Matter of Westar Energy, Inc.

In Kansas, electric utilities traditionally recovered their costs from ratepayers through a two-part rate structure that involved a flat service charge and a variable energy charge based on the actual kilowatt hours of electricity used by the ratepayer during the billing period. The utilities incurred certain fixed costs in producing electricity, including capital investments in power plants. The utilities chose to allocate some of those fixed costs into the variable energy charge to incentivize ratepayers to decrease their energy consumption. This approach created an economic imbalance—a so-called “free-rider problem”—when some of the utilities’ customers began satisfying at least some of their own electricity needs through renewable sources (e.g., solar power) and thus did not use as much utility-generated electricity as other customers. Those partially utility-dependent customers, known as DG customers, paid less in variable energy charges even though the utilities were still incurring the same amount of fixed costs. As a result, the utilities passed those fixed costs on to non-DG customers in the form of higher variable charges. To ensure that DG customers were paying their alleged “fair share” of the utilities’ fixed costs, Westar Energy, Inc., and Kansas Gas and Electric Company (plaintiffs) asked the Kansas Corporation Commission (the commission) to approve a new rate design that increased electricity charges for DG customers by adding a flat demand charge of $3 in winter and $9 in summer to the existing two-part rate structure. The commission approved the rate design over objections from renewable-energy advocates. The renewable-energy advocates appealed, arguing that the rate design violated K.S.A. 66-117d, which prohibited electric utilities from considering customers’ use of renewable-energy sources as a basis for charging higher rates or otherwise disadvantaging customers based on renewable-energy use. The utilities admitted that the rate design violated 66-117d because DG customers would pay more for electricity than other customers. However, the utilities argued that 66-117d conflicted with, and was thus preempted by, K.S.A. 66-1265(e), a more recent statute that allowed utilities to propose separate rate structures applicable to all customers who began generating their own electricity after July 2014. The appellate court affirmed the commission’s decision, and the Kansas Supreme Court reviewed the case.