Regulatory Matters

12 Months Ended

Dec. 31, 2011

5.	REGULATORY MATTERS

KCP&L Kansas Rate Case Proceedings

In November 2010, KCC issued an order, effective December 1, 2010, for KCP&L, authorizing an increase in annual revenues of $21.8 million, a return on equity of 10.0%, an equity ratio of approximately 49.7% and a Kansas jurisdictional rate base of $1.781 billion. The annual revenue increase was subsequently adjusted by KCC in a January 2011 reconsideration order to $22.0 million. In February 2011, KCC issued an order granting KCP&L and another party to the case their respective petitions for reconsideration regarding rate case expenses. In January 2012, KCC issued its order allowing approximately $0.2 million of additional rate case expenses to be included in rates and amortized over three years. The rates authorized by KCC are effective unless and until modified by KCC or stayed by a court.

KCP&L Missouri Rate Case Proceedings

On February 27, 2012, KCP&L filed an application with the MPSC to request an increase of its retail rates of $105.7 million, with a return on equity of 10.4% and a rate-making equity ratio of 52.5%. The request includes recovery of costs related to improving and maintaining infrastructure to continue to be able to provide reliable electric service and also includes a lower annual offset to the revenue requirement for the Missouri jurisdictional portion of KCP&L’s annual non-firm wholesale electric sales margin (wholesale margin offset). KCP&L currently expects that it will not be able to achieve the $45.9 million wholesale margin offset currently reflected in its retail rates due to a decline in wholesale power prices, which is being driven by low natural gas prices.

On April 12, 2011, the MPSC issued an order and on April 14, 2011, the MPSC Staff filed a report which quantified an authorized revenue increase of approximately $34.8 million on an annual basis, which reflects a wholesale margin offset of approximately $45.9 million and authorizes a return on equity of 10.0%, an equity ratio of approximately 46.3% and a Missouri jurisdictional rate base of approximately $2.0 billion effective May 4, 2011. If the actual Missouri jurisdiction wholesale margin amount exceeds the $45.9 million level reflected in the MPSC order, the difference will be recorded as a regulatory liability and will be returned, with interest, to KCP&L Missouri customers in a future rate case. The MPSC order provides the opportunity for KCP&L to retain a larger amount of non-firm wholesale electric sales margin than KCP&L proposed; however, there are no assurances that KCP&L will achieve the $45.9 million wholesale margin offset amount and there are no means for KCP&L to recover any shortfall through its retail rates unless the MPSC authorizes future recovery.

As a result of disallowances in the April 2011 MPSC order, KCP&L recognized losses of $1.5 million for construction costs related to Iatan No. 2 and the Iatan No. 1 environmental project during 2011. KCP&L also recorded a $2.4 million loss for other disallowed costs in the MPSC order.

In a related order, the MPSC required KCP&L and GMO to apply to the Internal Revenue Service (IRS) to reallocate approximately $26.5 million of Iatan No. 2 qualifying advance coal project tax credits from KCP&L to GMO. KCP&L and GMO did apply to the IRS but in September 2011, the IRS denied KCP&L’s and GMO’s request. The MPSC has indicated it will consider the ratemaking treatment of the tax credits in a future rate case. Certain ratemaking treatments that may be pursued by the MPSC could trigger the loss or repayment to the IRS of a portion of unamortized deferred investment tax credits. At December 31, 2011, KCP&L and GMO had $127.9 million and $3.3 million, respectively, of unamortized deferred investment tax credits.

GMO Missouri Rate Case Proceedings

On February 27, 2012, GMO filed an application with the MPSC to request an increase of its retail rates of $58.3 million for its Missouri Public Service division and $25.2 million for its L&P division, with a return on equity of 10.4% and a rate-making equity ratio of 52.5%. The requests include recovery of costs related to improving and maintaining infrastructure to continue to be able to provide reliable electric service, costs related to energy efficiency and demand side management programs, and increased fuel costs.

In December 2011, GMO filed a request with the MPSC seeking to recover costs for new and enhanced energy efficiency and demand side management programs under the Missouri Energy Efficiency Investment Act (MEEIA). If approved, the costs would be recovered through a rider mechanism and GMO would reduce its request to increase retail rates that it filed with the MPSC on February 27, 2012. A decision on the MEEIA request is expected in the second quarter of 2012.

On May 4, 2011, the MPSC issued an order and on May 10, 2011, the MPSC Staff filed a report which quantified authorized revenue increases on an annual basis of $30.1 million for GMO’s Missouri Public Service division and $29.3 million for GMO’s St. Joseph Light & Power (L&P) division. The MPSC order authorized a return on equity of 10.0%, an equity ratio of approximately 46.6% and a Missouri jurisdictional rate base of $1.76 billion. In response to applications for clarification and rehearing of the MPSC order, the MPSC on May 27, 2011, issued an order of clarification and modification. The modified MPSC order revised the authorized annual revenue increases to approximately $35.7 million for GMO’s Missouri Public Service division and approximately $29.8 million for GMO’s L&P division, resulting primarily from a clarification of the amount of fuel costs shifted from GMO’s fuel adjustment clause to base rates. However, because the MPSC authorized an annual revenue increase that was greater than the amount originally requested by GMO for its L&P division and communicated to GMO’s L&P customers, the modified MPSC order deferred approximately $7.7 million of the L&P division increase, which is the amount over GMO’s requested $22.1 million increase for that division, and will phase in the deferred revenue amount in equal parts over a two-year period, plus carrying costs. In addition, GMO shall be allowed to recover the revenue which would have been allowed in the absence of a phase in.

As a result of disallowances in the May 2011 MPSC order, GMO recognized losses of $0.8 million for construction costs related to Iatan No. 2 and the Iatan No. 1 environmental project during 2011. GMO also recorded a $1.5 million loss for other disallowed costs in the MPSC order.

Additionally, with respect to GMO’s Missouri Public Service division, the MPSC concluded that GMO’s decision to add Crossroads Energy Center (Crossroads) to its generation asset resources was prudent and reasonable; however, the order disallowed from rate base approximately $50 million for Crossroads, disallowed $4.9 million in associated annual transmission expense and offset rate base by approximately $15 million to reflect accumulated deferred taxes associated with Crossroads. GMO’s request included a net plant amount of approximately $104 million for Crossroads. In assessing the impact of the Crossroads disallowances, management considered that KCP&L’s and GMO’s generation asset resources include a diverse fuel mix consisting primarily of coal and nuclear fuel providing base load generation with natural gas facilities such as Crossroads to provide critical peaking and capacity support. This combined collection of generating assets meets KCP&L’s and GMO’s service obligations and produces joint cash flows based on system-wide average costs. Great Plains Energy conducted an analysis to assess the recoverability of the combined collection of generation asset resources and determined that no potential impairment exists.

The rates established by the modified MPSC order took effect on June 25, 2011. On June 24, 2011, GMO filed its appeal of the MPSC order with the Cole County, Missouri, Circuit Court regarding the Crossroads issues discussed above. Other parties to the case have also filed appeals of the MPSC order. However, the rates authorized by the modified MPSC order will be effective unless and until modified by the MPSC or stayed by a court.

GMO Fuel Adjustment Clause (FAC) Prudence Review

GMO’s electric retail rates contain an FAC tariff under which 95% of the difference between actual fuel cost, purchased power costs and off-system sales margin and the amount provided in base rates for these costs is passed along to GMO’s customers. The MPSC requires prudence reviews of the FAC no less frequently than at 18-month intervals. On November 28, 2011, the MPSC staff filed its prudence review report for the 18-month prudence review period covering June 1, 2009 through November 30, 2010. The MPSC staff recommended to the MPSC to order GMO to refund approximately $19 million, plus interest, to customers through an adjustment to its FAC because the MPSC staff asserts that GMO was imprudent in its use of natural gas hedges to mitigate risk associated with its future purchases in the spot power market. GMO is disputing the MPSC staff’s claim of imprudence and filed its testimony on February 22, 2012. A hearing is scheduled for May 16 – 17, 2012, with an order expected in June 2012.

SPP and NERC Inquiries

The Southwest Power Pool, Inc. (SPP) conducted a compliance inquiry regarding a transmission system outage that occurred in the St. Joseph, Missouri area in the summer of 2009. The North American Electric Reliability Corporation (NERC) is also investigating the circumstances surrounding this transmission system outage. The outcome of the outage inquiry cannot be predicted at this time.

Regulatory Assets and Liabilities

Great Plains Energy and KCP&L have recorded assets and liabilities on their consolidated balance sheets resulting from the effects of the ratemaking process, which would not otherwise be recorded if the Companies were not regulated. Regulatory assets represent incurred costs that are probable of recovery from future revenues. Regulatory liabilities represent future reductions in revenues or refunds to customers.

Management regularly assesses whether regulatory assets and liabilities are probable of future recovery or refund by considering factors such as decisions by the MPSC, KCC or FERC in KCP&L’s and GMO’s rate case filings; decisions in other regulatory proceedings, including decisions related to other companies that establish precedent on matters applicable to the Companies; and changes in laws and regulations. If recovery or refund of regulatory assets or liabilities is not approved by regulators or is no longer deemed probable, these regulatory assets or liabilities are recognized in the current period results of operations. The Companies’ continued ability to meet the criteria for recording regulatory assets and liabilities may be affected in the future by restructuring and deregulation in the electric industry or changes in accounting rules. In the event that the criteria no longer applied to any or all of the Companies’ operations, the related regulatory assets and liabilities would be written off unless an appropriate regulatory recovery mechanism were provided. Additionally, these factors could result in an impairment on utility plant assets. Great Plains Energy’s and KCP&L’s regulatory assets and liabilities are detailed in the following tables.


							Great
December 31, 2011	KCP&L			GMO			Plains Energy
Regulatory Assets	(millions)
Taxes recoverable through future rates	$	119.6		$	24.6		$	144.2
Loss on reacquired debt		9.1	(a)		2.7	(a)		11.8
Cost of removal		4.6			-			4.6
Asset retirement obligations		31.4			13.8			45.2
Pension and post-retirement costs		466.4	(b)		122.0	(b)		588.4
Deferred customer programs		48.2	(c)		20.6			68.8
Rate case expenses		9.6	(d)		3.8	(d)		13.4
Skill set realignment costs		3.4	(e)		-			3.4
Fuel adjustment clauses		14.0	(d)		36.4	(d)		50.4
Acquisition transition costs		24.7	(f )		20.2	(f )		44.9
Derivative instruments		-			7.6	(g)		7.6
Iatan No. 1 and Common facilities depreciation and carrying costs		16.4			6.1			22.5
Iatan No. 2 construction accounting costs		27.9			15.4			43.3
Kansas property tax surcharge		3.7	(d)		-			3.7
Other		1.7	(h)		4.3	(h)		6.0
Total	$	780.7		$	277.5		$	1,058.2
Regulatory Liabilities
Emission allowances	$	82.0		$	0.2		$	82.2
Asset retirement obligations		49.3			-			49.3
Pension		0.7			40.8			41.5
Cost of removal		-			61.9	(i)		61.9
Other		10.8			22.8			33.6
Total	$	142.8		$	125.7		$	268.5

(a)	Amortized over the life of the related new debt issuances or the remaining lives of the old debt issuances if no new debt was issued.

(b)

Represents unrecognized gains and losses, prior service and transition costs that will be recognized in future net periodic pension and post-retirement costs, pension settlements amortized over various periods and financial and regulatory

accounting method differences not included in rate base that will be eliminated over the life of the pension plans.

(c)	$10.4 million not included in rate base and amortized over various periods.

(d)	Not included in rate base and amortized over various periods.

(e)	$2.4 million not included in rate base and amortized through 2017.

(f)	Not included in rate base and amortized through 2016.

(g)	Represents the fair value of derivative instruments for commodity contracts. Settlements of the contracts are recognized in fuel expense and included in GMO’s FAC.

(h)	Certain insignificant items are not included in rate base and amortized over various periods.

(i)	Estimated cumulative net provision for future removal costs.


					Great
December 31, 2010	KCP&L		GMO		Plains Energy
Regulatory Assets	(millions)
Taxes recoverable through future rates	$	117.2	$	25.3	$	142.5
Loss on reacquired debt		5.0		0.7		5.7
Cost of removal		8.5		-		8.5
Asset retirement obligations		27.5		12.8		40.3
Pension and post-retirement costs		386.1		106.7		492.8
Deferred customer programs		44.7		15.6		60.3
Rate case expenses		12.3		3.3		15.6
Skill set realignment costs		4.8		-		4.8
Fuel adjustment clauses		8.4		37.1		45.5
Acquisition transition costs		29.3		22.5		51.8
Derivative instruments		-		3.1		3.1
Iatan No. 1 and Common facilities depreciation and carrying costs		15.1		4.3		19.4
Iatan No. 2 construction accounting costs		17.2		6.5		23.7
Other		3.5		6.5		10.0
Total	$	679.6	$	244.4	$	924.0
Regulatory Liabilities
Emission allowances	$	85.9	$	0.5	$	86.4
Asset retirement obligations		44.9		-		44.9
Pension		-		37.1		37.1
Cost of removal		-		62.8		62.8
Other		10.5		16.5		27.0
Total	$	141.3	$	116.9	$	258.2