September 30, 2012

Recommendations for Kansas Gas Service rate increases differ by $28.4 million

State regulatory staff is recommending that Kansas Gas Service get far less of a rate increase than the company has requested.

State regulatory staff is recommending that Kansas Gas Service get far less of a rate increase than the company has requested.

While the gas company is asking for a net increase of about $32 million a year, the staff of the Kansas Corporation Commission is recommending that the company get only $3.6 million, according to documents filed last week.

For residential customers, the difference would be substantial.

The gas company’s proposal would raise the average customer’s bill by $5.68 a month.

The KCC staff proposal would raise bills about $1.

The KCC staff doesn’t make the final ruling. That will be done by the three commissioners, who act as the judges in rate cases.

However, the commissioners do generally lean heavily on their staff’s reports when evaluating rate-increase proposals from the utilities they regulate.

Neither the KCC staff nor the gas company have much to say publicly about the rate hike proposal.

The state agency declined requests for interviews with its rate analysts through the agency’s spokesman, Jesse Borjon.

Dawn Ewing, the chief spokeswoman for Kansas Gas, said her company is still analyzing the KCC staff’s recommendations. She said the company does still believe that its original proposal would result in fair and reasonable rates.

But while neither side is talking, their proposals are detailed in hundreds of pages of documents that have been filed with the commission.

How a bill is divided

The Kansas Gas case is complicated, with a lot of moving parts.

To understand the case, you have to understand a little bit about how gas rates are set and billed to consumers.

The average gas bill is divided into two main sections, the cost of gas and the cost of delivering the gas to homes and businesses.

The cost of gas is set by the marketplace and fluctuates as the price of gas rises and falls.

Essentially, that’s a pass-through cost, meaning that consumers pay for gas what the company paid to buy it for them.

The rates customers pay for delivery cost are set by the commission. The delivery charge is based on the company’s documented cost of delivering gas, plus a percentage of extra return to allow the company the opportunity to make a profit.

It is that part of the bill where KGS is seeking permission to increase its rates.

In addition to the rates set by the commission, Kansas Gas also collects money from two riders on bills that allow the company to recoup costs from customers when they spend money improving the reliability of the gas system and when the utility’s property taxes go up.

Rider differences

In the current case, Kansas Gas has requested an overall increase of $50.7 million in its base rates.

But of that $50.7 million, consumers are already paying about $18 million through the reliability and property tax riders.

KGS proposes to roll the riders into the regular rate base.

Overall, that would mean an eventual net increase to customers of about $32.7 million.

The commission staff takes a different approach.

Instead of $50.7 million, the commission staff is proposing an overall increase in base rates of about $14.5 million.

The staff proposes to roll the reliability rider, $10.9 million, into base rates, but leave the property tax rider, $7.1 million, as a separate charge.

“Therefore, the overall net increase in base revenue is $3.6 million, or 1.4 percent,” said written testimony by Dorothy Myrick, a former 16-year KCC staff member who has been hired as a staff consultant on the KGS case.

One major difference between the company and the KCC staff proposals is the amount of profit margin that Kansas Gas would get for running the gas system.

The company is asking for a 10.7 percent return for its stockholders.

The KCC staff recommendation would set the shareholder return at 9 percent.

Revenue normalization

David Springe, chief consumer counsel for the Citizens’ Utility Ratepayer Board, said he was heartened to see the KCC staff recommend a much smaller rate increase than the gas company proposed.

CURB, a state agency that represents the interests of residential and small-business customers, is arguing that Kansas Gas should get a slight decrease in its rates instead of the slight increase proposed by the KCC.

However, he said the KCC staff recommendations are “in the ballpark” of what CURB believes would be an acceptable outcome for consumers.

But despite their similarities in numbers, there will be at least one issue where CURB and KCC staff disagree, he said.

In addition to the rate hike, Kansas Gas is seeking “revenue normalization,” a technical term for a guarantee that the company’s revenue won’t fall if customers conserve and buy less natural gas.

Under the company’s proposal, if sales fall, then rates would be raised automatically to ensure that the company actually gets the income authorized by the commission.

Kansas Gas has argued that that would stabilize revenue and ensure the company has enough money coming in to provide safe and reliable service.

Springe, however, has argued that revenue normalization is little more than a profit guarantee for the company that shifts its current business risk onto its customers.

The KCC staff recommended granting the company revenue normalization.

“The costs of the pipes and other infrastructure do not decline when gas usage declines,” wrote Robert Glass, KCC’s chief of economics and rates.

That sets the stage for at least one substantial argument between CURB and the KCC staff when the case goes to court-like “evidentiary hearings,” which are scheduled to start on Nov. 5.

In the evidentiary hearings, the company, KCC staff, CURB, and other interested parties who have formally intervened in the case will get the opportunity to question witnesses in front of the three commissioners.

The commission has already held its public hearings in the rate case.

However, the public may still comment on the case by contacting the KCC by mail, e-mail or phone.

The deadline for public comments is Oct. 31.

The commission is required by law to make its final decision by Jan. 14.

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