24 Kan. App. 2d 42
No. 78,523
KANSAS PIPELINE PARTNERSHIP, Petitioner/Appellant, v. THE STATE CORPORATION COMMISSION OF THE STATE OF KANSAS, Respondent/Appellee, and WESTERN RESOURCES, INC., WILLIAMS NATURAL GAS COMPANY, and CITIZENS UTILITY RATEPAYER BOARD, Intervenors/Appellees.
SYLLABUS BY THE COURT
1. Rules relating to the standard of review on appeal of orders of the Kansas Corporation Commission are set forth and interpreted.
2. The Kansas Corporation Commission has discretion to refuse to hold additional hearings and admit additional evidence on remand.
3. 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.
4. The transfer of a certificate of convenience and necessity from one holder to another transfers only the authority to operate as a public utility. It does not transfer other assets such as net operating losses or market entry costs from one holder to another.
5. Appellate review of a Kansas Corporation Commission rate order is part and parcel of the rate-making process.
6. A decision of the Kansas Corporation Commission establishing a rate is not a final decision until the period for appeal has run and the case has not been appealed or, if the case has been appealed, until the case is finally adjudicated.
7. An order of the Kansas Corporation Commission requiring a public utility to refund a rate which an appellate court has held unlawful is not retroactive rate making. A rate is not lawfully established until the appellate courts have made a final ruling on the matter or the time for appeal from the order has expired with no appeal having been filed.
8. Refund of a rate determined to be unlawful may be ordered regardless of whether a stay of the order was sought or obtained.
9. The Kansas Corporation Commission's approval or allowance of any rate is subject to judicial review. If a rate is determined to have been unlawful by the appellate courts, it is considered to have been unlawful from the date it was authorized. The Kansas Corporation Commission has the authority to order a public utility to refund monies which were overcollected from its customers under excessive and unlawful rates.
Appeal from the Kansas Corporation Commission. Opinion filed June 20, 1997. Affirmed.
Fred J. Logan, Jr., of Logan & Logan, of Prairie Village, and James P. Zakoura and Richard W. Hird, of Smithyman & Zakoura, of Overland Park, for the appellant.
John J. McNish, Janette W. Corazzin, and Larry Cowger, assistants general counsel, of the Kansas Corporation Commission, of Topeka, for the appellee.
J. Michael Peters, associate general counsel, for intervenor Western Resources, Inc.
A. Brady Cantrell, for intervenor Citizens Utility Ratepayer Board.
Kevin M. Fowler and John C. Frieden, of Frieden, Haynes & Forbes, of Topeka, for intervenor Williams Natural Gas Company.
Before BRAZIL, C.J., LEWIS and GREEN, JJ.
LEWIS, J.: This rate case is on its second appeal to this court. On the first appeal, we reversed the decision of the Kansas Corporation Commission (KCC) and remanded it for additional findings. This appeal is from the decision reached by the KCC on remand.
The petitioner/appellant is Kansas Pipeline Partnership (KPP), which strongly disagrees with the decision of the KCC on remand. At the time of the original rate hearings in 1994, KPP was associated in interest with Kansas Natural Partnership (KNP). At that time and in our first opinion, we referred to KPP and KNP as the "Joint Applicants." KPP and KNP have now merged under the name of KPP. Technically speaking, they are no longer Joint Applicants. However, for the purposes of continuity, we shall continue to refer to KPP and KNP as the Joint Applicants.
The respondent/appellee is the KCC, from whose order this appeal is being pursued.
There are several intervenors, all of whom appear to be united in interest in urging us to affirm the most recent decision of the KCC. They are Williams Natural Gas Company, which was the petitioner on the first appeal; Western Resources, Inc., which was not a party to the first appeal; and the Citizens Utility Ratepayer Board, which was also not a party to the first appeal. The intervenors have all filed briefs on this appeal and were granted the opportunity to deliver oral argument to this court.
As pointed out above, all parties except the Joint Applicants argue in favor of the KCC decision on remand. The Joint Applicants strongly argue that the KCC's order is in error and should be reversed.
Our original decision in this case is reported in Williams Natural Gas Co. v. Kansas Corporation Comm'n, 22 Kan. App. 2d 326, 916 P.2d 52, rev. denied 260 Kan. ___ (1996). Those interested are referred to that opinion for a detailed statement of the facts involved on the first appeal and, to an extent, on this appeal.
In its original rate orders, the KCC permitted the Joint Applicants to add to their rate base and to recover through the rates approved certain "market entry costs" incurred by Phenix Transmission Company (Phenix) and by Kansas Pipeline Company, L.P. (KPCLP). A total of $12.95 million in market entry costs was permitted to be added to the rate base of the Joint Applicants. Of this, some $10 million came from or was incurred by Phenix, and $2.95 million came from or was incurred by KPCLP. In addition to those market entry costs, another $1 million in carrying costs was permitted to be added to the rate base in connection with the market entry costs incurred by KPCLP. These market entry costs are in the nature of net operating losses incurred by Phenix and KPCLP.
In the original rate proceedings, one of the commissioners dissented from the order and said, among other things: "Simply stated, the joint applicants did not experience the $10.5 and $2.95 million shortfall nor did they assume any part of a debt that represents these sums. It stretches the bounds of intellectual integrity, albeit a most creative effort, that one could characterize the shortfalls and projected earnings on revenues as an asset."
We agreed with those comments. Our examination of the record did not reveal any evidence to show that the Joint Applicants had either acquired or incurred the operating losses of KPCLP or Phenix. Since these losses were all incurred prior to the duration and existence of the Joint Applicants, it seemed quite obvious that the Joint Applicants could not possibly have incurred the costs in question.
We reversed the KCC's rate order and remanded it for additional findings. In doing so, we held in Syl. ¶ 3 as follows: "The Kansas Corporation Commission has no power to permit an entity to add to its rate base or otherwise recover costs which were not incurred by that entity but were incurred by a previous unrelated entity and were not later acquired by the entity seeking recovery of such costs." 22 Kan. App. 2d 326. Since we were not then and are not now finders of fact, we reversed the orders of the KCC relating to the allowance of market entry costs and remanded the case for additional findings. Specifically, we held:
| "The orders authorizing the Joint Applicants to recover market entry costs and carrying costs are reversed. The matter is remanded to the KCC with the following directions:
"(1) The KCC must determine if, when, and how the Joint Applicants acquired market entry costs incurred by two unrelated entities prior to the formation of the Joint Applicants. If necessary, the KCC may hold additional hearings and may receive additional evidence on the issues in question.
"(2) If the market entry costs were neither incurred nor acquired by the Joint Applicants, the KCC shall not permit such costs to be added to the Joint Applicants' rate base or recovered by Joint Applicants in any fashion.
"(3) In the event the KCC finds that the market entry costs and carrying costs were acquired by the Joint Applicants, the KCC should restore its earlier orders authorizing recovery of those costs." 22 Kan. App. 2d at 339.
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REMAND
In our order of remand, we did not require the KCC to follow any specific procedures in determining the issues remanded. We required a determination of certain facts, but we left the method of that determination to the KCC. Specifically, we left it to the discretion of the KCC whether to hold additional hearings or to receive additional evidence. 22 Kan. App. 2d at 339.
The KCC resolved the issues remanded without holding additional evidentiary hearings and without hearing additional evidence. The Joint Applicants requested a hearing and a prehearing conference on remand. This request was denied. The parties were given the opportunity to file original and responsive briefs on the questions to be decided.
The Joint Applicants requested the right to offer additional evidence on the subject at hand and eventually made a specific proffer of additional evidence. The KCC denied this request and determined the issues on remand without receiving additional evidence.
After the briefing process had been completed, the KCC issued its order on remand in which it found that the Joint Applicants did not incur or acquire the market entry costs of Phenix or KPCLP. The net effect of this finding was that the original rates authorized by the KCC and collected by the Joint Applicants were illegal. Accordingly, the KCC ordered the Joint Applicants to refund to their customers that portion of any rates collected which represented the inclusion of the disallowed market entry costs in the rate base. Commissioner Susan Seltsam dissented from these decisions.
The Joint Applicants filed a timely motion for reconsideration, which was denied. The KCC then issued two nunc pro tunc orders which corrected errors or admissions in the earlier orders. The Joint Applicants filed a second motion for reconsideration. Although the KCC has never formally ruled on this second motion, it is deemed denied because a petition for reconsideration which is not ruled on within 20 days of its filing is deemed denied by operation of law. K.S.A. 1996 Supp. 77-529(b).
Having exhausted its administrative remedies, the Joint Applicants filed a timely petition for judicial review with this court.
JURISDICTION
There has been no challenge by either party or any of the intervenors to the jurisdiction of this court.
We have, nevertheless, considered the issue and hold that we have jurisdiction to decide the issues raised on appeal.
On the question of jurisdiction, we conclude as follows: (1) The Joint Applicants have exhausted their administrative remedies. (2) The application for judicial review was timely filed. (3) Pursuant to K.S.A. 1996 Supp. 66-118a(b), this court has exclusive jurisdiction to review any agency action of the KCC arising from a rate hearing requested by a public utility. (4) The Joint Applicants are natural gas distributing companies and are, therefore, public utilities pursuant to K.S.A. 66-104. (5) All the necessary statutory requirements have been complied with in order to vest this court with exclusive jurisdiction to decide the issues raised on appeal.
STANDARD OF REVIEW
Pursuant to K.S.A. 66-118c, our review of an order of the KCC is in accordance with the Act for Judicial Review and Civil Enforcement of Agency Actions (KJRA). The Joint Applicants argue that the KCC erroneously interpreted or applied the law, that the KCC's order is not supported by substantial evidence, and that the KCC's decision is otherwise unreasonable, arbitrary, or capricious.
K.S.A. 77-621 states, in relevant part:
| "(a) Except to the extent that this act or another statute provides otherwise:
(1) The burden of proving the invalidity of agency action is on the party asserting invalidity; and
(2) the validity of agency action shall be determined in accordance with the standards of judicial review provided in this section, as applied to the agency action at the time it was taken.
. . . .
"(c) The court shall grant relief only if it determines any one or more of the following:
. . . .
(4) the agency has erroneously interpreted or applied the law;
. . . .
(7) the agency action is based on a determination of fact, made or implied by the agency, that is not supported by evidence that is substantial when viewed in light of the record as a whole, which includes the agency record for judicial review, supplemented by any additional evidence received by the court under this act; or
(8) the agency action is otherwise unreasonable, arbitrary or capricious."
|
Operation of the KJRA is discussed in Crawford v. Kansas Dept. of Human Resources, 17 Kan. App. 2d 707, 708, 845 P.2d 703 (1989), rev. denied 246 Kan. 766 (1990):
| "Judicial review of orders of an administrative body is governed by the [KJRA]. The scope of review is stated in K.S.A. 77-621. The agency's findings are presumed valid on review and the agency's order may only be set aside by the district court if it is not supported by substantial competent evidence, is without foundation in fact, or is otherwise unreasonable, arbitrary, or capricious. [Citation omitted.]
"Judicial review is limited to these questions of law. K.S.A. 77-621 does not limit a court's review of an agency's interpretation or application of a matter of law. In reviewing a question of law, a court may substitute its judgment for that of the agency. [Citation omitted.]"
|
Therefore, this court must determine if the issues presented on appeal are questions of fact or questions of law. On questions of fact, the court should merely determine if there is substantial evidence to support the KCC's orders.
| "'Substantial evidence' is defined as evidence which possesses both relevance and substance, and which furnishes a substantial basis of fact from which the issues can reasonably be resolved. [Citation omitted.] Stated another way, substantial evidence is such legal and relevant evidence as a reasonable person might accept as being sufficient to support a conclusion. [Citation omitted.] It is not the function of an appellate court to reweigh the evidence; we are concerned only with the evidence which supports the findings below, and not the evidence which might have supported contrary conclusions. [Citation omitted.]" In re Petition of City of Shawnee for Annexation of Land, 236 Kan. 1, 21, 687 P.2d 603 (1984). |
Further guidance on scope of review is provided in Kansas Gas & Electric Co. v. Kansas Corporation Comm'n, 239 Kan. 483, 496-97, 720 P.2d 1063 (1986):
| "We should next consider the scope of judicial review where an appeal is taken to the courts from an order of the KCC in a rate-making case. The scope of review is discussed in the decision of the Court of Appeals in Midwest Gas Users Ass'n v. Kansas Corporation Commission, 3 Kan. App. 2d 376, 380-81, 595 P.2d 735, rev. denied 226 Kan. 792 (1979), where the court stated:
'K.S.A. 1978 Supp. 66-118d limits judicial review of an order by the commission to determining whether the order is "lawful" or "reasonable." [Citation omitted.] A court has no power to set aside such an order unless it finds that the commission acted unlawfully or unreasonably. [Citation omitted.] An order is "lawful" if it is within the statutory authority of the commission, and if the prescribed statutory and procedural rules are followed in making the order. [Citation omitted.] An order is generally considered "reasonable" if it is based on substantial competent evidence. [Citation omitted.]
'The legislature has vested the commission with wide discretion and its findings have a presumption of validity on review. [Citation omitted.] Since discretionary authority has been delegated to the commission, not to the courts, the power of review does not give the courts authority to substitute their judgment for that of the commission. [Citation omitted.] The commission's decisions involve the difficult problems of policy, accounting, economics and other special knowledge that go into fixing utility rates. It is aided by a staff of assistants with experience as statisticians, accountants and engineers, while courts have no comparable facilities for making the necessary determinations. [Citation omitted.] Hence a court may not set aside an order of the commission merely on the ground that it would have arrived at a different conclusion had it been the trier of fact. It is only when the commission's determination is so wide of the mark as to be outside the realm of fair debate that the court may nullify it. [Citations omitted.]'"
|
"The Commission is vested with wide discretion and its findings have a presumption of validity on review. [Citation omitted.] The Commission is presumed to act fairly, reasonably, and impartially." Southwest Kan. Royalty Owners Ass'n v. Kansas Corporation Comm'n, 244 Kan. 157, 165, 769 P.2d 1 (1989).
As stated above, this court should assume the KCC's actions are valid unless they are unlawful or unreasonable.
MARKET ENTRY COSTS
The Joint Applicants attack the KCC's decision that they did not incur or acquire the market entry costs in question. This attack is bifurcated. On the one hand, they argue that the KCC erred in not reopening the record for additional evidence on the issues presented. On the other hand, and somewhat inconsistently, the Joint Applicants argue that the record, as originally constituted, contains substantial competent evidence to show that they acquired the market entry costs in question and that the KCC findings to the contrary are not supported by substantial competent evidence. It is apparent that these two arguments are mutually irreconcilable.
A. Refusal to reopen record
Even though the Joint Applicants insist there was sufficient evidence in the original record to show that they acquired the market entry costs in question, they also argue that it was error not to reopen the record and allow them to admit even more evidence on the question. We suspect they find themselves in this conundrum because of their desire to "touch all the bases" in an effort to reverse the KCC's orders.
On the question of the reopening of the record, the Joint Applicants appear to suggest that our order of remand required the KCC to admit additional evidence on remand. This is simply untrue and represents a gross misreading of our opinion. We said: "If necessary, the KCC may hold additional hearings and may receive additional evidence on the issues in question." (Emphasis added.) 22 Kan. App. 2d at 339. As the emphasized portion of our opinion shows, we did not require that the KCC hold additional hearings or receive additional evidence. Those questions were left to the discretion of the KCC.
We have examined the record, and we see no abuse of discretion by the KCC in its decision not to reopen the record and not to hear additional evidence.
As the KCC noted:
| "The record made in this proceeding is extensive (the official record contained 17,364 pages reflecting the testimony of 29 witnesses during 17 days of hearings and containing 64 motions, 39 separate orders, 12 post hearing motions, and 11 separate post hearing orders), and the initial briefs and reply briefs have provided substantial assistance in reviewing the record and understanding the arguments for and against the acquisition or incurrence of market entry cost." |
If a party finds itself unable to squeeze all of its evidence on the issue into a record of this size, then it is beyond our help.
The Joint Applicants suggest that whether they incurred or acquired the market entry costs in question was not really an issue explored in the initial 17,364 pages of testimony. We disagree. There was abundant time and space devoted to this issue in those 17,364 pages. In fact, the issue was so significant that Commissioner Timothy McKee made it the sole object of his dissent. The Joint Applicants' argument that market entry costs were not an issue in the original rate hearing is without merit.
During oral argument, the Joint Applicants produced evidence which they proffered to the KCC and suggested to us that this evidence required that the record be reopened. We do not agree. At some point, enough is enough and the record must be closed. We think 17,364 pages of record is enough.
In addition, the regulations specifically addressed when the KCC may reopen the record. The KCC's regulations provide: "After the record of testimony has been closed by the person presiding at the hearing, any party may apply to reopen the record for good cause shown. However, no record shall be reopened for further hearing except upon order of the commission." K.A.R. 82-1-230(l). For purposes of reconsideration, the additional evidence must have either been not available or not known to exist at the time of the hearing. K.A.R. 82-1-235(c)(4). In addition to all of that, the nature and purposes of the evidence must be briefly stated and cannot merely be cumulative. K.A.R. 82-1-235(d). On remand, we cannot find in the record where the Joint Applicants alleged that the additional evidence it sought to proffer on remand was either unavailable or not known to exist at the time of the hearing. Given all the circumstances, KCC's decision not to reopen the record is supported by its regulations.
We note that the Joint Applicants made at least three proffers to the KCC. The first proffer was admittedly generic in nature. The second was only slightly less generic. It was not until the third proffer that the Joint Applicants began to produce substantive documentary evidence. By then, it was apparently too little, too late. We cannot imagine why this evidence was not offered at the original hearing, and the Joint Applicants have not provided a believable answer to that question. To argue that market entry costs really were not an issue and so they did not prove how or when they were acquired is not a reasonable or believable explanation. Market entry costs were an issue, and the Joint Applicants' obligation was to offer all of their best evidence at the original hearing, and they apparently failed to do so.
In summary, we hold that the KCC did not abuse its discretion in refusing to reopen the record and hear additional evidence on the question of the acquisition of the market entry costs.
B. The original record
The next issue was whether the original record supports the findings of the KCC that the Joint Applicants neither incurred nor acquired the market entry costs in question. As pointed out above, the Joint Applicants, having argued that the record should have been reopened, now make that argument irrelevant, insisting that the original record requires a finding that they did acquire or incur the market entry costs of Phenix and KPCLP.
We remanded for findings on the question of whether the Joint Applicants somehow acquired the market entry costs in question.
The Joint Applicants had the burden of proving they were entitled to the rate increase. That included the burden of proving that they somehow acquired the market entry costs of unrelated entities. The KCC on remand made the following findings in its order denying reconsideration:
| "In conclusion, KPP is the applicant in this matter. As such, KPP bears the burden of proving that it is entitled to recover an award of market entry costs. KPP has failed to meet this burden. The Commission finds that the record does not contain evidence demonstrating that KPP either incurred or acquired the so-called market entry costs." |
This is a negative finding and has significant impact on our standard of review: "[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." Beech Aircraft Corp. v. Kansas Human Rights Comm'n, 254 Kan. 270, 275, 864 P.2d 1148 (1993).
In addition, in Chris Hunt Water Hauling Contractor, Inc. v. Kansas Corporation Comm'n, 10 Kan. App. 2d 612, 617, 706 P.2d 825 (1985), we said:
| "While a finding of fact will not be upset on appeal if there is any substantial competent evidence to support it, a negative finding will only be overturned if there is proof of an arbitrary disregard of undisputed evidence or some extrinsic consideration such as bias, passion or prejudice. Lostutter v. Estate of Larkin, 235 Kan. 154, 162-63, 679 P.2d 181 (1984). This is true because a negative finding signifies the failure of the party on whom the burden of proof was cast to sustain it. Since it appears that the commission properly placed the burden of proof on the protestants to show an inconsistency with public convenience and necessity, and that it found that they failed to carry this burden of proof, the negative finding should stand unless there was a disregard of undisputed testimony." |
We see nothing in the record to indicate the KCC was guilty of bias, passion, or prejudice or that it disregarded any undisputed evidence. In short, we see no reason to reverse the finding of the KCC that the Joint Applicants failed to carry their burden of proof.
The KCC made specific and extensive factual findings on the question of whether the Joint Applicants acquired the market entry costs in question. We have reviewed those findings and conclude that they are supported by substantial competent evidence.
The Joint Applicants argue that the KCC ignored its own accounting orders, which they suggest preserve the market entry costs as further regulatory assets. We disagree with that proposition. The KCC dealt with this contention as follows with regard to the Phenix accounting order:
| "The October 30, 1991 accounting order does not reflect that the short fall of revenue was experienced by an entity other than KNP nor does the accounting order establish that KNP assumed any of the liabilities associated with the short fall of revenue which were experienced by Phenix. The October 30, 1991 accounting order does not establish that KNP incurred any market entry costs during the period in question. It is also clear that KNP's acquisition of the Phenix assets was just that, an asset purchase, not a stock or equity purchase, which would have brought with the stock all of the interest, both positive and negative, of Phenix." |
Virtually the same findings were made concerning KPCLP.
The Joint Applicants' argument regarding the accounting orders is without merit.
The Joint Applicants next argue that the transfer of the KPCLP and Phenix certificates of convenience and necessity to the Joint Applicants transferred the market entry costs and that no further action was necessary. This argument formed the basis of the dissent of Commissioner Seltsam to the order on remand.
We reject the proposition that the transfer of a certificate of convenience and necessity from one holder to the next can carry with it, without specific comment, the unrecovered market entry costs of the prior holder. We do not believe this document carries with it anything more than the authority to operate as a public utility.
The purpose of a certificate of convenience and necessity is clearly defined by K.S.A. 66-131 as follows:
| "No common carrier or public utility, including that portion of any municipally owned utility defined as a public utility by K.S.A. 66-104, governed by the provisions of this act shall transact business in the state of Kansas until it shall have obtained a certificate from the corporation commission that public convenience will be promoted by the transaction of said business and permitting said applicants to transact the business of a common carrier or public utility in this state." (Emphasis added.) |
K.S.A. 1996 Supp. 66-136 makes it clear that no transfer, sale, or assignment of a certificate of convenience and necessity can be valid unless and until it is approved by the KCC.
A certificate of convenience and necessity is, in essence, a license or authority issued by the KCC to an entity which desires to operate as a public utility in this state. It carries with it only the right to operate as a public utility, and no entity may operate as a public utility without it. However, it does not carry with it any of the other assets of the holder. Those other assets must be transferred by contract, bill of sale, certificate of title, etc.
The certificates of convenience and necessity transferred to the Joint Applicants in this case do not purport to transfer any loss carried forward, unrecovered market entry costs, or, for that matter, any other assets of Phenix or KPCLP. We have examined them as they appear in the record, and we conclude that they transfer only the authority to operate as a public utility. They did not, in this case and would not in most cases, transfer from the holder to the new holder any of the assets of the original holder other than the right to operate as a public utility.
The overwhelming evidence in this case is that the transactions between the Joint Applicants, Phenix, a