Atmos Energy Corporation v. Kansas Corporation Comm'n

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NOT DESIGNATED FOR PUBLICATION

No. 115,878

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

ATMOS ENERGY CORPORATION,
Petitioner,

v.

KANSAS CORPORATION COMMISSION,
Respondent,

and

CITIZENS' UTILITY RATEPAYER BOARD and
CONTINUUM RETAIL ENERGY SERVICES, LLC,
Intervenors.

MEMORANDUM OPINION

Appeal from Kansas Corporation Commission. Opinion filed September 15, 2016. Reversed and
remanded.

James G. Flaherty and Jeffrey A. Wilson, of Anderson & Byrd, LLP, of Ottawa, and James H.
Jeffries, IV, of Moore & Van Allen PLLC, of Charlotte, North Carolina, for petitioner.

Dustin L. Kirk, special assistant attorney general, of Kansas Corporation Commission, for
respondent.

David W. Nickel and Thomas J. Connors, of Citizens' Utility Ratepayer Board, for intervenor.

Before MCANANY, P.J., BUSER and LEBEN, JJ.

Per Curiam: Atmos Energy Corporation, a natural gas public utility operating in
Kansas, filed an application to increase its rates with the Kansas Corporation
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Commission (Commission). The parties submitted prefiled testimony and documents to
the Commission. Shortly before the scheduled evidentiary hearing, Atmos reached a
Unanimous Settlement Agreement with the Commission's Staff (Staff) and the two
intervenors in the case, the Citizens' Utility Ratepayer Board (CURB) and Continuum
Retail Energy Services, LLC (Continuum). The Settlement Agreement included a System
Integrity Program (SIP) surcharge which was intended to facilitate Atmos' ability to
replace obsolete materials in its pipeline system more rapidly than permitted by its
current rate structure. The Settlement Agreement was presented to the Commission for
approval with supporting testimony from all parties.

In its March 2015 order, the Commission approved the Settlement Agreement in
part but denied the implementation of the SIP tariff, finding this surcharge was
premature. After Atmos' petition for rehearing and clarification was denied, Atmos filed
this appeal asserting that contrary to the Commission's order, the denial of the SIP tariff
rendered the entire Settlement Agreement voidable. On appeal, our task is to determine
whether the Commission correctly interpreted and applied various provisions in the
Settlement Agreement. Concluding that the Commission erred in its interpretation of the
Settlement Agreement, we reverse and remand the case to the Commission for further
proceedings.

Procedural Background

Atmos Energy is a natural gas public utility headquartered in Olathe, Kansas. It
provides retail natural gas service to approximately 131,000 customers in Kansas in over
107 communities. Consequently, Atmos' intrastate operations and rates are regulated by
the Commission.

In March 2015, the Commission opened a generic docket, the "343 Docket," to
investigate programs that would allow Kansas local distribution gas utility companies
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(LDCs), such as Atmos, to more rapidly replace obsolete materials in natural gas
pipelines which were considered a safety risk. In proceedings under this 343 Docket,
Commission staff, LDCs, and other interested parties weighed in on the need for
additional rate mechanisms to enable LDCs to finance significant upgrades in their
obsolete and aging pipeline systems.

While the 343 Docket was pending, Atmos filed an application with the
Commission in August 2015 seeking permission to increase its rates to customers. Atmos
claimed it had incurred a gross revenue deficiency of $6.6 million for the operating year
ending March 31, 2015. Pursuant to K.A.R. 82-1-231, Atmos presented extensive
prefiled testimony and numerous schedules and exhibits in support of its request for
higher rates. CURB and Continuum intervened in the case.

As a result of the filing, the Commission issued a procedural schedule, set hearing
dates for public comment, and scheduled an evidentiary hearing for review of the
application for the week of February 2, 2016. Between December 2015 and January
2016, voluminous prefiled testimony was submitted to the Commission by its Staff,
CURB, and Continuum, in addition to rebuttal testimony presented by Atmos. All the
testimony discussed differing viewpoints of the various economic issues relating to
Atmos' rate calculations. Staff recommended a rate increase of $1.49 million, while
CURB recommended a rate decrease of over $700,000.

On January 20, 2016, less than 2 weeks before the scheduled evidentiary hearing,
all parties filed a joint motion with the Commission to approve a Unanimous Settlement
Agreement. The motion stated that the parties had worked diligently to resolve all issues
in the docket and had reached an agreement settling all disputed matters. Each party
submitted testimony supporting the Settlement Agreement.

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The Settlement Agreement provided, in part, that Atmos would be granted an
overall annual revenue increase of $2,218,303. The parties agreed to an increase to
Atmos' rate base, to appropriate depreciation rates, to the amount of Atmos' pre-tax rate
of return, and to various other accounting matters. Further, Atmos could use the
abbreviated rate setting process set forth in K.A.R. 82-1-231(b)(3) to update rates for
certain capital costs completed after September 2015; these were capital costs not
included in (1) Atmos' proposed SIP surcharge or in (2) a GSRS surcharge permitted
under the Gas Safety and Reliability Policy Act, K.S.A. 2015 Supp. 66-2201 et seq. In
exchange, Atmos would not request any other change to its base rates prior to an effective
date of March 1, 2019. But this 3-year moratorium would not preclude Atmos from
changing rates or tariffs to recover appropriate costs for previously approved cost
adjustments as well as the SIP tariff included in the Settlement Agreement.

The parties also agreed that Atmos could implement a SIP surcharge mechanism
as a 5-year pilot program to recover capital expenditures incurred in the accelerated
replacement of obsolete pipe. Atmos' recovery under the SIP would be limited to a 5-year
total of $75 million, and Atmos would submit a 5-year plan for its replacement process.
All annual capital expenditures would be reviewed by Staff and CURB and approved by
the Commission. Finally, the SIP surcharge mechanism would be subject to any changes
or additions that may be required so that the SIP complied with any Commission decision
issued in the 343 Docket.

The final two paragraphs of the Settlement Agreement form the heart of the
dispute in this appeal:

"43. This Settlement represents a negotiated settlement that fully resolves the
issues in this docket among the Parties. The Parties represent that the terms of this
Settlement constitute a fair and reasonable resolution of the issues addressed herein.
Except as specified herein, the Parties shall not be prejudiced, bound by, or in any way
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affected by the terms of this Settlement (a) in any future proceeding; (b) in any
proceeding currently pending under a separate docket; and/or (c) in this proceeding
should the Commission decide not to approve this Settlement in the instant proceeding. If
the Commission accepts this Settlement in its entirety and incorporates the same into a
final order without material modification, the Parties shall be bound by its terms and the
Commission's order incorporating its terms as to all issues addressed herein and in
accordance with the terms hereof, and will not appeal the Commission's order on these
issues.
. . . .

"44. Except as mentioned in this paragraph, the provisions of this Settlement
have resulted from negotiations among the parties and are interdependent. Except as
mentioned in this paragraph, in the event the Commission does not approve and adopt the
terms of this Settlement in total, it shall be voidable and none of the Parties shall be
bound, prejudiced, or in any way affected by any of the agreements or provisions hereof.
Further, in such event, this Settlement shall be considered privileged and not admissible
in evidence or made a part of the record in any proceeding. This provision shall not apply
to (1) the Parties' agreement to recommend a March 1, 2016, effective date for the rate
increase; or (2) the Parties' agreement relating to the SIP tariff should the Commission
elect to defer to the 343 Docket a decision on any of the agreed upon provisions herein
regarding Atmos Energy's SIP tariff."

At the February 2, 2016, evidentiary hearing, the Commission admitted all of the
prefiled testimony and exhibits and heard opening statements from the parties. Atmos'
attorney advised the Commission that the Settlement Agreement resolved all the issues
raised in the testimony of the witnesses. Counsel summarized the settlement terms
including the agreed 3-year rate moratorium and the SIP tariff, "which [was] a big part of
the Settlement." Counsel noted that three of the issues—the abbreviated rate case, the 3-
year moratorium, and the SIP surcharge—collectively "establish[ed] a Regulatory Plan
that [would] allow Atmos Energy a reasonable opportunity to earn its authorized return
on its investment while continuing to make significant investment in what [was referred]
to as non growth safety-related capital projects without having to file annual rate cases."
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Several Commissioners asked questions regarding the SIP surcharge as it related
to the issues in the 343 Docket, but no questions were raised regarding the effect a denial
of the SIP would have on the balance of the Settlement Agreement. Nor was there any
inquiry as to whether the parties were willing to waive the 240-day deadline for
Commission action on Atmos' rate application.

Staff's witness testified that the SIP mechanism in this case was the culmination of
a lot of work and constituted a "good product" balancing the interests of the utility and
consumers. The witness recognized that other gas companies in the 343 Docket might
suggest alternatives, but the SIP here was a good solution and was the mechanism
supported by Staff in the 343 Docket. Counsel noted that the Settlement Agreement
contained a provision stating that deferment of a SIP determination to the 343 Docket
would not void the Settlement Agreement, but Staff advocated for immediate adoption of
the SIP in this case.

A witness who submitted prefiled testimony on behalf of CURB also testified in
support of the Settlement Agreement.

On March 17, 2016, the Commission issued an order approving all the terms of the
Settlement Agreement except for the provision relating to the SIP tariff. In discussing the
SIP tariff, the Commission noted that it opened the 343 Docket to conduct industry-wide
discussions about modifying the GSRS or to consider other mechanisms to improve
natural gas pipelines' system integrity. The Commission found the 343 Docket was
intended to be a precursor to individual SIP-type mechanisms and that approval of
Atmos' proposed SIP tariff was premature. The Commission opined that in spite of its
rejection of the SIP tariff provision in the Settlement Agreement, the remainder of the
Settlement Agreement was still binding on the parties. The Commission noted that the
SIP or similar programs could be considered in future rate cases but not before the
conclusion of the 343 Docket.
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Commissioner Albrecht dissented in part, finding that the purposes of the SIP
were appropriate in funding a quicker replacement of aging pipeline infrastructure, was
appropriately limited in scope and duration, and had been agreed to by all parties.

Atmos filed a Petition for Reconsideration and Clarification as required by K.S.A.
66-118b and K.S.A. 2015 Supp. 77-529(a). Atmos requested the Commission to
reconsider its denial of the SIP tariff or, in the alternative, to clarify the order. Atmos
asserted that the Commission's rejection of the SIP tariff provision in the Settlement
Agreement rendered the other terms of the Settlement Agreement voidable. Staff agreed
with Atmos' arguments and confirmed the intent of the parties with respect to the
operation of the interdependence provision in the agreement. The majority of the
Commission denied the Petition for Reconsideration and Clarification. Again,
Commissioner Albrecht dissented.

Atmos then filed its petition for judicial review with this court pursuant to K.S.A.
66-118b. CURB has intervened as an interested party.

Standard of Review

The scope of our review is governed by the Kansas Judicial Review Act (KJRA),
K.S.A. 77-601 et seq., and specifically by K.S.A. 2015 Supp. 77-621(c). See K.S.A. 66-
118a(b); Bluestem Telephone Co. v. Kansas Corporation Comm'n, 52 Kan. App. 2d 96,
107, 363 P.3d 1115 (2015). Atmos contends that it is entitled to relief under two
subsections of K.S.A. 2015 Supp. 77-621(c): (1) because the Commission "erroneously
interpreted or applied the law," K.S.A. 2015 Supp. 77-621(c)(4), by misapplying Kansas
contract law in interpreting the Settlement Agreement, and (2) because the Commission's
factual determination of the parties' intent is not supported by substantial evidence,
K.S.A. 2015 Supp. 77-621(c)(7). Atmos has not made a claim for relief under K.S.A.
2015 Supp. 77-621(c)(8), which attacks the quality of the agency's reasoning through a
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claim that its order is arbitrary, capricious, or "otherwise unreasonable." See In re
Protests of Oakhill Land Co., 46 Kan. App. 2d 1105, 1115, 269 P.3d 876 (2012). Atmos
bears the burden of proving the invalidity of the Commission's action. K.S.A. 2015 Supp.
77-621(a)(1); Bluestem Telephone Co., 52 Kan. App. 2d at 107.

The issue before us involves the Commission's interpretation of the Settlement
Agreement. We exercise unlimited review over the interpretation and legal effect of
written instruments, and we are not bound by the Commission's interpretation of the
Settlement Agreement. See Prairie Land Elec. Co-op v. Kansas Elec. Power Co-op, 299
Kan. 360, 366, 323 P.3d 1270 (2014).

Discussion

The Commission and CURB argue that paragraph 44 of the Settlement Agreement
is unambiguous and, based on the "plain language" of the agreement, the Commission's
denial of the SIP surcharge did not render the agreement voidable.

Whether a written instrument is ambiguous is an issue of law which we review de
novo. Waste Connections of Kansas, Inc. v. Ritchie Corp., 296 Kan. 943, 964, 298 P.3d
250 (2013). A contract provision is not ambiguous merely because the parties disagree
over its meaning. Such a provision is ambiguous only if two or more meanings can
reasonably be construed from the contract. Iron Mound v. Nueterra Healthcare
Management, 298 Kan. 412, 418, 313 P.3d 808 (2013). To be ambiguous, the provision
must contain language of "'doubtful or conflicting meaning, as gleaned from a natural and
reasonable interpretation of its language.' [Citation omitted.]" Ney v. Farm Bureau Life
Ins. Co., 51 Kan. App. 2d 562, 571, 350 P.3d 1126 (2015), rev. denied 303 Kan. ___
(January 25, 2016). In our analysis we do not strain to find an ambiguity where, in
common sense, there is none. American Family Mut. Ins. Co. v. Wilkins, 285 Kan. 1054,
1059, 179 P.3d 1104 (2008). Nor do we focus our attention only on one particular
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provision but, rather, consider the contract in its entirety. The law favors reasonable
interpretations, and we reject results which vitiate the purpose of the agreement or render
its terms an absurdity. Waste Connections of Kansas, Inc., 296 Kan. at 963.

Here, the Settlement Agreement had three primary sections. First, it described
Atmos' application and its general revenue request and rate base adjustments. Second, it
described in general terms the positions of Staff and CURB regarding Atmos' revenue
requirement as well as their position on Atmos' request for a SIP surcharge. Third, it set
forth the terms of the settlement including a stipulated revenue requirement, agreed
depreciation rates and a pre-tax rate of return, and an agreement on various accounting
issues.

The final three elements of the agreement are key to the interdependency provision
at the center of this dispute. First, the parties agreed that Atmos may file an abbreviated
rate case to update rates in order to include various capital costs closed after September
30, 2015. Second, and subject to certain exceptions, Atmos may not make any other
change to its base rates before the effective date of March 1, 2019. Third, Atmos may
implement a SIP surcharge mechanism through a 5-year pilot project to recover capital
expenditures incurred in the accelerated replacement of obsolete pipe. This section of the
agreement contains nearly three pages of scheduling and approval procedures relating to
the implementation of the SIP tariff.

As noted earlier, the final two paragraphs of the Settlement Agreement describe
the effects of this negotiated settlement and the interdependency of its various provisions.
As stated in paragraph 43, the parties are not bound by the terms of the Settlement
Agreement if the Commission does not approve it "in its entirety . . . without material
modification." As stated in paragraph 44,

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"[T]he provisions of this Settlement have resulted from negotiations among the
Parties and are interdependent. Except as mentioned in this paragraph, in the event the
Commission does not approve and adopt the terms of this Settlement in total it shall be
voidable. . . . This provision shall not apply to . . . the Parties' agreement relating to the
SIP tariff should the Commission elect to defer to the 343 Docket a decision on any of
the agreed upon provisions herein regarding Atmos' Energy's SIP tariff."

The Commission contends that the plain and unambiguous language of paragraph
44 makes the SIP tariff provision an exception to the interdependence provision. As we
understand its argument, the Commission contends that the interdependence provision,
which would make the Settlement Agreement voidable, does not apply when the
Commission merely deferred a decision on the SIP tariff to the 343 Docket; and this
"deferment of a 'decision'" was accomplished by the Commission denying the SIP tariff
in the present case. This is apparently premised on the requirement that the Commission
render its decision on Atmos' application within a 240-day deadline and deferring the
decision on the SIP tariff issue rather than deciding it would have resulted in the SIP
tariff being automatically approved. Thus, according to the Commission, in this context
its denial of the SIP tariff was not a denial; it was a deferral.

But if at the hearing to approve the Settlement Agreement the Commission had
simply asked the parties if they were willing to waive the 240-day decision deadline, it
could have expressly deferred the SIP tariff provision to the 343 Docket notwithstanding
the 240-day deadline, rather than now relying on the rather curious characterization of its
decision to deny the SIP tariff provision in the Settlement Agreement as a "deferment of a
'decision.'"

We conclude that the unambiguous language of paragraph 44 established that the
SIP exception applied only if the Commission deferred the decision to the 343 Docket.
But here, the Commission simply denied the SIP tariff completely as premature. The law
favors reasonable interpretations, and results which vitiate the purpose of the terms of the
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agreement or render it an absurdity should be avoided. Waste Connections of Kansas,
Inc., 296 Kan. at 963. The Commission's interpretation of the agreement was
unreasonable and contrary to Kansas law.

The Commission also rejected Atmos' argument that the SIP tariff was an
important factor in agreeing to the 3-year moratorium on rates. The Commission asserts
that the only impetus for the 3-year rate moratorium was the agreement to allow Atmos to
file an abbreviated rate case for costs incurred through late 2015, not the SIP tariff. But
this assertion ignores the language in paragraph 20, which provides that notwithstanding
the 3-year moratorium Atmos could change rates or tariffs to recover costs under various
"pass-through" cost provisions, including "GSRS tariffs and the SIP tariff included in this
Settlement."

Pass-through mechanisms and similar mechanisms are becoming more common
due to the general rule that capital costs for new plants, generators, or other infrastructure
facilities are allowed into rates only when they become "used and required to be used" in
services to the ratepayers. Kansas Industrial Consumers Group, Inc. v. Kansas
Corporation Comm'n, 36 Kan. App. 2d 83, 97, 138 P.3d 338, rev. denied 282 Kan. 790
(2006); see K.S.A. 2015 Supp. 66–128 (property that has not been completed and
dedicated to commercial service shall not be deemed used and required to be used in
services to the public except under specific circumstances). Pass-through mechanisms
permit utilities to achieve some form of financial recovery for specific costs, including
capital costs, without the expenses of filing an expensive, voluminous rate case. See 36
Kan. App. 2d at 87, 97-98.

Under the terms of the Settlement Agreement, preserving Atmos' right to pursue
the recovery of costs under various "pass-through" cost provisions such as "the SIP tariff
included in this Settlement" was important to Atmos in agreeing to the 3-year moratorium
on any rate increase.
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The Commission was not obligated to approve the Settlement Agreement if it
found the SIP surcharge unacceptable. It could have rejected the Settlement Agreement
as an attempt by the parties to "tie the Commission's hands" with respect to the outcome
of the 343 Docket. But reading the contract in pari materia, the Commission's decision
that the agreement permitted the outright rejection of the SIP tariff without rendering the
remaining provisions unenforceable was based on an incorrect interpretation of the
Settlement Agreement. The language in paragraph 44, when read in its entirety and with
the remaining provisions of the agreement, makes it clear that for the Settlement
Agreement to remain enforceable without the SIP tariff provision, the Commission had to
explicitly defer the SIP tariff issue to the 343 Docket for a decision. That is not what
happened here. The Commission's outright rejection of the SIP tariff provision rendered
the balance of the agreement voidable.

We conclude that the Commission incorrectly interpreted the Settlement
Agreement. The Commission's order granting in part and denying in part the Settlement
Agreement, together with its order determining the Settlement Agreement remained
otherwise binding on the parties, is reversed. The matter is remanded to the Commission
for further action consistent with this opinion.

Reversed and remanded.