HOME

June 2005
by Ned Ford

Analysis of Experimental Regulatory Plan
of Kansas City Power and Light

Introduction:

I was contacted in April of 2005 by Wallace McMullen of the Missouri Sierra Club and asked to help with a proposal to build a new coal power plant. KCPL, a typical Midwest regulated electric utility has proposed to build an 850 – 950 MW pulverized coal plant. Over the course of the next two months I examined the company’s circumstances and produced an alternative strategy which was the subject of testimony I presented to the Missouri Public Service Commission on June 24.

To summarize my report, KCPL’s share of the proposed Iatan 2 coal plant will cost $873 million. The capital costs, financing, fuel, operation and other costs will result in a rate impact for the plant alone of $90 – 105 million per year – an increase above current rates for Missouri customers. Assuming KCPL’s projected growth rate is accurate, a strategy of aggressive promotion of energy efficiency technologies to all customer classes, similar to programs existing in at least 23 other states, could permanently eliminate the need for KPCL to participate in the Iatan 2 project for $60 million per year.

I don’t happen to think KCPL’s projected growth rate is likely, and believe the actual efficiency program cost would be substantially lower. But if they are accurate, or if the programs were only partially successful, they would still defer the need for the plant by enough years to produce a substantial economic benefit.

More important than the benefit of deferring the plant is the fact that the efficiency programs produce real and strong economic savings from the start. Each dollar spent on efficiency produces two to three dollars worth of electricity savings. This savings provides more than enough benefit to allow KCPL a higher rate of return than they would otherwise earn, which in turn allows them to be more profitable with a lower cost strategy. A utility may typically earn a nominal 14% rate of return. I was unable to identify KCPL’s specific rate of return, but spelled out the principles so that they may be adapted to the actual circumstances. A new coal plant which produces a $100 million rate increase actually produces about $14 million in annual increased revenue. The utility’s economic incentive to build the plant starts and ends with that $14 million, if all else is equal. So an alternative plan which saves more than $100 million per year from the start, even if it has a $60 million price tag, is more than adequate to provide the utility with a share of the savings, that could approach, equal or exceed $14 million per year, at the discretion of the regulatory agency.

The primary point here is that Iatan 2 is a very expensive plan compared to the available alternative efficiency strategy. The case that was before the Missouri Public Service Commission required that I present my testimony in terms of what the company could do or should do, but obviously, the critical action rests with the MPSC. They can decide to approve the company plan, or to reject it outright, or to cut some middle path.

The efficiency strategy I describe is based on the proposed 2% rate of growth that KCPL believes they will experience in the coming five years. Since growth during the last five years has been less than 1%, it could cost less than $30 million to permanently eliminate the need for Iatan 2, but the actual amount will be based on actual growth in consumption.

Current customers of KCPL are not likely to increase growth. The entire growth projection is associated with expected population growth. Therefore, a 15% rate increase to all customers to serve a 15% group of customers who do not presently exist should be regarded with the utmost caution, to say the least. My report below explains in detail how I considered the various issues, and what I recommended.

- Ned Ford
3420 Stettinius Avenue
Cincinnati, Ohio 45208
513-533-9244
Ned.Ford@fuse.net

The structure of this report bears some resemblance to testimony. During the course of preparation for the trial, it became clear that we would not have the opportunity to file written testimony, so the observations below were delivered in near entirety on the stand. The text below has been edited to reflect the course of the day on the witness stand.

My name is Ned Ford. I have spent more than twenty years actively pursuing environmentally preferred strategies for electric utilities which also save money. I have done this primarily as a volunteer at the State and National level of the Sierra Club. My activities have included editing and publishing the Sierra Club’s national internal newsletter on energy issues and being the Club’s manager for a series of approximately 25 formal interventions before the Public Utilities Commission of Ohio.

KCPL has proposed a plan to build a new coal-fired power plant, as part of a broader strategy to comply with Federal health-based environmental standards and prudent management of resources, and is seeking regulatory approval of this plan in a process which is described as experimental, but which clearly has numerous flaws, not the least of which is failing to adequately consider risks and costs associated with the proposed new coal plant according to Missouri regulation and the concerns raised by many parties during the evolution of this plan.

40% of the capital cost of this plan involves major pollution controls and upgrades to existing power plants. My investigation reveals no serious problems with any part of this plan except the proposed addition of 500 MW of new coal generation capacity to the KCPL regulated system.

The reader should keep in mind that those other elements of the proposed plan involve expenditures of approximately 40% of the capital cost proposed by KCPL to be expected to be included in rates. This will probably be less than 40% of the eventual rate impact because various interest or carrying costs of the new power plant will likely be a greater fraction of the total cost than for the other elements of the plan.

The proposed 500 MW of new coal capacity will cause an increase in rates of no less than $78.6 million per year and perhaps greater than $105 million per year, starting after the first rate case after the coal plant is completed. The rate impact could be considerably higher, based on a range of possible rate impacts stated by KCPL. This represents an increase in costs to all customers for a new resource which serves only approximately 15% of the load KCPL expects to have in five to seven years. There is no need for the plant today, and the growth in load which KCPL projects is speculative, and at the high end of the range of historical experience.

I identify and discuss in considerably detail some alternative strategies which KCPL can adopt, and apparently which KCPL was required to examine by Missouri regulation, specifically 4 CSR 240-22.050(2)(C) which requires KCPL to examine the cost-effectiveness of a sufficient amount of energy efficiency to eliminate a year’s worth of growth, which KCPL did not do. (During the trial we became aware that KCPL’s attorneys believe that the company was granted a waiver from this responsibility, along with the clear waiver of reporting to the MPSC which was a ten year waiver expiring in July of 2005. The timing of this expiriation is obviously relevant to the public interest in this matter, whether or not it indicates a failure by KCPL to follow the rules). The proposed efficiency and renewable energy combined amount to about half of a single year’s growth over a five year period, if you accept the KCPL assumptions about growth. If you accept the lower end of the historical range, these programs eliminate more than a year’s worth of growth over five years.

The strategy I propose will require a rate increase which could be as expensive as $61 million per year, which should be allowed into rates as soon as regulations allow. It could be much less expensive. The group of resource options I discuss includes energy efficiency, and perhaps some increase in the presently proposed amount of renewable energy.

The adoption of some strategy based on these resources will incur a cost but will produce a net savings to ratepayers which is approximately double the immediate rate impact, and will protect against future rate impacts for new generation resources for as long as KCPL continues to pursue this approach. The value to KCPL customers provided by this strategy is therefore a net savings of approximately $60 million in the first year after the alternative strategy is fully allowed into rates and an additional $78.6 – 105 million in the first year that the new coal plant would otherwise be added. Real dollar savings will expand every year thereafter.

Should the efficiency alternative to Iatan 2 fall short of the intended mark it will still defer the need for the plant substantially. This allows a high level of confidence that the plant will not be needed at a point where there is not enough time to build it. KCPL testimony (Grimwade) seems to confirm that even if the programs fall short of the intended mark they will be of substantial value in reducing the consumption of natural gas at KCPL’s facilities. I must observe that these programs will not fall short of the intended mark if KCPL does not deliberately undermine their effectiveness.

The failure of many utilities to develop strong efficiency programs is due in part to the lack of understanding of the whole array of costs and benefits that must be compared, and in part due to the lack of strong mechanisms to allow the utilities to share appropriately in the real savings as they are produced.

1) The program is likely to be more cost-effective if it is toward the high end of size as a function of total utility revenue as compared to programs which have been conducted elsewhere;

2) Every dollar spent on efficiency produces approximately two dollars in electric savings to KCPL customers;

3) After five years, the new coal plant is eliminated, and the net savings are increased by the avoided $78 – 105 million rate impact per year or more;

4) Further rate increases due to additional generation plant additions needed after Iatan 2 are also avoided by sustained efficiency program funding at the level needed to avoid new growth in electricity consumption – without an increase in the general size of that funding (unless an extremely large growth in electricity consumption emerges – which would also create problems for the supply-side strategy);

5) The saved dollars remain in the service area creating substantially greater economic growth and respending than any money invested in new power plant construction and operation.

Finally, I simply do not believe that KCPL should consider a return to the pre-2000 level of growth to be highly likely. Even using the high efficiency program cost assumptions I cite here, the actual cost is likely to be no more than half of the $61 million because KCPL’s actual current growth for the most recent five years is less than half of their assumed growth, and the Missouri jurisdictional portion of KCPL’s service area has actually reduced total consumption during this period. The recessionary influences which caused the substantial reduction in energy growth in KCPL’s service area during the last five years are nationwide, or global, and cannot be isolated from rapidly rising oil, natural gas and coal costs.

Efficiency spending is not the same as spending on power plants because power plants incur further costs and efficiency avoids further costs. Efficiency modernizes business industry and residential energy use while power plant construction is essentially antique technology with pollution controls and does nothing to improve local energy use patterns.

In essence, efficiency spending is a redirection of money we are committed to spend anyway. It results in lowering the total dollars to provide electric service while improving the quality of that service.

So while there are rate increases associated with efficiency programs, we must never lose sight of the fact that there are substantial net bill savings as well. Over the course of ten or fifteen years these savings will easily exceed the entire cost of the proposed coal plant.

I presented my testimony and capture its import in this report, on behalf of an environmental group for which I am a high level volunteer, but I only make reference to environmental issues to place them in an economic context that matters to KCPL and its regulated customers. I am fully aware that there is no legal constraint to CO2 emissions at the present time, and my report and testimony depend entirely on the economics of the alternative strategies.

I believe that unregulated customers and all other signatories to the Stipulation have a perverse and unfriendly interest in this matter to that of the regulated Missouri jurisdictional customers of KCPL, with the exception of the Office of Public Counsel, whose participation in the proceedings seem appropriate, but whose support of the Stipulation is inexplicable, especially in light of the history of hearings run by KCPL outside any recognized regulatory process which would create a public record, leading up to the Stipulation. The signature of the MPSC staff member can only be excused by confusion. In an honest process the public service commission staff would have refrained from signing such a stipulation as a matter of honor.

I believe that Missouri Public Service Commission’s approval of the Stipulation would be a profound failure of their responsibility to protect the interests of the regulated customers of KCPL.

I provide concrete evidence that:

- Building the Proposed Iatan 2 plant is more expensive than a suite of alternative technologies;

- Building the Proposed Iatan 2 plant in the proposed timeframe is especially risky due to a variety of uncertainties in the electric industry, so that if KCPL makes a sincere effort to pursue the suite of alternative technologies I identify, in an appropriate manner and fails, KCPL shareholders and ratepayers will still be better off than they would if Iatan 2 were built;

- KCPL has failed seriously in addressing a specific number of issues which were raised by participants in the various proceedings leading up to the current case;

- The economic risk to KCPL and its customers is the primary consideration at hand according to law and reason, but other factors such as the impact of KCPL’s high dependence on natural gas and the absence of a natural gas efficiency program, and the concrete nature of some aspects of climate change which are not presently clearly defined by legal constraints are serious enough that they should not be dismissed simply because they are not adequately defined at the present time;

- There are presently over 23 states with extensive experience in electric utility efficiency programs, including several which are currently pursuing programs on a scale similar to that which KCPL needs to pursue to eliminate the need for Iatan 2.

In response to these observations I make and describe the following recommendations:

- KCPL should indefinitely postpone the construction of the proposed Iatan 2 plant and immediately develop a new plan which is based on alternatives which are less expensive, less environmentally harmful, and which can be dispatched incrementally and very quickly.

- KCPL should immediately begin the development of end-use efficiency programs large enough to defer the proposed need for 82 MW per year each year, as required by Missouri regulation 4 CSR 240-22.050(2)(C). Missouri regulation only requires the analysis of such programs, but KCPL’s present analysis shows that more expensive efficiency programs remain cost-effective.

(KCPL proposes both wind and energy efficiency programs which are primarily residential, and therefore more expensive than the commercial and industrial programs which are widely recognized to be most cost-effective, in it’s proposed Stipulation. The fact that the proposed amounts are too small to defer Iatan 2 should not disguise the fact that larger efforts would be as much cheaper than the proposed new plant as these amounts are, or even less expensive than the currently considered programs, due to better program design and economies of scale).

Program spending should be weighted toward the most cost-effective programs, which are commercial and industrial programs in most cases. There are many more sophisticated program designs to choose from than those presently proposed by KCPL.

- KCPL should advertise in the region a specific price offering for Combined Heat and Power opportunities which its customers may provide. The offered price should be increased frequently until either the company has sufficient offers to produce a reasonable share of the 82 MW per year of presumed need, or the offered price has risen above the cost of windpower.

- KCPL should meet swiftly with concerned parties to provide an effective proposal for rate recovery of elements of this alternative strategy in anticipation of the 2006 rate case. This is necessary because current ratemaking does not clearly make KCPL whole if large and effective efficiency programs are implemented, and does not clearly establish a significant reward for KCPL for successfully avoiding an expensive new capacity addition.

Iatan 2 is more expensive than three major categories of options available to KCPL:

Ř Energy Efficiency is available at substantially lower cost and in sufficient quantity to eliminate the need for Iatan 2 for several decades at least;

Ř Combined Heat and Power is available at substantially lower cost and in sufficient quantity to eliminate the need for Iatan 2 for a decade or more.

Ř Wind energy is available at a lower cost and much larger quantity than proposed in the Stipulation and should be used instead of building a new coal plant.

I am not prescribing an alternative plan to Iatan 2 for KCPL. I am identifying elements of a much lower-cost plan than the one proposed in the Stipulation, providing evidence to support my assertions of the cost and availability, and identifying issues that KCPL must address in order to protect its own economic interests and those of its regulated customers from the risks associated with Iatan 2 as proposed.

Iatan 2 is alleged to be associated with a 15 – 20% rate increase (Attachment B). Approximately 40% of the capital expenditure causing this rate increase as identified by KCPL is not due to Iatan 2, but many of these expenditures will not require substantial additional carrying costs as Iatan 2 will. Further, a coal power plant’s capital costs are a commitment to future fuel, operation and maintenance, financing and earnings costs, so if I accept for the purpose of this report that the rate impact due to Iatan 2 alone is expected to be 9 – 12% over twenty to thirty years, I encourage readers to recognize that this is likely to prove very conservative. KPCL’s proposed interest in Iatan 2 is $776 million dollars for a 500 MW share of the plant.

The ratio of rate impact for efficiency compared to rate impact for new fossil fuel generation capacity of 1:2 is pretty consistent around the nation and over the last thirty years. The precise rate impact is highly sensitive to the actual growth experienced by KCPL, the amount of shared savings allowed by MPSC and how well the programs are conducted by KCPL. Efficiency program costs are often compared with the capital costs of new fossil power plants but this comparison neglects the added cost of fuel, operation and maintenance, financing and corresponding increased transmission costs for the fossil plants, and the actual net retail electricity savings for the efficiency programs less shared savings.

As a result efficiency costs about a third of the cost of new fossil fuel capacity, but to make it attractive to utilities the cost must be raised by 50% or more.

Efficiency programs have very clearly defined and powerful peak load and KWH savings impact and are the least expensive resource available on a large scale to utilities and communities who need electric supply and do not have substantial untapped hydroelectric potential. I consider Combined Heat and Power to be a form of efficiency, but discuss it as a discrete element because it requires some different programmatic and regulatory approaches. I discuss wind briefly. (Sierra Club and Concerned Citizens of Platte County’s other witness was expected to provide extensive discussion of wind, but proved not to be a credible witness. It is my opinion that while wind deserves a greater role in KCPL’s planning process, the peak capacity provisions of wind are not clearly matched to the needs KCPL experiences, and that it is impossible to assert that a specific amount of wind would adequately substitute for a specific amount of coal capacity, economically, without a detailed investigation which Sierra Club and Concerned Citizens of Platte County did not have time or resources to conduct). . KCPL may identify specific reasons to use a blend of resources, not limited to these three major technologies, to meet its needs, and effectively eliminate the need for Iatan 2.

Efficiency overview: End-use electric efficiency programs have been conducted by electric utilities since the 1960’s. For the last thirty years the national average cost to save a KWH of electricity through such programs, including technology and program administration costs but not shared savings, is approximately 3 cents per KWH. The combined capital and fuel cost of a new coal power plant is approximately 5 cents per KWH.

Further discussion based on confidential information provided by KCPL to SCCC through interrogatories discussed in Attachment A – Confidential at A5.

The retail price of electricity represents the internal cost of generation, plus fuel, O&M, financing and return. These components raise the net cost to ratepayers of such a power plant to the allowed retail price of electricity. When a new power plant adds ~15% to the total revenue requirement of all utility sales to regulated customers it demands a higher level of attention to available options than we see in the Iatan 2 plan.

Efficiency program costs are very low, no more than half of the capital cost of a new fossil plant, and no more than 35% of the retail price of electricity. But efficiency causes a reduction in sales revenue. So a properly developed efficiency program must share a significant fraction of the gross savings to the retail customer with the utility, amounting to about half of the retail price of electricity.

While these lower rate impacts are not insignificant they are accompanied by large reductions in total costs, so that the simple effect of efficiency is that rates go up, but bills go down. Typical revenue requirement reductions are twice the rate impact, although this is highly sensitive to the determination of appropriate shared savings by the regulatory body.

Some states have determined that “avoided costs” amounted to such a large fraction of real savings that they killed the programs they previously approved, claiming the programs “cost too much” and ignoring the fact that the “avoided cost” compensation was earned by the utility. The accurate determination of the costs and benefits at the current time is no guarantee that future regulators will not pervert the intention of law, regulation and experience. States with long term success in efficiency programs reinforce the principles that guide program design through extensive discussion in regulation and law.

Cost shifts to compensate for revenue erosion or incentives are effectively a determination by regulators or lawmakers that some of the net savings, the difference between the actual efficiency program cost of ~ 3 cents and the actual savings of the retail KWH of ~ 7 cents which is avoided, should be shared with the utility. These shared savings are typically described as “lost revenues” and “shared savings” or “incentive payments” but all are actually sharing of the net savings to the customer. Getting the correct values for these functions is essential in order to avoid erosion of revenue concerns for the utility and to avoid overcompensation.

I discuss rate recovery concerns in more detail below, at Ratemaking Concerns

The 500 MW of Iatan 2 proposed to meet the needs of Missouri Jurisdictional customers is better described as a plan to provide an additional 35 – 90 MW per year starting in 2010, for the foreseeable future. This is a reasonable range of estimates for KCPL’s growth per year based on actual experienced growth in electric consumption in the region and nationally.

KCPL’s response to Interrogatory “SCCC DATA REQUEST NO. 0004” shows this clearly, as follows:

REQUEST:

0004. What is KCPL’s energy and demand growth rate for the last five and ten years?

RESPONSE:
  KCPL Net System Input Gwh KCPL Annual Peak Load Mw
1994 12,405.3 2,714
1995 12,777.1 2,909
1996 13,275.8 2,987
1997 13,635.0 3,044
1998 14,357.4 3,175
1999 14,321.2 3,251
2000 15,224.7 3,374
2001 14,716.4 3,352
2002 14,955.4 3,335
2003 15,052.5 3,610
2004 14,985.1 3,384
Note: Peak and Net System Input are actual and not weather normalized.

John R. Grimwade constrains the projected need number in his testimony for KCPL in this case, at line 5, page 7 where he states that the company projects a 431 MW shortfall in 2010, based on peak load of 3,959 MW and a 12% reserve margin.

Obviously, KCPL cannot add bits of a >$1 billion coal plant each year to conform to load. Just as obviously KCPL is not going to arrive in late 2009 with little or no reserve margin and no plan to deal with it. So construction of Iatan 2 represents an unwieldy, large and mismatched addition to the ability of KCPL’s ability to serve its regulated customers. Because of the long timeframe needed to plan and construct a large coal plant, the plan is risky whether actual load is larger than expected, or smaller than expected.

The capacity of KCPL to fine-tune its load and sales to conform to the large block addition of a proposed new coal plant is identical to the capacity KPCL has to fine-tune any short-term mismatches between the cheaper more flexible strategy we support, and the actual needs of the customer base.

The importance of the potential mismatch of timing is especially critical in the present case because of the drastic shift in load growth experienced regionally and nationally over the last ten years. While the United States as a whole saw electric growth of approximately 2% per year during the 1990’s, that rate fell to almost nothing during the 2001, 2002 and 2003 years. Resumption of the 2% load growth in 2004 might mean a resumption of the trend after an anomaly, or it might represent pent-up demand to be followed by an extended period of lower growth rate. While this is not the place for an extended discussion of our economic future it is pertinent to my observations that the recent fall in load growth was associated with first the eruption and instability of natural gas prices in 2001, and subsequently with the doubling or tripling of oil and most coal prices.

Further discussion based on confidential information provided by KCPL to SCCC through interrogatories discussed in Attachment A – Confidential at A1.

The need for 500 MW of new capacity is most easily discussed if we define it as MW required per year. The 2.2% peak load growth experienced for the ten years from 1994 through 2004 projects a need for 75 additional MW of capacity per year, rising to 83 MW in 2009, 85 in 2010, 87 in 2011, and 89 in 2012, or an average of 82 MW per year. (Adding 12% reserve margin makes that a little under 92 MW per year, but this is not important to consider if a strategy SCCC supports is adopted – see Reserve Margins – below at page 15). Each of these numbers is reduced somewhat if we accept John Grimwade’s 431 MW.

(Among other things, this schedule of needed capacity implies that KCPL has viable means to cope with capacity shortfalls of smaller values than 431 MW. Otherwise there would be an increasing shortfall during the five years from the present time under KCPL’s assumptions which should have been addressed when KCPL fell below a 12% reserve margin. At a presumed 2.2% rate of growth, that time would be some time during this year, 2005, according to the projected need described by KCPL for year 2010).

Further discussion based on confidential information provided by KCPL to SCCC through interrogatories discussed in Attachment A – Confidential at A2

However, The need as defined by the 0.81% growth actually experienced in the most recent five years is for 34 MW in 2005, 36.3 in 2012, or an average of 35.15 MW per year, rising to an average need of 39.63 MW per year including 12% reserve margin.

With more than a 100% difference between actual experienced growth distinguished simply by asking what is the five year experience, versus the ten year experience it is inherent in regulatory requirements for MPSC to consider the risk imposed on regulated customers for any strategy, much more so for the proposed strategy.

KCPL Response 2014 demonstrates that the large difference in growth rates for the last ten years versus the last five is aggravated for the Missouri regulated customers who have actually reduced total consumption by an average of 0.55% per year since 1999.

SCCC DATA REQUEST NO. 2014


CASE NO. EO-2005-0329


REQUEST: 2014. Please provide the attachment to response #37.

Information provided by: Douglas Nickelson, Project Analyst, Regulatory Services

Provided as part of this is the data supplied in the attachment to SCCC-0037.

RESPONSE TO:

SCCC DATA REQUEST NO. 0037

CASE NO. EO-2005-0329


  Missouri Retail Mwh Missouri Load Coincident with System Peak MW
1994 7,581,352 1,567
1995 7,764,715 1,709
1996 8,028,127 1,738
1997 8,150,815 1,768
1998 8,536,620 1,804
1999 8,407,803 1,843
2000 8,803,449 1,901
2001 8,183,011 1,837
2002 8,186,087 1,810
2003 8,256,870 1,948
2004 8,179,662 1,807


Compound Avg. Growth Rate

1999-2004
-0.55%
-0.39%

1994-2004
0.8%
1.4%

Note: MWH energy are reported sales and are not weather normalized

Peak Loads prior to 2001 have been adjusted to reflect only the firm power levels of GST under special contract provisions.

Requested by: Kathleen Henry

What reasons other than available alternatives make it desirable to indefinitely postpone Iatan 2?

Before describing strategies which KCPL might adopt which would be cheaper and less risky than the proposed Iatan 2, we should identify a set of reasons why it would be better for Missouri regulated customers to defer or eliminate the need for this plant:

Ř The proposed plan requires a rate increase of 15 – 20% (Attachment B). The Stipulation acknowledges one, but does not specify how great it will be. It is clear from the Stipulation that as much as 40% of this rate increase is due to pollution controls on existing units and other changes that SC and CCPC do not find problematic;

Ř The delay of this plan will permit MPSC and KCPL to develop and finalize a cost-recovery mechanism that ensures that KCPL is at least as well financially compensated for saving a KWH as it is for generating and selling one.

Ř By deferring the plant several years KCPL will be likely to be able to evaluate a number of completed IGCC plants, to determine if the technology is suitable for KCPL. There are presently ~25 IGCC plants proposed for construction in the United States;

Ř The delay of this plan by several years will allow substantial increases in scientific understanding of climate change;

Ř The delay of this plan by several years will allow substantial improvement in the available technology and the cost of that technology to improve efficiency on both sides of the meter.

Ř The delay of this plan by several years will allow a substantial improvement in the knowledge of the market realities for natural gas and coal supply.

Ř The delay of this plan by several years will allow KCPL to make a thoughtful evaluation of the role the company wishes to play in the near term future evolution of a sustainable energy economy.

I am not in a position to tell KCPL how to arrive at a rate that will adequately compensate them for not building the plant. Instead I wish to provide a formal record of alternatives which are better than the proposed plan, so that the reasonableness of that plan can be assessed meaningfully at any future time that an increase in rates is requested. I strongly urge intervenors, including the Sierra Club and Concerned Citizens of Platte County to recognize the need to provide an adequate rate incentive for KCPL to conduct efficiency programs.

Discussion of reasons to avoid Iatan 2

Coal Prices:

My Attachment C is a page from the U.S. Department of Energy website which shows that coal prices have doubled for most of the U.S. over the last two years. KCPL plans to use Powder River Basin (PRB) coal for Iatan 2, which is unquestionably the most economic coal source option. However the doubling of other coal prices suggests that the current 20% increase in PRB cost is not the end of the story. Further coal price increases will substantially increase the economic preference for efficiency and wind. (KCPL discusses how substantial changes in coal prices do not change the preference for coal over natural gas, but neglect the effect rising coal prices have on efficiency).

Climate Change:

My observations address Climate Change only as it pertains to the uncertainty created by different fossil fuel choices made in the near future by KCPL. I underscore the imminence of some form of regulation on CO2 emissions by providing two distinct discussions of issues related to climate change which are not widely known, and which emphasize the concrete nature of our knowledge. While the future timing of warming is debatable, the basic science is established:

These observations about climate change were not introduced in the formal hearing. The process of the formal hearing did not seem to provide an opportunity to explore this topic in any detail.

Climate Change is not just warming: In addition to the warming caused by greenhouse gases, rising atmospheric fossil CO2 is presently causing mild acidification of surface waters of the ocean. This is already sufficient to cause damage to living coral reefs, but the more important point is that finishing this century with unrestrained CO2 emissions will acidify the entire surface of the ocean enough to disrupt the life cycle of key algae and plankton forms that are the base of the ocean food chain, and some scientists are concerned that the levels will be high enough to directly affect the reproduction of vertebrate life in the ocean.

At a global conference in April of 2004 scientists identified 70 research topics they consider essential for near term understanding of rising ocean acidity. These summaries are easily read by the layperson and form a deeply disturbing picture of the effects of unrestrained CO2 emissions from fossil fuels. Unlike the warming impact of atmospheric greenhouse gasses, rising acidity is easy to understand and is easily measured. (See Attachment D for an amplified discussion and direction to detailed online discussion).

An extremely brief history of climate science – to establish some simple certainties that are often overlooked in considering whether the greenhouse effect is real or serious: in 1859, John Tyndall first measured the infrared blocking properties of a variety of greenhouse gasses. In 1956 Gilbert Plass demonstrated to the scientific community that adding more CO2 to the atmosphere would impact surface temperatures, overcoming a century’s worth of debate on the subject. 1998 is the warmest year on record, and five of the subsequent six years are among the hottest ten years since records were established in the 1840’s.

Prehistoric temperature records are fairly controversial, but at some point in the early 1990’s we exceeded the warmest temperatures suggested by any of the presently existing reconstructions of global mean temperature in the last two thousand years.

Greenhouse gasses are not the only cause of change in the Earth’s temperature, and CO2 is not the only greenhouse gas, but we have presently elevated CO2 levels well above the highest point at any time in the last 420,000 years, and will see a doubling of preindustrial levels to approximately 550 parts per million around 2050 without a meaningful effort to reduce emissions. The effective doubling when all greenhouse gasses are considered is likely to occur in the next twenty years.

Potential improvements in efficiency technology:

Energy efficiency technology has made stunning leaps over the last several decades. Compact fluorescent bulbs sold today cost 20 – 25% as much as much lower quality CF’s sold ten years ago. Refrigerators and air conditioners use less than half the energy they did in the 1980’s. U.S. energy per dollar of Gross Domestic Product has fallen consistently for most of the last fifty years, and most of that reduction is due to improved efficiency of our energy use.

U.S. energy intensity, a measure of raw energy input per unit of GDP, has fallen by over half since 1970. Without exploring all the details this means that there is a strongly defensible argument that merely doubling the current rate of efficiency adoption will completely eliminate growth in CO2 emissions and provide billions of dollars of economic benefit. Those who study these matters provide detailed evidence that the efficiency potential can be pursued for decades, and if it is not sufficient to eliminate half of total fossil energy use, it is sufficiently large and sufficiently inexpensive that we should find out how far we can take it before it plays out.

It is hard to prove in a few paragraphs that the untapped existing potential for efficiency is massive, and harder still to prove that we are nowhere near a point of tapping out this resource. Attachment E consists of several slides from a presentation by Art Rosenfeld, member of the California Public Utilities Commission, which demonstrate that a large scale utility efficiency program which has operated at ~1% of revenues for 25 years has caused net savings of $12 billion per year as of 2004. This experience translated to KCPL would result in a 25-year efficiency program impact of $335 million per year in savings. My recommended strategy would produce savings as much as triple that amount, if load growth is as great as KCPL assumes.

KCPL’s future role in energy services:

Although my testimony advocates KCPL’s direct involvement in providing efficiency services to its customers, and all my experience in this field argues that willing utilities can provide the most coherent and powerful end-use efficiency programs, the converging facts of climate change, rising fossil fuel prices, a stagnating economy and massive efficiency potential (not to mention the growing availability of renewable electricity technologies) create a strong public interest in pursuing these objectives with or without the willing participation of the electric utilities.

During the last half century U.S. electricity consumption growth has dwindled from over 5% per year to less than 2% per year. This is due to modernization of the way we use energy. Electricity technologies which increase the potential for this modernization are emerging faster than the marketplace adopts them, even though we have a belief that our businesses and industry are modern, and that we have effective public policy programs.

Attachment F is a report from Efficiency Vermont. Vermont is a wholly deregulated state, which has established an independent state agency which administers the program expenditure of a system benefit charge which is presently more than 3.5% of the retail price of electricity.

KCPL faces challenges from many directions. Efficiency Vermont is one example of how efficiency can be promoted without a utility’s direct involvement. Appliance standards are being strengthened, including the powerful increase in central air conditioner standard that occurs in 2006. Many states have adopted appliance standards beyond those which the Federal government supports – there are about 20 technologies which presently justify a local or state standard. Efficient products continue to become less expensive and better, and public knowledge about them continues to improve.

KCPL needs to make a very serious evaluation of which side of this shift in the nation’s use of energy they want to be on. With the modest actual growth of electric consumption over the last few years it is not impossible that KCPL could build Iatan 2 and wind up with a very expensive wallflower. The relatively high efficiency and low per KWH cost of output expected from this plant must not be confused with the fact that the combined capital and incidental costs requires a rate increase which will provide further incentives for citizens and businesses to tap into available technology to reduce their costs.

By contrast, embracing a strategy to work with customers to improve their costs makes KCPL relatively invulnerable to many potential trends. It redefines the company as a partner with the community, and it will be incumbent upon the community to ensure that this shift is properly incentivized, encouraged or rewarded. Utilities which have embraced efficiency have found that they are uniquely effective in their ability to deliver efficiency services because of their established relationships with customers, their knowledge of the system and the impact of individual customers. The ability to address customer concerns about energy costs with strong efficiency responses makes a huge change in the human relationships between company employees and customers.

It is not too hard to project a few years forward to a time when CO2 reductions or economic recession or even a single major improvement in a key energy technology permanently eliminates the growth of electricity demand. The financial security of a company with a large new coal plant and trivial efficiency programs will be much less certain than a company with a trim fit of capacity to load and a strong end-use efficiency program.

Renewable energy:

KCPL has only one clear renewable generation resource available to it today which is cheaper than Iatan 2 and demonstrated to be available on a utility-scale basis – wind.

One remarkable aspect of wind in today’s world is that it is highly compatible with agricultural land. Farmers can often get more money per year in rent for a wind-side than they do with their crop or cattle use, and the turbine does not significantly reduce the usefulness of the land for farming.

KCPL’s proposed 100 MW addition of wind is very small relative to the stated need for new capacity. It is necessary to determine whether KCPL actually needs peak capacity, or baseload energy, to determine how appropriate wind is relative to energy efficiency, and this determination cannot be done with the resources and information presently available to me. KCPL could certainly afford to develop more than 100 MW of wind, or 200 MW if the speculative additional 100 MW in 2008 is completed, even in the context of becoming acquainted with the technology. But how much more should be determined by KCPL in the context of a strong efficiency program response.

KCPL’s selection of a Strategy

The correct mix of resources actually used will depend on KCPL’s assessment of actual growth on a very detailed basis, including decisions about base and peak capacity needs and issues regarding where on the company’s grid the resources are to be promoted.

Energy efficiency is uniquely able to address specific needs such as peaking growth, base energy needs, time of day concerns, and problems with discrete local areas of the company’s transmission grid. KCPL is a strong Summer peak company, and should progress immediately with a program to increase the adoption rate for high efficiency lighting in commercial buildings, to improve the efficiency of all air conditioning equipment sold, and to retrofit large office building HVAC systems after appropriate building energy use audits have ensured that any efficiency opportunities which also reduce waste heat are captured, since this can reduce the size of the cooling system needed for these larger systems.

But it may be more prudent to approach the avoidance of Iatan 2 from a variety of different fronts in concert with a basic efficiency strategy. Strong candidates for these fronts include improved efficiency of the current generation resource, increased adoption of Combined Heat and Power and a variety of renewable technologies.

My personal central concern is with climate change impact. But I participate in this investigation with clear recognition that regulatory and legal objectives require economic prudence, and recommend only those actions which reduce CO2 emissions while also costing less than the proposed Iatan 2. Fortunately all the strong CO2 reduction strategies are economically preferable to fossil fuel generation of electricity, with new or existing resources

A basic concern is expressed throughout the proposed Stipulation that economic risk should be avoided. There are a few significant risks that are incurred with increasing dependence on a conventional coal plant which are of limited concern to me, but are directly related to the profitability of KCPL. Since strategies which minimize these risks are more suitable to me, I point them out. The risks include an increased dependence on coal in the face of rising coal costs, and KCPL’s extremely high level of exposure to natural gas price impacts.

Finally, there are some ramifications to the current strategy which are not entirely KCPL’s responsibility, but are clearly the responsibility of the MPSC. These include establishment of recovery mechanisms for efficiency program costs which do not cause revenue erosion, and addressing the relatively high level of exposure KCPL has to natural gas price increases, as opposed to acknowledging the risk of it.

Efficiency for KCPL:

The load management programs described by KCPL as Demand Reduction in the Stipulation produce no environmental benefit. Although these programs do help reduce demand and thereby defer the need for a capacity addition, they also typically replace cleaner natural gas generation with dirtier coal, or with much dirtier diesel generation. These programs are typically cost-reducing measures, and should be examined for cost-effectiveness, because if they are cheap they reduce the company’s argument for a new coal-fired capacity addition. There is no reason to discourage the development of these programs, but the strategies I promote are less risky, because in addition to reducing the need for new coal capacity with substantially greater confidence than a load-shifting or peak-avoidance load management, they reduce pollution instead of increasing it.

Further discussion based on confidential information provided by KCPL to SCCC through interrogatories discussed in Attachment A – Confidential at A4.

KCPL proposes to spend $2.6 million on energy efficiency programs in year one, rising to $5.1 million in year five (Appendix C to Stipulation, graph after page C10). With annual revenues of $873 million (Int. No 2010) the fifth year of this program amounts to ~ six tenths of one percent of revenues. Percentage of revenues is an important measure of adequacy for efficiency programs as follows:

Attachments E and F to my report are respectively an article by Blair Hamilton, director of Efficiency Vermont, and selected graphics from a Power Point presentation by Art Rosenfeld, member of the California Public Utilities Commission.

The Vermont article provides evidence of two separate points which are relevant: first, the size and cost-effectiveness of strong electric end-use efficiency programs, and second, the potential to conduct such programs outside of the traditional regulatory environment. The California evidence supports the position that the long-term benefits of relatively modest total spending on efficiency are huge, and that if there is an ultimate ceiling on the total amount of this efficiency potential it has not been achieved in the most aggressive program in operation in the United States.

On page 4, the Vermont article states:

“In 2000, the charge averaged 1.5 mills/kWh, rising to an average of 2.9 mills in 2003”.

(Vermont’s electric rates are ~ 8˘/kWh, so the 1.5 mills/kWh amount to ~ 1.8% of the electric revenues. 2.9 mills/kWh are ~ 3.6% of the retail price of electricity).

Thus the Vermont program started at three times the level of the KCPL plan’s proposed fifth year budget, and rose to six times the KCPL’s fifth year budget in the fourth year.

Similarly, the Rosenfeld charts describe the economic savings that have resulted from a consistent spending of ~ 1% of electric revenues on efficiency for a sustained period of 25 years. Commissioner Rosenfeld reports gross savings of ~$16 billion per year and net savings of ~$12 billion as a result of spending approximately 1% of retail revenues per year for 25 years.

Both states report saving electricity at an average cost around 3 cents per kWh. (Actually, Vermont spends less than that, but in broad examinations not provided here the national average cost of utility efficiency programs is slightly over 3 cents per kWh saved, so we’ll work with that assumption). This compares to the cost of Iatan 2 which is expected to be close to five cents per kWh in terms of capital costs, but which will raise rates for all KCPL customers, which demonstrates a substantially higher net cost.

Reserve Margins

In addition to the direct savings, efficiency programs also eliminate the need for reserve margin. Because reserve margin is not economically productive beyond the retail price of electricity, the fact that need for reserve is eliminated by efficiency does not mean greater economic savings. But it does mean that the correct comparison is against the actual growth in sales, not the growth in sales plus expected reserve margin.

Eliminating All New Growth

Key to our argument here are the statements by people engaged with actual large scale program evidence that it is possible to save most if not all of the electricity that amounts to new growth in consumption. Neither California nor Vermont has done so yet, but California has experienced more than 50% population growth during the time these programs have operated, and Vermont is likely to produce net negative growth in electricity consumption if the current funding increases are kept on track.

There are numerous other examples that could be used to make these points. Attachment G is a report by Martin Kushler of the American Council for an Energy Efficient Economy which describes currently operating programs in 18 states which have system benefit charges or some other non-traditional means of funding efficiency programs. There are at least five more states (CO, FL, IA, MN and WA) which have active DSM programs using traditional program cost and shared savings compensation which are not considered in this report. California and Vermont are merely two of the most current and most powerful examples. Over half the U.S. states have conducted efficiency programs at one time or another. Many of those programs were developed to respond to a perceived emergency, and were dropped later. Those which were dropped were typically those where regulatory treatment of program costs failed to provide solid recovery of shared savings to make the utility as profitable saving energy as they would be selling it. This essential point is examined at “Cost recovery Issues – Conflict of Interest” on page 23.

Electric utility efficiency programs are the most important step to controlling CO2. The fact that these programs operate at all is concrete evidence of the existence of a massive efficiency gap – a gap between what is economically justified and what is standard practice. The programs are essential because they can provide a degree of flexibility necessary to bridge the gaps between other types of initiatives, including appliance standards and building energy code revisions.

More to the point, the fact that these programs can be run for sustained periods with large spending as a fraction of total electric revenues proves that if the efficiency resource is limited, it is not limited in the near term for states which have not conducted such programs on a sustained basis for a long term.

Efficiency is already the largest source of new capacity:

Although poorly recognized, energy efficiency technology has contributed more to the U.S. energy resource over the last thirty five years than all nuclear, fossil and renewable resources combined. This is shown by the ratio of raw energy input per dollar of gross domestic product, which has fallen an average 1.6% per year since 1970. This efficiency is primarily modernization of technology and gradual spontaneous adoption of new technology, and is supplemented by building codes, appliance standards and the array of existing utility efficiency programs which is modest in relation to the potential. Some switching from coal to natural gas is reflected in the ratio, but it is not a major factor. Nor is the export of heavy industry to other nations a significant factor because the world ratio is nearly identical to the U.S. ratio.

There are a number of other ways in which KCPL can promote efficiency than end-use programs. Combined Heat and Power (CHP) is an efficiency technology, and KCPL should actively promote this group of technologies. I believe that KCPL is presently discouraged from conducting strong efforts to promote CHP by the current rate-of-return formula, and would like to see MPSC recognize this and address it in near term rate reforms. KCPL presently has an inverted block rate structure for some customers, which encourages wasteful consumption, and should be eliminated. There are a number of ways in which efficiency can be applied to generation, some of which KCPL seems to be actively pursuing.

Cost recovery Issues – Conflict of Interest:

To properly engage in promotion of efficiency, a utility must not be compromised by a conflict of interest. Conventional ratemaking inherently creates a conflict of interest by rewarding capital expenditures to the exclusion of activities which benefit the regulated customer. KCPL’s response to Interrogatory SCCC 0042 and 0045 clearly establishes that KCPL does not appreciate the revenue erosion potential of an effective efficiency program.

SCCC DATA REQUEST NO. 0042


CASE NO. EO-2005-0329


REQUEST:

0042. Describe the current cost recovery treatment of program costs and other elements of recovery related to KCPL’s proposed end-use efficiency programs in Missouri. Describe the treatment of these costs, and any additional elements such as lost revenues and shared savings that KCPL would prefer, if different from the current treatment.

RESPONSE:

KCPL currently does not offer energy efficiency programs, therefore has no current cost recovery treatment.

On page 49 of the Stipulation and Agreement, KCPL states that it will “accumulate the Demand Response, Efficiency and Affordability Program costs in regulatory asset accounts as the costs are incurred. Beginning with the 2006 Rate Filing, KCPL will begin amortizing the accumulated costs over a ten (10) year period. KCPL will continue to place the Demand Response, Efficiency and Affordability Program costs in the regulatory asset account, and costs for each vintage subsequent to the 2006 Rate Filing will be amortized over a ten (10) year period. Signatory Parties reserve the right to establish a fixed amortization amount in any KCPL rate case prior to June 1, 2011. The amounts accumulated in these regulatory asset accounts shall be allowed to earn a return not greater than KCPL’s AFUDC rate. The class allocation of the costs will be determined when the amortizations are approved.” This is the recovery methodology that KCPL has requested and KCPL does not prefer any different methodology.

Information provided by: George Phillips

Requested by: Kathleen Henry

SCCC DATA REQUEST NO. 0045


CASE NO. EO-2005-0329


REQUEST:

0045. Does the current methodology for treatment of customer efficiency program costs make KCPL whole as compared to the sale of the power that will be avoided? Does the potential reduction in rate base due to efficiency program implementation create a .negative economic impact on KCPL which is not an erosion of revenue, but is in some other way seen as undesirable. If so, please explain.

RESPONSE:

Since KCPL currently offers no energy efficiency programs, we do not have a current methodology for recovering program costs.

KCPL has proposed these programs as a pilot with an evaluation in 2-3 years. The purpose of the evaluation is to determine the true impacts on energy use, demand, and market penetration, and consequently be able to respond to requests for information such as that requested in this data request. It will also enable better forecasts of the energy savings that could be expected to impact future generation needs, i.e. the deferral of future generation needs and will provide information on how to improve program design. Assuming the programs provide the benefits and the costs are truly avoided, the recovery methodology contained in the agreement is not undesirable.

Information provided by: George Phillips

Requested by: Kathleen Henry

Such a program as we hope to see KCPL develop will eliminate the revenues to be expected from future sales. So proper compensation includes not only program costs but a share of the net savings equivalent to the net revenues that would be earned had a kWh been sold, rather than saved. Proper compensation may also include a compensation for lost revenues for distribution. The correct determination of these amounts depends on the timing of the next proposed capacity addition, the timing of proposed transmission system upgrades and much more.

This is a highly complex subject if considered in detail. It is not necessary to do so for now, but it is essential that the MPSC recognize that program cost recovery alone will not overcome an inherent erosion of revenue that will become significant if KCPL is to develop programs which maximize customer benefit. Issues to be considered include lost revenues for distribution and the revenue that would be earned from a higher rate that would result from the capacity which is eventually avoided.

In short, efficiency programs cause rates to rise, but bills to fall. Since the rise in rates is limited to no more than several percentage points of the price of electricity it is generally less than a rate increase that would otherwise result from a new capacity addition, and of course the total cost of electric service to the community falls. In the current case it is demonstrably true that an efficiency rate increase will be very small in relation to a new power plant’s rate increase..

But the comparison is not complete if rates are the only element examined. Total revenue requirements must also be examined. Since KCPL found both wind and end-use efficiency to be cost-effective in relation to the proposed coal plant addition there is no reason to assume the company has failed to do these analyses correctly, but their failure to consider the amount required by regulation for analysis and their failure to acknowledge a revenue erosion concern with end-use efficiency makes it extremely important for a careful analysis of their methodology to be conducted. (As mentioned above, in the hearing it was apparent that the company believes that a decade-old waiver from the requirement to file resource plans also waived their responsibility to look at the appropriate resources as they develop their internal plans. Whether or not the company was required to do what Missouri regulation requires, they were required to do the same thing by common sense).

There are several major approaches to ratemaking reform which eliminate the inherent disincentive to efficiency caused by conventional ratemaking. Broadly speaking, these fall into four categories:

= Shared savings;
= Rate of Return incentives
= Decoupling
= Deregulation

Shared savings can include a shared fraction of the per KWH savings caused by the utility’s efficiency programs to equal or exceed the overall company rate of return. This can serve to eliminate a concern about the incentive the company experiences for or against efficiency. But shared savings must also include a fraction of the difference between the program cost and the retail price of the saved KWH to compensate for lost revenues for distribution.

Rate of Return incentives can be used to provide a broad indication of the Regulatory approval of a company’s selected strategies. For example, should Iatan 2 be successfully avoided, MPSC might acknowledge the enormous value of that avoidance to the ratepayers by providing KCPL with an increase in overall return of 50 – 150 basis points. Rate of Return incentives are not a surgically precise tool, and are best used as a promise and reward for desired performance. Since the strategies I am describing contain such large rewards to KCPL customers it would make sense to propose rewards of this sort as a status quo to be preserved until such future time as the company failed to pursue low cost options for providing service.

Decoupling is a regulatory tool which has been tried with mixed success over the last fifteen years. The basic concept is that a utility should be compensated on a set fee basis for provision of service. This makes the utility immune to revenue erosion effects of efficiency and creates a profit making opportunity for the utility which conducts efficiency both on the customer side of the meter and on the generator side of the meter.

Deregulation: A number of states have eliminated many of the traditional oversights in favor of the presumed effect of competition to produce similar or better benefits. Many states seem to have found the promised benefits to be elusive, but at least one state has found a strong and effective pathway to energy efficiency (See Attachment F, which describes the operation of Efficiency Vermont, a non-profit public entity which administers efficiency programs funded by a state System Benefit Charge).

I do not make recommendations about how to use these approaches. Rather I want to make it very clear that a utility must have a clear understanding that a preferred course for its customers is also a preferred course for its shareholders. Otherwise a powerful conflict exists, and that is the present case with KCPL’s proposed efficiency programs and lack of any meaningful commitment to develop better cost-recovery approaches.

Further discussion based on confidential information provided by KCPL to SCCC through interrogatories discussed in Attachment A – Confidential at A3.

Decoupling is important to consider even if it is not adopted because it helps clarify the perverse effects of conventional ratemaking. Earlier decoupling efforts were less than completely satisfactory because decoupling not only eliminates utility disincentives to efficiency, it also eliminates utility responsiveness to weather extremes.

The Regulatory Assistance Project http://www.raponline.org/ is one source of excellent support in examining these issues in detail. The principles of this organization are former utility commissioners David Moskowitz and Cheryl Harrington.

“20 Utilities” by Martin Kushler, Attachment G demonstrates that the majority of states with current end-use efficiency programs no longer use the traditional program cost and shared savings approach. Many of these states bypass the utility and contract directly with efficiency service providers. It is beyond the scope of my inquiry in this matter to make a recommendation as to whether KCPL should pursue a different sort of cost recovery. I hope to make it clear that the best interests of KCPL’s Missouri jurisdictional customers depends on KCPL being a willing partner in whatever course of action permits the lowest cost reliable service, and what issues should be addressed to ensure that this partnership is engendered. It is my impression that the system benefit charge approach is more suitable for those states where deregulation has proceeded furthest, and that it has the potential effect of removing the utility from the equation.

It is extremely clear that KCPL’s lack of concern about appropriate cost recovery for the presently proposed efficiency programs is due to the trivial size of the proposals in relation to KCPL’s revenues.

KCPL can easily expand the scope of the proposed efficiency programs to approach the level necessary to defer the need for Iatan 2 by one year each year within 2005/6, so that next year’s rate case can be based on sufficient actual costs in the test year to allow the introduction of an effective cost-recovery strategy. I believe this amount should be in the range of $30 million per year, but the actual amount should be determined by the development of a program of sufficient size to avoid 35 – 90 MW per year, based on actual growth experienced during the next few years.

There is ample time between now and next year’s rate case for KCPL to identify a methodology which satisfies it and the other parties in this case that KCPL and its customers can benefit equally from a new direction in planning.

I like to observe that if you pay a utility to treat it’s customers badly, and tell it to treat them well, one can feel highly confident that the company will treat its customers badly. With all due respect to KCPL which clearly has managed its affairs well from a conventional perspective, it is hard to see how this company would eagerly pursue the avoidance of Iatan 2 if building it remains far more profitable than not building it, regardless of the severe economic impact on customers of building the plant.

A Word About Profits

I have discussed the need for program cost recovery, and appropriate sharing of savings to cover legitimately lost revenues and a meaningful return. But all parties to this matter should work hard to keep a clear focus on the big picture: A rate increase of $30 million or so per year starting next year will permanently eliminate the prospect of a rate increase of $90 – 105 million per year in five years. The enormity of this potential savings surely justifies a higher overall level of profitability for the utility which makes it happen. An increase in overall rate of return of 50 – 150 basis points would be less than $5 - $15 million per year. Perhaps an even larger incentive would be appropriate, especially if the avoidance of a new capacity addition were sustained for a number of years. I highly recommend that KCPL, the MSPC and other parties to this case think long and hard about what sort of deal can be struck that would produce a genuine commitment to this strategy by all parties.

Efficiency Vermont’s savings of 3% of the entire state’s electric consumption in a mere four years is strong evidence that appropriately large efficiency programs are a relevant consideration in the current situation. California’s savings of $16 billion dollars in 2004 as the cumulative effect of 25 years’ moderate efficiency programs (and $4 billion in direct costs) compare with a $32 billion annual electric bill.

Energy efficiency amounts to modernizing the energy infrastructure of residents, businesses and industry. It not only saves electricity, but improves productivity and competitiveness. In Missouri’s case, it saves the export of a large number of dollars used to buy coal and natural gas for electric generation.

Natural Gas Efficiency

KCPL has a very high dependence on natural gas generation relative to other utilities. This means that there is a substantial opportunity to save natural gas and increase the available electric generation capacity. It is possible that a preferable course will be to save natural gas and replace the generation with efficiency or another resource. The options are non-existent if there is no effort to save natural gas.

Attachment H is a copy of Wilson Gonzales’ testimony on behalf of the Ohio Consumers’ Counsel to the Vectren company’s recent rate case. This testimony includes a copy of Martin Kushler’s report on the Midwest Natural Gas Crisis, and a set of recommended natural gas programs. I provide this attachment for two purposes – first to demonstrate that natural gas efficiency programs are practical, and second to raise the question of whether KCPL should consider developing such programs. Although KCPL has no natural gas retail customers they clearly have customer relations with a very large number of retail natural gas customers.

Unlike the concerns I raise about loss of profitability if KCPL decides to cut itself out of the modernization of Missouri’s electric infrastructure, there will be no losses to the company if some other entity causes natural gas efficiency to occur. In this case, the company will benefit from reduced natural gas costs as price is highly sensitive to changes in consumption growth rates.

However there are important synergies for conducting gas and electric efficiency programs at the same time. Even KCPL’s modest low income efficiency programs have probably equipped the company with some experienced employees who could identify such opportunities. If not, there are many people with experience in other states who can rapidly identify opportunities to install both gas and electric savings measures in a single contact with a homeowner or business. The potential for combining gas and electric savings measures is especially important for medium to large commercial customers who use natural gas to heat and electricity to cool office buildings.

Missouri’s use of natural gas sends millions of dollars out of the local economy every year. The current high cost of natural gas causes many efficiency opportunities which previously seemed expensive to have very short and reasonable paybacks.

My arguments do not depend on natural gas savings to produce the net elimination of electricity consumption that is required to eliminate the need for Iatan 2. These electric end-use efficiency proposals are more than adequate to this task. But substantial reliability and economic benefits to the customers of KCPL will be realized if KCPL pursues natural gas efficiency programs in concert with the electric efficiency program we describe. MPSC needs to examine the evidence in favor of such programs and decide whether there is an enhanced program potential that results from KCPL’s strong customer relations.

Combined Heat and Power (CHP) deserves more discussion than I can provide here. CHP plants optimize fuel combustion by re-heating and re-using steam in a secondary cycle, and then market the waste heat output to a third party for space heat, industrial steam or other similar uses. The average coal plant converts 34% of the heat from fuel into electricity. The state of the art is 38%, and IGCC can allegedly get between 38 and 50%, but there are too few plants to be sure yet. CHP is running well in hundreds of U.S. plants at an effective efficiency of 50%.

CHP is often assumed to be a means of saving natural gas or making natural gas consumption more efficient, but many existing CHP plants are actually coal plants.

Another example for potential natural gas savings which intersects several ways with potential electricity benefits: one of the largest potential areas for substantial energy savings is the boilers in most commercial buildings. These are universally oversized, under-maintained, and often simply don’t work as designed because no one is responsible to make sure that controls in the building ducts is working properly. But if the building engages a multi-year process to reduce lighting energy waste and other heat sources which can be moderated with efficiency (or even simple venting), then re-engineers the HVAC to the new lower energy requirements of the building, the HVAC equipment can be downsized, producing substantial savings with a very low payback, often over 40% of total building energy costs, and less than four years.

Supply Side Opportunities

In addition to end-use natural gas efficiency there are probably some important supply-side opportunities to pursue. I have not been able to examine the current generation mix, but there is likely to be little objection if KCPL should choose to replace older less efficient natural gas plants with more efficient ones.

Within the next ten years all proven natural gas in North America, including offshore Canada and Mexico, will either be contractually obligated, or we will see a significant price-induced reduction of consumption. Natural gas wholesale prices have tripled since five years ago. Missouri imports all or nearly all of its natural gas. The increasing demand for natural gas may exceed the capacity of the industry to build new natural gas import facilities for some time to come.

Attachments:

Attachment A discusses information KCPL considers proprietary. Although it may be, all of the points in concern are stated and defended above without proprietary data. It was prepared with the intention of being submitted in the formal trial, and will not be distributed to the public. The data excluded from this report merely reinforces the conclusions I offer above.

- Ned Ford

Attachment B: KCC release of meeting notice regarding Iatan 2.

Attachment C: Printout from DOE website on coal prices.

Attachment D: Ocean warming attachment

Attachment E: Three pages from a powerpoint presentation by Art Rosenfeld, California Public Utility Commissioner, which describe the cumulative savings of a quarter century of efficiency programs.

Attachment F: Efficiency Vermont: an article written by Blair Hamilton, Director of Efficiency Vermont, Vermont’s Energy Efficiency Utility, which is operated under contract to the Vermont Public Service Board by Vermont Energy Investment Corporation, and Michael Dworkin, Chair of the Vermont Public Service Board

Attachment G Is a report by Martin Kushler et al, of the American Council for an Energy Efficient Economy which describes presently active electric end-use efficiency programs in 18 states.

Attachment H is Wilson Gonzales’ testimony on behalf of the Ohio Consumers’ Counsel. It includes natural gas efficiency program descriptions, and a copy of Martin Kushler’s report on the Midwest Natural Gas Crisis. It also includes some electric efficiency program designs which are likely to be much more effective and cost-effective than the present set of programs proposed by KCPL in the Stipulation.

back to our home page