ML20029A711
| ML20029A711 | |
| Person / Time | |
|---|---|
| Site: | Wolf Creek  |
| Issue date: | 02/15/1991 |
| From: | Irwin D HUNTON & WILLIAMS |
| To: | Rutberg J NRC OFFICE OF THE GENERAL COUNSEL (OGC) |
| Shared Package | |
| ML20029A712 | List: |
| References | |
| NUDOCS 9103040102 | |
| Download: ML20029A711 (15) | |
Text
I; IIUNTON 8: WILLI AM S ATL.Akta,ogono6A 707 East MAIN StRtti wsw.ce,wtwson CmW66tts. Dt holVM ,
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, FAc tiMitt (804) 70 B+ 8P:8 t,, . c c , c. , A u (804) 768 8357 February 15, 1991 f'$ 4Y Joseph Rutberg, Esq.
Offico of the General Counsol U.S. Nuclear Regulatory Commission Washington, DC 20555 KPL/KG&E Mercer Wolf Crook License TransfcI D e s i.* J 0 0 1 Enclosed is a copy of the Kansas Corporation Commission's staff testimony in the Kansas Stato proceedings being conducted on the KPL/KG&E merger. I send it to you in advance in connection with your informal review of materials potentially bearing on the competitive aspects of the Wolf Cros licenso as it may be affected by the merger.
I also understand that Marty Pregman of KPL has forwarded to you, under separate cover, a copy of the direct testimony filed the other day by KPL and KG&E with FERC. I will endeavor to obtain and forward to you copics of the other parties' testimony when I receive it.
Sincerely yours, k, w %.. j Donald P. Irwin j Enclosure cc w/o enclosure: Richard D. Terrill, Esq. (KG&E)
Martin J. Bregman, Esq. (KPL)
Adlai S. Hardin, Jr., Esq. (Milbank, Twood) t \us\ Kansas \tutterg.1 0
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KANSAS CAS AND EllCTRIC COMPANY
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February 7, 1991 VIA FEDERAL EXPRESS Donald P. Irwin, Esq.
}!unton & Williams 707 East Main Street Richmon', Virginia 23219-1525 Re KCC Staff Testimony - Docket Nos. 172,745-U and 174,155-U Dear Mr. Irwin Enclosed is the Kansas Corpo.ation Commission's staff testimony in the above referenced KCC inatter.
Yours truly, fCIktsl . b jQ Richard D. Terrill RDT:hes Enclosures cc Adlai liardin, Esq.
1 201 N. Market - NcNte, Kams - Malt Addrsw PO, Box 200 i Nchtte, Kansas 67201 - Te% hone: Atee Code (316) 261-6568 k ._ .. . . . .
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KCC News =_
Media contact: Sam Van Leeuwen, Director of Pub!!c Affairs Offices (913)171327s Home (913) 233 IsCO Feb. 6,1991/For immediate release KCC staff testifies KFUKG&E merger application be denied The merger application of KPL Gas Service and Kansas Gas & Electric Co. is not in the public interest and should be denied, according to staff of the Kansas Corporation Commis-sion.
The KCC staff testified the total cost of the acquisition would exceed the real benefits generated. There was no indication that this merger transaction was the least cost means of providing the consumer benefits claimed by the companies, staff said.
The merger also would weaken competition by concentrating the control of essential electric transmission lines, staff said.
Staff proposed that if the commission approves the merger application, the commission should place conditions on the applicants which would attempt to protect ratepayers from ex-cessive rates.
The staff made its recommendations in written, direct testimony prefiled with the commission Feb. 6. Staff's recommendations are not binding on the three member commission.
The commission is scheduled to hear the merger application beginning on March 4.
Effect of merger Staff said that, as proposed, the merger could lead to higher electric rates in Kansas and leave KPL in a weakened financial condition. Even requiring the merged company's share-holders to pay the merger costs would not protect ratepayers, staff said. Such a requirement could, according to staff, weaken the merged company financially, leading to a lower credit rating and higher financing costs. A weakened financial condition also could eventually result in higher electric and gas rates, staff said.
Acquisition premium criticized If the application is approved, ratepayers should not pay the acquisition costs, staff said. KPL proposes to pay $388 million more than the book vajue of KG&E. This represents a 62 percent premium over look value. The amount over the book value is called the acquisition premium.
"The applicants are proposing to flow an estimated $388 million of acquisition costs to the ratepayers of the merged company," staff said. The acquisition premium represents a benefit for shareholders of KG&E and a burden for both the ratepayers and shareholdus of the merged company, staff said.
Rate reduction The application claimed that the merger savings would permit a $15 million per year rate reduction for KG&E customers. Staff countered that claim, explaining that the 515 million change is attributable to accounting and ratemaking changes unrelated to the merger transac-tion. (continued on beck)
Kansas Corporation Commission,1500 S.W. A.rowhead Road, Topeka, Kansas 66604
KCC News /Pagea According to staff, the merged company would simply flow to ratepayers a $15 million cost reduction caused by two things: a depreciation rate change for the Jeffrey Energy Center, and the incorporation of an $8.7 million rate reduction for KG&E ordered last year by the com-mission.
KG&E is currently appealing the commission order mandating the SS.7 nullion reduc-tion. Rather than passing on merger savings to ratepayers, as the company claims, this pro-posal allows the merged company to retain merger savings in the early years.
Effect on competition '
The merger could eliminate or reduce competition between KPL and KG&E for electric generation and transmission service, staff said.
"If the merger leads to an ability by KPL to restrict the flow ofinexpensive power across Kansas, it could cause an increase in electricity prices paid at retail in several Kansas commu-nities as well as the merged utility's own service area," staff said.
Staff found that the merger could create single ownership of essential transmissio'n facilities, which could allow KPL to restrict generation competitors' abiUty to compete with KPL-supplied electric generation.
Staff proposed conditions to ensure a competitive market for electric generation and transmission that should be imposed on any successful merger.
Merger savings tracking system If the application is approved, the companies propose an annual review of merger related saQgs through the use of a tracking system. Staff testified that such a syr> tem would be virtually impossible to implement and the data generated by the system would be highly questionable.
Background
Public hearings -
In January, approximately 200 people attended public hearings in Topeka, Independ-ence, Wichita and Overland Park regarding the proposed merger. Written comments from the public will be accepted by the commission tmtil the technical hearings begin on March 4. As of Feb. 6, the commission had received more than 150 letters and telephone calls regarding the merger.
Written comments should reference Docket No.174,1S5 U and be mailed to the KCC, Off!ce of Public Affairs,1500 S.W. Arrowhead Road, Topeka, Kansas 66604.
Technical hearing A technical hearing is scheduled to begin March 4 in Topeka. The testimony filed today '
will be part of the technical hearing. The applicants and interveners in the care previously filed their testimony for the technical hearing. All parties will be allowed to file rebuttal testimony latee this month.
The technical hearing will be held in the KCC's first floor hearing room,1500 S.W.
Arrowhead Road, Topeka.
(continued on next page)
KCC News /Page 3 l
Other regulatory approval needed ,
The proposed muger is also subject to the approve,1 c he Mis to si Public Service j ComfAlssion, the Oklahoma Corporation Commission, the Federal Energy Regulatory Com. {
mission, the Nuclear Regulatory Commission and the Securities and Exchange Commission. i Shueholders of each company must also vote to approve the merger agreement.
Merger filings On July 23,1990, Kansas City Power & Light Co. announced a 527 per share bid for all i shares of KG&E. The KG&E board of directors opposed the bid Last October, KPL and KG&E announced they had entewd into a merger agreement. In November the wo companies filed a
}oint appileation with the KCC for approval of a plan wher<ttiy KPL offers a combination of KPL stock and cash worth $32 for each share of KG&E stock. According to pre filed testimony, KPL initially plans to operate KG&E as a separate subsidiary, in December, KCP&L dropped its takeover attempt oi KG&E, saying it was not in the best interests of KCP&L customers, em-ployees or shareholders to compete with KPL's hAgher bid.
KPL, KG&E statistics KPI, which is based in Topeka, has approximately 300,000 ;etail electric customers in Kansas. KPL also transports and sells natural gas in Kansas, western Missouri and northeast-ern Oklahoma. Overall, KPL provides natural gas service to approximately 1.1 million retail customers.
KG&E, which is based in Wichita, serves approximately 153,000 retail electric customers in Kansas. Both companies also provide whoicsale elwtric and transmission services to wmer-ous municipal customers and elecric cooperatives located in Kansas and, through interchange agreements to surrounding integrated systems.
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- Kansas Corporation Commission -
Keith R. Lemby ---
Ch6rmen Rkh Kowalewski CannhA e February 6, 1991 Jim Robinere caem6mkeer TO: The Commission and A14 Parties in b
Consolidated Docket Nos. 1*'2,745-U and 174,155-U
, Enclosed is staff's direct arefiled testimony in
'he above-captioned proceeding. The staff of the dansas Corporation Commission stror, gly recommends that the Commission deny Kansas Power & LOyht Company's
')PI) and Kansas Gas & Electric Company's (KG&E) joint n.'rger application in Docket No. 174,155-U. The a.*ar'ad testimony demonstrates that the proposed mes;er will result in net costs to the participants in te, merger, including ratepayers and shareholders of t h> meiged company. Staff believes the proposed 19 ger will also increase the mergec company's control er c::ential transmission highways, teeteby increasing the potential for anti-competitive bel <t .cr in the bulk power market. As a result of its irW stigation, staff has concluded the proposed merget s o. not promote the public interest.
Staff's prefiled direct testimony is sun 4ri:ed Seit%
i St?MMARY OF ETATP's BTREO? ?Erf? MONY Ii order to evaluate the costs and benefits of I
the merger, ataff analyzed the following issues:
- 1. Costs cf the merger.,
- 2. Cost reductions.from the merger.
- 3.- Effe<ts 6f the merger on competition.
- 4. Efftets of the merger on the Kansa0 etoi my.
- 5. Tonditions necessary to protect ratepayers w t competition if the merger application r
la \pproved.
Testimenv ef 'Rnp et D. qillett t
Mr. Elliott, staff's Chief rngineer, reviewed the-iM 1owing isslest (1) savin (.i from possible l ePhone (9D) 2714100 i
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diferral of capacity additio4s; (2) fuel cost savings from the joint dispatch of generating units on the merged company system; (3) administrative and general savings; (4) fuel procurement and management practices; (5) reliability issues for the generation, transmission and distribution systems; (6) planning issues; (7) demand side management program impacts; and (B) environmental impacts.
As part of his review of administrative and general savings Mr. Elliott analyzed the following matters: (a) human resources; (b) fuel inventory! (c) ir*u ance; (d) telecommunications; (e) freight t.anagement; (f) information systems; (g) rate case avoidance savings; (h) EMS /SCADA equipment savings; (1) least cost planning savings; (j) services and fees ll( '
savings; and (k) purchasing re'.ated savings.
Whereas the companies predicted $5.1 million in capacity savings over the first five years of the merger, Mr. Elliott assumes $4.6 million. With respect to energy savings from joint dispatch, Mr.
Elliott p;edicted fuel savings from the merger over the period of 1992-1996 of S19.5 million, as compared to tL6 companies' prediction of $25 million. Mr.
Elliott also estimated, among other things, that the savings in the human resources area in the first five years would be S63.5 million, as compared to the companies' estimate of $76.1 million.
Mr. Elliott also proposed a possible operational plan for the Jmplementation of the transmission policy principles proposed by staff witness Shirley Sicilian.
Testimnnv of David N. Bittemore Mr. Dittemore is staff's Chief of Accounting and Financial Analysis. Staff's investigation included:
(1) the evaluation of the S15 million rate reduction; (2) the quantification of the net benefits or costs of the transaction on a net present value basis; and (3) the recovery of the acquisition premium from ratepayers. Based on this analysis, Mr. Dittemore's primary recommendation to the Commission is that the merger application be denied.
In regara to the proposed $15 million rate reduction, staff concluded that the true sources of the proposed rate adjustment are non-merger related accounting and ratemaking changes. Therefore, the
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4 ratepayers will not receive immediate benefits ft....
the merger savings as claimed by the applicants, Staff analyzed-the net costs of the transaction as a whole,-from a ratepayer perspective and from a stockholder perspective. When viewed in its entirety, the transaction'is not financially viable. Even though the applicants have structured.their merger proposal to apparently provide benefits for the ratepayers at-the expense of the shareholders, staff believus that, if approved, this merger will likely result in a financially weakened company and lead to higher financing costs in the future.
If the-application is approved, however, staff recommends that the Commission ceny the applicants' proposal-to recover the amortization of the acquisition premium from ratepayers, Staff believes that the applicants did not sufficiently justify the acquisition price as being the least-cost means of obtaining the merger benefits.
Testimnnv-ef tabra 3. weism Ms. Weiss is staff's Managing Utility Regulatory Auditor. Staff reviewed the estimated merger related savings quantified by the applicants. Staff proposed
' ' various adjystments to the applicants' estimated level of savings to reficct a more raasonable amount. Then, staff used this adjusted level of. savings to project
-the~ anticipated merger savings over a 27-year period.
The 27-year period is the amount of time the
-acquisition premium'would be amortized by_the merged company. A 27-year estimate of the savings was an input into the determination of whether the transaction 1as a whole produced net benefits or costs.
In addition, staff also reviewed the applicants' '
" merger savings tracking system" proposed as a means by which 50 percent of annual merger savings in excess of the amortization of the acquisition premium could be retained by the.-shareholders. -Staff believes that this-system is virtually impossible to_ implement and that the data generated by this system would be highly questionable.
Testimnnv of Shirlev K. Sicilian
w Ms. Sicilian is staff's Chief cf the Office of Economic Policy. Ms. Sicilian states that the application is the product of a capital market bidding process'in which information inputs from the ;
regulators-to the market were poor. Ms. Sicilian urges the Commission to address three major issues:
(1) the allocation of expucted merger benefits between ratepayers and shareholders; (2) -the potential for excess shareholder profits _through heightened monopoli:ation of transmission and distribution markets; and (3) the allocation of risk between ratepayers and shareholders that the estimated net merger benefits will not materialize. C0mmission action on'these issues is necessary becaus e there are areas of capital market uncertainty regarding regulatory electric pricing and policy. By addressing these three areas, the Commission will promote rational earnings expectations, reasonable bidding, and efficient employment.of assets by the capital market.
The allocation of expected' merger benefits between ratepayers and shareholders involves a treatment of the acquisition premium, i.e., the excess i of offer price over book value. Ms. Sicilian testifies that the " gains from trade" from the merger, 1.n., the "true economic value of the (combined assets) due to a merger's ability to increase the '
efficiency-with which electricity is produced or consumed, should be allocated to ratepayers because-
. they bear the risk that economic value will deviate from book value. Based on this reasoning, Ms.-
Sicilian urges the Commission to deny recovery of, and return on, the acquisition premium to the extent the premium-reflects _those gains from trade.
Ms. Sicilian explains that at least four vther factors-(in addition to the expectation of gains from trade) could lead an acquiring utility to offer a price exceeding book value: expectation of captured overearnings; managerial motives; retention of excess profit due to merger produced market power; and permitting shareholders to retain gain from the sale of excessively depreciated: assets. None of these factors represents.a legitimate ratepayer cost.
- Therefore, the full acquisition premium should be denied.
Given that the proposed merger will reduce competition in bulk power markets (see the testimony
-of staff witness Peter Eelkema below), Ms. Sicilian 1
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proposes policies for fair access to the merged I companies' essential transmission facilities. Her !
principles requires the provision of efficient and '
equitable access on a cost-justified basis. The policy would require the merged company to offer firm and non-firm service to other utilities (including municipal and rural cooperative systems), :PPs and QFs. The transmission policy also would permit the resale of capacity by transmission customers and would allow full requirements customers of either KPL or KG&E to convert all or part of their requirements service to transmission service.
Ms. Sicilian also says that it is reasonable to assume that " gas on electric" competition and competition for industrial load will be reduced by the merger.
With respect to allocation of risk, Ms. Sicilian proposes a " price cap" concept in which the Commission, if it approves the merger application, would adjust current rates downward to reflect the merger savings that should be passed to consumers.
This mechanism would place the risk of attaining cost reductions on the sharehol?ers who are promising them.
Testimonv of Adam H. Gatewood Mr. Gatewood is staff's Senior Financial Economist and performs cost of equity analysis for KPL stano alone and KG&E etand alone to be used in testimony of Mr. Dittemore. He calculated the cost o .'
equity of KG&E stand alone to be 13.22%, and 12.11%
for KPL stand alone.
Mr. Gatewood states the effects of the merger transaction on the financial health of the merged company are uncertain. These effects will remain uncertain until some time after the various regulatory agencies determine the appropriate regulatory treatment for the merger proposals. If the financial health of the merged company is adversely affected, there may be a downgrade in the merged ccmpany's bond l
I rating, which may increase the cost of equity for the merged company.
The key element for the financing agreement, the interest rate, is not finalized. Due to the uncertainty regarding the time it will take before all regulatory approvals are obtained for the merger, KPL '
should be required to return for approval of the credit agreements when the interest rate will be known.
Teetimony nf Peter Eelkamm Mr. Eelkema is a Managing Economist with the staff. Mr. Eelkema concluded that the proposed merger will harm competition. As a result of the proposed merger the merged company will gain control over s essential transmission facilities and can use that control in an anti-competitive manner.
Specifically, the merged company will be able to j block energy sales and long-term sales of capacity '
between the western portion of the state and the eastern border region. The merged company will control the transmission facilities, an essential part of any sale of capacity or eneigy between companies, so that the merged company will be able to promote its own sale of capacity and energy at anti-competitive prices. Moreover, Mr. Eelkema found that this merger will result in a significant increase in market concentration such that there is great potential for the merged company to dominate the market for transmission service. This domination could result in increased rates for all customers.
Testimony nf Rnbert Glass Mr. Glass is a Research Economist with the Institute of Public Policy and Business Research. Mr.
Glass and his colleagues _ investigated the effects of the proposed merger on the Kansas economy using an econometric input-output model of the Kansas economy.
Specifically, Mr. Glass reviewed the effect of KPL's plan to eliminate 403 jobs.- He estimated that this action would cause a reduction of S20,S79,000 in wages and salaries. He estimated that the total primary and secondary impact on t.3 Kansas economy of this reduction would be a i 1s1 loss of 782 jobs and a total reduction in ,as wage and salary income of
$27,400,000.
Since staff testified that the total jobs eliminated would be 330 rather than 403, Mr.
Glass reviewed that scenario as well. That scenario entailed payroll reduction of about S15,419,000. The effect of that event on the Kansas economy would be a loss of 617 jobs and a reduction in Kansas wage and salary income of $20,800,000.
Based on the estimated $15,419,000 payroll reduction KPL could achieve because of the merger, the XCC staff has estimated that the price of electricity in the KG&E service area could be reduced by approximately 1.2 percent. Mr. Glass estimates this rate decrease would result in an employment increase of 72 jobs and a wage and salary increase of
$3,300,000 in the KG&E service area. Mr. Glass further explains that his estimate of the economic impact of the rate change is for the KG&E service area economy only; thus, this estimate underestimates the effect on the whole Kansas economy of the rate decrease. Mr. Glass then calculated upper and lower bounds for the effect of the 1.2 percent price change on the whole Kansas ecoromy.
Respectfully submitted, Brian J. Moline General Counsel 1 -
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f l M L ,
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Charles V. Garcia Assistant General Counsel
, f
./_Y Scott Hempling Attorney for the Staff of the State Corporation Commission l
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Appendix 0
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