f8krc_mpscorder.htm
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
8-K
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Current
Report
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Pursuant
to Section 13 or 15(d) of the
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Securities
Exchange Act of 1934
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Date
of Report (Date of earliest event reported): July 10, 2008 (July 9,
2008)
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Commission
File
Number
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Registrant,
State of Incorporation,
Address
and Telephone Number
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I.R.S.
Employer
Identification
Number
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001-32206
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GREAT
PLAINS ENERGY INCORPORATED
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43-1916803
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(A
Missouri Corporation)
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1201
Walnut Street
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Kansas
City, Missouri 64106
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(816)
556-2200
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NOT
APPLICABLE
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(Former
name or former address,
if
changed since last report)
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000-51873
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KANSAS
CITY POWER & LIGHT COMPANY
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44-0308720
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(A
Missouri Corporation)
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1201
Walnut Street
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Kansas
City, Missouri 64106
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(816)
556-2200
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NOT
APPLICABLE
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(Former
name or former address,
if
changed since last report)
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Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
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[ ]
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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[ ]
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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[ ]
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange
Act
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(17
CFR 240.14d-2(b))
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[ ]
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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This
combined Current Report on Form 8-K is being filed by Great Plains Energy
Incorporated (Great Plains Energy) and Kansas City Power & Light Company
(KCP&L). KCP&L is a wholly owned subsidiary of Great Plains
Energy and represents a significant portion of its assets, liabilities,
revenues, expenses and operations. Thus, all information contained in
this report relates to, and is filed by, Great Plains
Energy. Information that is specifically identified in this report as
relating solely to Great Plains Energy, such as its financial statements and all
information relating to Great Plains Energy’s other operations, businesses and
subsidiaries does not relate to, and is not filed by,
KCP&L. KCP&L makes no representation as to that
information. Neither Great Plains Energy nor any of its subsidiaries
(other than KCP&L) have any obligation in respect of KCP&L’s debt
securities and holders of such securities should not consider Great Plains
Energy’s or its other subsidiaries’ financial resources or results of operations
in making a decision with respect to KCP&L’s debt
securities. Similarly, KCP&L has no obligation in respect of
securities of Great Plains Energy and of its other subsidiaries.
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Item
1.01
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Entry
into a Material Definitive
Agreement
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KCP&L,
Kansas City Power & Light Receivables Company (“Receivables Company”), The
Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (the “Agent”) and Victory
Receivables Corporation (the “Purchaser”) are parties to a certain Receivables
Sale Agreement, dated as of July 1, 2005, as amended by Amendment No. 1 dated as
of April 2, 2007 (as amended, the “Agreement”). The Receivables Sale
Agreement was filed as Exhibit 10.2.c to Great Plains Energy’s and KCP&L’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, and Amendment
No. 1 was filed as Exhibit 10.2.2 to Great Plains Energy’s and KCP&L’s
Quarterly Report on Form 10-Q for the quarter ended March 31,
2007. KCP&L sells all of its retail electric accounts receivable
to its wholly owned subsidiary, Receivables Company, which in turn sells an
undivided percentage ownership interest in the accounts receivable to the
Purchaser.
On July
9, 2008, the parties entered into Amendment No. 2 to the Agreement, effective as
of July 11, 2008 (the “Amendment”). The Amendment extends the date
certain contained in the definition of Termination Date from July 13, 2008 to
July 10, 2009. The Amendment also deletes the definition of, and
references to, the Special Limit (which was defined as five percent of the
Eligible Receivables Balance attributable to the City of Kansas City,
Missouri).
The Agent
is a party with other lenders to credit agreements dated as of May 11, 2006, as
amended, with Great Plains Energy and KCP&L providing for revolving credit
facilities aggregating $1 billion.
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Item
8.01
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Other
Information
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A copy of
the Missouri Public Service Commission Report and Order, dated July 1, 2008,
approving with modifications and conditions the joint application of Great
Plains Energy, KCP&L and Aquila related to the proposed acquisition of
Aquila by Great Plains Energy is attached as Exhibit 99.1 hereto and is
incorporated herein by reference.
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Item
9.01
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Financial
Statements and Exhibits
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(d) Exhibits
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99.1
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Report
and Order of the Missouri Public Service Commission dated July 1,
2008.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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GREAT
PLAINS ENERGY INCORPORATED
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/s/
Terry Bassham
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Terry
Bassham
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Executive
Vice President- Finance & Strategic Development and Chief Financial
Officer
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KANSAS
CITY POWER & LIGHT COMPANY
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/s/
Terry Bassham
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Terry
Bassham
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Chief
Financial Officer
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Date: July
10, 2008.
report_conversion.htm
BEFORE
THE PUBLIC SERVICE COMMISSION
OF
THE STATE OF MISSOURI
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In
the Matter of the Joint Application of Great Plains
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Energy
Incorporated, Kansas City Power & Light
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Company,
and Aquila, Inc., for Approval of the Merger
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Case No.
EM-2007-0374
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of
Aquila, Inc., with a Subsidiary of Great Plains
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Energy
Incorporated and for Other Related Relief.
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Issue
Date:
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July
1, 2008
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Effective
Date:
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July
11, 2008
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BEFORE
THE PUBLIC SERVICE COMMISSION
OF
THE STATE OF MISSOURI
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In
the Matter of the Joint Application of Great Plains
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Energy
Incorporated, Kansas City Power & Light
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Company,
and Aquila, Inc., for Approval of the Merger
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Case No.
EM-2007-0374
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of
Aquila, Inc., with a Subsidiary of Great Plains
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Energy
Incorporated and for Other Related Relief.
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REPORT AND
ORDER
TABLE OF
CONTENTS
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Appearances
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6
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I. Procedural
History
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Introduction
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8
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A.
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Notice
and Interventions
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9
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B.
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Initial
Procedural Schedule, Hearing Dates and Issues List
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10
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C.
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Resumption
of Evidentiary Hearing and Revised Issues List
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10
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D.
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Great
Plains and KCPL’s Motion to Limit the Scope of the
Proceedings
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14
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1.
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Overview
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14
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2.
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Commission
Ruling on the Motion to Limit the Scope of the Hearing
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18
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3.
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Conclusions
of Law Regarding the Evidentiary Ruling
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19
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a.
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The
Anonymous Letters
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21
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b.
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Great
Plains and KCPL’s Code of Ethical Business Conduct and Their Gift and
Gratuity Policy
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25
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c.
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The
Future “Additional Amortizations” Issue
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26
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d.
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The
Inquiry into KCPL’s Comprehensive Energy Plan
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29
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E
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Court
of Appeals – Petition for a Writ of Mandamus and Writ of
Prohibition
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30
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F.
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Missouri
Supreme Court – Petition for a Writ of Mandamus and Writ of
Prohibition
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31
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G.
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Petition
to Reopen the Record
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31
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H.
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Case
Submission
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32
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II. Findings of
Fact
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Introduction
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33
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A.
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Findings
of Fact Regarding the Parties
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35
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B.
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Findings
of Fact Regarding Witness Demeanor, Credibility and
Testimony
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44
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C.
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Findings
of Fact Regarding Aquila’s Decision to Transfer Its Assets
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61
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D.
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Findings
of Fact Regarding the Structure of the Merger Transactions
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66
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E.
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Findings
of Fact Regarding Costs to Achieve and Merger Synergy
Savings
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75
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1.
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Costs
to Achieve Synergies
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75
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2.
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Synergy
Savings
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79
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a.
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Methodology
for Synergy Savings
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81
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i.
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Due
Diligence
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81
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ii.
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Integration
Teams
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82
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(a)
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Overview
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82
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(b)
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Specifics
of the Integration Planning Process
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85
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b.
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Calculated
Synergy Savings – Summary
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90
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c.
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Calculated
Synergy Savings – Components
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92
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d.
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Synergy
Sharing versus Synergy Retention
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96
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e.
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Synergy
Savings Tracking
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97
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3.
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Reasonableness
of the Projected Synergies
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98
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4.
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Controverting
Evidence Regarding the Reasonableness of the
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Calculated
Synergy Savings
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107
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a.
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Staff’s
Position
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107
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b.
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Public
Counsel’s Position
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112
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c.
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The
Industrials’ Position
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118
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F.
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Findings
of Fact Regarding Transaction and Transition Cost Recovery
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121
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1.
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The
Applicants’ Proposal for Transaction and Transition Cost
Recovery
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123
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2.
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The
Reasonableness of Allowing Recovery of Transaction and Transition
Costs
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127
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G.
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Findings
of Fact Regarding Credit Quality Following the Merger
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128
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1.
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Credit-Worthiness
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128
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2.
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Controverting
Evidence About Post-Merger Credit Worthiness
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139
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a.
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Changes
in Key Assumptions Utilized by the Credit Rating Agencies
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145
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b.
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Cost
and Schedule of the Iatan Construction Projects
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147
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c.
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Company
Testimony
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151
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d.
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Crane
Accident
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153
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3.
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“Additional
Amortizations”
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154
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4.
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Actual
Debt Cost Recovery
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156
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H.
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Findings
of Fact Regarding Service Quality
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157
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1.
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Management
Structure
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159
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2.
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Field
Operations
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161
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3.
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KCPL
Reliability Measures
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164
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4.
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System
Reliability Post-Merger
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165
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5.
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Strategy
and Approach for Combining the Customer Service Functions
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168
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6.
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Maintenance
of Recent Improvements in Aquila’s Customer Service
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170
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7.
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Customer
Service Operations
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171
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8.
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Current
Services Provided and Post-Merger Integration
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175
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9.
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Other
Post-Merger Considerations
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180
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a.
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Energy
Efficiency and Conservation Issues
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180
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b.
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Transition
Services
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181
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c.
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Communities
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181
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10.
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Controverting
Evidence
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182
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I.
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Findings
of Fact Regarding the Requested Waiver of the Commission’s Affiliate
Transactions Rule, 4 CSR 240-20.015
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183
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1.
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Post-Merger
Accounting
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183
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a.
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Post-Merger
Affiliate Transactions
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183
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b.
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Tax
Consequences
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185
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2.
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Purpose
of the Affiliate Transactions Rule
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186
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3.
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Effect
of Application of the Rule to Synergies Generated by the
Merger
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187
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4.
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Staff’s
Position -- Controverting Evidence to the Requested Waiver
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188
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J.
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Findings
of Fact Regarding Transmission and RTO/ISO Criteria
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189
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1.
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Regional
Transmission Organization Participation, Pre- and Post-Merger
Considerations
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189
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2.
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Conditioning
Approval of the Merger
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197
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a.
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RTO
Membership
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198
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b.
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Quantification
of Joint Dispatch
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202
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c.
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Consolidation
of Balancing Authority Operations
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204
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K.
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Findings
of Fact Regarding Municipal Franchise Agreement with Kansas
City
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206
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L.
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Findings
of Fact Regarding Municipal Franchise Agreement with St.
Joseph
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212
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M.
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Findings
of Fact Regarding Proposal to Have KCPL Submit a Separate Quality of
Service Plan
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213
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N.
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Findings
of Fact Regarding Proposal to Have KCPL Establish an Earnings Sharing
Mechanism
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216
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O.
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Findings
of Fact Regarding a Future Rate Case
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218
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III. Conclusions of
Law
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A.
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Conclusions
of Law Regarding Jurisdiction, Applicable Statutes, Burden of Proof, and
Applicable Standards for Evaluating the Merger Application
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219
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1.
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Commission
Jurisdiction and Authority
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219
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2.
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Application
of Section 393.190.1
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220
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a.
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The
Statute
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220
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b.
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Properly
Pled Request for Relief
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222
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3.
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Merger
Approval Standard – “Not Detrimental to the Public Interest” – and Burden
of Proof
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228
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4.
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Public
Interest Defined
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232
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5.
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Final
Conclusions Regarding Jurisdiction, Applicable Statutes, Burden of Proof,
and Applicable Standards for Evaluating the Merger
Application
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234
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B.
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Conclusions
of Law Regarding Projected Synergy Savings
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234
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1.
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Total
Synergies
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234
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2.
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Methods
for Calculating Synergies
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236
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3.
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The
Criticisms of the Applicants’ Estimates of Synergies
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237
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4.
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Final
Conclusions Regarding Projected Synergy Savings
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237
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C.
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Conclusions
of Law Regarding Transaction and Transition Cost Recovery
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239
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1.
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Transaction
Costs
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239
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2.
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Transition
Cost Recovery
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240
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3.
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Final
Conclusions Regarding Transaction and Transition Cost
Recovery
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241
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D.
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Conclusions
of Law Regarding Post Merger Credit-Worthiness
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241
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1.
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Credit
Rating Agencies
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242
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2.
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Cost
and Schedule of the Iatan Construction Projects
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244
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3.
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Conclusions
Concerning the “Crane Incident”
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246
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4.
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Conclusions
of Law Regarding Additional Amortizations
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247
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5.
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Conclusions
of Law Regarding Actual Debt Cost Recovery
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248
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6.
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Final
Conclusions Regarding Post-Merger Credit Worthiness
|
249
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| |
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E.
|
Conclusions
of Law Regarding Service Quality and Customer Service
|
250
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1.
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Customer
Service
|
251
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2.
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Service
Quality
|
252
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3.
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Controverting
Evidence
|
254
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4.
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Final
Conclusions Regarding Service Quality and Customer Service
|
254
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| |
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F.
|
Conclusions
of Law Regarding the Application of the “Not Detrimental to the Public
Interest” Standard – Application of the Balancing Test
|
255
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1.
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Operational
Benefits
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256
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2.
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Synergy
Savings and Transaction and Transition Costs
|
258
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3.
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Credit-Worthiness
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259
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4.
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Customer
Service and Service Quality
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259
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5.
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Tangential
Benefits
|
260
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6.
|
Final
Conclusions Regarding the Application of the “Not Detrimental to the
Public Interest” Standard
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261
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| |
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G.
|
Conclusions
of Law Regarding the Commission’s Affiliate Transactions
Rule
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262
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1.
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The
Purpose of the Rule
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262
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2.
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Waiver
Request
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262
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3.
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Final
Conclusions Regarding the Affiliate Transactions Rule
|
264
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H.
|
Conclusions
of Law Regarding Other Potential Conditions to Place on the Approval of
the Merger
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265
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1.
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Transmission
and RTO/ISO Criteria, Quantification of Joint Dispatch, and Consolidation
of Balancing Authority
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265
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a.
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RTO/ISO
Criteria
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266
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b.
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Quantification
of Joint Dispatch
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267
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c.
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Consolidation
of Balancing Authority
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268
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d.
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Final
Conclusions Regarding Transmission and RTO/ISO Criteria, Quantification of
Joint Dispatch, and Consolidation of Balancing Authority
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268
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2.
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The
Kansas City and KCPL Municipal Franchise Agreement
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269
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a.
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Authority
of the Commission
|
269
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b.
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Final
Conclusion Regarding the Kansas City and KCPL Municipal Franchise
Agreement
|
272
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3.
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The
St. Joseph and Aquila Municipal Franchise Agreement
|
272
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a.
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Authority
of the Commission
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272
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b.
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Final
Conclusion Regarding the St. Joseph and Aquila Municipal Franchise
Agreement
|
273
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4.
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Kansas
City’s Request for a Separate Quality of Service Plan
|
273
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a.
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Kansas
City’s Request
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273
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b.
|
Final
Conclusions Regarding Kansas City’s Request for a Separate Quality of
Service Plan
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274
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5.
|
Kansas
City’s Proposed Earnings Sharing Mechanism
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275
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a.
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Earnings
Sharing Mechanism Proposal
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275
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b.
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Final
Conclusions Regarding Kansas City’s Proposed Earnings Sharing
Mechanism
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276
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6.
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Kansas
City’s Proposed Future Consolidated Rate Case
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277
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a.
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Future
Consolidated Rate Case Proposal
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277
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b.
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Final
Conclusion Regarding Kansas City’s Proposed Future Consolidated Rate
Case
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277
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7.
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Kansas
City’s Proposed Condition for a Comprehensive Energy Audit
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278
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8.
|
Name
Change
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278
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9.
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Transition
Services Agreement
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278
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|
I.
|
Precedential
Effect
|
279
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| |
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IV. Final
Decision
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|
|
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Decision
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280
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Ordered
Paragraphs
|
281
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APPEARANCES
James M.
Fischer, Fischer & Dority, P.C., 101 Madison Street, Suite 400,
Jefferson City, Missouri 65101,
and
William
G. Riggins, Vice
President and General Counsel, and Curtis D.
Blanc, Managing Attorney–Regulatory, Kansas City Power & Light
Company, 1201 Walnut, Kansas City, Missouri 64106,
and
Karl
Zobrist and Roger W.
Steiner, Sonnenschein, Nath & Rosenthal, L.L.P., 4520 Main
Street, Suite 1100, Kansas City, Missouri 64111,
for: Great Plains Energy Incorporated
and Kansas City Power & Light Company.
Paul A.
Boudreau and James C.
Swearengen, Brydon, Swearengen & England, P.C., 312 East
Capitol Avenue, Post Office Box 456, Jefferson City,
Missouri 65102-0456,
and
Renee
Parsons, Senior Attorney, and Chris
Reitz, Attorney, Aquila, Inc., 20 West Ninth Street,
Kansas City, Missouri 64105, for: Aquila, Inc.
Charles
Brent Stewart, Stewart & Keevil, L.L.C., Southampton Village at
Corporate Lake, 4603 John Garry Drive, Suite 11, Columbia,
Missouri 65203, for: Missouri Joint Municipal Electric
Utility Commission.
Stuart W.
Conrad, Finnegan, Conrad & Peterson, L.C., 1209 Penntower Office
Center, 3100 Broadway, Kansas City,
Missouri 64111,
and
David L.
Woodsmall, Finnegan, Conrad & Peterson, L.C., 428 East
Capitol Avenue, Suite 300, Jefferson City, Missouri 65101,
for: Ag Processing, Inc., a
Cooperative; Sedalia Industrial Energy Users’ Association; and Praxair,
Inc.
Paul S.
DeFord and Aimee
Davenport, Lathrop & Gage, L.C., 2345 Grand Boulevard,
Suite 2800, Kansas City, Missouri 64108-2612,
for: Black Hills
Corporation.
Carl J.
Lumley, Curtis, Heinz, Garrett & O’Keefe, P.C., 130 South
Bemiston, Suite 200, Clayton, Missouri 63105-1913,
for: Dogwood Energy,
LLC.
Alicia
Embley Turner, and Martin A.
Miller, Newman, Comley & Ruth P.C., 601 Monroe Street,
Suite 301, Post Office Box 537, Jefferson City,
Missouri 65102, for: Cass County,
Missouri.
B. Allen
Garner, City Counselor, and Dayla
Bishop Schwartz, Assistant City Counselor, City of Independence,
Missouri, 111 East Maple Street, Independence,
Missouri 64050,
and
Debra D.
Roby and Alan I.
Robbins, Jennings Strouss & Salmon, PLC, 1700 Pennsylvania
Avenue N.W., Suite 500, Washington, DC 20006-4725,
for: City of
Independence, Missouri.
Mark W.
Comley, Newman, Comley & Ruth P.C., 601 Monroe Street,
Suite 301, Post Office Box 537, Jefferson City,
Missouri 65102,
and
Willie E.
Shepherd, Raymond
L. Gifford, Adam M.
Peters, and Amy
Danneil, Kamlet, Shepherd & Reichert, LLP, 1515 Arapahoe
Street, Tower 1, Suite 1600, Denver, Colorado 80202,
for: City of
Kansas City, Missouri.
William
D. Steinmeier and Mary Ann
(Garr) Young, William D. Steinmeier, P.C., 2031 Tower
Drive, Post Office Box 104595, Jefferson City,
Missouri 65110, for: City of St. Joseph,
Missouri.
Jane L.
Williams and Scott
Brown, Blake & Uhlig, P.A., 753 State Avenue, Suite 475,
Kansas City, Kansas 66101, for: International Brotherhood of
Electrical Workers, Local Unions No. 412, 695, 814, 1613, and
1464.
John B.
Coffman, Attorney at Law, 871 Tuxedo Boulevard, St. Louis,
Missouri 63119, for: Frank Dillon, Kimberly Miller, James
E. Doll, Randy Cooper, Gary Crabtree, and Eric Thompson and Allen
Bockelman (collectively,
the “South Harper Residents”).
Lewis R.
Mills, Jr. Public Counsel, Office of the Public Counsel, Governor Office
Building, 200 Madison Street, Suite 650, Post Office Box 2230,
Jefferson City, Missouri 65102, for: Office of the Public Counsel and the
public.
Kevin A.
Thompson, General Counsel, Steven
Dottheim, Chief Deputy General Counsel, Nathan
Williams, Deputy General Counsel, and Sarah
Kliethermes, Assistant General Counsel, Missouri Public Service
Commission, Governor Office Building, 200 Madison Street,
Jefferson City, Missouri 65102, for: Staff of the Missouri Public Service
commission.
REGULATORY
LAW JUDGES: Harold Stearley,
Regulatory Law Judge, and Nancy Dippell, Deputy Chief Regulatory Law
Judge.
REPORT
AND ORDER
Syllabus: The order
conditionally approves Great Plains Energy Incorporated’s, Kansas City
Power & Light Company’s, and Aquila, Inc.’s, request for authority to merge
Aquila, Inc., with Gregory Acquisition Corporation, with Aquila, Inc., becoming
the surviving entity.
I. Procedural
History
On
April 4, 2007, Great Plains Energy Incorporated (“Great Plains” or “GPE”),
Kansas City Power & Light Company (“KCPL”), and Aquila, Inc., pursuant
to Sections 393.180, 393.190, 393.200, 393.210 and 393.220,
RSMo 2000,1 and
Commission Rules 4 CSR 240-2.060, 240-3.020, 240-3.110, 240-3.115,
240-3.120, 240-3.125, and 240-20.015, filed a joint application with the
Missouri Public Service Commission. The Applicants requested
authority for a series of transactions whereby: (1) Black Hills
Corporation, a South Dakota corporation owning both regulated and non-regulated
businesses, would acquire Aquila’s gas assets in Iowa, Nebraska, Kansas, and
Colorado and electric assets in Colorado for $940 million, subject to
closing adjustments (“Black Hills Purchase”);2 and (2) Gregory
Acquisition Corp. (“Gregory”), a Delaware corporation and a direct, wholly-owned
subsidiary of Great Plains would be merged with and into Aquila, with Aquila as
the surviving entity (referred to as “the merger”).
The
result of the merger is that Great Plains will effectively acquire Aquila’s
Missouri electric and steam operations, as well as its merchant services
operations, which primarily consist of the 340 MW Crossroads generating
facility in Mississippi, and certain residual natural gas
contracts. Aquila would ultimately become a direct, wholly-owned
subsidiary of Great Plains.
_________________________
1 All
statutory references are to the Revised Statutes of Missouri 2000, unless
otherwise noted.
2 See
Application to Intervene of Black Hills, pp. 1-2, filed April 27, 2007, and
Finding of Fact Number 5.
|
A.
|
Notice
and Interventions
|
On
April 9, 2007, the Commission issued notice of the proposed transactions,
and set an intervention deadline of April 30, 2007. On
April 24, the Commission directed Aquila to send individual notice of the
proposed transactions to its customers no later than its next billing
cycle. Aquila filed its notice of compliance with that order on
May 9, 2007.
On
May 10, 2007, the Commission set a technical conference for May 23,
2007, and a prehearing conference for May 24, 2007, to allow the parties to
further discuss the details of the proposed merger and to determine the
procedural schedule to be followed in this matter. The Commission
granted requests for intervention for the following entities on
May 15: (1) Ag Processing, Inc., a Cooperative;
(2) Praxair, Inc.; (3) Sedalia Industrial Energy Users’ Association;
(4) City of Kansas City, Missouri; (5) International Brotherhood
of Electrical Workers Local Unions Nos. 412, 1464, 1613, 695, and 814;
(6) Dogwood Energy, L.L.C.; (7) Missouri Joint Municipal Electric
Utility Commission; (8) City of Lee’s Summit, Missouri; (9) City
of Independence, Missouri; (10) City of St. Joseph, Missouri;
(11) Cass County, Missouri; (12) Black Hills Corporation; and
(13) Frank Dillon, Kimberly Miller, James E. Doll,
Randy Cooper, Gary Crabtree, Eric Thompson, and
Allen Bockelman (collectively, the “South Harper Residents”).
On
July 13, 2007, the Commission received a late application to intervene from
the United States Department of Energy, the National Nuclear Security
Administration, and the Federal Executive Agencies. This unopposed
application was granted on July 27, 2007.
|
B.
|
Initial
Procedural Schedule, Hearing Dates and Issues
List
|
On
June 19, 2007, the Commission adopted the procedural schedule proposed by
the parties. This schedule culminated in an evidentiary hearing scheduled for
December 3-14, 2007. On November 21, the parties jointly
filed the list of issues they believed required decisions from the
Commission. Notably, the parties stressed: “This
‘non-binding’ listing of issues is not to be construed as impairing any party’s
ability to argue about any of these issues or related matters, or to restrict
the scope of its response to arguments made by other parties.”3
The
hearing convened on December 3;4 however, on
December 6,5 the
Applicants proposed suspending the proceedings to give the parties time to
review an alternative merger proposal. That unopposed request was
granted.6
|
C.
|
Resumption
of Evidentiary Hearing and Revised Issues
List
|
On
March 11, 2008,7
the Commission adopted an updated procedural schedule setting April 21 as
the date for the evidentiary hearing to resume. On April 16,
2008, after the granting of a one-day extension, the Staff of the Missouri
Public Service Commission (“Staff”) filed with the Commission its “Second List
Of Issues And Order Of Opening Statements, Witnesses And
Cross-Examination.” Paragraph 9 of this filing reads as
follows:
The
parties agree the listing of issues below is not an agreement by any party that
any particular listed issue is, in fact, a valid or relevant issue. Indeed, in
their prehearing briefs, some parties may state that they consider a particular
listed issue to not be a valid issue. This “non-binding” listing of
issues is not to be construed as impairing any party’s ability to argue about
any of these issues or related matters, or to restrict the scope of its response
to arguments made by other parties.
_________________________
3 List of Issues and Order of Opening
Statements, Witnesses and Cross-Examination, Paragraph 5, Case
No. EM-2007-0374, filed November 21, 2007.
5 Chairman
Davis, sua sponte,
recused himself from this matter on December 6. See EFIS Docket
Number 128, Notice of
Recusal, filed December 6, 2007.
6
Transcript, pp. 1154-1158.
7 All
dates from this point forward in the order refer to the year 2008 unless
otherwise noted.
That
list, as well as the proposed dates for hearing testimony on each issue,
included:
Merger
Synergy Savings
1. Are
the estimates of savings from synergies reliable?
A. Could
any of the synergy savings be achieved by KCPL or Aquila on a stand-alone basis
absent the acquisition/consolidation/integration?
B.
Are any of the identified synergy savings dependent on KCPL and Aquila
consolidating/integrating/merging their operations?
2. Is
it likely that the actual synergy savings exceed the sum of the transaction,
transition and incremental interest costs that the Joint Applicants propose to
recover over the first five (5) years following the
acquisition/merger/consolidation? If not, is the proposed merger not detrimental
to the public interest?
Transaction
Cost Recovery
1. Should
transaction costs be directly charged to ratepayers through cost of service
amortizations? Would the proposed merger be detrimental to the public
interest if the Commission did so?
Affiliate
Transactions Rule Waiver/Variance
1. Should
GPE/KCPL and Aquila be granted a waiver/variance from the provisions of the
affiliate transactions rule under 4 CSR 240-20.015 as it might pertain to
transactions between Aquila and KCPL? Will the proposed merger be not
detrimental to the public interest if the Commission does so?
2. Have
GPE/KCPL and Aquila complied with the Commission’s rules regarding a request for
a waiver or variance from the affiliate transactions rule, such as the
requirement regarding making a showing of good cause?
3. Have
GPE/KCPL and Aquila provided adequate details for there to be clarity respecting
what provisions of the affiliate transactions rule that GPE/KCPL and Aquila are
seeking relief from?
Service
Quality
1. Can
service quality problems resulting from a merger/consolidation/acquisition of a
works or system necessary or useful in the performance of duties to the public
preclude the merger/consolidation/acquisition from being not detrimental to the
public interest?
2. Has
GPE/KCPL taken adequate measures to ensure that its proposed
postconsolidation/post-merger/post-acquisition operations will not be
detrimental to the public interest by precluding service quality issues arising
from the consolidation/merger/acquisition?
Transmission
and RTO/ISO Criteria
1. Have
Applicants demonstrated that the proposed transaction is not detrimental to the
public interest even though they have not addressed the rate and other impacts
of their intent to have Aquila participate in the Midwest ISO rather than
SPP?
2. Have
Applicants demonstrated that the proposed transaction is not detrimental to the
public interest even though they have not addressed the rate and other impacts
of potential joint dispatch of the combined companies’ generation resources,
including the impacts on transmission and interconnection
availability?
3. Should
Commission approval of the Joint Application be conditioned upon Aquila being
required to join and operate its generation and transmission facilities under
the auspices of the Southwest Power Pool (SPP) Regional Transmission
Organization (RTO) with KCPL within four (4) months of approval of the
merger?
4. Should
Commission approval of the Joint Application be conditioned upon Aquila and KCPL
being required to consolidate their balancing authority areas within six (6)
months of approval of the merger?
Municipal
Franchise
1. Should
Commission approval of the Joint Application be conditioned upon the negotiation
of a single, unitary franchise between KCPL/Aquila and the City of Kansas City
within nine (9) months of the Commission’s approval of the merger?
Quality
of Service Plan and Earnings Sharing Mechanism
1. Should
Commission approval of the Joint Application be conditioned upon requiring
KCPL/Aquila to file an application for a Quality of Service Plan within 90 days
of the Commission’s final decision in this proceeding?
2. Should
Commission approval of the Joint Application be conditioned upon establishment
of an Earnings Sharing Mechanism that returns to customers excess earnings of
KCPL/Aquila above an authorized level?
Future
Rate Case
1. Should
Commission approval of the Joint Application be conditioned upon requiring
KCPL/Aquila to file a comprehensive rate case with respect to the merged
operations within three (3) years of the Commission’s approval of the
merger?
Additional Amortization /
Credit
Worthiness
1. Is
the credit-worthiness of KCPL and Aquila as a result of the GPE acquisition of
Aquila dependent on the expectation that GPE/KCPL/Aquila will seek and the
Commission will authorize a regulatory plan similar to that contained in the
KCPL Stipulation and Agreement in Case No. EO-2005-0329 subsequent to Commission
authorization of GPE’s acquisition of Aquila?
2. If
yes, will KCPL’s credit-worthiness, and thereby the purpose of the KCPL
Regulatory Plan, be negatively affected if Aquila is unable to obtain such a
Regulatory Plan?
3. Is
the current expected cost and schedule outcome relating to KCPL’s infrastructure
commitments from the Case No. EO-2007-0329 Regulatory Plan an indication of GPE
and KCPL’s ability to complete the acquisition transaction in a manner that is
not detrimental to the public interest?
4. Is
KCPL’s creditworthiness affected by GPE’s decision not to seek recovery from
Missouri ratepayers of any of the debt repurchase costs of Aquila’s existing
debt that GPE will refinance post-closing?
Anonymous
Public Allegations/Comments Related to Proposed Acquisition
(a) Would
the adoption of GPE/KCPL’s gift and gratuity practice for Aquila be detrimental
to the public interest?
(b) Does
KCPL have adequate control of the Iatan projects to be able to operate the
nondispatch functions of Aquila in addition to those of KCPL in a manner not
detrimental to the public interest?
(c) Does
the Commission have adequate information to determine whether the public
allegations/comments it has received regarding GPE/KCPL are accurate and such
conduct in the operation of the non-dispatch functions of Aquila would be
detrimental to the public interest?
The
parties also enumerated five items which some or all of them considered to be
“legal issues.”8
In
addition to the fact that the issues list was not binding on the parties, the
Commission did not adopt the list of issues as filed by Staff for two
reasons: it was not agreed to by the parties; and, Staff’s framing of
the issues may not accurately reflect the material issues to this matter under
the applicable statutes and rules.
|
D.
|
Great
Plains and KCPL’s Motion to Limit the Scope of the
Proceedings
|
On
April 17, after Staff filed its proposed revised list of issues, Great
Plains and KCPL moved “to limit the scope of this proceeding to evidence
relating to whether the proposed acquisition of Aquila is not detrimental to the
public interest, which is the standard that the Commission is required to apply
by law.”9 The motion
identified several issues that Great Plains and KCPL believed were either
totally or partially irrelevant to the Commission’s determination, and requested
that the Commission restrict evidence to that which was relevant and decline to
hear certain purported evidence that Great Plains and KCPL believed to be
completely irrelevant. Great Plains and KCPL further requested that
certain witnesses be released from the proposed procedural schedule for the
hearing believing their testimony into these alleged irrelevant issues should
not be required. The issues that were the subject of Applicant’s
motion included:10
_________________________
8 The Commission notes that lists of
issues submitted by the parties do not always frame the
issues accurately or, in fact, reflect the material issues correctly
in any given case pursuant to the applicable statutes and Commission
rules. Consequently, the Commission does not automatically adopt any
proposed issues list, and as is the case in this matter, the Commission deemed
it inappropriate to adopt the issues list because of the parties’ failure to
accurately delineate the issues requiring the Commission’s
decision.
9 EFIS
Docket Number 309, Great Plains Energy’s and KCPL’s Motion to Limit Scope of the
Proceeding to Evidence Relating to Whether the Proposed Acquisition of Aquila by
Great Plains Energy, Inc. Is Not Detrimental to the Public Interest, filed April
17, 2000; See also 4 CSR 240-3.115(1)(D).
|
|
(1)
|
An
inquiry into four anonymous letters that, during the course of this
proceeding, were directed to various Commissioners, either participating
or not participating in this matter; the subject of which pertained to
Applicant’s financial ability to effectuate the proposed merger.11
|
|
|
(2)
|
An
inquiry into the Great Plains Energy Code of Ethical Business Conduct and
its gift and gratuity policy.
|
|
|
(3)
|
An
inquiry into a plan for regulatory “Additional Amortizations” that
appeared in the Applicant’s original application but was subsequently
removed and is not being requested.
|
|
|
(4)
|
An
extensive inquiry into to KCPL’s Comprehensive Energy Plan (“CEP”) set
forth in the Stipulation and Agreement approved by the Commission in Case
No. EO-2005-0329, including the current reforecast of cost and schedule
issues related to the Iatan Unit 1 and Unit 2 construction
projects.
|
Great
Plains and KCPL further stated:
To be
clear, the Applicants do not object to evidence related to: (1) The
inter-relationship between the Iatan projects and Great Plains Energy’s
acquisition of Aquila; (2) KCPL’s procurement function and asserted merger
savings estimates; and (3) Credit agency debt rating information and debt
ratings.
A number
of the Applicants’ witnesses who have submitted prefiled testimony can address
these issues, including Great Plains Energy’s Chief Financial Officer Terry
Bassham; Great Plains Energy’s Vice-President of Investor Relations and
Treasurer Michael Cline; and KCPL’s Vice President of Administrative Services
Lora Cheatum. Additionally, the Applicants will produce William H.
Downey, President and Chief Executive Officer of KCPL, to provide testimony on
the relationship of the CEP projects (including the status of the Iatan Unit 1
environmental retrofit and Iatan Unit 2 construction) to the acquisition of
Aquila. He will also be able to advise the Commission on the status
of the reforecast that is underway regarding construction costs and schedules at
the Iatan Generating Station.
_________________________
10 See Issues X and XI, Staff’s Second List of
Issues and Order of Opening Statements, Witnesses and Cross-Examination at 10-11
(“Staff’s Second List of Issues”).
11 A fifth
anonymous letter was received by the Commission on May 12, after the hearing had
adjourned. It was filed by the Commissioners in this docket on May
13.
Great
Plains and KCPL finally noted:
However,
the wide range of inquiries conducted during the depositions of 11 Great
Plains Energy/KCPL witnesses and 5 Aquila witnesses during the past three weeks
indicates that Staff is pursuing the “fishing expedition” and a “full
re-evaluation of the CEP in the context of this case,” contrary to the
Commission’s directive of March 20. See Order Denying Motion to Quash
Deposition Subpoenas at 3-4. Issues X and XI of Staff’s Second List of Issues
demonstrate that Staff plans to continue this trek into areas that are not
relevant to whether the proposed merger is not detrimental to the public
interest. The Commission should not require the Applicants to produce
for hearing: (1) Michael J. Chesser, Great Plains Energy Chairman of the Board
and Chief Executive Officer; (2) Stephen Easley, KCPL’s Senior Vice President of
Supply; (3) Brent Davis, KCPL’s Iatan Unit 1 Project Director; (4) Terry
Foster, KCPL’s Director of Project Controls for CEP projects; (5) Steven
Jones, KCPL’s CEP Procurement Director; (6) John R. Grimwade, KCPL’s Senior
Director of Strategic Planning and Development.
If Staff
feels compelled to introduce evidence from these witnesses, the Commission
should require Staff to designate from each witnesses' deposition the pages and
lines that it proposes to offer. All other parties will then be able
to raise objections or agree that such passages may be admitted.
On
April 21, the evidentiary hearing resumed following its December 6,
2007 suspension.12 During the
course of the proceedings, the Presiding Officer raised the need to rule on the
Applicant’s motion. The Presiding Officer stressed the need to ensure
all parties a full and fair opportunity to respond to the Applicant’s motion,
while also noting that the procedural schedule for the hearing would bring these
issues into the hearing as early as April 24.13
Ultimately,
the parties agreed to have the Presiding Officer rule on the Applicant’s motion
on April 24. As of April 24, the parties had seven days to
file written responses to the motion, and the parties were given the additional
opportunity to provide oral argument on the motion at the hearing on
April 24. No party requested additional time to respond to
Applicant’s motion and no party objected to the Commission taking up the motion
on April 24.
_________________________
12 Kevin
Gunn officially commenced his term as Commissioner on April 21. On
April 24, Commissioner Gunn recused from this matter sua sponte. See
EFIS Docket Number 320, Notice
of Recusal, filed April 24, 2008.
13
Transcript, pp. 1202-1203, 1441-1442, 1608-1610, 1917-1918, and
2073-2120.
The
Commission’s Staff filed a written response to the Applicant’s motion on
April 24, and its oral argument at hearing on this motion echoed its
written response. The gravamen of Staff’s response is
that: (1) it does not propose that the Commission decide matters
on the basis of the content of anonymous complaints, but rather from the basis
of sworn testimony from individuals regarding the anonymous complaints;
(2) it believes Aquila's approach to cost overruns and schedule slippage
(in relation to the Iatan construction projections), and Aquila’s approach to
gifts and gratuities are superior to those of Great Plains and KCPL and the
Commission should require the adoption of Aquila’s approach should the merger be
approved; (3) the issue of a proposed future regulatory plan involving
“Additional Amortizations” is relevant in this proceeding as it is related to
the Applicant’s credit-worthiness and that the Commission must hear this
evidence because of the Missouri Supreme Court decision in State ex rel.
A.G. Processing v. Public Serv. Comm 'n;14 and (4) the
Commission should take a broad view of the relevance of KCPL’s Comprehensive
Energy Plan (“CEP”) to the ultimate issue pending before the
Commission. Staff further requests that the Commission not release
the witnesses as requested by the Applicant so that they may provide the
testimony that Staff believes is relevant to these issues.
Ag
Processing, Inc, Sedalia Industrial Energy Users’ Association and Praxair,
Inc., (collectively referred to as “Industrial Intervenors” or “Industrials”)
also filed a written response to the Applicant’s motion. Similarly to
Staff, the Industrials’ oral arguments on the motion also echoed its written
response. The Industrials stated that their particular interest was
to ensure that evidence regarding the Applicant’s credit-worthiness be entered
into the record. The Industrials further stated that they supported
Staff’s position on the remaining issues.
_________________________
14
120 S.W.3d 732 (Mo. banc 2003).
The
Office of the Public Counsel (“Public Counsel”) echoed support for Staff’s and
the Industrials’ positions opposing the Applicant’s motion. Public
Counsel further stated that with regard to the issue concerning a potential
future regulatory plan involving “Additional Amortizations” that the Commission
should, at minimum, hear an offer of proof on this issue and preserve that
evidence in the record.
|
|
2.
|
Commission
Ruling on the Motion to Limit the Scope of the
Hearing
|
On
April 24, following oral argument at the evidentiary hearing, the Presiding
Officer, pursuant to the authority delegated by the Commission15 ruled as
follows:
|
|
(1)
|
Purported
evidence regarding the anonymous letters is wholly irrelevant to this
proceeding and the Commission will not hear this purported
evidence.
|
|
|
(2)
|
Great
Plains Energy Code of Ethical Business Conduct and its gift and gratuity
policy is wholly irrelevant to this proceeding and the Commission will not
hear this purported evidence.
|
_________________________
15 See
Commission Rules 4 CSR 240-2.110, 2.120 and 2.130. Commission Rule 4
CSR 240-2.110(4) provides: “The presiding officer may limit the number of
witnesses, exhibits, or the time for testimony including limitations consistent
with the application of the rules of evidence.”
Commission
Rule 4 CSR 240-2.120(1) provides:
A
presiding officer shall have the duty to conduct full, fair and impartial
hearings, to take appropriate action to avoid unnecessary delay in the
disposition of cases, to maintain order, and shall possess all powers
necessary to that end. The presiding officer may take action as may be necessary
and appropriate to the discharge of duties, consistent with the statutory
authority or other authorities under which the commission functions and with the
rules and policies of the commission.
Commission
Rule 4 CSR 240-2.130(3) provides:
The
presiding officer shall rule on the admissibility of all
evidence. Evidence to which an objection is sustained, at the request
of the party seeking to introduce the same or at the instance of the commission,
nevertheless may be heard and preserved in the record, together with any
cross-examination with respect to the evidence and any rebuttal of the evidence,
unless it is wholly irrelevant, repetitious, privileged or unduly
long. When objections are made to the admission or exclusion of
evidence, the grounds relied upon shall be stated briefly. Formal
exceptions to rulings shall be unnecessary and need not be
taken.
|
|
(3)
|
While
the Commission believes that any purported evidence regarding a future
plan for regulatory “Additional Amortizations” is irrelevant, it is not
wholly irrelevant, and the Commission will preserve this evidence in the
record as an offer of proof.
|
|
|
(4)
|
An
extensive inquiry into to KCPL’s CEP as set forth in the Stipulation and
Agreement approved by the Commission in Case No. EO-2005-0329,
including the current reforecast of cost and schedule issues related to
the Iatan Unit 1 and Unit 2 construction projects is overly
broad and the scope of any offered evidence in this regard will be
restricted to: (1) The inter-relationship between the Iatan projects
and Great Plains Energy’s acquisition of Aquila; (2) KCPL’s
procurement function and asserted merger savings estimates; and
(3) Credit agency debt rating information and debt
ratings.
|
|
|
(5)
|
The
witnesses that the Applicant’s have requested to be released in this
matter will not be released to the extent they can provide testimony on
the Applicant’s credit-worthiness.
|
|
|
(6)
|
Witnesses
from Aquila that were to provide testimony solely on the issue of the
anonymous communications are released and do not have to appear before the
Commission.
|
No
motions for reconsideration of this ruling were filed with the
Commission.
|
|
3.
|
Conclusions
of Law Regarding the Evidentiary
Ruling
|
Evidence
is logically relevant when it tends to prove or disprove a fact in issue or
corroborates other relevant evidence which bears on the principal issue.16 Even if
logically relevant, the finder of fact has discretion to limit such evidence, or
exclude it all together, if the fact-finder believes the evidence is not legally
relevant.17 Legal
relevance refers to the probative value of the purported evidence outweighing
its risks of unfair prejudice, confusion of issues, delay, waste of time, or
cumulativeness.18 Consequently,
even logically relevant evidence may be excluded unless its benefits outweigh
its costs.19
_________________________
16 State v. Liles, 237 S.W.3d
636, 638-639 (Mo. App. 2007); Cohen v. Cohen, 178 S.W.3d
656, 664 (Mo. App. 2005); Roorda v. City of Arnold, 142
S.W.3d 786, 797 (Mo. App. 2004); Kendrick v. Board of Police Com'rs
of Kansas City, Mo., 945 S.W.2d 649, 654-655 (Mo. App. 1997); Gardner v. Missouri State Highway
Patrol Superintendent, 901 S.W.2d 107, 116 (Mo. App. 1995) (quoting State ex rel. Webster v. Missouri
Resource Recovery, Inc., 825 S.W.2d 916, 942 (Mo. App.
1992)).
17 Liles, 237 S.W.3d at
638-639.
19 Id. Even when evidence is
relevant, it is within the discretion of the fact-finder to exclude the evidence
if its probative value is outweighed by its prejudicial effect. Stevinson v. Deffenbaugh Industries,
Inc., 870 S.W.2d 851, 860 (Mo. App.
1993).
A
determination of relevancy is often subjective and the fact-finder is granted
broad discretion in determining the relevance of evidence.20 The
fact-finder is granted discretion because of concerns about prejudice, confusion
of the issues, and interrogation that is only marginally relevant.21 The
fact-finder’s wide discretion extends to the determination of the admissibility
of evidence on collateral matters.22
The
fact-finder's rulings will not be disturbed by an appellate court unless an
abuse of discretion is shown.23 “An abuse of
discretion is shown when the trial court's ruling is clearly against the logic
of the circumstances then before the trial court and is so unreasonable and
arbitrary that the ruling shocks the sense of justice and indicates a lack of
careful deliberate consideration.”24
The
Commission notes that at hearing Staff planned to call 15 witnesses on the
Iatan construction issues, and 15 witnesses on the anonymous allegations
issue.25 Staff also
proposed to inquire into the “Additional Amortizations” issue, as well as the
possibility of a future regulatory plan for Aquila, even though Great Plains’
Chief Financial Officer Terry Bassham had testified that the additional
amortizations issue had been withdrawn from the Applicants’ request.26 Additionally,
Staff launched an investigation into the codes of corporate conduct of the
Applicants, with particular emphasis on the companies' policies regarding gifts
and gratuities apparently out of an interest to determine if there was any merit
to the hearsay allegations contained in the anonymous letters directed to the
Commission.
_________________________
20 Cohen v. Cohen, 178 S.W.3d
656, 664 (Mo. App. 2005); Stevinson v. Deffenbaugh Industries,
Inc., 870 S.W.2d 851, 860 (Mo. App. 1993).
21 Liles, 237 S.W.3d at 638
- -639.
22 Midwest Materials Co. v. Village
Development Co., 806 S.W.2d 477, 495 (Mo. App. 1991); Boehmer v. Boggiano, 412
S.W.2d 103, 110 (Mo. 1967); Barrett v. Flynn, 728 S.W.2d
288, 293 (Mo. App. 1987).
23 Cohen, 178 S.W.3d at
664.
25 See
Issues X and XI, Staff’s Second List of Issues at 10-11 (EFIS Docket Number 303,
filed April 16, 2008); EFIS Docket Number 309, Great Plains Energy’s and KCPL’s
Motion to Limit Scope of the Proceeding to Evidence Relating to Whether the
Proposed Acquisition of Aquila by Great Plains Energy, Inc. Is Not Detrimental
to the Public Interest, filed April 17, 2000; EFIS Docket Number 318, Staff’s
Response In Opposition To Great Plains Energy’s And KCPL`s Motion To Limit Scope
Of The Proceeding To Whether Evidence Relating To Issues II Through IX Of The
Second List Of Issues Is Not Detrimental To The Public Interest, filed April 24,
2008; EFIS Docket Number 323, Industrial Intervenors Response to Motion to Limit
Scope of the Proceeding, filed April 24, 2008.
26 See
Bassham Add’l Supp. Direct at 4. An Aquila regulatory plan is a
potential topic for a future case, but it is not an element of the Applicants’
current request. Id.
The
Presiding Officer held that any purported evidence related to the unsolicited
and unsigned letters was “wholly irrelevant” to this proceeding and the
determination with regard to if the transaction contemplated is not detrimental
to the public interest. Being hearsay, and perhaps being even beyond
hearsay since no proponent of admitting the purported evidence of the out of
court/hearing statements has identified the source of these statements, the
statements themselves are incompetent, unsubstantial and cannot be used as the
basis of any ruling by this Commission. Moreover, as directed
by this state’s Supreme Court, conclusions or further speculation about this
hearsay does not qualify as competent and substantial evidence upon the whole
record essential to the validity of a final decision, finding, rule of order of
an administrative officer or body under § 22, Article V of the
Missouri Constitution.27 “The rule
against hearsay evidence is based on the propriety of the confrontation and the
cross-examination of the witness having personal knowledge of the facts adduced,
and his veracity
alone.”28
_________________________
27 State ex rel. De Weese v.
Morris, 221 S.W.2d 206, 209 (Mo. 1949); Lacey v. State Bd. of Registration
for the Healing Arts, 131 S.W.3d 831, 842 (Mo. App.
2004);
28 De Weese, 221 S.W.2d at
209.
Sworn
testimony from other witnesses will not cure the fundamental defect of this
purported evidence. Even the fact that the technical rules of
evidence do not apply in administrative proceedings does not abrogate this fundamental rule of
evidence.29 In fact,
soliciting comment or speculation from other individuals regarding these hearsay
statements invites double hearsay, speculation and additional statements that
cannot be substantiated. Indeed two of the anonymous letters already
involve instances of double hearsay. This merely magnifies the
evidentiary incompetence of this entire line of investigation – especially when
no such speculative inquiry is required.
The
Applicants filed their initial merger request over one year ago on April 4,
2007. The parties have had more than sufficient time, through
discovery and other procedural devises, to develop and present actual competent
evidence on the exact same subject matter as encompassed within the anonymous
communications. The Commission has heard testimony from multiple
subject matter experts, presented by multiple parties, regarding the proposed
transactions. The parties in opposition to Applicant’s motion seem to
have overlooked the fact that volumes of competent evidence were appropriately
offered into the record addressing the very same subject matter of the anonymous
letters, i.e., the Applicant’s financial ability to effectuate the proposed
merger. Indeed many of these witnesses were the same witnesses that
Staff had listed to provide testimony about the anonymous
letters. Having sworn competent testimony in the record is certainly
superior to any hearsay letters or testimony surrounding them. Even
if some minuscule piece of relevant evidence is buried in this incompetent
evidence, given the facts that the same witnesses Staff seeks to examine with
regard to the anonymous letters already provided competent evidence on the same
subject matter, then any ferreting out of this information would merely be
repetitive – another reason for denying the offer of proof.
_________________________
29 Id. See also State
Bd. of Registration for Healing Arts v. McDonagh, 123 S.W.3d 146, 154-156 (Mo.
banc 2003).
The
Commission has indeed faced this identical issue before. In KCPL’s
application for authority to issue certain debt securities, Case
No. EF-2008-0214, Praxair, Inc., sought to have the Commission address an
anonymous letter when making its decision.30 The
Commission concluded that: “Given that this case constitutes a
contested case under § 536.010(4) RSMo 2000, the Commission declines
to consider the letter in question. An anonymous letter not supported
by a sworn witness who is subjected to cross-examination constitutes mere
hearsay and should not be considered by the Commission in reaching a decision in
a contested case.”31 Moreover, the
Commission has had its decisions overturned for ignoring this basic precept of
law and it declines to err again at the bequest of any party in this
matter.32
_________________________
30 See
Application of Kansas City
Power & Light Company for Authority to Issue Debt Securities, Order
Approving Financing, Case No. EF-2008-0214, issued February 14,
2008.
32 The
Western District Court of Appeals opined:
Cases are
legion that hearsay evidence does not rise to the level of competent and
substantial evidence within the ambit of Mo. Const. Art. V, §
18. State ex rel.
DeWeese v. Morris, 221 S.W.2d 206, 209 (Mo. 1949); Dickinson v. Lueckenhoff, 598
S.W.2d 560, 561-62 (Mo. App. 1980); Wilson v. Labor and Indus. Relations
Comm'n, 573 S.W.2d 118, 120-21 (Mo. App. 1978); Bartholomew v. Bd. of Zoning
Adjustment, 307 S.W.2d 730, 733 (Mo. App. 1957); State ex rel. Horn v.
Randall, 275 S.W.2d 758, 763 (Mo. App. 1955); and Dittmeier v. Missouri Real Estate
Comm'n, 237 S.W.2d 201, 206 (Mo. App. 1951). Laclede and the
Commission seek to avoid the fatal consequence of the evidentiary deficiency by
the classic hue and cry of virtually limitless discretion possessed by the
Commission, the admonition that courts should not substitute their judgment for
that of the Commission, and the indulgence of deference for decisions of the
Commission because of its expertise in the complicated and highly sophisticated
matters it is legislatively ordained to resolve. Judicial recognition
thereof when and where appropriate, however, does not dictate blind acceptance
of every order cut and every decision handed down by the
Commission. Indiscriminate approval of orders and decisions of the
Commission, without subjecting them to the rigors of Mo. Const. Art. V, § 18, is
an abdication of judicial responsibility. Unbridled bureaucracy is
the subtle destroyer of people's rights and Mo. Const. Art. V, § 18, is their
response. Having concluded that there was no "competent and
substantial evidence" upon the whole record to support a finding by the
Commission that 34 degrees Fahrenheit was a mean or average temperature
"balance" or "changeover" point at which electric add-on heat pumps cease to be
operational, the surcharge tariff sought by Laclede and approved by the
Commission falls apart for want of a linch-pin. Perforce, the Circuit Court of
Cole County was eminently justified when it invalidated the surcharge tariff on
the ground heretofore discussed.
State ex rel. Marco Sales, Inc. v.
Public Service Com'n, 685 S.W.2d 216, 220-221 (Mo. App.
1984).
Under the
relevance standard, the anonymous letters and the testimony about those letters
just summarized, are clearly irrelevant and were properly
excluded. This purported evidence tends neither to prove nor disprove
any fact in issue and does not corroborate any other relevant evidence bearing
on the principal issues before the Commission. If the excluded
evidence does not tend to prove or disprove a fact in issue or corroborate other
relevant evidence which bears on the principal issue, then a Commission decision
made in the absence of such evidence does not render the Commission’s decision
arbitrary, capricious, unreasonable or an abuse of discretion.33
With
regard to denying the offer of proof on this purported evidence, finding that
this purported evidence is wholly irrelevant and repetitious to valid and
competent testimony eliminates the requirement for an offer of proof.34 Further, it
is not a due process violation to exclude an offer of proof when purported
evidence that a party wishes to offer is wholly irrelevant, repetitious,
privileged, or unduly long.35
Finally,
Staff and the Industrials claim there is plenty of time to hear this wholly
irrelevant evidence, or at least an offer of proof with regard to its purported
relevancy. This assertion ignores the fact that these proceedings
have already dragged on for over a year and that there is a clock ticking
between the Applicants with regard to when the proposed transaction will
expire. The Commission has literally thousands of pages in this
record composed of pleadings and filings, prefiled testimony and hearing
transcripts, and of relevant statutes and Commission Rules that it must review
in order to reach a decision in this matter, consuming another two days on
wholly irrelevant matters causes the Commission to conclude that two-days to
hear irrelevant testimony on incompetent hearsay or hear an offer of proof would
indeed be unduly long.
_________________________
33 Kendrick, 945 S.W.2d at
654-655.
34 See
Section 536.070(7) and Commission Rule 4 CSR-240-2.130(3).
35 Roorda v. City of Arnold, 142
S.W.3d 786, 797 (Mo. App. 2004).
Consequently,
while the Commission only addressed the “wholly irrelevant” status of this
purported evidence at hearing, upon further examination, the Commission further
finds that to the extent even a small kernel of relevant evidence could be
buried in this irrelevancy, allowing the introduction of this evidence would
also have been repetitive and caused undue delay.
|
|
b.
|
Great
Plains and KCPL’s Code of Ethical Business Conduct and Their Gift and
Gratuity Policy
|
As Great
Plains and KCPL correctly point out, the Applicants’ code of
ethical business conduct and their gift and gratuity policies, and Staff's
inquiries regarding them have no bearing on whether Great Plains' acquisition of
Aquila is not detrimental to the public interest. Such questions,
prompted only by the anonymous letters filed at the Commission that contain no
specific accusations of misconduct or bribery against any person or entity, have
brought Staff close to second-guessing management in its operation of these
companies. The Commission, of course, is not permitted "to dictate
the manner in which the company shall conduct its business."36 As the Court
of Appeals succinctly stated in State ex rel. Harline v. Public
Service Commission of Mo: 37
The
powers of regulation delegated to the Commission are
comprehensive . . . . Those powers do not,
however, clothe the Commission with the general power of management incident to
ownership. The utility retains the lawful right to manage its own
affairs and conduct its business as it may choose, as long as it performs its
legal duty, complies with lawful regulation and does no harm to public
welfare.38
_________________________
36 State ex rel. Kansas City Transit,
Inc. v. PSC, 406 S.W.2d 5, 11 (Mo. 1966); State ex rel. PSC v.
Bonacker, 906 S.W.2d 896, 899 (Mo. App. 1995).
37 State ex rel. Harline v. Public
Service Commission of Mo., 343 S.W.2d 177, 181-182 (Mo. App.
1960).
38 Harline, 343 S.W.2d at 181
- -182. See also State ex rel. City of
St. Joseph v. Public Service Commission, 325 Mo. 209,
30 S.W.2d 8 (Mo. banc 1930). Also, see State of Missouri ex rel.
Southwestern Bell Telephone Co. v. Public Service Commission of Missouri,
262 U.S. 276, 43 S.Ct. 544,
67 L.Ed. 981.
As noted,
the source for the purported evidence upon the business ethics and gratuities
inquiry is also the anonymous letters. Not only is the source
incompetent with regard to evidentiary quality, but it involves a wholly
irrelevant matter over which the Commission lacks jurisdiction.39 Continuing
such inquiry at the hearing would sidetrack the Commission from the questions
that must be properly explored and the weighing of benefits and detriments
relevant to whether the acquisition should be approved. This evidence
was appropriately excluded as being wholly irrelevant and no offer of proof is
required or warranted.
|
|
c.
|
The
Future “Additional Amortizations”
Issue
|
While the
future additional amortizations issue was raised by Great Plains and KCPL in
their motion to limit the scope of the proceedings, it was also the subject of a
separate motion from the Industrial Intervenors that was still pending before
the Commission at the resumption of the evidentiary hearing in April
2008. On December 5, 2007, the Industrials had filed a motion
for partial summary judgment with regard to the Applicants now-discarded request
to have the Commission consider a regulatory plan involving Additional
Amortizations. The Industrial's reasoning was that absent an
agreement of the parties, such regulatory methodology is prohibited by
Section 393.135. This argument has been repeated over and over
throughout this case in various contexts despite the fact that the Applicants
removed their request for a regulatory plan that included Additional
Amortizations from their merger application. The Industrials, Public
Counsel, and Staff have all attempted to use the Missouri Supreme Court ruling
in AG Processing40 to bootstrap the
argument that the Commission must rule on this issue now, even though there is
no plan for Additional Amortizations before the Commission.
_________________________
39 Even in
cases involving the prudence of a utility’s expenditures, there is a presumption
that the utility’s costs are prudently incurred. “In the context of a
rate case, the parties challenging the conduct, decision, transaction, or
expenditures of a utility have the initial burden of showing inefficiency or
improvidence, thereby defeating the presumption of prudence accorded the
utility. The utility then has the burden of showing that the
challenged items were indeed prudent. Prudence is measured by the
standard of reasonable care requiring due diligence, based on the circumstances
that existed at the time the challenged item occurred, including what the
utility’s management knew or should have known. In making this
analysis, the Commission is mindful that ‘[t]he company has a lawful right to
manage its own affairs and conduct its business in any way it may choose,
provided that in so doing it does not injuriously affect the public.” City of St. Joseph,
30 S.W.2d at 14.’” In the
Matter of Missouri-American Water Company’s Tariff Sheets, Report and
Order, Case No. WR-2000-281 (August 31, 2000).
40 State ex rel. AG Processing, Inc. v.
Public Service Com'n of State, 120 S.W.3d 732, 735-736 (Mo. banc
2003).
Even
assuming AG Processing applied,
the argument fails. Furthermore, this is not the same situation as
AG Processing. To
break it down, the decision in AG Processing was a
narrow holding, requiring the Commission to consider a known, quantified
acquisition premium that was entered into evidence in a merger
case. The Commission had maintained that “considering recoupment of
the $92,000,000 acquisition premium while considering approval of the merger
amounts to prejudging a ratemaking factor outside a ratemaking case.”41 The court
held:
_________________________
41 Id.
The
Supreme Court did not hold that the Commission in a pending case must consider
every piece of speculative, non-existent evidence that might appear in a future
case where such evidence, if it existed, might somehow be relevant.
Regardless,
putting the AG Processing argument
aside for a moment, Section 393.315, entitled “Charges based on
nonoperational property of electrical corporation prohibited,”
provides:
Any
charge made or demanded by an electrical corporation for service, or in
connection therewith, which is based on the costs of construction in progress
upon any existing or new facility of the electrical corporation, or any other
cost associated with owning, operating, maintaining, or financing any property
before it is fully operational and used for service, is unjust and unreasonable,
and is prohibited.
The
Industrials, Public Counsel, and Staff argue that a regulatory plan allowing for
Additional Amortizations would fall under the umbrella of this statute, and as
such the Commission could not independently approve such a plan. The
parties further argue that the Commission does have the authority, however, to
approve such a plan by means of approving a unanimous stipulation and agreement
containing such a plan.
However,
there is no stipulation and agreement submitted by the parties in this
action. How could the Commission possibly make a prospective
determination about an unfilled stipulation and agreement and its unknown terms
and conditions? Especially when there is no guaranty that such a
stipulation and agreement would even be filed; no guaranty the parties would
agree to a unanimous stipulation and agreement; and no guaranty the company
would even seek this relief.
Simply
put, even if one accepted the AG Processing argument,
which the Commission believes is incorrect, there is no way possible for this to
be a live issue before the Commission. No plan is
filed. Moreover, no stipulation and agreement is filed so there is
nothing else for the Commission to review or consider at this
time. AG Processing does not
require the Commission to rule on a nonexistent issue. And, similar
to the appellate courts in our state, the Commission does not decide
hypothetical or nonexistent issues, and will not render an advisory opinion
where there is no case in controversy.43
While the
evidentiary ruling found this issue to be irrelevant, it did not find it to be
wholly irrelevant and the Commission received an offer of proof on this
evidence.44
|
|
d.
|
The
Inquiry into KCPL’s Comprehensive Energy
Plan
|
With
regard to the extensive inquiry into to KCPL’s CEP,45 including the
current reforecast of cost and schedule issues related to the Iatan Unit 1
and Unit 2 construction projects, Great Plains and KCPL argued that
bringing this evidence into the record would be overly broad and requested that
the scope of any offered evidence in this regard will be restricted to:
(1) The inter-relationship between the Iatan projects and Great Plains’
acquisition of Aquila; (2) KCPL’s procurement function and asserted merger
savings estimates; and (3) Credit agency debt rating information and debt
ratings.
_________________________
43 See
Warren v. Warren, 601
S.W.2d 683, 687 (Mo. App. 1980); Order Partially Dismissing Application for
Failure to State a Claim, In
the Matter of the Application of Middle Fork Water Company for an Order
Initiating an Investigation to Ascertain the Value of the Company's Property
Devoted to the Public Service, Case No. WO-2007-0266, 2007 WL 923935
(Mo. P.S.C.) Issued March 20, 2007, Effective March 30, 2007; Order Denying
Motion to Open Case, In the
Matter of the Necessity of Approval of Transiting Services Agreements Under
Section 252 of the Telecommunications Act of 1996 and Related Issues,
Case No. TO-2005-0407 (Jun. 7, 2005). See also State ex rel. County of Jackson v.
Missouri Pub. Serv. Comm'n, 985 S.W.2d 400, 403 (Mo. App. 1999)
(declining to review issues raised by respondent "in terms of all future cases"
since that was "effectively a request for an advisory opinion on hypothetical
questions"); State ex rel.
Missouri Cable Television Ass'n v. Missouri Pub. Serv. Comm'n, 917 S.W.2d
650, 652 (Mo. App. 1996) (dismissing appeal because there was no live
controversy, but "[o]nly a hypothetical question for which appellant seeks an
advisory opinion.")
44
Transcript, pp. 2946-3027.
45 As
previously noted, the CEP is set forth in the Stipulation and Agreement approved
by the Commission in Case No. EO-2005-0329.
It should
be noted that the basis for Staff’s request of an expansive inquiry into the CEP
was based upon the anonymous hearsay letters. Also, Staff only
referenced the Iatan projects in relation to the CEP in its response to the
motion. This issue became expansive only when it was filed in the
issues list – a list not adopted by the Commission, and a list the parties
agreed was non-binding.
Great
Plains and KCPL simply requested that the scope of this evidence be restricted
to that which was relevant. They offered to provide all testimony
with relation to these construction programs, in relation to procurement and
synergies, and in relation to the company’s credit-worthiness. In
fact, the Commission heard from numerous subject matter experts on these issues
and heard virtually two days worth of testimony on the issue of the company’s
credit-worthiness and the company’s ability to manage its construction programs
– indeed, from the very same witnesses Staff intended to present on these
issues.46 The expansion
of the scope of this testimony would not only bring irrelevant evidence into the
record, but would be repetitive to the evidence already adduced.
|
E.
|
Court
of Appeals – Petition for a Writ of Mandamus and Writ of
Prohibition
|
On
May 1, the Industrial Intervenors filed a petition for a writ of mandamus
and a writ of prohibition with the Court of Appeals alleging that the Presiding
Officer’s evidentiary ruling to limit the scope of these proceedings was
“arbitrary” and “an abuse of discretion exercised with manifest injustice.”47 The Court of
Appeals took up the writ application expeditiously pursuant to the Industrial
Intervenors’ request for expedited treatment.48 The Court of
Appeals denied the petition summarily without requiring any response from the
Commission.49
_________________________
46 It should be noted that the evidentiary
ruling did not release any of the witnesses that Great Plains and KCPL requested
to be released so that those witnesses could still be examined on the relevant
issues.
47 State of Missouri ex rel. Praxair
Inc., Sedalia Industrial Energy Users’ Association and Ag Processing, Inc. a
Cooperative v. Public Service Commission of the State of Missouri, a State
Agency, and Its Members Jeff Davis, Connie Murray,
Robert Clayton, II, Terry Jarrett, and Kevin Gunn, in Their Official
Capacity, Suggestions in Support of Petition for Writ of Mandamus and
Writ of Prohibition, Case No. WD69611, filed May 1, 2008, denied May 2,
2008.
48 Id. at Docket Entry May 2,
2008.
|
F.
|
Missouri
Supreme Court – Petition for a Writ of Mandamus and Writ of
Prohibition
|
On
May 7, the Industrial Intervenors filed a petition for a writ of mandamus
and a writ of prohibition with the Missouri Supreme Court raising the same
allegations that were made in their writ application with the Court of Appeals;
i.e., that the Presiding Officer’s evidentiary ruling to limit the scope of
these proceedings was “arbitrary” and “an abuse of discretion exercised with
manifest injustice.”50 That same day
the Court directed the Commission to file Suggestions in Opposition to the writ
application no later than May 16. Suggestions were filed by both
the Commission and Great Plains. On June 24, the Court issued its
decision denying the Writ Petition without opinion.51
|
G.
|
Petition
to Reopen the Record
|
On
May 30, the Industrial Intervenors filed a petition to reopen the record
for the taking of additional evidence. The Industrial Intervenors
specifically claimed that a crane accident occurring at the Iatan 2
construction site could have jeopardized KCPL’s ability to manage its current
construction projects while at the same time consummate the planned
merger. The Commission reopened the record and received additional
testimony and arguments on June 11, regarding the effect of the crane accident
on the credit-worthiness of the Applicants.52
_________________________
50 State of Missouri ex rel. Praxair
Inc., Sedalia Industrial Energy Users’ Association and Ag Processing, Inc. a
Cooperative v. Public Service Commission of the State of Missouri, a State
Agency, et al. Supreme Court Case Number SC89289, filed May 7,
2008.
51 Id. at Docket Entry June 24,
2008.
52
Transcript, pp. 3142-3230.
The
Commission heard testimony from Terry Bassham, KCPL’s Chief Financial Officer
(“CFO”) and Great Plains’ Vice-President of Finance and CFO; Brent Davis, KCPL’s
Project Manager at Iatan I; and Michael Cline, KCPL’s Treasurer and Risk
Officer. The
Commission allowed for oral argument in this singular issue in lieu of
additional briefing.
Pursuant
to the procedural schedule adopted by the Commission, the evidentiary hearing
resumed on April 21 through May 1 and finally concluded on
June 11, at the Commission’s offices in Jefferson City,
Missouri. In total, the Commission admitted the testimony of
34 witnesses and received some 140 exhibits into
evidence.
Post-hearing
briefs and proposed findings of fact and conclusions of law were filed according
to the post-hearing procedural schedule as revised. The post-hearing
briefs were filed on June 253 and oral arguments
regarding the crane accident issue were heard at the close of the hearing on
June 11.54 The case was
deemed submitted for the Commission’s decision on that date.55
________________________
53 With
the exception of Staff’s brief which was filed out-of-time with leave of the
Commission.
54 The
Commission admitted all late-filed exhibits on June 10, 2008, after allowing
sufficient response time for objections to their late-filing or
late-offering. See EFIS Docket Number 474, Order Admitting Late-Filed and
Late-Offered Exhibits. That same order allowed the parties
until June 13, 2008 to amend their post-hearing briefs in relation to those
exhibits, in the event that the parties had failed to rely on any of the
exhibits when their briefs were originally filed.
55 “The
record of a case shall stand submitted for consideration by the commission after
the recording of all evidence or, if applicable, after the filing of briefs or
the presentation of oral argument.” Commission Rule 4 CSR
240-2.150(1).
II. Findings
of Fact
The
Missouri Public Service Commission, having considered all of the competent and
substantial evidence upon the whole record, makes the following findings of
fact. In making its findings of fact, the Commission is mindful that
it is required, pursuant to Section 386.420.2, after a hearing, to "make a
report in writing in respect thereto, which shall state the conclusion of the
commission, together with its decision, order or requirement in the
premises." Because Section 386.420 does not explain what
constitutes adequate findings of fact to support the agency’s decision, Missouri
courts have turned to Section 536.090, which applies to "every decision and
order in a contested case," to fill in the gaps of Section 386.420.56 Section 536.090
provides, in pertinent part:
Every
decision and order in a contested case shall be in writing, and . . .
the decision . . . shall include or be accompanied by findings of fact and
conclusions of law. The findings of fact shall be stated separately
from the conclusions of law and shall include a concise statement of the
findings on which the agency bases its order.
Missouri
courts have not adopted a bright-line standard for determining the adequacy of
findings of fact.57 Nonetheless, the
following formulation is often cited:
The most
reasonable and practical standard is to require that the findings of fact be
sufficiently definite and certain or specific under the circumstances of the
particular case to enable the court to review the decision intelligently and
ascertain if the facts afford a reasonable basis for the order without resorting
to the evidence.58
Findings
of fact are inadequate when they "leave the reviewing court to speculate as to
what part of the evidence the [Commission] believed and found to be true and
what part it rejected."59 Findings of fact are
also inadequate that "provide no insight into how controlling issues were
resolved" or that are "completely conclusory."60
_________________________
56 St. ex rel. Laclede Gas Co. v. Pub.
Serv. Comm'n, 103 S.W.3d 813, 816 (Mo. App. 2003); St. ex rel. Noranda
Aluminum, Inc. v. Pub. Serv. Comm'n, 24 S.W.3d 243, 245 (Mo. App.
2000).
57 Glasnapp v. State Banking
Bd., 545 S.W.2d 382, 387 (Mo. App. 1976).
58 Id. (quoting 2 Am.Jur.2d Administrative Law § 455, at
268).
59 State ex rel. Int'l. Telecharge,
Inc. v. Mo. Pub. Serv. Comm'n, 806 S.W.2d 680, 684 (Mo. App. 1991) (quoting St. ex rel. Am. Tel. &
Tel. Co. v. Pub. Serv. Comm'n, 701 S.W.2d 745, 754 (Mo. App.
1985)).
60 State ex rel. Monsanto Co. v. Pub.
Serv. Comm'n, 716 S.W.2d 791, 795 (Mo. banc 1986) (relying on St. ex rel. Rice v. Pub.
Serv. Comm'n, 359 Mo. 109, 220 S.W.2d 61 (1949)).
When
making findings of fact based upon witness testimony, the Commission will assign
the appropriate weight to the testimony of each witness based upon that
witness’s qualifications, expertise, and credibility with regard to the attested
to subject matter. Not only does the qualification of a witness as an
expert rest within the fact-finder's discretion,61 but witness credibility
is solely a matter for the fact-finder “which is free to believe none, part, or
all of the testimony.”62 An
administrative agency as fact-finder also receives deference when choosing
between conflicting evidence.63
Appellate
courts also must defer to the expertise of an administrative agency when
reaching decisions based on technical and scientific data.64 And an agency
has reasonable latitude concerning what methods and procedures to adopt in
carrying out its statutory obligations.65 Consequently,
it is the agency that decides what methods of expert analysis are acceptable,
proper, and credible while satisfying its fact-finding mission to ensure the
evidentiary record, as a whole, is replete with competent and substantial
evidence to support its decisions.66
_________________________
61 State ex rel. Missouri Gas Energy v.
Pub. Serv. Comm'n, 186 S.W.3d 376, 382 (Mo. App. 2005); Emerson Elec. Co. v. Crawford &
Co., 963 S.W.2d 268, 271 (Mo. App. 1997). In determining whether a
witness is an expert under Section 490.065.1, the fact-finder looks to whether
he or she possesses a “peculiar knowledge, wisdom or skill regarding the subject
of inquiry, acquired by study, investigation, observation, practice, or
experience.” Id. In
State Board of Registration
for Healing Arts v. McDonagh, 123 S.W.3d 146, 154-55 (Mo. banc
2003), the Missouri Supreme Court ruled that the standards set out in section
490.065 apply to the admission of expert testimony in contested case
administrative proceedings.
62 In re C.W., 211 S.W.3d 93, 99
(Mo banc 2007); State v.
Johnson, 207 S.W.3d 24, 44 (Mo banc 2006); Herbert v. Harl, 757 S.W.2d
585, 587 (Mo. banc 1988); Missouri Gas Energy, 186
S.W.3d at 382; Commerce Bank,
N.A. v. Blasdel, 141 S.W.3d 434, 456-57 n. 19 (Mo. App. 2004); Centerre Bank of Branson v.
Campbell, 744 S.W.2d 490, 498 (Mo. App. 1988); Paramount Sales Co., Inc. v.
Stark, 690 S.W.2d 500, 501 (Mo. App. 1985); Keller v. Friendly Ford,
Inc., 782 S.W.2d 170, 173 (Mo. App. 1990).
63 Klokkenga v. Carolan, 200
S.W.3d 144, 152 (Mo. App. 2006); Farm Properties Holdings, L.L.C. v.
Lower Grassy Creek Cemetery, Inc., 208 S.W.3d 922, 924 (Mo. App.
2006); In the Interest of A.H., 9 S.W.3d 56, 59 (Mo. App. 2000); State ex rel. Associated Natural Gas
Co. v. Public Service Com’n of the State of Mo., 37 S.W.3d 287(Mo.
App. 2000); State ex rel.
Midwest Gas Users’ Ass’n. v. Public Service Com’n of the State of Mo.,
976 S.W.2d 485(Mo. App. 1998); State ex rel. Conner v. Public
Service Com’n, 703 S.W.2d 577 (Mo. App. 1986).
64 Citizens for Rural Preservation,
Inc. v. Robinett, 648 S.W.2d 117, 128 (Mo. App. 1982), citing to
Smithkline Corp. v.
FDA, 587 F.2d 1107, 1118 (D.C.Cir.1978); Cayman Turtle Farm, Ltd. v.
Andrus, 478 F.Supp. 125, 131 (D.C.Cir.1979).
65 Id. citing to
Natural Resources Defense
Council, Inc. v. Nuclear Regulatory Comm'n, 539 F.2d 824, 838 (2d
Cir.1976), vacated for
mootness, 434 U.S. 1030, 98 S.Ct. 759, 54 L.Ed.2d 777
(1978).
Additionally,
the Commission is entitled to interpret any of its own orders in prior cases as
they may relate to the present matter.67 When
interpreting its own orders, and ascribing a proper meaning to them, the
Commission is not acting judicially, but rather as a fact-finding agency.68 Consequently,
factual determinations made with regard to the Commission‘s prior orders receive
the same deference shown in relation to all of the Commission’s findings of
fact. Indeed, even where there are mixed questions of law and fact, a
reviewing court views the evidence in the light most favorable to the
Commission's decision.69
|
A.
|
Findings
of Fact Regarding the Parties
|
1. Great
Plains Energy Incorporated (“Great Plains” or “GPE”), located at
1201 Walnut, Kansas City, Missouri, is a Missouri corporation and the
holding company for Kansas City Power & Light Company, and for
Strategic Energy, L.L.C., a competitive electricity supplier located in
Pittsburgh, Pennsylvania.70 Great Plains
was established on October 1, 2001, and its stock is traded on the
New York Stock Exchange (“NYSE”) as “GXP.”71 Great Plains is a public
utility holding company regulated under the Public Utility Holding Company Act
of 2005, which was enacted as part of the Energy Policy Act of 2005.72 As a holding
company, Great Plains does not provide electric service to retail
customers.73
_________________________
67 State ex rel. Beaufort Transfer Co.
v. Public Service Commission of Missouri, 610 S.W.2d 96, 100
(Mo. App. 1980). State ex
rel. Missouri Pacific Freight Transport Co. v. Public Service Commission,
312 S.W.2d 363, 368 (Mo. App. 1958); State ex rel. Orscheln Bros. Truck
Lines v. Public Service Commission, 110 S.W.2d 364, 366
(1937).
69 State ex rel. Coffman v. Pub. Serv.
Comm'n, 121 S.W.3d 534, 541-542 (Mo. App. 2003). See also State ex rel. Inter-City
Beverage Co., v. Mo. Pub. Serv. Comm'n, 972 S.W.2d 397, 401 (Mo. App.
1998).
70 Joint
Application of Great Plains Energy Incorporated, Kansas City Power and Light
Company and Aquila, Inc., filed April 4, 2007, pp. 1-2, paragraph
1.
2. Kansas City
Power & Light Company (“KCPL”), located at 1201 Walnut,
Kansas City, Missouri, is a corporation duly organized and existing under
the laws of the State of Missouri.74 KCPL is
engaged in the generation, transmission, distribution, and sale of electric
energy.75 KCPL
distributes and sells electric service to the public in its certificated areas
in Missouri and Kansas.76 KCPL serves
approximately 500,000 customers.77 Its service
territory is comprised of 11,710 distribution primary circuit miles over 4,600
square miles.78
_________________________
74 Joint
Application of Great Plains Energy Incorporated, Kansas City Power and Light
Company and Aquila, Inc., filed April 4, 2007, p. 2, paragraph
2.
77
GPE/KCPL Exh. 16, Herdegen Direct, p. 2.
William P. Herdegen, III is
employed by KCPL as Vice President of Customer Operations. He is responsible for
the engineering, design, construction, maintenance, and operation of KCPL’s
distribution system, as well as the call center and revenue
management. His role includes the recent assignment as lead of the
delivery transition teams, responsible for the integration of Aquila with Great
Plains. He graduated from the University of Illinois,
Champaign-Urbana in 1976 with a Bachelor of Science degree in Electrical
Engineering, and in 1981, he received M.B.A. from The University of Chicago. He
was first employed at KCPL in 2001. He has nearly 30 years of experience in the
electric utility industry. Prior to joining KCPL, he served as chief operating
officer for Laramore, Douglass and Popham, a consulting firm providing
engineering services to the electric utility industry. Additionally, he was vice
president of Utility Practice at System Development Integration, an
IT consulting firm focused on development and implementation of technology
systems. He began his utility career at Commonwealth Edison and over
a course of more than 20 years held various positions, including field engineer,
district manager, business unit supply manager, operations manager and vice
president - Engineering, Construction & Maintenance. He has
previously testified before both the Missouri Public Service Commission and the
Kansas Corporation Commission.
3. Aquila,
Inc. (“Aquila”) is a Delaware corporation, with its principal office and place
of business at 20 West Ninth Street, Kansas City, Missouri.79 Aquila was
established in 1985, and its stock is traded on the NYSE as “ILA”.80 Aquila is
authorized to conduct business in Missouri through its Aquila Networks-MPS and
Aquila Networks-L&P operating divisions and, as such, is engaged in
providing electric and steam utility service in Missouri to the public in its
certificated areas.81 Aquila also
has regulated energy operations in Colorado, Iowa, Nebraska and Kansas.82
4. Aquila
and KCPL are co-owners, with certain other parties, of the coal-fired
Iatan 1 generating plant (“Iatan 1”) located at the Iatan Generating
Station in Platte County, Missouri.83 Aquila and
KCPL are also co-owners, with certain other parties, of the coal-fired
Iatan 2 generating plant (“Iatan 2”), which is now under construction
at the Iatan Generating Station.84
5. Black Hills
Corporation (“Black Hills”) is a South Dakota corporation, with its principle
office and place of business located at 625 Ninth Street, Rapid City,
South Dakota, which owns both regulated and non-regulated businesses.85 Its regulated
gas and electric utility subsidiaries are Black Hills Power, Inc., an
electric utility serving western South Dakota, northeastern Wyoming and
southeastern Montana, and Cheyenne Light, Fuel & Power Co., an electric and
gas distribution utility serving the Cheyenne, Wyoming area.86 The wholesale
energy business unit of Black Hills is Black Hills Energy, Inc., which
generates electricity, markets energy, and produces natural gas, oil and
coal.87 In
addition to its electric and gas utility service businesses and wholesale energy
production and marketing business, Black Hills Services Company, Inc., a
wholly-owned subsidiary of Black Hills, provides centralized services to
the Black Hills system.88
_________________________
79 Joint
Application of Great Plains Energy Incorporated, Kansas City Power and Light
Company and Aquila, Inc., filed April 4, 2007, pp. 2-3, paragraph
3.
85
Application to Intervene of Black Hills, pp. 1-2, filed April 27,
2007.
6. Missouri
Joint Municipal Electric Utility Commission (“MJMEUC”) is a political
subdivision of the State of Missouri, organized and existing as a joint
municipal utility commission pursuant to Section 393.700, et seq.89 The MJMEUC is
not an “association,” but rather a political subdivision of the State of
Missouri pursuant to Section 393.720.90 Fifty-eight
Missouri municipalities currently are parties to the joint contract establishing
the MJMEUC.91 MJMEUC is a
wholesale energy and transmission customer of KCPL, both directly and on behalf
of its contracting municipalities.92 The MJMEUC
and some of its contracting municipalities also receive transmission service
from Aquila, Inc.93 The MJMEUC
also has a partial ownership interest in the Iatan 2 generating
facility.94
7. Ag Processing,
Inc. (“AGP”) is an agricultural cooperative and is a large manufacturer and
processor of soybean meal, soy-related food products, and other grain products
throughout the central and upper Midwest, including the State of Missouri.95 AGP is the
largest cooperative soybean processing company in the world, the third-largest
supplier of refined vegetable oil in the United States, and the third-largest
commercial feed manufacturer in North America.96 AGP operates
a major processing facility in St. Joseph, Missouri, where it is a major
industrial electrical and steam customer of Aquila in the L&P service
territory.97
_________________________
89
Application to Intervene of MJMEUC, p. 1, paragraphs 1, filed April 27,
2007.
90 Id. at p. 2, paragraph
3.
91 Id. at p. 1, paragraph
1.
92 Id. at p. 2, paragraph
4.
94 Id. at p. 2, paragraph
3.
95
Application to Intervene of AGP, p. 1, paragraphs 1, filed April 11,
2007.
97 Id. at p. 2, paragraph
2.
8. Sedalia
Industrial Energy Users’ Association (“SIEUA”) is an unincorporated voluntary
association consisting of large commercial and industrial users of natural gas
and electricity in the city of Sedalia, Missouri and in the surrounding
area.98 SIEUA was
formed for the purpose of economical representation of its members’ interests
through intervention and other activities in regulatory and other appropriate
proceedings, and in combination its members are major consumers of Aquila’s
electric service.99
9. Praxair,
Inc. (“Praxair”) is a large industrial electric customer of KCPL, operates a
major air liquefaction and constituent gas separation facility in
Kansas City, Missouri, and is the successor in interest to the Linde
Division of Union Carbide Corporation.100
10. Dogwood
Energy, L.L.C. (“Dogwood”) is a limited liability company organized and existing
under the laws of the State of Delaware and authorized to conduct business in
the State of Missouri.101 Dogwood owns
a 600 MW combined cycle generating facility located within Aquila's MPS
service territory and is a potential provider of capacity and energy to
Aquila.102
_________________________
98
Application to Intervene of SIEUA, p. 1, paragraph 1, filed April 11,
2007. Current members of SIEUA are as follows: Pittsburgh Corning
Corporation; Waterloo Industries; Hayes-Lemmerz International; EnerSys Inc.;
Alcan Cable Co.; Gardner Denver Corporation; American Compressed Steel
Corporation; and ThyssenKrupp Stahl Company. Id. at p. 2, paragraph
2.
99 Id. at p. 1, paragraph 1, p.
3-4, paragraph 6.
100
Application to Intervene of Praxair, Inc., p. 1, paragraph 2, p. 2, paragraph 5,
filed April 11, 2007.
101
Application to Intervene of Dogwood, p. 1, paragraph 1, filed April 27,
2007.
102 Id. at p. 2, paragraph
4.
11. The
International Brotherhood of Electrical Workers, Local Unions Nos. 412,
695, 814, 1613, and 1464 (“IBEW” or “Locals”) are voluntary organizations
doing business and representing employees in the State of Missouri.103 The Locals
are also labor organizations as defined in the National Labor Relations Act, as
amended, 29 U.S.C. § 152, et seq.104 Locals 412,
1464, and 1613 have separate collective bargaining agreements with
Kansas City Power & Light Company and represent certain employees of
KCPL.105 Locals 695
and 814 represent employees employed by Aquila, Inc., d/b/a Aquila
Networks-WPK.106
12. Frank Dillon,
Kimberly Miller, James E. Doll, Randy Cooper,
Gary Crabtree, Eric Thompson, and Allen Bockelman (collectively,
the “South Harper Residents”) are individuals each of whom has pending
civil court claims against Aquila alleging loss in property values related to
the construction and operation of Aquila’s South Harper Project facilities.107
_________________________
103
Application to Intervene of IBEW, Locals 412, 1464 and 1613, p. 1, paragraph 1,
p. 2, paragraph 6, filed April 24, 2007; Application to Intervene of IBEW,
Locals 695, and 814, p. 1, paragraph 1, p. 2, paragraph 6, filed April 30,
2007.
105
Application to Intervene of IBEW, Locals 412, 1464 and 1613, p. 1, paragraph 1,
p. 2, paragraph 6.
106
Application to Intervene of IBEW, Locals 695 and 814, p. 1, paragraph 1, p. 2,
paragraph 6.
107
Application to Intervene of South Harper Residents, p. 1, paragraph 1, p. 2,
paragraph 2, filed April 30, 2007. Frank Dillon, Kimberly Miller,
James E. Doll, Randy Cooper, Gary Crabtree, and Eric Thompson each reside on
property adjacent to or in very close proximity to an electrical peaking
facility (commonly known as the “South Harper Facility” or the “South Harper
Power Plant”). Allen Bockelman resides on property adjacent to a related
electric substation (commonly known as the “Peculiar Substation”). Id.
13. Cass
County is a First Class County of the State of Missouri under the county
classification provisions of Chapter 48, RSMo 2000, and is a political
subdivision of the state with powers, duties and obligations as provided by
law.108 Aquila
operates an electrical power production facility and an associated electric
transmission substation located on tracts of property in unincorporated Cass
County, Missouri, frequently referred to as the South Harper Facility and
Peculiar Substation.109
14. The
City of Kansas City, Missouri (“Kansas City”) is a municipality of the
State of Missouri and is a large consumer of energy supplied by Aquila and
KCPL.110
15. The
City of St. Joseph, Missouri (“St. Joseph”) is a municipality of the
State of Missouri located in Buchanan County and is a large consumer of energy
supplied by Aquila.111
16. The
City of Independence, Missouri (“Independence”) owns and operates a municipal
electric utility serving more than 55,000 customers, and acquires much of the
power and energy needed to meet its customers' demand through direct physical
interconnections with both KCPL and Aquila.112 These
arrangements include purchases of a portion of the capacity and energy from
Montrose, a large, base load, coal-fired unit owned by KCPL.113 The City is
also a retail customer of KCPL, with KCPL providing retail electric service to
the City's water treatment plant.114 KCPL also
provides electric service to one large retail customer located within the City
(the Lake City Army Ammunitions Plant), and KCPL has a franchise from the
City allowing and governing KCPL's service to this customer.115
_________________________
108
Application to Intervene of Cass County, p. 1, paragraph 1, filed April 27,
2007.
109 Id. at p. 2, paragraph
4.
110
Application to Intervene of Kansas City, p. 1, paragraph 1, p. 2, paragraph 4,
filed April 18, 2007.
111
Application to Intervene of St. Joseph, p. 1, paragraph 1, p. 2, paragraph 2,
filed April 27, 2007.
112
Application to Intervene of Independence, p. 1, paragraph 1, p. 2, paragraphs 2
and 3, filed April 30, 2007.
113 Id. at p. 2 paragraph
4.
17. The
City of Lee’s Summit (“Lee’s Summit”) is a constitutional charter city
pursuant to Chapter 82 of RSMo and Article VI, Section 19 of the
Missouri Constitution and is a political subdivision and municipal corporation
of the State of Missouri.116 Aquila
supplies electricity to Lee’s Summit and to residential, commercial and
industrial customers located within the corporate limits of
Lee’s Summit.117
18. The
United States Department of Energy (“DOE”), National Nuclear Security
Administration (“NNSA”), and all other affected Federal Executive Agencies
(“FEA”) intervened late is this proceeding.118 DOE/NNSA is
a large industrial electric customer of KCPL consuming approximately
156,000 MWhs of electric power annually at an annual cost of approximately
$5.9 million.119 NNSA is a
separately organized agency of the DOE created by the National Nuclear Security
Administration Act, National Defense Authorization Act for Fiscal Year 2000,
Pub. L. 106-65, div. C, title XXXII, Sec. 3211,
et seq., Oct. 5, 1999, 113 Stat. 957, codified in
Title 50 U.S.C., Section 2401, et seq. and other various
titles.120 DOE/NNSA is
authorized by a grant of Delegation of Authority from the General Services
Administration pursuant to Section 201(a)(4) of the Federal Property and
Administrative Services Act of 1948, as amended (49 U.S.C. 481(a)(4)) to
represent customer interests of affected executive agencies of the federal
government.121 FEA
represents all federal executive agencies located in KCPL’s and Aquila’s service
territories that purchase electricity from KCPL and Aquila.122
_________________________
116
Application to Intervene of Lee’s Summit, p. 1, paragraph 1, filed April 30,
2007. Robert Handley, City Attorney for Lee’s Summit filed the City’s
application to intervene; however, no attorney entered an appearance for the
City during either prehearing conference or during the evidentiary
hearing. The City did not participate in this matter beyond their
application to intervene. The City adduced no evidence, and did not
file any briefs stating a position on any issue in this
case. Consequently, the City of Lee’s Summit is subject to dismissal
pursuant to 4 CSR 240-2.116.
117 Id. at, p. 2, paragraph
4.
118
Petition for Leave to Appear Pro Hac Vice of Paul N. Jones
and Lewis O. Campbell and Application for Late Intervention of United States
Department of Energy, National Nuclear Security Administration and Federal
Executive Agencies, filed July 13, 2007.
119 Id. at p. 3, paragraph
10.
120 Id. at p. 2, paragraph
7.
121 Id. at p. 3, paragraph
12.
122 Id. at p. 3, paragraph
11. Attorney’s Paul N. Jones and Lewis O. Campbell were
granted leave to appear pro
hac vice, for the United States Department of Energy, National Nuclear
Security Administration, and the Federal Executive Agencies on July 27,
2007. However, no attorney entered an appearance for DOE/NNSA/FEA at
the two pre-hearing conferences held in this matter or at the evidentiary
hearing. These parties did not participate in this matter once
intervention was granted. They adduced no evidence, and did not file
any briefs stating a position on any issue in this
case. Consequently, DOE/NNSA is subject to dismissal pursuant to 4
CSR 240-2.116.
19. The
Office of the Public Counsel (“Public Counsel”) “may represent and protect the
interests of the public in any proceeding before or appeal from the public
service commission.”123 Public Counsel “shall
have discretion to represent or refrain from representing the public in any
proceeding.”124
20. The
General Counsel of the Missouri Public Service Commission “represent[s] and
appear[s] for the commission in all actions and proceedings involving any
question under this or any other law, or under or in reference to any act,
order, decision or proceeding of the commission . . .”125 In this
matter the General Counsel represents the position of the Staff of the Missouri
Public Service Commission (“Staff”).
_________________________
123
Section 386.710(2); Commission Rules 4 CSR 240-2.010(16) and
2.040(2).
124
Section 386.710(3); Commission Rules 4 CSR 240-2.010(16) and 2.040(2). Public
Counsel “shall consider in exercising his discretion the importance and the
extent of the public interest involved and whether that interest would be
adequately represented without the action of his office. If the public counsel
determines that there are conflicting public interests involved in a particular
matter, he may choose to represent one such interest based upon the
considerations of this section, to represent no interest in that matter, or to
represent one interest and certify to the director of the department of economic
development that there is a significant public interest which he cannot
represent without creating a conflict of interest and which will not be
protected by any party to the proceeding.” Id.
125
Section 386.071; Commission Rules 4 CSR 240-2.010(8) and
2.040(1). Additionally, the General Counsel “if directed to do so by
the commission, to intervene, if possible, in any action or proceeding in which
any such question is involved; to commence and prosecute in the name of the
state all actions and proceedings, authorized by law and directed or authorized
by the commission, and to expedite in every way possible, to final determination
all such actions and proceedings; to advise the commission and each
commissioner, when so requested, in regard to all matters in connection with the
powers and duties of the commission and the members thereof, and generally to
perform all duties and services as attorney and counsel to the commission which
the commission may reasonably require of him.” Id.
|
B.
|
Findings
of Fact Regarding Witness Demeanor, Credibility and
Testimony
|
21. The
following witnesses prefiled testimony with the Commission pursuant to
Commission Rules;126
i.e. Direct, Supplemental Direct, Additional Supplemental Direct; Rebuttal,
Surrebuttal and/or Cross-Surrebuttal:127
Terry
Bassham (GPE/KCPL), Kevin E. Bryant (GPE/KCPL), Wallace P. Buran
(GPE/KCPL), Lora Cheatum (GPE/KCPL), Michael W. Cline (GPE/KCPL),
F. Dana Crawford (GPE/KCPL), William H. Downey (GPE/KCPL), Chris Giles
(GPE/KCPL), William P. Herdegen (GPE/KCPL), William J. Kemp
(GPE/KCPL), John Marshall(GPE/KCPL), Tim M. Rush (GPE/KCPL),
Richard A. Spring (GPE/KCPL), Robert F. Steinke (GPE/KCPL),
Charles H. Tickles (GPE/KCPL), Paul Van Dyne (GPE/KCPL),
Lori A. Wright (GPE/KCPL), Robert T. Zabors (GPE/KCPL), R. Thomas
Fleener (Aquila), Wayne A. Cauthen (KCMO), Robert J. Hix (KCMO), Russell W.
Trippensee (Public Counsel), James R. Dittmer (Public Counsel), Robert E.
Schallenberg (Staff), Paul N. Mahlberg (Independence), Mark J. Volpe
(Independence), Robert Janssen (Dogwood Energy), John E. Grotzinger
(MJMEUC) and Maurice Brubaker (AgProcessing/Praxair/SIEUA).
22. The
following witnesses provided live testimony and were subject to
cross-examination by the parties and the Commission:128
Terry
Bassham (GPE/KCPL), Kevin E. Bryant (GPE/KCPL), Wallace P. Buran (GPE/KCPL),
Wayne A. Cauthen (KCMO), Lora Cheatum (GPE/KCPL), Michael Chesser (GPE/KCPL),
Michael W. Cline (GPE/KCPL), F. Dana Crawford (GPE/KCPL), Brent Davis
(GPE/KCPL), James R. Dittmer (Public Counsel), William H. Downey
(GPE/KCPL), Stephen Easley (GPE/KCPL), Jon Empson (Aquila), R. Thomas Fleener
(Aquila), Terry Foster (GPE/KCPL), Chris Giles (GPE/KCPL), Richard Green
(Aquila), William P. Herdegen (GPE/KCPL), Robert J. Hix (KCMO), William J. Kemp
(GPE/KCPL), John Marshall (GPE/KCPL), James Rose (Aquila), Tim M. Rush
(GPE/KCPL), Robert E. Schallenberg (Staff), Max Sherman (Aquila), Robert F.
Steinke (GPE/KCPL), Charles H. Tickles (GPE/KCPL), Russell W. Trippensee (Public
Counsel), Paul Van Dyne (GPE/KCPL), Lori A. Wright (GPE/KCPL), and
Robert T. Zabors (GPE/KCPL).129
_________________________
126 See
Commission Rules 4 CSR 240-2.110, 2.130, and 2.135.
127
GPE/KCPL Exhs. 1-39; Staff Exh. 100; OPC Exhs. 200-201; Industrial Intervenors’
Exh. 300; KCMO Exhs. 400-401; Dogwood Energy Exh. 700; MJMEUC Exh. 800; and
Independence Exhs. 1300 and 1305.
128 See
Transcript Volumes 1-26.
129 Michael Chesser is the Chief
Executive Officer and Chairman of the Board for Great Plains
Energy. Brent
Davis is the Iatan 1 Project Director for GPE/KCPL. Stephen Easley is the
Vice-President of Supply for KCPL. Jon Empson is the Senior
Vice-President of Regulated Operations for Aquila. Terry Foster is the Director
of project controls for KCPL. Richard Green is the Chief
Executive Officer for Aquila. None of these six witnesses prefiled
testimony with the Commission and they were called to be witnesses by the
Commission’s Staff.
23. The
following witnesses filed prefiled testimony and at the agreement of the
parties, cross-examination was waived. These witnesses did not appear
before the Commission and provided no live testimony:130
Richard
A. Spring (GPE/KCPL), Paul N. Mahlberg (Independence), Mark J. Volpe
(Independence), Robert Janssen (Dogwood Energy), John E. Grotzinger
(Missouri Joint Municipal Electric Utility Commission - MJMEUC) and Maurice
Brubaker (AgProcessing/Praxair/SIEUA).
24. The
following witnesses did not prefile any testimony and did not provide any live
testimony before the Commission because they were either released directly by
the Commission when it made its evidentiary ruling limiting the scope of these
proceedings on April 24, or excused by the parties’ decisions:131
Steve
Jones (GPE/KCPL), John Grimwade (GPE/KCPL), Scott Heidtbrink (Aquila), Daryl
Uffelman (Aquila) and Lynn Fountain (Aquila).
25. Stanley J. Harris,
a witness for Kansas City, prefiled testimony, but on April 8, 2008,
Kansas City withdrew him as a witness and withdrew his prefiled testimony
from the case.132 Mr. Harris
was not offered as a witness at the hearing and his prefiled testimony was not
offered for admission into evidence.
26. The
South Harper Residents (i.e., Frank Dillon, Kimberly Miller,
James E. Doll, Randy Cooper, Gary Crabtree, and
Eric Thompson) did not prefile testimony or provide live testimony.133 The South
Harper Residents offered no evidence into the record and the Commission makes no
credibility findings regarding these individuals.
_________________________
130 See
Transcript, p. 1577, lines 4-24; p. 1598, lines 11-19; pp. 1598-1602; p. 2031,
lines 15-23;
131 See
Transcript, pp. 2073-2118; p. 2402, lines 10-22.
132 EFIS
Docket Number 290, Correspondence to Judge Dale
Withdrawing the Pre-filed Written Testimony of Mr. Stan Harris, filed
April 8, 2008.
133 See
EFIS docket entries for EM-2007-0374.
27. Witness
R. Thomas Fleener (Aquila) provided testimony on how Aquila reached
its decision to transfer its assets.134
28. Wayne A. Cauthen
(KCMO) and Robert J. Hix (KCMO) provided testimony on the issues
concerning municipal franchise agreements between the companies and
Kansas City, a potential requirement for the companies to submit a quality
of service plan, a potential requirement for the companies to submit an earnings
sharing plan, and future rate cases.135
29. Paul N. Mahlberg
(Independence), Mark J. Volpe (Independence), Robert Janssen
(Dogwood Energy), and John E. Grotzinger (MJMEUC) provided rebuttal or
surrebuttal testimony on the issues surrounding transmission and RTO/ISO
criteria.136
30.
Witnesses Cauthen, Hix, Mahlberg, Volpe, Janssen and Grotzinger did not oppose
the Applicants’ merger proposal, but instead offered testimony advocating that
certain conditions be placed upon the merger.137
31. While
on the witness stand, the parties and the Commission waived cross-examination of
Russell W. Trippensee (Public Counsel) with regard to his prefiled
testimony.138 Mr. Trippensee
did offer live testimony in association with an offer of proof taken on
May 1 with regard to the subject matter of regulatory plans involving
“Additional Amortizations.”139
_________________________
135 KCMO
Exhs. 400 and 401.
136
Independence Exhs. 1300 and 1305; Dogwood Energy Exh. 700; and MJMEUC Exh.
800.
137 See
Footnotes 135 and 136, supra, and Transcript, pp.
2132-2200.
138
Transcript Volume 21, pp. 2885-2888 (Trippensee).
139
Transcript Volume 23, pp. 2961-2980.
32. Terry Bassham
(GPE/KCPL), Kevin E. Bryant (GPE/KCPL), Wallace P. Buran
(GPE/KCPL), Lora Cheatum (GPE/KCPL), Michael W. Cline (GPE/KCPL),
F. Dana Crawford (GPE/KCPL), William H. Downey (GPE/KCPL), Chris Giles
(GPE/KCPL), William P. Herdegen (GPE/KCPL), William J. Kemp (GPE/KCPL),
John Marshall (GPE/KCPL), Tim M. Rush (GPE/KCPL), Richard A. Spring (GPE/KCPL),
Robert F. Steinke (GPE/KCPL), Charles H. Tickles (GPE/KCPL), Paul Van
Dyne (GPE/KCPL), Lori A. Wright (GPE/KCPL), and Robert T. Zabors
(GPE/KCPL), all provided extensive prefiled testimony in this matter addressing
the merger proposal, purported merger synergies, transaction cost recovery,
service quality, the proposed waiver of the Commission’s affiliate transactions
rule, transmission and RTO/ISO criteria, municipal franchise agreements between
the companies and Kansas City, future rate cases, and the companies’
credit-worthiness.140
33. The
Applicants’ witnesses provided extensive documentary support with regard to
their respective positions on the subject matter of their testimony, via various
schedules.141
34. Four
of Great Plains and KCPL’s witnesses, Robert T. Zabors,
Wallace P. Buran, William J. Kemp and Robert Steinke
were hired as independent consultants versed in the areas of synergy
potential/identification and opportunity valuation to provide an additional
level of support for the synergy projections and merger value.142
_________________________
140
GPE/KCPL Exhs. 1-13 and 15-39.
141 Id. See Schedules included
with testimony.
142
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
35. Great
Plains and KCPL filed an additional pleading and prefiled testimony after the
revision of their merger proposal to clarify the issues that were present for
Commission decision.143
36. Witnesses
Terry Bassham (GPE/KCPL), Michael W. Cline (GPE/KCPL), and
Chris Giles (GPE/KCPL) filed Additional Supplemental Direct Testimony
following the revision of the merger proposal.144
37. With
the exception of making minor corrections to their prefiled testimony when
taking the witness stand, no other Great Plains and KCPL witness updated,
revised, or amended his or her prefiled testimony following the revision of the
merger proposal.145
38. While
on the witness stand, Great Plains and KCPL’s witnesses and Aquila’s witnesses
were composed, confident, sincere, and unwavering in their
testimony.
39. While
on the witness stand, Great Plains and KCPL’s witnesses and Aquila’s witnesses
were articulate and their live hearing testimony was consistent with their
prefiled testimony.
40. The
testimony provided by Great Plains and KCPL’s witnesses and Aquila witnesses was
substantial and credible.
41. Issues
that were removed from the case as a result of the revised merger proposal
included:146
_________________________
143 See
the Commission’s Docket Sheet EFIS Numbers 234, 235, 236, and 237;
i.e. Motion for
Leave to File Additional Supplemental Direct Testimony and Notice of Withdrawal
of Certain Regulatory Plan Requests, Additional Supplemental Direct
Testimony of Terry Bassham, Additional Supplemental Direct
Testimony and Schedule of Chris B. Giles and Additional Supplemental Direct
Testimony and Schedules of Michael W Cline, all filed
February 25, 2008 by Great Plains and KCPL.
144 Id. GPE/KCPL Exhs.
37, 38, and 39.
145 See
EFIS Docket entries for EM-2007-0374.
146 EFIS
Docket Number 386, Identification of Evidence that is
No Longer Relevant to the Joint Application, filed by Great Plains and
KCPL on May 9, 2008, pursuant to the Commission’s order, EFIS Docket Number 313,
Order Directing Identification of Irrelevant Evidence, effective April 18,
2008. EFIS Docket Number 234, Motion for Leave to File Additional
Supplemental Direct Testimony and Notice of Withdrawal of Certain Regulatory
Plan Requests, filed February 25, 2008 by Great Plains and
KCPL.
1) Aquila
Interest Expense: Joint Applicants do not seek to recover in any future general
ratemaking proceeding any interest expense in excess of equivalent
investment-grade debt that is currently held by Aquila.
2) Merger
Savings: Joint Applicants do not request a specific merger savings sharing
mechanism, but rather will rely upon the traditional regulatory ratemaking
process so that any merger savings will be passed through to Aquila and KCPL
customers in future rate cases.
3) Regulatory
Amortizations: Joint Applicants do not request authority in this proceeding for
Aquila to use regulatory “Additional Amortizations” to maintain the
investment-grade credit rating that Aquila anticipates receiving upon approval
of its acquisition by Great Plains Energy.
4) Aquila
Senior Executive Severance Costs: Joint Applicants will not request recovery in
a future rate case of $16.7 million in severance expense related to
departing Aquila senior executives. When combining this adjustment with the
re-classification of $13.6 million in non-executive severance expense as
Transition Costs, the total amount of Transaction Costs that Joint Applicants
will seek to recover has been reduced from $95.2 million to
$64.9 million, of which $47.2 million is Missouri
jurisdictional.
42.
The Commission finds that the issues removed from the merger plan, as listed in
Finding of Fact Number 41 no longer require a decision by the Commission in
this matter and that any testimony regarding these issues is irrelevant.147
43. Although
all of the parties were given the opportunity, none chose to file responsive
testimony to the Additional Supplemental Direct Testimony filed by Great Plains
and KCPL.148
44. Rebuttal
witnesses Maurice Brubaker (AgProcessing/Praxair/SIEUA), James R. Dittmer
(Public Counsel), Russell W. Trippensee (Public Counsel) and Robert E.
Schallenberg (Staff) did not update their prefiled testimony after the
Applicants revised their merger proposal prior to the evidentiary
hearing. None of these witnesses filed responsive testimony to the
Additional Supplemental Direct Testimony filed by Great Plains and KCPL.149
_________________________
147 The
issue involving Regulatory Amortizations was ruled to be irrelevant on
April 24 when the Commission ruled on Great Plains and KCPL’s motion to
limit the scope of these proceedings. See Transcript Volume 15,
pp. 2073-2118.
148 See
EFIS docket entries for EM-2007-0374.
149 See
EFIS Docket Sheet reflecting no updated prefiled testimony for these
witnesses. Staff Exh. 100; OPC Exhs. 200-201; Industrial Intervenors’
Exh. 300; Transcript, p. 1652, lines 7-25, p. 1653, lines 1-5, p. 1905,
lines 12-20 (Brubaker), pp. 1724-1727 (Dittmer), p. 1823, lines 14-17
(Schallenberg); Transcript, pp. 2885-2888
(Trippensee).
45. The
Industrial Intervenors, Public Counsel and Staff specifically requested that the
Commission eliminate, from the proposed procedural schedule, the deadlines for
filing responsive testimony to the Additional Supplemental Direct Testimony
filed by Great Plains and KCPL.150 Their
unopposed request was granted.151
46. Russell
W. Trippensee (Public Counsel), provided rebuttal testimony regarding
the Applicants’ original request for the Commission to consider a
regulatory plan involving the use of “Additional Amortizations.”152 While the
Commission received this testimony into the record to evaluate if it had any
probative value as to the company’s credit-worthiness, the original merger
proposal was changed after the filing of Mr. Trippensee’s testimony
and the Applicants no longer seek consideration of any regulatory
plan involving “Additional Amortizations.”153
47. Witness
Russell W. Trippensee (Public Counsel) did not update, revise, or amend his
prefiled testimony after the Applicants revised their merger
proposal, and did not update his prefiled testimony with live testimony
after the merger plan was revised.154
48. Witness
Russell W. Trippensee provided no documentary support for the positions
advocated in his testimony.155
_________________________
150 See
Response of Staff Public
Counsel, Praxair, AGP and SIEUA to Procedural Schedule Proposed by Joint
Applicants, filed on March 4, 2008.
151 See
Second Order Adopting
Procedural Schedule, Effective March 11, 2008.
153 See
Finding of Fact Numbers 35, 36 and 41 and their associated
footnotes.
154 OPC
Exh. 201; Transcript, pp. 2885-2888 (Trippensee).
49. While
on the witness stand, Witness Trippensee was composed, confident, sincere, and
unwavering. He was articulate and his live hearing testimony was
consistent with his prefiled testimony. His testimony was credible,
but because the primary focus of his testimony related to issues not part of the
revised merger proposal, it was not substantial.
50. James
R. Dittmer (Public Counsel), provided rebuttal testimony on purported merger
synergies, transaction cost recovery and the issues surrounding the companies’
credit-worthiness.156
51. Witness
James R. Dittmer (Public Counsel) did not update, revise, or amend his prefiled
testimony after the merger proposal was revised.157
52. Mr. Dittmer
did not perform an analysis on Missouri Jurisdictional figures associated with
the proposed transaction.158
53. Witness
Dittmer provided limited documentary support for the positions advocated in his
testimony.159
54. Mr. Dittmer
did not analyze the Applicants’ calculated synergies in detail, did not perform
a “bottom-up” calculation of potential savings, was not sure what synergies are
achievable, believes that it is possible the company could achieve
132 million dollars in savings, and he expects there will be significant
synergy savings achieved by the proposed merger.160
________________________
156 OPC
Exh. 200.
157 Id.; Transcript, pp.
1724-1727.
158
Transcript, pp. 1712-1713.
159 OPC
Exh. 200, Schedules JRD 1-3.
160
Transcript, pp. 1720-1723.
55. Throughout
Witness Dittmer’s live testimony regarding synergy savings he made reference to
agreeing with the Applicants’ math with regard to their synergy calculations,
but qualified his answers by stating, and/or implying, that the Commission could
not have faith in the mathematical analysis. However,
Mr. Dittmer did not provide a complete qualitative or quantitative
independent analysis to discredit the Applicants' math. With regard
to these statements, the Commission finds Mr. Dittmer’s testimony to have
diminished credibility.161
56. While
on the stand, Witness Dittmer was composed, confident, and
sincere. He was articulate and his live hearing testimony was
consistent with his prefiled testimony. His testimony was credible
with the exception of the credibility issues identified in Finding of Fact
Number 55, and with the exception of other specific credibility findings
made in other portions of this Order; however, because he did not perform a full
synergy analysis, or an updated analysis, his testimony with regard to estimated
synergies is not substantial.162
57. Maurice
Brubaker (AgProcessing/Praxair/SIEUA) provided rebuttal testimony on purported
merger synergies.163
58. Maurice
Brubaker provides only a limited analysis regarding the issues of merger related
synergies. As he stated in his testimony, “My testimony does not address the
specifics of the synergies that the Applicants contend will be
achieved. My testimony utilizes the claimed synergies and in that
context analyzes the proposed regulatory plan, its weaknesses, and the effect on
customers.”164
_________________________
161
Transcript, pp. 1654-1781.
162 See
also Finding of Fact Number 101 -- a given witness’s qualifications and overall
credibility are not necessarily dispositive as to each and every portion of that
witness’s testimony.
163
Industrial Intervenors’ Exh. 300.
164 Id., p. 4, lines
5-8.
59. Maurice Brubaker
focused his testimony primarily on evaluating the originally proposed
synergies-sharing plan, a plan that was removed from the revised merger
proposal.165
60. Witnesses
Maurice Brubaker (AgProcessing/Praxair/SIEUA) did not appear before the
Commission and did not update, revise, or amend his prefiled testimony by virtue
of live testimony after Great Plains and KCPL revised their merger
proposal.166
61. Witness
Maurice Brubaker provided some documentary support for the positions advocated
in his testimony; however, as noted above, the primary focus of his testimony
was on subject matter no longer relevant to the merger proposal.167
62. Witness
Brubaker did not appear before the Commission and the Commission is unable to
make demeanor and credibility findings regarding live testimony. His
prefiled testimony was credible; however, because he did not perform a full
analysis on the subject matter for which he purported to be offering testimony,
and because his testimony was primarily focused on subject matter no longer
relevant to the merger proposal, the Commission finds his testimony to be
insubstantial.
63. Witness
James Rose, called by Staff, is employed by Aquila as a senior manager in
the risk assessment audit service department.168
64. Witness
Rose did not provide testimony utilizing his expertise as an
auditor. Mr. Rose provided testimony regarding his personal
knowledge of what transpired at the joint owners meetings he attended regarding
the Iatan construction projects. He also offered his opinion as to
whether the companies were accurately considering invoicing and cost controls
for the Iatan projects at those meetings.169
_________________________
165
Industrial Intervenors’ Exh. 300. See also Findings of Fact Number
35, 36 and 41 and their associated footnotes.
166 Id.; Transcript, p. 1652,
lines 7-25, p. 1653, lines 1-5, p. 1905,
lines 12-20.
168
Transcript, pp. 2805-2834.
65. Witness
Max Sherman, called by Staff, is employed by Aquila as Vice President of
Strategic Initiatives.170
66. Witness
Sherman did not provide testimony utilizing his expertise, but rather provided
testimony regarding his personal knowledge of what transpired at the joint
owners meetings he attended regarding the Iatan construction projects in
relation to whether the Iatan projects were under a challenge with regard to
completion date and control budget.171
67.
While on the witness stand, witnesses Rose and Sherman were composed, confident,
and sincere. Their testimony was credible; however, the testimony did
not involve their employment and expertise but rather was only testimony
regarding their personal knowledge surrounding certain company meetings.172
68. Rebuttal
witnesses Maurice Brubaker (AgProcessing/Praxair/SIEUA), James R. Dittmer
(Public Counsel), Russell W. Trippensee (Public Counsel), Robert E.
Schallenberg (Staff) did not update any of the schedules, appendices or reports
attached to and submitted with their prefiled testimony after the Applicants
revised their merger proposal prior to the evidentiary hearing.173
69. None
of the witnesses providing opposition testimony to the approval of the merger,
i.e., Schallenberg, Dittmer, Trippensee and Brubaker, provided a
“bottom-up” analysis of the expected synergies that are calculated to result
from the operational integration of KCPL and Aquila.174
_________________________
170
Transcript, Volume 21, pp. 2835-2884.
172
Transcript, Volume 21, pp. 2805-2884.
173 Staff
Exh. 100; OPC Exhs. 200-201; Industrial Intervenors’ Exh. 300; Transcript
p. 1652, lines 7-25, p. 1653, lines 1-5, p. 1905, lines 12-20
(Brubaker), pp. 1724-1727, lines 1-9 (Dittmer), p. 1823, lines 14-17
(Schallenberg); Transcript Volume 21, pp. 2885-2888
(Trippensee).
174 See
Findings of Facts Numbers 46-62 and 68, supra.
70. Mr. Schallenberg
was the only witness proffered by Staff in this matter.175
71. Witness
Schallenberg (Staff) provided rebuttal testimony on purported merger synergies,
transaction cost recovery, the proposed waiver of the Commission’s affiliate
transactions rule, service quality, and the issues surrounding the companies’
credit-worthiness.176
72. Witness
Schallenberg (Staff) provided only a limited analysis regarding the issues of
merger-related synergies because of the legal argument that the Applicants had
not properly pled their request for relief pursuant to Section 393.190,
and, consequently, Staff asserts that the Commission can not consider the
evidence about synergy savings.177
73. The
Commission’s Staff did not “do a bottom-up audit of all the allegations of
savings.”178
74. Witness
Schallenberg (Staff) did not update, revise, or amend his prefiled testimony
after the Applicants revised their merger proposal.179
75. All
of the items of testimony that Mr. Schallenberg listed on the schedules to
his testimony in this case were prepared while he was either a member of the
auditing or accounting department or as the Division Director of the Utility
Services Division.180
_________________________
175 See
Transcripts, Volumes 1-26.
177 Id., see in particular pp.
11-12 and 43-44; Transcript, pp. 1820-23 and pp. 1844-1949.
179 Staff
Exh. 100; Transcript, p. 1823, lines 14-17 (Schallenberg). See
Findings of Fact 35, 36 and 41 and their associated
footnotes.
180
Transcript, pp. 1782-1907, Schallenberg testimony.
76. Mr. Schallenberg
has not provided testimony in any merger case on quality service issues, with
the exception of the Report he sponsored in this matter.181
77.
Mr. Schallenberg has not provided prefiled or live testimony in a merger
case before the Commission for at least 15 years.182
78. Mr. Schallenberg’s
testimony consisted of four full pages and the start of a fifth page: page one
is composed of his biography; page two is a description of his duties as a
Regulatory Auditor V with the Commission; page three is the listing of
topics upon which he offered testimony; and page four and five are where his
testimony on the substantive issues of this case begins.183
79. Other
than the attached Staff Report, Mr. Schallenberg offers no other prefiled
testimony on the substantive issues in this matter.184
80. The
Staff Report is not sworn and, it bears no author(s) identification.185
81. Mr. Schallenberg
claimed “ultimate” authorship of the Staff Report during his
cross-examination.186
82. Mr. Schallenberg
acknowledged that Lisa Kramer, Utility Regulatory Manager, provided him
with a draft of the section of the Report dealing with service quality issues,
i.e., pages 68-76 of the Report.187
83. Mr. Schallenberg
acknowledged that Kim Bolin, Utility Regulatory Auditor V, wrote the
initial draft of the part of the Report concerning the Kemp study.188
_________________________
181 Id.
84. Mr. Schallenberg
acknowledged that the portions of the Report addressing Missouri Revised
Statutes and Missouri case law were either drafted by members of the General
Counsel’s Office or were copied out of prior Commission orders.189
85. Mr. Schallenberg
acknowledged that the portions of the Report addressing state statues and case
law, and the interpretations of those, were drafted either by
Steve Dottheim, Chief Deputy Counsel, or Nathan Williams, Deputy
Counsel, lawyers in the General Counsel’s Office.190
86. Mr. Schallenberg
stated that other than the sections of the Report on service quality and the
Kemp study, that “I would have been the initial author on all of it (the
Report).191
87. Mr. Schallenberg
acknowledged that with regard to the section of the Report concerning actual
debt cost recovery, he had some of the schedules and numbers checked through
financial analysis by Matt Barnes, Utility Regulatory Auditor II, and
Ron Bible, Utility Regulatory Manager.192
88. Lisa
Kramer, Kim Bolin, Nathan Williams, Steven Dottheim, Matt Barnes and
Ron Bible were not proffered as witnesses by Staff in this
matter.
89. Lisa
Kramer, Kim Bolin, Nathan Williams, Steven Dottheim, Matt Barnes and
Ron Bible did not prefile testimony, provide live testimony and were not
subject to cross-examination by the parties or the Commission.
_________________________
189 Id.
192
Transcript, pp. 1782-1907. The Commission notes that the occupational
titles of the Staff personnel identified by Mr. Schallenberg in his testimony,
and as listed in Findings of Fact Numbers 82-89 were obtained from the
Commission’s employee roster. Mr. Schallenberg did not state their
titles during his testimony.
90. Great
Plains and KCPL lodged an objection to the admission of the Staff’s Report when
it was offered into evidence stating:
We do
object to the 80-page anonymous Staff report which does not contain a statement
of who its authors are. We believe it's a blend of opinions of
experts in accounting economics, business management, law, customer service and
other disciplines and professions. We believe that it is an attempt
to prevent other potential witnesses from Staff who would normally testify in
merger cases from having their prefiled testimony presented to the
Commission. It contains numerous legal arguments. For
example, there are citations which I believe Mr. Schallenberg discussed briefly
in one of my cross-examinations of not only Commission cases, Supreme Court
cases, the first drafts of which were authored by attorneys here at the
Commission. These are not the types of materials or sources upon
which an expert in at least auditing and accounting like Mr. Schallenberg
would normally reasonably rely upon under Section 490.065.3. We
also think that it contains numerous examples of anonymous hearsay and other
third-party arguments and opinions, and we believe it violates either
specifically or at least in spirit the Commission's rules on prefiled testimony
found in 4 Code of State Regulations 240-2.130. Specifically, it's
not under oath, its authors are not identified and some other technical
requirements.193
91. The
Commission received the Staff’s Report into evidence, over objection, noting
that the defects listed by Great Plains and KCPL would be taken into
consideration regarding the weight and credibility assigned by the Commission to
Mr. Schallenberg’s testimony and the attached Staff Report.194
92.
The Commission finds that the information contained in Staff’s Report, attached
to Mr. Schallenberg’s testimony, is deserving of only limited weight and
credibility related to the defects noted in Findings of Fact Numbers 70-91,
supra.195
_________________________
193
Transcript, pp. 2279-2280.
194
Transcript, p. 2884. The Commission notes that while it did not
sustain the hearsay objection to Staff’s report, “[A]n expert who consults and
merely summarizes the content of a hearsay source without applying his own
expertise is merely a hearsay witness.” Graves v. Atchison-Holt Elec.
Co-op., 886 S.W.2d 1, 7 (Mo. App. 1994). Given Mr.
Schallenberg’s admitted limits on his expertise, his summaries of other Staff
members’ contributions to the Report have little credibility in this
matter.
195 See
Transcript, pp. 1782-1907 (cross-examination revealing the diminished
credibility of Staff’s Report).
93. While
on the witness stand, witness Schallenberg was composed and confident in his
testimony, and his live hearing testimony was consistent with his prefiled
testimony. Mr. Schallenberg’s testimony is only credible to the
extent of his expertise, as described in Findings of Fact Numbers 99-101, infra, and given that he did
not perform a full accounting or auditing analysis of the beginning or updated
merger proposals, the Commission finds his testimony not to be
substantial.
94. Individual
witness biographies are footnoted throughout this Report and Order at the time
of the initial reference to each witness’s testimony.196
95. Section 490.065
sets forth standard of admissibility of expert testimony in civil cases,
including contested case administrative proceedings.197
96. Section 490.065
states:
1. In
any civil action, if scientific, technical or other specialized knowledge will
assist the trier of fact to understand the evidence or to determine a fact in
issue, a witness qualified as an expert by knowledge, skill, experience,
training, or education may testify thereto in the form of an opinion or
otherwise.
2. Testimony
by such an expert witness in the form of an opinion or inference otherwise
admissible is not objectionable because it embraces an ultimate issue to be
decided by the trier of fact.
3. The
facts or data in a particular case upon which an expert bases an opinion or
inference may be those perceived by or made known to him at or before the
hearing and must be of a type reasonably relied upon by experts in the field in
forming opinions or inferences upon the subject and must be otherwise reasonably
reliable.
4. If
a reasonable foundation is laid, an expert may testify in terms of opinion or
inference and give the reasons therefor without the use of hypothetical
questions, unless the court believes the use of a hypothetical question will
make the expert's opinion more understandable or of greater assistance to the
jury due to the particular facts of the case.
_________________________
196 The
Commission did not receive extensive biographies on witnesses Jon Empson,
Richard C. Green, Michael Chesser, Brent Davis, Steven Easley, or Terry
Foster. These witnesses provided only live testimony before the
Commission.
197 State Board of Registration for the
Healing Arts v. McDonagh, 123 S.W.3d 146, 153 (Mo. banc
2003).
97. The
Commission finds that the following witnesses are subject matter experts for
their individual fields of expertise as identified in their uncontroverted
prefiled and live testimony:
Terry
Bassham (GPE/KCPL), Kevin E. Bryant (GPE/KCPL), Wallace P. Buran (GPE/KCPL),
Lora Cheatum (GPE/KCPL), Michael W. Cline (GPE/KCPL), F. Dana Crawford
(GPE/KCPL), William H. Downey (GPE/KCPL), Chris Giles (GPE/KCPL), William P.
Herdegen (GPE/KCPL), William J. Kemp (GPE/KCPL), John Marshall(GPE/KCPL), Tim M.
Rush (GPE/KCPL), Richard A. Spring (GPE/KCPL), Robert F. Steinke (GPE/KCPL),
Charles H. Tickles (GPE/KCPL), Paul Van Dyne (GPE/KCPL), Lori A. Wright
(GPE/KCPL), Robert T. Zabors (GPE/KCPL), R. Thomas Fleener (Aquila), Wayne A.
Cauthen (KCMO), Robert J. Hix (KCMO), Russell W. Trippensee (Public Counsel),
James R. Dittmer (Public Counsel), Paul N. Mahlberg (Independence), Mark J.
Volpe (Independence), Robert Janssen (Dogwood Energy), John E. Grotzinger
(MJMEUC) and Maurice Brubaker (AgProcessing/Praxair/SIEUA).
98. Witnesses
James Rose and Max Sherman did not offer testimony based upon their
areas of educational and employment expertise. The Commission finds
them to be fact witnesses only, and not subject matter expert
witnesses.
99. The
Commission finds that witness Robert E. Schallenberg (Staff) is not a subject
matter expert witness in the following specialty areas or occupations, as
admitted in his uncontroverted live testimony:198 Engineer,
Economist, Lawyer, Computer Specialist in Information Technology or Information
Systems, Management Systems, Management Consulting, Human Resources, Investment
Banking, Mergers and Acquisitions Specialist, Generating Plants, Transmission
and Distribution Systems of Electrical Corporations Operating as Regulated
Utilities, Consumer Services, or Management Services.199
100. The
Commission finds Mr. Schallenberg is an expert witness in relation to his
auditing and accounting expertise.
_________________________
198
Transcript, pp. 1782-1907.
101.
Additionally, the Commission finds that regardless of the general credibility
findings made in Findings of Facts Numbers 21 through 100, a given witness’s
qualifications and overall credibility are not necessarily dispositive as to
each and every portion of that witness’s testimony. The Commission
gives each item or portion of a witness’s testimony individual weight based upon
the detail, depth, knowledge, expertise and credibility demonstrated with regard
to that specific testimony. Consequently, the Commission will make
additional specific weight and credibility decisions throughout this order as to
specific items of testimony.200
|
C.
|
Findings
of Fact Regarding Aquila’s Decision to Transfer Its
Assets
|
102.
Following Aquila’s September 2005 announcement of its sale of four utility
operations and its need to effectively deploy those sale proceeds, the Aquila
Board of Directors (“Aquila’s board”) determined that it would be appropriate to
conduct a strategic review of Aquila’s remaining operations and consider
alternatives to its stand-alone plan that could provide greater shareholder
value.201
_________________________
200 As
previously stated: witness credibility is solely a matter for the fact-finder,
“which is free to believe none, part, or all of the testimony. In re C.W., 211 S.W.3d 93, 99
(Mo banc 2007); State v.
Johnson, 207 S.W.3d 24, 44 (Mo banc 2006); Herbert v. Harl, 757 S.W.2d
585, 587 (Mo. banc 1988); Missouri Gas Energy,
186 S.W.3d at 382; Commerce Bank, N.A. v.
Blasdel, 141 S.W.3d 434, 456-57 n. 19 (Mo. App. 2004); Centerre Bank of Branson v.
Campbell, 744 S.W.2d 490, 498 (Mo. App. 1988); Paramount Sales Co., Inc. v.
Stark, 690 S.W.2d 500, 501 (Mo. App. 1985); Keller v. Friendly Ford,
Inc., 782 S.W.2d 170, 173 (Mo. App. 1990).
201
GPE/KCPL Exh. 14, Fleener
Direct, pp. 1-9. See Generally Transcript, pp.
615-695.
R. Thomas Fleener is presently
employed by Aquila, Inc. (“Aquila”) as Vice President of Corporate
Development. He has held this position with Aquila since
mid-2004. Prior to this he served as Vice President of Corporate
Development for Aquila Merchant Services. He began his employment
with Aquila in July 2001. Prior to joining Aquila, he worked for Verizon
Corporation where he was involved in corporate development, finance and
accounting matters. He has an MBA from the University of Texas at
Austin and a Bachelor of Science degree in business from Trinity
University. At Aquila he is primarily responsible for leading
corporate development, mergers and acquisitions, and other strategic initiatives
for Aquila. In this transaction, he was responsible for managing the
execution of the strategy, and is currently involved in satisfying the
conditions to close the transaction.
103.
Aquila began its strategic review process in the fall of
2005. Aquila continued to refine its strategic plan and underlying
financial models throughout 2006.202
104.
As part of this strategic review, Aquila compared its baseline stand-alone plan
against other corporate business structure alternatives, such as a potential
business combination or additional asset sales.203
105.
As a result of the strategic review, Aquila’s board determined that
shareholder value would most likely be maximized through a sale of Aquila.204
106.
Aquila retained The Blackstone Group L.P. ("Blackstone") and Lehman
Brothers Inc. ("Lehman Brothers") to advise Aquila on this transaction, and
Evercore Group L.L.C. ("Evercore") to advise the independent members of Aquila’s
board regarding this transaction.205
107.
Aquila has previously worked with Blackstone, Lehman Brothers and
Evercore. Most recently, Aquila worked with these financial advisors
in connection with the sale of Aquila’s Michigan, Minnesota and Missouri gas
operations and Kansas electric operations. Evercore has acted as the
financial advisor to Aquila’s independent directors since 2002, having provided
advice to the independent directors on numerous aspects of Aquila’s strategic
restructuring transactions (including its liability management plans, asset
sales and now, the merger).206
_________________________
202 Id. For example,
Aquila updated its stand-alone analysis as part of its normal quarterly process
during 2006 and again when Aquila concluded its annual budgeting process in the
fall of 2006. Id.
108.
In May 2006, Aquila’s financial advisors recommended, and Aquila’s board
authorized, Aquila’s management to approach nine parties identified as potential
buyers.207
109.
In determining which parties to contact, Aquila considered, among other
things, the logical potential bidders (in terms of operational synergies,
financial wherewithal, M&A capability, etc.) and the parties that expressed
an interest previously in acquiring all or portions of Aquila. The
nine parties included seven strategic parties and two financial parties.208
110.
Seven (five strategic and two financial) of the nine contacted parties
signed confidentiality agreements. The two other contacted parties
declined to participate in the process, citing (i) in one case, an
unwillingness to participate in an auction process and a view that delivering a
premium to the then-current share price of approximately $4.20 could be
challenging, and (ii) in the other case, an interest only in a portion of
Aquila’s regulated operations.209
111.
Of the seven parties that signed confidentiality agreements, six were provided
with confidential marketing materials, including the Company’s financial
projections. The seventh party elected not to continue in the
process.210
112.
Five parties submitted non-binding indicative bids in July 2006. Each
indication of interest was conditional upon further due diligence and the
confirmation of certain assumptions made by the party submitting the indication
of interest.211
_________________________
207 Id.
113.
Each of the five parties that submitted a non-binding indication of
interest was invited to conduct detailed due diligence and to submit a
definitive offer in the second round of the sale process.212
114.
In late August or early September of 2006, Aquila’s management made
presentations about Aquila’s business operations to four of the five bidding
entities participating in the second round of the process. The fifth
participant declined an invitation to receive the management presentation.213
115.
Of the five participants invited into the second round, only one bidder
group (the Great Plains-Black Hills bidder consortium) submitted an offer
in late November 2006. It was non-binding and contingent on the
Company entering into exclusive negotiations to finalize the commercial terms of
definitive agreements.214
116.
On December 8, 2006, after receiving detailed presentations regarding
the status of the sale process and terms of the bid received from Great Plains
and Black Hills, Aquila’s board authorized Aquila to enter into exclusive
negotiations with Great Plains and Black Hills in pursuit of a sale of
Aquila.215
117.
No other parties contacted Aquila or its advisors regarding a potential
business combination.216
118.
At no point during the process did Aquila or its advisors receive any credible,
unsolicited expressions of interest (that is, legitimate proposals from
companies with sufficient balance sheet capacity, utility experience or merger
and acquisition experience), even though reports of a potential sale of Aquila
existed in the marketplace.217
_________________________
212 Id.
217 Id. For example,
articles reported during the process include:
• July
2006: Power Finance and Risk
reported Aquila had put itself up for sale;
• July
2006: Reuters reported
on the Power Finance and Risk
article, and the Reuters article was
subsequently picked up by other sources, such as The Energy Daily and the
Kansas City
Star;
• July
2006: The Australian Financial
Review reported that Aquila was for sale and that Australian companies
were likely bidders;
• July
2006: The Kansas City Star
reported on the market speculation surrounding Aquila having reportedly
put itself up for sale;
• July
2006: The Deal listed
Aquila in its “New on the Block” section, which tracks companies that have (or
reportedly have) put themselves up for sale;
• July
2006: Corporate Finance Weekly
reported Aquila had launched a sales process and hoped to “hook” a buyer
in the $5.00 - $5.50 per share range; and
•
November 2006: Financial Times
reported Aquila was evaluating bids for a potential sale of the
company.
Aquila
did not confirm or deny these reports. Aquila’s long-standing policy
has been, and continues to be, not to comment on speculation regarding Aquila’s
future. For obvious reasons, Aquila maintained this policy during the
sales process. Id.
119.
As shown by Aquila’s Securities and Exchange Commission filings, Aquila’s board
was closely involved in the events that occurred throughout the period leading
to the merger announcement. The process was discussed at every
regularly scheduled Aquila board meeting, and between October 2006 and
February 6, 2007, Aquila’s board held eight special meetings solely to
discuss the sale. Aquila’s board also received updates periodically
from man agement throughout the process, particularly as significant events
occurred (such as the withdrawal of a bidder or events that could affect
Aquila’s stand-alone value).218
120.
Before unanimously approving the merger on February 6, 2007, Aquila’s board
received from Blackstone and Lehman Brothers, and the independent members of
Aquila's board received from Evercore, opinions that, considering the
assumptions and other qualifications at that time, the financial consideration
to be received by Aquila’s shareholders was fair.219
_________________________
218 Id.
219 Id. At Aquila’s
request, Blackstone, Lehman Brothers and Evercore prepared drafts of the
information they will be required to provide for Aquila’s merger proxy statement
with respect to their fairness opinions. The materials prepared by
Blackstone, Lehman Brothers and Evercore are attached as an exhibit to the
Schedule 14A filed with the Securities and Exchange Commission by Aquila on
March 7, 2007, which is available at:
http://www.sec.gov/Archives/edgar/data/66960/000006696007000032/0000066960-07-000032-index.htm. Id.
|
D.
|
Findings
of Fact Regarding the Structure of the Merger
Transactions
|
121.
The merger application filed with the Commission outlines a series of three
transactions: (1) the Assets Purchase Agreement (“APA”) among
Aquila, Inc., Black Hills, Great Plains, and Gregory; (2) the
Partnership Interests Purchase Agreement (“Black Hills Purchase” or
“PIPA”); and (3) the Agreement and Plan of Merger (“Gregory/Aquila
Merger”).220
122.
Each transaction is conditioned upon the closing of the other transactions.221
123.
Each transaction is subject to regulatory approval, and the merger is subject to
approval by the shareholders of Aquila and Great Plains.222
124.
Under the terms of the APA, Aquila will transfer to Black Hills the
assets associated with Aquila’s natural gas operations in Nebraska, Kansas and
Iowa.223
_________________________
220 Joint Application of Great Plains
Energy Incorporated, Kansas City Power & Light Company and Aquila,
Inc., pp. 4-11, paragraphs 6-24, filed April 4, 2007; Staff Exh. 100,
Schallenburg Rebuttal, Staff
Report of Staff’s Evaluation and Recommendations Regarding Great Plains Energy
Incorporated’s Proposed Acquisition of Aquila, Inc., pp. 37-40, filed
October 12, 2007. GPE/KCPL Exh. 1, Bassham Direct, pp.
2-17.
Terry Bassham is employed by
Great Plains as Executive Vice President, Finance & Strategic Development,
and Chief Financial Officer, and employed by KCPL as Chief Financial Officer.
His responsibilities include the oversight of Great Plains financial activities,
as well as the oversight of KCPL’s finance and accounting
departments. He holds a Bachelor of Business Administration degree in
Accounting from the University of Texas at Arlington and a Juris Doctor degree
from St. Mary’s University School of Law in San Antonio, Texas. He has held his
current positions at Great Plains and KCPL since April of 2005. Prior
to that time, he was employed by El Paso Electric for nine years in various
positions including General Counsel, Chief Administrative Officer and Chief
Financial Officer. He has provided pre-filed testimony in KCPL’s 2006
rate cases before both the Missouri Public Service Commission (“Commission”) and
the Kansas Corporation Commission (“KCC”) and has testified before the Federal
Energy Regulatory Commission, the Public Utility Commission of Texas, the New
Mexico Public Service Commission and various legislative committees of the Texas
and New Mexico legislatures.
221
GPE/KCPL Exh. 1 Bassham Direct, pp. 2-17.
125.
The transactions contemplated by the APA are subject to a number of conditions,
including: (i) a waiver from, or the approval of, the Kansas
Corporation Commission under the “standstill” obligations imposed on Aquila;
(ii) the approval of the Kansas Corporation Commission, Iowa Utilities
Board, and Nebraska Public Service Commission; (iii) the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended; (iv) the readiness of Great Plains
and Aquila to complete the merger; and (v) the absence of a materially
adverse effect on the businesses being acquired by Black Hills, including
the businesses being acquired by Black Hills under the PIPA.224
126.
Under the terms of the PIPA, Aquila will transfer to Black Hills the assets
associated with Aquila’s natural gas and electric operations in Colorado.225
127.
The PIPA will be effectuated through the following series of
transactions: (i) Aquila will form two Delaware limited
partnerships, called “Electric Opco” and “Gas Opco”; (ii) Aquila will be
the general partner thereof; (iii) Aquila’s subsidiary, Aquila Colorado,
L.L.C., will be a limited partner of “Electric Opco” and “Gas Opco”;
(iv) immediately before closing, Aquila will transfer its Colorado electric
assets to Electric Opco and its Colorado natural gas assets to Gas Opco; and
(v) Aquila and Aquila Colorado, L.L.C., will then sell their partnership
interests in Electric Opco and Gas Opco to Black Hills. 226
128.
The transactions contemplated by the PIPA are also subject to a number of
conditions, including (i) a waiver from, or the approval of, the Kansas
Corporation Commission under the “standstill” obligations imposed on Aquila;
(ii) the approval of the Colorado Public Utilities Commission;
(iii) the approval of the Federal Energy Regulatory Commission;
(iv) the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (v) the
readiness of Great Plains and Aquila to complete the merger; and (vi) the
absence of a materially adverse effect on the businesses being acquired by Black
Hills, including the businesses being acquired by Black Hills under the
APA.227
_________________________
129.
Following the closing of the APA and PIPA transactions, Black Hills
will own and operate the natural gas assets of Aquila in Nebraska, Kansas, Iowa,
and Colorado. Black Hills will also own Aquila’s Colorado
electric assets.228
130.
Black Hills will assume the liabilities directly associated with the assets
it acquires through the PIPA.229
131.
Black Hills will also acquire the intellectual property associated with
doing business under the Aquila name and upon consummation of the merger, if
approved, Great Plains will rename Aquila, pending Commission approval.230
132.
Immediately following the consummation of the PIPA, Gregory will merge with
Aquila, and Aquila will be the surviving entity.231
133.
The primary document controlling the Gregory/Aquila Merger is the Agreement and
Plan of Merger dated February 6, 2007, which was executed by Aquila, Great
Plains, Black Hills, and Gregory.232
_________________________
228 Id.
232
GPE/KCPL Exh. 1 Bassham Direct, pp. 2-17.
134.
Great Plains will purchase the outstanding shares of Aquila for
consideration consisting of Great Plains stock and cash.233
135.
When asked why the merger was structured in this fashion, Witness
Chris Giles, KCPL’s Vice President of Regulatory Affairs,
replied:
There
were four primary reasons. One, and I think this has been mentioned in prior
testimony, is the outstanding liabilities, potential liabilities of Aquila. That
was one reason. Another one was the status of the RTO, which the
Commission has just heard, but at this point Aquila is a participating member of
MISO [Midwest Independent Transmission System Operator]. KCPL is SPP
[Southwest Power Pool]. A third reason was the market power
issues. We did not believe we had market power issues if we were to
consolidate the two companies, but to be on the safe side and get a rapid FERC
approval, we thought it would be better to not. And the fourth reason
is purely from an administrative standpoint. We would have had to
transfer all the franchises and all the contracts and the financings,
potentially getting consent agreements on a number of financings. So
from a time standpoint we didn't feel like it was a needed thing to do.234
136.
Great Plains intends to purchase each of the outstanding shares of Aquila
stock for $1.80 cash plus 8.56% shares of Great Plains stock. 235 It is
anticipated that Great Plains will pay approximately $1.6 billion for
Aquila stock at that time. This price is based upon a market price
for Great Plains’ stock of $28.82.236
_________________________
233 Id.
234
Transcript, pp. 1486-1488 (Giles testimony).
Chris B. Giles is employed by
KCPL as Vice President of Regulatory Affairs. His responsibilities
include all aspects of regulatory activities including cost of service, rate
design, revenue requirements, and tariff administration. He graduated
from the University of Missouri at Kansas City in 1974 with a Bachelor of Arts
degree in Economics and in 1981 with a Master of Business Administration degree
with concentrations in accounting and quantitative analysis. He was
first employed at KCPL in 1975 as an Economic Research Analyst in the Rates and
Regulation Department. He held positions as supervisor and manager of
various rate functions until 1988 when he was promoted to Director of
Marketing. In January 1993, he returned to the rate area as Director
of Regulatory Affairs. In March of 2005, he was promoted to
Vice-President or Regulatory Affairs. He has previously testified
before both the Commission and the Kansas Corporation Commission on numerous
issues regarding utility rates and regulation
235
GPE/KCPL Exh. 1, Bassham Direct, p. 8; Staff Exh. 100, Schallenburg Rebuttal, Staff Report of Staff’s Evaluation
and Recommendations Regarding Great Plains Energy Incorporated’s Proposed
Acquisition of Aquila, Inc., pp. 38-39, filed October 12,
2007.
Robert E. Schallenberg is the
Director of the Utility Services Division of the Missouri Public Service
Commission. He graduated from the University of Missouri at Kansas
City in 1976 with a Bachelor of Science Degree and major emphasis in
Accounting. In November 1976, he successfully completed the Uniform
Certified Public Accountant (CPA) examination and subsequently received the CPA
certificate. In 1989, he received his Missouri license as a CPA. He
began employment with the Commission as a Public Utility Accountant in
1976. In May 1978, he accepted the position of Senior Regulatory
Auditor with the Kansas State Corporation Commission, but returned to the
Commission in October of that same year. Prior to October 1997, he
was an Audit Supervisor/Regulatory Auditor V and in October 1997, he began his
current position. As a Regulatory Auditor V for the Commission, he
had several areas of responsibility including: (1) conducting timely and
efficient examination of the accounts, books, records and reports of
jurisdictional utilities; (2) aiding in the planning of audits and
investigations, including staffing decisions, and in the development of Staff
positions in cases to which the Accounting Department of the Commission was
assigned; (3) serving as lead auditor, as assigned on a case-by-case basis; (4)
assisting in the technical training of other auditors in the Accounting
Department; (5) preparing and presenting testimony in proceedings before the
Commission and the Federal Energy Regulatory Commission (FERC), and aiding the
Commission’s Staff attorneys and the Washington, D.C. counsel in the preparation
of pleadings and for hearings and arguments, as requested; and (6) reviewing and
aiding in the development of audit findings and prepared testimony to be filed
by other auditors in the Accounting Department. He has presented
testimony before the Commission on issues ranging from the prudence of building
power plants to the appropriate method of calculating income taxes for
ratemaking purposes. He has also submitted testimony in proceedings
before the FERC.
236 Staff
Exh. 100 at p. 39. In their Post-Hearing Brief, the Applicants
represented, that based upon Great Plains’ closing New York Stock Exchange stock
price on May 30, 2008 of $26.23, the merger represented a value of $4.05 per
share of Aquila common stock. See EFIS Docket Number 449,
Post-Hearing Brief of Joint Applicants Great Plains Energy, Inc., Kansas City
Power and Light Co. and Aquila, Inc., filed June 2, 2008,
p. 6.
137.
Black Hills will pay Aquila approximately $940 million in cash
on consideration for the Black Hills Purchase. A portion of
those proceeds will, with additional cash from Great Plains, fund the
approximate $677 million cash element of the consideration received by
Aquila’s shareholders under the terms of the Agreement and Plan of Merger.237
138.
The Gregory/Aquila merger has a total indicated value of approximately
$1.7 billion. 238
139.
Great Plains will assume approximately $1 billion of Aquila net debt and
other liabilities.239
140.
Great Plains, in its original merger proposal, estimated the total costs to
achieve the merger to be approximately $181 million.240
_________________________
237
GPE/KCPL Exh. 1, Bassham Direct, p. 8, lines 21-23, p. 9, lines
1-2.
238
GPE/KCPL Exh. 1, Bassham Direct, p. 8.
240 Id. at 9. This
estimate was made prior to revising the merger plan that removing certain
executive compensation costs and costs of debt. EFIS Docket Number
386, Identification of
Evidence that is No Longer Relevant to the Joint Application, filed by
Great Plains and KCPL on May 9, 2008, pursuant to the Commission’s order, EFIS
Docket Number 313, Order Directing Identification of Irrelevant Evidence,
effective April 18, 2008. EFIS Docket Number 234, Motion for Leave to File Additional
Supplemental Direct Testimony and Notice of Withdrawal of Certain Regulatory
Plan Requests, filed February 25, 2008 by Great Plains and
KCPL. See also Findings of Fact Numbers 41, 171 and
421.
141.
The Gregory/Aquila merger was subject to a number of conditions, including
(i) approval by Aquila’s shareholders and the shareholders of Great Plains;
(ii) approval by the Federal Energy Regulatory Commission, the KCC and this
Commission; (iii) the expiration or termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;
(iv) the receipt of all regulatory approvals and completion of the
Black Hills Purchase; and (v) the absence of a materially adverse
effect on the Aquila businesses that remain after giving effect to the
Black Hills Purchase.241
142.
Following the completion of the Black Hills Purchase, the Aquila
corporate entity will consist of (i) Aquila’s current Missouri electric
operations, i.e., Aquila
Networks-MPS and Aquila Networks-L&P; (ii) Aquila’s St. Joseph
Industrial Steam operations; and (iii) Aquila’s merchant services
operations, which primarily consist of the 340 MW Crossroads power
generating facility in Mississippi and certain residual natural gas contracts,
that have been hedged to address price risk.242
143.
As a result of the merger, Aquila will become a direct, wholly-owned subsidiary
of Great Plains, just as KCPL. 243
144.
KCPL and Aquila will be affiliated entities by virtue of Great Plain’s common
ownership of both. 244
_________________________
241
GPE/KCPL Exh. 1, Bassham Direct, pp. 7-8.
145.
Although Aquila and KCPL will remain separate legal entities, many of the
companies’ operational functions will be integrated and centralized after the
merger closes.245 The
Applicants have not filed a joint operators agreement, but they have offered to
file one if the Commission so directs them.246
146.
Although employees will be transferred between KCPL and Aquila, and certain
operations will be centralized, the integration of KCPL’s and Aquila’s
operations will not involve the sale or transfer of utility assets between KCPL
and Aquila.247
147.
Upon completion of the Gregory/Aquila Merger, Aquila’s current shareholders will
own approximately 27% of Aquila’s outstanding common stock and Great Plains’
current shareholders will own the remaining 73%.248
148.
The merger will expand Great Plains’ electric utility service territory around
the Kansas City metropolitan area by adding approximately 300,000 electric
utility customers to the 500,000 customers Great Plains currently serves through
KCPL. 249
149.
The newly merged company will serve a combined metropolitan customer base of
over 625,000, an increase of almost 40% for KCPL today, and will add over
170,000 rural customers. 250
150.
Following the merger, Great Plains’ utility subsidiaries will have a generating
capacity of approximately 5,800 megawatts.251
_________________________
245
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 1. Since
announcing the merger, Great Plains, Aquila, and KCPL have worked on the
processes, procedures, and practical aspects of centralizing Aquila’s and KCPL’s
operations. The major objective has been to select the
“best-in-class” operations of each utility for implementation across the board,
in order to create synergy savings, and to maintain or improve customer service
at both Aquila and KCPL. Id. at
1-2.
246
Transcript pp. 1463-1465.
247
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 2.
248
GPE/KCPL Exh. 1, Bassham Direct, p. 9.
250
GPE/KCPL Exh. 21, Marshall Supp. Direct, pp. 1-22.
251
GPE/KCPL Exh. 1, Bassham Direct, pp. 3-4.
151.
The KCPL and Aquila combined service territory will be comprised of 21,770
distribution primary circuit miles over approximately 18,000 square miles.252
152.
Aquila’s shareholders approved the three transactions on October 9, 2007.253
153.
The shareholders of Great Plains approved the three transactions on
October 10, 2007.254
154.
The transactions did not require the approval of Black Hills’ shareholders.255
155.
The Federal Energy Regulatory Commission (“FERC”) approved the three
transactions on October 19, 2007.256
156.
On August 27, 2007, the Federal Trade Commission announced that it granted early
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.257
157.
The Iowa Utilities Board and the Nebraska Public Service Commission have
approved the Black Hills Purchase.258
158.
After the Missouri hearings were adjourned in December, the transactions were
also approved by both the Colorado Public Utilities Commission and the Kansas
Corporation Commission.259
_________________________
252
GPE/KCPL Exh. 16, Herdegen Direct, p. 2-3.
253 See
Finding of Fact Number 120; Transcript, p. 1394.
254
Transcript, p. 1383, 1394,1397-1398; A certified copy of the resolutions of the
board of directors of Great Plains authorizing the merger and related
transactions contemplated by the agreement and plan of mergers is marked as 7
and attached to the application. Id.
255 EFIS
Docket Number 1, Application filed on April 4, 2007 – See all attached Exhibits;
EFIS Docket Number 449, Post-Hearing Brief of Joint
Applicants Great Plains Energy, Inc., Kansas City Power and Light Co. and
Aquila, Inc., pp. 6-7, filed June 2, 2008.
256 Great Plains Energy Inc.,
et al., Order
Authorizing Disposition and Acquisition of Jurisdictional Facilities and
Granting Petition for Declaratory Order, 121 FERC ¶ 61,069 at P 50 (October 19,
2007).
257
Transcript, p. 1519; EFIS Docket Number 449, Post-Hearing Brief of Joint
Applicants Great Plains Energy, Inc., Kansas City Power and Light Co. and
Aquila, Inc., pp. 6-7, filed June 2, 2008.
258 In re Aquila, Inc., Docket
No. SPU-07-12 (Iowa Util. Bd., Aug. 31, 2007); In re Aquila, Inc.,
Application No. NG-0044 (Neb. P.S.C., Oct. 16, 2007).
259 See In re Application
of Aquila, Inc., Docket
No. 07A-108EG (Colo. P.U.C., Feb. 14, 2008); In re Joint
Application of Great Plains Energy Inc., Kansas City Power & Light Co. and
Aquila, Inc., Docket
No. 07-KCPE-1064-ACQ (Kan. Corp. Comm’n, May 15,
2008).
159.
Only this Commission’s approval is needed for the merger to close.
160.
The Agreement and Plan of Merger contains certain termination rights for both
Aquila and Great Plains, including the right to terminate the agreement if the
merger has not closed within twelve months following the date of the agreement
(subject to extension to up to 18 months for receipt of regulatory approvals
required to consummate the merger and the Black Hills Purchase).260
161.
The final termination date for failure to close the merger is August 6,
2008.261
162.
Aquila and Great Plains also each have the right to terminate the Agreement and
Plan of Merger in order to enter into a superior transaction after giving the
other party six-business-day’s notice and an opportunity to revise the terms of
the agreement.262
163.
If Aquila terminates the Agreement and Plan of Merger under specified
circumstances, including a termination to enter into a superior transaction,
then Aquila would pay to Great Plains a $45 million termination
fee. If Great Plains terminates the merger, then Great Plains would
pay Aquila a $45 million termination fee and would pay Black Hills a
termination fee equal to the lesser of $15 million or the actual
transaction costs Black Hills had incurred at the time of termination.263
_________________________
260
GPE/KCPL Exh. 1, Bassham Direct, pp. 11-12.
261 See
Exhibit 4 to the Application filed on April 4, 2007 (EFIS Docket Number 1),
Agreement and Plan of Merger
Among Aquila, Inc. Great Plains Energy Incorporated, Gregory Acquisition Corp.
and Black Hills Corporation, dated February 6, 2007, Article IX
Termination, pp. 67-71.
262
GPE/KCPL Exh. 1, Bassham Direct, pp. 11-12.
|
E.
|
Findings
of Fact Regarding Costs to Achieve and Merger Synergy
Savings
|
|
|
1.
|
Costs
to Achieve Synergies
|
164.
Synergy benefits will not be achieved without effort or cost. The
costs to achieve need to be considered in evaluating net transaction
benefits.264
_________________________
264
GPE/KCPL Exh. 18, Kemp Supp.
Direct, pp. 1-28.
William J. Kemp
is employed as a Managing Director in the Enterprise
Management Solutions Division of Black & Veatch Corporation
(B&V). He leads B&V’s management consulting practice in
Business Strategy and Planning including consulting services in the areas of
strategic planning, business planning, M&A transaction support, financial
due diligence, merger integration, financial analysis, financing strategies,
load forecasting, demand-side management, resource planning, and litigation
support. Mr. Kemp earned a B.A. magna cum laude from
Harvard University and a Master of Public Policy from the Goldman School of
Public Policy at the University of California at Berkeley, with a focus on
energy policy. Prior to joining Black & Veatch in 2003, he co-founded and
served as a Managing Director of Economists.com, a management consultancy
focusing on financial and technology issues in the power, gas, and water
industries. He was responsible for Economists.com’s strategic
direction, sales and marketing leadership, alliance development, client
relationship management, and direct services to clients.
His
previous consulting experience was primarily with Deloitte
Consulting. From 1986 to 1999, he held positions of increasing
responsibility in that firm’s management consulting practice in the energy
industry, ultimately serving as one of three managing partners for the worldwide
practice. He was energy industry leader for the Asia-Pacific-Africa
region, and before that the western U.S. region. His experience
includes advisory roles in the competitive restructuring of the power industry
in a number of countries, including the United States, Australia, New Zealand,
United Kingdom, Singapore, the Philippines, Turkey, and China. He
advised energy clients on numerous M&A transactions, served on Deloitte’s
Global Steering Committee for its M&A practice across all industries, and
led development of major portions of its M&A methodology.
Deloitte
Consulting was involved in synergy estimation and transaction support for most
of the utility mergers consummated in the U.S. in the 1990 to 2004
period. His experience includes advice or analysis on the following
publicly announced enterprise-level utility M&A transactions:
PacifiCorp-Utah Power & Light, Puget Sound Power & Light-Washington
Energy, Pacific Enterprises-Enova, Public Service Company of
Colorado-Southwestern Public Service, Washington Water Power-Sierra Pacific
Resources, AGL Resources-NUI, Exelon-PSEG Enterprises, PacifiCorp-Powercor,
Texas Utilities-Eastern Energy, Australian Gas Light-Natural Gas Corp of New
Zealand, Transalta New Zealand-Southpower, and Singapore Power-GPU
PowerNet.
He has
also reviewed synergy data on numerous other transactions, and has advised on
many energy M&A transactions for specific assets, as well as many potential
utility enterprise transactions that were not publicly announced. He
has also held positions as Wholesale Rate Engineer for Pacific Gas &
Electric Company, Regulatory Cost Analyst for Southern California Edison
Company, Research Specialist for Lawrence Berkeley Laboratory in the U.S.
Department of Energy, and Regulatory Economist for the President’s Council on
Environmental Quality, Office of the White House.
He has
not testified previously before the Missouri Public Service Commission, but has
testified as an expert witness or prepared expert witness testimony before
federal and state regulatory agencies in the U.S., the U.S. International Trade
Commission, and civil courts, and presented on energy policy issues to numerous
governmental bodies outside the U.S.
Black & Veatch, an
employee-owned company, is a leading global consulting, engineering, and
construction company, focusing on the power and water industries. Founded in
1915 and headquartered in Overland Park, Kansas, Black & Veatch maintains
more than 90 offices worldwide. Black & Veatch was ranked in 2006
by the Engineering News Record as the number 1 company worldwide in generation
engineering and Engineering/Procurement/Construction (“EPC”), and as the number
2 company in North America in engineering and EPC for electricity transmission
and distribution. Its consulting practice is very active in the areas
of regulations and mergers/acquisitions. Collectively, Black &
Veatch’s team of industry experts has submitted testimony in well over 1,000
proceedings before the Federal Energy Regulatory Commission, state regulatory
commissions and other regulatory bodies, licensing and sitting boards, U.S.
state and local legislative bodies and investigative panels, and civil and
bankruptcy courts. Black & Veatch’s Business Strategy and
Planning practice has advised on technical and economic issues at least 500
M&A transactions and greenfield projects in the electricity
industry.
To assist
with developing his testimony Mr. Kemp drew from his base of
experience in performing synergy estimation and due diligence projects for other
clients, and analyzed information from a number of sources that were relevant to
the issues including:
•
Selected Missouri and Kansas regulatory precedents on utility
mergers;
• KCPL’s
synergy estimates and supporting workpapers, both as originally filed and as
updated;
• Data
gathered through interviews with KCPL team leaders in the synergy estimation
process;
• Base
year (2006) costs for KCPL and Aquila;
•
Announced and realized synergies in similar utility merger transactions since
1995; and
•
Testimony on merger synergies in other approved utility
mergers.
165.
“Costs to achieve” refers to those costs necessary to ensure the merger is
completed, synergy savings are achieved and the merger process is
effective. Costs to achieve can be categorized into two
types: (i) costs to consummate the merger, also known as
transaction costs, and (ii) transition-related costs attributable to
integrating Aquila into Great Plains’ operations.265
_________________________
265
GPE/KCPL Exh. 29, Wright
Direct, pp. 3-4; GPE/KCPL Exh. 2, Bassham Supp. Direct, p. 2;
GPE/KCPL Exh. 31, Zabors Supp.
Direct, pp. 1-15 and accompanying schedules excluding RTZ-12; GPE/KCPL
Exh. 18, Kemp Supp. Direct, pp. 1-28.
Lori A. Wright earned a
Bachelor of Business Administration degree in Accounting from the University of
Iowa in 1985 and a Master of Business Administration degree from the University
of Iowa in 1989. She is a Certified Public Accountant and was
originally employed at KCPL in 2001 as Assistant Controller and became
Controller in 2002. From 1990 to 2001 she held various accounting
positions at Central and South West and American Electric Power (Central and
South West was acquired by American Electric Power in 2000), and from 1986 to
1990, she held various accounting positions at Iowa Electric Light and Power
Company. She has testified in prior proceedings at the Commission and the Kansas
Corporation Commission.
Robert T. Zabors is a partner
with Bridge Strategy Group LLC, a management consulting firm based in
Chicago. He leads the firm’s energy and utilities
practice. He graduated from Northwestern University in 1985, and
received an MBA from the University of Chicago, with a concentration in Business
Economics. He has spent approximately 20 years in management
consulting, primarily serving electric and gas utilities on a wide range of
strategic and operational issues. Representative engagements include corporate
and business unit strategy, acquisitions, process improvement, cost reduction,
organizational redesign, regulatory strategy, alliances and joint
ventures. His specific experience with Great Plains includes
supporting the development of the Great Plains strategic intent and the
Comprehensive Energy Plan of KCPL. While at Bridge Strategy Group, he
has written articles for industry publications such as Public Utilities
Fortnightly and Electric Perspectives. Prior to Bridge Strategy
Group, he had been a consultant with three consulting firms, Renaissance
Worldwide, Booz Allen & Hamilton, and Planmetrics.
166.
The two components of the costs to achieve, transaction and
transition costs, were originally estimated to be approximately
$181 million.266 After
the merger plan was revised, Transaction Costs to Achieve dropped to
$64.9 million and Transition Costs to Achieve decreased to
$58.9 million, the total now being $123.8 million.267
_________________________
266
GPE/KCPL Exh. 20, Marshall
Direct, pp. 2-5; GPE/KCPL Exh. 30, Zabors Direct, pp. 13-19 and
Schedule RTZ-2.
John R. Marshall is employed
by Kansas City Power & Light Company (“KCPL”) as Senior Vice President,
Delivery Division. He oversees Customer Operations, Transmission
Services, Information Technology and Energy Solutions. He graduated
from the University of Arkansas at Fayetteville in 1976 with a Bachelor of
Science degree in Electrical Engineering. Further education from 1990
through 1997 includes management development at Columbia University, The Aspen
Institute, The Wharton School, and Harvard Business School Advanced Management
Program. He began employment at KCPL in May 2005. Prior to joining
KCPL, he was a Senior Executive Resource for GFI Energy Ventures LLC; Chairman
of InfraSource Services Inc.; Chairman of SPL World Group Inc.; and a Director
of Power Measurement Holdings, Inc. From 2001-2002, He was
Senior Vice President of Customer Service at the Tennessee Valley Authority, and
from 1999-2001, he served as President of Duquesne Light Company, Pittsburgh,
Pennsylvania. Prior to joining Duquesne Light, he was Vice President
of Entergy Corporation and served in various nuclear and fossil generation,
transmission, distribution, customer service, information services, and retail
operations positions from 1976 through 1999. He has testified before
the Missouri Public Service Commission, the Kansas Corporation Commission, and
the Texas Public Utility Commission.
267
GPE/KCPL Exh. 37, Bassham Additional Supp. Direct, p. 5. Transcript,
pp. 1676-1677. For changes in the merger plan see EFIS Docket Number
386, Identification of
Evidence that is No Longer Relevant to the Joint Application, filed by
Great Plains and KCPL on May 9, 2008, pursuant to the Commission’s order, EFIS
Docket Number 313, Order Directing Identification of Irrelevant Evidence,
effective April 18, 2008; EFIS Docket Number 234, Motion for Leave to File Additional
Supplemental Direct Testimony and Notice of Withdrawal of Certain Regulatory
Plan Requests, filed February 25, 2008 by Great Plains and
KCPL. Although the original cost estimates have changed with the new
proposal, the original transaction and transition costs specifically consisted
of: (1) Position costs/Severance; (2) Position costs/Share of executive change
in control (“CIC”) and CIC tax gross-up **This item has changed in association
with the revised merger plan; (3) Position costs/Rabbi Trust **This item has
changed in association with the revised merger plan; (4) Position
costs/Retention; (5) Position costs/Restricted stock and stock options; (6)
Process integration costs and benchmarking; (7) Legal and Human Resources; (8)
Costs to maintain support services for Black Hills; (9) Integration team; (10)
Transaction costs; (11) Incremental debt tender costs – **This item has changed
in association with the revised merger plan; (12) Other/Directors and Officers
liability tail coverage; (13) Other/Regulatory process costs; (14)
Other/Facilities integration; and, (15) Other/Internal and external
communications. GPE/KCPL Exh. 30, Zabors Direct, pp. 13-19, and
Schedule RTZ-2; GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying
schedules excluding RTZ-12; GPE/KCPL Exh. 20, Marshall Direct,
pp. 2-5.
See
GPE/KCPL Exh. 30, Zabors Direct, pp. 13-19, and Schedule RTZ-2; GPE/KCPL Exh.
31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules excluding RTZ-12;
GPE/KCPL Exh. 20, Marshall Direct, pp. 2-5; GPE/KCPL Exh. 37, Bassham
Additional Supplemental Direct, pp. 4-6; GPE/KCPL Exh. 39, Giles, Additional
Supplemental Direct, pp. 1-6 and Schedule CBG-1. The sharp reduction
in transaction costs is related to the Applicants withdrawal their requests to
recover; (1) $35 million in Debt Tender Costs associated with refinancing and
retiring Aquila’s existing debt obligations; (2) change-in-control
costs associated with Aquila’s senior management, including change-in-control
payments and the tax “gross up” thereof, and including the funding of the rabbi
trust, representing Aquila’s supplemental executive retirement plan,
i.e. $16.7 million with a Missouri jurisdictional amount of
$12.2 million; and, (3) the re-categorization of certain severance payments
from transaction costs to transition costs, i.e. $13.6 million with a
Missouri jurisdictional amount of $9.9 million. Id. See also
GPE/KCPL Exh. 2, Bassham
Supp. Direct, p. 8; GPE/KCPL Exh. 31, Zabors
Supp. Direct, pp. 14-15. Transcript, p. 1223,
1422-1423.
167.
Examples of transaction costs include investment banker fees, consulting and
legal fees associated with the evaluation, bid, negotiation and structure of the
deal. 268
168.
Transition-related costs are comprised of the costs incurred to integrate Aquila
into Great Plains. They are those costs necessary to ensure that the
synergy savings are achieved and that the merger process is
effective. These costs include severance and retention costs and
costs associated with process integration.269
169.
In the original merger plan the Missouri Jurisdictional Transaction Costs were
approximately $69.3 million and the Missouri Jurisdictional Transition
Costs were approximately $33.0 million.270
170.
After the merger plan was revised, the Missouri Jurisdictional Transaction Costs
dropped to $47.2 million, and the Missouri Jurisdictional Transition Costs
increased to $42.8 million.271
171.
The changes in Missouri Jurisdictional costs occurred because (1) the
change-in-control costs for Aquila’s senior management, including certain
payments, taxes, and additional trust funding of the executive retirement plan
were eliminated, reducing transaction costs by $16.7 million (Missouri
jurisdictional amount by $12.2 million); and, (2) certain severance
payments were moved from transaction to transition costs, thereby reducing
transaction costs and increasing transition costs by $13.6 million
(Missouri jurisdictional amount by $9.9 million).272
_________________________
268
GPE/KCPL Exh. 29, Wright Direct, p. 4; GPE/KCPL Exh. 2, Bassham Supp. Direct, p.
2; GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying
schedules excluding RTZ-12; GPE/KCPL Exh. 18, Kemp Supp. Direct, pp.
1-28.
269
GPE/KCPL Exh. 29, Wright Direct, p. 4; GPE/KCPL Exh. 2, Bassham Supp. Direct, p.
3; GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying
schedules excluding RTZ-12; GPE/KCPL Exh. 18, Kemp Supp. Direct, pp.
1-28.
270
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and Schedules RTZ-10-11;
GPE/KCPL Exh. 37, Bassham Additional Supplemental Direct, pp. 4-6; GPE/KCPL Exh.
39, Giles, Additional Supplemental Direct, pp. 1-6 and Schedule
CBG-1. See also GPE/KCPL Exh. 2, Bassham
Supp. Direct, p. 8. Transcript, pp. 1223, 1303-1305,
1715-1716.
271
GPE/KCPL Exh. 37, Bassham Additional Supp. Direct, p. 5; Transcript, pp.
1303-1305, 1406,1715-1716.
272
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 15-15 and Schedules RTZ-10-11;
GPE/KCPL Exh. 37, Bassham Additional Supplemental Direct, pp. 4-6; GPE/KCPL Exh.
39, Giles, Additional Supplemental Direct, pp. 1-6 and Schedule
CBG-1. See also GPE/KCPL Exh. 2, Bassham
Supp. Direct, p. 8. Transcript, p. 1223, 1303-1305,
1422-1423.
172.
Great Plains anticipates that all costs to achieve the merger will be incurred
by 2012, with over 95% of estimated costs incurred by 2009.273
173.
The Applicants request that the costs to achieve the merger be allocated to
Great Plains’ various regulatory units (KCPL, Aquila and St. Joseph
Industrial Steam), booked as a regulatory asset and amortized into cost of
service over five years, beginning on January 1, 2008, or the month
immediately following consummation of the merger, whichever occurs later.274
174.
“Synergy savings” refers to reductions in
costs from combining Great Plains and Aquila as compared to the combined costs
of the entities standing alone.275
175.
Examples of synergy savings include benefits of
scale, improved efficiency in support functions, economies of scale in
purchasing, and savings from combining customer service and field operations in
the same geographic area.276
176.
Utilities in the U.S. typically use a common typology to classify merger
synergies. The categories are created, enabled, and developed
synergies.277
_________________________
273
GPE/KCPL Exh. 30, Zabors Direct, pp. 13-19 and Schedule
RTZ-2.
274
GPE/KCPL Exh. 29, Wright Direct, p. 4.
276 Id. at pp. 4-5; GPE/KCPL
Exh.20, Marshall Direct, pp. 2-5.
277 GPE/KCPL Exh. 18, Kemp Supp.
Direct, pp. 1-28; GPE/KCPL
Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules excluding
RTZ-12; GPE/KCPL Exh. 22, Marshall Surrebuttal, pp.
1-19.
177.
Created synergies are those cost savings or revenue enhancements that are
directly attributable to the transaction. They would not occur but
for the transaction. The savings are driven by achievement of
scale economies and consolidation of redundant functions. 278
178.
Examples of created synergies include consolidation of corporate back office
functions (finance, human resources, information technology, etc.), call
center consolidation, field support center consolidation, and integration
of generation dispatch.279
179.
Enabled synergies are those cost savings or revenue enhancements that are
facilitated or unlocked by merger. The transaction makes them much
more accessible and achievable, but the tie to the merger is not
definitive. This type of synergy often involves transferring skills
between companies or applying one company’s superior practice across both
companies. It could also entail leveraging the combined companies’ larger
scale into a level of benefit greater than the sum of what either company could
achieve separately. 280
180.
Examples of enabled synergies include transfer of better operations or
maintenance practices (generation, transmission, distribution), migration to the
better information technology platforms, or achieving lower supply chain costs
through increased leverage over vendors.281
_________________________
278 GPE/KCPL Exh. 18, Kemp Supp. Direct,
pp. 1-28; GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying
schedules excluding RTZ-12; GPE/KCPL Exh. 22, Marshall Surrebuttal, pp.
1-19.
279
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
280 Id.; GPE/KCPL Exh. 31, Zabors
Supp. Direct, pp. 1-15 and accompanying schedules excluding RTZ-12; GPE/KCPL
Exh. 22, Marshall Surrebuttal, pp. 1-19.
281
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
181.
Developed benefits are not synergies. They are cost savings or
revenue enhancements that occur during the merger time frame, but are not
directly related to merger. 282
182.
Developed benefits can be achieved without a merger. Because the merger
environment does not confer any advantage; development benefits typically
carry greater execution risk than created or enabled synergies. 283
183.
Examples of developed benefits would include financial restructuring, business
process re-engineering, or organizational redesign.284
184.
Neither Aquila nor KCPL addressed developed benefits.285
185.
As incorporating developed benefits is not appropriate, the management of Aquila
and KCPL properly excluded them from potential merger synergies.
|
|
a.
|
Methodology
for Synergy Calculations
|
186.
For the due diligence phase of the synergy valuation, a team of 20 KCPL senior
executives spent three months developing a top-down estimate of synergy
potential and building integration plans for the key areas of the business.286
187.
The top-down analysis involved: (1) Assessing the strategic
implications of the merger; (2) Estimating potential ranges of values for
the transaction using comparable metrics from numerous mergers and acquisitions
in the electric utility sector; (3) Identifying potential areas of synergy
and estimating potential value ranges through the application of
benchmarks; (4) Establishing multiple teams focused on operations and
corporate center that analyzed the available information to further refine
the synergy analysis; and (5) Utilizing these teams to build preliminary
integration plans that would provide the basis for future integration.287
_________________________
282 Id.; GPE/KCPL Exh. 22,
Marshall Surrebuttal, pp. 1-19.
283
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28; GPE/KCPL Exh. 22, Marshall
Surrebuttal, pp. 1-19.
284
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
285
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
188.
Upon completion of the preliminary bid and prior to the public announcement
of the merger, Aquila and KCPL worked together to review the analysis and
jointly agreed on key principles such as synergy potential.288 This high
level of analysis and collaboration ensures that the companies will meet
their commitments to customers in terms of synergies and service
quality.289
189.
After the merger was publicly announced in February 2007, integration
planning efforts expanded to include more than 20 integration teams
and 150 employees of both KCPL and Aquila.290
190.
The integration team process is similar to the due diligence process to develop
synergy savings estimates in that the underlying approach was to build the
operating model and cost basis for the combined operations. This
process involves a bottom-up perspective by managers who would likely run the
combined operation, balanced by frequent cross-functional and executive
reviews.291
_________________________
288 Id.
289 Id. Transcript, p. 1524, lines
7-12.
290 GPE/KCPL Exh. 22, Marshall
Surrebuttal, pp. 1-19. See in particular Schedules JRM-5 and
JRM-6. There
were 26 different sub-teams. Transcript, pp.
1423-1424.
291
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules
excluding RTZ-12.
191.
In using employees from both companies to develop and validate the
synergies, the synergy projection is more robust and accurate than typical
valuations conducted during merger analyses.292
192.
The joint-company teams were also involved in a thorough, bottom-up
analysis to identify material opportunities for creating operational and
financial value. A bottom-up analysis involves a detailed assessment
whereby the projected headcount and costs for the companies were
developed through detailed analyses.293
193.
Following the shareholder approvals received in October, integration
planning teams moved to the next phase of planning efforts in anticipation
of the transaction close. In addition to increasing both the
frequency and level of activity, the shareholder vote gave the teams from both
companies greater access to each other’s information.294
194.
All synergy projects were tested and validated at multiple levels within both
companies.295
195.
The Integration Planning Leadership Team (“IPLT”) assessed all potential
synergies to ensure that they met the definition of a synergy. Also,
both companies filed two separate joint proxies in which both companies agreed
to the identified synergies.296
196.
The joint teams used direct analysis of synergies rather than the estimates and
comparison that are sometimes used in other transactions.297
_________________________
292
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
293 Id. For example,
teams built models of their go-forward organizations and used actual salary data
to build labor cost projections. And, the teams have focused on
ensuring that successful operations are achieved at Day 1. Id.
197.
As the integration planning progressed, KCPL worked to address integrated
combined operations in its 2008 business planning process. As such,
the goals, strategies, tactics, and metrics identified to achieve successful
operations included both core KCPL operations and the incremental Aquila
operations.298
198.
To ensure that an evaluated project qualified as a synergy, KCPL utilized a
rigorous process. First, all teams were offered definitions of what
constitutes a synergy. Second, KCPL employees from the regulatory and
finance areas met with each team on a periodic basis to review synergy ideas for
appropriateness and to ensure accurate valuation. Third, all
synergies were tested in IPLT peer review sessions.299
199.
KCPL was supported with outside experts versed in the areas of identifying
potential synergies and opportunity valuation during the whole
process. These experts included Mr. Robert Zabors of Bridge
Strategy Group for synergy identification and analysis; Wallace Buran for
identification of supply chain opportunities; William Kemp for synergy and
process validation and support; and Robert Steinke for plant
operations/generation support and synergy identification. These
outside resources provided an additional level of support for the synergy
projections and merger value.300
_________________________
298 Id.
299 Id. To demonstrate this
review process, the IPLT evaluated a potential synergy project whereby value
would be created by installing environmental controls at Aquila’s Sibley
generating station and selling the incremental allowances. In this
case, the IPLT, with input from Aquila, determined that this was not a synergy
because Aquila had the ability to do this modification in the course of its
normal business. As such, the IPLT modified its plans to recognize
that Aquila had already accounted for capital needs for this
project. Id.
300 Id.; Transcript, p. 1521; See
generally the prefiled and live testimony of Robert Zabors, GPE/KCPL
Exhs. 30 and 31, Transcript, pp. 2888-2928; Wallace Buran, GPE/KCPL
Exh. 6, Transcript, pp. 1532-1549; William Kemp, GPE/KCPL Exhs. 18-19,
Transcript, pp. 1007-1076; Robert Steinke, GPE/KCPL
Exh. 26, Transcript, pp. 1569-1570.
Wallace P. Buran is a
consultant for Bridge Strategy Group LLC, who is under contract to KCPL to
support the integration planning process. His responsibilities
encompass facilitating the discussion and analysis of the supply chain processes
and activities, materials acquisition, materials recovery and salvage and fleet
acquisition and maintenance areas of the two companies to support the
integration planning teams. He received both a Bachelors in
Industrial and Systems Engineering and a Masters in Industrial Engineering from
the Georgia Institute of Technology. He has worked for General Motors
as a Production Foreman, Avon Products as a Distribution Supervisor, Theodore
Barry and Associates as a Partner in the Utility Practice, Advanced Management
Concepts as President, Deloitte Consulting as a Partner and National Director,
WorldCrest Group as Chief Executive Officer, IBM as the Global and Americas
Leader of Operations Strategy Consulting, Monitor Group as a Practice Leader of
the Activities, Processes and Systems Group, and Supply Chain Frontiers
Institute as the Managing Director. During his career, he has
served over 20 Electric Utilities in the Generation, Customer Service,
Distribution and Transmission, Fuels and Power Supply areas. He has
consulted with and/or served as a supplier to: Southern Company, Arkansas Power
& Light, Jacksonville Electric, Florida Power and Light, Carolina Power and
Light, Consolidated Edison, South Carolina Gas and Electric, Southern California
Edison, Oklahoma Gas and Electric and Dayton Power and Light.
Robert F. Steinke is an independent
consultant employed by Bridge Strategy Group L.L.C., a management consulting
firm based in Chicago. He graduated with a degree in Mechanical
Engineering from Steven’s Institute of Technology in 1958 and attended the
Program for Management Development at the Harvard Business School in
1980. He is the President of Robert F. Steinke & Associates, a
consulting firm specializing in power generation management and
operation. He has more than 48 years of consulting and industrial
experience serving the power industry worldwide. For the last 16
years he has specialized in analyzing and making recommendations in the area of
power plant operation and management effectiveness, conducting in-depth power
plant analysis evaluation programs for over 250 fossil and gas-turbine power
plant units worldwide. Prior to founding Robert F. Steinke &
Associates, he was a Vice President at Public Service Electric and Gas Company
(“PSE&G”). He served as a Corporate Officer for five years,
managing the Business and Technical Support department and the Fuel Supply
department. Prior to that, he served as General Manager Fossil
Operations managing and directing the overall operation, maintenance, and
control of seven major fossil power plants and 49 gas turbine
units. He also served in many managerial and supervisory capacities
at PSE&G, for more than 27 years in the Electric Production
department.
Mr.
Steinke conducted in-depth onsite inspections and analysis of the following
Aquila operations: Lake Road power plant, Sibley power plant, all gas turbine
operations, facilities, engineering, support group, and various other management
and executive personnel. At KCPL, he conducted detailed analysis of:
central maintenance facility, turbine overhaul support group, fuel supply
organization, construction support group, and various other management and
executive personnel. He conducted a detailed on-site inspection,
investigation, and analysis of Aquila’s entire generation fleet, and in this
process conducted over 75 detailed interviews with management, staff, and
employees. He reviewed many documents and a considerable amount of
historical data. He conducted detailed three-hour plant inspection
investigations of each facility, and participated in a number of plant
Operations Integration Team meetings with both Aquila and KCPL
staff
|
|
(b)
|
Specifics
of the Integration Planning Process
|
200.
Many of the integration teams were led by individuals involved in the due
diligence process.301
201.
The major differences between the team process and the due diligence process
consisted in the number and level of involvement of people across the
organizations and the ability to share and discuss information across the larger
team and with members of Aquila.302
_________________________
301
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules
excluding RTZ-12.
302 Id. Information
was shared within guidelines established by the legal departments. In
several areas, such as Generation and Power Marketing, the teams did not have
access to all data due to restrictions at this stage of the approval process,
which would have helped refine the analysis. Id.
202.
There was extensive involvement from both Aquila and KCPL management and
employees in integration planning. At the leadership level, there
were ten employees named as team leaders from KCPL, and fourteen employees from
KCPL on subteams. A similar number of employees from Aquila were named to
the teams.303
203.
In order to accurately determine synergy savings from the integration of the
companies, four goals were articulated by KCPL management for the integration
planning process beginning on the morning of the merger announcement,
February 7th, 2007:304
|
|
(1)
|
Capture
the value of the deal;
|
|
|
(2)
|
Position
for sustainable Tier 1 performance;
|
|
|
(3)
|
Prepare
for Day 1 and transition to steady state;
and
|
|
|
(4)
|
Continue
to successfully manage operating
businesses.
|
204.
These goals provided direction to those involved with integration planning, and
reinforced the importance of maintaining operating performance through a long
transition.305
205.
“Tier 1 performance,” as articulated in goal number 2, is a
performance standard that KCPL uses to indicate operating performance in the top
quartile of a relevant peer group. The broader connotation is
a process of understanding benchmarks and best practices and incorporating
them as appropriate to continuously improve business performance.306
_________________________
303 Id. The project structure is
depicted in Schedule RTZ-5. Bridge Strategy Group helped to
structure the process, facilitate group discussions, coordinate project
management activities, and, as needed, support analyses of the
teams. Bridge Strategy Group supported the development of synergy
savings as they relate to the integration of operations and support services of
the two companies, the transition with Black Hills Corporation, and activities
for the merger approval process. Id. See also Transcript, pp.
1423-1425.
305 Id. Another goal
embodied in this process, from KCPL’s perspective
of building a successful culture for the combined operations, is KCPL’s desire
to ensure that activities and decisions were consistent with KCPL’s cultural
standards and aspirations. For purposes of the merger integration
teams, that implies attributes such as collaboration, engagement, respect,
leadership and integrity. Id.
206.
“Day 1,” as used in goal number 3, refers to the first day of
operation of the combined entities.307
207.
There are six steps in the integration planning process, which covers the
timeframe from merger announcement (February 7, 2007) until Day 1
operations. The steps are:308
|
|
(1)
|
Launch
Integrations Teams;
|
|
|
(2)
|
Develop
Common Understanding;
|
|
|
(3)
|
Design
the Path to Tier 1;
|
|
|
(4)
|
Launch
Key “Enabler” Activities;
|
|
|
(5)
|
Develop
Integration Plans and Materials;
and
|
208.
Templates were developed to assist teams and project management with consistency
and completeness.309
209.
The templates were customized for each step of the process and made available on
a common site. For example, financial templates were developed to
aggregate budget information and evaluate synergy projects. Operational
templates were developed to structure discussions on organization, processes,
and information technology (“IT”).310
210.
KCPL’s current Economic Value Added (“EVA”) project assessment model was used
across teams to assess benefits of synergy projects.311
211.
KCPL management held weekly meetings with its team leaders to ensure appropriate
progress and identification of relevant issues.312
_________________________
307 Id.
312 Id. See specifically
Schedule RTZ-5.
212.
A project steering team, which included Aquila leadership, met every other
week.313
213.
Several forums were created to gather input from across the companies to help
identify issues. KCPL executives visited every Aquila and KCPL
location to discuss the integration with employees. The company intranet
contained coverage and included the ability to post questions on the site.
A monthly Integration Insights newsletter was published to communicate to
employees of both companies, and also shared with
Black Hills Corporation. Team leaders and other KCPL
executives made frequent visits to Aquila to promote interaction and
understanding.314
214.
The functional teams, comprised of Great Plains and Aquila employees, worked
together to determine the incremental resources (expenses, capital, and
positions) required in their functional area post-merger close.315
215.
The incremental resources were compared to the baseline Aquila resources to
determine the estimated amount of synergies.316
216.
The baseline selected for calculating the savings was Aquila’s 2006
non-fuel operating and management expense (“non-fuel O&M”) and the capital
plan issued in November 2006.317
_________________________
313 Id.
317
GPE/KCPL Exh. 30, Zabors Direct, pp. 6-13 and Schedule RTZ-1;
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules
excluding RTZ-12; GPE/KCPL Exh. 20, Marshall Direct, pp. 2-5; GPE/KCPL Exh.
22, Marshall Surrebuttal, p. 9.
217.
The baseline of non-fuel O&M expense level, based on 2006 actual spending,
was chosen by KCPL and Aquila to ensure the synergies proposed to be shared with
customers were consistent with the costs currently included in Missouri
rates.318
218.
The level of 2006 actual spending was determined in Aquila’s most recent rate
order at $151 million (Missouri jurisdictional).319
219.
Detailed information regarding baseline non-fuel O&M expense level was
provided to KCPL by Aquila and allocated to each of the integration planning
teams.320
220.
When the 2006 actual budgets were received, early in the integration planning
process, an initial allocation of the costs was made to each Integration
Planning team based on their defined scope, as mapped to the current KCPL
organization. The initial allocation was then reviewed by each team
to ensure that they were addressing the proper cost base and had properly
defined their scope.321
221.
Each integration team project provided a net synergy
calculation. This calculation nets the synergy benefit against all
costs including capital costs and costs to achieve.322
222.
The synergies from each team were then combined to determine the total
estimated synergies resulting from the transaction.323
_________________________
318 Id. Subsequent to
the announcement of the merger, Aquila received final rate orders in both of its
Missouri electric jurisdictions. The Missouri costs that were the
foundation for the Orders in those cases were compared to 2006 actual
information that was allocated to the Missouri jurisdictional operations.
In collaborative reviews with Aquila, the two sets of data were seen as
consistent. Id.
321
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules
excluding RTZ-12.
322 Id. Details on
specific projects are included in the testimony of several KCPL witnesses,
including John Marshall, William Herdegen, Dana Crawford and Kevin
Bryant. Id.
323
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules
excluding RTZ-12.
223.
The teams determined synergies over a five year period, with a pro forma
start date of January 1, 2008, although the teams assumed the actual merger
close date would be some time in the first quarter of 2008.324
224.
Because the majority of synergies continue over time, those synergies were
escalated by 3.1%, which is the 3-year average of the consumer price index for
utilities (CPI-U). This is a conservative assumption relative to more
recent CPI figures.325
|
|
b.
|
Calculated
Synergy Savings – Summary
|
225.
Operational synergies identified in due diligence pointed to $264 million
over a five-year period ending 2012.326
226.
Synergies increased with the functional team analysis when compared to the
estimates developed in due diligence.327
227.
The functional team analysis of operational synergies determined there were $305
million in operational synergy savings, exceeding estimates from due diligence
by $41 million. A direct comparison between the two reveals that
projects relating to non-fuel O&M or revenue/purchased power were not
reported separately in due diligence.328
228.
Due to the nature of the bottom-up projections, anticipated cost increases were
reflected in specific budget line items within business areas instead of
applying a single escalation factor to all items.329
_________________________
324 Id.
328
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules
excluding RTZ-12. See Schedule RTZ-6 in
particular. Additionally, Schedule RTZ-8 enables a functional
team analysis comparison to due diligence, which was categorized as operations
(including customer service) and services. See also GPE/KCPL Exh. 37,
Bassham, Additional Supp. Direct, p. 3. Transcript, pp.
275.
329
GPE/KCPL Exh. 30, Zabors Direct, pp. 6-13 and Schedule RTZ-1; GPE/KCPL Exh. 20,
Marshall Direct, pp. 2-5.
229.
The expenses were projected on a quarterly basis for 2008 and an annual basis
thereafter, so the bottom-up estimates would be far more reflective of actual
conditions than applying a standard escalation.330
230.
Five- year synergy detail is depicted as follows:331
231.
The functional teams expect synergies to extend beyond the five-year
period. In addition, KCPL is investing in multiple areas in which the
value of the synergy will provide increasing levels of value after the five-year
period.332
232.
To quantify the value of synergies beyond the five-year period, if the synergies
in year five are escalated at the inflation rate through year ten, the
total synergies created would total $755 million.333
_________________________
330 Id.
331
GPE/KCPL Exh. 31, Zabors Supp. Direct, Schedule RTZ-8.
332
GPE/KCPL Exh. 30, Zabors Direct, pp. 6; GPE/KCPL Exh. 21, Marshall Supp. Direct,
pp. 5-6.
333
GPE/KCPL Exh. 31, Zabors Supp. Direct, pp. 1-15 (See p. 8 in particular) and
accompanying schedules excluding RTZ-12. Operating expenses related to the
savings are included in these figures. And the projects (non-fuel
O&M and purchased power) included a fixed charge for
capital. Id.
See also GPE/KCPL Exh. 37, Bassham, Additional Supp. Direct, p.
3.
233.
These amounts represent total savings. On a Missouri jurisdictional
basis, total synergies are equal to $549 and $222 million for ten and five
years, respectively.334
234.
All amounts shown in Findings of Fact Numbers 227-233 above represent
projected savings directly attributable to the merger.335
|
|
c.
|
Calculated
Synergy Savings – Components
|
235.
With regard to the specific components comprising the general categories of
synergies described generally in Findings of Fact Numbers 227-233, the
Commission has received extensive, detailed pre-filed testimony from the
following witnesses: Buran, Cheatum, Crawford, Kemp, Herdegen,
Marshall, Steinke, Tickles, Van Dyne, and Zabors.
236.
On May 9, 2008, pursuant to the Commission’s order, the Applicants
identified specific portions of the prefiled testimony of witnesses Kemp,
Marshall and Zabors in relation to synergy savings that were no longer relevant
to the merger proposal because of the proposal’s revisions.336 Those
irrelevant portions are as follows:337
|
|
William Kemp – Supplemental
Direct Testimony (Hearing Exhibit No.
18)
|
|
|
a.
|
Page
4, line 22 – page 5, line 1 (“I will not address … to this
transaction.”);
|
|
|
b.
|
Page
5, lines 9-10 (in entirety);
|
|
|
c.
|
Page
24, lines 1-18 (in entirety);
|
|
|
d.
|
Page
26, lines 6-10 (“from KCPL’s proposal … through to
customers.”);
|
_________________________
334
GPE/KCPL Exh. 37, Bassham, Additional Supp. Direct, p. 3.
335
GPE/KCPL Exh. 30, Zabors Direct, pp. 6-13 and Schedule RTZ-1; GPE/KCPL Exh. 20,
Marshall Direct, pp. 2-5. In addition, both Aquila and KCPL had
previously undergone significant cost reduction and efficiency efforts and had
reflected resulting savings in their respective “stand-alone” company
projections. Id.
336 See
Identification Of Evidence
That Is No Longer Relevant To The Joint Application, filed on May 9,
2008. EFIS Docket Number 386.
|
|
e.
|
Page
26, line 10-11 (“after 2012”);
|
|
|
f.
|
Page
26, line 11 (“also”);
|
|
|
g.
|
Page
27, lines 1-2 (in entirety); and
|
|
|
h.
|
Page
27, line 18 – page 28, line 2 (in
entirety).
|
William Kemp – Surrebuttal Testimony
(Hearing Exhibit No. 19)
|
|
a.
|
Page
2, lines 14-22 (in entirety).
|
John Marshall – Direct Testimony
(Hearing Exhibit No. 20)
|
|
a.
|
Page
3, line 20 – page 4, line 4 (in
entirety).
|
John Marshall – Surrebuttal
Testimony (Hearing Exhibit No. 22)
|
|
a.
|
Page
6, lines 16-22 (in entirety); and
|
|
|
b.
|
Schedule
JRM-8, Title (“with customers capturing 80% of the value”). Also, because
the Applicants have withdrawn their request for approval of a synergy
sharing mechanism, the designation of benefits flowing to “KCPL” and
“Customers” in the bar graph and accompanying table in Schedule JRM-8 is
no longer relevant. The “Total” figures depicted in the bar graph and
chart, on the other hand, continue to be
relevant.
|
Robert Zabors – Direct
Testimony (Hearing Exhibit No. 30)
|
|
a.
|
Page
12, lines 6-9 (in entirety);
|
|
|
b.
|
Page
14, lines 8-10 (in entirety); and
|
|
|
c.
|
Schedule
RTZ-1, the row labeled “Interest.”
|
Robert Zabors – Supplemental
Direct Testimony (Hearing Exhibit No. 31)
|
|
a.
|
Page
8, lines 16-18 (“Of that, net … $341 million.”);
and
|
|
|
b.
|
Schedule
RTZ-12: Because the Applicants have withdrawn their request for approval
of a synergy sharing mechanism, the designation of benefits flowing to
“GPE” and “Customers” in the table on Schedule RTZ-12 is no longer
relevant. The “Total” figures, on the other hand, continue to be
relevant.
|
237.
The Commission finds the sections of witnesses Buran, Cheatum, Crawford, Kemp,
Herdegen, Marshall, Steinke, Tickles, Van Dyne, and Zabors prefiled
testimony that provide the component analyses of the over-all synergy
calculations (with the exclusion of the irrelevant materials identified in
finding of Fact Number 236) to be accurate and supported by proper
methodology. Consequently, the Commission will adopt these portions
of witnesses Buran’s, Cheatum’s, Crawford’s, Kemp’s, Herdegen’s, Marshall’s,
Steinke’s, Tickles’, Van Dyne’s, and Zabors’ prefiled testimony as findings
of fact in support of the overall synergy calculations.338
_________________________
338 In
fact, as other Findings of Fact in this section will describe, this evidence is
virtually unconverted. The Commission will not repeat that testimony
in its Findings of Fact section, but notes that it is sufficiently identified
for the parties in Findings of Fact 235-238.
238.
The Commission adopts the following testimony as findings of fact:
a) GPE/KCPL
Exh. 6, Buran Supp. Direct, pp. 2-27, and the accompanying schedules;339
b) GPE/KCPL
Exh. 7, Cheatum Supp. Direct, pp. 2-3;340
c) GPE/KCPL
Exh. 11, Crawford Direct, pp. 2-6 and GPE/KCPL Exh. 12, Crawford, Supp. Direct,
pp. 1-9 and the accompanying schedules;341
d)
GPE/KCPL Exh. 16; Herdegen Direct, pp. 3-8 and GPE/KCPL Exh. 17, Herdegen Supp.
Direct, pp. 2-22;342
e) GPE/KCPL
Exh. 20, Marshall Direct, pp. 2-5, GPE/KCPL Exh. 21, Marshall Supp. Direct,
pp. 1-22 and GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-11;343
f)
GPE/KCPL
Exh. 26, Steinke Direct, pp. 2-8;344
g) GPE/KCPL
Exh. 27, Tickles Supp. Direct, pp. 1-6;345
_________________________
339 See
also Transcript, pp. 1532-1548 (Synergy Savings).
340 See
also Transcript, pp. 1501-1531 (Synergy Savings).
Lora Cheatum is employed by
KCPL as Vice President of Administrative Services. Her general
responsibilities include Human Resources, Purchasing and Facilities for
KCPL. She holds an undergraduate degree from Washburn University in
Topeka and an MBA from the University of Kansas. She has held
numerous Human Resources positions with both PepsiCo and Wal-Mart since 1986,
and joined KCPL on September 11, 2001 as the Director of Human Resources for the
Delivery Division and was promoted to Vice President of Administrative Services
in March of 2005. She has previously testified before the
Commission.
341 See
also Transcript, pp. 1549-1569 (Synergy Savings).
342 See also Transcript, pp. 2238-2316
(Service Quality, Synergy Savings)
343 See
also Transcript, pp. 1076-1217 (Synergy Savings).
344 See
also Transcript, pp. 1569-1571(Synergy Savings).
345 See
also Transcript, pp. 1572-1579 (Synergy Savings).
Charles H. Tickles is employed
by KCPL as the Senior Director of Information Technology. His
responsibilities include management and coordination of all corporate
information technology business applications, corporate IT architecture and
infrastructure including telecommunications. He graduated from the
University of Kansas in 1980 with a Bachelor of Science degree in Mechanical
Engineering. In 1993, he completed the Edison Electric Institute
Senior Middle Management Program and in 2001 he graduated from the Rockhurst
University Executive Fellows Program with a Master of Business Administration
degree. He began employment at KCPL in 1980 as a Grade I Engineer and
was promoted to a Grade II Engineer in 1984. Subsequently, he served
as Superintendent of Computer Applications from 1984-1988, Manager of Computer
Applications from 1988-1994, Manager of System Applications from 1994-1996 and
Director of Information Systems from 1996-2000. In 2000, he became
Senior Director of Information Technology, the title he holds today.
h) GPE/KCPL
Exh. 28, Van Dyne Supp Direct, pp. 1-5;346
i) GPE/KCPL
Exh. 30, Zabors Direct, pp. 6-13 and accompanying schedules and GPE/KCPL Exh.
31, Zabors Supp. Direct, pp. 1-15 and accompanying schedules excluding
RTZ-12.347
239. The
Commission further adopts Mr. Kemp’s prefiled testimony in its totality as
findings of fact (with the exclusion of the irrelevant materials identified in
Finding of Fact Numbers 236), but his testimony will also be considered in depth
in another portion of this order and additional specific findings regarding his
testimony will be made in relation to his testimony at that time.348
_________________________
346 See
also Transcript, pp. 1611-1645 (Synergy Savings)
Paul Van Dyne is employed by
KCPL as the Director of Compensation and Benefits. His responsibilities include
supervision of the compensation, benefits and Human Resources Services groups of
the company. He has a BA from Penn State and a MA from the University
of Kansas and is a Certified Compensation Professional and a Certified Employee
Benefits Specialist. He has 30 years experience in the human
resources, compensation and benefits field. He became an employee of
KCPL on August 15, 2006. Most immediately prior to this he was the
Vice President of Compensation and Benefits for Mutual of Omaha
(3 years). Prior to that he was: Director of
Compensation for FBD Consulting, Inc. (6 years); Senior Vice President of
Personnel for NationsBank/Bank of America (2 years); Director of Compensation
and Benefits for American General Finance (14 year); and he held various human
resources positions with Payless Cashways, Inc., Realex Corporation and St.
Joseph Medical Center in Wichita, Kansas.
347 See
also Transcript, pp. 1400-1430 (Synergy Savings).
348
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 3-28 and accompanying schedules;
GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15. See Findings of Fact
Numbers 248-315.
|
|
d.
|
Synergy
Sharing versus Synergy Retention
|
240. As
previously noted, synergies were estimated based on a detailed evaluation by the
transaction integration teams, including members of Aquila and KCPL management
and individuals responsible to achieve the synergies. 349
241. The
amount of synergies or benefits contained in the original request filed on
August 8, 2007 has not changed.350
242. In
February 2008, the Applicants’ withdrew their original request concerning
synergy sharing stating:
The Joint
Applicants withdraw their request for a specific synergy savings adder and
instead propose to utilize the natural regulatory lag that occurs between rate
cases to retain any portion of synergy savings. The Joint Applicants
believe that this will result in benefits to customers in every year after the
close of the transaction. Both Aquila and KCPL will file rate cases
in 2008 to include in rate base new environmental plant at Iatan 1 and, in
the case of Aquila, to include new environmental plant at
Sibley 3. Both Aquila and KCPL will file rate cases in 2009 to
include in rate base the newly constructed Iatan 2 generation
unit. Synergy savings will be included in the test year cost of
service of those rate cases, allocated to all jurisdictions, and flowed through
to customers in rates effective in 2009 and 2010. Great Plains Energy
proposes to retain only those synergies achieved between rate cases in excess of
those synergies previously included in rates.351
243. The
Applicants revised merger plan proposes to rely on the natural regulatory lag
that occurs between rate cases to retain any portion of synergy
savings. The traditional ratemaking process will be used so that any
merger synergy savings in a test year will be passed through to Aquila and KCPL
customers in future rate cases.352
_________________________
349
GPE/KCPL Exh. 37, Bassham, Additional Supp. Direct, pp. 3. See
Findings of Fact Numbers 186-224.
351 Id. at pp. 3-4. The
Applicants originally proposed that KCPL and Aquila be permitted, collectively,
to retain fifty percent (50%) of merger-related synergy savings for five years,
beginning on January 1, 2008, or the month immediately following the
consummation of the merger, whichever occurs last. GPE/KCPL
Exh. 29, Wright Direct, p. 5; GPE/KCPL Exh. 1, Bassham Direct, p.
10. Total non-fuel operating synergies were
$305 million. After subtracting transition-related costs of
$45 million and using the 50/50 synergy sharing ratio, synergy sharing
would have been $130 million over five years. GPE/KCPL Exh. 2,
Bassham Supp. Direct, p. 8.
352
Transcript, p. 1219-1220.
|
|
e.
|
Synergy
Savings Tracking
|
244. Tracking
synergy savings with any degree of accuracy is problematic at
best. Business operations are not conducted in a static environment,
but rather under constant change, including customer growth, technological
improvements, etc. Tracking will become more difficult each
successive year after the merger.353
245. If
the Commission requires synergy tracking, the Applicants suggest a simple
approach, noting that additional complexity does not improve
accuracy. The Applicants suggest establishing base period costs and
then comparing each subsequent year’s actual costs to the base year costs, as
adjusted for inflation. The net decrease in expense would be
considered synergy savings.354
246. Consideration
for known and measurable changes shall be reflected in the synergy savings
computation, including cost escalations, such as wage increases and the effects
of inflation among others.355
247. Applicants
recommend 2006 as the base year for synergy savings tracking because that year
represents the last full year of operations unaffected by the
merger. It is also the test period for Aquila’s most recent rate
case, Case No. ER-2007-0004, and the test period of KCPL’s most recent rate
case, Case No. ER-2007-0291. Consequently, the base year of 2006
provides a good test period for both Aquila and KCPL to evaluate synergy savings
to be accomplished as a result of the merger.356
_________________________
353
GPE/KCPL Exh. 29, Wright Direct, p. 5; GPE/KCPL Exh. 1, Bassham Direct, p.
10;
355
GPE/KCPL Exh. 29, Wright Direct, p. 6.
|
|
3.
|
Reasonableness
of the Projected Synergies
|
248. An
important measure of the public interest test is the long term effect on rates
to customers. Any type of attributable cost or benefit that would be
included in the cost basis for regulated rates should be considered in synergy
estimates.357
249. In
general, the operational model for a new entity after the closing of a merger
can affect the range of synergies that can be accessed. If the
utilities’ service territories are geographically separated by a significant
distance (e.g., AEP-C&SW or MidAmerican-PacifiCorp), many types of
synergies in generation, transmission, and distribution operations may not
be accessible. Similarly, if the new entity plans to
maintain substantial corporate separation between the predecessor companies
(with their own management teams, headquarters facilities, etc.), some
elements of back office synergies may not be accessible.358
250. The
post-transaction operational model planned by Great Plains will allow the full
range of synergies to be accessed. One of the major drivers
of synergy benefits for this transaction is the geographic proximity of the two
companies’ utility operations. Their service territories form a
compact, contiguous area. There is no geographic barrier to accessing the
full range of synergies.359 This
proximity enhances synergy potential as the overlap in operations results in
similar operating models and fossil fuel generating fleets, the Corporate
centers are within a few blocks of one another, the companies share common
values, numerous employees have worked for both companies and employees of both
companies have worked together on numerous industry and community ventures.360
_________________________
357
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
359 Id.; GPE/KCPL Exh. 22,
Marshall Surrebuttal, pp. 1-19.
360
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19. This analysis revealed that
Great Plains’ synergy estimates showed significantly higher savings in areas
such as customer service, distribution, and A&G due to the fact that KCPL
and Aquila have adjoining service territories, are similarly sized, and have
complementary operating strengths. GPE/KCPL Exh. 18, Kemp
Supp. Direct, p. 21. Transcript, p. 1065. Kemp’s detailed
comparisons appear in Exh. 18, pp. 19-21.
251. KCPL
and Aquila formed joint teams of internal experts around each of their major
operational functions. These teams followed the same general steps in
developing their synergy estimates:361
a. Define
the scope of their functional area, resolve any boundary issues with other
teams, and establish sub-teams to address sub-functions in more
detail.
b. Establish
the base 2006 costs related to their area, and document the
existing business processes.
c. Review
the combined level of expected business activity in their assigned functions,
and the combined resource level (labor and non-labor).
d. Define
the operating model for the combined function, and estimate savings from its
implementation. In most cases KCPL’s operating model was extended conceptually
to cover the additional Aquila operations, but in some instances this was
reversed.
e. Screen
all the other improvement opportunities suggested by the sub-teams,
and decide what was large and tangible enough to include in the synergy
estimates.
f. Estimate
the reductions to resource levels and associated costs over the 2008
to 2012 period.
g. Estimate
any costs to achieve the resource savings.
h. Obtain
sign-off from the Great Plains Energy/KCPL executive who will be responsible for
meeting the synergies targets.
252. For
ratemaking purposes, separate rate bases will be maintained for KCPL,
Aquila/MPS, Aquila/SJLP electric, and Aquila/SJLP steam.362
_________________________
361
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
362
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
253. The
integration team method of determining synergy savings is generally the same
method used by other utilities. Knowledgeable functional
teams drill down into their own areas of expertise, and come up with their best
estimates of the savings that are reasonably achievable.363
254. KCPL’s merger synergy estimation
methodology was comprehensive. All functions were assigned to
one or more teams. The teams addressed as a first order of business
any boundaries issues between their areas, to ensure that all cost items
belonged to one and only one team. 364
255. KCPL
also performed a top-down check to verify that the sum of the non-fuel
O&M costs across their areas was equal to the companies’ total non-fuel
O&M costs. 365
256. KCPL’s teams appropriately identified
and quantified costs to achieve the estimated gross synergies.366
257. KCPL’s merger synergy estimates are
reasonably current and have not changed. The base cost data
were from the most recent available year, i.e., 2006. KCPL’s
base data were its recorded actual costs. Aquila’s base cost data were
from a management report provided by Aquila in June 2007, which matched the
aggregate approved revenue requirement for its Missouri jurisdiction. Its
resource data (filled positions, customers, etc.) were from a management
report prepared for KCPL in July 2007. These were reliable and current
sources for the data.367
_________________________
363 Id.
367 Id.; GPE/KCPL Exh. 37,
Bassham, Additional Supp. Direct, filed February 25, 2008, pp.
3. Hart-Scott-Rodino restrictions on sharing competitively
sensitive information initially restricted KCPL’s access to detailed
information in the generation area, but the available public data were
adequate. Id. These
restrictions were later lifted allowing full access. See Finding of
Fact Number 156.
258. KCPL’s merger synergy estimation
methodology is unusually detailed. The functional teams
drilled down to a level of detail that is typically not achieved until the
completion of detailed integration planning just prior to transaction close.
Estimated synergies in each area were built up from detailed
analyses of their constituent sub-areas, i.e., bottom-up estimates
were preferred. Top-down estimates based on high-level assumptions or
comparative data were used mainly as reality checks, to validate the
bottom-up estimates.368
259. KCPL’s merger synergy estimates are
attributable. Only created or enabled synergies were
counted. In several cases, significant benefits were identified but
excluded from the synergies estimates, because they were benefits not directly
related to the merger. For example, KCPL witness Buran explains that
the estimates of supply chain synergies did not include additional savings
related to growth in system sales and spending, because this system growth is
driven by the merger.369
260. KCPL’s merger synergy estimates are
quality assured. Quality control procedures were implemented
on several levels. The functional teams checked their own work and
reviewed the work of other teams. Outside consultants facilitated the
analytical process and also conducted quality assurance reviews. The
transaction team, which included KCPL and Aquila personnel, assessed the quality
and reasonableness of the estimates as they rolled up to the enterprise
level. Finally, KCPL senior executives reviewed and approved the estimates,
and took responsibility for achieving the targeted benefits.370
_________________________
368
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
261. KCPL’s merger synergy estimation
methodology is conservative. The functional teams screened out
hard-to-quantify benefits, even if potentially significant. They
deliberately chose estimates in the low to middle end of the potential savings
ranges, when such ranges were available for consideration. Overly aggressive benefit estimates
were screened out. As noted above, the involvement of
sponsoring executives ensured that implementation plans were realistic.371
262. The
nominal value of KCPL’s estimates of the synergies that could be achieved
through its merger with Aquila’s Missouri electric operations amounts to $305
million over the 2008 to 2012 period.372
263. KCPL’s estimated synergy savings are
comparable to other utility merger transactions.373
_________________________
371 Id. Mr. Kemp also
found that the synergy estimates were assured because KCPL senior executives had
reviewed and approved the estimates and “took ownership” for achieving the
targeted benefits. Id. at 12. Taking
ownership of the implementation of synergies is a necessary step to achieve the
estimated levels of savings. Transcript, p. 1068.
372 Id. See also
GPE/KCPL Exh. 30, Zabors Direct, Schedule RTZ-7.
373 Id. Mr.
Kemp testified that
in order to compare KCPL’s synergy estimates to the synergies in other utility
mergers, he classified both the base 2006 costs and the estimated synergies into
six major functional areas: Generation, Transmission, Distribution, Customer
Service, Sales, and Administrative & General (A&G). These
groupings correspond to the functional groups of accounts in FERC’s Uniform
System of Accounts. Since KCPL’s synergy estimates are grouped in
categories that are not explicitly aligned with FERC’s definition of functions,
he assigned each line item in KCPL’s estimates to the appropriate FERC function,
based on KCPL team leaders’ descriptions of the type of costs in the line
item. The synergy estimates in the supply chain process area were
allocated by KCPL to the Supply (Generation), Corporate (A&G), and Delivery
teams. The Delivery team includes the Transmission, Distribution, and Customer
Service functions. For comparative purposes, Mr. Kemp allocated the supply chain
synergies in Delivery to its constituent functions according to each function’s
share of the base non-fuel O&M expense. He also focused on the
savings for the third calendar year of the synergies estimation period (i.e.
2010), again to make the data more comparable to his analyses of other
transactions. The year 2010 is fairly representative of the average annual
synergies for KCPL over the 2008-2012 period. By that time all of the
major synergy related initiatives should be gaining full
traction. The 2010 KCPL synergies were deflated to 2006 dollars using
the same CPI assumptions as the other KCPL witnesses, to put the synergies on
the same real basis as the base year costs. Finally, Mr.
Kemp excluded fuel and purchased power costs from his comparisons of
realized synergies, as the data from transaction to transaction for this type of
cost are so heavily influenced by regional energy market factors and commodity
price cycles that they are not meaningful to compare. Since the
absolute level of pre-transaction base costs varies widely, according to the
size of the companies Mr. Kemp used in the comparison, it would not be
meaningful to compare absolute synergies. Rather, quantified synergy levels
across different transactions are typically compared on the basis of percentage
of base costs. Id.
264. The
2010 total non-fuel synergies of $55 million ($51 million in 2006
dollars) amount to 10 percent of the combined 2006 non-fuel O&M costs of
KCPL and Aquila.374
265. These estimated synergy levels are
reasonable. A total non-fuel savings level of 10 percent
is above average for a utility-utility merger, but is expected for a transaction
between neighboring firms that can access the full range of synergies.375
266. The
level of achievable synergies is affected by many factors. Some of
the more important factors are:376
a. Relative
size. Similarly sized companies have greater synergy
opportunities. Acquisitions of smaller companies by much larger
companies do not affect combined costs as much on a percentage
basis.
b. Relative
operating performance. Greater synergies can be achieved if one company has
significantly lower unit costs or superior service quality. Its practices
can be transferred to the other company. This is also true on a
functional level, e.g., leveraging one company’s better distribution
O&M practices.
c. Proximity.
Neighboring or overlapping service territories make greater
synergies possible in both field and corporate operations.
d. Need
for capacity. Reductions in capital expenditures for new generation
or transmission capacity will be larger if one utility has a long position
(i.e., more than adequate capacity) and the other has a more pressing
capacity need.
e.
Corporate and management culture. Benefits can be larger if one of the
companies (especially the dominant partner) has superior project execution
capabilities or has demonstrated an ability to achieve superior operating
results relative to its peers.
_________________________
374
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
267. A
review of the data on the proposed merger shows that all of these factors
line up to increase the synergies that could be achieved through
this transaction.377
268. Essentially
two types of synergy data are available from other utility transactions that can
be compared to KCPL’s estimates:378
a. Announced
synergies data can be obtained from press releases and SEC filings at the time
an intended transaction is publicly disclosed. Typically these data are
aggregate and not escalated, e.g., “$1 billion in savings over the first 10
years.” In describing the strategic rationale for the transaction,
the major areas of expected benefit may be mentioned (e.g., back office
consolidation, economies of scale in generation operations), but the total
synergy number is almost never broken down into its component
pieces. Not infrequently, no specific synergy number is disclosed,
and the benefits are described only qualitatively.
b. Realized
synergies are the actual reductions in real costs (or merger-related increases
in revenue) that are achieved by the merged company. Data on realized synergies
are most reliably and consistently obtained from utilities’ annual filings to
FERC on their actual costs of utility operations (FERC Forms 1 and
2). These data must be reviewed carefully, as organizational changes,
changes in operating models, one-time events (large storms or extreme weather),
changes in accounting methods, changes in industry structure, and subsequent
M&A transactions can distort the filed costs.
269. KCPL’s
estimated synergies, as a percentage of either total O&M or non-fuel
O&M, are above the average announced synergies for utility merger
transactions in the U.S. in the past ten years.379
270. Compared
to 26 other utility merger transactions across all energy utility types,
KCPL’s percentage savings are well into the upper half of the range.380
_________________________
377 Id.
379 Id. Mr. Kemp
testified that since the announced synergies from other transactions typically
do not distinguish between fuel and non-fuel synergies, he used KCPL’s total
estimated 2010 synergies - including fuel savings - of $62 million ($55 million
in 2006 dollars) for this comparison. Id.
380 Id. Only 3 of 26
transactions have higher synergies as a percentage of total O&M, and only 7
of 26 have higher synergies as a percentage of non-fuel O&M. See
Schedule WJK-4. The transactions with higher announced synergy
percentages generally were expected to benefit from large fuel or purchased
energy savings, as generation fleets or gas contract portfolios were
integrated. This area of costs is a future upside for KCPL Aquila, as
the estimated synergies do not include any benefits from joint generation and
transmission dispatch. Id.
271. KCPL’s
estimated synergies are higher than the median level of realized synergies in
other comparable transactions.381
272. KCPL’s
estimated synergy savings are greater than the median for Transmission,
Distribution, Customer Service, and A&G, less than the median for Generation
Non-Fuel O&M and the Sales function (which is a very small part of utility
costs), and overall significantly higher than the median for total non-fuel
O&M.382
273. The range of 7-10% is a reasonable
general expectation for total non-fuel synergy savings. This
is based on synergies estimates and realized synergies across a large number of
proposed combinations. Expectations for KCPL and Aquila, at 10%
synergy savings, are at the upper end of this typical range.383
274. The KCPL-Aquila pairing has unusually
broad opportunities for savings, as noted above in listing the factors
that drive the level of achievable benefits. They are similarly
sized. They have complementary operating strengths (e.g., KCPL
in generation and transmission and distribution (“T&D”), Aquila in customer
service operations) that enable transfer of better practices and creation of
substantial savings. They have adjoining service territories, which
increases potential operating and corporate synergies. They have differing
and complementary capacity positions through the medium term. KCPL
and Aquila’s geographic fit gives the combined companies natural advantages for
achieving synergies in T&D operations.384
_________________________
381 Id. Mr. Kemp
testified that he compared inflation-adjusted cost changes for the categories of
Generation Non-Fuel O&M, Transmission O&M, Distribution O&M,
Customer Service, Sales, and Administrative and General. Id.
384
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
275. KCPL’s synergy estimates both on a
stand-alone basis and in the context of industry experience are reasonable and
conservative. At least four separate lines of corroborating
evidence support the conclusion that the estimates are reasonable and
conservative.385
276. KCPL’s
estimates tend to exceed the industry averages because KCPL and Aquila are
neighboring utilities who can access an unusually broad range of synergies.386
277. Mergers
are complex transactions that entail many risks. There are strategic
risks around the choice of business models and transaction
partner. There are transaction risks around quality of due diligence,
pricing of the transaction, etc. There are execution risks around the
successful integration of the two organizations. 387
278. If
the merger does not produce the intended net benefits due to any of these risks,
the shareholders will pay a price through lower rates of return or decreased
equity value. Shareholders shoulder much of this
risk. They bear the costs of the pre-transaction efforts, which could
yield no benefits if the transaction does not go forward. They also
support up-front financing of transaction costs and costs to achieve.388
279. The utility industry has a generally
positive track record on mergers and significant cost savings are normally
achieved.389
_________________________
385 Id. at p.
22. See also Footnote 407.
386
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
280. The level of hard, attributable
benefits actually realized through merger transactions is typically in the range
of 125 to 175 percent of the announced synergies.390
281. Customers
of KCPL and Aquila will benefit, because to the extent that synergies are
realized, they will flow through to customers. This is true because
KCPL plans to file base rate cases every one or two years for the foreseeable
future, so any cost reductions that are achieved would be reflected in the
actual costs that are used to establish base rates.391
|
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4.
|
Controverting
Evidence Regarding the Reasonableness of the Calculated Synergy
Savings
|
282. With
regard to synergy savings, the Commission finds the testimony of GPE/KCPL’s
witnesses, Buran, Cheatum, Crawford, Kemp, Herdegen, Marshall, Steinke, Tickles,
Van Dyne, and Zabors to be significantly more credible and substantial than the
testimony of Staff’s witness Schallenberg, Public Counsel’s Witness Dittmer, and
the Industrial’s witness Brubaker.
283. Contrary
to Staff’s position in pages 77-80 of its Report, adjusting actual costs by
the CPI index, when comparing pre-transaction vs. post-transaction costs
for merged utility companies is a basic logical requirement, when analyzing
costs across a time series. Otherwise, cost comparisons will be
distorted by the effects of inflation.392
_________________________
390 Id. Mr. Kemp
testified that in his considered opinion that the level of synergy benefits that
will ultimately be achieved through the merger will be substantially greater
than KCPL’s current synergy estimates. Joint dispatch of generation
and transmission assets could add large benefits, once ISO issues are resolved.
Also, due to the ability of competent utility management to find additional cost
reductions or revenue enhancements as they dig deeper into the detail of
integration planning, synergies tend to expand rather than
contract. Id.
392
GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15. Inflation
represents increases in the prices of goods and services (and the inputs
required to produce them), not increases in the volume of those goods and
services. Inflation, or the decrease in the value of the currency
(the U.S. dollar in this case) was running in the range of 2 to
4 percent per year in the time period of this realized synergies
analysis.
284. Inclusion
of inflation when valuing the synergies was conservative because cost
projections were compared against actual 2006 Missouri electric expenses (the
baseline). An escalation factor was applied to the budgets and to the
baseline to ensure that the effects of inflation were not ignored and that the
2006 baseline was suitable for analysis. The savings versus baseline represent
synergies.393
285. It
is prudent to adjust for the effects of inflation on the operating costs (in
nominal dollars) that were reported to FERC by the utilities covered in the
synergies analysis. Dollars adjusted for inflation are called “real
dollars,” and comparisons using real dollars are not distorted by inflationary
effects.394
286. It
is reasonable to use the CPI to adjust utility operating costs for the effects
of inflation because the CPI is the most widely cited measure of
inflation. It is commonly used as a basis for restating nominal
dollars into real dollars. The CPI is broadly reflective of utility
non-fuel operating and maintenance costs, enjoys wide acceptance, and is easily
understood.395
287. Use
of the CPI is also reasonable because about one-half of the typical utility’s
non-fuel O&M expenses are labor-related. The price of that labor
is closely related to changes in the CPI, as employees seek to keep themselves
whole for the effects of inflation on their living expenses. Their
expenditures range across the cost categories included in the CPI. In
fact, many labor agreements reference the CPI as the basis for changes in labor
rates. So as the CPI changes, so do the labor-related costs of
utilities.396
_________________________
393
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
394
GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15. The Commission adopted
the use of inflation or escalation indices in prior proceedings. For
example, in KCPL’s most recent rate case, Case No. ER-2007-0291, Staff used
the Handy Whitman Index in calculating the Company’s non-labor production and
transmission and distribution adjustments. In its Cost-of-Service Report in that
case, Staff stated that these adjustments were consistent with the methodology
adopted by the Commission in Case No. ER-2006-0314. Id.
396
GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15. The Commission’s
general policy against adjusting historical costs for inflation, when
determining historical test year costs, does make sense in the intended context,
a rate-making case. The reason that many commissions prefer a
historical test year is that cost forecasts are considered too
speculative. Use of a historical test year avoids dispute about how
to move from recorded actual (i.e., historical) costs to future costs during the
effective rate period. However, that situation is a far cry from the
widely accepted practice of restating costs from nominal dollars to real
dollars, when making comparisons (outside of a ratemaking context) of costs
across time, i.e. such as in this merger case. Staff apparently
believes that the Commission should consider only “actual” (i.e., nominal) costs [Staff
Report, page 77]. The basis for this position is stated on page
79. Staff cites a number of Commission decisions in which it declined
to allow historical test year costs to be adjusted for inflation through use of
a CPI index. Mr. Kemp’s analysis compared inflation-adjusted
actual operating costs, as reported to the FERC. He did not compare
allowed revenue requirements. A revenue requirements comparison would
show how costs were treated for ratemaking purposes, but would be subject to
serious shortcomings as a method for analyzing whether the merged companies
reduced their costs and became more efficient. Id.
288. Use
of the CPI to calculate real synergy savings is conservative for two
reasons. First, the CPI understates the level of inflation in the
non-labor portion of utility non-fuel O&M expense. If an index
with a greater increase than the CPI had been used to deflate the
post-transaction costs of the utilities in KCPL’s analysis, the decreases in
real costs would have been larger. Second, to the extent that unit
sales (kwh) and numbers of customers increased in the four years between the
pre-transaction cost data and the post-transaction cost data – as they did in
all cases – adjusting the post-transaction costs by only the CPI would not
capture the full gains in efficiency realized by the merging utilities.397
289. It
is also appropriate to exclude Uncollectible Accounts from the comparison of
pre-transaction and post-transaction costs for the Customer Service function of
the combined utility companies because:398
_________________________
397 Id. A more
comprehensive (but less conservative) measure of gains in input-output
efficiency would involve increasing the pre-transaction costs of the separate
companies by both inflation and an index of increased output levels, and
comparing those adjusted costs to the post-transaction costs of the combined
companies. KCPL not including this output-related adjustment is more
conservative. Id.
398
GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15. Contrary to the Staff’s
Report, Mr. Kemp’s workpapers allowed for a complete review of his analysis
[Staff Report, pages 79-80]. The workpapers that Mr.
Kemp relied upon directly for his exhibits were filed with his Supplemental
Direct Testimony. These workpapers are tables that show
pre-transaction and post-transaction costs by functional area for the parent
utility companies in the relevant transactions. The charts in Mr.
Kemp’s exhibits were derived from these tables. In response to
Staff’s request for further details, Mr. Kemp provided the underlying cost data
for the individual utility operating companies that reported cost data to the
FERC. Mr. Kemp also explained how the data from the individual
utility operating companies were aggregated by the parent utility, and listed
the FERC accounts that were included in each functional area of non-fuel O&M
expense. Mr. Kemp’s data were obtained from the SNL data base
service, which groups the accounts as they are grouped in the FERC Uniform
System of Accounts. Finally, Mr. Kemp provided three examples of how
the reported FERC costs track through from the more detailed level to the
aggregate level.
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•
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First,
Uncollectible Accounts cost is more properly characterized as a
contra-revenue item, not an expense item. The realized synergies analysis
deals with non-fuel O&M
expenses.
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•
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Second,
the levels of Uncollectible Accounts cost are heavily influenced by the
rules of the local regulatory jurisdiction, primarily those regarding
disconnection procedures (multiple warning notices, time periods to
disconnect). These rules can expand or shrink a utility’s
revenue exposure on overdue accounts, vs. other utilities in other states,
for reasons not directly related to a company’s effectiveness in managing
such accounts. Uncollectible Accounts costs are less controllable by
utility management.
|
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•
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Third,
Uncollectible Accounts costs are more closely related to the level of fuel
and purchased power costs than the level of non-fuel O&M
expenses. When fuel and purchased power costs are high, and
push up the total bill to customers, one would expect more customers to
have difficulty paying their bill.
|
290. Staff’s
contention that the synergies will not be realized in the timelines offered is
also in error. In terms of the timing of synergy capture, the close
working relationship between Aquila and KCPL resulted in the development of
detailed plans to realize the synergies. The teams are actively
working to ensure that synergy capture is at full potential as close to the day
the merger closes as possible.399
291. With
regard to Staff’s general credibility on its testimony concerning the
synergies, Staff did not proffer any other individual subject matter
expert that contributed to Staff’s Report, attached to witness Schallenberg’s
five pages of testimony.400
________________________
399
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
400 See
Findings of Fact Numbers 70-93 in the Witness Credibility
Section. Public Counsel cites to the Missouri Supreme Court Case of
Love 1979 Partners v. Public
Service Commission, 715 S.w.2d 482, for the proposition that the
Commission must defer to its Staff and Staff’s expertise. See EFIS
Docket Number 440; Initial
Brief of the Office of the Public Counsel, pp. 3-4. Public
Counsel misreads the Court’s opinion. The Court opined that the court
would defer to the Commission’s expertise, in part, because the Commission had a
staff of experts to advise it. This does not relieve the Commission
of its mandate to support its conclusions of law with substantial and credible
evidence on the record as a whole. Environmental Utilities, LLC v.
Public Service Com'n, 219 S.W.3d 256, 263 (Mo. App. 2007); State ex rel. AG Processing, Inc. v.
Public Service Com'n of State, 120 S.W.3d 732, 734 -735 (Mo. banc
2003); State ex rel. Rice v.
Public Service Com'n, 359 Mo. 109, 114, 220 S.W.2d 61, 64 (Mo.
banc 1949). The Missouri Supreme Court does not require the
Commission to defer to incompetent evidence adduced by any party merely because
of that party’s position or title. The Commission must evaluate the
evidence presented in any case, objectively.
292. Staff’s
major objection to the Application’s merger structure is, in reality, a legal
issue concerning the requirements of Section 393.190.1 that its testifying
witness, Mr. Schallenberg, is not qualified to address, lacking a law
degree or any legal education.401
293. Staff’s
final point regarding the Applicants’ synergy calculations that the merger is
“uneconomical from a consumer perspective even when comparing the cost and
benefits sponsored by the Joint Applicants” has little probative value, given
Mr. Schallenberg’s concession that Staff did not conduct an audit of the
asserted merger savings.402 Neither
Mr. Schallenberg nor members of the Engineering and Management Services
Department analyzed or developed an alternative calculation of merger
synergies.403 Mr. Schallenberg
admitted that in the Staff Report section dealing with merger synergy savings,
there was no discussion or evaluation of the testimony offered by
KCPL witnesses Lora Cheatum, Wallace Buran,
William Herdegen, Dana Crawford, Robert Steinke,
Richard Spring or John Marshall.404 Additionally
Mr. Schallenberg admitted that neither his testimony nor the Staff Report
has been updated since being filed in October 2007, or after the merger proposal
was modified.405
_________________________
401
Transcript, pp. 1790-91. Mr. Schallenberg conceded that portions of
the Staff Report were written by lawyers in the Commission’s General Counsel
Division, Transcript, pp. 1814-15. That legal argument mirrors the
one advocated by the Industrial Intervenors claiming that because the Joint
Application does not request approval to merge KCPL and Aquila, Staff may simply
ignore the many witnesses who offer detailed testimony on merger synergy savings
and the benefits of the detailed plans to functionally integrate and coordinate
KCPL and Aquila operations.
402 Staff
Exh. 100, Schallenberg Rebuttal at 4; Transcript, pp.
1820-21.
403
Transcript, pp. 1825-26.
404
Transcript, pp. 1893-94.
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b.
|
Public
Counsel’s Position
|
294. Contrary
to Public Counsel’s witness Dittmer’s testimony,406 KCPL’s estimates of
synergy savings from the proposed merger are not “overstated”.407
_________________________
406 OPC
Exh. 200, Dittmer
Rebuttal, pp. 36-39.
James R. Dittmer is a Senior
Regulatory Consultant with the firm of Utilitech, Inc., a consulting firm
engaged primarily in utility rate work. The firm's engagements
include review of utility rate applications on behalf of various federal, state
and municipal governmental agencies as well as industrial groups. In
addition to utility intervention work, the firm has been engaged to perform
special studies for use in utility contract negotiations. He
graduated from the University of Missouri - Columbia, with a Bachelor of Science
Degree in Business Administration, with an Accounting Major, in
1975. He holds a Certified Public Accountant Certificate in the State
of Missouri. He is a member of the American Institute of Certified
Public Accountants. Following his graduation from the University of
Missouri, he was employed as an auditor for the Missouri Public Service
Commission. In 1978, he was promoted to Accounting Manager of the Kansas City
Office of the Commission Staff. In that position, he was
responsible for all utility audits performed in the western third of
Missouri. During his service with the Commission, he was involved in
the audits of numerous electric, gas, water and sewer utility
companies. Additionally, he was involved in numerous fuel adjustment
clause audits, and played an active part in the formulation and implementation
of accounting staff policies with regard to rate case audits and accounting
issue presentations in Missouri. From 1979 through 1985 he practiced
as an independent regulatory utility consultant. In 1985, Dittmer, Brosch and
Associates was organized, which changed its name to Utilitech, Inc., in
1992. For the past twenty-eight years, he has appeared on behalf of
clients in utility rate proceedings before various federal and state regulatory
agencies where he performed revenue requirement studies for electric, gas, water
and sewer utilities and testified as an expert witness on a variety of rate
matters. As a consultant, he has filed testimony on behalf of
industrial consumers, consumer groups, the Missouri Office of the Public
Counsel, the Missouri Public Service Commission Staff, the Indiana Utility
Consumer Counselor, the Mississippi Public Service Commission Staff, the Arizona
Corporation Commission Staff, the Arizona Residential Utility Consumer Office,
the Nevada Office of the Consumer Advocate, the Washington Attorney General's
Office, the Hawaii Consumer Advocate's Staff, the Oklahoma Attorney General's
Office, the Oregon Citizens Utilities Board, the West Virginia Public Service
Commission Consumer Advocate's Staff, municipalities and the Federal government
before regulatory agencies in the states of Alaska, Arizona, Colorado, Florida,
Hawaii, Indiana Kansas, Maine, Michigan, Mississippi, Missouri, Nevada, New
Mexico, New York, Ohio, Oklahoma, Oregon, Texas, Washington and West Virginia,
as well as FERC.
407 GPE/KCPL Exh. 19, Kemp
Surrebuttal, pp. 1-15; GPE/KCPL Exh. 22, Marshall Surrebuttal, pp.
1-19. As stated in pages 22-23 of Mr. Kemp’s Supplemental Direct
Testimony:
1. Its
synergy estimation methodology is sound. The synergy teams have
drilled down to an unusually deep level of detail, and have identified and
vetted reasonable levels of synergies. The sources of savings that they cited
are credible.
2. KCPL’s
estimated total synergies (including fuel) are modestly higher than the median
announced synergies for 26 other energy utility transactions (5% vs. 3% of total
O&M, 11% vs. 9% of non-fuel O&M). [This is reasonable because the
KCPL-Aquila pairing has unusually broad opportunities for savings -- See
findings of Fact 248-281.]
3. KCPL’s
estimated synergies for non-fuel O&M expense are significantly higher than
the median realized synergies for other electric utility transactions (10% vs.
2%). [However, this is reasonable because the KCPL-Aquila pairing has unusually
broad opportunities for savings -- See findings of Fact 248-281.]
4. KCPL’s
estimated synergies are at the upper end of the range that we have advised
utility clients, based on our experience, is reasonable to expect in merger
transactions 10% v. 7-10%. [Again, this is reasonable because the KCPL-Aquila
pairing has unusually broad opportunities for savings – See findings of Fact
248-281.]
As stated
in pages 7-9 of Mr. Marshall’s Surrebuttal Testimony:
Aquila is
not already enjoying economies of scale and shared corporate overhead related
synergies based on its current organization as claimed by Public
Counsel. Capturing the identified savings will only be achieved by
leveraging the integrated infrastructure and capabilities of KCPL and
Aquila. This integration will allow both companies to realize greater
economies of scale and shared services. The savings potential for
these costs is projected to be $302 million. Costs have only
been considered that are included in the Missouri rate case. Any
current economies of scale and overhead-related synergies that Aquila enjoys are
lessened by a business model with higher costs and non-investment grade
debt. Rather than enjoying current savings, Aquila is burdened by an
inefficient capital structure and expensive cost base. Savings
derived from the merger will offer significant benefits to Aquila and are not
achievable without the benefits and improved operations of the
merger.
** The
commission notes that the $302 million referenced by witness Marshall represents
Aquila’s corporate overhead costs that were not allocated to Missouri, but are
additional costs that will be reduced subsequent to the closure of the
merger. This savings is in addition to the projected
$305 million in synergy savings. See GPE/KCPL Exh. 31, Zabors
Supp. Direct, Schedule RTZ-6 and Transcript pp. 2923-2926. The $302
million was determined using 2006 for the baseline, and as reflected by the
testimony, Aquila’s corporate costs have already been reduced and the
$302 million would be reduced to $221 million if the year 2007 was used as
the baseline.
295. Mr.
Dittmer’s testimony makes virtually no attempt to rebut the analysis contained
in Mr. Kemp’s Supplemental Direct Testimony, regarding the reasonableness
of Great Plains’ and KCPL’s methods for estimating synergies and the
reasonableness of its estimates of total achievable synergies. 408
296. Synergy
estimates were reviewed by Mr. Kemp both on a stand-alone basis and in the
context of industry experience. At least four separate lines of
corroborating evidence support the conclusion that the estimates are reasonable
and conservative:409
|
|
(1)
|
The
soundness of the estimating
methodology.
|
|
|
(2)
|
The
reasonableness of the synergy estimates vs. announced synergies for
comparable transactions.
|
_________________________
408 Id.
|
|
(3)
|
The
reasonableness of the synergy estimates vs. realized synergies from
comparable transactions.
|
|
|
(4)
|
The
reasonableness of the synergy estimates in the context of Black &
Veatch’s substantial experience in advising utility management on
expectations for merger synergies.
|
297.
The total estimated level of synergy savings are modestly above the industry
average. This is expected given the fact that KCPL and Aquila have
adjoining territories and can access higher levels of proximity-related
synergies (mainly in the generation and T&D areas) than many of the
transactions included in the industry data.410
298. Another
reason that the synergy estimates are conservative, and not “overstated” or
“quite aggressive,” is the realized synergies
are likely to be greater than Great Plains’ and KCPL’s
estimates. Competent utility managers almost always find more
synergies as they dig deeper after the transaction, and several significant
sources of synergy savings were not included in KCPL’s
estimates. These observations were not rebutted by any opposing
witness.411
299. Mr. Dittmer
argues that the Commission should consider only those merger-related benefits
that go beyond a hypothetical level of stand-alone savings, but he does not
explain how those stand-alone savings can be achieved as effectively without a
merger. His suggested method of counting benefits is logically
equivalent to setting rates for KCPL and Aquila based on an unproven assumption
that their costs are equal to those achieved by best-in-class utilities, without
allowing KCPL or Aquila to recover any costs that might be incurred in order to
achieve such performance.412
_________________________
410 GPE/KCPL Exh. 19, Kemp Surrebuttal, pp.
1-15. Mr. Dittmer is also inconsistent in his logic about economies
of scale. He admits [page 36] that Aquila’s electric operations enjoy
reduced costs due to economies of scale from being part of a larger
organization, yet he discounts the possibility that the KCPL/Aquila combination
could also produce scale synergies. There is no magic size at which
scale economies cease, especially in the corporate overhead areas that he
mentions. Id. See also GPE/KCPL Exh. 22,
Marshall Surrebuttal, pp. 1-19.
300. Under
questioning from Commissioner Murray, Mr. Dittmer admitted that a utility under
financial stress may not have the capital available to fund construction
projects and would have to defer them.413
301. Mr.
Dittmer also admitted during questioning from Commissioner Clayton that he did
not know if Aquila had the resources to undertake on its own the $59 million of
“enabled” projects that he identified.414
302. Both
created and enabled synergy savings are unlocked by the merger, and both require
management initiative and action before they can be realized.415
303. It
is also not realistic to expect that KCPL and Aquila could separately achieve
all the enabled synergies that Mr. Dittmer argues are not
merger-related. The merger process is a change enabler.416
304. The
management and employees of both companies become more open to considering and
implementing changes, which they otherwise might not have pursued.417
305. The
benefits associated with enabled synergies are larger and faster in the merger
context than they would be on a stand-alone basis.418
_________________________
413
Transcript, p. 1686.
415
GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15; GPE/KCPL Exh. 22, Marshall
Surrebuttal, pp. 1-19. Schedule JRM-7 provides a direct response
to OPC Schedule JRD-1 to show how these synergies are created by the
merger. Id.
416
GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15.
306. Contrary
to Mr. Dittmer’s contention that $59 million in “enabled” synergies should
not be allowed,419
enabled synergies should be included in the total pool of synergy savings,
because, in this instance, they are unlocked by the merger.420
307. Weighing
the expert testimony, the Commission finds that Mr. Dittmer misunderstands the
nature of “enabled” synergies as applied to this particular set of facts and
circumstances.421
308. Similarly,
there is no merit to Mr. Dittmer’s assertion that synergy savings
attributable to the closure of the 20 West Ninth Street headquarters
are overstated as a result of the sale of the properties at an amount below net
book value because the net book value of the properties is anticipated to
be written down to fair value in the application of purchase accounting
for the acquisition, which is expected to result in an increase to
goodwill.422
309. Great
Plains has not requested recovery of goodwill associated with this
acquisition.423
310. There
is also no merit to Public Counsel’s claim that Great Plains or KCPL will pay
officers more for running a larger company resulting in reduced
synergies. Great Plains does not plan to change its peer group for
executive compensation; Great Plains still benchmarks executive compensation by
comparison to other companies; the utility executive surveys used to market
price utility executive positions classify Great Plains as a medium revenue
company, and this classification is not expected to change; current executives
are appropriately positioned in market based and company performance data; and
Great Plains applies the pay for performance methodology.424
_________________________
419 OPC
Exh. 200, Dittmer Rebuttal, pp. 12-16.
420
Transcript, pp. 1409 GPE/KCPL Exh. 19, Kemp Surrebuttal, pp. 1-15; GPE/KCPL Exh.
22, Marshall Surrebuttal, pp. 1-19. Schedule JRM-7 provides a
direct response to OPC Schedule JRD-1 to show how these synergies are
created by the merger. Id. See also
Finding of Fact Number 302.
421 See
Findings of Fact Numbers 174-185, 299-306. Transcript, pp.
1408-1416.
422
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19. The Company intends to sell
the 20 West Ninth Street building and adjacent properties at the close
of the transaction with a target date for sale by the end of 2008. As
referenced in the Rebuttal Testimony of Mr. Dittmer in this case, the
company has supplied a Broker Opinion of Value for the properties as prepared by
Grubb & Ellis, which indicates a projected market value below the expected
net book value of the assets at the time of close. Based on these
factors, and the application of purchase accounting under the Financial
Accounting Standards Board Statement of Financial Accounting Standards
No. 141, Business Combinations, the Company anticipates writing down the
value of the 20 West Ninth Street building and adjacent properties to
fair value at the time of close. The reduction to the net book value
of these properties in the application of purchase accounting is expected to
increase the excess of cost over the fair value of acquired net assets in the
acquisition (i.e., goodwill). Id.
423
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
424
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19, see in particular pp.
9-10.
311. Finally,
the Commission notes that witness Dittmer also presented testimony to the
Commission where he stated that “Public Counsel would welcome a scenario under
which Missouri ratepayers would no longer be exposed to subsidizing Aquila’s
failed unregulated business operations.”425 He
acknowledged during the hearing that the Applicants’ withdrawal of their request
to recover Aquila’s actual cost of debt changed his analysis of the potential
benefits to consumers from a negative to a positive number.426 He
further agreed that with the reduction in Transaction Costs from
$95 million to $65 million (Missouri jurisdictional
$47.2 million) “the math would work” to increase the positive number.427 Mr. Dittmer
admitted that he did not have the resources to do a “complete bottom-up analysis
of the expected synergies,” and that as of April 23 when he testified he
had not looked at “the underlying work papers for seven months.”428 He conceded
that a utility like Aquila that is not able to recover all of its costs has “a
bigger hole to crawl out of” and could “go into bankruptcy,” with debt holders
taking “a bigger pounding than they have already.”429 He
additionally noted that the purchase price for Aquila that Great Plains agreed
to pay “looks very reasonable,” and that adjoining companies like KCPL and
Aquila “should achieve more synergies than disjoined utilities.”430 He also
admitted that his initial analysis failed to evaluate the merit of either the
estimated Transaction or Transition Costs “because we didn’t need to,”431 In response
to Commissioner Clayton’s questions, Mr. Dittmer acknowledged that, despite
his misgivings, “I expect there are some fairly significant synergy
savings.”432
_________________________
425
GPE/KCPL Exh. 200, Dittmer Rebuttal at 47.
428
Transcript, pp. 1666, 1720, and 1686.
429
Transcript, pp. 1682-83.
430
Transcript, pp. 1694, and 1752.
431
Transcript, pp. 1724-27. During Mr. Dittmer’s testimony on this
subject, Public Counsel interjected that because of its “limited budget, we have
not had Mr. Dittmer do a whole lot of work since that time,” having only paid
him to do the “analysis on the original case” and not on the numbers now before
the Commission. Transcript, pp. 1724-1725. Public Counsel
complains that the Commission should not require a complete analysis of the
synergies from the opposition parties because of the limitations in their budget
and resources. See EFIS Docket Number 440; Initial Brief of the Office of the
Public Counsel, pp. 43. Public Counsel’s argument seems to be
one of asking to be excused from presenting competent and substantial
evidence. In essence, Public Counsel requests that the Commission
bias itself based upon the relative economics of the parties choosing to
participate in this matter. The Commission is unsure how, nor is it
appropriate, to apply a sliding scale to evidence adduced in a contested
case. The quality of experts produced by the parties may, and usually
does, vary, as does the quantum of evidence produced by each
party. The Commission cannot shirk its responsibility to render a
decision based upon competent and substantial evidence on the record as a whole
at the request of a party to a contested case. The Commission must
objectively evaluate and weigh all of the evidence presented.
|
|
c.
|
The
Industrials’ Position
|
312. Similar
to Mr. Dittmer’s conclusions, the Industrials’ witness Mr. Brubaker’s
label of the synergy savings estimates as being “quite aggressive”433 is unfounded for the
same reasons articulated in Findings of Fact Nos. 294-311, supra.
_________________________
433
Industrial Intervenors Exh. 300, Brubaker Rebuttal,
p. 10.
Maurice Brubaker is a
consultant in the field of public utility regulation and President of the firm
of Brubaker & Associates, Inc. (BAI), energy, economic and regulatory
consultants. He graduated from the University of Missouri in 1965
with a Bachelor's Degree in Electrical Engineering. Following
graduation, he was employed by the Utilities Section of the Engineering and
Technology Division of Esso Research and Engineering Corporation of Morristown,
New Jersey, a subsidiary of Standard Oil of New Jersey. In the Fall
of 1965, he enrolled in the Graduate School of Business at Washington University
in St. Louis, Missouri, where he earned a Master of Business Administration in
June of 1967. His major field was finance. From March of
1966 until March of 1970, he was employed by Emerson Electric Company in St.
Louis, during which time he earned a Master of Science Degree in Engineering at
Washington University. In March of 1970, he joined Drazen Associates,
Inc., of St. Louis. Since that time he has prepared numerous studies
relating to electric, gas, and water utilities, including cost analysis, rate
design, cost forecasts, cogeneration rates and determinations of rate base and
operating income. He has also addressed utility resource planning
principles and plans, reviewed capacity additions to determine whether they were
used and useful, addressed demand-side management issues independently and as
part of least cost planning, and reviewed utility determinations of the need for
capacity additions and/or purchased power to determine the consistency of such
plans with least cost planning principles. He has provided
testimony about the prudency of the actions undertaken by utilities
to meet the needs of their customers in the wholesale power markets, and has
testified before FERC, various courts and legislatures, and the state regulatory
commissions of Alabama, Arizona, Arkansas, California, Colorado, Connecticut,
Delaware, Florida, Georgia, Guam, Hawaii, Illinois, Indiana, Iowa, Kentucky,
Louisiana, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York, North
Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas,
Utah, Virginia, West Virginia, Wisconsin and Wyoming.
During
the past ten years, BAI and its predecessor firm, has participated in over 700
major utility rate and other cases and statewide generic investigations before
utility regulatory commissions in 40 states, involving electric, gas, water, and
steam rates and other issues. Cases in which the firm has been
involved have included more than 80 of the 100 largest electric utilities and
over 30 gas distribution companies and pipelines. An increasing
portion of the firm’s activities is concentrated in the areas of competitive
procurement. The firm assists clients in identifying and evaluating
purchased power options, conducts request for proposals (RFPs) and negotiates
with suppliers for the acquisition and delivery of supplies. The firm
has prepared option studies and/or conducted RFPs for competitive acquisition of
power supply for industrial and other end-use customers throughout the Unites
States and in Canada, involving total needs in excess of 3,000
megawatts. The firm is also an associate member of the Electric
Reliability Council of Texas and a licensed electricity aggregator in the State
of Texas.
313. Mr.
Brubaker admitted that his “testimony does not address the specifics of the
synergies that the Applicants contend will be achieved.”434
314. Witness
Brubaker argued that the synergy estimates should be discarded merely because
they are above the median of industry experience. As Mr. Kemp
explained in his testimony, the synergies should be expected to be above the
industry average since KCPL and Aquila are in close proximity and the potential
for synergies is substantially greater than in other transactions.435
315. Given
that all parties waived cross-examination of Mr. Brubaker, and the
testimony given by Great Plains’ Mr. Kemp that exposed the weaknesses of
the Brubaker analysis,436 the Commission finds
that little weight will be given to his opinions.
_________________________
434
Industrial Intervenors Exh. 300, Brubaker Rebuttal, p. 4.
436
GPE/KCPL Exh. 19, Kemp
Surrebuttal, pp. 10-12 (above-industry synergies should be expected since KCPL
and Aquila have adjoining service territories).
316. KCPL
and Aquila spent significant time and resources since June 2006 analyzing and
developing plans for the merger. Contrary to the assertions of Staff,
Public Counsel or the Industrials, the merger process and synergy valuation has
been adequate.437
317. The
forecasted Best Practices Spend Management synergy savings are
conservative relative to past experience in both the utility industry and with
companies outside the utility industry. They are also in-line with
the documented realized savings from contiguous mergers within the utilities
industries.438
318. The
actions required to achieve the synergies align well with the collective
expertise of the combined companies and can be implemented with a high degree of
confidence.439
319. The
forecasted savings are both realistic and achievable.440
320. KCPL
has adequately supported its contention that the synergies it has identified are
a direct result of the merger.441
321. Since
the Applicants have agreed to recover any merger savings through “regulatory
lag” as part of the traditional ratemaking process,442 there is no net
detriment to customers. Under this proposal, if the Applicants are
not able to demonstrate the realization of synergies, then none could be used to
recover Transaction or Transition costs.443
_________________________
437
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
438
GPE/KCPL Exh. 6, Buran Supp. Direct, pp. 2-27, and accompanying
schedules.
441 Id.; GPE/KCPL Exh.
22, Marshall Surrebuttal, pp. 1-19. Schedule JRM-7 provides a
direct response to OPC Schedule JRD-1 to show how these synergies are
created by the merger. Id. An example of
the supported synergies is KCPL’s ability to successfully implement automatic
meter reading (“AMR”) across the Aquila customer base that will only be achieved
with the skills, knowledge, financial, and employee resources that KCPL
possesses. Specifically, KCPL has detailed systems and information
technology (“IT”) knowledge that has resulted in the development of code,
capabilities, and enhanced processes for KCPL’s CIS Plus system that will be
used to expedite the implementation of AMR and accelerate the realization of
value from it. Id.
442
Transcript, pp. 1301, 1309-11.
322. The
Commission finds that the synergies and savings that will result from the merger
are real and substantial, and will produce benefits that support the approval of
the Applicants’ requests.
|
F.
|
Findings
of Fact Regarding Transaction and Transition Cost
Recovery
|
323. Great
Plains will use the purchase accounting method to record the merger, if approved
by the Commission. Under the purchase method, Great Plains will
record the net assets acquired at fair market value. In the case of
regulated assets and liabilities, fair value is generally considered to be book
value.444
324. The
excess of the purchase price, including transaction costs, over the fair market
value of the net identifiable assets is recorded as goodwill.445
325. The
Applicants do not request authorization to recover the acquisition premium
component of goodwill associated with the merger.446 The
Applicants request recovery of the transaction cost component of goodwill over a
five-year period.447
_________________________
444
GPE/KCPL Exh. 29, Wright Direct, pp. 2-3. Under Generally Accepted
Accounting Principles (“GAAP”), the accounting rules for a business combination
are prescribed in Financial Accounting Standards Board (“FASB”) Statement
No. 141, Business
Combinations. FASB Statement No. 142, Goodwill and Other Intangible
Assets, is also relevant to the merger, among others. Id. at p. 2. See
also Transcript, pp. 1990-1995.
445 Id. at p.
3. “Goodwill” is defined as the excess of the purchase price over the
net book value. Transcript, p. 2013. An “acquisition
adjustment” is the summation of the transaction costs and the acquisition
premium and is consistent or synonymous with the term “goodwill.” Transcript,
pp. 2013-2014. The term ”merger premium” is consistent with
“acquisition premium.” Transcript, p. 2014.
446 Id. Financial
Accounting Standards Board (“FASB”) Statement No. 142 does not allow
amortization of goodwill. Rather, the statement requires annual
impairment testing to determine whether the value of the underlying asset has
been impaired. If an impairment is indicated, a write-down would be
required. Impairment testing, between annual testing, is required if
events or circumstances indicate an impairment is more likely than not.
Id.
447
GPE/KCPL Exh. 29, Wright Direct, p. 3.
326. After
revising their merger application, the Applicants continued to request that they
be permitted to recover, in general rate cases, the majority of the transaction
costs. 448
327. Applicants
request that the Commission allow the surviving entities to defer both
transaction and transition costs and to amortize them over a five-year period
beginning with the first rate cases post-transaction for Aquila and KCPL subject
to “true up” of actual transition and transaction costs in those future
cases.449
328. Recovery
of transaction and transition costs would not be sought if insufficient synergy
savings were realized to cover those costs.450
329. There
is no credible evidence in the record that transaction and transition costs, as
calculated by Great Plains and KCPL, are inaccurate or unreasonable.451
|
|
1.
|
The
Applicants’ Proposal for Transaction and Transition Cost
Recovery
|
330. The
Applicants believe the concept of assigning costs in proportion to savings is
appropriate and have identified synergy savings and developed an allocation for
those savings based on specific cost drivers.452
331. A
cost driver is an activity that causes a cost to be incurred. For
example, meter reading costs are driven by the number of meters in the
field. Billing costs are driven by the number of bills
processed.453
_________________________
448
GPE/KCPL Exh. 37, Bassham Additional Supp. Direct, p. 4.
449 Id. GPE/KCPL is
requesting authority from the Commission to establish a regulatory asset account
on the books of KCPL and Aquila for both the transition-related and transaction
costs and to allow those costs to be amortized over a five-year period beginning
at the time of the completion of the merger. GPE/KCPL Exh. 23, Rush Supp.
Direct, pp. 2-14.
450
Transcript, p. 1310-1311, 1707-1708, 1773.
451
Transcript, pp. 1405-1406, 1723-1726, 1996, line 11 through p. 1999, line 4, p.
2007, 2929-2934. See GPE/KCPL Exhibits 1, 2, 3, 6, 23, 30, 31, and
37.
452
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 4-6.
453
GPE/KCPL Exh. 23, Rush Supp. Direct, pp. 2-14.
Tim M. Rush is employed by
KCPL as Director of Regulatory Affairs, a position he has held since
2001. His general responsibilities include overseeing the preparation
of KCPL’s rate cases, class cost of service and rate design. He is
also responsible for overseeing the regulatory reporting and general activities
specific to the state of Missouri and the Missouri Public Service
Commission. He received a Master's Degree in Business Administration
from Northwest Missouri State University in Maryville, Missouri and completed
his undergraduate study at both the University of Kansas in Lawrence and the
University of Missouri in Columbia. He received a Bachelor of Science
Degree in Business Administration with a concentration in Accounting from the
University of Missouri in Columbia. Prior to his employment with
KCPL, he was employed by St. Joseph Light & Power Company (“Light &
Power”) for over 24 years. At Light & Power, he was Manager of
Customer Operations from 1996 to 2001, where he had responsibility for the
regulatory area, as well as customer services, which included the call center,
collections and marketing areas. Prior to that, he held various
positions in the Rates and Market Research Department from 1977 until
1996. He was the manager of that department for fifteen
years. He has testified in numerous proceedings before the
Commission.
332. Other
cost drivers may result in the costs being directly assigned to a specific
jurisdiction or combination of jurisdictions. 454
333. The
terms “cost driver” and “allocation factor” can be used interchangeably.455
334. In
order to develop an appropriate method to allocate the synergies,
transition-related, and transaction costs to the various KCPL and Aquila
regulatory jurisdictions and to Aquila’s non-regulated operations (referred to
as “Merchant”), an allocation team with representatives from Great Plains, KCPL,
and Aquila determined an allocation factor for each synergy savings based on the
most representative cost driver. The allocation team’s approach was
to keep the allocation factors relatively simple and easily auditable.456
335. The
KCPL regulatory jurisdictions include KCPL-Missouri, KCPL-Kansas and
KCPL-wholesale. 457
336. The
Aquila regulatory jurisdictions include Aquila MPS-retail, Aquila MPS-wholesale,
Aquila L&P-electric, and Aquila L&P-industrial steam.458
_________________________
454
GPE/KCPL Exh. 23, Rush Supp. Direct, pp. 2-14.
456 Id. See Schedule
TMR-2 for a depiction of the cost drivers utilized by
GPE/KCPL.
337. A
“general allocator” was selected for Shared Services non-fuel O&M expense
synergies. This was because Shared Services
activities encompass general corporate overhead, including Accounting, Legal,
Executive, etc., and because no single cost driver is appropriate for these
activities, a multi-part “general” allocation factor was used. Great
Plains and Aquila use a similar general allocator for their overhead
allocations, as documented in their respective Cost Allocation
Manuals. The allocation team decided on a three-part general
allocation factor including: net plant; retail revenue; and payroll costs.459
338. A
general allocator was not used for any of the other synergy categories, except
for the synergy attributable to the sale of Aquila’s current corporate
headquarters at 20 West 9th Street, because the other categories have
identifiable cost drivers.460
339. Once
the appropriate cost drivers/allocation factors were identified, a two-step
approach was used to allocate the synergies among the various regulatory
jurisdictions and the Merchant operation: 461
(1) Each
synergy item was allocated among KCPL, Aquila-MPS, Aquila-L&P and
Aquila-Merchant, based on the applicable allocation factor and the associated
statistical data. In many cases, only certain of these entities were
affected, as shown on Schedule TMR-2 (the “Allocated to”
column).
(2) Further
allocation of the synergies identified in step one to KCPL’s three regulatory
jurisdictions, Aquila-MPS’s two regulatory jurisdictions, and Aquila-L&P’s
two regulatory jurisdictions, as applicable.462
_________________________
459 Id.
460 Id. For example,
delivery and customer service costs are directly influenced by the number of
customers or meters. Supply costs, on the other hand, are directly influenced by
output levels, such as megawatt hours generated and/or
purchased. Id.
461 Id. See Schedule
TMR-1, as modified by the change in merger proposal – EFIS Docket Number 385,
Identification of Evidence
That Is No Longer Relevant to the Joint Application, filed May 9,
2008.
462 Id. The result of
this two-step allocation process is presented on Great Plains and KCPL’s witness
Tim Rush’s Schedule TMR-1 below, which depicts the proposed overall
allocation of synergies to each jurisdiction, including Aquila Merchant and both
KCPL and Aquila MPS wholesale. The allocation, as proposed and
described by the Applicants, demonstrates that each jurisdiction will receive a
benefit from the merged organization because the synergy benefits filter to
those jurisdictions as a result of the allocation process. Id.
340. The
KCPL synergies identified in step one were allocated to its jurisdictions based
on allocation percentages established in KCPL’s recent rate case, for cost
drivers that were the same as or similar to the cost drivers used in step
one.463
341. Because
of the changes in the level of sales between jurisdictions, Applicants propose
to allocate the cost of electric operations based on the change in sales between
jurisdictions in comparison to the base period sales.464
342. Applicants
propose to allocate the merger integration costs (transition and transaction
costs) over a period of five years (beginning with the effective date of rates
ordered by the Commission in the first rate case after the close of the merger)
to each of the retail, wholesale and merchant operations of KCPL and Aquila
based on the contribution of synergy savings estimated from the base
period.465
343. The
percentage allocation for electric operations, under the Applicants’ proposal,
would be adjusted in each rate case to reflect the change in sales in each
jurisdiction between the base period and the rate case.466
_________________________
463 Id. For example,
KCPL’s Shared Services synergies were allocated to KCPL’s three regulatory
jurisdictions based on a general allocator identical to the three factors
utilized to allocate total Shared Services synergies in step
one.
464
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 4-6.
465 Id.; GPE/KCPL Exh. 23, Rush
Supp. Direct, p.6 and Sch.
TMR-1.
466 Id.; See also Schedule
CBG-1. The Industrial Steam, Merchant and FERC operations allocation
percentage will remain unchanged from the base period. If the
electric sales mix does not change between the base period and the next rate
case, then the allocation percentages in the following table would be the
allocation of costs to each jurisdiction. For the Missouri
operations, this represents a 72.75% allocation of Merger Integration
Costs. Likewise, Missouri operations will receive 72.75% of the
synergy savings. Id.
344. With
regard to how Aquila-MPS’s synergies were allocated between its retail and
wholesale jurisdictions, the Aquila-MPS synergies
identified in step one were allocated based on a 99.46% retail to 0.54%
wholesale allocation, consistent with Aquila’s recent rate case.467
345. With
regard to how Aquila-L&P’s synergies were allocated between its electric and
industrial steam regulatory jurisdictions, Aquila-L&P’s synergy
savings identified in step one were allocated based on various allocators
established in the 2007 Aquila rate case, including the Administrative &
General allocator, the O&M allocator, and the coal burn allocator.468
346. Under
the allocation proposal, both transition and transaction-related costs to
achieve were allocated in direct proportion to the synergies allocation
discussed in Findings of Fact Nos. 330-345, supra.469
347. Great
Plains and KCPL maintain that each jurisdiction of KCPL and Aquila will enjoy a
reduced cost from the merger as a result of the overall allocations of
synergies, transition-related costs, and transaction costs. 470
348. Assuming
the merger is consummated in 2008, it is expected that the first change in rates
that include merger synergy savings will occur in mid-2009.471
349. The
Applicants plan to file an additional rate case implemented to correspond with
the completion of Iatan 2, sometime in mid-2010.472
_________________________
467
GPE/KCPL Exh. 23, Rush Supp. Direct, pp. 2-14.
470 Id.; GPE/KCPL Exh. 39, Giles
Additional Supp. Direct, Schedule CBG–1, p. 4-6.
471
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, filed February 25, 2008, p.
4-6.
350. Based
on the assumptions in findings of Fact Numbers 348 and 349, it is
expected that Missouri customers will receive net benefits between now and 2013
of over $100 million.473
|
|
2.
|
The
Reasonableness of Allowing Recovery of Transaction and Transition
Costs
|
351. Transaction
costs are generally not recovered through rates but rather charged to
shareholders because transaction costs consist of costs incurred by both the
acquiring company as well as the acquired company to complete the transaction,
and not to facilitate the provision of utility service – such costs are properly
considered to be a part of the purchase price of the acquisition.474
352. Absent
the specific rate and accounting treatment being requested by the Applicants,
pursuant to Generally Accepted Accounting Principles, transaction costs would be
added to the value of the consideration being given by Great Plains for the
Aquila stock being acquired to arrive at the total purchase price of the
transaction.475
353. Transaction
costs do not meet the normal criteria for traditional expenses used to establish
rates. These costs are not used or useful nor necessary for the provision of
safe and adequate service. These costs are investor costs incurred in the buying
and selling of their stock. These are the costs of a non-regulated holding
company. Great Plains and its Board decided to incur these costs. Recovery of
these transaction costs would result in regulated utilities subsidizing their
non-regulated parent companies.476
_________________________
473
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, filed February 25, 2008, p.
4-6. Transcript, pp. 1424-1425.
474 OPC
Exh. 200, Dittmer Rebuttal, p.42-45. The Commission finds Mr.
Dittmer’s testimony with regard to the general nature of transaction costs to be
credible.
476
Transcript, pp. 1484-1491, and 1726; Staff Exh. 100, Report p. 51; Transcript,
p. 2050.
354. Great
Plains and KCPL maintain that while denial of their request for recovery of
transaction costs may not prevent the merger from being consummated, it would
deprive the Applicants of financial flexibility as they manage a variety of
post-merger issues.477
355. The
denial of the recovery of transaction costs would not affect the companies’
credit ratings.478
356. The
transition costs quantified by the Applicants will be incurred to integrate
Aquila and KCPL operations. Without incurring these costs, the
companies could not achieve the estimated synergies, while maintaining or
improving system reliability for Aquila’s and KCPL’s customers.479
357. It
is Staff’s view that transition costs can be booked on the utility’s books when
incurred and then brought up in rate cases for their reasonableness and prudence
to determine if they should be recoverable.480
358. There
is no credible or substantial evidence in the record that weighs against
allowing the Applicants to recover transition costs if the Commission approves
the Applicant’s merger proposal.481
|
G.
|
Findings
of Fact Regarding Credit Quality Following the
Merger
|
359. An
investment-grade credit rating is important to utility customers because many
times a company is required to go to the capital markets in support of a capital
spending program. In doing so, credit quality plays an important role
in both the cost and availability of that capital.482
_________________________
477
Transcript, pp. 1384-85, 1982-83, and 2319-2320.
478
Transcript, pp. 1322-1323.
479
GPE/KCPL Exh. 2, Bassham Supp. Direct, p. 3. Transcript, p.
1381
481 It is
Staff view that it is appropriate for transition costs to be booked on the
utility’s books when incurred and brought up in subsequent rate cases for a
review of reasonableness and prudence. Transcript, p.
2040.
482
GPE/KCPL Exh. 2, Bassham Supp. Direct, p. 4, 6-7.
360. Although
a company’s credit rating applies most directly to its access and cost of debt,
companies with a lower credit quality also find fewer equity investors willing
to risk their investment dollars on their stock. In both instances,
debt and equity investors demand a higher cost or return on their investment
dollars to compensate them for the higher credit risk. This increased
cost of capital can translate directly into higher costs for customers.483
361. Great
Plains has a Standard and Poor’s (“S&P”) credit rating of BBB- and KCPL has
an S&P credit rating of BBB, both of which are investment grade.484
362. Great
Plains extensively discussed the credit rating effects of the proposed merger
with the credit rating agencies prior to announcing the merger.485
363. In
October 2006, Great Plains engaged S&P to conduct an analysis of the merger
through S&P’s Ratings Evaluation Service, based on transaction assumptions
as they stood at that time.486
_________________________
483 Id. at p.
4.
484
GPE/KCPL Exh. 1, Bassham Direct, pp. 12-13.
485
GPE/KCPL Exh. 8, Cline
Direct, pp. 1-10.
Michael W. Cline is employed
by Great Plains, the parent company of KCPL, as Treasurer and Chief Risk
Officer. His responsibilities include financing and investing
activities, cash management, bank relations, rating agency relations, enterprise
risk management, and insurance. He graduated from Bradley University
in 1983 with a B.S. in Finance, summa cum laude. He earned an MBA
from Illinois State University in 1988. From 1984-1991, he was
employed by Caterpillar Inc. in Peoria, Illinois and held a number of finance
and treasury positions. From 1992-1993, he was Manager, International
Treasury at Sara Lee Corporation in Chicago, Illinois. From 1994-2000, he was
employed by Sprint Corporation in Overland Park, Kansas, initially as Manager,
Financial Risk Management and then as Director, Capital Markets. During most of
2001, he was Assistant Treasurer, Corporate Finance, at Corning Incorporated in
Corning, New York. He joined Great Plains in October 2001 as Director
of Corporate Finance. He was promoted to Assistant Treasurer in
November 2002. During 2004, he was assigned to lead the company’s
Sarbanes-Oxley Act compliance effort on a full-time basis, though he retained
the Assistant Treasurer title during that time. He was promoted to
Treasurer in April 2005 and added the title of Chief Risk Officer in July
2005. He has previously testified before the Commission and the
Kansas Corporation Commission.
486
GPE/KCPL Exh. 8, Cline Direct, pp. 1-10. A copy of S&P’s October
2006 analysis is included with Exh. 8 as Exhibit
MWC-3(HC).
364. In
January 2007, Great Plains engaged S&P to perform another assessment based
on the then-current transaction assumptions, and also engaged Moody’s Investor’s
Service (“Moody’s”) to conduct a similar analysis through its Ratings Assessment
Service.487
365. S&P
indicated that, upon announcement of the merger, the long-term ratings of Great
Plains and KCPL would not change but that the ratings would be placed on “Credit
Watch – Negative.” This action would communicate S&P’s intent to
formally review Great Plains’ and KCPL’s credit ratings during the period
between the announcement of the merger and the closing and, in particular, to
evaluate whether a number of important “regulatory considerations” surrounding
the merger were addressed in a manner consistent with initial
assumptions. Satisfactory resolution of these matters would lead to
S&P’s action to, as outlined in their January 9, 2007 analysis, “remove GXP
and KCPL’s ratings from CreditWatch, reaffirm all
ratings . . . .”.488
366. S&P
also indicated that KCPL’s short-term rating would be lowered from A-2 to A-3
upon the transaction announcement. This is S&P’s standard
methodology in instances where the ratings for companies with BBB senior
unsecured ratings are placed on Credit Watch – Negative during the pendency of a
merger.489
_________________________
487 Id. Copies of S&P’s and Moody’s January
2007 analyses are attached to Exh. 8 as Exhibits MWC-4(HC) and MWC-5(HC),
respectively.
488
GPE/KCPL Exh. 8, Cline Direct, p. 6 (emphasis added); GPE/KCPL Exh. 1, Bassham
Direct, pp. 12-13. See also Staff Exhs. 124 and 125; and Letter dated
January 12, 2007 from Moody’s Investor Service to Michael Cline (Highly
Confidential) that’s included in Schedule MWC-5 of Exh. 8, Cline
Direct.
489
Transcript, pp. 2322, 2364, 2370 GPE/KCPL Exh. 8, Cline Direct, pp. 1-10;
GPE/KCPL Exh. 1, Bassham Direct, pp. 12-13.
367. Given
the assumptions provided to Moody’s and S&P by Great Plains and KCPL, both
agencies indicated that Great Plains’ and KCPL’s credit positions should be
maintained following the merger.490
368. KCPL
benefits from its strong credit quality in a number of ways that generally
reduce its cost of capital.491
369. At
the time the merger was announced, Aquila had an S&P credit rating of B,
which is below investment grade.492
370. Consistent
with S&P’s methodology with respect to KCPL, Aquila’s ratings will be based
on those of Great Plains.493
371. Since
Aquila will be a wholly-owned subsidiary of Great Plains, debt at the Aquila
level will be structurally senior to debt at the parent company.494
372. S&P
typically assigns a rating for the subsidiary that is one notch higher than the
parent rating. As a result, if Great Plains’ ratings were maintained
at the current senior unsecured rating of BBB-, KCPL would expect Aquila’s
senior unsecured rating to be BBB. If Great Plains were downgraded,
Aquila’s rating would likely be established one notch above the lower parent
rating.495
373. Upon
the public announcement of the companies’ intent to merge, S&P placed Aquila
on positive watch.496
_________________________
490
GPE/KCPL Exh. 1, Bassham Direct, pp. 12-13. See also Staff Exhs. 124
and 125;
491
GPE/KCPL Exh. 8, Cline Direct, pp. 1-10.
492
GPE/KCPL Exh. 1, Bassham Direct, pp. 12-13.
493
GPE/KCPL Exh. 8, Cline Direct, pp. 1-10.
496
GPE/KCPL Exh. 1, Bassham Direct, pp. 12-13.
374. Moody’s
indicated that, upon announcement of the merger, the long-term ratings of Great
Plains and KCPL, as well as the Stable Outlook assigned to each, would not
change.497
375. Unlike
S&P, Moody’s did not place the ratings under formal review, but states the
following in its January 12, 2007 analysis:498
Please
note that the ratings determined herein are point in time assessments and based
upon a set of assumptions presented by the company with regard to the structure
of the proposed transaction. Additional facts and industry-specific
circumstances including potentially different regulatory outcomes could change the overall
assessment of the ratings.499
376. Moody’s
indicated that Aquila’s debt assumed or guaranteed by Great Plains would be
rated equivalent to Great Plains’ ratings, i.e., currently Baa2 senior
unsecured.500
377. The
actions taken by S&P and Moody’s upon announcement of the merger were fully
consistent with what they had conveyed in their respective assessments.501
378. Aquila
has approximately $1 billion of net operating losses on its balance
sheet.502
379. For
a regulated utility such as Aquila, net operating losses are generated in large
part through unregulated activities and regulated activities that are not
allowed to be recovered in rates. Great Plains expects to utilize
these losses in the transaction to offset future earnings. The
benefit of that utilization is part of Great Plains’ valuation and pricing of
Aquila. Without retaining those benefits generated outside the
regulatory environment, the price offered to Aquila shareholders would have been
reduced.503
_________________________
497 GPE/KCPL Exh. 8, Cline Direct, pp.
1-10. When the status of
Aquila becoming a subsidiary of Great Plains, as opposed to being merged with
KCPL was confirmed with Moody’s, Moody’s verbally clarified that KCPL’s ratings
would remain unchanged. See in particular Schedule
MWC-5(HC).
499 Id. Moody’s
Investment Service Letter to Michael Cline, dated January 12, 2007, 5. See also
MCW-5 (HC). Point in time assessment based upon certain set of
assumptions.
500 Id. The discussion
in the January 12, 2007 analysis was framed around KCPL as guarantor; however,
Moody’s subsequently confirmed the same methodology would apply with Great
Plains as guarantor.
502 GPE/KCPL Exh. 2, Bassham Supp.
Direct, p. 6. GPE/KCPL Exh. 9, Cline Supp. Direct, pp. 1-15. See also
Schedule MWC-6 (HC) listing the debt.
503
GPE/KCPL Exh. 2, Bassham Supp. Direct, pp. 6-7. As an example, as
Aquila’s actual debt cost increased over the past several years, but its ability
to recover those costs did not, the additional costs were borne by shareholders
and, therefore, created an under-earning situation. In Aquila’s case,
that under-earning grew to a point that when combined with its unregulated
losses, the company generated actual operating and capital
losses. Id.
380. As
of year-end 2006, the potential tax benefit associated with those net operating
losses is $426 million, net of proposed IRS adjustments and tax
reserves.504
381. The
nature of the transaction, specifically the sale of significant utility assets
to Black Hills, uniquely enables the use of much of Aquila’s net operating
losses. It would take several years for Aquila as a stand-alone
company to utilize these tax attributes, and to the extent not fully utilized,
they would have been lost. 505
382. Great
Plains’ ability to pay the price necessary to purchase Aquila and deliver
synergies is significantly supported by its ability to fully utilize the tax
losses of Aquila.506
383. Maintaining
high credit quality is vital to debt and equity investors, banks, and rating
agencies for three primary reasons: 507
(1) Investors
need to have confidence in a company’s credit strength and financial strength to
feel comfortable making capital available on attractive terms, particularly
given the number of investment alternatives otherwise available to
them.
(2) Achieving
an investment-grade credit rating will significantly lower Aquila’s cost of
debt.
(3) Equity
investor views of Aquila’s financial strength and credit quality will be a major
influence on Great Plains’ stock price. A number of other factors will also
impact the performance of Great Plains’ stock. However, because
Aquila’s earnings will represent a significant portion of Great Plains’ core
earnings and assets, assurance of Aquila’s continued strength is, and will
remain, extremely important to Great Plains investors.
_________________________
504 Id. at p.
6.
507
GPE/KCPL Exh. 1, Bassham Direct, pp. 12-13.
384. Aquila
would benefit from the achievement of an investment-grade rating primarily
through significant savings on new debt issued to fund future capital
expenditures.508
385. In
addition to significantly reduced interest costs, the strong financial profile
that goes hand-in-hand with an investment-grade rating will provide similar
benefits to Aquila in terms of Aquila’s ability to do the following:
(1) readily attract the capital needed to make infrastructure investments;
(2) meet its obligations in a timely fashion; (3) attract and retain a
high-quality workforce; and (4) invest in the communities it serves.509
386. In
June 2007, Aquila utilized cash on hand and a portion of the proceeds from the
sale of its Kansas Electric properties to retire a number of their debt
issues. In all, Aquila called four issues totaling
$344.0 million, with a weighted average coupon rate of 7.90%, and planned
to call approximately $2 million additional in August of
2007. The two largest issues retired as part of this activity,
$287.5 million of 7.875% Retail Quarterly Interest Bonds due in March 2032
and $51.5 million of 8.00% Senior Notes due in March 2023, had been assumed
to still be outstanding at closing when interest synergies were originally
calculated.510
_________________________
508
GPE/KCPL Exh. 8, Cline Direct, pp. 1-10; GPE/KCPL Exh. 1, Bassham Direct, pp.
12-13.
509
GPE/KCPL Exh. 8, Cline Direct, pp. 1-10.
510
GPE/KCPL Exh. 9, Cline Supp. Direct, pp. 1-15. The four issues retired are the
last four listed in the table entitled “Bonds Previously Tendered, Matured, or
Converting” in Schedule MWC-6 (HC). The approach a firm takes in
managing a portfolio of liabilities depends on its objectives. A firm
may decide to retire different debt issues if its goal is to reduce interest
expense on the income statement going forward than it might if the focus were on
minimizing the near-term volatility in reported results. A firm could
also choose to make maximum dollar reduction of debt the top priority for credit
reasons, or focus only on those issues that could be refinanced at lower rates
based on current borrowing cost or the opportunity cost of available cash.
Aquila’s liability management objectives in 2007 were originally projected to
focus more upon retiring their higher-cost debt issues in order to reduce
interest expense going forward. However, Aquila adopted an approach
that used its available cash to target issues that were callable either at par
(face value) or at a small premium. This enabled Aquila to maximize
the amount of debt reduction on their balance sheet, achieve some degree of
interest expense savings going forward, minimize the income statement hit that
would result from retiring higher-premium issues, and obtain positive
refinancing economics since the all-in cost, including call premiums, of the
retired debt was higher than the rate Aquila could earn by investing the cash at
money market rates. Id.
387. The
rating agencies have reinforced Aquila’s approach to retiring debt through their
rating changes on Aquila since the company’s announcement of this strategy.511 S&P
upgraded Aquila’s senior unsecured rating one notch, from B to B+, on
May 15, 2007, while Moody’s upgraded the senior unsecured rating two
notches from B2 to Ba3 on June 22, 2007. Despite these upgrades,
Aquila’s senior unsecured rating remains four notches below the lowest
investment-grade level of BBB- at S&P and three notches below the Baa3
investment-grade threshold at Moody’s.512
388. Aquila
plans to retire some of its debt prior to the closing deadline for the merger;
however, the exact amount is classified as being highly confidential and is
listed on Schedule MWC-6(HC).513
389. Portions
of Aquila’s debt will mature or covert prior to the closing deadline of the
merger.514
390. The
debt issues anticipated to remain on Aquila’s balance sheet at the time of the
deadline for closing the merger will still be retireable and Aquila has a number
of issues representing over 90% of its outstanding debt that could be fully
retired at a “make-whole” price.515
_________________________
511
GPE/KCPL Exh. 9, Cline Supp. Direct, pp. 1-15.
514 Id. See the table
entitled “Bonds Previously Tendered, Matured, or Converting” in Schedule MWC-6
(HC). For example, the remaining $2.6 million of Aquila’s Premium Income Equity
Security (PIES) will convert to common stock in September 2007. Id.
515 Id. The method for
determining the make whole price, when applicable, is outlined in the prospectus
for each security. Id.
391. The
balance of Aquila’s debt without a “make-whole” provision can be repurchased in
the market through a tender offer.516
392. Great
Plains expects that Moody’s and S&P’s would upgrade Aquila’s credit rating
to Baa2 and BBB, respectively, within a relatively short period following
closing of the merger.517 If realized,
this upgrade would result in an immediate coupon rate reduction in two of
Aquila’s senior note issues.518 Two of Aquila’s
high coupon debt issues have step-down provisions that lower the coupon on the
debt upon achievement of an investment-grade credit rating (i.e., Aquila has a
coupon debt issuance currently at 14.875% that will step down to 11.875% and
another coupon debt issuance currently at 9.95% that will step down to 7.95%
upon its achievement of an investment-grade credit rating).519
393. Ratepayers
would benefit from an upgrade in Aquila’s investment-grade credit metrics
because the expected credit ratings for Aquila post-merger (senior
unsecured ratings of BBB at S&P and Baa2 at Moody’s) are one notch
better than the lowest investment grade ratings used to establish the
actual interest cost allowed in current rates.520
394. Great
Plains has not yet prepared financial models that, in detail, determine the
borrowing needs of the Missouri assets to be acquired by Great Plains for 2008
and beyond. However, Great Plains’ financial advisor on the
transaction has prepared an indicative model that reflects cash requirements for
2008 and 2009.521
_________________________
516 Id. While there is
no certainty as to the amount of any particular issue that existing holders
would make available in response to a tender offer, it should be possible to
structure the terms of the offer in a manner that would be sufficiently
attractive to ensure a significant degree of investor
participation. Id.
518 Id. The prospectus
supplements for these securities, which include a description of the coupon
reductions, are attached as Schedule MWC-7 and MWC-8. Some of this
information is classified as being highly confidential and will not be reprinted
in this Order.
519
GPE/KCPL Exh. 8, Cline Supp. Direct, pp. 1-15.
520
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21.
521
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21. See Schedule
MWC-15. Again, some of this information is classified as being highly
confidential and will not be reprinted in this Order.
395. Great
Plains has also not yet made any definitive determinations as to how the funding
needs of the Aquila properties will be met; however, it is reasonable to assume
that Aquila being able to borrow at a senior unsecured debt rating of BBB/Baa2
would result in interest savings compared to equivalent borrowings at BBB-/Baa3,
whether the borrowings were short or long-term in nature.522
396. Also,
short-term borrowing facilities are frequently structured such that, within the
investment grade spectrum, an upgrade of one notch reduces the borrowing
cost. Great Plains’ revolving credit facility, as an example,
contains a “pricing grid” that reflects a difference between a senior unsecured
credit rating of BBB/Baa2 and BBB-/Baa3 of 10 basis points. This
reflects a difference in the interest cost only and does not take into account
any other fee reductions, e.g., commitment or
facility fees that would result from the upgrade.523
397. Of
Aquila’s total portfolio, nine issues totaling about $53 million were fully
allocated to Aquila’s Missouri operations at their actual coupon rates in
Aquila’s most recent rate case.524
398. Of
the remaining Aquila debt, a total of about 60% was allocated to Aquila’s
Missouri operations in varying proportions for each of the six individual
issues.525
_________________________
522 Id. As an example,
Schedule MWC-16 reflects the historical borrowing spreads, assuming issuance of
10-year debt, for utilities with a rating of “BBB” compared to those rated
“BBB-“ over the past nine years. As the Schedule indicates, the
average benefit to the higher rating over the period has been 25 basis
points.
523
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21.
524
GPE/KCPL Exh. 38, Cline Additional Supp. Direct, pp. 1-5.
525
GPE/KCPL Exh. 38, Cline Additional Supp. Direct, pp. 1-5. Approximately
$600 million of this debt was allocated at a blended interest rate of 6.78%
(compared to an actual weighted average interest rate of 12.69%). The
blended allocated rate reflected either (a) the actual all-in cost if the debt
was issued when Aquila was still investment grade; or (b) the investment grade
equivalent rate at the time of apportionment if the debt was issued when Aquila
was not investment grade. The two issues that received the treatment in
(b) included Aquila’s $500 million, 14.875% Senior Notes and Aquila’s $137.3
million, 9.95% Senior Notes. Id.
399. The
Applicants propose to use the established process for apportionments of the
remaining debt in future rate cases as Aquila’s Missouri rate base
increases.526
400. Once
those issues mature and are refinanced by Aquila, which the Applicants expect to
be an investment-grade company following the merger, Aquila will file for
recovery of actual interest costs of the replacement debt, and other debt it
issues, in rates going forward.527
401. Aquila
will be able to finance its operations at a lower cost going forward as a result
of Great Plains’ acquisition, and it is a reasonable assumption that
Missouri ratepayers will benefit in the long run from reduced interest
costs.528
402. There
are also qualitative benefits beyond lower interest costs that ratepayers will
derive from Aquila achieving investment grade status as a result of Great
Plains’ acquisition. Those benefits are:
(1) The
strength to access, on reasonable terms, the long-term capital it needs under
all market conditions; and
(2)
Attractive costs on future short-term borrowing facilities on an unsecured
basis, i.e., without the need to pledge Missouri assets as collateral to
creditors to support the transaction as is the case today.529
_________________________
526 Id. The $1.037
billion is $50 million higher than indicated in witness Cline’s earlier
testimony (see Cline Supplemental Direct, page 2, line 22), because Aquila
reallocated funds to support necessary capital expenditures. Id.
528
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21.
|
|
2.
|
Controverting
Evidence About Post-Merger Credit
Worthiness
|
403. Public
Counsel’s witness Mr. Dittmer’s530 testimony regarding the
company’s credit-worthiness following the merger can be summarized in the
following excerpt from his Rebuttal testimony:
In
summary, as much as I, Public Counsel, or this Commission might desire GPE/KCPL
to maintain their investment grade rating and Aquila to return to an investment
grade rating, it is difficult to envision any set of conditions that would
facilitate such result given 1) the price being paid for Aquila’s Missouri
electric properties, 2) the significant level of transaction and transition
costs estimated to be incurred, 3) the high cost of Aquila’s debt – even after
expected debt retirements – versus the amount of regulatory interest expense
that should be allowed in retail rates, all relative to 4) estimated “true” or
“created” merger savings. Because of these hurdles, the Public
Counsel cannot envision enough conditions or safeguards being implemented as to
adequately protect ratepayers from likely detriments stemming from the
transaction. Accordingly, Public Counsel’s position is to simply reject the
entire merger and attendant regulatory plan.531
404. Even
though Mr. Dittmer offered those criticisms, he also testified that:
(1) the purchase price for Aquila “looks very reasonable”;532 (2) the reduction
in Transaction Costs from $95 million to $65 million (Missouri
jurisdictional $47.2 million) worked to increase the numbers
positively;533
(3) the Applicants’ withdrawal of their request to recover Aquila’s actual
cost of debt changed his analysis of the potential benefits to consumers from a
negative to a positive number (and his testimony does not even take into account
the tax benefits Applicants will realize by assuming Aquila’s debt);534 and (4) because
they are adjoining companies, Aquila and KCPL “should achieve more synergies
than disjoined utilities,”535 and, in fact, he
“expect[s] there are some fairly significant synergy savings.”536
________________________
530 OPC
Exh. 200, Dittmer Rebuttal, pp. 15-16.
531 Id. at p. 15, line 20 to page
16, line 9.
405. Although
Mr. Dittmer was critical of the merger because of interest expense and the
effect of the transaction on the credit ratings of Great Plains, KCPL, and
Aquila, Mr. Dittmer does not discuss, qualitatively or quantitatively, any
potential interest cost, market access, or collateralization benefits from
the merger on Aquila’s future financing requirements, either in the first
five years following the proposed merger or beyond. Mr. Dittmer limited
his assessment to the effect of actual interest cost on Aquila’s current debt
portfolio in the first five years following the merger.537
406. Mr.
Dittmer cites two individual items that, in his opinion, could result in a
downgrade of Great Plains’ and KCPL’s credit ratings and, by extension, this
would preclude Aquila from attaining investment-grade status as well. The items
are (1) a write-off of merger “transaction costs;”538 and (2) an
inability to collect actual interest costs from ratepayers.539 Moreover, as
noted in Finding of Fact Number 404, Mr. Dittmer has changed his
position with regard to many of the factors underlying his analysis.540
_________________________
537
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21.
538 OPC
Exh. 200, Dittmer Rebuttal, pp. 15, 48.
539 Id. at pp. 15, 48, and
49.
540 Mr.
Dittmer also admitted that his initial analysis failed to evaluate the merit of
either the estimated Transaction or Transition Costs “because we didn’t need
to,” having arrived at his preliminary negative conclusion. Transcript, pp.
1724-1727. Mr. Mills then interjected that because of Public
Counsel’s “limited budget, we have not had Mr. Dittmer do a whole lot of work
since that time,” having only paid him to do the “analysis on the original case”
and not on the numbers now before the Commission. Transcript,
pp. 1724-1725.
407. Mr. Dittmer’s
conclusions are purely speculative because it is impossible to predict the
reaction of credit rating agencies to a single component of a transaction.541 S&P and Moody’s will
assess the credit ratings of Great Plains, KCPL, and Aquila based on the affect
of the merger in totality, not on any individual element. In doing so,
they will be assessing the reduction in Great Plains’ business risk that results
from the transaction, the projected quantitative effects (i.e., the
financial results and credit metrics, of the transaction over the next three to
five years), and the qualitative attributes of the deal, particularly their
views of regulatory support for post-transaction Aquila.542
408. Mr.
Dittmer also testified to there being a possibility of what he termed a “death
spiral”:
Commissioner Murray: Now,
considering the detriments that you see from the revised plan and, as I
interpret what you've said, all centering around a potential downgrade of
KCP&L if the synergies aren't realized, can you envision conditions which
would protect from those potential detriments?
Mr. Dittmer: I guess the short
answer is no. Where I get caught or hung up is, if the synergies
aren't real, let's say the Commission issues an Order and says we will initially
allow you to defer transaction and transition costs and we accept that you're
never going to ask for high cost in interest cost, but we expect you to prove it
up in the next rate case. Next rate case comes along and ultimately
parties disagree that the synergies have been realized and, therefore, you
determine that synergy savings won't cover all the costs they're trying to
recover in this proceeding, and now there will be -- now there will be a hit to
those financial matrix which drive the credit rating, credit rating agencies'
opinion. And at that point if there's a downgrade, there's high cost
interest that comes through the pipeline for the next rate case. At
that point, it would seem you would say, okay, we never saw this one coming
up. This is really a cost of them not being able to prove up, not
realizing their synergy savings. Now we've not only got high cost
debt on the Aquila side that we're going to pass on to ratepayers, we now have
high cost -- a little higher cost debt on the KCPL/Great Plains side, and we're
not going to allow recovery of that, and then you start moving into the
so-called death spiral. That's the problem.543
_________________________
541
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21; OPC Exh. 200, Dittmer Rebuttal,
pp. 15-49.
543
Transcript, pp. 1687-1689.
409. Mr.
Dittmer’s “death spiral” testimony is found not to be credible and will be given
no weight, because it was based upon the hypothetical that no synergies would be
realized and he has already testified in this matter that the merger would
result in significant synergy savings.544
410. The
Industrials’ witness Mr. Brubaker’s overall conclusion is outlined in his
Rebuttal Testimony. He states that “the merger proposal and
regulatory plan would be a detriment to customers and create unacceptable
risks,” therefore, “the proposed merger and regulatory plan should be
rejected.”545
411. There
is no longer a regulatory plan to consider, and Mr. Brubaker did not update
or supplement his testimony.546 And like
Mr. Dittmer, Mr. Brubaker does not discuss, qualitatively or
quantitatively, any potential interest cost, market access, or collateralization
benefits from the merger on Aquila’s future financing requirements, either in
the first five years following the proposed merger or beyond. He
limited his assessment to the effect of actual interest cost on Aquila’s current
debt portfolio in the first five years following the merger.547
412. Like
Mr. Dittmer and Mr. Brubaker, the Commission’s Staff concludes, as outlined
in the opening sentence of their report, that:
The
proposed transaction . . . will cause a net detriment to the public
interest because the cost of service to establish rates for Missouri ratepayers
of Aquila and KCPL, as a direct result, will be higher than the rates would be
absent the proposed transaction.548
_________________________
544
Transcript, p. 1724-1727.
545
Industrials Exh. 300, Brubaker Rebuttal, p. 3.
546 Mr.
Brubaker did not provide live testimony for the Commission, nor did the
Industrials file any supplemental testimony.
547
Industrials Exh. 300, Brubaker Rebuttal, pp. 1-14 and accompanying appendices;
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21.
548 Staff
Exh. 100, Schallenberg Rebuttal, Attached Report, p. 1.
413. With
respect to interest, and credit ratings, the Staff’s Report does not discuss,
qualitatively or quantitatively, any potential interest cost, market access, or
collateralization benefits from the merger on Aquila’s future financing
requirements, either in the first five years following the proposed merger or
beyond. Staff limited their assessment to the effect of actual
interest cost on Aquila’s current debt portfolio in the first five years
following the merger.549
414. In
the Executive Summary section of Staff’s Report, Staff asserts that “GPE does not have the
financial strength to acquire Aquila and absorb Aquila’s financial difficulties
without seriously weakening GPE’s financial condition.”550 In support of this
position, the Staff Report includes an excerpt from the S&P Ratings
Evaluation Service assessment done prior to Great Plains’ announcement of the
merger which lists several regulatory support considerations deemed important by
S&P in achieving the indicated rating outcome.551 Staff’s
implication, expressed in the Report is that only strong regulatory support of
the merger would provide the appropriate safeguards to prevent a downgrade in
Great Plains’ and KCPL’s credit rating.552
415. Staff’s
assertion, in Finding of Fact 414, is based upon a selective quote from the
S&P report. The S&P report cited does not reference
regulatory safeguards exclusively but also references “compensating
modifications.”553 When
questioned about other compensating mechanisms to help prevent a down grade,
witnesses Bassham and Cline observed that there were always a number of
alternatives available to the company for purposes of maintaining their credit
rating, including, but not limited to: (1) different types of financing;
(2) changing corporate structure such as selling a subsidiary (like
Strategic Energy which Great Plains recently sold); and (3) evaluating and
changing spending both from a capital and an O&M perspective.554
_________________________
549 Staff
Exh. 100, Schallenberg Rebuttal and Attached Report; GPE/KCPL Exh. 10, Cline
Surrebuttal, pp. 1-21.
550 Staff
Exh. 100, Schallenberg Rebuttal, Attached Report, p. 1.
551
GPE/KCPL Exh. 9, Cline’s Supplemental Direct Testimony, Schedule
MWC-4.
552 Staff
Exh. 100, Schallenberg Rebuttal, Attached Report, p. 1-2; GPE/KCPL Exh. 10,
Cline Surrebuttal, pp. 1-21.
554
Transcript, pp. 2376-2377 and 2582.
416. Staff’s
second assertion in its Staff Report is that “GPE’s acquisition of Aquila will
weaken KCPL’s financial condition at a time when KCPL is committed to
significant capital expenditures.”555 Notwithstanding Great
Plains’ placement on CreditWatch – Negative by S&P, the customary action
with respect to an acquiring company when a merger is announced,
KCPL readily accessed the long-term debt markets for $250 million in
June 2007 and the tax exempt debt markets for nearly $150 million in
September 2007 on attractive terms in both cases.556
417. KCPL’s
experience under CreditWatch since the announcement of the merger is not
consistent with a “weakened” financial condition as posited by Staff.557
418. KCPL’s
credit ratings at Moody’s have been entirely unaffected by the merger
announcement.558
419. Staff’s
third assertion is that “[t]he GPE acquisition of Aquila will expose Aquila to
GPE’s current non-utility risk caused by GPE’s affiliation with an unregulated
competitive supplier of electricity, Strategic Energy, L.L.C.,”559 Staff is referring
to a potential risk to Aquila’s credit rating that might arise from S&P’s
“consolidated rating methodology” whereby subsidiary credit ratings can be
influenced by changes in the credit rating of the parent company.560 There is
nothing in the S&P assessments that supports Staff’s assertion of an
increase in Aquila’s risk related to Strategic Energy. S&P
indicated that Aquila’s Business Risk Profile, currently “6”, would remain “6”
post-merger.561 In addition,
Strategic Energy was sold on June 2, 2008, for $305 million providing Great
Plains a working capital adjustment.562
_________________________
555 Staff
Exh. 100, Schallenberg Rebuttal, Attached Report, p. 1-2.
556
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 1-21.
557 Id. See also Staff
Exhs. 124 (HC), 125 (HC).
559 Staff
Exh. 100, Schallenberg Rebuttal, Attached Report, p. 2.
560 Staff
Exh. 100, Schallenberg Rebuttal, Attached Report, p. 1; GPE/KCPL Exh. 10, Cline
Surrebuttal, pp. 1-21.
561
GPE/KCPL Exh. 10, Cline Surrebuttal, pp. 17-18. See in particular
Schedules MWC-4 and MWC-5 of Cline’s Supplemental Direct
Testimony. Staff Exhs. 124(HC), 125(HC). Strategic Energy was sold on
June 2, 2008, for $305 million providing Great Plains a working capital
adjustment. Transcript, p. 3163. See also Staff Exhs. 136
and 137.
562 Transcript, p. 3163. See
also Staff Exhs. 136 and 137.
|
|
a.
|
Changes
in Key Assumptions Utilized by the Credit Rating
Agencies
|
420. Several
of the assumptions, taken under consideration by S&P’s and Moody’s, as
provided by Great Plains and KCPL in January 2008 when the agencies made their
projected ratings outcome predictions and set out in S&P’s and Moody’s
letters to Great Plains and KCPL, have changed.563
421. The
Applicants filed additional testimony on February 25, 2008 outlining their
revised merger proposal: (1) withdrawing their request for approval of
recovery of interest costs associated with non-investment grade Aquila debt and
instead proposing to follow the debt interest cost recovery procedure utilized
in the most recent Aquila rate case, (i.e., any non-investment grade debt
of Aquila will be assigned for purposes of setting retail rates and
investment-grade interest rates for comparable debt); (2) withdrawing their
request for approval of a specific synergy savings plan, i.e., retention of
50% of purported operational synergies, and replacing it with a proposal to
utilize the natural regulatory lag between rate cases to retain any portion of
synergy savings; (3) withdrawing their request for approval of an
additional amortization for Aquila similar to the KCPL Regulatory Plan
additional amortization; and (4) withdrawing their request for recovery of
certain transaction costs - change in control costs and rabbi trust,
representing Aquila’s supplemental executive compensation plan, thus decreasing
transaction and transition costs.564
_________________________
563 Transcript Vol. 18(HC), Bassham, pp.
2335-38, 2357-2361; Ex. 38(HC), Schedule MWC-18(HC), p. 9; and Schedule
MWC-19(HC), p. 9. See also Staff Exhs. 124(HC), and
125(HC).
564 Id. GPE/KCPL Exh. 37, Bassham
Additional Supp. Direct, pp. 1-6. The
Industrials cite to several other changes in key assumptions provided to the
credit rating agencies, but the Industrials appear to be referring to
assumptions for the 2007 credit rating projections. One of those
changes involved the sale of Strategic Energy, L.L.C., i.e. because of its
recent sale it will no longer provide annual revenues. Other changes
in key assumptions from the 2007 projections include: (1) no issuance of
$250 million of hybrid securities in 2007, however, this is still being
considered this for the future (Transcript, p. 2377); and (2) Aquila did not
receive a 2007 rate increase of 14.1% but rather received one of
11.9%. It appears these changes were all taken into consideration by
the agencies in the January 2008 projections. See Exhs. 124 and
125(HC). One other assumption has obviously changed -- the
merger did not close in the first quarter of 2008 because this Commission was
still evaluating the Applicant’s request to approve the
merger.
422. The
rating agencies’ projections did not include an evaluation of the changes in the
merger proposal described in items 3 or 4 in Finding of Fact 421.565
_________________________
565 See
Staff Exhs. 124, 125, Schedules MWC-5, 18, and 19. See also Findings
of Fact Number 460. For changes in the merger plan see EFIS Docket
Number 386, Identification of
Evidence that is No Longer Relevant to the Joint Application, filed by
Great Plains and KCPL on May 9, 2008, pursuant to the Commission’s order, EFIS
Docket Number 313, Order Directing Identification of Irrelevant Evidence,
effective April 18, 2008; EFIS Docket Number 234, Motion for Leave to File Additional
Supplemental Direct Testimony and Notice of Withdrawal of Certain Regulatory
Plan Requests, filed February 25, 2008 by Great Plains and
KCPL. The Commission notes that Public Counsel, in its brief, takes
exception with the Commission relying, in any way, upon Schedules MWC-18(HC) and
MWC-19(HC) because witness Cline was unable to answer certain questions with
regard to specific items on those schedules. See Transcript, pp.
2543-2622. However, the two exhibits in question, involving the
January 2008 presentations to S&P’s and Moody’s, mirror the same information
contained in Staff’s Exhs. 124 and 125 and contain the “Key Assumptions”
utilized by the credit rating agencies when offering their projections in
January 2008. Mr. Cline’s inability to answer specific questions
regarding individual line items in the Schedules, which as a standard company
practice were prepared by other company experts, does not diminish the
evidentiary value of the Schedules themselves, especially in light of Staff’s
collaborating evidence in Exhs. 124 and 125. Moreover, Public Counsel
has relied on these exhibits to support its arguments that certain Key
Assumptions were not evaluated by the credit rating agencies, and cannot now be
heard to complain to the use of the same documents to confirm what Key
Assumptions actually were evaluated by the agencies.
423. The
rating agencies projections did include assumptions for future additions to rate
base,566 and did
include an assumption that Strategic Energy would be sold, although the
assumptions were that it would sell for a lesser amount than the sale
netted. Pressure on cash flow was offset by the sale of Strategic
Energy for $305 million.567
424. On
March 20, 2008, S&P upgraded Aquila’s credit rating to a double B
minus, and Aquila remained on “credit-watch positive” status.568
425. This
upgrade was not hindered by Aquila not having a regulatory plan in place
involving accelerated amortization because other options are available to Aquila
to relieve pressure on cash flow.569
|
|
b.
|
Cost
and Schedule of the Iatan Construction
Projects
|
426. Another
issue interrelated to the credit-worthiness of the Applicants relates to whether
management of the infrastructure projects of the CEP (the Iatan Unit 1 and
Unit 2 projects) in conjunction with the merger created a risk of a
downgrade of the Applicants’ credit ratings.570
427. Prior
to the release of the reforecast of the costs and schedule of the Iatan
projects, Mr. Bassham testified that the cost and schedule estimates for
Iatan 1 and 2 compiled at the end of April did not present undue risk
to Great Plains Energy and KCPL, and that the companies possessed sufficient
financial flexibility to consummate the merger and carry out the projects.571
_________________________
566 Mr.
Bassham testified that those assumptions involved the addition of the
environmental add to Iatan 1, the environmental add for Aquila at Sibley, and
the 09 for the addition of Iatan 2. Transcript 2339 Volume 18(HC) –
this portion declassified on June 24, 2008. Additionally there was an
assumption that the Crossroads facility would be placed in rate base, but
currently there is no availability to get transmission from this generating
facility into Aquila’s Missouri service area. Transcripts pp.
2857-2859. See also Volume 20(HC) pp. 2554-2555.
567
Transcript, p. 3163; Staff Exhs. 124 and 125, See also Schedules MWC-18(HC) and
MWC-19(HC).
569
Transcript, pp. 2597-2600.
570 See
Transcript Volumes 19, 20, 21, and 22.
571
Transcript, pp. 2380-2384.
428. As
KCPL President William H. Downey testified, these increases in costs
and minor delays in schedule are the product of an “extraordinary period” of
labor and construction industry issues. The electric utility
industry, not just in the United States, but worldwide, is in a building mode,
which has increased demand not only for the sophisticated equipment needed to
build power plants, but also for labor.572 Inflation is
on the rise, and the value of the U.S. Dollar has fallen.573
429. Chairman
of the Board Michael Chesser advised the Commission that even in light of
these economic trends, he believed that Great Plains and KCPL would remain
financially strong post-merger and that, based on discussions with rating
agencies, a credit downgrade was “very unlikely.”574
430. Mr.
Chesser noted that with Aquila’s debt being reduced, additional assets being
placed in rate base, “significant growth” in Aquila’s service area, and the sale
of Strategic Energy, the rating agencies are viewing Great Plains “as a pretty
positive story.”575
431. Mr.
Michael Cline, KCPL’s treasurer, echoed these sentiments, stating that the
results of the reforecast were not likely to have a negative effect, and there
is no evidence of such a decline to-date.576
_________________________
572
Transcript, pp. 2479-2481, 2484; Industrials Exh. 305, Securities and Exchange
Commission Form 8-K, p. 2.
574
Transcript, p. 2528, 2539-40.
575
Transcript, p. 2539-40.
432. KCPL
witnesses involved in the Iatan construction projects emphasized the utility’s
efforts to keep a strict account of cost issues through an evaluation of risks
and opportunities through what are known as Risk and Opportunity Tables, as well
as a comprehensive reforecast process.577
433. KCPL
has recruited highly qualified individuals to manage the Iatan construction
projects and retained competent outside experts to review the decisions being
made.578
434. Terry
Foster, Director of Project Controls at Iatan, has spent over 40 years in the
electric utility industry.579
435. Brent
Davis, now Iatan 1 Project Director, has worked on Iatan 1 and 2
projects since June 2006.580
436. Both
Mr. Foster and Mr. Davis testified that their full attention is
devoted to the Iatan projects, that they are not involved with the acquisition
of Aquila or related creditworthiness issues, and that they do not serve as
members of any merger integration team.581
437. A
new vice president of construction has been hired to replace the manager, who
had started the reforecast process in 2007 but resigned in February to re-join
the non-regulated utility sector.582
_________________________
577 Transcript, pp. 2467-2484 (Downey);
2715-28 (Davis); 2756-62 (Foster).
579
Transcript, p. 2755. In the last ten years Mr. Foster worked for
Fluor Daniel as the project director for a standalone project with Carolina
Power & Light, was director of project controls for all capital projects at
American Electric Power Co., and was the regional quality control manager for
projects overseen by Black & Veatch. Transcript, p.
2755.
580
Transcript, pp. 2713-2714. Mr. Davis has worked for KCPL since 1980
at all four of its coal-fired power plants, and most recently served as plant
manager at Hawthorn 5. Transcript, pp. 2713-2714.
581
Transcript, pp. 2746-2747, 2752 (Davis); 2754, 2799-2800
(Foster).
582 Transcript, pp. 2487-2489,
2708.
438. Witnesses
James Rose, Aquila’s Senior Manager in the Risk Assessment Audit Service
Department and Max Sherman, Aquila’s Vice President of Strategic
Initiatives
provided testimony regarding statements made at the February 14, 2008 joint
owners’583 meeting
discussing the Iatan 1 construction project. These witnesses attested
to statements made at this meeting that the upcoming budget reforecast numbers
for the Iatan project were not based in “reality.”584 However,
these witnesses did not provide any testimony based upon their individual
expertise that objectively quantified any budgetary implications for the
construction project or any specific time constraints that could affect the
Applicants’ credit ratings.585
439. The
public statements issued by Great Plains and KCPL on May 7, 2008, disclosed
that while overall projected costs rose by 19%, Iatan 1 will experience a
delay of 47 days to February 1, 2009, and Iatan 2 remains on
schedule to be completed in the summer of 2010.586
_________________________
583 The
Joint Owners of Iatan 1 include Aquila, KCPL, and the Empire District Electric
Company.
584
Transcript, Volume 21, pp. 2805-2834. See in particular pp. 2822 and
2826. See also Staff Exh. 146.
James Rose has worked for
Aquila for eight years. Prior to working for Aquila, he worked for
ten to eleven years with United Cities Gas Company in various
positions. He worked in the regulatory group, in internal auditing,
and in operations. He spent two years in Applebee's internal audit
group, and then came to Aquila. He started out as a senior auditor
and progressed up to his current position. He has earned a Bachelor
of Science Degree in Accounting and is a Certified Public
Accountant. He has performed construction audits, but not at the
magnitude of Iatan. He has also been to a number of training seminars
through the Institute of Internal Auditors and other organizations.
Transcript,
Volume 21, pp. 2835-2884. See in particular p. 2849.
Max Sherman, in his role as
Aquila’s Vice President of Strategic Initiatives, is the co-owner representative
for the company on Aquila's minority-owned interests in a couple of coal
projects: the Iatan station of which KCPL is the primary owner, and the Jeffrey
Energy Center in Saint Maries, Kansas, in which Aquila has a small ownership
share. He was responsible for filing special use permit applications
for South Harper and also led the development effort for the potential expansion
site in Sedalia, Missouri. He has been employed by Aquila for a total
of approximately ten years. Former positions include being an owners’
representative on a dormitory construction job in grad school; four years with
Commonwealth Edison on the Clinch River Breeder Reactor as cognizant
engineer; senior staff for the owner of the Grand Gulf Nuclear
Station in Port Gibson, Mississippi; power marketer for Entergy; asset manager
for 809 megawatts of utility generation; developer of the Aries Power
Plant and of Crossroads Energy Center in Clarksdale, Mississippi, a 308-megawatt
peaking station in Clarksdale; and was a consultant through Tyr Energy out of
Overland Park, Kansas, assisting Aquila's Merchant
business. Currently he is responsible for oversight or monitoring of
Iatan on behalf of the minority owner.
586
Industrials Exh. 305, Securities and Exchange Commission Form 8-K, pp. 2-3;
Transcript, pp. 2380-2381.
440. KCPL’s
share of the cost of the Iatan 1 environmental retrofits increased from the
previous estimated range of $255-264 million to $330-350 million, a
33% rise from the top end of the prior estimate.587 The
mid-point estimate is a 28% increase.588
441. The
cost estimate for Iatan 2 experienced a mid-point increase of 10%, from the
control budget estimate of $1.685 billion to $1.861 billion.589
442. KCPL’s
approximately 55% share of Iatan 2 has increased from the previous 2006
range of $837-914 million to a range of $994 million to
$1.050 billion, with the top end of the range representing a 15%
increase.590
443. Both
Great Plains Chairman Chesser and KCPL Treasurer Cline believed that a downgrade
in the credit ratings would not occur even given the changes in the original
assumptions.591
444. During
the hearings, Mr. Bassham testified that he was “very confident” that the
credit ratings of KCPL and Great Plains “would remain consistent with the
information we discussed with Moody’s and Standard & Poor’s” earlier in
2008.592 He also
testified that he did not believe that a down grade is “likely” by Moody’s,
particularly since its credit rating of Baa2 “is one notch above Standard &
Poor’s.”593
_________________________
587
Industrials Exh. 305, Securities and Exchange Commission Form 8-K, p.
2-3.
589
Transcript, pp. 2380-2381.
590
Industrials Exh. 305, Securities and Exchange Commission Form 8-K, p.
2-3.
591
Transcript, pp. 2539-2540 (Chesser); and p. 2585 (Cline).
593
Transcript, pp. 2322-2323.
445. Although Moody’s had recently placed
the companies on a negative outlook, Mr. Bassham explained that this was not a
down grade, but rather an indication of concern as a “result of the
[Applicants’] revised [merger] request” and “the fact that [the companies] had
agreed to absorb [Aquila’s] interest costs [which] would cause there to be less
flexibility….”594
446. Given that credit ratings are not
normally changed because of a single event and that multiple factors are
included in a rating agency’s review, Mr. Bassham concluded that under the
Applicants’ revised regulatory requests, “with all the work we’ve done, we don’t
see the merger in and of itself causing a downgrade.”595
447. On
April 29, 2008, when asked if he had an opinion as to how likely he thought that
a downgrade may result from approval of this transaction, the following exchange
occurred:
Mr. Mills: Okay. Do you have
an opinion today as to how likely you think it is that a downgrade may result as
- -- from approval of this transaction in Missouri?
Mr. Chesser: I think it's very
unlikely that a downgrade would result. And it's based on, as I said before, not
only the letters and advice that we've gotten from the Commission, but also my
- -- from the rating agencies -- but my experience in working with them through
the years. You know, I think they look at the longer view, not just
the short term, and I think they see in our long-term picture the Aquila debt
working off, Strategic Energy being sold, additional assets being put in the
rate base, significant growth from the Aquila service area. So I
think that all adds up. I believe that all adds up into their eyes as
a pretty positive story.
_________________________
594
Transcript, pp. 2321-2322.
Mr. Mills: So in other words,
you think it's a very minimal risk that a -- that a downgrade will result from
this merger?
Mr. Chesser: I do.596
448. Although
Great Plains and KCPL senior management express confidence that Great Plains and
KCPL will not experience a downgrading from the credit rating agencies as a
consequence of the acquisition of Aquila, they stated that there was some risk
that a downgrade would result by the rating agencies from approval of the
transaction as presently proposed by the Applicants.597
449. Great
Plains and KCPL senior management also indicated that they did not think it was
appropriate to have the shareholders fund the costs of any credit rating
downgrading.598
450. On
May 23, 2008, a Manitowoc 18000 crane (the “Crane”) being used to install
environmental upgrades on the Iatan construction projects collapsed.599
451. At
the time of its collapse, the Crane had just been wind tested, it was not
bearing any load and it was being lowered, having determined that it was too
windy to lift the ductwork that had been planned.600
452. When
the Crane collapsed, four people were injured, one fatally. The
injured individuals were employees of Aerotech and Alstom Power
Incorporated. They were not Aquila or KCPL employees.601
_________________________
596
Transcript, pp. 2539-2540.
597
Transcript, pp. 2539-2541 (Chesser); pp. 2497-2504 (Downey); and pp. 2320-2325
(Bassham).
598
Transcript, pp. 2539-2541 (Chesser); pp. 2496, 2598, 2599 (Downey); and pp.
2319-20, 2321, 2323-25 (Bassham).
599
Transcript, pp. 3152-3153.
600
Transcript, pp. 3149-3155.
453. Construction
was halted, appropriate emergency personnel were dispatched and the Occupational
Safety and Health Administration (“OSHA”) restricted access to the damaged Crane
to perform an investigation. OSHA released the site surrounding the
Crane on June 10, 2008.602
454. Construction
personnel returned to the worksite on May 27, 2008, and continued with
other duties, the day after the Memorial Day holiday.603
455. Demolition
of the damaged Crane will take approximately 10 to 12 days and alternatives
are being considered to continue with the installation of the environmental
upgrade.604
456. The
evidence in the record indicates that the accident, while creating a challenge
for the construction projects, should not have an effect on either the projected
completion dates or exceed the allocated contingency funds.605
457. There
is no competent, credible evidence in the record that the crane accident will
affect the schedule for completion of the construction projects or increase
costs beyond contingency planning.606
458. There
is no competent, credible evidence in the record that the Crane accident will
affect the credit ratings of Great Plains, KCPL or Aquila.
|
|
3.
|
“Additional
Amortizations”
|
459. The
Applicants withdrew their request that the Commission approve a regulatory or
“additional” amortization provision for Aquila and instead intend to initiate
discussions, post-close of the transaction, with interested parties to develop a
regulatory plan for Aquila that might include an amortization provision as part
of that regulatory plan.607
_________________________
602
Transcript, pp. 3158-3159.
604
Transcript, pp. 3187-3191.
605
Transcript, pp. 3191-3195.
606
Transcript, Volumes 25-26.
607 GPE/KCPL Exh. 37, Bassham
Additional Supp. Direct, p. 4. Mr. Bassham explained to Commissioner
Clayton that while the Applicants are not asking for a specific regulatory
amortization treatment in this case, “we would like ... to work with
the parties to develop a plan similar to what we did with
KCPL. Assuming we’re not able to achieve that, we might propose our
own plan in the first rate case.” Transcript, pp.
1312-1313.
Because
the request was withdrawn, Public Counsel's witness Russell Trippensee’s testimony
(Public Counsel Exh. 201) is predominantly irrelevant, except to the extent that
it could demonstrate that Great Plains’ and KCPL’s credit-worthiness would
decline as a result of not having an additional amortization regulatory plan
approved, and the Commission finds that his testimony fails to establish such a
scenario. Mr. Trippensee also testified that “[t]here’s no
tracing of debt to specific investments at all.” Transcript,
pp. 2967-2968. He stated that when the ratios and formula are in
place and after the Commission sets rates on a traditional basis in a future
rate case, only then would the Additional Amortization process be used “to
reflect the additional cash flow necessary to meet ... that ratio
target that was set out in the plan ....” Transcript, p.
2978.
Russell W. Trippensee is the
Chief Utility Accountant for the Missouri Office of the Public Counsel. He is a
Certified Public Accountant, Missouri certificate/license number
2004012797. He attended the University of Missouri at Columbia, from
which he received a BSBA degree, major in Accounting, in December
1977. He also completed the requisite hours for a major in
finance. He attended the 1981 NARUC Annual Regulatory Studies Program
at Michigan State University and has attended numerous seminars and conferences
related to public utility regulation. From May through August, 1977,
he was employed as an Accounting Intern by the Missouri Public Service
Commission. In January 1978 he was employed by the Commission as a Public
Utility Accountant I. He left the MPSC staff in June 1984 as a Public
Utility Accountant III and assumed his present position. He has
served as the chairman of the Accounting and Tax Committee for the National
Association of State Utility Consumer Advocates from 1990-1992 and is currently
a member of the committee. He is also a member of the Missouri
Society of Certified Public Accountants. While employed with the
Commission, he supervised and assisted with audits and examinations of Missouri
public utility companies with regard to proposed rate increases. In
the Public Counsel’s Office, he is responsible for the Accounting section and
performs audits and examinations of public utilities. He previously
testified before the Commission.
460. There
is no current, applicable or relevant additional amortization provision or plan
in the evidentiary record for the Commission to evaluate when considering the
merger application.608
_________________________
608
Testimony from both Michael Cline (GPE/KCPL) and Robert Schallenberg (Staff)
confirmed that any cash flow from Additional Amortizations was “fungible,” and
not specifically separated out or directed to specific capital investments or
other utility projects. Transcript, pp. 2956, 2958 (Cline);
Transcript, pp. 2994-96 (Schallenberg). Mr. Schallenberg agreed with
Commissioner Clayton that the “focus” of Additional Amortizations “is less on
the actual dollar amount that’s going into construction but more on the credit
metrics” of the utility’s regulatory plan. Transcript, p.
2995. Mr. Schallenberg noted that in KCPL’s case the cash flow from
Additional Amortizations “doesn’t identify Iatan 2” or any other construction
project and “isn’t designed to specify ... different power
plants.” Transcript, p. 2994. He observed that arriving at
amounts for Construction Work in Progress, if it were permitted in Missouri,
would involve “calculations [that] are completely
different.” Transcript, p. 2997. “In fact, if you were
really trying to isolate part of an entity’s construction activities, you
probably wouldn’t want to use the [Additional Amortization’s] formula
approach.” Transcript, p. 2996.
|
|
4.
|
Actual
Debt Cost Recovery
|
461. There
is no current, applicable or relevant proposal for recovery of Aquila’s actual
debt interest in the evidentiary record for the Commission to evaluate when
considering the merger application, because the Applicants have withdrawn their
request with respect to recovery of Aquila’s actual debt interest based on past
commitments made by Aquila with respect to certain specific debt issues. 609
462. Great
Plains has quantified the effect of not recovering actual debt interest on the
Aquila debt portfolio under the “no refinancing” assumption. The
difference between actual and regulatory debt interest costs, under the “no
refinancing” assumption, as well as other assumptions regarding projected
rate base growth at Aquila and debt apportionment methodology, is
approximately $120 million over the 2008–2012 period.610
463. As
previously found, the Applicants propose to use the established process for
apportionments of the remaining debt in future rate cases as Aquila’s Missouri
rate base increases.611
464. Applicants’
withdrawal of their request to recover all of Aquila’s actual debt costs will
not have an adverse effect upon KCPL’s credit-worthiness.612
_________________________
609
GPE/KCPL Exh. 38, Cline Additional Supp. Direct, pp. 1-5. With regard
to recovery of debt repurchase costs, the initial merger plan was to use a
combination of cash remaining from the Black Hills sale and new hybrid debt
issued by Great Plains Energy to retire all but one of Aquila’s currently
outstanding long-term debt issues, i.e., the $500 million Senior
Notes that mature in July 2012. The Applicants’ initial request
included this cost in the total actual interest cost they sought to recover in
rates; however, a re-evaluation of the Applicants’ position with respect to
actual interest, as well as the collapse of the hybrid debt market in the last
few months of 2007, led Great Plains to reconsider the refinancing strategy
previously articulated. Great Plains does not plan to move forward
with refinancing any of Aquila’s existing debt post-closing that would give rise
to debt repurchase costs for which it would seek recovery from Missouri
customers. GPE/KCPL Exh. 38, Cline Additional Supp. Direct, pp.
1-5.
610 Id. See in
particular Schedule MWC-17(HC). Cline Additional Supp. Direct, p. 4. With
the recovery of actual interest and the net debt reduction that would have
resulted from the refinancing strategy no longer part of the proposal, Great
Plains and KCPL would retain their current credit rating and Aquila would
achieve an investment grade credit rating upon the closing of the merger.
GPE/KCPL Exh. 38, Cline Additional Supp. Direct, pp. 1-5. Copies of Great
Plains’ presentations to S&P and Moody’s are attached as Schedules
MWC-18(HC) and MWC-19(HC), respectively.
611
GPE/KCPL Exh. 38, Cline Additional Supp. Direct, pp. 1-5.
612
GPE/KCPL Exh. 38, Cline Additional Supp. Direct, pp. 1-5.
|
H.
|
Findings
of Fact Regarding Service Quality
|
465. Both
Aquila and KCPL have received multiple awards for service quality.613
466. KCPL
was recently awarded the National Reliability Excellence Award by
PA Consulting (October 2007); the EEI Edison Award; the EEI Outstanding
Customer Service Award for Mid-Sized Utilities (May 2007); and is ranked Number
Three in the Midwest by JD Power for Customer Service Satisfaction for
Business Customers (March 2007).614
467. Aquila
was also recently awarded the JD Power award for Outstanding Customer
Service Experience (September 2007).615
468. To
ensure quality service, KCPL and Aquila are expending significant resources
during the nearly one year prior to actual integration to plan the merger.616
469. This
significant investment in planning and employee time will help ensure that the
proper plans are put in place and proper risks mitigated.617
470. This
significant lead time on quality service planning will ensure that merger
integration is conducted at a measured pace rather than an overly aggressively
one. 618
471. KCPL
employees have engaged in integration planning activities since the due
diligence phase of the process in July, 2006. This timing means that
KCPL employees will have spent over 18-24 months planning for the merger
and considering service quality issues by the time the merger closes.619
________________________
613
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19. See generally
Transcript, pp. 2200-2237.
614
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19. See in particular
Schedules JRM 9-12.
615
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
472. Specific
measures being taken within Customer Service include:620
(1) KCPL
has reached agreement with Jim Alberts to lead Customer Service operations for
both companies. Mr. Alberts is a key reason for Aquila’s successful,
and award winning, customer service operations.
(2) KCPL
will provide incremental Customer Service Representatives at the time the merger
closes to ensure a smooth transition. This action will help avoid any
service quality degradations that stem from underestimating the demands of the
newly integrated companies and the uncertainties that customers face in the
post-merger environment.
(3) The
merger will leverage the best practices of KCPL and Aquila to ensure the best
possible service.621
(4) Operations
will be integrated in Raytown for a single location from which to conduct
Customer Service operations. To further mitigate potential risks, the
decision has been made to use separate customer information systems from Day
1. This will enable Customer Service Representatives to use a
familiar interface and it will ensure that there are no data conversion
issues. Over time, the customer information systems will be migrated
to a common interface. Prior to that point, employees will have ample
time to train on the new system to facilitate a smooth transition.622
_________________________
621 Id. As an example, on the
Sibley Unit 1 and Unit 2 opportunity, KCPL will use its significant
combustion engineering and outage planning experience. This knowledge
has been demonstrated at KCPL plants and will be essential if Sibley is to
realize higher output. A similar combustion improvement project on
LaCygne Unit 1 resulted in increased operating capacity. KCPL will
apply tested and proven technical resources together with in-house-developed
methodologies. Additionally, the optimization for Sibley Unit 1 and
Unit 2 will eliminate or reduce the need for fall cleaning
outages. None of the Aquila units have intelligent sootblowing, so
all can benefit. Id.
622
Transcript, p. 2220. Additionally, Great Plains and KCPL have taken
the proper steps to ensure that the integration of the companies’ IT systems
will be transparent to the external customer and will have minimal impact on the
internal users of IT services. GPE/KCPL Ex. 27, Tickles Supp. Direct,
p. 3.
473. Service
quality will be measured by service quality metrics following the
merger. Key metrics such as customer satisfaction and reliability
(e.g., System
Average Interruption Duration Index (“SAIDI”)) will be measured to gauge
progress.623
474. With
regard to service quality issues and the management structure following the
merger, very little change will occur within Great Plains Energy or KCPL
executive management. Personnel placements that are planned include:
(1) Michael Chesser will remain Chairman of the Board of Great Plains
Energy and KCPL, as well as Chief Executive Officer of Great Plains;
(2) William H. Downey will remain President of Great Plains
Energy and KCPL, as well as Chief Operating Officer of Great Plains Energy and
Chief Executive Officer of KCPL; (3) William H. Downey will
become President and Chief Executive Officer of Aquila; (4) the membership
of the Boards of Directors of Great Plains and KCPL will be unaltered;
(5) Great Plains Energy’s corporate headquarters will remain at
1201 Walnut; (6) Aquila corporate employees will relocate to Great
Plains Energy’s existing office space and other facilities; (7) there will
be little to no change in the senior management team of Great Plains and KCPL;
and (8) while there will be no immediate reduction in current union
employees, the companies anticipate eliminating approximately 250-350
overlapping administrative, management and support positions over a five (5)
year period.624
_________________________
623
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
624
GPE/KCPL Exh. 13, Downey
Direct, pp. 1-9.
William H. Downey is
President, Chief Operating Officer, and a member of the Board of Directors of
Great Plains, the holding company of KCPL. He is also the President
and Chief Executive Officer of KCPL. His responsibilities include
overall management of all aspects of Great Plains and KCPL. He
holds a Bachelor of Science degree from Boston University, a Master of Science
degree from Columbia University and a Master of Business Administration degree
from the University of Chicago. He began working for KCPL in 2000
after 28 years of electric utility experience. He was named to his current
position in October of 2003. Prior to joining KCPL, He served as vice president
of Commonwealth Edison and president of Unicom Energy Services Company, Inc., an
unregulated energy marketing and services company operating throughout the
Midwest. He has testified before the Commission in KCPL’s 2006
Missouri rate case.
475. The
acquisition of Aquila complements Great Plains’ current operations
because: (1) Aquila’s Missouri electric utilities are not only
adjacent to KCPL’s service territory, but also would fill in the gap that
currently exists between KCPL’s East District and the rest of its service
territory, thereby creating significant savings opportunities; (2) KCPL and
Aquila have had a working relationship for many years, being joint owners of the
coal-fired Iatan 1 generating plant and of the coal-fired Iatan 2
generating plant, which is now under construction; (3) Aquila’s financial
condition after the merger is anticipated to satisfy the financial metrics
necessary to support an investment-grade credit rating, lowering debt costs to
Aquila and supporting greater access to capital markets on more reasonable terms
for Aquila; and (4) the merger is anticipated to improve the overall
business risk profile of Great Plains because Great Plains will own a higher
percentage of regulated business than it does currently and will also spread the
business risk of its nuclear assets over a broader asset and revenue base.625
476. With
regard to the effect the merger will have on customers and communities served by
KCPL and Aquila in Missouri: (1) KCPL ranks in the top tier of performance in
nearly every category typically benchmarked by utilities, including production
cost, reliability, distribution cost to serve per customer, and is nearing
top-tier in customer satisfaction; and, (2) it is Great Plains’ and KCPL’s
objective to combine management practices and resources to achieve significant
reduction in costs and further enhance reliability and customer satisfaction,
with rates lower than they would have been had the merger not occurred.626
________________________
625 Id.
477. The
combined companies will have a customer base of approximately 805,000
customers. 627
478. KCPL
will pool the combined operational work force to more efficiently address
customer needs. 628
479. KCPL’s
focus on the construction, maintenance, operation, and restoration of the
electric system will be balanced across all communities whether metropolitan or
rural. 629
480. Union
employees in field forces will not be reduced with this combination, but will be
reassigned in a more balanced approach to the new, combined customer base.630
481. While
Great Plains and KCPL do expect to reduce employee levels as a result of the
transaction, all of the distribution and customer service collective bargaining
unit employees will be employed by KCPL from the outset. The majority
of the reductions in the distribution and customer service areas are from
reductions in redundant administrative/clerical positions or middle and senior
management.631
482. The
combined service territory will be divided into geographic areas known as
districts. Within each district, employees will operate from multiple
service centers.632
483. The
greater Kansas City metropolitan area will be managed as a single
district. The district will include customers from just north of the
Kansas City International Airport to points south including Johnson County,
Kansas and Peculiar, Missouri. It will also cover from the eastern
edge of Blue Springs, Missouri to points west including Olathe,
Kansas. This area will comprise approximately 627,000 customers.633
_________________________
627
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22. See generally
Transcript, pp. 2238-2316.
632
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22. See Schedule WPH-1
for a combined map of the districts.
633
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22.
484. Currently,
both companies serve the Kansas City District from eleven service
centers. The combined operation will serve this district from six
service centers. 634
485. Although the number of customer service
centers will be reduced from eleven to six, each district will have satellite
offices so that service representatives will be employed throughout the rural
areas of the utilities’ respective service territories.635
486. None
of the nine service centers in more rural areas (St. Joseph, Maryville, Trenton,
Henrietta, Marshall, Sedalia, Warrensburg, Clinton and Nevada) will be
closed.636
487. Given
the extensive interstate highway system in the area, and the KCPL approach of
24/7 shift coverage for emergency response, KCPL expects its customers will
encounter improvements in service delivery.637
488. The
sharing of resources and shifting of work project assignment can be accomplished
more efficiently with larger work groups in fewer locations.638
489. In
storm situations, the combined resources of both companies can be redirected in
a balanced approach to all customer outages, and stronger focus can be placed on
the most severely damaged areas.639
490. In
the further reaches of the Kansas City District, Aquila currently has first
responder employees who take their trucks home to speed
response. These areas (Buckner, Drexel, Adrian) will continue to see
this dedicated service in the combined companies. This service will be extended
to the areas of Platte City and Weston. 640
_________________________
634 Id.
635 Transcript, p. 2219; GPE/KCPL Ex. 17,
Herdegen Supp. Direct, p. 11.
636
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22, see in particular p.
12.
637
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22.
640
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22; Transcript, p.
2270.
491. Beyond
the Kansas City metropolitan area, the new company will operate in four
additional districts, East, Southeast, South, and North.641
492. The
South District will be operated as it is today in KCPL serving approximately
30,100 customers. This area is mainly known as the Paola – Ottawa,
Kansas area of the company.642
493. The
North District will be operated as it is today in Aquila serving approximately
68,500 customers. This area is mainly known as the St. Joseph –
Maryville/Mound City – Trenton, Missouri area of the company. 643
494. The
East District of the company will combine areas of both Aquila and
KCPL. This continuous geographic area will include approximately
39,300 customers from Henrietta and points east to Carrolton and Glasgow,
Missouri and points south including Sedalia, Missouri and Benton
County. The current service centers of both companies will continue
to operate in this area. They are located in Henrietta, Marshall, and
Sedalia, Missouri.644
495. The
Southeast District of the company will include areas currently served by
Aquila. This area will include approximately 40,200 customers from
Lone Jack and Warrensburg to points south including Clinton and Nevada,
Missouri. The current service centers in this area, located in
Warrensburg, Clinton, and Nevada, will continue to operate and serve the
customers effectively. 645
________________________
641 Id.
496. These
five operating areas, although different in customer size and area, will be
operated as an integrated organization.646
497. The
critical support functions such as system engineering, materials supply, and
dispatch operations will be centralized to provide stronger, more focused
execution of the work. The
employees in these groups will be able to share practices, priority issues, and
real-time problems on a daily basis. Situations that arise in one
area will be understood by the group and can be addressed across the entire
17,900 square miles of territory.647
|
|
3.
|
KCPL
Reliability Measures
|
498. The
Standard Institute of Electrical and Electronics Engineers (“IEEE”) benchmarks
of System Average Interruption Duration Index (“SAIDI”), Customer Average
Interruption Duration Index (“CAIDI”), and System Average Interruption Frequency
Index (“SAIFI”) will be used to monitor performance of the
system. KCPL will increase the number of existing IEEE benchmarks as
technology develops, allowing it to enhance its ability to monitor
performance.648
499. KCPL
will continue using IEEE Standard 1366, Guide for Electric Power
Distribution Reliability Indices, at KCPL and start using the same standard in
the new Aquila territory to ensure a consistent approach has been taken toward
future reporting.649
________________________
646 Id.
500. KCPL
and Aquila have reviewed the past three years of existing normalized data to
determine their independent averages and the new average for the combined
territories as noted below.650
| |
KCPL
|
Aquila
|
Combined
|
|
SAIDI
|
60.6
|
143.8
|
90.5
|
|
CAIDI
|
89.1
|
91.6
|
90.5
|
|
SAIFI
|
0.68
|
1.57
|
1.0
|
501. Post-merger
KCPL will use one system to track both service territories and will focus on
improving reliability performance for the customers who have experienced the
most outages. 651
502. KCPL
and Aquila have reviewed the practices for tracking their worst performing
circuits. The circuits have been identified based on data from
outages and detailed patrols and improvements are in progress.652
4. System
Reliability Post-Merger
503. KCPL’s
approach to managing system reliability incorporates both tactical day-to-day
operational processes, as well as a comprehensive portfolio of proactive Asset
Management Programs.653
504. KCPL
has reviewed its and Aquila’s management structures, work practices, technology
use and most importantly the use of the field workforce to ensure it can reach
and maintain its Tier I system performance objectives.654
_________________________
650 Id.
652 Id. KCPL has
applied the same criteria in Missouri and Kansas. Id.
505. KCPL
captures and tracks outage information at a more detailed customer and circuit
level and will migrate Aquila facilities into KCPL’s Outage Management System
(“OMS”). This expanded OMS will provide the capabilities for system
monitoring, event management and capture at circuit component and customer
levels so that targeted reliability improvements can be determined and addressed
as needed.655
506. The
system performance data KCPL can obtain through the OMS application is also used
to continually measure the effectiveness of long-term asset management
programs.656
507. In
addition to the expanded OMS application, KCPL will expand its Outage Reporting
System (“ORS”) so that its management team can monitor outage performance of
both territories from open web based applications.657
508. The
OMS and ORS applications and work practices will be expanded to cover the entire
customer base.658
509. The
Aquila territory has operated with extended workday hours but will benefit from
KCPL’s model for 24/7 shift work in field operations in the Kansas City
metropolitan area. Both companies have reviewed the historical outage
levels and locations in order to place the expanded 24/7 shift workers in
strategic response locations in the combined territory and at the appropriate
levels. KCPL will also expand its automated crew callout system in
the Aquila territory.659
_________________________
655 Id.
657 Id. The ORS system
has been in place at KCPL since 2004 and is considered an extremely useful
management tool to make early tactical decisions supporting recovery from major
events or storms. Id.
510. Regarding
KCPL’s Asset Management Programs, KCPL is currently performing a Distribution
System Inventory and Condition Assessment (“DSICA”) that will be used to assess
asset health. Applications, processes, and tools that have been
developed for the DSICA will be adapted for assessing the health of Aquila’s
distribution system. Data analysis, trending, optimization studies,
specific equipment history, and health assessment tools developed at KCPL can be
used across both systems rather than being developed separately.660
511. After
completion of the DSICA, programs can be refined across both companies for
better investment optimization. The combined companies portfolio will
include: High Outage Count Customers; Circuit Inspection and Repair; URD Cable
Replacement; URD Cable Injection; Worst Performing Circuits; Infrared Patrols;
and various Distribution Automation initiatives.661
512. Expansion
of Distribution Automation at Aquila will instantaneously provide critical
information to system operators during outages or other
events. KCPL’s extended use of distribution automation on the Aquila
network will enable real time, condition-based monitoring and maintenance of
certain assets, rather than mere cyclic patrols. This information can
then be shared with customer service personnel and customers.662
513. Overall,
the expertise from both companies will be consolidated, enabling sharing of
knowledge and experience and providing additional resource depth. The
knowledge and experience base of the combined companies will be greater than
that of either stand-alone.663
_________________________
660 Id.
662 Id. Many of the
noted KCPL Asset Management and Distribution Automation Programs are identified
in KCPL’s Comprehensive Energy Plan as part of the company’s stated commitments
to continually improve transmission and distribution
infrastructure. Id.
663
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22.
|
|
5.
|
Strategy
and Approach for Combining the Customer Service
Functions
|
514. KCPL’s
organization design will be adopted for both companies to minimize change as
much as possible. Using a known design, and mapping Aquila’s customer
service activities to it, reduces the number of variables requiring
change. This approach will provide a smoother transition, and
position the implementation of improvement projects once the sale is
complete.664
515. The
organization structure is designed around core service processes, which will
allow KCPL to effectively monitor performance and compare to historical
achievement levels. Careful review of each detailed customer service
process is also underway, including the identification of best practices at each
company so that areas of strong performance are maintained.665
516. To
begin the mapping process between organizations, teams were formed using subject
matter experts from each company based on the current KCPL functional areas of
customer service as the baseline. The focus of the assessment was to
ensure that all work was accounted for at Aquila, and properly mapped into the
KCPL organization even if there are some alignment differences
organizationally.666
517. In
total, 124 incremental positions will be added to KCPL’s Customer Service
team at the successful completion of the merger. This number is the
sum of the allocation from Aquila’s Central Service team to its Missouri
electric properties plus the direct cost areas of meter reading, customer
service personnel, and the customer relations team.667
_________________________
664 Id.
666 Id. An example
would be the meter reading function, which is part of the customer service team
at KCPL, but not at Aquila. In this case, the monitoring of meter reading
completion and accuracy rates will still be tracked, but it will be part of a
different department. Id.
518. There
are differences in how functions are aligned between the two companies, but the
balanced approach of comparing the staffing in the Aquila allocated model to the
integration planning teams’ bottom up staffing requirements shows that adequate
staffing will be in place to sustain current service levels to customers.668
519. Because
KCPL expects additional customer questions for the first year following the
transition date, an additional forty-two employees will be retained in the
Customer Service area to work through the temporary influx of requests and
ensure that customer service stays at its current levels. KCPL will
use the normal attrition process to achieve expected staffing levels, but will
let service levels guide that decision.669
520. Customer
service operations will be consolidated into the Raytown location with the
exception of the consolidated Field Services group, which will remain at the
1331 facility. 670
521. Each
integration planning team initiated a full review of system, process, business
rule, and regulatory differences between the two companies in preparation for
the actual integration. Once the reviews are complete, KCPL will be
able to finalize the actual implementation approach to achieve the best possible
outcome during the transition.671
_________________________
668 Id.
669 Id.; Transcript, p.
2295;
670
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22.
|
|
6.
|
Maintenance
of Recent Improvements in Aquila’s Customer
Service
|
522. KCPL
has established teams represented by both companies to review all customer
service work processes and document the customer requirements and strategies
used to achieve targeted performance. Using this approach, KCPL will
understand what improvements have been made in Aquila’s customer service
enabling it to ensure those activities will be continued, and well aligned with
customer expectations.672
523. Part
of the organizational design will include the adoption of a formalized Quality
Assurance and Training team. This best practice will allow KCPL to
continuously measure and improve the performance of its customer service teams
in the Care Center. This information will be combined with “Voice of
the Customer” (feedback surveys) data to make sure KCPL is focused on those
things that make it easier for customers to do business with KCPL, as well as
fully leveraging technology such as Interactive Voice Response and Virtual Hold
providing convenience to customers.673
524. Customer
satisfaction is measured by the J.D. Power survey, and going forward, the
combined companies will use the J.D. Power customer survey process.674
525. KCPL
utilizes the performance trends for supporting metrics that have a large effect
on customers. Its goal for Tier 1 performance, i.e., top quartile, in
its key metrics is supplemented and validated by improvements in performance
measured through these supporting metrics. The metrics identified for
Customer Services are the Care Center service levels, billing accuracy, meter
reading accuracy, and Commission complaints.675
_________________________
672 Id.
675 Id. Specifically,
customer service metrics, including the history of both KCPL and Aquila, for
2004 through June 2007, are depicted in the chart at page
21.
526. KCPL
was recently ranked in the top quartile according to the residential electric
survey results as reported by J.D. Power in the Midwest
category.
527. KCPL
recommends reviews of Customer Service performance at regular intervals with the
Commission’s Staff as the mechanism for Commission assurance that service will
continue at current levels.676
|
|
7.
|
Customer
Service Operations
|
528. KCPL’s
current customer service
operations consist of the following departments: (1) the
Call Center;677
(2) Billing Services; (3) Credit and Collection; (4) Customer
Relations (5) Meter Reading/Field Service; and (6) Revenue
Protection.678
529. KCPL
has a single call center
and Aquila currently utilizes two call centers to address the electric and gas
systems. A single call center for the new Great Plains customer base will
be created. The call center, referred to as the Customer Care Center, will
handle all residential and business customer contacts for time-saving,
self-service options for any service or account need including service requests,
new construction or service upgrades, billing and account information, payment
options, and special programs and services. In addition, KCPL
will evaluate the call center approaches it currently has in place and determine
any changes that are necessary following the merger.679
_________________________
676
GPE/KCPL Exh. 17, Herdegen Supp. Direct, pp. 2-22.
677 During
the hearing, Mr. Marshall explained the difference between a “call center” and a “service center”
during the hearing: “A call center is primarily where we have our customer
service representatives that answer phones, handle a broad range of needs from
our customers, so they talk with customers directly. Or we have
technology that the customer can call in and get information through our voice
response systems or other online technologies that give them whatever
information or whatever transactions they would like to do with
us. A service center is
primarily oriented around craft, primarily linemen and metermen and people that
are necessary to keep the distribution transmission infrastructure service, so
they're more focused on the wires and the outside aspect of the
plant. Transcript, p. 2219.
678
GPE/KCPL Exh. 16, Herdegen Direct, pp. 8-12.
530. Billing Services ensures the
accurate and timely billing of retail customers – major functions include
account adjustments, entering rate changes, set-up of area light billings,
processing customer refunds, adding and removing customers on Easy Pay program
and resolution of various issues within our computer systems. KCPL
will evaluate the approaches each company is taking to payment options, to the
delivery and printing of bills, and to the information flow from its meter
systems with the intent of creating one approach to the bill process that
customers will understand, regardless of geographic location.680
531. Credit and Collection handles
the collection of past due receivables. KCPL will review the current work
force approach taken at both companies, and evaluate the outbound telephone
calling technology currently utilized. KCPL will also review third
party approaches taken in the industry to establish a single approach to this
business area.681
532. The
Customer Relations Department
is responsible for the investigation and response to informal commission
complaints and inquires, it builds profiles on community action and social
service agencies to strengthen relationships, it identifies low-income, elderly
and disabled customers for purposes of outreach and customer service that is
targeted to their needs, and it takes a forward-looking approach with medical
and hospice customers, as well as nursing homes, by staying in touch with them
during extended heat periods and extended outages. The department
will be reviewed in consideration of the added customer base and service
territory.682
533. The
Meter Reading/Field Service
Department ensures the accurate and timely reads of electric meters for
billing. The initial review of integration for these areas will include meter
reading integration, mobile implementation and labor issues. KCPL
currently utilizes an Automated Meter Reading (“AMR”) system and Great Plains
will review expansion of metering technology to the acquired geographic areas,
including the investigation of Advanced Metering Infrastructure solutions for
the integrated company, reviewing interface capabilities with the current meter
reading and the customer information systems.683
_________________________
680 Id.
683
GPE/KCPL Exh. 16, Herdegen Direct, pp. 8-12.
534. If
the Commission approves the merger, KCPL plans to expand its AMR into Aquila’s
urban areas.684 There is a
significant amount of capital involved in the AMR project;685 however, expected
synergy savings for the project in terms of labor and other savings are
approximately $4.7 million.686 The AMR
project will also bring about improvements in service quality since AMR will
allow enhanced meter reading capabilities and increase the level of program
offerings to customers.687
535. AMR
allows quicker response times for the customer, reduced fuel/energy costs, and
increased productivity due to reduced drive times. Using AMR will
allow Aquila to employ Advanced Metering Infrastructure which enables the
utility to obtain connect/disconnect reads without a field visit; detect
tampering, theft and diversion of service; obtain real-time leads to resolve
billing complaints over the phone; provide outage management; and verify when
power has been restored. These improvements in service quality to
Aquila customers will take place as a result of KCPL’s expertise in implementing
AMR systems and its ability to invest in AMR technology.688
_________________________
684
Transcript, p. 2281.
687
GPE/KCPL Exh. 16, Herdegen Direct, p. 11; GPE/KCPL Exh. 17, Herdegen Supp.
Direct, p 6.
688
GPE/KCPL Exh. 17, Herdegen Supp. Direct, p 6.
536. Another
area involving the field service department is vegetation
management. The companies plan to reduce the amount of spending on
tree trimming by Aquila; however, adopting KCPL’s vegetation management
practices improves the reliability of the circuit, instead of encouraging
contractors to trim trees, whether or not it is needed.689
537. Revenue Protection minimizes
the companies’ loss of revenue due to fraud, theft of service, or other metering
irregularities by identifying and investigating abnormal account activity.
Great Plains and KCPL will continue to focus on meter data management
solutions to provide early warning of abnormal conditions that enable transition
to a proactive revenue assurance approach within the companies.690
538. Overall,
customer service operations at both KCPL and Aquila are expected to reach
Tier 1 following the merger.691
539. Immediately
following the merger, Great Plains and Black Hills will operate as
stand-alone companies; however, in order to provide a seamless integration of
customer service functions to customers, there may be a short transition period
where Great Plains Energy provides assistance to Black Hills
Corporation.692
_________________________
689
Transcript, p. 2287-2288. Witness Herdegen testified that by using
KCPL’s experience and best work practices, Aquila’s incremental spending on tree
trimming can be reduced by about 30 percent or approximately
$2 million per year. Id.
690
GPE/KCPL Exh. 16, Herdegen Direct, pp. 8-12.
|
|
8.
|
Current
Services Provided and Post-Merger
Integration
|
540. KCPL
offers a variety of products and services for commercial, industrial, and
residential customers.693
541. KCPL
intends to evaluate the totality of services provided by it and Aquila and
develop a combined portfolio of products and services for the combined customer,
including developing a plan to ensure the seamless integration of the products
and services addressing any requirements in all areas including marketing,
product development, planning, and information systems.694
_________________________
693
GPE/KCPL Exh. 4, Bryant
Direct, pp. 3-12. These products and services include: (1) For
Commercial & Industrial customers KCPL offers: E-Services and Payment
Options: AccountLink, ApartmentLink, Check By Phone, Easy Pay, Web Pay,
Paperless, Real-Time Pricing, Dusk to Dawn Security Lighting; (2) For
Residential Consumers, KCPL offers: E-Services and Payment Options AccountLink,
Easy Pay, Web Pay, Check By Phone, Paperless, Pay Stations, Delayed Due Date;
and, (3) Other Programs & Services: Dollar-Aide, Dusk to Dawn Security
Lighting, and Medical Customer. Id.
Kevin E. Bryant is employed by
KCPL as Vice President of Energy Solutions. His responsibilities
include providing leadership and direction to the Energy Solutions team,
including the development, coordination and execution of promotional strategies
and programs designed to efficiently and effectively promote and implement
KCPL’s products and services. He is also responsible for all residential and
commercial sales efforts and for maintaining relationships with KCPL’s largest
customers and trade allies. His duties include initiating and
bringing to market new products and services, as well as improvements and
innovations to existing products and services. His duties also
include the development, implementation and evaluation of customer programs,
which include demand side affordability, energy efficiency, and demand response
programs. His role also includes the recent assignment as leader of
the Energy Solutions Integration team, which is responsible for the integration
of Aquila with KCPL’s Energy Solutions team. He pursued an
undergraduate education from the University of Missouri – Columbia where he
graduated Cum Laude with dual degrees in both finance and real estate in May
1997. He continued his education at the Stanford University Graduate
School of Business where he graduated with a Masters in Business Administration
degree, with an emphasis in finance and marketing, in June 2002. He
joined Great Plains in 2003 as a Senior Financial Analyst and was promoted to
Manager - Corporate Finance, in 2005 where he was responsible for contributing
to the development and maintenance of the sound financial health of both Great
Plains and KCPL through the management of company financing activities. He has
experience in strategic planning and financial areas including analysis, cash
management, financial modeling and mergers and acquisitions. While at
THQ Inc. from 2002 to 2003, a worldwide developer and publisher of interactive
entertainment software based in Calabasas, California, he served as Manager -
Strategic Planning where he was, amongst other things, responsible for
establishing corporate goals and developing and assisting with the execution of
the Company’s strategic plan. As a Corporate Finance Analyst from 1998 to 2000
for what is now UBS Paine Webber, he worked on mergers and acquisitions for
medium and large sized companies. He also worked at Hallmark Cards as
a Financial Analyst from 1997 to 1998.
694
GPE/KCPL Exh. 4, Bryant Direct pp. 3-12.
542. KCPL
is in the process of evaluating or implementing two Affordability programs, ten
Energy Efficiency programs, two Demand Response programs, and two additional
funding areas to be extended to Aquila’s customers.695
543. KCPL
has evaluated the customer programs it offers and the programs that Aquila
either offers or has proposed to offer as part of its Integrated Resource Plan
that was submitted to the Commission in February 2007. Although
Aquila currently offers a limited portfolio of affordability, energy efficiency,
and demand response programs, Aquila has proposed to offer its customers a more
robust portfolio of affordability, energy efficiency, and demand response
programs. KCPL began its assessment of these programs by mapping each
company’s respective product and service offerings in one of the following
program category types: (1) Affordability; (2) Energy
Efficiency; (3) Demand Response & Pricing Options; (4) E-Services
& Payment Options; and (5) Other.696
544. The
purpose of this mapping, outlined in the preceding Finding of Fact, was to
identify areas where: (1) both companies provide a product
offering or has proposed to provide a product offering; (2) either KCPL or
Aquila provides a product offering or has proposed to provide a product
offering; or (3) a gap exists where neither company currently provides or
has proposed to provide a needed product offering. Post acquisition,
KCPL anticipates offering a total of 37 programs.697
________________________
695
GPE/KCPL Exh. 4, Bryant Direct pp. 3-12. Those programs include:
Affordable New Homes (New Construction), Low Income Weatherization Program, Home
Energy Analyzer, The Home Energy Analyzer, Home Performance With Energy Star®
(Training), Change a Light, Change the World, Cool Homes Program, Energy Star®
Homes (New Construction), PAYS-type program, Business Energy Analyzer, C&I
Audit Rebate, C&I Custom Rebates-Retrofit, and C&I Custom Rebates-New
Construction, Building Operator Certification (Training), Energy Optimizer (Air
Conditioning Cycling), and MPower. Id.
696 Id.; GPE/KCPL Exh. 5, Bryant
Supp. Direct, pp. 1-9 and accompanying schedules.
697
GPE/KCPL Exh. 5, Bryant Supp. Direct, pp. 1-9 and accompanying schedules. A
summary of KCPL’s assessment is provided in Schedule KEB-1. Brief
program descriptions for each of these customer programs are provided in
Schedule KEB-2. Currently, KCPL offers or plans to offer 28
programs. Aquila offers or plans to offer 26
programs.
545. Of
the 28 current KCPL programs, KCPL expects to offer 21 of those programs to
Aquila’s customers. Many of these programs require a filed tariff
before they could be offered to Aquila’s customers. These programs
are: (1) Affordable New Homes; (2) Low Income
Weatherization; (3) Home Energy Analyzer; (4) Home Performance with
Energy Star®; (5) Change A Light/Change The World; (6) Cool Homes;
(7) Energy Star Homes; (8) Business Energy Analyzer;
(9) C&I Rebates; (10) Building Operator Certification;
(11) Energy Optimizer; (12) MPower; (13) AccountLink;
(14) AccountLink Advantage; (15) ApartmentLink; (16) Web Pay;
(17) Check By Phone; (18) Web Approve; (19) Paperless Bill;
(20) Dollar Aide; and (21) Dusk To Dawn Security Lighting.698
546. KCPL
continues to evaluate the remaining seven currently-offered KCPL
programs. These programs represent offerings where both KCPL and
Aquila have a program offering (or propose to have a program offering) and it is
anticipated that a single offering will be provided. The evaluation
on the combination of these programs has not been completed. These
programs are: (1) Real-Time Pricing; (2) Two-Part Time of
Use; (3) BuilderLink/Builder Web Site; (4) Easy Pay/CheckLine;
(5) Budget Billing/StreamLINE; (6) Green Tariff; and (7) Net
Metering.699
547. Of
the 27 customer programs offered or proposed to be offered by Aquila, KCPL
continues to evaluate eight of them. These eight current or proposed
programs are: (1) Low Income Energy Education;
(2) Residential New Construction; (3) Thermal Envelope Improvements;
(4) Residential Audit; (5) School Based Energy Education;
(6) Demand Buyback; (7) Fixed Bill; and (8) PowerTech Heat Pump
Financing.700
_________________________
698
GPE/KCPL Exh. 5, Bryant Supp. Direct, pp. 1-9 and accompanying schedules. See
summary in Schedule KEB-1,
548. Based
upon KCPL’s assessment to date, the eight programs outlined in the preceding
Finding of Fact remain candidates for inclusion in the combined program
portfolio. KCPL plans to move forward with offering Aquila’s Agency
Portal program to KCPL customers. This program is currently available
and offers Aquila customers a web portal for social service agencies.701
549. KCPL
plans to offer all of its Affordability, Energy Efficiency and Demand Response
programs to Aquila customers. To support this effort, KCPL proposes
to invest $5.0 million, $12.5 million, $12.5 million,
$15.0 million, and $15.0 million in the years 2008-2012, respectively,
for a total five-year investment of $60 million for Aquila customers.702
550. KCPL
has committed to maximizing cost-effective demand-side solutions as part of
future generation capacity planning. Since 2005, KCPL has been
aggressively developing and promoting the Affordability, Energy Efficiency, and
Demand Response programs that are part of its CEP. These activities
have increased KCPL’s understanding of customers’ needs and preferences while
refining KCPL’s program development process along the way. By
leveraging these growing capabilities and knowledge within Aquila's service
territory, KCPL can create additional opportunities for energy efficiency and
demand-side resources.703
551. KCPL
has proposed an investment of $60 million over the 2008-2012 timeframe for
sizing an Affordability, Energy Efficiency, and Demand Response portfolio
because KCPL’s CEP contemplated nearly $53 million of investments in such
programs over the first five years of program existence and KCPL, given its
recent experience with its CEP programs, this base level of investment is
required to facilitate the launch of a successful and robust portfolio of
programs for Aquila’s customers.704
_________________________
702
GPE/KCPL Exh. 4, Bryant Direct pp. 3-12; GPE/KCPL Exh. 5, Bryant Supp. Direct,
pp. 1-9 and accompanying schedules.
703
GPE/KCPL Exh. 5, Bryant Supp. Direct, pp. 1-9 and accompanying
schedules.
704
GPE/KCPL Exh. 5, Bryant Supp. Direct, pp. 1-9 and accompanying
schedules.
552. Significant
and cost-effective energy efficiency opportunities exist in the areas of both
commercial and residential lighting and both commercial and residential heating,
ventilation, and air conditioning. Consequently, KCPL has increased
the level of proposed investment to $60 million to allow for resources to
more heavily target these energy efficiency opportunities.705
553. KCPL
has also proposed this increased level of investment to allow for a set of
energy efficiency and demand response programs that would be structured to
leverage its proposed Advanced Meter Infrastructure
investments. These programs would take advantage of the two-way
communication ability afforded by its investment in Advanced Meter
Infrastructure and would lead to incremental energy efficiency and demand
response resources within Aquila’s service territory.706
554. KCPL
continues to develop a customer marketing segmentation approach to facilitate
adoption of its programs and will use this same marketing approach for Aquila’s
customers.707
555. The
benefits of energy efficiency, as articulated in the National Action Plan for
Energy Efficiency, and as promoted by KCPL, are significant. These
benefits include: (1) Lower energy bills, greater customer
control and greater customer satisfaction; (2) lower cost than supplying
new generation only from new power plants; (3) modular and quick to deploy;
(4) significant energy savings; (5) environmental benefits;
(6) economic development; and (7) energy security.708
_________________________
705 Id.
708
GPE/KCPL Exh. 5, Bryant Supp. Direct, pp. 1-9 and accompanying
schedules.
556. KCPL
recommends that its Customer Program Advisory Group (“CPAG”) expand its oversight to
include offerings to Aquila’s customers. CPAG was established
specifically as a result of the Stipulation and Agreement in Case
No. EO-2005-0329.709
557. KCPL
will perform a benefit-cost analysis on all proposed Aquila
programs. Aquila’s rates for service are different than KCPL and will
need to be analyzed separately.710
558. At
this time, KCPL does not have a specific estimate of the expected costs of
expanding KCPL’s and Aquila’s customer programs into each other’s service
territory; however, it has demonstrated its commitment through its proposed
investment expansion of $60 million for affordability, energy efficiency,
and demand response programs to Aquila’s customers.711
|
|
9.
|
Other
Post Merger Considerations
|
|
|
a.
|
Energy
Efficiency and Conservation Issues
|
559. Great
Plains plans to evaluate Aquila’s energy efficiency, conservation, and other
related programs. KCPL will continue its current programs, and Great
Plains will evaluate extending those programs to Aquila’s
customers. Great Plains Energy will also explore expanding any
successful Aquila programs to KCPL’s customers. 712
_________________________
709 Id.
710
GPE/KCPL Exh. 4, Bryant Direct pp. 3-12; GPE/KCPL Exh. 5, Bryant Supp. Direct,
pp. 1-9 and accompanying schedules.
712
GPE/KCPL Exh.20, Marshall Direct pp. 8-10.
560. Following
the merger and Black Hills’ acquisition of Aquila’s non-Missouri assets,
Great Plains, or one if its subsidiaries, might need to provide services to
Black Hills, or vice versa, on a
temporary basis. Such services might include, among other things,
customer support, information technology, and accounting services. 713
561. In
recognition of the potential need to provide temporary services, the parties
entered into a Transition Service Agreement (“TSA”).714 Under
the TSA, the parties have composed a transition service committee to examine
these transition service issues, and the parties agreed to finalize a transition
service plan setting forth the steps to be taken by each party in order to
resolve the transition service issues by July 30, 2007. 715
562. On
August 2, 2007, the Applicants filed a TSA and Amendment 1 to the TSA, including
a Schedule of Services to be provided between the Applicants and Black
Hills. The TSA was executed on February 6, 2007, and Amendment 1 was
executed on July 30, 2007.716
563. Currently
Great Plains and KCPL support initiatives targeted
toward: (1) improving the lives of vulnerable youth;
(2) environmental programs that build on current business practices,
including energy efficiency/weatherization, tree care, and plantings and
conservation; and (3) agencies and initiatives focused on retaining and
stimulating economic and community development, as well as utility-related
workforce development. 717
_________________________
713
GPE/KCPL Exh.20, Marshall Direct pp. 8-10.
716
GPE/KCPL Exh.20, Marshall Direct pp. 8-10; GPE/KCPL Exh. 33, Transition Services
Agreement.
717
GPE/KCPL Exh.20, Marshall Direct pp. 8-10.
564. This
community strategy is supported by financial contributions, as well as a
volunteerism program allowing employees to participate with partner agencies
through a combination of personal and company time.718
565. Great
Plains Energy and KCPL plan to review Aquila’s current community support
activities and will assess the effectiveness of those
activities. Great Plains and KCPL will continue those programs that
align with its focus areas and philosophy of community improvement and offer the
best value and effectiveness for the communities served.719
|
|
10.
|
Controverting
Evidence
|
566. In
the Staff Report, adopted and proffered by Mr. Schallenberg,
Mr. Schallenberg expresses some generalized concerns regarding service
quality; however, Staff provides no evidence that service quality would in any
way be compromised if the merger is approved by the Commission.720 Moreover, as
Mr. Schallenberg testified, he is not an expert in service quality.721 The parties
waived cross-examination of Mr. Schallenberg on the issue of service
quality.722
567. No
other party adduced any credible evidence that if the Commission approves the
merger, Aquila’s and KCPL’s service quality would be adversely
affected.
_________________________
718 Id.
719
GPE/KCPL Exh.20, Marshall Direct pp. 8-10.
720 Staff
Exh. 100, Attached Report, pp. 68-77.
721 See
Witness Credibility Findings, specifically Findings of Fact Numbers 70-93 and
99-100.
722
Transcript, pp. 2314-2315.
|
I.
|
Findings
of Fact Regarding the Requested Waiver of the Commission’s Affiliate
Transactions Rule, 4 CSR 240-20.015
|
|
|
1.
|
Post-Merger
Accounting
|
|
|
a.
|
Post-Merger
Affiliate Transactions
|
568. If
the Commission approves the proposed merger, KCPL and Aquila will each be
separate affiliates of Great Plains. Although Aquila and KCPL will
remain separate legal entities, many of the companies’ operational functions
will be integrated after the merger closes.723
569. If
the Commission approves the merger, the Applicants intend to account for
Aquila’s operations in Great Plains’ accounting and reporting systems with a
separate general ledger similar to Aquila’s general ledger today, with reporting
entities within its accounting and reporting systems for Aquila’s regulatory
business units (currently named Aquila Networks-MPS, Aquila Networks-L&P,
and St. Joseph Industrial Steam) and for those business units’ parent
company (currently named Aquila, Inc.).724
570. The
current allocation methodology used by Great Plains Energy Services, Inc.
(“GPES”) to allocate shared costs to KCPL and other Great Plains business units,
as documented in the Great Plains Cost Accounting Manual filed annually with the
Commission, will be utilized to charge Aquila’s business units for costs
incurred by KCPL, GPES or Great Plains that benefit multiple subsidiaries,
commonly referred to as shared or common costs. 725
________________________
723 GPE/KCPL Exh. 39, Giles
Supp. Direct, p. 1.
724
GPE/KCPL Exh. 29, Wright Direct, pp. 6-8.
571. Aquila’s
employees will become KCPL employees and services will be provided to Aquila
from KCPL, GPES and Great Plains.726
572. Shared
costs, or common costs incurred by KCPL, GPES or Great Plains that benefit
multiple subsidiaries will be incurred by KCPL, such as accounting, payroll,
regulatory, and accounts payable, whereas other shared costs will be incurred by
GPES, such as human resources. 727
573. GPES’s
allocation of its shared costs will be expanded to include Aquila in the
allocation, and similar KCPL allocations will be established for KCPL’s
allocation of its shared costs.728
574. If
it is determined that a particular KCPL shared cost should be allocated based on
each business unit’s utility plant, then Aquila will receive a portion of that
cost based on its utility plant.729
575. Aquila’s
existing allocation methodologies to allocate costs among the various Aquila
business units will be used to allocate individual Aquila business units that
are shared costs allocated to Aquila.730
576. The
allocation methods outlined in the previous Findings of Fact involve the billing
of costs to an affiliate company. Consequently, if the Commission
decides to approve the merger, the Applicants request that the Commission waive
its affiliate transaction rule, Commission Rule 4 CSR 240-20.015, as it pertains to
transactions between Aquila and KCPL to the extent the Commission deems
necessary.731
_________________________
726
GPE/KCPL Exh. 29, Wright Direct, p. 7.
731
GPE/KCPL Exh. 29, Wright Direct, pp. 7-8. See also Joint
Application of Great Plains Energy Incorporated, Kansas City Power and Light
Company and Aquila, Inc., filed April 4, 2007.
577. The
income tax consequences to Aquila’s customers are minimal. The merger
will be treated for federal income tax purposes as a taxable stock
purchase.732
578. The
shareholders of Aquila will recognize a gain or a loss on their shares of stock;
however, Aquila will not recognize any gain or loss on the sale of its stock and
therefore Aquila’s tax basis in Aquila’s remaining assets after the merger will
be the same as Aquila’s tax basis prior to the merger.733
579. Aquila’s
existing unamortized investment tax credits and deferred income tax reserves
will carry over to Aquila post-merger.734 There will
be no changes to these components because the merger is a stock transaction and
not a sale of assets.735
580. The
merger will not affect the property taxes of Great Plains. Utility
property taxes are based upon the fair market value of the
utility. The fair market value of Aquila and Great Plains combined
should not be significantly different than the combined values of the companies
standing alone, and therefore the assessed valuation should not change
appreciably.736
_________________________
732
GPE/KCPL Exh. 29, Wright Direct, p. 8.
|
|
2.
|
Purpose
of the Affiliate Transactions Rule
|
581. The
stated “purpose” of the Affiliate Transactions Rule (4 CSR 240-20.015) is
“to prevent regulated utilities from subsidizing their non-regulated
operations.” 737
582. The
affiliate transaction rule is premised on asymmetric pricing to prevent a public
utility from subsidizing its affiliates. 738
583. Pursuant
to the affiliate transaction rules, goods and services provided by a public
utility to any
affiliate are to be priced at the higher of market value or the cost to
the public utility in providing the goods and services.739
584. Conversely,
goods and services provided by any affiliate to a public
utility are to be priced at the lower of market value or the cost to the public
utility in providing the goods and services to itself.740
585. The
pricing mechanism in the affiliate transaction rule is designed to make the
public utility indifferent as to whether it sells or receives goods and services
from an affiliate or a third party.741
586. This
concept is appropriate where the transactions involve a public utility and an
unregulated affiliate.742
587. If
both parties are public utilities subject to the affiliate transaction rule, the
rationale underlying the rules does not apply because the utilities already are
subject to Commission regulation. In such a utility-to-utility
situation, the asymmetric pricing mechanism is also unworkable. If a
public utility is to provide a service to an affiliated public utility, the
public utilities are on the opposite sides of the asymmetric pricing
requirements.743
________________________
737
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 3-4.
738
GPE/KCPL Exh. 15, Giles Surrebuttal, pp. 7-8.
743
GPE/KCPL Exh. 15, Giles Surrebuttal, pp. 7-8; Transcript, pp.
2064-2066.
588. The
affiliate transaction rule does not contemplate two regulated utilities owned by
the same parent and operated in the manner contemplated by the merger.744
589. Rather
than the asymmetrical pricing prescribed in the rule, the Applicants request
that the Commission grant a waiver from the rules to the extent necessary to
allow KCPL and Aquila to provide services at fully distributed costs, except for
wholesale power transactions, which would be based on rates approved by
FERC.745
|
|
3.
|
Effect
of Application of the Rule to Synergies Generated by the
Merger
|
590. The
synergies contemplated by Great Plains Energy in this transaction are premised
on the ability of KCPL and Aquila to exchange goods and services at
cost. To the extent the asymmetric pricing dictated by the affiliate
transaction rules prevents KCPL and Aquila from doing so, the synergies will be
reduced to the detriment of the utilities’ Missouri customers.746
591. Applicants’
request for a waiver from the affiliate transactions rule as it might pertain to
KCPL and Aquila, if granted, will help the companies achieve synergy
savings.747
592. Because
KCPL and Aquila will each be “regulated electrical corporations” and “public
utilities” under Chapter 386, and thus subject to the Commission’s jurisdiction,
both companies will continue to be subject to the various reporting requirements
they operate under today and the Commission will continue to have access to the
books and records of both companies.748
_________________________
744
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 3-4.
746
GPE/KCPL Exh. 15, Giles Surrebuttal, pp. 7-8.
747
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 3-4.
748
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 2.
|
|
4.
|
Staff’s
Position – Controverting Evidence to the Requested
Waiver
|
593. Staff
argues that the waiver of the rule should not be granted because the merger or
consolidation of KCPL and Aquila is outside the scope of the proposed
transaction in this case, and because Staff believes that they do not have
sufficient information to evaluate the requested waiver.749
594. Under
cross-examination, Staff witness Schallenberg agreed that the purpose of the
affiliate transactions rule is to prevent regulated utilities from subsidizing
their non-regulated operations and that after the close of the merger, if
approved, the Commission will have full access to the books and records of both
Aquila and KCPL.750 Mr. Schallenberg
also indicated that Staff was not generally opposed to transactions between
Aquila and KCPL on a cost basis.751
595. There
is no competent or credible evidence in the record that, if the proposed merger
is approved, a limited waiver or grant of a variance in the Commission’s
affiliate transactions rule allowing KCPL and Aquila to provide services at
fully distributed costs, except for wholesale power transactions, would in any
way cause a detriment to the public interest.
_________________________
749 Staff
Exh. 100, Schallenberg Direct, attached Report, pp. 64-68.
750
Transcript, pp. 2070-2071.
|
J.
|
Findings
of Fact Regarding Transmission and RTO/ISO
Criteria
|
|
|
1.
|
Regional
Transmission Organization Participation, Pre- and Post-Merger
Considerations
|
596. Regional
Transmission Organizations (“RTOs”) were promoted and established, among other
reasons, in order to provide benefits and improvements in electric transmission
services and in the operation of the bulk power system. These
benefits include open and non-discriminatory electric transmission access and
pricing, regional Open Access Transmission Tariff (“OATT”) administration,
regional transmission planning and coordinated regional reliability
operations.752
597. If
the Commission approves the merger, KCPL employees will operate the transmission
systems of KCPL and Aquila following the merger.753
598. Regarding
the effect of the merger on the transmission operations of KCPL and Aquila and
their RTO participation, KCPL proposes to take the following actions:
(1) consolidate transmission control center operations; (2) integrate
Aquila’s planning functions with KCPL’s planning functions; (3) incorporate
Aquila’s transmission and substation field operations into KCPL’s operations;
(4) combine the transmission and substation engineering processes; and
(5) include the Aquila facilities in the KCPL comprehensive transmission
asset management plan in order to achieve Tier I reliability levels for all
customers.754
_________________________
752
GPE/KCPL Exh. 20, Marshall Direct, p. 7.
599. Aquila
is currently a conditional member of the Midwest Independent Transmission System
Operator (“MISO”) RTO, whereby MISO provides specific transmission security and
reliability coordination functions for Aquila.755
600. The
Southwest Power Pool (“SPP”) provides Aquila regional transmission tariff
administration, available transmission capacity (“ATC”), total transmission
capacity, and other regional planning functions.756
601. Aquila
has an application pending before the Commission in Case No. EO-2008-0046,
requesting authority to transfer functional control of its transmission
facilities to MISO (“Aquila MISO Proceeding”).757
602. The
overview of the Aquila transmission system serving Missouri load is as
follows: 758
Aquila
owns and operates transmission facilities in the northwestern, north central and
western areas of Missouri serving approximately 300,000 electric customers in
Missouri. Within its transmission system, Aquila has direct
interconnections with AmerenUE, Associated Electric Power Cooperative (“AEC”),
the City of Independence (“IND”), Mid-American Energy Company (“MEC”), KCPL and
Westar Energy Inc. (“WR”). Aquila operates two non-synchronous,
normally open interconnections with Empire District Electric Company (“EDE”) and
KAMO Electric Cooperative (“KAMO”). Aquila has joint transmission
ownership and interconnection agreements for the following
facilities:
_________________________
755
GPE/KCPL Exh.20, Marshall Direct, pp. 8-10; GPE/KCPL Exh. 25, Spring Surrebuttal, pp.
1-9.
Richard A. Spring is employed
by KCPL as Vice President of Transmission Services. His
responsibilities include overseeing KCPL’s transmission planning, transmission
system operations, transmission energy accounting, Energy Management System,
distribution OMS, substation and transmission engineering, transmission
construction and maintenance, substation construction and maintenance, and
system protection. He holds a Master of Business Administration from
Rockhurst College, a Bachelor of Science in Mechanical Engineering from Wichita
State University and an Associates of Arts degree from Butler County Community
College. He began his career at KCPL in 1978 as a Staff Maintenance
Engineer, promoted to Operations Supervisor in 1979 and Maintenance
Superintendent 1982, all at the La Cygne Generating Station. He then
moved to the Iatan Generating Station as Maintenance Superintendent where he was
promoted to Plant Manager in 1984. He returned to the La Cygne
Generating Station in 1991 as Plant Manager. In 1993, he joined
Northern Indiana Public Service Company as Director of Electric
Production. He returned to KCPL in 1994 as Vice President of
Production. He shifted responsibilities and was named Vice President
of Transmission and Environmental Services in 1999. In 2003, he was
named to his current position of Vice President of Transmission
Services. He is currently the Chair of the SPP Strategic
Planning Committee, a member of the SPP Members Committee, and a member of the
SPP Human Resources Committee. Previously, he served as a Director on
the SPP Board of Directors prior to the evolution to the current independent
Board of Directors. He has previously testified before both this
Commission and the Kansas Corporation Commission.
756
GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
757
Id. See In the Matter of the Application of Aquila, Inc., d/b/a
Aquila Networks-MPS and Aquila Networks-L&P for Authority to Transfer
Operational Control of Certain Transmission Assets to the Midwest Independent
Transmission System Operator, Inc., Case No. EO-2008-0046, Application filed
August 20, 2007.
758
GPE/KCPL Exh. 24, Spring Direct, pp. 3-11.
a) St.
Joseph to Fairport, Missouri to Cooper Station at Brownville, Nebraska 345kV
transmission line; known as the Cooper-Fairport-St. Joseph 345kV
Interconnection (“CFSI”); and administered with a joint agreement between AEC,
KCPL, Lincoln Electric System (“LES”), MEC, Nebraska Public Power District
(“NPPD”), and Omaha Public Power District (“OPPD”). Aquila and OPPD
jointly own the Cooper to St. Joseph 345kV transmission line with ownership
changing at the point where the line crosses the Missouri river.
b) Aquila
owns an 8 percent share of the Jeffrey Energy Center located in the WR
territory. Transmission service is reserved, using a Jeffrey
Transmission Agreement with WR, to deliver Aquila this capacity and energy via
the Jeffrey (WR) to Stranger Creek line; and known as the Aquila-WR
Interconnection.
c) Swissvale
to Stilwell to Peculiar to Pleasant Hill to Sibley 345kV transmission line;
known as the “MOKAN Interconnection”; and joint owners are KCPL, Aquila and
WR.
d) Hawthorn
to Sibley to Overton 345kV transmission line; known as the “Missouri
Interconnection”; and joint owners are KCPL, Aquila and AmerenUE.
e) Aquila
owns an 18 percent share of the Iatan Generating Station located near Weston, MO
and has a 345kV transmission line directly connected at the station facilities
for transfer of this capacity and energy. Aquila currently operates its
transmission system from its Operations Center in Lee’s Summit, Missouri using
an [Energy Management System] with Supervisory Control and Data Acquisition
(“SCADA”). The Operations Center is manned 24 hours per day providing
both normal and emergency operations for transmission and substation
facilities.759
_________________________
759 Id. See also Schedule RAS-1
illustrating the Aquila 69kV transmission system; Schedule RAS-2 illustrating
the Aquila 345kV and 161kV transmission system; Schedule RAS-3 illustrating the
Aquila (St. Joseph area) transmission system; and, Schedule RAS-4
illustrating the entire Aquila transmission configuration with land-based
geography.
603. KCPL
is a full member of the SPP RTO.760
604. KCPL
will evaluate the strategy of RTO membership when the acquisition is completed,
taking into consideration multiple factors including the advantages of operating
both transmission systems within a single RTO structure and the results of the
pending cost-benefit study evaluating the relative benefits of Aquila’s RTO
options.761
605. The
overview of the KCPL transmission system serving Missouri load is as
follows:762
KCPL owns
and operates transmission facilities in the west central and central areas of
Missouri and east central areas of Kansas serving approximately 500,000 electric
customers in Missouri and Kansas. Within its transmission system,
KCPL has direct interconnections with AmerenUE, Aquila, AEC, Board of Public
Utilities of Kansas City, Kansas (“BPU”), IND, and WR. KCPL has joint
ownership in the following transmission facilities:
a) The
CFSI line, which is administered with a joint agreement with AEC, KCPL, LES,
MEC, NPPD, and OPPD.
b) The
MOKAN Interconnection line, which is jointly owned by KCPL, Aquila and
WR.
c) The
Missouri Interconnection line, which is jointly owned by KCPL, Aquila and
AmerenUE. KCPL operates its transmission system from its Transmission
Control Center in Kansas City, Missouri using an [Energy Management System] with
SCADA. The Transmission Control Center is manned 24 hours per day providing both
normal and emergency operations for transmission and substation
facilities. Schedule RAS-5 illustrates the entire KCPL transmission
system with land-based geography. Schedule RAS-6 illustrates the
KCPL Kansas City metropolitan area transmission system with land-based
geography.
_________________________
760
GPE/KCPL Exh.20, Marshall Direct, pp. 8-10; GPE/KCPL Exh. 25, Spring
Surrebuttal, pp. 1-9. KCPL’s participation in the SPP has been
approved by the Commission, the Kansas Corporation Commission, and
FERC. GPE/KCPL Exh. 25, Spring Surrebuttal, pp.
1-9.
761
GPE/KCPL Exh.20, Marshall Direct, pp. 8-10.
762
GPE/KCPL Exh. 24, Spring Direct, pp. 3-11.
606. The
proposed plan for integrating Aquila’s transmission operations after the merger
is completed is as follows:763
a. Integrate
Aquila’s Operations Center into KCPL’s Transmission Control Center.
b. Incorporate
Aquila’s transmission planning functions into KCPL’s transmission planning
functions.
c. Incorporate
Aquila’s transmission and substation field functions into KCPL’s transmission
and substation field functions.
d. Integrate
Aquila’s transmission and substation engineering functions into KCPL’s
transmission and substation engineering functions.
e. KCPL
will incorporate all Aquila transmission assets into its comprehensive
transmission asset management plan.
607. Combining
the transmission operation should provide a more cost effective, integrated
real-time and planned transmission operation of the combined transmission
system. By operating from a single point of transmission system
authority, KCPL can maintain consistent communication, coordinated field
operations, and integrated training and manpower schedules.764
608. Merging
planning functions should provide coordinated transmission planning over the
combined service territories for improved synergies in system modeling
capabilities, reductions in transmission facility additions, improved tie-line
coordination with the region, and a larger, more regional system planning
scope.765
609. Incorporating
transmission and substation field functions should provide synergies in field
operating practices where specific operation and maintenance practices can be
engaged. KCPL is a recognized leader in these practices and is in a
position to apply specific industry best practices that will provide
improvements in these critical operating areas.766
_________________________
763
GPE/KCPL Exh. 24, Spring Direct, pp. 3-11.
610. Combining
transmission and substation engineering functions will utilize the collaborative
engineering talent and provide standardized design and construction methods,
which should result in increased savings in transmission and substation asset
investments.767
611. The
asset management plan sets forth strategic investments in new transmission and
substation facilities while also providing crucial maintenance, inspection,
testing, and replacement plans for aging infrastructure. KCPL
provides Tier 1 service reliability levels to its customers and plans to
maintain the same level of service for the Aquila customers.768
612. KCPL,
as a member of SPP RTO, has turned over functional control of its transmission
facilities to SPP as an RTO. 769
613. KCPL
currently serves its native load under the SPP OATT. 770
614. Most
service provided on KCPL’s transmission system to parties other than KCPL is
administered through the SPP OATT. The SPP OATT provides
several benefits including one-stop pricing and reservations for transmission
customers across the entire SPP region, nondiscriminatory transmission service,
consistent terms and conditions of service, and equitable revenue recovery. 771
_________________________
767 Id.
770
GPE/KCPL Exh. 24, Spring Direct, p. 8.
615. KCPL
continues to maintain a small number of grandfathered point-to-point
transmission reservations under the KCPL OATT but the KCPL OATT is
closed except for network service and rollover extensions of existing
reservations.772
616. SPP
acts as a regional Planning Coordinator and creates plans for future
transmission grid additions through its annual SPP Transmission Expansion Plan
and four-month Aggregate Study process (together referred to as the
“Plan”).773
617. This
Plan incorporates OATT transmission service requests, generation interconnection
requests, transmission owner additions, and proposed economic projects.774
618. As
a result of the Plan, SPP directs member transmission owners to build all
necessary transmission expansions, additions, and upgrades in order to provide
sufficient and reliable transmission service within the region.775
619. SPP
also implements certain cost allocation methods for transmission expansion plans
that allocate a portion of the investment costs to all members for those
transmission additions that provide regional benefits.776
620. SPP
serves as KCPL’s Reliability Coordinator in order to meet specific reliability
requirements set forth in North American Electric Reliability Corporation
(“NERC”) reliability standards.777
621. KCPL
submits real-time and planned transmission operations information to the SPP for
review and approval on a coordinated regional basis. 778
_________________________
772
GPE/KCPL Exh. 24, Spring Direct, p. 8.
775
GPE/KCPL Exh. 24, Spring Direct pp. 3-11.
622. SPP
also provides critical emergency operations and black-start coordination for the
region. 779
623. As
the Reliability Coordinator, SPP has the authority to give reliability
directives to member owners in order to ensure stable and reliable bulk power
grid operations.780
624. Aquila
is a conditional member of the MISO RTO. Certain regulatory approvals
are still pending for continued participation.781
625. Due
to the potential of KCPL and Aquila having membership in separate RTOs, KCPL
will evaluate the strategy of RTO membership when the merger is completed. It is
anticipated that certain specific conditions Aquila currently has in process for
approvals, including interconnection agreements and the release of functional
control to an RTO, will be considered within a plan for RTO
participation. Also, consideration will be given to the results
of a pending consulting study evaluating the benefits of Aquila’s full
participation in various RTO options including SPP and MISO.782
626. There
are significant benefits for operating the combined companies within a single
RTO structure. The following are benefits that are expected to be
derived from a single RTO membership:783
1. Membership
in a single RTO will avoid transmission seam issues between KCPL and
Aquila. Establishing the SPP-MISO seam outside the companies’ areas
may reduce the number of flowgates on the companies’ transmission facilities
that will have transmission capacity allocated between the two
RTOs. In general, keeping the RTO seam outside KCPL’s and Aquila’s
area will simplify the management of transmission capacity and increase the
flexibility of power transactions.
_________________________
779 Id. at p.
9.
783
GPE/KCPL Exh. 24, Spring Direct, pp. 9-11.
2. Maintaining
a single RTO structure will reduce costs related to support and participation in
stakeholder activities such as governance, market development, transmission
planning and expansion, reliability standards development and tariff
administration. Furthermore, participating in one RTO will achieve
additional savings by allowing one regional transmission tariff, which
simplifies administration and minimizes revenue recovery applications and tariff
filings to the Federal Energy Regulatory Commission.
3. Cost
allocation methods with a single RTO structure for future transmission upgrades
will maintain consistency across both companies, thereby ensuring coordinated
transmission cost sharing, lower administrative costs, and more congruent
investment structures. It also will facilitate consistent retail rate
structures for that portion of retail rates associated with transmission
expenditures and investments.
4. Transmission
planning and expansion will be more effective from one RTO due to inclusion of
both companies’ facilities in one planning process that develops regional
solutions. KCPL and Aquila being in separate RTO transmission
expansion plans could result in solutions that are not only inefficient or
redundant for the companies, but also possibly conflicting.
5.
Finally, a single structure for reliability coordination ensures the consistent
development and adherence to bulk power reliability standards and
criteria. While all owners, operators and users of transmission
facilities must meet grid-wide NERC reliability criteria, specific reliability
criteria also exist for each region. Attempting to meet two separate
sets of regional reliability criteria adds unnecessary additional burdens and
can have the potential for conflicting criteria. Therefore, effectively managing
operations, planning and other critical functions related to the reliability of
the transmission grid will be best facilitated with one set of regional
criteria, which will be provided if both companies operate entirely within the
control of only one regional reliability entity.
|
|
2.
|
Conditioning
Approval of the Merger
|
627. Dogwood
witness Robert Janssen, Independence witnesses Paul Mahlberg and
Mark Volpe, and MJMEUC witness John E. Grotzinger all suggest that the
Commission should condition its approval of the merger on several conditions:
(1) requiring Aquila join the SPP; (2) requiring the quantification of joint
dispatch; and (3) requiring KCPL and Aquila to consolidate their balancing
authority.784
________________________
784
Dogwood Energy Exh. 700, Janssen Rebuttal, pp. 1-14; Independence Exh. 1300,
Mahlberg Rebuttal, pp. 1-8; Independence Exh. 1305, Volpe Rebuttal, pp.
1-41; MJMEUC Exh. 800, Grotzinger Cross-Surrebuttal, pp.
1-11; GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
Robert Janssen has held the
position of Vice President for Kelson Energy Inc. ("Kelson") since February
2007. From October 2005 to February 2007, he was a Director with
Kelson. He also holds the position of President of Redbud Energy,
L.P., which is a 1,200 MW generating facility wholly owned by Kelson and located
in Oklahoma. Kelson is a power generation holding company that wholly
owns Dogwood Energy, LLC, and the Dogwood 600 MW combined cycle generating
facility located in Aquila’s MPS service territory. He holds a B.S.
in Mechanical Engineering with a Minor in Economics from the University of
Pennsylvania and has completed Finance and Accounting Graduate Level Classes at
Johns Hopkins University. He has held past positions as a Commercial
Engineer with UGI Utilities, Inc., as Project Director for Boston Pacific
Company, Inc. His experience includes: (a) development and management
of generating facilities; (b) analysis of electricity markets and
transmission systems; (c) analysis of, and development of testimony regarding,
utility rates and other filings before federal and state regulatory commissions;
(d) due diligence analysis of power purchase agreements and fuel contracts; (e)
financial analysis of utility and independent power producer assets such as
power plants and water supply systems; and (f) monitoring and reviewing the
results of power supply RFPs. He is responsible for the operations of
the Redbud Energy generating facility, representing Kelson and its subsidiaries
at the SPP RTO, state and federal regulatory affairs, power market development,
and NERC compliance for approximately 4,000 MW of Kelson's generating capacity
within the United States, including Dogwood’s Missouri facility. This
includes coordinating Dogwood's potential future participation in electricity
markets in SPP. He has submitted written testimony in eight prior
proceedings before FERC, the Louisiana Public Service Commission, the Oklahoma
Corporation Commission, the Public Service Commission of Wisconsin, the City
Council of New Orleans, and the Public Utility Commission of
Texas.
628. Independence
witnesses Paul Mahlberg and Mark Volpe suggest that the Commission
must consider, in this case, costs that are passed on to retail customers,
including what they describe as the significant cost differences of
participation in SPP or MISO.785
_________________________
785
Independence Exh. 1300, Mahlberg Rebuttal, pp. 1-8; Independence Exh. 1305,
Volpe Rebuttal, pp. 1-41; GPE/KCPL Exh. 25, Spring Surrebuttal, pp.
1-9.
Paul N. Mahlberg is employed
by the City of Independence, Missouri, as Planning and Rates Supervisor for the
Power & Light Department. His responsibilities include power
supply resource planning, power contract administration, fuel planning and
procurement, fuel contract administration, cost-of-service, retail rate
development, transmission service procurement, and strategic
planning. He serves as Independence’s representative on the Markets
and Operations Policy Committee for the SPP. He graduated from Iowa
State University in 1988 with a Bachelor of Science degree in Electrical
Engineering. He began his career with Independence in January 1996 as
a Senior Planning Engineer working on resource planning, wholesale and retail
rate activities, and contract administration and was promoted to his current
position of Planning & Rates Supervisor in October 2001. Prior to
working for Independence, from 1988 to 1996, he held several positions at R.W.
Beck, an engineering consulting firm. He has not previously testified
before the Commission or any other utility regulatory agency.
Mark J. Volpe is employed by
the law firm of Jennings, Strouss & Salmon, PLC as a non-lawyer
consultant. His firm has been retained by the City of Independence,
Missouri to assist them in evaluating the effects of the proposed merger between
KCPL and Aquila. He holds a Bachelor of Science degree in Business
Administration, majoring in accounting and legal studies, from Ohio Northern
University (1981) and a Masters in Business Administration from Ashland
University (1988). From March 2000 through April 2007, he worked for
MISO serving in the capacity as the company’s Director of Regulatory
Affairs. Prior to working for the MISO, he worked for Cinergy
Corporation from 1997 to 2000 as a Senior Contract Analyst in the Energy
Delivery Business Unit. Prior to that, he worked for FirstEnergy
Corporation from 1987 to 1997. As a non-lawyer consultant, he works
with clients in the areas of retail and wholesale electric cost of service
development, support and analysis. This consulting work also includes
tariff matters on issues including, but not limited to revenue sufficiency
guarantee charges, grandfathered agreements, and RTO membership evaluation
criteria and analysis. He also provides: energy market and
transmission service related overviews for state regulatory commissions and
consumer advocate groups; transmission expansion system planning, cost recovery
mechanisms, transmission pricing proposal consulting; and interconnection
agreement negotiations. He has previously sponsored testimony before
FERC.
629. Witness
Volpe describes and contrasts the energy market between SPP and MISO as
follows:786
The SPP
energy market consists primarily of a market for Imbalance Energy. Imbalance energy is the
difference between the amount of energy that actually flows from each
generator and to each load, and the amount that was prearranged through schedules.
Under the SPP market, the Energy Imbalance Service (“EIS”) is the dollar amount
associated with imbalance energy. The calculation is based on the amount of
imbalance energy (in megawatts) multiplied by a price at a specific point on the
energy grid. SPP conducts a regional dispatch calculated using a security
constrained, offer-based economic dispatch (“SCED”) every 5 minutes. More
simply put, in many ways the SPP is a spot balancing market; there is no day-ahead
market and SPP does not utilize the LMP concept, as is the case in the Midwest ISO.
In its place, SPP relies upon Locational Imbalance Pricing at a nodal
level. Generation resources make voluntary offers of their resources for the EIS or
may self-commit their resources. This is in contrast to the Midwest ISO market
where Network Resources are required to submit offers to supply their
generation in the Day-Ahead. The EIS is settled on an hourly basis. The major
difference between the SPP model and the Midwest ISO’s market is that there is
no financially binding Day-Ahead energy market within SPP’s market design and
the majority of the transactions occur on a bilateral basis.
Furthermore, in SPP there are no FTRs to provide customers with the opportunity to hedge
against the costs of congestion as is the case in an LMP based market. SPP’s
market is rooted in a defined set of physical
transmission rights.
While
there are some similarities, there are major differences between the
two markets. SPP is a voluntary market rooted in a bilateral transaction
where market participants can obtain balancing energy from a spot energy
market, using Locational Imbalance Pricing and a set of physical rights.
Participation in the Midwest ISO’s market is mandatory for generators
that are network resources, and the Midwest ISO uses a two-settlement
system based on LMP where congestion costs are hedged using an allocation of
FTRs. The Midwest ISO’s market design is more complex.
_________________________
786
Independence Exh. 1305, Volpe Rebuttal, pp. 9-11.
630. Witness
Volpe provided the Commission with an in-depth description of the cost
differences associated with membership in either SPP or MISO and explained how
the “City of Independence cannot even begin the process of attempting to analyze
the effect of the RTO membership decision on its customers until KCPL and Aquila
make a commitment as to their RTO plans.”787
631. MJMEUC
witness John E. Grotzinger: (1) supported the testimony by Independence and
Dogwood requesting a Commission decision to condition approval of the merger
upon RTO selection;788 (2) concurred with
the results of Aquila’s RTO study that indicates that SPP offers greater
benefits in RTO operation than does MISO;789 (3) raised
concerns with the treatment of the Applicants’ other transmission facilities
because of joint use lines;790 and (4) raised
concerns with respect to generation issues arising out of MJMEUC’s participation
in KCPL’s Iatan Unit 2.791
________________________
787
Independence Exh. 1305, Volpe Rebuttal, p. 13. Mr. Volpe’s explains,
compares and contrasts the key differences between the two RTOs related to: 1)
the basic functions of their energy markets; 2) the mechanisms used to recover
their respective RTO’s administrative costs; 3) the potential exposure to energy
market charges that are uplifted to load such as Revenue Neutrality Uplift
“(RNU”); the procurement of ancillary services; 5) rate pancaking for
transactions between the various RTOs; 6) the RTO’s plans for additional
regional transmission infrastructure expansion and the associated cost
allocation implications; and 7) the economic and reliability benefits which can
be obtained as a result of a single dispatch. See Exh. 1305
generally.
788 MJMEUC
Exh. 800, Grotzinger Cross-Surrebuttal, pp.
5-8.
John E. Grotzinger is employed
by the MJMEUC as Executive Director for Engineering Operations. He is
responsible for engineering and system planning for MJMEUC and operations of
MoPEP. His responsibilities include planning for power supply and
transmission needs of MoPEP and securing power supplies and associated
transmissions arrangements. He received his Bachelor of
Science degree in Electrical Engineering from the University of
Missouri-Columbia in 1979, and began his career at KCPL as an Engineer in the
System Planning Department, doing both transmission and generation
planning. In 1980, he began work for City Utilities of Springfield,
Missouri as an Engineer in the System Planning Department, and for the next
fourteen years he performed electric transmission, electric generation, electric
distribution, gas distribution, and water distribution planning
studies. In 1994, he began working for MJMEUC and in 1999 he became
Executive Director for Engineering & Operations. He is a
Registered Professional Engineer in the State of Missouri. He has
testified previously before this Commission in Case No. EA-2005-0180, and he has
participated in several Commission roundtables and workshops including the
roundtable on electric deregulation in the late 1990’s and the subsequent RTO
and transmission discussions over the last five years.
789 MJMEUC
Exh. 800, Grotzinger Cross-Surrebuttal, pp.
5-8.
790
Specifically, the Missouri-Iowa-Nebraska Transmission (“MINT”) facilities.
MJMEUC believes the ownership in MINT by KCPL is covered in the SPP tariff and
that the Aquila MINT facilities likewise should be covered by the SPP tariff.
MJMEUC Exh. 800, Grotzinger Cross-Surrebuttal, pp.
8-10.
791
Splitting Iatan 2 across two RTOs causes some concern because KCPL is the
majority owner and operator of Iatan 2. Thus, adding control of
Aquila’s share in Iatan 2 gives KCPL a super majority for decision making.
Use of Iatan 2 by the balancing authority of KCPL is implied for Iatan, but
expanding it even further through a merger with Aquila without some sort of
continuing regulatory oversight or safeguards could impact operations for MJMEUC
and Missouri’s municipal customers throughout the state. MJMEUC Exh. 800,
Grotzinger Cross-Surrebuttal, pp.
10-11.
632. A
full and thorough record is being developed in EO-2008-0046 concerning the
benefits and costs associated with Aquila’s RTO status. In
particular, there has been extensive evidence concerning the relative
cost-benefit analyses of Aquila joining MISO, SPP, or reverting back to a
stand-alone transmission provider. Such evidence is critical for the
Commission’s evaluation of which RTO, if any, would best serve Aquila and its
customers.792
633. Evidentiary
hearings in EO-2008-0046 were held on April 14-16, 2008, and post-hearing
briefs were due in that matter on May 29, 2008.793
634. Independence
and Dogwood are participating in the Aquila MISO Proceeding (EO-2008-0046) and
are representing identical positions in that matter.794
_________________________
792 See In the Matter of the Application of
Aquila, Inc., d/b/a Aquila Networks-MPS and Aquila Networks-L&P for
Authority to Transfer Operational Control of Certain Transmission Assets to the
Midwest Independent Transmission System Operator, Inc., Case No. EO-2008-0046,
Application filed August 20, 2007; GPE/KCPL Exh. 25, Spring Surrebuttal, pp.
1-9.
793 See
Order Modifying Procedural
Schedule, effective January 23, 2008, In the Matter of the Application of
Aquila, Inc., d/b/a Aquila Networks-MPS and Aquila Networks-L&P for
Authority to Transfer Operational Control of Certain Transmission Assets to the
Midwest Independent Transmission System Operator, Inc., Case No.
EO-2008-0046.
794
GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9. See Docket entires for
EO-2008-0046. See in particular: Order Granting Intervention and
Scheduling Prehearing Conference, issued September 28, 2007; and Order Granting Late-filed
Application to Intervene, issued November 13,
2007.
635. Independence
and Dogwood intervened in the application for FERC approval of the merger,
Docket Nos. EC07-99-000 and EL07-75-000 (“FERC Merger
Proceeding”). Both parties raised the same potential RTO-related cost
effect arguments before FERC. 795
636. Independence
requested that FERC condition its approval of the merger on KCPL and Aquila
being in a single RTO. Dogwood requested that FERC condition its
approval of the merger on Aquila joining the SPP.796
637. In
its October 19, 2007 order, FERC stated as follows:
We will
decline the protestors’ request to condition our section 203 authorization
on the Applicants joining a particular RTO. When necessary, the
Commission [FERC] conditions merger authorization in order to address specific,
merger-related harm; but no such harm has been identified in this
proceeding. Moreover, the Applicants’ future RTO status is unclear at
this time and therefore, there is no baseline against which to assess
merger-related changes to rates.797
638. FERC
expressly considered Independence’s assertions concerning the different cost
structures of SPP and MISO, the same issues as those raised in the Rebuttal
Testimony of Mark Volpe, Paul Mahlberg, and Robert Janssen in
this case. FERC declined to condition the merger on a particular RTO
status for KCPL or Aquila.798
|
|
b.
|
Quantification
of Joint Dispatch
|
639. Assuming
the merger is approved, KCPL plans to operate post-merger with two control areas
– one for KCPL and one for Aquila. 799
_________________________
795
GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
796
Dogwood Energy Exh. 700, Janssen Rebuttal, pp. 1-14; Independence Exh. 1300,
Mahlberg Rebuttal, pp. 1-8; Independence Exh. 1305, Volpe Rebuttal, pp.
1-41; GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
797 Great Plains Energy Inc.,
et al., Order
Authorizing Disposition and Acquisition of Jurisdictional Facilities and
Granting Petition for Declaratory Order, 121 FERC ¶ 61,069 at P 50 (October 19,
2007); GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
798
GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
799 Id.; GPE/KCPL Exh. 11, Crawford Direct, p.
5.
F. Dana Crawford is employed
by KCPL as Vice President of Plant Operations. His responsibilities
include the direction of the operation and maintenance of KCPL’s fossil-fuel
generating stations, including their support and construction
services. He graduated from the University of Missouri-Columbia with
a degree in Civil Engineering, and also has a Master of Business Administration
degree from DePaul University. He joined KCPL in 1977 as a
Construction Engineer on the Wolf Creek Nuclear Plant project. In
1980, he was promoted to Manager, Nuclear and promoted to Director, Nuclear
Power in 1983. Following completion of Wolf Creek, he became Manager,
Distribution Construction & Maintenance, in 1988 and Manager, Customer
Services, in 1989. In 1994, he became Plant Manager of the La Cygne Generating
Station. He was promoted to his current position in March of
2005. He has testified before this Commission and the Kansas
Corporation Commission.
640. Great
Plains and KCPL plan to evaluate whether to combine the two control areas into
one in order to provide joint dispatch capabilities after the merger transaction
is consummated and that decision will be subject to regulatory review.800
641. During
the FERC Merger Proceeding, Independence argued that KCPL and Aquila must
quantify the effects of joint dispatch before being permitted to merge.801 In
response, FERC
found as follows:
Independence’s
argument that the [Federal Energy Regulatory] Commission cannot reasonably
conclude that proposed transaction presents neither horizontal nor vertical
market power issues without analyzing the possibility of joint dispatch of
KCP&L’s and Aquila’s generation is misplaced. First, our analysis
focuses on merger-related effects on competition, and there is no evidence in
the record that KCP&L and Aquila plan to engage in joint economic dispatch
following the merger. Second, even if KCP&L and Aquila do pursue
a joint economic dispatch agreement, Applicants have shown that the merger will
not adversely affect competition. Regarding horizontal market power,
Applicants’ analysis shows that the combination of KCP&L’s and Aquila’s
generation will not materially increase market concentration using the AEC
measure, indicating that the merger will not harm competition in the relevant
market; thus, even if Applicants do engage in joint dispatch, the merger will
not create or enhance the ability to exercise market power. Further,
if KCP&L and Aquila do pursue a joint dispatch agreement, they will need to
file an operating agreement with the [Federal Energy Regulatory] Commission, at
which time Independence will have the opportunity to participate in the
proceeding and protect its interests. Therefore, we will not require
a further analysis of the effect of joint dispatch or condition section 203
approval on Applicants not engaging in joint dispatch, as proposed by
Independence.802
_________________________
800
GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9; GPE/KCPL Exh. 11, Crawford
Direct, p. 5.
801
Independence Exh. 1300, Mahlberg Rebuttal, pp. 1-8; Independence Exh. 1305,
Volpe Rebuttal, pp. 1-41; GPE/KCPL Exh. 25, Spring Surrebuttal, pp.
1-9.
802 Great Plains Energy Inc.,
et al., 121 FERC ¶
61,069 at P 36 (2007); GPE/KCPL Exh. 25, Spring Surrebuttal, pp.
1-9.
642. FERC
expressly considered the same arguments Independence raises here and denied it
the relief it sought.803
|
|
c.
|
Consolidation
of Balancing Authority Operations
|
643. Dogwood
witness Robert Janssen recommends that the Commission condition its approval of
the merger on KCPL and Aquila being required to consolidate their Balancing
Authority operations.804
644. Currently,
SPP is developing additional market services beyond the current Energy Imbalance
Service. SPP’s efforts include consolidating Balancing Authority
operations, as well as providing ancillary services and other future market
services. With a potential for consolidated Balancing Authority
service across the SPP footprint, participating members would achieve a number
of benefits including, among other things, additional generation efficiencies
due to joint economic generator dispatching and shared spinning reserves.805
645. KCPL
anticipates participating in a fully operational, consolidated Balancing
Authority market function given the determination of an appropriate level of
operational efficiencies and benefits to its customers if such region-wide
consolidated Balancing Authority services are developed by SPP. 806
646. Until
SPP completes developing additional market services, it would be premature and
potentially redundant for KCPL and Aquila to pursue consolidation of their
Balancing Authority operations.807
_________________________
803
GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
804
Dogwood Energy Exh. 700, Janssen Rebuttal, pp. 1-14; GPE/KCPL Exh. 25, Spring
Surrebuttal, pp. 1-9.
805
GPE/KCPL Exh. 25, Spring Surrebuttal, pp. 1-9.
647. Independence
witness Paul Mahlberg raises a concern about the merger’s effect on
transmission availability; however, the combined companies will continue to
provide transmission service through a single RTO and an associated OATT.808
648. Independence
also raised concerns about the merger’s effect on transmission availability in greater detail in the
FERC Merger Proceeding. In that proceeding, Independence argued that
KCPL and Aquila had not adequately evaluated the effect of the merger on
transmission availability as part of their market power analysis in support of
their application.809
649. FERC
addressed Independence’s concerns about transmission availability,
finding:
We find
that the Applicants have shown that the proposed transaction will not adversely
affect competition. Regarding the horizontal combination of
generation capacity, Applicants’ analysis shows that for all relevant geographic
markets, there are no screen failures for AEC, the relevant measure in this
case, indicating that it is unlikely that the transmission will harm
competition. In addition, the Black Hills Acquisition will not result
in the consolidation of generating assets in any relevant
market. Given that the proposed transaction does not materially
increase the merged firm’s market share or market concentration, we conclude
that it is not likely to create or enhance Applicants’ ability to exercise
market power in any wholesale electricity markets. Regarding the
vertical combination of upstream transmission and natural gas assets with
downstream generating capacity, Applicants have shown that the proposed
transaction will not create or enhance the ability or incentive to use control
of upstream assets to harm competition in downstream wholesale electricity
markets. We reach this conclusion because: (1) Applicants’
transmission facilities will be operated pursuant to an OATT, thus ensuring that
they cannot be used to frustrate competition in wholesale electricity markets;
and (2) there is no overlap between Applicants’ natural gas transportation
assets and downstream electric generation capacity in any relevant wholesale
market. We discuss the specific issues raised by protestors
below. Independence argues that Applicants fail to show that
Independence will not be affected by decreased transmission
availability. However, it does not offer any evidence that less
transmission will be available to it. Applicants’ transmission system
is subject to a Commission-approved OATT, which ensures open access to the
transmission system. Regarding merger-related increases in vertical
market power, we are not persuaded by Independence’s
argument. Applicants’ transmission facilities are currently and will
continue to be operated pursuant to an OATT, thus ensuring that they cannot be
used to frustrate competition in wholesale electricity markets.810
_________________________
808
Independence Exh. 1300, Mahlberg Rebuttal, pp. 1-8; GPE/KCPL Exh. 25, Spring
Surrebuttal, pp. 1-9.
809 Id.; Independence Exh. 1305,
Volpe Rebuttal, pp. 1-41.
810 Great Plains Energy Inc.,
et al., 121 FERC ¶
61,069 at P 34, 35 and 37 (2007) (footnotes omitted);GPE/KCPL Exh. 25, Spring
Surrebuttal, pp. 1-9.
650. FERC
expressly considered the same arguments Independence raises in this proceeding
and denied Independence the relief it sought.811
651. FERC
concluded that the merger does not create any transmission availability
concerns.812
|
K.
|
Findings
of Fact Regarding Municipal Franchise Agreement with
KCMO
|
652. In
1881, Kansas City and KCPL’s predecessor-in-interest entered into a Franchise
Agreement that sets forth the respective parties’ rights and obligations.813
653. Kansas
City also has a franchise agreement with Aquila that currently remains in
effect, but that will be subject to renegotiation when it expires in December of
2008.814
654. KCPL
is experienced in operating under multiple franchises, with approximately 70
different franchises across its territory.815
655. Based
upon the testimony of the witnesses, the Kansas City Franchise Agreement
does not contain a limitation on its duration.816
_________________________
811 Id.
813
Transcript, pp. 2153 and 2210. See also KCMO Exh.
402.
814
Transcript, pp. 2153-2154, 2157-2158, and 2202.
816 See
testimony of KCMO witnesses, Cauthen and Hix; KCMO Exhs. 400 and 401; GPE/KCPL
Exh. 22, Marshall Surrebuttal, pp. 1-19; Transcript, pp. 2132-2237. See in
particular Transcript, p. 2153, lines 7-12.
Wayne A. Cauthen is the City
Manager for Kansas City. He was appointed by Kansas City in this
capacity in April of 2003. He is Kansas City’s chief administrator
and his overall responsibility is to ensure that the city government runs
efficiently and economically. He advises the Mayor and the City
Council and he appoints all department directors except for the Director of
Parks and Recreation. He prepares a proposed annual budget for the
Council's consideration, and his work also includes enforcing municipal laws and
ordinances and coordinating city operations and programs. His office
provides staff support services to the City Council and its committee meetings,
and coordinates the development and analyses of policy recommendations presented
to the Mayor and the City Council. He has over 25 years of
professional experience in the public and private sectors. He
graduated from Central State University in Wilberforce, Ohio, with a degree in
political science and also completed graduate studies in political science at
the University of Colorado. Prior to his employment with Kansas City,
he worked as Chief of Staff for Denver Mayor Wellington Webb from 2000 to
2003. He served as Webb's deputy Chief of Staff from 1997 to
2000 and as the director of the Mayor's Office of Contract Compliance from 1993
to 1997. During his tenure in Denver, he managed nine cabinet-level
departments and eleven agencies and he served on several boards including the
Denver Housing Authority Board of Directors, the Stapleton Redevelopment Board,
and the Denver International Airport Business Partnership Board. He
also worked for the State of Colorado Capital Complex Divisions and the Colorado
Minority Business Development Agency. Prior to his work for the City and County
of Denver, he was an administrator for the Space Launch Systems at Martin
Marietta, which is now Lockheed Martin located in Littleton,
Colorado. He has not previously testified before the Commission or
any other utility regulatory agency.
Robert J. Hix is an
independent consultant in utility regulation, policy and
operations. He has been retained by the law firm of Kamlet Shepherd
& Reichert, LLP on behalf of Kansas City. His role began as an
advisor to Kamlet Shepherd in reviewing the case filed by the
Applicants. He has spent most of his working life in utility
regulation as a regulator, advocate, and consultant. His employment
in utility operations began in September 1971 and continued in some fashion for
the last thirty-six years. He worked in various capacities for a
large combined electric and natural gas company in Colorado from September 1971
through November 1983. In December 1984, he became the senior
technical expert witness for the newly formed Colorado Office of Consumer
Counsel. In May 1994, he was confirmed as the Chairman of the
Colorado Public Utilities Commission. Upon completion of his two
terms on that Commission, he left state service in May of 2001. He
joined a Boston-based energy consulting firm in August 2001 and opened a western
office near Denver, Colorado. He left the consulting firm in March
2004 when he accepted a position as with Xcel Energy as Director, Regulatory
& Strategic Analysis. In June 2006, he retired from Xcel
Energy. In January 2007, he began accepting invitations for
occasional consulting projects in the arena of regulatory policy and
operations. While employed by the Colorado Office of Consumer
Counsel, Xcel Energy and consulting, he testified numerous times before the
Colorado PUC and Wyoming PSC in the areas of electric, natural gas and
telecommunications engineering, pricing and rate design matters. Additionally,
he has appeared before FERC.
656. Great
Plains’ and KCPL’s witness John Marshall has testified that the Franchise
Agreement between KCPL and Kansas City is a valid and binding contract that
sets forth the rights and obligations of each signatory.817
657. Kansas
City has not provided any testimony controverting witness Marshall’s testimony
that the Franchise Agreement between KCPL and Kansas City is valid and
enforceable.818
_________________________
817
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19; Transcript, p. 2202. See also
KCMO Exh. 402.
818 See
testimony of KCMO witnesses, Cauthen and Hix; KCMO Exhs. 400 and 401;
Transcript, pp. 2132-2195.
658. Kansas City
has not provided any testimony controverting the validity and enforceability of
the Franchise Agreement between Aquila and Kansas City.819
659. Kansas City
has requested that the Commission condition the approval of the current merger
request on having KCPL abrogate the Franchise Agreement with the city and
renegotiate a new franchise agreement with Kansas City.820
660. Over
the years Kansas City has expressed interest in renegotiating certain
aspects of the Franchise Agreement and KCPL has entertained some of
Kansas City’s proposals, KCPL has elected to maintain the rights contained
in the Franchise Agreement because they provide significant benefits to KCPL’s
customers.821
661. Kansas City’s
request that the Commission condition approval of the merger upon the
renegotiation of the Franchise Agreement is premised on its claims that it lacks
adequate guidance in determining who pays the costs associated with relocations,
line extensions, and undergroundings.822
662. Disputes
over requests for relocations and line extensions are limited, in general, to
the issue of who is responsible for these costs.823
663. KCPL’s
Commission-approved tariffs provide guidance on the question of who pays
for relocation costs, line extensions, and undergroundings and ensure that
KCPL’s customers do not subsidize the development costs of private
entities. 824
_________________________
819 See
testimony of KCMO witnesses, Cauthen and Hix; KCMO Exhs. 400 and 401;
Transcript, pp. 2132-2195.
820 KCMO
Exh. 400 Cauthen Rebuttal, pp. 3-4 and 10-11.
821
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
822 KCMO
Exh. 400 Cauthen Rebuttal, pp. 3-4 and 10-11. See also Transcript, pp.
2132-2159.
823
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
824 Id. See also
Section 15.08, Changes and Removal, Municipal Lighting Service, KCPL General
Rules and Regulations, P.S.C. Mo. No. 2 (Tariff Sheets 1.51-52)
(1989). Id.,
Section 10.03(e)(v), Underground Distribution System in Residential
Subdivisions. The Commission takes official notice of KCPL’s tariffs
that are on file with the Commission.
664. Missouri
common law also provides guidance on the issue of relocation and
line extension costs.825
665. Missouri
law states that utilities must relocate their facilities located in public
right-of-ways at their own expense if the change or improvement necessitating
the relocation is for a government purpose. If, however, the
relocation is for a private or proprietary purpose, utilities are entitled to be
reimbursed for the costs associated with a relocation or line extension.826
666. Issues
of relocation and subordination that concern Kansas City are dealt with
through KCPL’s line extension policy.827
667. Consistent
with its tariffs, KCPL seeks reimbursement for relocation or line extension
costs that can be traced backed to the development of private property by
developers. The fact that these developers are working closely with
Kansas City does not permit these developers to shift their costs to KCPL’s
customers.828
_________________________
825 See
City of Bridgeton v.
Missouri-American Water Co., 219 S.W.3d 226, 232 (Mo. banc 2007),
quoting Union Electric Co. v.
Land Clearance for Redevelopment Authority of St. Louis, 555 S.W.2d 29,
32 (Mo. banc 1977) -- “The fundamental common-law right applicable to franchises
in streets is that the utility company must relocate its facilities in public
streets when changes are required by public necessity, or public convenience and
security require it, at its own expense.” See also Riverside-Quindaro Bend Levee Dist.,
Platte County, Missouri v. Missouri American Water Co., 117 S.W.3d
140 (Mo. App. 2003).
826 Id. See also Home Builders Ass'n of Greater St.
Louis v. St. Louis County Water Co., 784 S.W.2d 287 (Mo. App. 1989);
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19; Transcript, pp. 2212,
2233.
827
Transcript, p. 2233. The current Franchise Agreement between
Kansas City and KCPL does not address subordination
issues. Transcript, p. 2212. See also Section 15.08,
Changes and Removal, Municipal Lighting Service, KCPL General Rules and
Regulations, P.S.C. Mo. No. 2 (Tariff Sheets 1.51-52)
(1989). See also id., Section 10.03(e)(v),
Underground Distribution System in Residential Subdivisions.
828
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
668. To
protect its customers from overreaching, KCPL makes case-by-case determinations
to ensure development costs are not shifted from developers to KCPL’s
customers.829
669. Over
the past several years KCPL has received thousands of requests for relocations
and line extensions. KCPL’s records indicate that only two formal
complaints have been filed against KCPL.830
670. KCPL
uses a sophisticated software program that estimates the costs of relocation or
line extension projects (“STORMS”). The first step in the process
requires KCPL’s engineers to determine what facilities will be necessary to
complete the project. The engineers enter this information into the
STORMS program. Then STORMS generates a detailed estimate of the cost
of the project (“STORMS Report”). 831
671. It
is KCPL’s practice to share the information contained in the STORMS Report with
the entity requesting the relocation or line extension. If a customer
needs the information contained in the STORMS Report explained to them or makes
reasonable requests for additional information, it is KCPL’s policy to honor the
request.832
672. KCPL,
as a general rule, does not disclose the locations of its facilities to third
parties. Because of heightened security concerns KCPL does not
disclose information regarding its infrastructure unless the entity requesting
the information has a specific need for the information.833
_________________________
829 Id.
830
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
833 Id. After the 9/11
terrorism attacks, KCPL took steps to secure its facilities from an
attack. Id.
673. To
the extent Kansas City has a specific need for information regarding KCPL’s
infrastructure, KCPL provides that information.834
674. KCPL
provides adequate information regarding relocation and line extension
costs.835
675. Consummation
of the proposed merger will not extinguish Aquila’s corporate existence.836
676.
In addition to maintaining separate corporate entities, KCPL and Aquila will
maintain separate control areas for the foreseeable future. 837
677. In
its testimony, Kansas City’s witness Mr. Cauthen alleged that it has
experienced operational problems with Aquila;838 however,
Mr. Cauthen also described its working relationship with KCPL as, on the
whole, “good.”839
678. There
is no evidence in the record that establishes that approval of the merger will
result in additional burdens for Kansas City.
679. There
is no evidence in the record that establishes that the terms of corporate
structure of the merger will result in any changes that will have an adverse
effect on Kansas City.
680. The
current Franchise Agreements, company tariffs, and Missouri case law provide
sufficient guidance and regulation concerning the issues Kansas City raises
with regard to its relationship with KCPL and any post-merger relationship
Kansas City will have with KCPL and Aquila.
_________________________
834 Id. Although he
stated that his public works director had indicated there was a problem
receiving maps or drawings from KCPL, Kansas City’s witness Cauthen could not
provide a single example of KCPL failing to provide a map or drawing of its
facilities at Kansas City’s request. Transcript, p.
2151.
835
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
836 Id. As noted in
various sections of this order, under the terms of the merger agreement, Gregory
Acquisition Corp., a direct, wholly-owned subsidiary of Great Plains Energy,
will be merged into Aquila, with Aquila as the surviving entity (although Great
Plains Energy anticipates that it will rename Aquila). After the
merger closes, Aquila, as well as KCPL, will continue to exist as separate
corporate entities.
837
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
838 KCMO
Exh. 400, Cauthen Rebuttal, p. 4.
|
L.
|
Findings
of Fact Regarding Municipal Franchise Agreement with
St. Joseph
|
681. St. Joseph
has also asked the Commission to condition the approval of the proposed merger
upon Aquila negotiating a new municipal franchise with St. Joseph and further
requests that a condition be placed upon the newly merged entity to obtain a
franchise agreement from each municipality in which it provides service.840
682. St.
Joseph did not produce a witness to testify before the Commission.
683. St.
Joseph offered no prefiled or live testimony on the issue it raises with regard
to its current franchise agreement with Aquila.
684. Instead,
St. Joseph offered Exhibit 1200 into evidence, which includes an affidavit
from the St. Joseph’s attorney, Ms. Lisa Robertson, and a letter dated
September 24, 2007, from Daniel Vogel to
Ms. Renee Parsons.841
685. No
witness was present at the hearing to authenticate St. Joseph Ex. 1200 and,
consequently, St. Joseph Exhibit 1200 lacks a proper foundation and is
hearsay.842
686. No
party was given an opportunity to cross-examine any St. Joseph witness
concerning its contention that Aquila’s franchise with St. Joseph had
expired.843
687. The
Applicants objected to the admission of Exhibit 1200 on the basis of
hearsay, and because the documents were unauthenticated by any witness subject
to cross-examination.844
________________________
840 See
Post-Hearing Brief of City of
St. Joseph, filed June 2, 2008, EFIS Docket Number 446, pp.
1-2.
841 SJMO
Exh. 1200; Transcript, pp. 2224-2231.
842
Counsel for St. Joseph, Mr. Steinmeier, explained that budgetary constraints of
his client precluded the production of a witness in this
matter. Transcript, p. 2226.
843
Transcript, pp. 2224-2231.
688. St.
Joseph Exhibit 1200 was received subject to the parties’ objections and the
presiding Regulatory Law Judge made clear that the Commission would rule on its
ultimate admissibility in its final Report and Order.845
689. St.
Joseph also offered for admission Exhibit 1201, a copy of a portion of the
St. Joseph Code, Article XIII on Franchises. The Commission
received this exhibit into evidence over objection.846
690. St.
Joseph, during cross-examination of Witness Marshall, established that “when the
time comes,” “franchise negotiations . . . between [the] city of
St. Joseph and Aquila would actually take place between the city of
St. Joseph and Kansas City Power and Light employees acting on behalf
of Aquila d/b/a KCPL Great[er] Missouri Operations.”847
|
M.
|
Findings of Fact Regarding
Proposal to Have KCPL Submit a Separate Quality of Service Plan
|
691. Kansas City
requested that the Commission condition the approval of the Joint Application
upon requiring KCPL and Aquila to file an application for a Quality of Service
Plan within 90 days of the Commission’s final decision in this
proceeding.848
692. Mr. Hix,
when asked if he was familiar with the quality of service standards employed by
the Commission also stated:
I don't
have direct knowledge. I have reviewed some of the material related
to the rulemaking that the Missouri Commission had engaged in and read some of
that material. Some of that I merely scanned, just for background and
understanding the perspective that was brought to that proceeding. I
didn’t get into the details. I didn’t care about the thresholds under
SAIFI or SAIDI or CAIFI. That was not my purpose of the testimony in this
instance.849
_________________________
845
Transcript, p. 2231.
846
Transcript, pp. 2224-2231.
848 KCMO
Exh. 401, Hix Rebuttal, pp. 5-10.
693. Kansas City’s
witness Mr. Hix was
unfamiliar with this Commission’s vegetation management standards and
reliability metrics.850
694. Upon
questioning by Commissioner Murray, Mr. Hix stated that when he looked at
the service quality and earnings sharing issue:
I didn’t
give it much emphasis because it's intuitively obvious that one need be careful
when an entity has -- has an incentive to cut costs to improve its earnings
picture, and that occurs quite frequently under merger situations or acquisition
situations. And so that's why I would say that there is a link
between service quality, having metrics that work, and have them be specific to
the utility, and put some teeth to those and allow for reparations to be
returned to customers when the company fails to perform up to those standards.
That's the service quality.851
695. Mr. Hix
further indicated that if the Commission had rules using basic measures of
performance, such as the type outlined in his prefiled testimony, this would
satisfy his concerns, but added that there should also be provisions for
reparations to customers when a company underperforms.852
696. Kansas City
has not suggested any specific service quality standards when making this
recommendation, but its witness, Mr. Hix, confirmed that System Average
Interruption Frequency Index (“SAIFI”), System Average Interruption Duration
Index (“SAIDI”) and Customer Average Interruption Duration Index (“CAIDI”) were
all “good measures”.853
_________________________
850
Transcript, p. 2168-2169.
851
Transcript, pp. 2171-2172.
852
Transcript, pp. 2173.
853 KCMO
Exh. 401, Hix Rebuttal, pp. 1-10; Transcript, pp. 2168 and
2178.
697. The
Commission’s Staff already reviews the performance measures mentioned by
Mr. Hix as part of its Cost of Service report when a utility files a rate
case.854
698. In
KCPL's last rate case (ER-2007-0291), the Staff reviewed five years of data for
SAIFI, SAIDI, CAIDI,855 and the Momentary
Average Interruption Frequency Index (“MAIFI”) and found no evidence of long
term trends that should be cause for concern by the Commission.856
699. Kansas
City’s witness Mr. Hix could not list any of the synergies that KCPL is
proposing in the area of customer service or how these synergies would affect
customer service.857
700. Great
Plains’ and KCPL’s witness Mr. Herdegen testified to numerous steps being
initiated by KCPL to ensure that service quality does not decline, including
adding 42 employees in the customer service area on Day One
post-merger.858 (See
Findings of Fact Section for Service Quality for a more specific and detailed
analysis of the Service Quality issues.)
701. Although
there may be an increased risk of service quality degradation when utility
operations and functions are integrated, Mr. Hix presented no credible evidence
that customer service would be affected by the transaction.859
_________________________
854
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19.
855 CAIDI
equals SAIDI divided by SAIFI.
856
GPE/KCPL Exh. 22, Marshall Surrebuttal, pp. 1-19, see in particular p.
19.
857
Transcript, pp. 2192 and 2193.
859 KCMO
Exh. 401, Hix Rebuttal, pp. 1-10; Transcript, pp. 1877-1878. The
Commission notes that in its credibility findings it was determined that Witness
Schallenberg was not an expert on Service Quality; however, this particular
statement with regard to general risk did not require subject matter expertise.
Transcript, pp. 2160-2200.
|
N.
|
Findings
of Fact Regarding Proposal to Have KCPL Establish an Earnings Sharing
Mechanism
|
702. Kansas
City requested that the approval of the merger be conditioned upon the
establishment of an Earnings Sharing Mechanism that returns to customers excess
earnings of KCPL and Aquila above an authorized rate of return to
customers.860
703. Kansas
City’s witness Mr. Hix testified that this mechanism should involve annual
evaluations of the earnings picture of the company and his preferred method of
returning excess earnings to the customers utilizes a “reverse taper” whereby
after greater excess earnings are achieved, more is retained by the
utility.861
704. Mr.
Hix testified that he agreed that the electric utility industry is in a rising
cost environment and in a construction phase.862
705. Mr. Hix did not review any
earnings sharing mechanisms or grids approved by this Commission.863
706. Mr.
Hix also testified that he had not reviewed other Commission approvals of
electric company mergers.864
707. Mr.
Hix does not know the specifics of KCPL’s infrastructure investments contained
in its Regulatory Plan.865
708. Mr.
Hix did not review KCPL’s two rate cases filed since the approval of the
Regulatory Plan and did not calculate KCPL’s actual rate of return.866
_________________________
860 KCMO
Exh. 401, Hix Rebuttal pp. 6-8. KCMO Exh. 401; Transcript, pp.
2160-2200.
861 KCMO
Exh. 401, Hix Rebuttal, pp. 6-8.
865
Transcript, pp. 2163-2164.
709. The
last earnings sharing mechanism that Mr. Hix designed and was familiar with was
in effect from 1997 to 2001.867
710. KCPL
and Aquila are currently engaged in major generation construction programs, and
both companies will need to raise additional capital beyond their current
construction programs to meet environmental regulations.868
711. KCPL
and Aquila intend to file rate cases with the Commission in the year after the
proposed transaction closes (assuming Commission approval). Approved
rate increases resulting from these cases will be necessary to recover the costs
of the infrastructure as it is placed into service, and those costs will exceed
the total estimated synergies of the acquisition during the next several
years.869
712. The
realized synergies from the merger will result in requiring smaller rate
increases than would have been required absent the transaction, but initially
there will be no excess earnings to share.870
713. Earnings
sharing mechanisms are used when the cost of service is expected to be flat or
declining over the time the synergies are expected to occur.871 Absent
increases in cost of service, the synergies would result in excess earnings
above an authorized rate of return.
714. Any
savings derived from synergies as a result of the merger, as the merger proposal
is structured, will be shared through the mechanism of regulatory lag.872
________________________
867
Transcript, p. 2167.
868
GPE/KCPL Exh. 15, Giles Surrebuttal, p. 13.
872
GPE/KCPL Exh. 37, Bassham, Additional Supp. Direct, pp.
3-4.
715. Kansas
City presented no credible evidence that any detriment would result if the
merger was not conditioned upon establishing an earnings sharing mechanism,
other than the method of regulatory lag.873
|
O.
|
Findings
of Fact Regarding a Future Rate
Case
|
716. Kansas City
has also requested that the Commission condition the approval of the merger upon
requiring KCPL and Aquila to file a comprehensive rate case with respect to the
“merged” operations within three years of the Commission’s approval of the
merger.874
717. As
part of this proposed condition, Kansas City requests the Commission to
order the company to file a proposal to integrate financial operations and
electric system operations into a cost structure that can be comprehensively
evaluated for efficiencies and improved operations.875
718. The
Applicants, however, are not proposing to merge KCPL with Aquila,876 and the timing of
KCPL’s rate cases are already influenced by its commitments and activities under
the Regulatory Plan Stipulation, Case No. EO-2005-0329.877
719. Kansas
City’s witness testifying on this issue, Mr. Hix, did not review the Regulatory
Plan regarding KCPL’s future rate cases.878
_________________________
873 KCMO
Exh. 401, Hix Rebuttal, pp. 1-10; Transcript, pp. 2160-2200.
874 KCMO
Exh. 401, Hix Rebuttal, p. 4.
876
GPE/KCPL Exh. 22, Marshall Surrebuttal, p. 16; Transcript, pp.
305-07.
877 See
Case No. EO-2007-0329, In the
Matter of a Proposed Experimental Regulatory Plan of Kansas City Power &
Light Company, Report and Order, effective August 7, 2005 and Order
Approving amendments to Experimental Regulatory Plan, effective August 23,
2005.
720. Kansas
City presented no credible evidence that any detriment would result if the
merger was not conditioned upon requiring a future comprehensive rate case with
respect to what Kansas City is referring to as KCPL’s and Aquila’s “merged
operations.”879
III. Conclusions
of Law
The
Missouri Public Service Commission has arrived at the following conclusions of
law.
|
A.
|
Conclusions
of Law Regarding Jurisdiction, Applicable Statutes, Burden of Proof, and
Applicable Standards for Evaluating the Merger Application880
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|
|
1.
|
Commission
Jurisdiction and Authority
|
Section 386.020(15),
RSMo, defines "electrical corporation" as including:
every
corporation, company, association, joint stock company or association,
partnership and person, their lessees, trustees or receivers appointed by any
court whatsoever, other than a railroad, light rail or street railroad
corporation generating electricity solely for railroad, light rail or street
railroad purposes or for the use of its tenants and not for sale to others,
owning, operating, controlling or managing any electric plant except where
electricity is generated or distributed by the producer solely on or through
private property for railroad, light rail or street railroad purposes or for its
own use or the use of its tenants and not for sale to others.
Section
386.020(42) defines "public utility" as including “every . . .
electrical corporation . . . as [this term is] defined in this
section, and each thereof is hereby declared to be a public utility and to be
subject to the jurisdiction, control and regulation of the commission and to the
provisions of this chapter.”
KCPL is
an “electrical corporation” and a “public utility,” as defined in
Sections 386.020(15) and (42), and is subject to the jurisdiction,
supervision, and control of the Commission under Chapters 386 and 393
of the Missouri Revised Statutes. Aquila is an “electrical
corporation” and a “public utility,” as defined in Sections 386.020(15)
and (42), and is subject to the jurisdiction, supervision and control of
the Commission under Chapters 386 and 393. Great Plains is
not an electrical corporation or public utility as defined in
Sections 386.020(15) and (42), and is not subject to the jurisdiction,
supervision and control of the Commission.
_________________________
879 KCMO
Exh. 401, Hix Rebuttal, pp. 1-10; Transcript, pp. 2160-2200.
880 See
Findings of Fact 1-163 as they relate to this section.
|
|
2.
|
Application
of Section 393.190.1
|
Section
393.190.1 provides in pertinent part:
No gas corporation, electrical corporation, water
corporation or sewer corporation shall hereafter sell, assign, lease,
transfer, mortgage or otherwise dispose of or encumber the whole or any part of
its franchise, works or system, necessary or useful in the performance of its
duties to the public, nor by any means, direct or indirect, merge or consolidate
such works or system, or franchises, or any part thereof, with any
other corporation,
person or public utility, without having first secured from the
commission an order authorizing it so to do. . . .881
The
Applicants extensively outlined the transactions associated with their merger
proposal in their application and by means of the prefiled testimony that was
incorporated by reference and filed with the application.882 The
Applicants’ wherefore clause in their Application reads as follows:
WHEREFORE,
pursuant to Sections 393.180, 393.190, 393.200, 393.210 and 393.220, as well as
4 CSR 240-2.060, 240-3.020, 240-3.110, 240-3.115, 240-3.120, 240-3.125, and 240-
20.015, Applicants request the Commission to issue an order:
(a) Authorizing
Great Plains Energy and Aquila to perform in accordance with the terms and
conditions of the Agreement and Plan of Merger, APA, PIPA, and
all other transaction-related instruments, and to take any and all
other actions that may be reasonably necessary and incidental to the performance
of the Merger;
_________________________
881
Emphasis added.
882 Joint Application of Great Plains
Energy Incorporated, Kansas City Power & Light Company and Aquila,
Inc., pp. 20-21, paragraph 50, filed April 4, 2007; Transcript, pp.
3119-3121; Finding of Fact Numbers 121-163.
(b) Authorizing
Great Plains Energy, via the Merger, to acquire and assume the stocks, bonds,
and other indebtedness and obligations of Aquila, all as more particularly
described in the Agreement and Plan of Merger;
(c) Authorizing
Aquila to merge with Merger Sub, a wholly-owned subsidiary of Great Plains
Energy, with Aquila being the surviving corporation, all as more particularly
described in the Agreement and Plan of Merger;
(d) Finding
that the Merger and other relief sought in this Joint Application are not
detrimental to the public interest;
(e) Approving
the Regulatory Plan, including Aquila’s use of the Additional Amortizations
mechanism in its next general rate case after achieving the financial metrics
necessary to support an investment-grade credit rating;
(f) Authorizing
KCPL and Aquila to establish a regulatory asset and amortize into cost of
service costs associated with the Merger, including both transaction and
transition-related costs, as properly allocated to KCPL’s and Aquila’s Missouri
regulated operations and excluding the non-incremental labor costs of the
integration team, over a five (5) year period beginning on January 1, 2008, or
the month immediately following consummation of the Merger, whichever occurs
later;
(g) Authorizing
KCPL and Aquila, collectively, to retain for a five (5) year period fifty
percent (50%) of the synergy savings that result from the Merger, as properly
allocated to their Missouri-regulated operations;
(h) Authorizing
Aquila to distribute approximately $677 million of the proceeds from the sale of
Aquila’s non-Missouri properties in a direct or indirect cash distribution to
Aquila’s shareholders, pursuant to Sections 393.210 and 393.220, as a
result of the sale of such properties to Black Hills;
(i) Authorizing
Aquila to change its name;
(j) Granting
KCPL and Aquila a waiver from the affiliate transaction rule to the extent
deemed necessary; and
(k) Granting
such other relief as may be necessary and appropriate to accomplish the purposes
of the Merger and this Joint Application, and to consummate the Merger and
related transactions in accordance with the Agreement and Plan of Merger and
this Joint Application.
The
Commission has already noted the requests that have been eliminated by the
Applicants when they revised their merger proposal, i.e., including
subparts (e) and (g).883
The
transactions proposed ultimately involve a merger of Aquila with Gregory
Acquisition Corp., a direct, wholly-owned subsidiary of Great Plains, with
Aquila being the surviving entity. As a result of the merger, Aquila
will become a direct, wholly-owned subsidiary of Great Plains, just as
KCPL. KCPL and Aquila will be affiliated entities by virtue of Great
Plains’ common ownership of both. Although Aquila and KCPL will
remain separate legal entities, many of the companies’ operational functions
will be integrated and centralized after the merger closes.
The
merger involves Aquila’s selling, transferring, or otherwise
disposing or encumbering the whole or any part of its franchise, works or
system, necessary or useful in the performance of its duties to the public,
by any means, direct or indirect, merge or consolidate such works or
system, or franchises, or any part thereof, with any other corporation, person or
public utility, and as such, the transfer, sale, merger or consolidation of
Aquila’s assets requires that the companies involved secure Commission
authorization.884 No party
contests the fact that the transactions proposed require Commission approval
pursuant to Section 393.190.
|
|
b.
|
Properly Pled Request for
Relief
|
The
Industrial Intervenors, Staff, and Public Counsel (“opposition parties”) have
argued that because the Applicants are not seeking a merger, combination,
integration, either direct or indirect, between KCPL and Aquila, two companies
subject to the jurisdiction of the Commission, that the Commission is barred
from considering the benefits of the proposed transaction pursuant to the very
standard, the “not detrimental to the public interest” standard, they all agree
applies to this transaction.885 The
opposition parties frame their argument as being a pleading defect on the part
of the Applicants, and state that the scope of the proceeding is, necessarily,
limited by the Application filed and the relief requested therein, which they
allege does not encompass any of the benefits of the transaction as
proposed.886 However, as
time has progressed in this matter, the ever-shifting sands surrounding the
opposition parties’ argument have revealed that it has not one, but three
heads.887
_________________________
883 See
GPE/KCPL Exh. 37-39.
884
Section 393.190.1 (emphasis added).
885 See
EFIS Docket Number 440, Initial Brief of the Office of the Public Counsel; EFIS
Docket Numbers 447 and 448, Post-Hearing Brief of Industrial
Intervenors; EFIS Docket Number 461, Staff’s Post-Hearing
Brief.
886 The
Industrials in particular assert that they are not consenting to any argument,
or evidence, that the Applicants have properly requested authority for the
integration of KCPL and Aquila so that synergy savings flowing from that
integration can be evaluated in this matter. Transcript, pp.
1264-1265, 1305-1309, 1426-1428, and 3107-3111. See also Section
536.063(3).
887 See
Transcript, pp. 1426-1427. The Commission notes that, prior to the
resumption of the evidentiary hearing on April 21, 2008, the Commission
specifically denied two motions in limine filed by the Industrial Intervenors
raising these same arguments. See also Transcript, pp 99-102 (the
Commission denied the Industrials’ first motion from the bench); EFIS Docket
Number 120, Opposition of Great Plains Energy, Inc. and Kansas City Power and
Light Co. to Motion in Limine of Indicated Industrials, filed December 2, 2007;
and EFIS Docket Number 286, Order Denying Second Motion in Limine of Industrial
Intervenors, issued April 8, 2008.
The first
variation of the opposition parties’ argument is that the Applicants, by failing
to specifically request approval or authority to integrate (or merge) KCPL and
Aquila have forfeited consideration of the benefits of the proposed merger,
because the benefits flow from the integration of KCPL and Aquila and not the
merger of Aquila and Gregory Acquisition. Staff witness Schallenberg
summarized this theory when he testified that Staff did not review the specifics
of the expected synergies because Staff believes that synergies can only occur
if a formal merger or consolidation of KCPL and Aquila occurs, which is
something that the Applicants have not asked to do under Section 393.190.888 Staff also
argues that because it views the Joint Application as effectively seeking the
merger or consolidation of Aquila and KCPL without requesting approval under the
statute, any claimed synergies may be disregarded by the Commission without
further analysis.889
_________________________
888 See
Transcript, pp. 1820-23 and 1844-49.
889 See
Staff Exh. 100, Schallenberg Rebuttal and Staff Report, pp. 11-12 and
43-44.
The
second variation of the argument is simply that it would be unlawful for
the Commission to grant the Applicants’ proposed merger because they have failed
to request Commission approval of the integration of KCPL and Aquila.890
And
finally, the third variation is that because the Applicants failed to request
Commission authority to integrate KCPL and Aquila in their Application, the
other parties lacked sufficient notice to prepare their opposition
cases. Thus, this final variation generates the conclusion that
consideration of synergies associated with the merger would be irrelevant and
would be a violation of due process to the prejudice of the opposition parties
for the Commission to consider the calculated synergies flowing from the
merger.891
Despite
the opposition parties’ arguments, it is well established law that the technical
rules of pleading are not applicable to applications or pleadings filed with the
Commission.892 “They are to
be liberally construed.”893 Indeed, many
Commission rules even allow for late-filing of required application materials,
and the Commission frequently conditions its authorizations on the submission of
additional documentation or on procedural or substantive requirements being
fulfilled at a time following evidentiary hearings and final
determinations.894
________________________
890
Transcript, pp. 3111-3112.
891 Transcript, pp.
3107-3112. See also Transcript, pp. 1264-1265, 1305-1309,
1426-1428, 1820-23 and 1844-49. See Post-Hearing Briefs of Staff,
Public Counsel, and Industrial Intervenors. See EFIS Docket Number
112, Motion in Limine of
Indicated Industrials, pp.
2-4, filed November 28, 2007; EFIS Docket Number 254, Second Motion in
Limine of Indicated Industrials, pp. 2-5, filed March 13, 2008; EFIS
Docket Numbers 447 and 448, Post-Hearing Brief of Industrial Intervenors, pp.
20-26, filed June 2, 2008. Staff did not join in the notice
argument. Transcript, p. 3122.
892 State ex rel. Crown Coach Co. v.
Public Service Com'n, 179 S.W.2d 123, 126 (Mo. App.
1944). See also State ex rel. M., K. & T. R. Co.
v. Public Service Com'n, 210 S.W. 386 (Mo. 1919); State ex rel. Kansas City Terminal
R. Co. v. Public Service Com'n, 272 S.W. 957 (Mo.
1925).
893 Id. See also
Section 386.610.
894 See
Commission Rules 4 CSR 240-3.110 and 3.115 as examples.
With
regard to the first head of the opposition parties’ argument,
Section 393.190 does not require that the approval authority sought for a
merger or transfer of assets be somehow restricted to any particular
entities. The statute clearly states, “with any other
corporation.”895 Section
393.120 states: “The provisions of section 386.020, RSMo, defining words,
phrases and terms, shall apply to and determine the meaning of all such words,
phrases or terms as used in sections 393.110 to 393.290,” and
Section 386.020(11) defines "corporation" simply as including “a
corporation, company, association and joint stock association or
company.”
“Merge”
and “consolidate” are not defined in Chapter 393, so the Commission must
look to other sources for guidance. Under Missouri law any two
“domestic corporations may merge into one of the
corporations . . . .”896 Similarly,
any two “domestic corporations may consolidate in a new domestic
corporation . . . .”897 In order for
a merger or consolidation to occur under Missouri corporate law, two entities
must combine to form one entity.
No party
to this matter disputes the facts that Aquila, Gregory, and Great Plains are all
corporations and none are disputing the fact that the Applicants have sought
approval of a merger. The merger is between a special purpose
subsidiary of Great Plains Energy with Aquila, with Aquila being the surviving
corporation. KCPL and Aquila are not merging or consolidating
corporations. Both will remain separate entities with separate
tariffs, separate rates, and separate generation and distribution
assets.
_________________________
895
Section 393.190.1 (Emphasis added).
Regardless
of how the opposition parties characterize the transaction, Section 393.190
applies, Commission approval is required for the transaction to proceed, and the
appropriate standard for evaluating the transaction is the “not detrimental to
the public interest” standard. The statute places no restrictions on
the application of the “not detrimental to the public interest
standard.” The statute does not prohibit the Commission from
evaluating the benefits of the transaction based upon the structure of the
transaction. It is irrelevant as to what part of the transaction that
the benefits flow; any benefits of the transaction must be evaluated by the
Commission.
Paragraph 34
of Joint Applicants’ Application states that total pretax synergies for KCPL and
Aquila are estimated to reach approximately $500 million over five
years. This statement identifies the Applicants’ intent to derive the
synergies from the integration of KCPL and Aquila. Additionally, the
“Wherefore” clause to the application cites all relevant statutes and Commission
rules governing the proposed merger and subpart (K) of the clause requests that
the Commission grant “such other relief as may be necessary and appropriate to
accomplish the purposes of the Merger and this Joint Application, and to
consummate the Merger and related transactions in accordance with the Agreement
and Plan of Merger and this Joint Application.”
The
Application incorporates by reference the prefiled testimony from Great Plains
and KCPL’s witnesses that fully outline the specifics of the transaction,
including the integration of KCPL and Aquila’s operations. The
Application clearly identifies the transactions proposed, places all potential
intervenors on notice as to what transactions are being contemplated and seeks
the appropriate Commission authorizations for those proposed transactions.898
_________________________
898 Staff
admits they were preparing to litigate this case based upon a full understanding
of the full relief requested by the Applicants and the associated attendant
benefits, but became aware of this legal argument early in the proceedings and
elected to pursue that as a matter of trial strategy. Transcript,
Volume 23, pp. 3106-3125, see in particular pp. 3115 and
3126-3128. Public Counsel admitted the application was not deficient,
in that the Commission can grant authorization for the merger requested, but
maintains that the Commission cannot grant approval of the integration of KCPL
and Aquila as part of that merger and maintains that the Commission cannot
examine the benefits of the transaction. Transcript, pp.
3126-3127. The Industrials agreed with Public Counsel’s assessment
that the Application was not deficient, but that it failed to request the proper
relief in order for the Commission to examine the synergy savings or benefits
flowing from the merger. Transcript, p. 3126. EFIS Docket Numbers 447
and 448, Post-Hearing Brief of Industrial Intervenors, pp. 19-25, filed June 2,
2008.898
The
opposition parties all argue that Section 393.190 governs this transaction, and
they all argue that the appropriate standard to apply when evaluating the
transaction is the “not detrimental to the public interest” standard, but they
then inexplicably assert that the Commission must limit its evaluation of the
transaction and the application of the standard.899 The
Applicants have properly pled and sought the appropriate authorizations pursuant
to Section 393.190 to consummate the proposed merger. Thus, the
Commission shall apply the appropriate standard to evaluate the transaction,
which necessarily includes weighing all of the attendant benefits of the
transaction.
Even
assuming, arguendo,
that the opposition parties are correct, which they are not, the Commission
directs them to the conclusions of law section where the Commission performs its
balancing test to determine if the Applicants met their burden of establishing
that the proposed merger is “not detrimental to the public
interest.” Synergy savings are but one factor to be weighed, and even
if the Commission was barred from evaluating the synergies (an evaluation that
the Commission believes is appropriate and required under the law) the
Commission could still find the proposed transactions satisfy the standard for
approval.
_________________________
899 The
opposition parties’ recitations of Section 393.190 imply that only a merger
between Aquila and KCPL would allow the Commission to examine any benefits
flowing from the merger. These parties chose this as one of their
legal strategies in this matter and to the extent they chose not to address the
alleged benefits of the transaction, that was their choice. The
Commission did not in any way prejudice them or impinge upon their due process
rights by allowing relevant evidence to be admitted in order to properly apply
the “not detrimental to the public interest” standard. See EFIS Docket Number
112, Motion in Limine of
Indicated Industrials, pp. 2-4, filed November 28, 2007; EFIS Docket
Number 254, Second Motion in
Limine of Indicated Industrials, pp. 2-5, filed March 13, 2008; EFIS
Docket Numbers 447 and 448, Post-Hearing Brief of Industrial Intervenors, pp.
20-26, filed June 2, 2008; Transcript, pp. 1426-1428, 3107-3109, and
3112-3122.
|
|
3.
|
Merger
Approval Standard – “Not Detrimental to the Public Interest” – and Burden
of Proof
|
No party
contests that the appropriate standard the Commission must apply to evaluate the
proposed transaction, pursuant to the application of Section 393.190, is
the “not detrimental to the public interest” standard. The parties
have each laid out descriptions of what they assert the application of this
standard entails in their post-hearing briefs. The Commission looks
to the relevant case law and prior Commission orders for guidance and concludes
that the Missouri Supreme Court delineated this standard and prescribed its
application for cases filed pursuant to Section 393.190 in City of St. Louis v. Public
Service Com'n of Missouri, when it stated:
The state
of Maryland has an identical statute with ours, and the Supreme Court of that
state in the case of Electric Public Utilities Co. v. Public Service Commission,
154 Md. 445, 140 A. 840, loc. cit. 844, said: “To prevent injury to the public,
in the clashing of private interest with the public good in the operation of
public utilities, is one of the most important functions of Public Service
Commissions. It is not their province to insist that the public shall be
benefited, as a condition to change of ownership, but their duty is to see that
no such change shall be made as would work to the public detriment. 'In the
public interest,' in such cases, can reasonably mean no more than 'not
detrimental to the public.'”900
The
Missouri Supreme Court based its determination on a review of
Section 393.190's predecessor, Section 5195, RSMo 1929.901 No Missouri
court has deviated from that ruling in terms of it being the proper standard to
apply for applications filed pursuant to Section 393.190.
_________________________
900State ex rel. City of St. Louis v.
Public Service Com'n of Missouri, 73 S.W.2d 393, 400 (Mo banc
1934).
Since 1934, other Missouri court
decisions have touched upon this standard,902 and the Commission summed up, most
cogently and completely, the standard when it issued its Report and Order in the
AmerenCIPS
case.903 The Commission summarized
the standard and the burden of proof for such cases as
follows:
The
Governing Standard under Section 393.190.1:
Section
393.190.1 does not contain a standard to guide the Commission in the exercise of
its discretion; that standard is provided by the Commission's own
rules. An applicant for such authority must state in its application
“[t]he reason the proposed sale of the assets is not detrimental to the public
interest.” (Commission Rule 4 CSR 240-2.060(7)(D)). A
court has said of Section 393.190.1, that “[t]he obvious purpose of this
provision is to ensure the continuation of adequate service to the public served
by the utility.” (State ex rel. Fee Fee
Trunk Sewer, Inc. v. Litz, 596 S.W.2d 466, 468 (Mo. App.,
1980)). To
that end, the Commission has previously considered such factors as the
applicant's experience in the utility industry; the applicant's history of
service difficulties; the applicant's general financial health and ability to
absorb the proposed transaction; and the applicant's ability to operate the
assets safely and efficiently. (See In the Matter of the Joint
Application of Missouri Gas Energy, et al., Case No. GM-94-252 (Report and
Order, issued October 12, 1994), 3 Mo. P.S.C.3rd 216, 220). None
of these factors are at issue in the present case; neither is UE's ability to
continue to provide adequate service to its customers.
The
parties do not agree on the interpretation or application of the “not
detrimental to the public” standard. UE asserts that the Commission
must grant approval unless it finds the transfer would be detrimental to the
public interest. (St. ex rel. City of St. Louis v.
Public Service Commission, 73 S.W.2d 393, 400 (Mo. banc
1934)). UE emphasizes the opinion of one court, quoted above, that
the purpose of the statute is to ensure the continuation of adequate service to
the public. (Fee Fee Trunk Sewer,
supra). UE quotes prior decisions of this Commission to the effect
that denial requires compelling evidence on the record that a public detriment
is likely to occur. (In the Matter of KCP&L, Case
No. EM-2001-464 (Order
Approving Stipulation & Agreement and Closing Case, issued
Aug. 2, 2001)). According to UE, while the Applicant has the
burden of proof, those asserting a specific detriment have the burden of proof
as to that allegation. (Anchor Centre Partners, Ltd. v.
Mercantile Bank, NA, 803 S.W.2d 23, 30 (Mo. banc 1991); In the Matter of Gateway Pipeline
Co., Inc., Case No. GM-2001-585 (Report & Order, issued Oct. 9,
2001)). Finally, UE notes that the Applicant is not required to show
that the transfer is beneficial to the public. (In the Matter of Sho-Me Power
Corp., Case No. EO-93-259 (Report & Order, issued Sep. 17,
1993)).
_________________________
902 As the
Missouri Court of Appeals noted: “We have reviewed Chapter 386 RSMo. which
delineates the general powers of the Commission and Chapter 393 RSMo. which
deals specifically with the Commission's powers over public utilities including
those furnishing sewage services. We have found no provision and
Relator directs us to no provision that grants to the Commission the power to
determine the interests of persons making claim to the proceeds of the sale of
the assets of a utility. Before a utility can sell assets that are necessary or
useful in the performance of its duties to the public it must obtain approval of
the Commission. § 393.190 RSMo. (1969). The obvious purpose of
this provision is to ensure the continuation of adequate service to the public
served by the utility. The Commission may not withhold its approval
of the disposition of assets unless it can be shown that such disposition is
detrimental to the public interest. State ex rel. City of St. Louis
v. Public Service Commission of Missouri, 73 S.W.2d 393, 400 (Mo. banc
1934).” State ex
rel. Fee Fee Trunk Sewer, Inc. v. Litz , 596 S.W.2d 466,
468 (Mo. App. 1980).
903 In the Matter of the Application of
Union Electric Company, d/b/a AmerenUE, for an Order Authorizing the Sale,
Transfer and Assignment of Certain Assets, Real Estate, Leased Property,
Easements and Contractual Agreements to Central Illinois Public Service Company,
d/b/a AmerenCIPS, and, in Connection Therewith, Certain Other Related
Transactions, Case No. EO-2004-0108
Staff
points out that this is the Commission's first contested case under
Section 393.190.1 since AG Processing, a decision in which the Missouri
Supreme Court reversed a Commission decision under that
section. (AG Processing, Inc. v. Public
Service Commission, 120 S.W.3d 732 (Mo. banc 2003)). That
case held, Staff asserts, that the Commission must evaluate both the present and
future impacts of a transfer at the time it makes its decision. Staff
further contends that, while the 'not detrimental' standard applies to the
transfer itself, UE seeks some additional relief that is governed by other,
higher standards. For example, Staff argues that UE seeks several
ratemaking determinations that are subject to the 'just and reasonable' standard
and that UE seeks a waiver from the Commission's affiliate transaction rules
governed by the 'best interests of the regulated customers'
standard.
Public
Counsel, in turn, agrees that Section 393.190.1 requires prior Commission
authority for a utility to transfer any part of its system or assets; such
authority is to be granted only where the proposed transfer is “not detrimental
to the public interest.” (City of St. Louis, supra). The
applicant utility bears the burden of proof and, contrary to UE's notion, this
burden does not shift. Public Counsel urges the Commission to ignore UE's
quotations of erroneous language from past Commission orders that approval must
be granted unless “compelling” evidence shows that a “direct and present”
detriment is 'likely' to occur. Instead, as recently articulated by
the Missouri Supreme Court in AG Processing, and restated by the Commission
itself, (In the Matter of
Aquila, Inc., Case No. EF-2003-0465 (Report & Order, issued
Feb. 24, 2004, pp. 6-7)) “a detriment to the public interest includes
a risk of harm to ratepayers.” Thus, Public Counsel takes the
position that the mere risk itself of higher rates in the future is a detriment
to the public. Public Counsel insists that the law requires that the
Commission deny the proposed transaction even if the detriments found are the
result of events that would simply be set into motion or which involve the
probability of significant harm which could likely occur, but is not certain to
occur.
In the AG
Processing case, the Commission approved an acquisition and merger by Aquila,
Inc. -- then called UtiliCorp -- that involved an acquisition premium of
$92,000,000. (An acquisition premium is the amount by which the
purchase price exceeds the book value of the assets
purchased). Although the Commission rejected Aquila's proposed
regulatory plan, under which a portion of the acquisition premium would be
recovered in rates, the Commission refused to consider the recoupment of the
acquisition premium on the grounds that it was a rate case issue. The
Missouri Supreme Court reversed, saying:
The fact
that the acquisition premium recoupment issue could be addressed in a subsequent
ratemaking case did not relieve the PSC of the duty of deciding it as a relevant
and critical issue when ruling on the proposed merger. While PSC may
be unable to speculate about future merger-related rate increases, it can
determine whether the acquisition premium was reasonable, and it should have
considered it as part of the cost analysis when evaluating whether the proposed
merger would be detrimental to the public. The PSC's refusal to
consider this issue in conjunction with the other issues raised by the PSC staff
may have substantially impacted the weight of the evidence evaluated to approve
the merger. The PSC erred when determining whether to approve the
merger because it failed to consider and decide all the necessary and essential
issues, primarily the issue of UtiliCorp's being allowed to recoup the
acquisition premium. (AG Processing, supra,
120 S.W.3d at 736 (internal footnotes omitted)).
The
Missouri Supreme Court did not announce a new standard for asset transfers in
AG Processing, but
rather restated the existing “not detrimental to the public”
standard. In particular, the Court clarified the analytical use of
the standard. What is required is a cost-benefit analysis in which
all of the benefits and detriments in evidence are considered. The
AG Processing decision
does not, as Public Counsel asserts, require the Commission to deny approval
where a risk of future rate increases exists. Rather, it requires the
Commission to consider this risk together with the other possible benefits and
detriments and determine whether the proposed transaction is likely to be a net
benefit or a net detriment to the public. Approval should be based
upon a finding of no net detriment. Likewise, contrary to UE's position, the
AG Processing decision
does not allow the Commission to defer issues with ratemaking impact to the next
rate case. Such issues are not irrelevant or moot because UE is under
a temporary rate freeze; the effects of the transfer will still exist when the
rate freeze ends.
In
considering whether or not the proposed transaction is likely to be detrimental
to the public interest, the Commission notes that its duty is to ensure that UE
provides safe and adequate service to its customers at just and reasonable
rates. A detriment,
then, is any direct or indirect effect of the transaction that tends to make the
power supply less safe or less adequate, or which tends to make rates less just
or less reasonable. The presence of detriments, thus defined, is not
conclusive to the Commission's ultimate decision because detriments can be
offset by attendant benefits. The mere fact that a proposed
transaction is not the least cost alternative or will cause rates to increase is
not
detrimental to the
public
interest where the
transaction will confer a benefit of equal or greater value or remedy a
deficiency that threatens the safety or adequacy of the service.904
_________________________
904
Emphasis added.
In cases
brought under Section 393.190.1 and the Commission's implementing regulations,
the applicant bears the burden of proof. That burden does not shift. Thus, a
failure of proof requires a finding against the applicant.905
Consequently,
the Commission may not withhold its approval of the proposed transaction unless
the Applicants fail in their burden to demonstrate that the transaction is not
detrimental to the public interest, and detriment is determined by performing a
balancing test where attendant benefits are weighed against direct or indirect
effects of the transaction that would diminish the provision of safe or adequate
of service or that would tend to make rates less just or less reasonable.906
|
|
4.
|
Public
Interest Defined
|
While the
standard for evaluating transactions proposed pursuant to Section 393.190
is clear, the term “public interest” must also be examined. “The
public interest is found in the positive, well-defined expression of the settled
will of the people of the state or nation, as an organized body politic, which
expression must be looked for and found in the Constitution, statutes, or
judicial decisions of the state or nation, and not in the varying personal
opinions and whims of judges or courts, charged with the interpretation and
declaration of the established law, as to what they themselves believe to be the
demands or interests of the public.”907 “[I]f there
is legislation on the subject, the public policy of the state must be derived
from such legislation.”908 The General
Assembly of the State of Missouri many years ago, by enactment of the Public
Service Commission Law (now Chapter 386), wisely concluded that the public
interest would best be served by regulating public utilities.909 The
legislature delegated the task of determining the public interest in relation to
the regulation of public utilities to the Commission when it enacted Chapter
386, and all other chapters and sections related to the exercise of the
Commission’s authority.
_________________________
905 Report
and Order, In the Matter of
the Application of Union Electric Company, d/b/a AmerenUE, for an Order
Authorizing the Sale, Transfer and Assignment of Certain Assets, Real Estate,
Leased Property, Easements and Contractual Agreements to Central Illinois Public
Service Company, d/b/a AmerenCIPS, and, in Connection Therewith, Certain Other
Related Transactions, Case No. EO-2004-0108, issued October 6, 2004,
effective October 16, 2004. See also Report and Order on Rehearing,
issued February 10, 2005, effective February 20, 2005, reiterating the standard,
2005 WL 433375 (Mo.P.S.C.) Re Union Electric Company, d/b/a
AmerenUE. It should be noted that the Commission footnoted the
relevant legal citations in its Report and Order and for purposes of completely
referencing this excerpt of the Report and Order in this case those footnote
citations were placed back in the text at the appropriate cite
notations.
906 State ex rel. City of St. Louis v.
Public Service Commission of Missouri, 73 S.W.2d 393, 400 (Mo. banc
1934); State ex
rel. Fee Fee Trunk Sewer, Inc. v. Litz , 596 S.W.2d 466,
468 (Mo. App. 1980).
907 In re Rahn’s Estate, 316 Mo.
492, 501, 291 S.W. 120, 123 (Mo. 1926).
908 Morrshead v. Railways Co.,
Mo. 121 165, 96 S.W. 261, 271 (Mo. banc 1907).
909 Missouri Public Service Co. v. City
of Trenton, 509 S.W.2d 770, 775 (Mo. App.
1974).
The
public interest is a matter of policy to be determined by the Commission.910 It is within
the discretion of the Public Service Commission to determine when the evidence
indicates the public interest would be served.911 Determining
what is in the interest of the public is a balancing process.912 In making
such a determination, the total interests of the public served must be
assessed.913 This means
that some of the public may suffer adverse consequences for the total public
interest.914 Individual
rights are subservient to the rights of the public.915 The “public
interest” necessarily must include the interests of both the ratepaying public
and the investing public; however, as noted, the rights of individual groups are
subservient to the rights of the public in general.
_________________________
910 State ex rel. Public Water Supply
District v. Public Service Commission, 600 S.W.2d 147, 154 (Mo. App.
1980). The dominant purpose in creation of the Commission is public welfare.
State ex rel. Mo. Pac. Freight
Transport Co. v. Public Service Commission, 288 S.W.2d 679, 682 (Mo.
App. 1956).
911 State ex rel. Intercon Gas, Inc. v.
Public Service Com'n of Missouri, 848 S.W.2d 593, 597 -598 (Mo.
App. 1993). That discretion and the exercise, however, are not
absolute and are subject to a review by the courts for determining whether
orders of the P.S.C. are lawful and reasonable. State ex rel. Public Water Supply
Dist. No. 8 of Jefferson County v. Public Service Commission, 600 S.W.2d
147, 154 (Mo. App. 1980).
912 In the Matter of Sho-Me Power
Electric Cooperative’s Conversion from a Chapter 351 Corporation to a Chapter
394 Rural Electric Cooperative, Case No. EO-93-0259,
Report and Order issued September 17, 1993 , 1993 WL 719871 (Mo.
P.S.C.).
915 State ex rel. Mo. Pac. Freight
Transport Co. v. Public Service Commission, 288 S.W.2d 679,
682 (Mo. App. 1956).
|
|
5.
|
Final
Conclusions Regarding Jurisdiction, Applicable Statutes, Burden of Proof,
and Applicable Standards for Evaluating the Merger
Application
|
Substantial
and competent evidence in the record as a whole supports the conclusions that:
(1) KCPL and Aquila are subject to the jurisdiction, control, and
regulation of the Commission; (2) the Applicants have properly pled and
requested all appropriate relief from the Commission with regard to their merger
application pursuant to Section 393.190 and the Commission’s Rules;
(3) the standard to apply to evaluate the merger proposal is the “not
detrimental to the public interest standard,” and application of this standard
is a balancing test as described in detail, supra; (4) determination
of what constitutes the “public interest” is a matter of policy to be determined
by the Commission; and (5) the Applicants bear the burden of proof of
satisfying the standard in order to gain approval of their proposed
merger.
|
B.
|
Conclusions
of Law Regarding Projected Synergy Savings916
|
Based
upon the Commission’s findings of fact, the total operational synergies
projected to result from the proposed transaction are $305 million over the
first 5-year period. The total synergies created through the first
ten years are $755 million. On a Missouri jurisdictional basis,
the total synergies are equal to $549 million for 10 years, with
$222 million expected during the first 5 years. The individual
breakdown for each category of synergy savings is extensively outlined in the
Commission’s Findings of Fact.
_________________________
916 Refer
to Findings of Facts Numbers 164-322 for this section.
These
synergy savings, if fully realized, will substantially exceed $90 million;
the sum of the $47.2 million in Missouri Transaction Costs and
$42.8 million in Missouri Transition Costs.917 As testified
to by Great Plains and KCPL witness Zabors, two areas of synergies alone nearly
equal the expected Transaction and Transition Costs; those being
$50 million of synergies related to employee reductions and an additional
$30 million related to the sale and closing of the Aquila headquarters
building.918 Witness
Zabors further testified that there is nothing speculative about these
synergies, and they are in fact, “certain” and can be calculated “to the
penny.”919 Moreover, as
is further delineated below, the Commission determines that substantial evidence
supports the conclusion that the majority, if not all of the projected synergy
savings will be attained.
The
Applicants have withdrawn their request for a “sharing proposal” through which
synergy savings would be allocated on a 50%/50% basis between customers and
shareholders. Instead, they propose to rely upon the natural
regulatory lag that occurs between rate cases to retain any portion of synergy
savings.920 Because the
Applicants do not seek recovery of Transaction or Transition Costs in rates
unless the synergies achieved equal or exceed the level of such amortized costs,
ratepayers are not subject to any risk regarding the recovery of these costs in
rates.921 The
Commission notes that, while it will address the issue of recovering these costs
in another section of this order, Public Counsel witness Dittmer admitted while
being questioned by Commissioner Clayton that the Applicants’ proposal regarding
recovery of these costs is reasonable.922
_________________________
917 Merger
integration costs will be allocated as described by Mr. Giles in his Additional
Supplemental Direct Testimony, Ex. 39 at 4-5, and by Mr. Tim Rush in his
Supplemental Direct Testimony, Ex. 23 at 3-8.
919
Transcript, pp. 1410-1411.
920 See
GPE/KCPL Exh. 37, Bassham Add’l Supp. Direct Testimony, pp.
3-4.
921
Transcript, pp. 1310-1311.
|
|
2.
|
Methods
for Calculating Synergies
|
The
methods the Applicants employed for developing the synergy estimates, and the
support for ensuring their reliability, are extensively outlined in the
Commission’s Findings of Facts. The competent and substantial
evidence indicates that the Applicants have taken care to separate synergies
that may be achievable in their stand-alone capacities from the synergy savings
that are unlocked by the merger.
There may
be variations between projected and realized synergy savings post-merger, but
this does not discredit the accuracy and reliability of the estimated
calculations. Moreover, multiple witnesses testified as to the strong
potential for recovery of even more synergies than were projected. In
fact, some potential synergies were excluded from the projections in order to
keep the estimates conservative. Witness Kemp, the most qualified
expert reviewing the methods used to calculate synergies, testified that the
level of hard, attributable benefits actually realized through merger
transactions is typically in the range of 125 to 175 percent of the
announced synergies.923 Mr. Kemp
further testified that in his considered opinion the level of synergy benefits
that will ultimately be achieved through the merger will be substantially
greater than KCPL’s current synergy estimates. In addition, Joint
dispatch of generation and transmission assets could add large benefits, once
ISO issues are resolved. Also, due to the ability of competent utility
management to find additional cost reductions or revenue enhancements as they
dig deeper into the detail of integration planning, synergies tend to expand
rather than contract.924
_________________________
923
GPE/KCPL Exh. 18, Kemp Supp. Direct, pp. 1-28.
|
|
3.
|
The
Criticisms of the Applicants’ Estimates of
Synergies
|
As
explained above, the Applicants have presented extensive, detailed testimony
regarding the synergies and cost savings that are expected to result from the
integration of the Aquila and KCPL operations. While Staff, Public
Counsel and the Industrial Intervenors witnesses partially addressed the synergy
savings issue in their testimony, as demonstrated in the Commission’s Findings
of Facts, the Commission concludes that none of these limited criticisms are
valid or supported when evaluated in the light of the factual record and
accepted regulatory policy principles. Even opposition witness
Mr. Dittmer admitted that the transaction would result in substantial
synergy savings.
The
Commission further notes that even if the overall synergy savings were reduced
by the amount of “enabled” synergies identified by Mr. Dittmer, the
remaining synergy savings would nevertheless exceed the transaction and
transition costs needed to complete the proposed
transaction. However, the Commission concludes that Mr. Dittmer’s
attempt to distinguish these types of synergies, in the context of this case,
was erroneous. Both the created and enabled synergies, as supported
by the competent and substantial evidence in this case, are unlocked by the
merger.925
|
|
4.
|
Final Conclusions Regarding
Projected Synergy Savings
|
Substantial
and competent evidence in the record as a whole supports the conclusions that:
(1) the Applicants’ methodology for calculating and evaluating estimated
synergies is consistent with industry practice and is more detailed and better
supported than most transactions; (2) the Applicants’ methodology for
calculating and evaluating estimated synergies is comprehensive, current,
detailed, attributable, quality assured, and conservative; (3) the
estimated synergies are modestly above the industry average, but the facts of
this case support the higher estimates; and (4) the Applicants’
estimates of synergies are reasonable on a stand-alone basis and are in the
range that would be expected on the basis of comparable transactions in the
utility industry, and specifically with regard to the circumstances of
integrating KCPL’s and Aquila’s operations.
_________________________
925 As
correctly noted by witness Zabors, it also makes no difference to the ratepayer
how a realized synergy is labeled when that savings is passed through to the
ratepayer. Transcript, pp. 1415-1416.
The
Commission further determines that substantial and competent evidence in the
record as a whole supports the conclusions that: (1) the projected
synergies are accurate, realistic and achievable at a very high level of
confidence and probability; (2) the synergies actually realized from the
merger have a very high probability of exceeding the Applicants’ estimates;
(3) the synergies exceed transaction and transition costs and the method
proposed for recovery of transaction and transition costs does not place the
ratepayers at risk (the Commission will address transaction and transition cost
recovery in a separate section of this order); (4) because the Applicants
have agreed to recover any merger savings through “regulatory lag” as part of
the traditional ratemaking process there is no net detriment to customers; and
(5) the resulting
synergies from the operational integration of KCPL and Aquila will afford
substantial benefits to the companies’ customers.
These
conclusions weigh in favor of approving the transaction, and the Commission
concludes that the achievable synergies projected weigh as a benefit of the
proposed merger and will be balanced against any factor tending to pose a
detriment of any kind to the public interest.
|
C.
|
Conclusions
of Law Regarding Transaction and Transition Cost Recovery926
|
The
Applicants have requested that the Commission authorize the recovery of the
transaction and transition costs associated with the merger by amortizing them
over a five-year period. This period would begin with the first rate
cases post-transaction for Aquila and KCPL subject to “true up” of actual
transition and transaction costs in future cases. These costs, after
the merger proposal was revised, total: $64.9 million in transaction costs,
of which $47.2 million is Missouri jurisdictional; and $58.9 million
in transition costs, of which $42.8 million is Missouri
jurisdictional. There is no credible evidence in the record that the
calculation of these amounts is inaccurate or unreasonable.
Staff,
Public Counsel, and the Industrials have opposed recovery of the transaction
costs, arguing that such costs should be borne by the
shareholders. No party has opposed the recovery of transition
costs.
Public
Counsel’s witness, Mr. Dittmer, testified that the intent of protecting
ratepayers from providing unreasonable returns to utilities would be
circumvented if rates were developed by considering a return on investments
above net depreciated original costs.927 This concept
has been described as being the net original cost rule and the Commission has
more fully articulated this rule as follows:
As a
general rule, only the original cost of utility plant to the first owner
devoting the property to public service, adjusted for depreciation, should be
included in the utility’s rate base. That principle is known as the
net original cost rule. The net original cost rule was developed in
order to protect ratepayers from having to pay higher rates simply because
ownership of utility plant has changed, without any actual change in the
usefulness of the plant. If a utility were allowed to revalue its
assets each time they changed hands, it could artificially inflate its rate base
by selling and repurchasing assets at a higher cost, while recovering those
costs from its ratepayers. Thus, ratepayers would be required to pay
for the same utility plant over and over again. The sale of assets to
artificially inflate rate base was an abuse that was prevalent in the 1920s and
1930s and such abuses could still occur.928
_________________________
926 Refer
to Findings of Facts Numbers 323-359 for this section.
927 OPC Exh. 200, Dittmer Rebuttal, pp.
42-45.
928 Case Number EM-2000-292, Second Report
and Order, In the Matter of the Joint Application of UtiliCorp United Inc. and
St. Joseph Light & Power Company for Authority to Merge St. Joseph Light
& Power Company with and into UtiliCorp United Inc., and, in Connection
Therewith, Certain Other Related Transactions, 12 Mo.P.S.C.3d 388, 389-90
(2004), effective March 7, 2004.
Great
Plains is either paying outright or reimbursing KCPL for any transaction costs
associated with the merger. Consequently, the Commission concludes
that, in this instance, establishing a mechanism to allow recovery of the
transaction costs of the merger would have the same effect of artificially
inflating rate base in the same way as allowing recovery of an acquisition
premium. This would result in an increase in rates to ratepayers that
would exceed what would otherwise be the case.
|
|
2.
|
Transition
Cost Recovery
|
The
transition costs quantified by the Applicants will be incurred to integrate
Aquila and KCPL operations. Without incurring these costs, the
companies could not achieve the estimated synergies, while maintaining or
improving system reliability for Aquila’s and KCPL’s customers. These
costs include third-party expenses to support the integration from legal, human
resources, information technology, and other process perspectives. No
party has opposed the deferral and amortization of transition costs in this
proceeding, and as noted earlier, there is no credible evidence in the record to
establish that the transition costs as calculated are in any way inaccurate or
unreasonable. Moreover, the Applicants will not seek recovery of
transition costs if insufficient synergy savings are realized to cover those
costs.929 Consequently,
the Commission will allow recovery of transition costs.
_________________________
929
Transcript, pp. 1310-1311.
|
|
3.
|
Final Conclusions Regarding
Transaction and Transition Cost
Recovery
|
Substantial
and competent evidence in the record as a whole supports the conclusions that:
(1) the Applicants’ calculation of transaction and transition costs are
accurate and reasonable; (2) in this instance, establishing a mechanism to
allow recovery of the transaction costs of the merger would have the same effect
of artificially inflating rate base in the same way as allowing recovery of an
acquisition premium; and (3) the uncontested recovery of transition costs
is appropriate and justified. The Commission further concludes that
it is not a detriment to the public interest to deny recovery of the transaction
costs associated with the merger and not a detriment to the public interest to
allow recovery of transition costs of the merger.
If the
Commission determines that it will approve the merger when it performs its
balancing test (in a later section in this Report and Order), the Commission
will authorize KCPL and Aquila to defer transition costs to be amortized over
five years.930
|
D.
|
Conclusions
of Law Regarding Post-Merger Credit-Worthiness931
|
As an
initial matter, the Commission takes note of the Missouri Supreme Court’s
decision in State ex rel.
AG Processing, Inc. v. Public Service Com'n,932 where the Court held
that post-merger credit ratings are not a determinate factor when the Commission
evaluates a merger proposal.933 The Court
held that even if a company’s cost of debt increased post-merger, and even if a
company’s credit rating would be lowered as a result, that this “is just one
factor for the Commission to weigh when deciding whether or not to approve the
merger.”934 In noting
this fact, the Commission does not diminish the importance of this factor, but
merely makes this observation to emphasize that this is but one factor to be
weighed in the application of the “not detrimental to the public interest”
standard that the Commission is obligated to apply.
_________________________
930 The
Commission will give consideration to their recovery in future rate cases making
an evaluation as to their reasonableness and prudence. At that time,
the Commission will expect that KCPL and Aquila demonstrate that the synergy
savings exceed the level of the amortized transition costs included in the test
year cost of service expenses in future rate cases.
931 Refer
to Findings of Facts Numbers 359-464 for this section.
932 120
S.W.3d 732 (Mo. banc 2003).
933 State ex rel. AG Processing, Inc. v.
Public Service Com'n, 120 S.W.3d 732, 736-737 (Mo. banc
2003).
|
|
1.
|
Credit
Rating Agencies
|
As
demonstrated by the Commission’s Findings of Facts on this issue, the Applicants
adduced a significant amount of evidence regarding their current and projected
post-merger credit ratings. S&P’s and Moody’s projected ratings
were based upon assumptions related to the merger proposal, some of which
changed during the course of this proceeding. The most recent
projections from the rating agencies were issued in January 2008, and the
agencies did not have a full picture of the revised merger
proposal. However, the changes in the key assumptions cannot be
regarded as tipping the scales toward a downgrade. For example, Great
Plains sold its unregulated subsidiary Strategic Energy for $305 million in
cash. Given that the credit rating agencies had assumed a lower sales
price of $250 million in their January evaluation of the Applicants’ revised
regulatory requests, the sale of Strategic Energy provides more financial
flexibility. The assumed lower sales price also confirms the
conservative nature of the advisory opinions of the credit rating agencies that
Great Plains’ acquisition of Aquila will not adversely affect the credit ratings
of Great Plains or KCPL.
During
the hearings, Mr. Bassham testified that he was “very confident” that the credit
ratings of KCPL and Great Plains “would remain consistent with the information
we discussed with Moody’s and Standard & Poor’s” earlier in 2008.935 Both Great
Plains Chairman Michael Chesser and KCPL Treasurer Cline believed that a
change in the credit ratings would not occur.936 Although
Moody’s had recently placed the companies on a negative outlook,
Mr. Bassham explained that this was not a downgrade, but rather an
indication of concern as a “result of the [Applicants’] revised [merger]
request” and “the fact that we had agreed to absorb [Aquila’s] interest costs
[which] would cause there to be less flexibility ….”937 Mr. Bassham
stated: “I wouldn’t say [a downgrade is] likely” by Moody’s, particularly since
its credit rating of Baa2 “is one notch above Standard & Poor’s.”938
_________________________
935
Transcript, p. 2139.
936
Transcript, pp. 2539-40 (Chesser); Transcript, p. 2585
(Cline).
937
Transcript, pp. 2321-22.
938
Transcript, pp. 2322-23.
Given
that credit ratings aren’t normally changed because of a single event and that
multiple factors are included in a rating agency’s review, Mr. Bassham
concluded that under the Applicants’ revised regulatory requests, “with all the
work we’ve done, we don’t see the merger in and of itself causing a
downgrade.”939
Staff,
Public Counsel, and the Industrials all challenged the Applicants’ assertions
that they can maintain their credit-worthiness. These parties
primarily base their arguments on the fact that certain key assumptions the
rating agencies used (as fully delineated the Findings of Fact) have changed and
an assertion of cost and schedule delays with current construction projects will
negatively affect credit-worthiness. The problem with these
opposition arguments is that they are totally speculative in nature and lack any
credible factual support.
________________________
939
Transcript, p. 2324.
|
|
2.
|
Cost
and Schedule of the Iatan Construction
Projects
|
Mr.
Bassham testified that the cost and schedule estimates for Iatan 1
and 2 compiled at the end of April did not present undue risk to Great
Plains and KCPL, and that the companies possessed sufficient financial
flexibility to consummate the merger and carry out the projects.940 The public
statements issued by Great Plains and KCPL on May 7, 2008, disclosed that while
overall projected costs rose by 19%, Iatan 1 will experience a delay of only
47 days to February 1, 2009, and Iatan 2 remains on schedule to
be completed in the summer of 2010.941 KCPL’s share
of the cost of the Iatan 1 environmental retrofits increased from the
previous range estimate of $255-264 million to $330-350 million, a 33%
rise from the top end of the prior estimate.942 The
mid-point estimate is a 28% increase.943 The cost
estimate for Iatan 2 experienced a mid-point increase of 10%, from the
control budget estimate of $1.685 billion to $1.861 billion.944 KCPL’s
approximately 55% share of Iatan 2 has increased from the previous 2006
range of $837-914 million to a range of $994 million to
$1.050 billion, with the top end of the range representing a 15%
increase.945
As KCPL
President William H. Downey testified, these increases in costs and
minor delays in schedule are the product of an “extraordinary period” of labor
and construction industry issues. The electric utility industry, not
just in the United States, but worldwide, is in a building mode, which has
increased demand not only for the sophisticated equipment needed to build power
plants, but also labor.946 Inflation is
on the rise, and the value of the U.S. Dollar has fallen.947 Chairman of
the Board Michael Chesser advised the Commission that even in light of
these economic trends, he believed that Great Plains and KCPL would remain
financially strong post-merger and that, based on discussions with rating
agencies, a credit downgrade was “very unlikely.”948 Mr. Chesser
noted that with Aquila’s debt being reduced, additional assets being placed in
rate base, “significant growth” in Aquila’s service area, and the sale of
Strategic Energy, the rating agencies are viewing Great Plains “as a pretty
positive story.”949 Mr. Michael Cline,
KCPL’s treasurer, echoed these sentiments, stating that the results of the
reforecast were not likely to have a negative effect, which they have not had to
date.950
_________________________
940
Transcript, pp. 2380-84.
941
GPE/KCPL Exh. 305 at pp. 2-3 (Form 8-K); Transcript, pp.
2380-81.
942 See
GPE/KCPL Exh. 305 at p. 3.
944
Transcript, pp. 2380-81.
945
GPE/KCPL Exh. 305 at p. 2 (Form 8-K)
946
Transcript, pp. 2479-2481 and 2484; Ex. 305 at 2.
948
Transcript, pp. 2528 and 2539-2540.
949
Transcript, pp. 2539-2540.
KCPL
witnesses involved in the Iatan construction projects emphasized the utility’s
efforts to keep a strict account of cost issues through an evaluation of risks
and opportunities through what are known as “R&O Tables,” as well as a
comprehensive reforecast process.951 KCPL has
recruited highly qualified individuals to manage those projects and retained
competent outside experts to review the decisions being made.952 KCPL
witnesses Foster and Davis testified that their full attention is devoted to the
Iatan projects, that they are not involved with the acquisition of Aquila or
related credit-worthiness issues, and that they do not serve as members of any
merger integration team.953 Finally, a
new vice president of construction has been hired to manage the construction
projects evidencing Great Plains and KCPL continued managerial oversight of the
projects.954
_________________________
951 See
generally, Transcript, pp. 2467-84; Transcript, pp. 2715-28; Transcript, pp.
2756-62.
952 Id. Terry Foster, Director of
Project Controls at Iatan, has spent over 40 years in the electric utility
industry. Transcript, p. 2755. In the last ten
years he worked for Fluor Daniel as the project director for a standalone
project with Carolina Power & Light, was director of project controls for
all capital projects at American Electric Power Co., and was the regional
quality control manager for projects overseen by Black &
Veatch. See Transcript, p. 2755. Brent
Davis, now Iatan 1 Project Director, has worked on Iatan 1 and 2 projects
since June 2006. Transcript, pp. 2713-14. He has worked
for KCPL since 1980 at all four of its coal-fired power plants, and most
recently served as plant manager at Hawthorn 5. Transcript, pp.
2713-14.
953
Transcript, pp. 2746-47 and 2752; Transcript, pp. 2754 and
2799-2800.
954
Transcript, pp. 2487-89 and 2708.
No
qualified expert was offered by any other party to contradict any of these
witnesses. In fact, not one witness testified that the proposed
acquisition of Aquila endangered the CEP construction projects or the financial
well-being of KCPL, or that the CEP could not be carried out as the acquisition
of Aquila proceeds. Staff, Public Counsel, and the Industrials
adduced no credible evidence that the changes in cost and completion schedule of
the Iatan infrastructure projects: (1) were out of line with current
industry standards and current economic trends; (2) were being mismanaged
or that imprudent expenditures had been incurred; or (3) that the
companies’ contingency plans were in any way inadequate. Nor did the
opposition parties provide any credible evidence to establish that the
infrastructure projects of the CEP posed an unreasonable risk to the merger or,
conversely, that the merger posed an unreasonable risk to the CEP projects, such
that the merger would detrimental to the public interest. The
unequivocal evidence presented at the hearing was that the CEP projects neither
threaten the merger, nor are threatened by the merger such that the proposed
transaction should be disapproved.
|
|
3.
|
Conclusions
Concerning the “Crane Incident”
|
As
demonstrated by the record in this matter, there is no credible evidence that
the crane accident that occurred at the Iatan construction site on May 23,
2008, will have any significant effect on the cost and schedule for the
completion of the Iatan construction projects. There is no credible
evidence that Applicants’ recovery and contingency planning will be in any way
inadequate to address this incident. There is no credible evidence
that the crane incident will have any effect on KCPL’s or Aquila’s credit
ratings.
|
|
4.
|
Conclusions
of Law Regarding Additional Amortization955
|
The
Applicants have no request pending before the Commission with regard to a future
Aquila regulatory plan. As Mr. Bassham explained to Commissioner
Clayton, while the Applicants are not asking for a specific regulatory
amortization treatment in this case, “we would like . . . to work with
the parties to develop a plan similar to what we did with
KCPL. Assuming we’re not able to achieve that, we might propose our
own plan in the first rate case.”956 As described
in the procedural history section of this Report and Order, because the
Applicants’ withdrew their original request for a regulatory plan involving
Additional Amortizations the Regulatory Law Judge properly ruled that any
evidence relating to the Additional Amortizations was irrelevant to this
proceeding.
An offer
of proof was accepted on this issue from the Industrial Intervenors at the end
of the case, and testimony was received from witnesses Cline, Schallenberg and
Trippensee on the issue of Additional Amortizations. Testimony from
both Michael Cline, the treasurer of Great Plains and KCPL, and Staff’s Robert
Schallenberg confirmed that any cash flow from Additional Amortizations was
“fungible,” and not specifically separated out or directed to specific capital
investments or other utility projects.957 Public
Counsel’s witness Russell Trippensee also testified that “[t]here’s no tracing
of debt to specific investments at all.”958 He stated
that when the ratios and formula are in place and after the Commission sets
rates on a traditional basis in a future rate case, only then would the
Additional Amortization process be used “to reflect the additional cash flow
necessary to meet . . . that ratio target that was set out in the
plan . . . .”959
_________________________
955 Refer
to Findings of Facts Numbers 359-464, in particular Numbers 459-460 for this
section. See also procedural history section concerning the
evidentiary ruling on April 24, 2008.
956 GPE/KCPL Exh. 37,
Bassham Add’l Supp. Direct, p. 4; Transcript, pp. 1312-1313.
957
Transcript, pp. 2956 and 2958 (Cline); and pp. 2994-2997
(Schallenberg).
958
Transcript, pp. 2967-68. See also Findings of Fact Numbers 31 and
44-49 regarding the credibility of witness Trippensee and the limits of the
relevance of his pre-filed testimony.
The
Industrials never moved the Commission to reconsider its evidentiary ruling
following the offer of proof. The Commission concludes that the offer
of proof made clear that in the absence of a specific proposal containing a
variety of financial metrics and other considerations, there was no way to
predict what effect a future regulatory plan containing Additional Amortizations
would have on either Aquila, Great Plains, or KCPL.
For
purposes of its Conclusions of Law section on this issue, the Commission makes
clear that in addition to the reasons articulated in this section it is adopting
the reasoning delineated in detail in the Procedural History section of this
Order regarding the relevancy of this issue. The Commission made the
determination that this issue was not relevant in its April 24, 2008
evidentiary ruling.960 The
Commission concludes that any issues relating to the Additional Amortization
proposal originally made by the Applicants for use by Aquila are not relevant to
whether the merger should now be approved by the Commission and no Commission
decision is required on Additional Amortizations in this
proceeding.
|
|
5.
|
Conclusions
of Law Regarding Actual Debt Cost
Recovery961
|
The
Applicants have withdrawn their request that the Commission permit recovery of
Aquila’s actual debt interest costs in a future rate case. Instead,
they propose to follow the debt cost recovery procedure that the Commission used
in Aquila’s recent Missouri rate cases.962 Because the
Applicants have withdrawn their request for recovery of the actual interest
costs of Aquila, the Commission will not address this issue in this
proceeding. The Commission will review the proper ratemaking
treatment of Aquila interest costs in future Aquila rate cases. With
regard to this proceeding, there is no credible evidence in the record that this
alternative proposal would negatively affect the credit-worthiness of KCPL or
Aquila and no evidence that approval of the merger utilizing this alternative
proposal would be detrimental to the public interest.
_________________________
960 See
the Procedural History Section. See also Transcript, pp. 2073-2120 -
see p. 2096, in particular.
961 Refer
to Findings of Facts Numbers 359-464, in particular Number 460-464 for this
section.
962
GPE/KCPL Exh. 37, Bassham Add’l Supp. Direct, p. 2; GPE/KCPL Exh. 38, Cline
Add’l Supp. Direct, pp. 1-4.
|
|
6.
|
Final
Conclusions Regarding Post-Merger
Credit-Worthiness
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) there is no conclusive, competent
evidence that there would be either an upgrade or downgrade in the current
credit ratings of Great Plains, KCPL, or Aquila in relation to approval of the
proposed merger; (2) KCPL’s Comprehensive Energy Plan does not affect Great
Plains’ financial ability to acquire Aquila in a manner that is detrimental to
the public interest; (3) the current cost estimates and schedule of the
Iatan construction projects are not related to the merger, do not affect the
credit-worthiness of Great Plains, KCPL, or Aquila and do not cause the merger
to be detrimental to the public interest; (4) the crane incident occurring
on May 23, 2008, did not significantly affect the current cost estimates
and schedule of the Iatan construction projects and no evidence supports a
conclusion that the accident would have a negative effect on the
credit-worthiness of the Applicants post-merger; (5) there is no regulatory
plan involving Additional Amortizations and no proposal for actual debt cost
recovery before the Commission to consider in this matter, and consequently,
these non-existent plans have no bearing on the credit-worthiness of Great
Plains, KCPL, or Aquila pre- or post-merger (assuming the merger is approved);
and, (6) there is no credible evidence in the record that approval of a
merger with the Applicants alternative proposal for debt cost recovery would
negatively affect the credit-worthiness of Great Plains, KCPL, or
Aquila.
These
conclusions, however, do not fully alleviate the Commission’s concerns with
regard to the companies’ post-merger credit-worthiness because of the
speculative nature of predicting the Applicants’ post-merger credit
ratings. Some key assumptions utilized by the credit-rating agencies
when evaluating the effect of the merger changed when the merger proposal were
revised. Consequently, if the Commission determines that it will
approve the merger after performing its balancing test, it will condition the
merger on a requirement that the shareholders of Great Plains and KCPL bear the
burden of any downgrading in their credit ratings post-merger.
|
E.
|
Conclusions
of Law Regarding Service Quality and Customer Service963
|
In order
to ensure that service quality and customer service will not be adversely
affected by the integration of customer service functions of Aquila and KCPL,
KCPL undertook an extensive analysis of both companies’ management structure,
work practices, technology use, and field workforce.964 KCPL Vice
President of Customer Operations William Herdegen explained KCPL’s process
and future steps to ensure that customer service and reliability will not
deteriorate after the close of the transaction. The strategy is to
adopt the KCPL organization design to minimize change as much as possible for
combining the two companies’ customer service functions. Teams were
formed with experts from each utility, using KCPL’s customer service
organization as the baseline.965 All work was
accounted for at Aquila and properly mapped into the KCPL
organization.
_________________________
963 Refer
to Findings of Facts Numbers 465-567 for this entire section.
964 GPE
Exh. 17, Herdegen Supp. Direct, p. 15.
As a
result of integration team analysis, 124 incremental positions will be added to
KCPL’s customer service team after the transaction is completed.966 This number
represents the sum of the allocation from Aquila’s Central Service team assigned
to its Missouri electrical properties, plus the direct cost areas of meter
reading, customer service personnel, and the customer relations team.967 Given the
potential for additional customer questions during the year following the
merger, an additional 42 employees will be made available by KCPL on
Day One in the Customer Service area to respond to these expected inquires
and ensure that service levels stay at their current levels.968
KCPL’s
Vice President of Information Technology, Charles Tickles, testified that
Great Plains and KCPL have taken the proper steps to ensure that the integration
of the companies’ IT systems will be transparent to the external customer
and will have minimal effect on the internal users of IT services.969 The
integration will provide a seamless customer experience for KCPL and Aquila
customers, and will allow for separate tracking and reporting of customer
financial and operational support data for both companies. In order
to minimize disruptions, both the Aquila and KCPL customer information systems
will remain in place on Day One post-closing until they can be integrated into
one system.970
________________________
966 Id. at p.
18.
969 See
Finding of Fact Number 237; GPE/KCPL Exh. 27, Tickles Supp. Direct, p.
3.
While
Great Plains and KCPL expect to reduce employee levels as a result of the
transaction, it is important to note that all of the distribution and customer
service collective bargaining unit employees will be employed by KCPL on Day
One. The majority of the reductions in the distribution and customer
service areas are from reductions in redundant administrative/clerical positions
or middle and senior management.971
Although
the number of customer service centers will be reduced from eleven to six, each
district will have satellite offices so that service representatives will be
employed throughout the rural areas of the utilities’ respective service
territories.972 None of the
nine service centers in the more rural areas (St. Joseph, Maryville,
Trenton, Henrietta, Marshall, Sedalia, Warrensburg, Clinton and Nevada) will be
closed.973 Rural areas
will continue to be served by local utility workers who will take their trucks
home to respond to problems where they live.974 Service
levels will operate at the same or higher levels due to a greater depth of
resources at the larger service centers.975
Two
factors influencing service quality are tree trimming and meter
reading. Witness Herdegen testified that by using KCPL’s experience
and best work practices, Aquila’s incremental spending on tree trimming can be
reduced by about 30 percent or approximately $2 million per year.976 Even though
the amount of spending will be reduced, the amount of tree trimming performed at
Aquila will be maintained due to the adoption of KCPL’s vegetation management
practices that improve the reliability of the circuit, instead of encouraging
contractors to trim trees, whether or not it is needed.977
_________________________
971
Transcript, p. 2297.
972
Transcript, p. 2219; GPE/KCPL Exh. 17, Herdegen Supp. Direct, p.
11.
973
GPE/KCPL Exh. 17, Herdegen Supp. Direct, p. 12.
If the
Commission approves the merger, KCPL plans to expand its AMR into Aquila’s urban
areas.978 There is a
significant amount of capital involved in the AMR project;979 however, expected
synergy savings for the project in terms of labor and other savings are
approximately $4.7 million.980 The AMR
project will also bring about improvements in service quality since AMR will
allow enhanced meter reading capabilities and increase the level of program
offerings to customers.981
Aquila
facilities will be managed through the KCPL OMS, which tracks outage information
at a more detailed customer and circuit level than Aquila currently does.982 Using the
OMS on Aquila’s system provides for better system monitoring and event
management at the circuit and customer levels, so that targeted reliability
improvements can be made and long-term asset management programs can be
identified.983 KCPL will
also expand its Outage Reporting System (“ORS”) so that Aquila’s outage
performance can be monitored. The ORS system permits early tactical
decisions that will allow quicker recovery from major storms.984
KCPL has
also agreed with Staff’s recommendation concerning the frequency of customer
service performance reviews by Staff to ensure that service will continue at
current levels.985 KCPL will
maintain reliability benchmarking data based on rate jurisdiction so that Staff
can monitor both Aquila and KCPL reliability benchmarks.986
_________________________
978
Transcript, p. 2281.
981
GPE/KCPL Exh. 16, Herdegen Direct, p. 11. GPE/KCPL Exh. 17, Herdegen Supp.
Direct, p 6.
982
GPE/KCPL Exh. 17, Herdegen Supp. Direct, p. 15.
|
|
3.
|
Controverting
Evidence
|
There is
virtually no competent evidence to controvert the Applicants’ extensive approach
to ensure the service quality of its operations post-merger. Staff,
in its Report,987
references customer service issues following the acquisition of a Missouri
natural gas local distribution company by a Texas utility almost 15 years
ago and presents no analysis of how problems in that transaction are likely to
be encountered by KCPL and Aquila, other than to note that workforce reductions
and high turnover were factors encountered by the gas utility.988 The evidence
in this case, however, demonstrates that Great Plains and KCPL will add
permanent and temporary employees to the customer service team and have prepared
for integration of Aquila and KCPL operations through the adoption of the best
practices of both utilities.
|
|
4.
|
Final
Conclusions Regarding Service Quality and Customer
Service
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) Great Plains has taken adequate
measures to ensure that the service quality of KCPL and Aquila post-merger will
be maintained and even enhanced; (2) if the merger is approved, as the
integration of systems progresses, services to both Aquila and KCPL customers
should improve with new expanded services and options that include the best both
companies have to offer; (3) KCPL’s distribution program is based on a set
of clearly defined strategies, specifications, and guidelines using a systematic
preventive maintenance approach focused on maintaining high reliability while
controlling costs; and (4) KCPL has an asset management portfolio of
distribution maintenance and reliability programs that have produced reliable
electric service. The Commission further determines that substantial
and competent evidence in the record as a whole supports the conclusions that
the integration of KCPL and Aquila operations will result in synergy savings
that will maintain or improve service levels.
_________________________
987 See
Findings of Fact Numbers 70-93 regarding the credibility of Staff’s
Report.
988 Staff
Exh. 100, Schallenberg Direct, attached Report, p. 72.
The
Commission is confident that KCPL’s identified day-to-day operational processes
combined with the expanded use of technologies and asset management programs
will drive the company toward improved electric service reliability as well as
lower per-unit costs to install, operate, and maintain distribution
assets. The Commission is also confident that the proper performance
monitoring will ensure customer service levels will be maintained and eventually
improved, and if the Commission ultimately determines that it will approve the
merger it will impose the condition that KCPL comply with a service monitoring
program, providing quarterly reports of monthly service quality
data.
These
conclusions weigh in favor of approving the transaction, and the Commission
concludes that Great Plains and KCPL’s approach to maintaining and improving
service quality weighs as a benefit of the proposed merger and will be balanced
against any factor tending to pose a detriment of any kind to the public
interest.
|
F.
|
Conclusions
of Law Regarding the Application of the “Not Detrimental to the Public
Interest” Standard – Application of the Balancing Test989
|
The
substantial and competent evidence on the record as a whole demonstrates that
Applicants’ revised merger proposal offers greater protection and more benefits
to ratepayers than their original proposal. There is long-term
advantage in Aquila becoming an operating subsidiary of Great Plains in
coordination with KCPL. Operational efficiencies and
significant realized synergies will result in rates over time rising less than
they would have otherwise. This will occur because the geographical
service territories of the utilities are adjacent, therefore increasing the
potential for economies of scale and improved reliability.
_________________________
989 See
Findings of Fact 1-567 for this section.
From a
Transmission & Distribution perspective, consolidating adjacent operations
will enable the two companies to more efficiently cover the same
area. The newly combined companies will: (1) serve a combined
metropolitan customer base of over 625,000 – an increase of almost 40% for KCPL
today - and over 170,000 rural customers; (2) will have a generating
capacity of approximately 5,800 megawatts; and (3) will be
comprised of 21,770 distribution primary circuit miles over approximately 18,000
square miles. Applying KCPL’s expertise in managing urban areas and
Aquila’s experience in managing rural areas will contribute to improved
long-term performance. Transmission assets are also adjacent, with
some substation assets jointly owned. An integrated customer service
function will build upon the performance improvements that have been
demonstrated by both companies.
From an
energy supply perspective, the merger will provide greater scale and enable both
companies to benefit from the processes and skills of each other.
Increasing efficiency and availability of generation assets delivers
significant financial and environmental benefits and reduces customers’ exposure
to the volatility of the regional power market. The companies are
currently joint owners of Iatan 1 and 2, so the combination will
simplify this structure.990 Scale
advantages and process improvements will also apply to support functions, where
the combination will enable reduction of many overlapping
positions.
_________________________
990
GPE/KCPL Exh. 21, Marshall Supp. Direct, pp. 1-22.
Facility
consolidation and rationalization across the service area reduces costs for
customers and supports integrated response. The reduction of
duplicate facilities – including headquarters and data center operations that
neither party could do alone –reduces operating expenses and rate
base. Facility consolidation is also a component of supply chain
management synergies, which are significant. These include sourcing,
materials management, fleet, and contract management.991
Many of
the benefits that will flow to KCPL and Aquila customers come from integrating
various KCPL and Aquila functions and activities. Realizing synergy
savings is clearly a purpose of the merger, and integrated operations are
clearly necessary and appropriate to accomplish that purpose. Because
of the way the merger proposal is structured, the Applicants do not believe that
a joint operating agreement is required because they believe the Cost Accounting
Manual system of accounting adequately addresses the Commission’s regulatory
requirements.992 During the
hearing, Mr. Giles explained:
Mr. Riggins: Mr. Giles, in
response to a question from Mr. Dottheim, I think you agreed with him or you
made the statement that -- pardon me. You didn't agree with him, but
you made the statement that we don't need an operating
agreement. Could you explain why in your view we don't need an
operating agreement?
Mr. Giles: Yes. Both Aquila
and KCPL will, in whatever ultimately Aquila's name is changed to, will be owned
100 by GPE, Great Plains Energy, and Aquila will no longer exist as
Aquila. The key to integrating the operations of these two companies
is to make sure we track the costs, make sure we allocate the costs properly on
the accounting and for regulatory purposes because we will continue to maintain
separate rate schedules, separate assets, separate books. So the key
is the cost allocation system, and we will have a cost allocation manual that
will set all of that detail out as to how we operate the two companies and
maintain this separate distinction for both accounting and financial reporting
and for regulatory purposes. You don't need an operating agreement to
do that because Bill Downey, as I said, will be president and CEO of both of
these companies, and I find it hard to picture Bill Downy signing an operating
agreement with Bill Downey.
_________________________
991 Id.
992
Transcript, pp. 1497-1498.
Mr. Riggins: Does KCPL
currently have a cost allocation manual that it utilizes to allocate costs to
different entities?
Mr. Giles: Yes, we
do.
Despite
the Applicants’ belief that a joint operators agreement is not required, Great
Plains and KCPL have offered to execute and file a joint operators agreement if
the Commission decides that one is required.993
The Commission believes that the
operational integration of KCPL and Aquila will produce substantial benefits for
their respective customers, and to ensure a seamless operation and the flow of
those benefits the Commission determines that a condition of the merger, if it
is approved, should be a requirement that the KCPL and Aquila execute file a
joint operators agreement with the Commission.994
|
|
2.
|
Synergy
Savings and Transaction and Transition
Costs
|
The total
operational synergies that will result from the proposed transaction are
$305 million over the first 5-year period. However, the merger
is expected to produce substantially more savings to customers. The
total synergies created would total $755 million through
year 10. On a Missouri jurisdictional basis, the total synergies
are equal to $549 million for 10 years, with $222 million
expected during the first 5 years. These will substantially
exceed $90 million, the sum of the $47.2 million in Missouri
Transaction Costs and $42.8 million in Missouri Transition
Costs. In fact, two areas of synergies alone nearly equal the
expected Transaction and Transition Costs. Great Plains and KCPL
witness Zabors testified that there was approximately $50 million of
synergies related to employee reductions and an additional $30 million
related to the sale and closing of the Aquila headquarters building – savings
that were certain. The Applicants will not seek recovery of
Transaction or Transition Costs in rates unless the synergies achieved equal or
exceed the level of such amortized costs. Consequently, ratepayers
are not subject to any risk regarding the recovery of these costs in
rates. Moreover, as the Commission has already determined, if it
approves the merger it will disallow the recovery of Transaction Costs creating
additional savings for the ratepayers.
_________________________
993
GPE/KCPL Exh. 39, Giles Additional Supp. Direct, p. 3; Transcript, pp.
1893.
994 Indeed, Staff’s witness Schallenberg
indicated that a requirement of filing an operators and ownership agreement
would eliminate its, Public Counsel’s and the Industrial Intervenors’ argument
that the Applicants had not properly pled their application for the proposed
merger. Transcript, pp. 3062-3064.
There is
no credible evidence in the record that the Applicants’ credit rating will be
upgraded or downgraded as a result of approving the merger
proposal. Moreover, the Commission has decided that if it approves
the merger it will condition approval with a requirement that any financial
effects caused by a downgrade in the Applicants’ credit rating shall be borne by
the shareholders and not the ratepayers.
|
|
4.
|
Customer
Service and Service Quality
|
Company
witness William Herdegen, Vice President Customer Operations, testified
that integration efforts in the customer service area will focus on the best
practices of KCPL and Aquila, with the expectation that customer satisfaction
levels at both companies will reach Tier 1 as the complementary strengths
of both companies are combined. Several of the Aquila employees who
were instrumental in achieving Aquila’s high level of customer service have
agreed to stay on following the merger. Great Plains intends to
create a single call center for customers of both KCPL and Aquila, which will
leverage the two companies’ strengths. Great Plains is also reviewing
the Customer Relations area in consideration of the expanded customer base and
service territory, including expansion of its metering technology to the Aquila
service territory. It is also reviewing billing services at both
Aquila and KCPL to ensure easy and efficient payment options for customers
throughout the service areas.
Additional
customer service employees will be available at the time of the transition to
help ensure service quality. Additionally, Great Plains intends to
make all KCPL Affordability, Energy Efficiency, and Demand Response programs
available to Aquila customers following the merger. There is
overwhelming evidence in the record that the Applicants have planned
sufficiently to ensure that customer service will not suffer as a result of the
merger and in fact that customer service would improve to Aquila’s customer
base.
There are
benefits to the proposed merger that are difficult to precisely quantify but
testimony was provided by a number of witnesses with regard to extensions of
community programs, environmental programs, and workforce development.995 There are
also additional potential benefits that can be developed in terms of future
quantifying of the effect of joint dispatch.
Performing
its required balancing test, the Commission determines that the substantial and
competent evidence on the record as a whole supports the conclusions that:
(1) operational benefits, synergy savings, and expanded and improved
customer service all weigh in favor of approving the merger; (2) because
the Applicants will not be allowed to recover Transition Costs unless synergies
achieved equal or exceed the level of such amortized costs, ratepayers are not
subject to any risk regarding the recovery of these costs in rates;
(3) because the Commission will condition approval on disallowance of
Transaction Costs, the ratepayers will receive the benefits of the shareholders
bearing these costs; (4) with no credible evidence of a potential downgrade
in credit rating, and with the addition of a condition to ensure that should a
downgrade materialize that it is not borne by the ratepayers, the post-merger
credit-worthiness of the Applicants is not a detriment to approving the proposed
merger; and (5) the likelihood of additional tangential and currently
unquantifiable benefits that will result from the merger weigh in favor of
approving the merger.
_________________________
995
GPE/KCPL Exh. 3, Bassham Surrebuttal, pp. 1-8; GPE/KCPL Exh. 21, Marshall Supp.
Direct, pp. 1-22.
|
|
6.
|
Final
Conclusions Regarding the Application of the “Not Detrimental to the
Public Interest” Standard
|
The
Commission finds that approving the proposed merger, with the conditions that it
plans to impose, is not detrimental to the public interest. The
Commission concludes the Applicants met their burden of establishing that there
is no detriment to the public interest if the Commission authorizes the proposed
merger. The Commission shall authorize the proposed merger subject to
the conditions already contemplated and will consider other conditions requested
by various parties to this action in other sections of this Report and
Order.
Additionally,
the Commission observes that synergy savings compose only one factor in the
multi-factor “not detrimental to the public interest” balancing
test. Given the number of positive benefits associated with the
transaction, and the fact that no credible evidence establishes any negative
effects from the merger (especially in light of the conditions imposed by the
Commission as being necessary for approval), the Commission further concludes
that even if it had not weighed the projected synergy savings when performing
its balancing test, the Applicants still met their burden of proof that the
proposed merger is not detrimental to the public interest.
|
G.
|
Conclusions
of Law Regarding the Commission’s Affiliate Transactions Rule996
|
|
|
1.
|
The
Purpose of the Rule
|
The
purpose of Commission Rule 4 CSR 240-20.015, as explicitly stated in the Rule is
as follows:
This rule
is intended to prevent regulated utilities from subsidizing their nonregulated
operations. In order to accomplish this objective, the rule sets forth
financial standards, evidentiary standards and recordkeeping requirements
applicable to any Missouri Public Service Commission (commission) regulated
electrical corporation whenever such corporation participates in transactions
with any affiliated entity (except with regard to HVAC services as defined in
section 386.754, RSMo Supp. 1998, by the General Assembly of Missouri).
The rule and its effective enforcement will provide the public the
assurance that their rates are not adversely impacted by the utilities’
nonregulated activities.997
As noted
previously in this Order, the Commission is granting conditional approval of the
proposed transaction, and KCPL and Aquila will ultimately be separate affiliates
of Great Plains if they chose to accept the Commission’s conditions and finally
consummate the transaction. Assuming the Applicants do consummate the
transaction, Aquila and KCPL will remain separate legal entities, but many of
the companies’ operation functions will be integrated after the merger
closes.998 Necessarily
the two affiliates will engage in transactions with each other, and the
asymmetrical pricing requirements of the Rule, which were designed to prevent
cross subsidization of a regulated utility’s non regulated operations, would
prevent the two regulated affiliates from exchanging goods and services at
cost.
_________________________
996 Refer
to Findings of Facts Numbers 568-595 for this section.
997 Commission Rule 4 CSR
240.20-015. See also
In re Union Elec. Co.,
Case No. EO-2004-0108, 2005 Mo. PSC LEXIS 190 at 17, Report and Order on
Rehearing at 38 (2005) (“… purpose of the affiliate transaction rule is to
prevent cross-subsidization, in which a conglomerate including a regulated
entity seeks to shift costs of its unregulated activities to its regulated
customers”). Prior to the Union Electric case, the
Commission defended the Rule at the Missouri Supreme Court in State ex rel. Atmos Energy Corp. v.
PSC, 103 S.W.3d 753, 763-64 (Mo. 2003). The Court
noted:
In its
brief, the PSC explained that the rules are a reaction to the emergence of a
profit-producing scheme among public utilities termed “cross-subsidization,” in
which utilities abandon their traditional monopoly structure and expand into
non-regulated areas. This expansion gives utilities the opportunity
and incentive to shift their non-regulated costs to their regulated operations
with the effect of unnecessarily increasing the rates charged to the utilities’
customers. Id.
998 KCPL’s
and Aquila’s cost allocation manual will set forth how costs are to be allocated
among KCPL, Aquila, Great Plains, and any other subsidiary of Great
Plains.
Because
both Aquila and KCPL will continue to be regulated electrical corporations after
approval of the transaction and both meet the Rule’s definition of “affiliates,”
and because many of the synergies to be realized by the Applicants post-merger
are premised on the ability of KCPL and Aquila to exchange goods and services at
cost, the Rule would actually prevent benefits from accruing to Missouri
ratepayers. Consequently, the Applicants have argued that the
Affiliate Transaction Rule does not apply to transactions between KCPL and
Aquila, or in the alternative that they should be granted a waiver from the rule
to the extent it would inhibit transactions at cost between KCPL and Aquila
after the close of the merger.
Staff has
suggested that the Affiliate Transactions Rule should apply, and that no waiver
should be granted because it is unnecessary and beyond the scope of the
proceeding since the Applicants have not requested authority to consolidate KCPL
and Aquila. The Commission has already determined that Staff’s
position regarding the scope of this proceeding is incorrect, and under
cross-examination, Staff witness Schallenberg agreed that the purpose of the
Rule is to prevent regulated utilities from subsidizing their non-regulated
operations and that after the close of the merger, the Commission will have full
access to the books and records of both Aquila and KCPL.999 Mr. Schallenberg
also indicated that Staff was not generally opposed to transactions between
Aquila and KCPL on a cost basis.1000 Thus, there
is no reason to apply the Rule in order to maintain access to the books and
records of Aquila or KCPL, or to prevent cost-based transactions between Aquila
and KCPL.
_________________________
999
Transcript, pp. 2070-2071.
1000
Transcript, p. 2071.
Because
both Aquila and KCPL will be regulated electrical corporations, transactions
between KCPL and Aquila do not involve cross-subsidization and these
transactions were not intended to be covered by the Rule. However,
because the Commission is imposing a condition on the merger of having KCPL and
Aquila execute a joint operators agreement, the issue of cross-subsidization
becomes blurred and the Commission concludes that a variance is
required.
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3.
|
Final
Conclusions Regarding the Affiliate Transactions
Rule
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) the Commission’s Affiliate
Transactions Rule, 4 CSR 240.015, applies to KCPL and Aquila because these
entities meet the Rule’s definition of “affiliates”; (2) the purpose of the
Commission’s Affiliate Transactions Rule is to prevent cross-subsidization of
regulated utility’s non-regulated operations, not to prevent transactions at
cost between two regulated affiliates; (3) to the extent that the Affiliate
Transactions Rule is applicable to transactions between KCPL and Aquila, a
variance shall be granted; and (4) more specifically, the variance shall be
granted for all transactions except for wholesale power transactions, which
would be based on rates approved by FERC.
The
Commission finds as good cause for the variance to be the need to allow the
applicants the ability to attain their projected synergy savings
post-merger. The Commission further concludes there is no detriment,
or any direct or indirect effect of the transaction, that tends to make the
power supply less safe or less adequate, or which tends to make rates less just
or less reasonable, that is related to the granting of this variance in
4 CSR 240.015.
The
Commission finally notes that although both KCPL and Aquila will continue to be
subject to the Commission’s recordkeeping requirements for regulated electrical
corporations, the sections of 4 CSR 240.015 which relate to recordkeeping
will not be waived. Because KCPL and Aquila will be maintaining their
records pursuant to the Commission’s regulations, one set of records should
satisfy all regulatory requirements without being duplicative.
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H.
|
Conclusions
of Law Regarding Other Potential Conditions to Place on the Approval of
the Merger1001
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|
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1.
|
Transmission
and RTO/ISO Criteria, Quantification of Joint Dispatch, and Consolidation
of Balancing Authority1002
|
In this
proceeding, Independence has argued that it is necessary for the Commission to
address the rate effects of the Applicants’ intent to have Aquila participate in
the Midwest ISO rather than the SPP. In particular, Independence has
asserted that the Commission should require the Applicants to provide analysis
of the rate effects of the merger, effects of joint generation dispatch, and the
effects of Aquila’s participation in the Midwest ISO as compared to
SPP. Independence has also argued that the Commission should evaluate
the rate and other effects of potential joint dispatch of the combined
companies’ generation resources in this proceeding.
_________________________
1001 Refer
to Findings of Facts Numbers 596-720 for this entire section.
1002 Refer
to Findings of Facts Numbers 596-651 for this
sub-section.
Additionally,
Dogwood and MJMEUC have argued that the Commission should condition the approval
of the proposed transaction upon Aquila being required to join and operate its
generation and transmission facilities under the auspices of the SPP RTO with
KCPL. Similarly, Dogwood has argued that the Commission should
condition the approval of the proposed transaction upon Aquila and KCPL being
required to consolidate their balancing authority areas.
As a
factual and legal matter, Aquila’s RTO status is independent of the
merger. The merger will have no direct effect on either KCPL’s or
Aquila’s RTO status. Aquila has an application pending before the
Commission in Case No. EO-2008-0046, regarding the transfer of functional
control of its transmission facilities to Midwest ISO or another
RTO. The evidentiary hearing in that case concluded April 15,
2008, and post-hearing briefs were submitted on May 29,
2008. The Commission has before it in that case a full evidentiary
record concerning the benefits and costs associated with Aquila’s RTO
status. Such evidence is critical for the Commission’s evaluation of
which RTO, if any, would best serve Aquila and its
customers. Moreover, although SPP and Midwest ISO were both active
participants in that case, neither party is represented here.
It is
noteworthy that FERC refused to condition its approval of the merger on Aquila
being required to join SPP. FERC found as follows:
We will
decline the protestors’ request to condition our section 203 authorization on
the Applicants joining a particular RTO. When necessary, the
Commission conditions merger authorization in order to address specific,
merger-related harm; but no such harm has been identified in this
proceeding. Moreover, the Applicants’ future RTO status is unclear at
this time and therefore, there is no baseline against which to assess
merger-related changes to rates.1003
_________________________
1003 Great Plains Energy Inc., 121
FERC ¶ 61,069 at P 50 (2007).
FERC
considered Independence’s assertions concerning the different cost structures of
SPP and Midwest ISO, which are the same issues raised here by Independence and
Dogwood Energy.
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|
b.
|
Quantification
of Joint Dispatch
|
Great
Plains does not propose to dispatch jointly the Aquila and KCPL generation
fleets, and will retain the utilities’ respective control areas.1004 Any future
decision to dispatch jointly will be subject to regulatory approval, at which
time a record would be fully developed concerning the effects of such
action. In the FERC Merger Proceeding, Docket Nos. EC07-99-000
and EL07-75-000, Independence asked FERC to require KCPL and Aquila to quantify
the effects of joint dispatch before being permitted to merge. In its
order approving the merger, FERC denied that request.1005
KCPL and
Aquila fulfill specific obligations set by FERC Orders 888 and 890
regarding open-access, non-discriminatory transmission service to
customers. Following the merger, KCPL and Aquila will continue to
provide transmission service through a federally-approved Open Access
Transmission Tariff. Independence also raised this issue before FERC,
arguing that KCPL and Aquila had not adequately evaluated the effect of the
merger on transmission availability as part of their market power analysis in
support of their application. FERC considered these same arguments
that Independence now raises again in this proceeding and concluded that the
merger did not create any transmission availability concerns.1006
_________________________
1004
GPE/KCPL Exh. 11,
Crawford Direct, p. 5.
1005 Great Plains Energy Inc., 121
FERC ¶ 61,069 at Para. 36 (2007).
1006 Great Plains Energy Inc., 121
FERC ¶ 61,069 at Para. 34, 35 and 37 (2007).
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c.
|
Consolidation
of Balancing Authority
|
Again,
the Commission is presently evaluating Aquila’s RTO status in a separate
proceeding. Moreover, SPP is presently evaluating consolidating
Balancing Authority operations within its footprint. Until these
matters are resolved, it is premature and potentially redundant for KCPL and
Aquila to pursue consolidation of their Balancing Authority
operations.
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|
d.
|
Final
Conclusions Regarding Transmission and RTO/ISO Criteria, Quantification of
Joint Dispatch, and Consolidation of Balancing
Authority
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) it is unnecessary and
premature to require the Applicants to evaluate the potential effects of
Aquila’s RTO status; (2) it is unnecessary and premature to require the
Applicants to quantify the effects of joint dispatch of the generation fleets;
and (3) it is unnecessary and premature to require the Applicants to
consolidate their balancing authority.
The
Commission further concludes there is no detriment to the public interest
created by not conditioning the merger with regard to the above
issues. There is no competent or credible evidence in the record to
support a conclusion that anything would directly or indirectly make the power
supply less safe or less adequate, or would tend to make rates less just or less
reasonable by not imposing said conditions in this proceeding.
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|
2.
|
The
Kansas City and KCPL Municipal Franchise Agreement1007
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|
|
a.
|
Authority
of the Commission
|
The
Commission first notes that it is an administrative body of limited
jurisdiction, created by statute and has only such powers as are expressly
conferred upon it by the statutes and reasonably incidental thereto.1008 Those
powers are purely regulatory.1009 The
dominating purpose in the creation of the Commission was to promote the public
welfare, and to that end the statutes provided regulation which seeks to correct
the abuse of any property right of a public utility, not to direct its use,
because exercise of the latter function would involve a property right in the
utility.1010 “The
utility's ownership of its business and property includes the right of control
and management, subject, necessarily, to state regulation through the Public
Service Commission.”1011
“The
powers of regulation delegated to the Commission are comprehensive and extend to
every conceivable source of corporate malfeasance. Those powers do
not, however, clothe the Commission with the general power of management
incident to ownership. The utility retains the lawful right to manage
its own affairs and conduct its business as it may choose, as long as it
performs its legal duty, complies with lawful regulation and does no harm to
public welfare.”1012
The
Commission further notes that the Missouri Constitution commands that “[t]he
exercise of the police power of the state shall never be abridged, or so
construed as to permit corporations to conduct their business in such a manner
as to infringe the equal rights of individual or the general well-being of the
state.”1013 This
prohibition is not limited to private corporations. The Missouri
Supreme Court also has concluded that the legislature cannot “authorize a
municipal corporation to make a contract abridging or limiting . . .
the police power.”1014
_________________________
1007 Refer
to Findings of Facts Numbers 652-680 for this section.
1008 State ex rel. Harline v. Public
Service Commission of Mo., 343 S.W.2d 177, 181-182 (Mo. App.
1960).
1013 See
Missouri Const., § 5, art. 12; State ex rel. City of Sedalia v.
PSC, 204 S.W. 497, 498-99 (Mo. 1918).
1014 See
State ex rel. Kansas City v.
PSC, 524 S.W.2d 855, 859 (Mo. 1975)(police power cannot be hindered or
frustrated by contracts between individuals, companies or governmental
subdivisions); State ex rel.
Kansas City Pub. Serv. Co. v. Latshaw, 30 S.W.2d 105, 108 (Mo.
1930)(Legislature cannot authorize municipal corporations to make contracts with
utilities regarding rates that prevent the state from establishing reasonable
rates); Sedalia, 204 S.W. at 497.
Kansas City
has requested that the Commission condition approval of the proposed merger upon
a requirement that KCPL negotiate a new Franchise Agreement with Kansas City
that would uniformly apply to both KCPL and KCPL’s newly created sister
subsidiary, Aquila. Kansas City argues that the Commission
has broad authority to override franchises and contracts in order to maintain
and preserve the public welfare.1015 Kansas City
further argues that a franchise agreement is not truly a contract, but merely a
license for a term of years. Consequently, Kansas City claims that
Great Plains and KCPL’s impairment of contract defense is not a cognizable legal
defense and states that it would serve the public interest for there to be one
franchise for a single operational company. Conversely,
Kansas City argues it would constitute a detriment if the Commission did
not require a new franchise agreement with the unified companies and lacking
such an agreement creates the risk that Kansas City will be exposed to
disruption in its ability to effectively manage its right-of-way, which in turn
would adversely affect the public welfare.
_________________________
1015 EFIS
Docket Number 302, City of
Kansas City’s Updated Prehearing Brief, p. 4, filed April 15, 2008,
citing to May Dep’t Stores Co.
v. Union Elec. Light & Power Co., 107 S.W.2d 41, 48
(Mo. 1937). In May the Commission did
exercise its authority to override a contract regarding the provision of
electric service between a utility and a large user because that contract
limited the regulatory authority of the Commission. However, the
franchise agreement between Kansas City and KCPL does not interfere with the
Commission’s regulatory authority.
The
Kansas City Franchise Agreement does not contain a limitation on its
duration. Under Missouri law, a franchise agreement that does not
specify a period of duration is a grant in perpetuity.1016 Perpetual
franchise agreements are grants of property rights protected from impairment by
the Contract Clauses of the United States and Missouri Constitutions.1017 In the
absence of a finding by the Commission that the Franchise Agreement frustrates
or hinders the proper exercise of its police power, the Commission concludes
that it cannot grant Kansas City’s requested relief without impairing
KCPL’s contractual rights.1018
The
Commission finds that the continued operation of the Franchise Agreement in no
way frustrates or hinders the Commission’s ability to exercise the State’s
police power. In addition, Kansas City has failed to introduce
any credible evidence into the record upon which the Commission could base a
decision to abrogate the Franchise Agreement, or condition the proposed merger
on KCPL’s “willingness” to relinquish its rights under the Franchise
Agreement. Kansas City has failed to introduce into the record
any credible evidence that the Franchise Agreement, after governing the
relationship between Kansas City and KCPL for 126 years, now threatens
the Commission’s ability to protect the health, safety, and general welfare of
the citizens of Missouri. While Kansas City and KCPL may have
had some problems requiring resolution over the years, in total there is no
credible or substantial evidence in the record establishing that KCPL is not
meeting its obligations regarding relocations, mapping, or cooperation with
Kansas City concerning building projects. On the contrary, the
evidence indicates that KCPL and Kansas City, in general, have a very good
working relationship.
_________________________
1016 Missouri Pub. Serv. Co. v.
Platte-Clay Elec. Cooperative, 407 S.W.2d 883, 889 (1966); State ex rel. McKittrick v. Missouri
Pub. Serv. Corp., 174 S.W.2d 871, 879 (Mo. 1943); State ex rel. Chaney v. West
Missouri Power Co., 281 S.W. 709, 714 (Mo. 1926).
1017 See
U.S. Const., art. I, § 10; Missouri Const., art. I, § 13.
1018 XO Missouri, Inc. v. Maryland
Heights, 256 F. Supp. 2d 966, 974 (E.D. Mo. 2002).
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|
b.
|
Final Conclusion Regarding the Kansas City and
KCPL Municipal Franchise
Agreement
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) the current Franchise Agreements
between KCPL and Kansas City and Aquila and Kansas City do not infringe the
equal rights of individuals or the general well-being of the state;
(2) without a demonstration that the current agreements are a detriment to
the public interest, the Commission lacks authority under Missouri and federal
law to abrogate the existing Franchise Agreement between KCPL and Kansas City;
(3) the Commission will not condition the approval of the proposed merger
upon Kansas City’s requested condition for the negotiation and execution of a
single, unitary franchise between KCPL/Aquila and Kansas City; and, (4) it
is not a detriment to the public interest not to condition the approval of the
proposed merger on requiring the negotiation and execution of a single, unitary
franchise between KCPL/Aquila and Kansas City.
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|
3.
|
The
St. Joseph and Aquila Municipal Franchise Agreement1019
|
|
|
a.
|
Authority
of the Commission
|
Similarly,
St. Joseph wants the Commission to condition the approval of the merger
upon Aquila negotiating a new municipal franchise with St. Joseph. As
an initial matter, the Commission received St. Joseph’s Exhibit 1200
subject to the Applicants’ objections as noted in Findings of Fact Numbers
684-688. The Commission sustains those objections as
Exhibit 1200 is unauthenticated and is hearsay. Additionally,
St. Joseph did not comply with Section 536.070(12) which requires that
affidavits to be used at hearing shall be provided before the hearing so that
parties may object to them. However, pursuant to
Section 536.070(7) and 4 CSR 240-2.130(3), the Commission will
preserve this exhibit in the record.
_________________________
1019 Refer
to Findings of Facts Numbers 681-690 for this section.
St.
Joseph has submitted no credible or substantial evidence to establish that
Aquila’s St. Joseph franchise is no longer valid. Regardless,
the Commission does not have the authority to judge the validity of a franchise
agreement.1020
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|
b.
|
Final
Conclusions Regarding the St. Joseph and Aquila Municipal Franchise
Agreement
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) for the same reasons articulated
in the conclusions of law section regarding the issue of the municipal franchise
agreement with Kansas City, the Commission concludes that it will not
condition the proposed merger on the negotiation and execution of a new
franchise agreement between Aquila, or its successor, and St. Joseph; and,
(2) it is not a detriment to the public interest not to condition the
approval of the proposed merger on requiring the negotiation and execution of a
new franchise agreement between Aquila, or its successor, and
St. Joseph.
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|
4.
|
Kansas
City’s Request for a Separate Quality of Service Plan1021
|
In this
proceeding, the City of Kansas City, Missouri has requested that the
Commission condition the approval of the Joint Application upon requiring KCPL
and Aquila to file an application for a Quality of Service Plan within 90 days
of the Commission’s final decision in this proceeding. However, Staff
already reviews the very performance measures mentioned by Kansas City
witness Hix as part of its Cost of Service report when KCPL files a rate
case. Mr. Hix was unfamiliar with the Commission’s quality of
service standards, its management standards, or its reliability
metrics. In fact, Mr. Hix’s testimony was inconsistent in that
he found the Commission’s standards to be good measures of performance while
also stating that he did not care about the thresholds under SAIFI, SAIDI, or
CAIFI. Mr. Hix provided no credible evidence that the proposed
merger would have any effect on KCPL’s service quality.
_________________________
1020 See State ex rel. Electric Co. of
Missouri v. Atkinson, 204 S.W. 897, 898 (Mo. 1918).
1021 Refer
to Findings of Facts Numbers 691-701 for this section.
The only
other significant suggestion that Mr. Hix offered the Commission in
relation to this issue was the concept that the Commission should adopt
provisions for reparations to customers when a company
underperforms. While this is a laudable idea, it is one more
appropriately addressed in a global rulemaking proceeding as opposed to an
individual merger application.
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|
b.
|
Final
Conclusions Regarding Kansas City’s Request for a Separate Quality of
Service Plan
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) there is no credible evidence in
the record that a quality of service plan, as proposed by Kansas City is
warranted; (2) the Commission Staff already receives and reviews much of
the information Kansas City would have KCPL and Aquila provide as part of
its proposal as part of the Staff’s Cost of Service report when a utility files
a rate case; (3) in KCPL's last rate case (ER-2007-0291), the Staff
reviewed five years of this data and found no evidence of long-term trends that
raise a cause for concern by the Commission; and (4) the Commission will
not condition the merger on upon requiring KCPL to submit a separate Quality of
Service plan.
Moreover,
the Commission already has in place the mechanisms for challenging KCPL
regarding quality of service issues and underperformance. Any
interested entity can elect to initiate a complaint or over-earnings action
against KCPL to address the adequacy of the service that KCPL
provides. The Commission further concludes there is no detriment, or
any direct or indirect effect of the transaction that tends to make the power
supply less safe or less adequate, or which tends to make rates less just or
less reasonable, that is related to not conditioning the proposed merger upon a
requirement for KCPL to submit a separate quality of service
plan.
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|
5.
|
Kansas
City’s Proposed Earnings Sharing Mechanism1022
|
|
|
a.
|
Earnings
Sharing Mechanism Proposal
|
Kansas
City also proposed that, in order for the merger to be not detrimental to the
public interest, the merger be conditioned upon KCPL and Aquila filing an
Earnings Sharing Mechanism that returns a portion of excess earnings above the
Commission’s authorized rate of return to customers.
Again,
while Kansas City’s proposal is laudable, Kansas City’s witness
Mr. Hix’s lack of understanding and analysis as to the specifics of this
case are fatal to the request. Earnings sharing mechanisms are used
when the cost of service is expected to be flat or declining over the time the
synergies are expected to occur. Absent increases in cost of service,
the synergies would result in excess earnings above an authorized rate of
return. The evidence reveals that KCPL and Aquila are currently
engaged in major generation construction programs, and both companies will need
to raise additional capital beyond their current construction programs to meet
environmental regulations, which will require KCPL and Aquila to file rate cases
with the Commission in the year after the transaction closes. These
rate increases are necessary to recover the costs of the infrastructure as it is
placed into service and although those costs will exceed the total estimated
synergies of the acquisition during the next several years, the synergies will
result in smaller rate increases absent the transaction.
_________________________
1022 Refer
to Findings of Facts Numbers 702-715 for this section.
There
will be no excess earnings to share initially, and the Commission finds the
method of sharing synergies by use of the mechanism of regulatory lag, as
proposed, is sufficient. Moreover, the Commission notes that it lacks
statutory authority to order a utility to share earnings with
customers. The Commission may approve a voluntary earnings sharing
plan that comes about as a result of negotiations between the utility, Staff,
Public Counsel, and other interested parties, and may only approve such a plan
where it finds that it is in the public interest to do so.1023
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|
b.
|
Final
Conclusions Regarding Kansas City’s Proposed Earnings Sharing
Mechanism
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusions that: (1) the Commission lacks the statutory
authority required to impose a non-voluntary earnings sharing mechanism upon
KCPL/Aquila; (2) that the mechanism of regulatory lag is the proper method
for sharing synergies derived from the merger, (3) the Commission shall not
condition the merger upon the establishment of an earnings sharing mechanism as
proposed by Kansas City; and, (4) the Commission does not find any
detriment, or any direct or indirect effect of the transaction that tends to
make the power supply less safe or less adequate, or which tends to make rates
less just or less reasonable, that is related to not conditioning the proposed
merger upon a requirement for KCPL to establishing an Earnings Sharing
Mechanism.
_________________________
1023 Case
Number ER-95-411, In re Union
Elec. Co., Order Adopting Stipulation and Agreement, effective August 1,
1995, 1995 WL 606416 (Mo. P.S.C.), 163 P.U.R.4th 458,
458.
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|
6.
|
Kansas
City’s Proposed Future Consolidated Rate Case1024
|
|
|
a.
|
Future
Consolidated Rate Case Proposal
|
Kansas City’s
final proposal is that KCPL and Aquila be required to file a comprehensive rate
case within three years after the Commission’s approval of the
transaction. Part of this proposal appears to be intertwined with
Kansas City wanting Aquila and KCPL to integrate their financial and system
operations into a structure that can be comprehensively evaluated for
efficiencies and improved operations. This proposal is improperly
premised because Great Plains does not seek to merge KCPL and
Aquila. Great Plains, the parent company of KCPL, is requesting
approval to acquire Aquila. Aquila will retain and continue to
operate under its Commission-approved tariffs. KCPL and Aquila will
maintain separate generation, transmission, and distribution
systems. Additionally, the timing of KCPL’s rate cases is influenced
by its commitments and activities under the Regulatory Plan Stipulation, Case
No. EO-2007-0329.
|
|
b.
|
Final
Conclusion Regarding Kansas City’s Proposed Future Consolidated Rate
Case
|
The
Commission determines that substantial and competent evidence in the record as a
whole supports the conclusion that it is unnecessary to add this condition to
its approval of the merger. Kansas City’s request contemplates
requiring the merger or consolidation of KCPL and Aquila, something that is not
part of the merger proposal; and, the Commission concludes there is no
detriment, or any direct or indirect effect of the transaction that tends to
make the power supply less safe or less adequate, or which tends to make rates
less just or less reasonable, that is related to requiring a condition for a
comprehensive rate case as proposed by Kansas City.
_________________________
1024 Refer
to Findings of Facts Numbers 715-720 for this section.
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|
7.
|
Kansas
City’s Proposed Condition for a Comprehensive Energy Audit1025
|
On
April 8, 2008, Kansas City withdrew the testimony of rebuttal witness
Stanley J. Harris and represented that it was withdrawing its proposal
for a requirement of a comprehensive energy audit. Kansas City
indicated that this was no longer an issue in this
matter. Consequently, the Commission made no findings of fact on this
subject matter and similarly renders no conclusions of law regarding Kansas
City’s initial proposed condition.1026
As part
of the Applicants’ original request, they asked to the Commission to authorize a
name change for Aquila, Inc., once a new name for the company had been
chosen. At one point during the evidentiary hearing, there was
mention of a possible new name for Aquila, i.e., KCPL Greater Missouri
Operations.1028 The
Applicants’ current request does not satisfy the Commission’s rules governing
name changes.1029 The
Commission shall deny this request and require a proper name change application
prior to considering any name change for Aquila, Inc.
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|
9.
|
Transition
Services Agreement
|
On
August 2, 2007, the Applicants filed a Transition Services Agreement and
Amendment 1 to the TSA, including a Schedule of Services to be provided
between the Applicants and Black Hills Corporation. The TSA was
executed on February 6, 2007, and Amendment 1 was executed on
July 30, 2007. Because these documents were executed prior to
the changes in the merger proposal and have not been updated, the Commission
shall require the Applicants to either file a pleading with the Commission
stating whether the TSA, as it currently exists, is accurate and up-to-date, or
file with the Commission a new TSA including all necessary amendments thereto to
account for any changes that resulted from the changes in the merger
proposal.
_________________________
1025
Because this issue was removed by the parties, the Commission made no findings
of fact in connection with it.
1026 See
Correspondence to Judge Dale
Withdrawing the Prefiled Written Testimony of Mr. Stan Harris, EFIS
Docket Entry Number 290, filed April 8, 2008.
1027 No
findings of fact were required for this section because the issue solely
involves an issue of law.
1029 See
Commission rule 4 CSR 240-2.060(5).
An
administrative body, that performs duties judicial in nature, is not and cannot
be a court in the constitutional sense.1030 The
legislature cannot create a tribunal and invest it with judicial power or
convert an administrative agency into a court by the grant of a power the
constitution reserves to the judiciary.1031
An
administrative agency is not bound by stare decisis, nor are agency decisions
binding precedent on the Missouri courts.1032 “Courts are not
concerned with alleged inconsistency between current and prior decisions of an
administrative agency so long as the action taken is not otherwise arbitrary or
unreasonable.”1033 The mere
fact that an administrative agency departs from a policy expressed in prior
cases which it has decided is no ground alone for a reviewing court to reverse
the decision.1034 “In all
events, the adjudication of an administrative body as a quasi-court binds only
the parties to the proceeding, determines only the particular facts contested,
and as in adjudications by a court, operates retrospectively.”1035
_________________________
1030 In re City of Kinloch, 362
Mo. 434, 242 S.W.2d 59, 63[4-7] (Mo. 1951); Lederer v. State, Dept. of Social
Services, Div. of Aging, 825
S.W.2d 858, 863 (Mo. App. 1992).
1031 State Tax Comm'n v. Administrative
Hearing Comm'n, 641 S.W.2d 69, 75 (Mo. banc 1982); Lederer, 825 S.W.2d at
863.
1032 State ex rel. AG Processing, Inc. v.
Public Serv. Comm'n, 120 S.W.3d 732, 736 (Mo. banc 2003); Fall Creek Const. Co., Inc. v.
Director of Revenue, 109 S.W.3d 165, 172 -173 (Mo. banc 2003); Shelter Mut. Ins. Co. v. Dir. of
Revenue, 107 S.W.3d 919, 920 (Mo. banc 2003); Southwestern Bell Yellow Pages, Inc.
v. Dir. of Revenue, 94 S.W.3d 388, 390 (Mo. banc 2002); Ovid Bell Press, Inc. v. Dir. of
Revenue, 45 S.W.3d 880, 886 (Mo. banc 2001); McKnight Place Extended Care, L.L.C.
v. Missouri Health Facilities Review Committee, 142 S.W.3d 228,
235 (Mo. App. 2004); Cent
Hardware Co., Inc. v. Dir. of Revenue, 887 S.W.2d 593, 596 (Mo. banc
1994); State ex rel. GTE N.
Inc. v. Mo. Pub. Serv. Comm'n, 835 S.W.2d 356, 371 (Mo. App.
1992). On the other hand, the rulings, interpretations, and decisions
of a neutral, independent administrative agency, “while not controlling upon the
courts by reason of their authority, do constitute a body of experience and
informed judgment to which courts and litigants may properly resort for
guidance.” Lacey v. State Bd.
of Registration For The Healing Arts, 131 S.W.3d 831, 843 (Mo. App.
2004). “The weight of such a judgment in a particular case will
depend upon the thoroughness evident in its consideration, the validity of its
reasoning, its consistency with earlier and later pronouncements, and all those
factors which give it power to persuade, if lacking power to control.” Skidmore v. Swift & Co.,
323 U.S. 134, 140, 65 S.Ct. 161, 164, 89 L.Ed. 124
(1944).
1033 Columbia v. Mo. State Bd. of
Mediation, 605 S.W.2d 192, 195 (Mo. App. 1980); McKnight Place Extended Care, L.L.C.
v. Missouri Health Facilities Review Committee, 142 S.W.3d 228,
235 (Mo. App. 2004).
1035 State ex rel. Gulf Transport Co. v.
Public Service Com'n of State, 658 S.W.2d 448, 466 (Mo. App. 1983);
N.L.R.B. v. Wyman-Gordon
Co., 394 U.S. 759, 765, 89 S.Ct. 1426, 1429, 22 L.Ed.2d 709 (1969); State ex rel. Summers v. Public
Service Commission, 366 S.W.2d 738, 741[1-4] (Mo. App. 1963); State ex rel. Consumers Public
Service Co. v. Public Service Commission, 352 Mo. 905, 180 S.W.2d 40,
46[6-8] (banc 1944); §§ 386.490 and 386.510. 1 Cooper, State Administrative
Law, pp. 177 et seq. (1965); Mayton, The Legislative Resolution of the
Rulemaking Versus Adjudication Problem in Agency Lawmaking, Duke Law Journal,
Vol. 1980: 103, 118.
The
Commission emphasizes that its decision in this matter is specific to the facts
of this case. Evidentiary rulings, findings of fact and conclusions
of law are all determined on a case-by-case basis. Consequently, the Commission
makes it abundantly clear that, consistent with its statutory authority, this
decision does not serve as binding precedent for any future determinations by
the Commission.
IV. Final
Decision
In making
this decision, the Commission has considered the positions and arguments of all
of the parties. Failure to specifically address a piece of evidence,
position or argument of any party does not indicate that the Commission has
failed to consider relevant evidence, but indicates rather that the omitted
material was not dispositive of this decision. After applying the
facts, as it has found them, to its conclusions of law, the Commission has
reached the following decision.
Although
a number of parties offered objections or conditions, a fair reading of the
record does not reveal any serious impediment to a conclusion that the proposal
is not detrimental to the public interest. To the contrary, given the
failure of the opposition to offer a serious analysis of the Applicants’ merger
synergy savings evidence, and the absence of any real objection to the revised
regulatory requests, and no evidence beyond speculation that any detriment would
result to the public interest, the Commission is not faced with any good reason
to disapprove the request. The Applicants have met their burden to
establish that the proposed transaction is not detrimental to the public
interest, and; consequently, “[t]he Commission may not withhold its approval of
the disposition of assets . . . .”1036
The
Commission concludes that the transaction proposed by the Applicants, as
conditioned by the Commission, is not detrimental to the public interest and
shall approve it. The specific conditions the Commission shall impose
will be delineated in full in the Ordered Paragraphs below.
IT
IS ORDERED THAT:
1. The
“Joint Application of Great Plains Energy Incorporated, Kansas City Power
and Light Company and Aquila, Inc.,” filed on April 4, 2007, and as
subsequently amended by additional filings on February 25, 2008, seeking
Commission authorization for Great Plains Energy Incorporated, Kansas City
Power & Light Company, and Aquila, Inc., to perform in accordance with the
terms and conditions of the Agreement and Plan of Merger, Assets Purchase
Agreement, Partnership Interests Purchase Agreement, and all other
transaction-related instruments, is hereby granted, subject to the conditions
delineated in the ordered paragraphs below.
_________________________
1036 State ex rel. Fee Fee Trunk Sewer,
Inc. v. Litz, 596 S.W.2d 466, 468 (Mo. App. 1980).
2. Great
Plains Energy Incorporated is authorized to acquire and assume the stocks,
bonds, and other indebtedness and obligations of Aquila, Inc., as described in
particular in the Agreement and Plan of Merger.
3. Aquila,
Inc. is authorized to merge with Gregory Acquisition Corporation, a wholly-owned
subsidiary of Great Plains Energy Incorporated, with Aquila, Inc., becoming the
surviving entity, as described in particular in the Agreement and Plan of
Merger.
4. Great
Plains Energy Incorporated, Gregory Acquisition Corporation, Kansas City
Power & Light Company, and Aquila, Inc., are authorized to take any and all
other lawful actions that may be reasonably necessary and incidental to the
performance of the approved Joint Application for the merger.
5.
Great Plains Energy, Incorporated, Kansas City Power & Light Company, and
Aquila, Inc., are directed to comply with the terms of the transactions
authorized in Ordered Paragraph Number One.
6.
Authorization
of the transactions described in Ordered Paragraphs Number One through Five
are subject to the following conditions:
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a.
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Great
Plains Energy, Incorporated will not be allowed to recover transaction
costs associated with the transactions from
ratepayers;
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b.
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Within
ninety days of the effective date of this Report and Order, Kansas City
Power & Light Company, and Aquila, Inc., shall execute and file with
the Commission a joint operating
agreement;
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c.
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Great
Plains Energy, Incorporated, Kansas City Power & Light Company, and
Aquila, Inc., shall, upon closure of the authorized transactions,
implement a synergy savings tracking mechanism as described by the
Applicants, and in the body of this order, utilizing a base year of
2006;
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d.
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Beginning
ninety days after the closure of the authorized transactions, KCPL and
Aquila will, on a quarterly basis, engage in periodic customer service
performance reviews with the Commission’s Staff, including the quarterly
filing with Staff of monthly service quality
data;
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7. No
later than one week following the effective date of this Report and Order, the
Applicants shall file a pleading with the Commission stating whether the
Transition Services Agreement executed on February 6, 2007 and Amended on
July 30, 2007, is accurate and up-to-date. If the Transition
Services Agreement, as it currently exists, requires further amendment, then
within ninety days following the effective date of this Report and Order, Great
Plains Energy, Incorporated, Kansas City Power & Light Company, and
Aquila, Inc., and any necessary subsidiaries of Great Plains Energy, shall
execute and file with the Commission a new Transition Service Agreement to cover
any transition service issues, including among other things, the temporary
provision of customer support, information technology, and accounting services
by one of the merged companies’ with any of the subsidiaries, or vice versa.
8. In
addition to the conditions outlined in Ordered Paragraph Number Three, the
Commission conditions its authorization of the transactions described in Ordered
Paragraph Number One of this Report and Order upon a requirement that any
post-merger financial effect of a credit downgrade of Great Plains Energy
Incorporated, Kansas City Power & Light Company, and/or Aquila, Inc.,
that occurs as a result of the merger, shall be borne by the shareholders of
said companies and not the ratepayers.
9. Great
Plains Energy Incorporated’s, Kansas City Power & Light Company’s and
Aquila, Inc.’s request for a name change for Aquila, Inc. in this application is
denied. The Applicants shall be required to submit an appropriate
name change request that is fully compliant with Commission rules prior to a
grant of a name change for Aquila.
10. The
Commission grants a limited variance of its Affiliate Transaction Rule to
Kansas City Power & Light Company and Aquila, Inc., as described in
detail in the Conclusions of Law Section of this Report and Order.
11. The
objections to the City of St. Joseph, Missouri’s Exhibit 1200, as delineated in
the body of this order, are sustained. Exhibit 1200 shall be
preserved in the record, but the Commission has not considered this
unauthenticated, hearsay exhibit when making its final determinations in this
matter.
12. All
objections not ruled on are overruled and all pending motions not otherwise
disposed of herein are hereby denied.
13. Nothing
in this order shall be considered a finding by the Commission of the value for
ratemaking purposes of the transactions herein involved.
14. The
Commission reserves the right to consider any ratemaking treatment to be
afforded the transactions herein involved in a later proceeding.
15. No
later than August 11, 2008, Great Plains Energy Incorporated, Kansas City
Power & Light Company and Aquila, Inc., shall file with the Commission a
pleading indicating if they consummated the merger or exercised their respective
rights under the termination clause of the merger agreement or if they took some
other alternative action.
16. This
Report and Order shall become effective on July 11, 2008.
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BY
THE COMMISSION
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Colleen
M. Dale
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Secretary
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( S E A L
)
Murray
and Jarrett, CC., concur;
Clayton,
C., dissents, with separate
dissenting
opinion to follow;
and
certify compliance with the provisions
of
Section 536.080, RSMo 2000.
Davis,
Chm., and Gunn, C., absent.
Dated at
Jefferson City, Missouri,
on this
1st day of July, 2008.
285
