No. 85,750
No. 85,757
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
CITIZENS' UTILITY RATEPAYER BOARD,
Petitioner/Appellant,
v.
THE STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS,
Respondent/Appellee.
UTILICORP UNITED INC., d/b/a PEOPLES NATURAL GAS
and KANSAS PUBLIC SERVICE,
Cross-petitioner/Appellant,
v.
THE STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS,
Respondent/Appellee.
SYLLABUS BY THE COURT
1. To examine whether the Kansas Corporation Commission's action is supported by substantial competent evidence, the record must contain evidence which possesses something of substance and relevant consequence, and which furnishes a substantial basis of fact from which the issues tendered can reasonably be resolved. Where the Commission's findings of fact and conclusions of law are inadequate to disclose the controlling facts or the basis of the court's findings, meaningful appellate review is precluded.
2. It is a well-established principle that all rates fixed by the Kansas Corporation Commission are prima facie reasonable unless or until changed or modified by the Commission or by court order. However, the presumption of validity which attaches is measured by the conditions then existing. The Commission is not precluded from considering changed conditions under an application for a rate increase.
3. When a utility seeks an increase in its rates, it bears the burden to show such a change is necessary. However, once a tariff is established, it carries the presumption that it is just and reasonable.
4. K.S.A. 1999 Supp. 66-129 gives the Kansas Corporation Commission the authority to examine, audit, and inspect any and all books, accounts, papers, records, property, and memoranda kept by public utilities and common carriers.
5. The Kansas Corporation Commission has the authority to examine the discount contracts established under a prior tariff and issue such orders as necessary.
6. Pursuant to K.S.A. 66-1,207, all grants of power and authority and jurisdiction herein made to the Kansas Corporation Commission shall be liberally construed, and all incidental powers necessary to carry into effect the provisions of the Natural Gas Public Utilities Act are specifically conferred upon the Commission.
Appeal from Kansas Corporation Commission. Opinion filed December 15, 2000. Affirmed.
Walter Hendrix, for petitioner/appellant Citizens' Utility Ratepayer Board.
Robert A. Fox, Dana Bradbury Green, James D. Oliver, of Foulston & Siefkin L.L.P., of Topeka, for cross-petitioner/appellant UtiliCorp United Inc., d/b/a Peoples Natural Gas and Kansas Public Service.
Caroline Ong, advisory counsel, Glenda Cafer, general counsel, and Anne E. Tymeson, staff attorney, of the Kansas Corporation Commission, for appellee.
Before KNUDSON, P.J., RULON and GREEN, JJ.
KNUDSON, J.: In this consolidated appeal, the Citizens' Utility Ratepayers Board (CURB) and UtiliCorp United, Inc., (UC) appeal from orders of the Kansas Corporation Commission (Commission) granting UC a rate increase. Appellate jurisdiction is conferred upon this court in K.S.A. 1999 Supp. 66-118a(b).
CURB contends the Commission's final orders are not supported by adequate findings of fact and were entered without appropriate consideration or investigation of UC's flexible rate practices. UC contends the Commission erroneously determined UC's cost of debt to finance its Kansas natural gas public utility divisions.
We affirm the Commission's final orders.
UC is a natural gas public utility engaged in the purchase, transmission, sale, and distribution of natural gas. In October 1999, UC filed a request for a rate increase on behalf of its two Kansas natural gas public utility divisions, Peoples Natural Gas Company (PNG) and Kansas Public Service (KPS). UC requested an increase of $5,884,389 based on a test year ending December 31, 1998. It subsequently revised its request to $6,025,413 because of various inadvertent omissions in the original request.
In addition to CURB, several other parties were allowed to intervene in the proceedings before the Commission, including Mountain Energy Corporation, the Department of Student Housing at the University of Kansas (KU), Kansas Gas Service Company, and the City of Garden City. CURB is a statutorily authorized volunteer consumer advocacy group which represents the interests of Kansas residential and small commercial ratepayers. See K.S.A. 66-1222. None of the intervenors other than CURB is a party in these appeals.
The Commission staff (Staff) position was that based upon its review of the test year, UC should be allowed a revenue increase of $1,316,701. CURB argued that the Commission should reduce UC's revenue by $3,002,508.
All parties supplied the Commission with direct and rebuttal testimony prior to the rate hearing. At the beginning of the technical hearing, UC and Staff presented a nonunanimous stipulation and settlement agreement (S&A), agreeing to settle most of the issues except for those relating to imputation of revenue relative to UC's discount contracts, cost of UC's debt issues, rate design, as well as aggregations and pooling issues. CURB did not agree to the S&A.
Not until all of the evidence was presented did the Commission decide to adopt the S&A. It also rejected Staff's and CURB's recommendations for revenue imputation as a result of discount contracts, rejected UC's position on the cost of debt, rejected UC's request to increase the charges associated with aggregation pooling charges, and ruled on a number of other issues not before us. UC, CURB, and KU filed timely motions to reconsider. The Commission made modifications in its original order and approved a revenue increase for UC of $4,779,351. Both CURB and UC appeal.
Our general standard of review is stated in K.S.A. 77-621. A party challenging the legality of the Commission's orders bears the burden of proof pursuant to K.S.A. 77-621(a)(1). See Farmland Industries, Inc. v. Kansas Corporation Comm'n, 24 Kan. App. 2d 172, 175, 943 P.2d 470, rev. denied 263 Kan. 855 (1997).
"If KCC action is constitutionally authorized by statute, it is presumed valid on review unless it is not supported by substantial competent evidence and is so wide of its mark as to be outside the realm of fair debate, or is otherwise unreasonable, arbitrary, or capricious and prejudices the parties." Zinke & Trumbo, Ltd. v. Kansas Corporation Comm'n, 242 Kan. 470, 475, 749 P.2d 21 (1988).
CURB'S APPEAL
Commission Adoption of the S&A
CURB contends the Commission did not make sufficient findings of fact in adopting the nonunanimous S&A. Unquestionably, the Commission may accept a nonunanimous settlement agreement provided an independent finding is made, supported by substantial evidence in the record as a whole, that the settlement will establish just and reasonable rates. Farmland Industries, 24 Kan. App. 2d at 186-87.
K.A.R. 82-1-232 provides rules of form and content for orders of the Commission. K.A.R. 82-1-232(a)(3) states that each order of the Commission shall contain "[a] concise and specific statement of the relevant law and basic facts which persuade the commission in arriving at its decision."
"The purpose of findings of fact as mandated by K.A.R. 82-1-232(a)(3) is to facilitate judicial review and to avoid unwarranted judicial intrusion into administrative functions. The Commission must, therefore, express the basic facts upon which it relied with sufficient specificity to convey to the parties, and to the courts, an adequate statement of facts which persuaded the Commission to arrive at its decision. [Citations omitted.]" Ash Grove Cement Co. v. Kansas Corporation Commission, 8 Kan. App. 2d 128, 132, 650 P.2d 747 (1982).
The Kansas Supreme Court has construed the Commission's procedural requirements to mean findings need not be rendered in minute detail. However, findings must be specific enough to allow judicial review of the reasonableness of the order. To guard against arbitrary action, conclusions of law must be supported by findings of fact which are in turn supported by evidence in the record. Zinke & Trumbo, 242 Kan. at 475.
To examine whether the Commission's action is supported by substantial competent evidence, K.S.A. 77-621(c)(7), the record must contain evidence "which possesses something of substance and relevant consequence, and which furnishes a substantial basis of fact from which the issues tendered can reasonably be resolved." Southwestern Bell Tel. Co. v. Kansas Corporation Commission, 4 Kan. App. 2d 44, 46, 602 P.2d 131 (1979), rev. denied 227 Kan. 927 (1980).
Where the trial court's (or the Commission's) findings of fact and conclusions of law are inadequate to disclose the controlling facts or the basis of the court's findings, meaningful appellate review is precluded. Tucker v. Hugoton Energy Corp., 253 Kan. 373, 378, 855 P.2d 929 (1993).
In its original order, Order No. 8, the Commission made the following findings regarding the S&A:
"6. UtiliCorp and Staff presented witnesses in support of the S&A. [Citation omitted.] The only party opposing the S&A was CURB. [Citations omitted.]
"7. There is a strong policy in the law that settlements are to be encouraged. Bright v. LSI Corp., 254 Kan. 853, 858, 869 P.2d 686 (1994). The Commission has the power to consider non-unanimous settlement agreements and can accept such settlements if it finds the proposed settlement to be reasonable. Farmland Industries, Inc. v. Kansas Corporation Comm'n, 24 Kan. App. 2d 172, 186-88, 943 P.2d 470 (1997).
"8. The Commission notes that CURB's statutory obligation is to represent residential and small commercial customers, while the Commission's responsibility is to take a broader view that also considers the interests of any intervenors in the case, all classes of ratepayers, and the stockholders of the utility. [Citation omitted.]
"9. The Commission finds that, on balance, the S&A represents a reasonable settlement of the issues it addresses. The rate options in the S&A are within the litigation positions of Staff and UtiliCorp. [Citations omitted.] Staff indicates that it had considered the possibility that some of its requested adjustments may not have been accepted by the Commission. [Citation omitted.] Parties face uncertainty when litigating issues, and a settlement agreement will reflect acknowledgement of that risk and of the hazards of litigation. See 24 Kan. App. 2d at 194-95. It is evident that the terms of the settlement were zealously negotiated. The fact that the parties could not resolve all issues indicates to the Commission that they were not seeking an agreement at any cost, but were carefully deciding where compromise was possible and where their positions could not be altered. UtiliCorp emphasizes the reasonableness and fairness of the rates agreed to in the S&A when compared to current rates for other natural gas local distribution companies. [Citation omitted.] Based on its familiarity with the industry and the evidence in the record as a whole, the Commission finds that the settlement will establish just and reasonable rates. The Commission also finds that the settlement provides for depreciation and corporate overhead allocation studies which will assist the Commission in monitoring the utility and will benefit future ratepayers. Having considered the terms of the S&A, the Commission concludes that it is reasonable and in the public interest. The May 16, 2000 S&A is accepted and approved."
Upon CURB's petition to reconsider, the Commission in Order No. 9 stated:
"10. CURB argues that the Commission did not make sufficient findings to support its approval of the S&A. The Commission met the applicable standard for approving the S&A by finding that the S&A reasonably resolved the issues it addressed and that the resulting rates would be within a range of reasonableness. As noted in ¶8 of Order No. 8, the Commission's obligation to balance the interests of all affected parties is broader than CURB's responsibility in representing residential and small commercial ratepayers. The Commission's oral ruling on the S&A, made at the conclusion of the hearing, did recognize CURB's evidence, but found that on the whole, given the Commission's responsibility to all parties, the S&A was reasonable and in the public interest."
As noted by CURB, Kansas law does require more than a mere pronouncement a settlement is reasonable. In Southwestern Bell Tel. Co. v. State Corporation Commission, 192 Kan. 39, 46-47, 386 P.2d 515 (1963), the Supreme Court stated:
"In a seriously contested rate investigation there must be a determination of (1) a rate base, (2) a fair rate of return, and (3) reasonable operating expense. In determining these factors, there are numerous elements pertaining to each which must be fairly and reasonably determined if a fair return is to result."
While the better practice would have been for the Commission to provide more detailed findings of fact, we believe CURB's contention is without legal merit because the Commission did not accept the S&A until after a full evidentiary hearing on the merits of UC's application for a rate increase. This is not a situation where the stipulation impermissibly shifted the burden of proof or prevented CURB from presenting evidence in opposition to the S&A. The Commission weighed the evidence pro and con that had been presented and only then decided to adopt the S&A as reasonable. We also observe the S&A is limited in scope. It addressed issues of depreciation, corporate overhead allocation, capitalization ratios, sales-based pressures, consolidation of small customer classes, miscellaneous service fees, as well as customer deposits and interest charges. According to the testimony, it also included issues relating to weather normalization calculations and various accounting methodologies. As previously noted, it did not include agreements on revenue imputation, cost of debt, aggregation and pooling issues, or daily imbalance penalties. Finally, our review of Staff Schedule C-1, adopted by implication by the Commission, together with the S&A, demonstrates the Commission did fully consider the essential determinants of (1) a rate base, (2) a fair rate of return, and (3) reasonable operating expense. Thus, after a thorough review of the record, the Commission's findings of fact, including the specifics within the adopted S&A, are supported by substantial competent evidence.
UC's Discounting Practices
CURB contends the Commission erred in refusing to impute income to offset lost revenues resulting from UC's practice of providing large customers with discount contracts, a practice countenanced by the Commission in a previously approved tariff. This approved tariff authorizes UC to negotiate and provide flexible rates to large customers who might otherwise leave the system. According to Staff, the difference between the revenues UC would have collected during the test year if these discount customers had been charged the full fixed tariff rate is approximately $6 million; coincidentally, this is the amount now sought by UC in its application for a rate increase.
At the underlying rate hearing, CURB argued for a 100% imputation of revenues "lost" as a result of flexible rates; Staff argued for a 50% imputation. Clearly, both CURB and Staff were concerned that residential and small commercial customers should not be burdened with higher rates as a result of UC granting discounts to large customers.
In response, UC argued the Commission had previously approved the flexible tariff and that without discount rates large customers would leave the system. The result would be adverse to the interests of residential and small business customers. Larry Headley, UC's Director of Regulatory Services, testified that Staff's recommendation of a 50-50 split was unreasonable because UC shareholders had shouldered the loss of revenue in the period between the time the discounts were granted and the effective date of the next (this) rate case. Headley explained that as an investor-owned utility, UC was already motivated to maximize its return on investment with discounts given only when load retention was genuinely threatened. Headley also responded to CURB's alternative argument regarding the absence of proof as to whether UC's best efforts had been utilized to minimize the financial impact of discounts. Headley contended that because the discount contracts were pursuant to a previously approved flexible tariff there is a presumption that they are reasonable. Therefore, according to Headley, the burden should be on CURB, not UC, to present evidence that the discounts given were not prudent.
In its initial order the Commission rejected Staff's and CURB's recommendations for revenue imputation. The Commission found imputation arguments must be based on prudence and particular facts of each individual discount service contract. In its order on reconsideration, the Commission stated that at the time UC entered into the discount agreements, they were either approved as special contracts or were in compliance with approved tariffs. It went on to say that the time to challenge the flexible rate tariffs and special contracts was when they were initially filed for review. The Commission noted that the rates charged under these agreements are prima facia reasonable and, pursuant to K.S.A. 66-115, the party challenging the prudence of such agreements bears the burden of overcoming the presumption of reasonableness. The Commission went on to note that CURB had not provided sufficient evidence that any of the agreements were imprudent.
K.S.A. 66-115 provides:
"Except as otherwise provided in K.S.A. 66-117 and amendments thereto, all orders, regulations, practices, services, rates, fares, charges, classifications, tolls, and joint rates fixed by the commission shall be in force and effect 30 days after service, and shall be prima facie reasonable unless, or until, changed or modified by the commission or in pursuance of proceedings instituted in court as provided in this act."
It is a well-established principle that all rates fixed by the Commission are prima facie reasonable unless or until changed or modified by the Commission or by court order. Southwestern Bell Tel Co., 4 Kan. App. 2d at 47. However, the presumption of validity which attaches is measured by the conditions then existing. This would not preclude the Commission from considering changed conditions under an application for a rate increase. Midwest Gas Users Ass'n v. Kansas Corporation Commission, 5 Kan. App. 2d 653, 661, 623 P.2d 924, rev. denied 229 Kan. 670 (1981).
CURB contends UC failed to provide documents and corporate records to support CURB's claim of imprudence. The Commission noted CURB had made its discovery request less than 2 weeks prior to the hearing. The Commission ruled CURB should have filed a motion to compel production if it was dissatisfied with UC's initial response.
When a utility seeks an increase in its rates, it bears the burden to show such a change is necessary. Kansas-Nebraska Natural Gas Co. v. State Corporation Commission, 217 Kan. 604, 615, 538 P.2d 702 (1975). However, once a tariff is established, it carries the presumption that it is just and reasonable. K.S.A. 1999 Supp. 66-117. It would appear CURB should have the burden to show that the discount agreements were not reasonable to justify any imputation of income to UC.
CURB was apparently acting under the assumption that UC would have to provide such data with its rate request. When it determined that such data was not provided and that the Commission was not requiring the data be provided in the application, CURB made a request of UC for the data. UC filed its request for rate increase in October 1999. However, CURB did not ask for any documentation supporting the prudence of the discount contracts until May 4, 2000, or approximately 12 days before the start of the public hearings. CURB apparently did not ask for additional information after UC responded to CURB's request.
David Springe, an economist, testifying on behalf of CURB, stated he did submit a lengthy data request for analysis on the discount contracts but the responses were not adequate. On cross-examination, he testified that CURB's position was the captive ratepayers should not pay for any of UC foregone revenue. Further, since CURB's position was that UC should have to prove the contracts were prudent, Springe believed UC's inadequate response to the data request strengthened CURB's case that UC had not done any analysis prior to granting the discounts.
The Commission found that the flexible tariffs were presumptively reasonable and CURB had not carried its burden to come forward with evidence to show they were not. This is a negative finding. "'[A] negative finding that a party did not carry its requisite burden of proof will not be disturbed on appeal absent proof of an arbitrary disregard of undisputed evidence or some extrinsic consideration such as bias, passion, or prejudice.'" Kansas Pipeline Partnership v. Kansas Corporation Comm'n, 24 Kan. App. 2d 42, 52, 941 P.2d 390, rev. denied 262 Kan. 961 (1997) (quoting Beech Aircraft Corp. v. Kansas Human Rights Comm'n, 254 Kan. 270, 275, 864 P.2d 1148 [1993]).
CURB erroneously assumed that UC would be required to present the data ultimately requested as part of its application for a rate increase. When CURB did request the data and determined UC's production was inadequate, CURB's remedy was to file a motion to compel. Although the Commission could have ordered UC to provide the data regarding the discount contracts upon the untimely and unorthodox request of CURB, it was certainly not required to do so. The Commission correctly placed the burden of proof upon CURB and did not abuse its discretion in denying CURB's untimely request for further production of documents.
CURB also claims the Commission failed its regulatory oversight responsibilities by not reviewing the discount contracts entered into by UC with certain customers under the previously approved flexible rate tariff.
CURB cites Colorado-Ute Elec. v. Public Utilities, 760 P.2d 627 (Colo. 1988) for the position that the Commission had an affirmative duty to investigate UC's contracts. In that case, the Colorado Supreme Court held that the Public Utilities Commission (PUC) had the authority to investigate and hold hearings concerning utility rates. 760 P.2d at 636. In construing the Colorado statutes, the court held that "under certain circumstances the Commission is required to investigate a tariff change." 760 P.2d at 638. The language CURB wishes this court to adopt comes from that portion of the decision dealing with allocation of $24 million of electric generation fixed costs (demand costs) to the energy component of the demand-energy rate. 760 P.2d at 645. The Colorado Supreme Court affirmed the district court's ruling that there was insufficient evidence to support such a shift. 760 P.2d at 647. The court then stated:
"We have held that where an order of the Commission is issued solely as a matter of administrative convenience, or in the absence of sufficient investigation into pertinent considerations, the order is arbitrary, capricious, and invalid. City of Montrose v. Public Utilities Comm'n, 197 Colo. 119, 123, 590 P.2d 502, 505-06 (1979) (commission's order arbitrary and capricious, where no study commissioned regarding cost-of-service breakdown, although study was feasible, and no discussion in commission's order of disparate service cost; therefore, order issued solely as a matter of administrative convenience). Further, orders of the Commission which are arbitrary and capricious must be set aside. Peoples Natural Gas Div. v. Public Utilities Comm'n, 698 P.2d 255, 265 (Colo. 1985) . . . .
"The same factors which cause us to conclude that the Commission's conclusions are not supported by substantial evidence, also lead us to find this portion of the Commission's decision arbitrary and capricious. The proposed shift to demand costs represents little more than an ad hoc and unsupported analytical shortcut invented and adopted simply because the necessary rate design studies had not been performed by the Commission staff. The evidence clearly shows that such a study was entirely feasible, had the staff collected the necessary data. The district court, therefore, was fully justified in holding that this portion of the Commission's order was arbitrary and capricious." 760 P.2d 648.
A close reading of the facts of Colorado-Ute Elec. convinces us the Colorado PUC adopted a method of classifying certain demand costs that was contrary to its own cost-of-service study. The only testimony in the record indicated the rate eventually adopted could not be supported, either in outside literature or by Staff's own studies. In fact, the witness testified he was unaware of any other case where the Commission had proposed such an approach.
In the instant case, the Commission did consider whether revenue should be imputed to make up for revenue lost as a result of discounting in prior rate cases. Thus, unlike the case in Colorado-Ute Elec., this was not a new or unstudied procedure. Also, this case is different in that UC's discounts were granted pursuant to an existing Commission-approved tariff. There was no such prior approval in the Colorado case.
"The KCC is the state regulatory agency with the power and authority to supervise and control intrastate natural gas public utilities doing business in Kansas. See K.S.A. 66-101 et seq." Kansas Pipeline Partnership v. Kansas Corporation Comm'n, 22 Kan. App. 2d 410, 412, 916 P.2d 76, rev. denied 260 Kan. 994 (1996). K.S.A. 1999 Supp. 66-129 gives the Commission the authority to examine, audit, and inspect any and all books, accounts, papers, records, property, and memoranda kept by public utilities and common carriers. Although not cited by either party, K.S.A. 1999 Supp. 66-1,204 provides:
"The commission, upon its own initiative, may investigate all schedules of rates and rules and regulations of natural gas public utilities. If after investigation and hearing the commission finds that such rates or rules and regulations are unjust, unreasonable, unjustly discriminatory or unduly preferential, the commission shall have the power to establish and order substituted therefor such rates and such rules and regulations as are just and reasonable.
"If after investigation and hearing it is found that any regulation, measurement, practice, act or service complained of is unjust, unreasonable, unreasonably inefficient or insufficient, unduly preferential, unjustly discriminatory, or otherwise in violation of this act or of the orders of the commission, or if it is found that any service is inadequate or that any reasonable service cannot be obtained, the commission may substitute therefor such other regulations, measurements, practices, service or acts, and make such order respecting any such changes in such regulations, measurements, practices, service or acts as are just and reasonable. When, in the judgment of the commission, public necessity and convenience require, the commission may establish just and reasonable concentration or other special rates, charges or privileges, but all such rates, charges and privileges shall be open to all users of a like kind of service under similar circumstances and conditions. Hearings shall be conducted in accordance with the provisions of the Kansas administrative procedure act, unless, in the case of a general investigation, for good cause, the commission orders otherwise."
See also K.S.A 66-1,201 (Commission is empowered to do all things necessary and convenient to supervise and control the natural gas public utilities).
Authorities have observed that a public service commission, like the Kansas Corporation Commission, "has no inherent power; all its power and jurisdiction, and the nature and extent of the same, must be found within the statutory or constitutional provisions creating it." 64 Am. Jur. 2d, Public Utilities ñ 232, p. 739. However, these provisions should not be construed so narrowly as to defeat their main purpose, but should be liberally construed to include every power fairly to be implied by the language used or necessary to enable the Commission to exercise the powers expressly granted. Street Lighting Co. v. Utilities Commission, 101 Kan. 774, 777, 169 Pac. 205 (1917). In Pelican Transfer & Storage v. Kansas Corporation Commission, 195 Kan. 76, 79, 402 P.2d 762 (1965), the court, interpreting K.S.A. 66-101, which at the time applied to common carriers as well as public utilities, stated that the Commission had full power and authority to regulate common carriers (and presumably utilities) and could do all things necessary and convenient in the exercise of its power. See Grindsted Products, Inc. v. Kansas City Power & Light Co., 21 Kan. App. 2d 435, 443, 901 P.2d 20 (1995). Kansas courts have also recognized that matters concerning public utilities are highly complex, and the Commission is recognized to have vast expertise and discretion in regulating utilities. Kansas Gas & Electric Co. v. Kansas Corporation Comm'n, 239 Kan. 483, 495, 720 P.2d 1063 (1986).
Thus, the Commission does have the authority to examine the discount contracts established under the prior tariff and issue such orders as necessary. The question remains, does the Commission have a duty to investigate the discount agreements?
This is a question of statutory interpretation and, therefore, a question of law. Our standard of review is unlimited. Hamilton v. State Farm Fire & Cas. Co. 263 Kan. 875, 879, 953 P.2d 1027 (1998).
The long-standing rule in this jurisdiction is that when a statute is plain and unambiguous, the court must give effect to the intention of the legislature as expressed rather than determine what the law shoul