Missouri fight could threaten $12.2 billion Westar Energy-KCP&L merger

A regulatory battle in Missouri could potentially pull the plug on the $12.2 billion merger of Westar Energy and Kansas City Power & Light.

It appears to hinge in large part on whether the transaction would harm customers and whether Westar, Kansas’ dominant utility company, is technically a “public utility” under Missouri law.

If the Missouri Public Service Commission does claim jurisdiction, and decides the merger would be detrimental to electric customers in the state, it could quash the sale of Westar to KCP&L’s parent company Great Plains Energy.

Missouri commission staff says job cuts and possible outsourcing spurred by the proposed aquisition could harm customers. The staff also claims Great Plains violated a 2001 agreement with the Missouri commission, where it agreed not to acquire any public utilities without commission approval.

Great Plains argues that combining Westar and KCP&L would benefit customers on both sides of the state line. Moreover, it says it’s a moot point anyway because Westar isn’t a public utility under Missouri law and therefore, Great Plains doesn’t need Missouri’s approval to buy it.

On May 31, Great Plains announced it had reached an agreement to buy Westar at a cost of $12.2 billion. The idea is that Westar and KCP&L operations would merge to serve 1.5 million customers on both sides of the state line.

Last week, the Missouri commission closed a staff investigation into the transaction, basically inviting its staff to file a formal case challenging the merger if it thinks it would hurt customers. That case would run more or less parallel to the Kansas Corporation Commission’s consideration of the deal.

“Our understanding is that (Missouri) PSC staff is going to do that,” said James Owen, acting director of Missouri’s Office of Public Counsel.

If they don’t, his office will, he said. In Missouri, the public counsel represents the interests of residential and small-business utility customers, similar to the role of the Kansas Citizens’ Utility Ratepayer Board.

Detriment or benefit?

The Missouri utility staff said in a report to the commission that it sees the potential for two main problems that could hurt customers and the state economy if the sale goes through.

First, the cost of buying Westar, which includes assuming $3.6 billion in Westar debt, could hurt Great Plains’ credit rating, meaning customers would have to pay higher rates for the company to borrow money.

A report by Kevin Thomson, chief staff counsel for the commission, said the Standard & Poor’s debt rating agency has already moved Great Plains from “stable” to “negative,” a sign that a credit downgrade could be coming.

A second potential problem could be layoffs, outsourcing and possibly degraded service as Great Plains tries to capture savings from merging the two utilities, the report said.

Thomson quoted Kansas testimony from Great Plains chief executive officer Terry Bassham that “some level of involuntary severance may occur as this is typically unavoidable in transactions of this nature.”

The staff report concluded: “At this time, Staff maintains that all of the known evidence supports a determination that the proposed transaction is detrimental to the public interest and ought not to be permitted to go forward.”

Chuck Caisley, a vice president of Great Plains, said “we have every reason to be confident at this point” that the deal will go forward.

The staff’s case against the merger lacks hard evidence and is mostly based in “newspaper stories and what could happen,” he said. Great Plains has already acquired other utilities in Missouri and the process has gone smoothly, he said.

He said merger savings would come primarily from consolidating operations of Westar and KCP&L and eliminating duplicated jobs. That would make both utilities more efficient and keep rates low, he said.

“This is a positive both for Kansas customers and Missouri customers,” he said.

Westar not a public utility?

The first and possibly most important question is whether the Missouri commission will even hear the arguments for and against the deal. To do that, it has to decide it has legal jurisdiction, which Great Plains would almost certainly appeal.

All parties agree that the acquisition has to be approved by the Kansas commission.

The KCC has until April to make a decision and determined Tuesday that it will require Great Plains to prove the deal will benefit utility customers, a higher mark than Missouri’s “not detrimental” standard.

But from the day the transaction was announced, Great Plains has asserted it doesn’t need Missouri’s permission to close the deal.

“Great Plains Energy’s position is that the merger is not subject to approval by the Missouri Public Service Commission, as it will be effectuated at the parent corporation/holding company level by entities that are not electrical corporations in Missouri subject to (commission) jurisdiction,” said an e-mail sent by Great Plains Chief Executive Officer Terry Bassham to Missouri commissioners within hours of the May 31 announcement.

Missouri’s utility staff argues that Great Plains agreed to subject mergers and acquisitions to commission approval in a 2001 agreement that allowed Great Plains to incorporate as a utility holding company.

The paragraph in the agreement that’s at issue says:

“GPE (Great Plains Energy) agrees that it will not, directly or indirectly, acquire or merge with a public utility or the affiliate of a public utility, where such affiliate has a controlling interest in a public utility unless GPE has requested prior approval for such a transaction from the Commission and the Commission has found that no detriment to the public would result from the transaction.”

In his report, Thomson wrote “As GPE has announced its intention to acquire Westar – a public utility – without seeking Commission approval, Staff necessarily concludes that GPE has violated (the 2001 agreement).”

Great Plains is looking for a technical knockout. The company argues the term “public utility” isn’t defined in the agreement and thus defaults to definitions in state law.

“This will sound a little non-intuitive,” KCP&L’s Caisley said. “Westar is definitely a public utility” in the common usage of the term.

But Missouri law defines a public utility “as doing business in Missouri, where Westar is not,” he said.

Westar and KCP&L jointly own three power plants on the Kansas side of the state line and Westar owns a 40 percent share of a fourth plant in Missouri, but that doesn’t make Westar a Missouri public utility because the company doesn’t provide power directly to retail customers, Caisley said.

This story was originally published August 9, 2016 at 2:51 PM with the headline "Missouri fight could threaten $12.2 billion Westar Energy-KCP&L merger."