance to be constructed between 2009 and 2012.
Further, it has applied for another round of rate increases. In Kansas, the KCC tentatively has approved a $28 million increase that also includes formal approval of the 8.3 percent ROE for Iatan 2. A similar request in Missouri still is pending.
Construction of Iatan 2—which features a supercritical design to improve efficiency and reduce emissions—also is underway and on schedule to begin operations in 2010. KCP&L will own roughly 55 percent of the new plant, while Aquila Inc.—a portion of which Great Plains is in the process of acquiring—will own 18 percent. Empire District Electric will own 12