Kan. City Power & Light Co.'s Request for Auth. to Implement a General Rate Increase for Elec. Serv. v. Mo. Pub. Serv. Comm'n, WD 79125 Consolidated with WD 79143

• Court: Court of Appeal of Missouri (US)
• Writing for the Court: Gary D. Witt, Judge
• Citation: 509 S.W.3d 757
• Decision Date: 06 September 2016
• Docket Number: WD 79125 Consolidated with WD 79143,WD 79189
• Parties: IN the MATTER OF KANSAS CITY POWER & LIGHT COMPANY'S REQUEST FOR AUTHORITY TO IMPLEMENT A GENERAL RATE INCREASE FOR ELECTRIC SERVICE, Appellant, and Midwest Energy Consumers' Group, Appellant, v. MISSOURI PUBLIC SERVICE COMMISSION, Respondent.

509 S.W.3d 757

IN the MATTER OF KANSAS CITY POWER & LIGHT COMPANY'S REQUEST FOR AUTHORITY TO IMPLEMENT A GENERAL RATE INCREASE FOR ELECTRIC SERVICE, Appellant,

and

Midwest Energy Consumers' Group, Appellant,

v.MISSOURI PUBLIC SERVICE COMMISSION, Respondent.

WD 79125 Consolidated with WD 79143

WD 79189

Missouri Court of Appeals, Western District.

OPINION FILED: September 6, 2016

Motion for Rehearing and/or Transfer to Supreme Court Denied November 1, 2016

Application for Transfer Denied February 28, 2017

David L. Woodsmall, Jefferson City, MO, for appellant MECG.

Karl Zobrist, Kansas City, MO, for appellant KCP&L

Jennifer Heintz, Jefferson City, MO, for respondent.

Before Division Two: Karen King Mitchell, Presiding Judge, Cynthia L. Martin, Judge and Gary D. Witt, Judge

Gary D. Witt, Judge

This case consolidates two appeals from a rate case involving Kansas City Power & Light Company's ("KCPL") request for a rate increase from the Public Service Commission ("PSC"). KCPL appeals from the Report and Order ("Report and Order") of the PSC in its most recent general rate case, pursuant to Section 386.510.¹ KCPL raises five points on appeal, challenging the return on equity granted by the PSC, the methods used to calculate that rate of return, the rejection of a "tracker" accounting mechanism, the PSC's refusal to include certain transmission costs in a fuel adjustment clause, and the denial of certain rate case expenses. We affirm the PSC's Report and Order.

Midwest Energy Consumers' Group ("MECG") is an unincorporated association that is comprised of large consumers of energy, which was permitted to intervene in KCPL's rate case. MECG appeals from the Compliance Tariff Order, which implemented the Report and Order. MECG raises seven points of error, each challenging the September 16 Compliance Tariff Order that concluded the Final Compliance Tariff sheets filed by KCPL complied with the PSC's September 2 Report and Order. Each point of error challenges the process and procedure by which the PSC issued its Compliance Tariff Order. MECG's appeal is dismissed as moot.

Factual Background

KCPL is a regulated public utility under the jurisdiction of the PSC of the State of Missouri under Chapters 386 and 393. The PSC is charged with the authority to set the rates that KCPL is allowed to charge consumers pursuant to section 393.150. On October 30, 2014, KCPL filed tariff sheets that would implement a general rate increase for its retail electric utility service. KCPL requested an increase on its return on equity from 9.7% to 10.3%. In addition, KCPL asked the PSC to adopt a fuel adjustment clause under section 386.266 and to use an accounting deferral mechanism for certain items of expenditure.

The implementation of the new tariffs was suspended until September 29, 2015 to allow for full rate case proceedings. A number of parties intervened and participated in the proceedings, including MECG. A test year of twelve months, ending on March 31, 2014 and extended to December 31, 2014, was agreed to by the parties and adopted by the PSC. The PSC also established a "true-up" period to run through May 31, 2015. Public hearings were conducted and evidentiary hearings were held over a number of days. The parties filed post-hearing briefs and the case was submitted to the PSC on August 3, 2015.

In its Report and Order, the PSC set KCPL's return on equity to 9.5%. The PSC denied KCPL's request for an accounting deferral mechanism known as a "tracker" for certain expenses. The PSC permitted KCPL to implement a fuel adjustment clause, but only for "true" purchased power, approximately 7.3% of the costs charged to KCPL by the Southwest Power Pool. Finally, the PSC allowed KCPL to recover approximately 74.26% of its expenses on the rate case. Timely applications for rehearing were filed and denied.

This appeal follows. Further details regarding the relevant disputed issues are outlined as applicable in the analysis sections of each point below.

Standard of Review

An order from the PSC is presumed to be valid, and the burden of proof is on the party challenging the order, by clear and satisfactory evidence, to show that the order is either unlawful or unreasonable. See In re Laclede Gas Co., 417 S.W.3d 815, 819 (Mo.App.W.D.2014) ; Section 386.430.

Judicial review of the PSC's Report and Order is two-fold. State ex rel. Pub. Counsel v. Pub. Serv. Comm'n, 397 S.W.3d 441, 446 (Mo.App.W.D.2013). First, we must determine whether the PSC's order was lawful. Id.

An order's lawfulness depends on whether the [PSC's] order and decision was statutorily authorized. When determining whether the order is lawful, we exercise independent judgment and must correct erroneous interpretations of the law. Because the [PSC] is purely a creature of statute, its powers are limited to those conferred by statute either expressly, or by clear implication as necessary to carry out the powers specifically granted.

Id. at 446–47 (internal quotations and citations omitted). "Second, we must determine whether the [PSC's] order was reasonable." Id. at 447. "In determining whether the Commission's order is reasonable, we consider (1) whether it was support[ed] by substantial and competent evidence on the whole record, (2) whether the decision was arbitrary, capricious, or unreasonable, and (3) whether the [PSC] abused its discretion." Id. (internal quotations and footnote omitted).

"We consider the evidence, along with all reasonable supporting inferences, in the light most favorable to the Commission's order. [State ex rel. Mo. Gas Energy v. Pub. Serv. Comm'n, 186 S.W.3d 376, 382 (Mo.App.W.D.2005).] "[I]f substantial evidence supports either of two conflicting factual conclusions, ‘[we are] bound by the findings of the administrative tribunal.’ " State ex rel. AG Processing, Inc. v. Pub. Serv. Comm'n , 120 S.W.3d 732, 735 (Mo.banc 2003) (quoting Amway Corp. v. Dir. of Revenue, 794 S.W.2d 666, 668 (Mo.banc 1990) ). The determination of witness credibility is left to the Commission, " ‘which is free to believe none, part, or all of the testimony.’ " Mo. Gas Energy, 186 S.W.3d at 382 (quoting Commerce Bank, N.A. v. Blasdel, 141 S.W.3d 434, 456–57 n. 19 (Mo.App.W.D.2004) ). "It is only where a Commission order is clearly contrary to the overwhelming weight of the evidence that we may set it aside." Id. Additionally, with regard to issues within the Commission's expertise, "we will not substitute our judgment for that of the Commission." [Union Elec. Co. v. Pub. Serv. Comm'n, 136 S.W.3d 146, 151 (Mo.App.W.D.2004) ].

State ex rel. Pub. Counsel v. Mo. Pub. Serv. Comm'n, 289 S.W.3d 240, 246–47 (Mo.App.W.D.2009).

Appeal by Kansas City Power & Light Company

Analysis

Point One—Return on Equity

In KCPL's Point One on appeal, KCPL argues the PSC erred in choosing a return on equity ("ROE") of 9.5% and in refusing regulatory treatment that recognizes certain known future cost increases because the impact of these determinations is unreasonable and unlawful as it is confiscatory.

The Supreme Court has decided that a public utility, as a matter of constitutional right,

is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding[ ] risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.

Bluefield Waterworks & Improvement Co. v. Pub. Serv. Comm'n of W. Va., 262 U.S. 679, 692–93, 43 S.Ct. 675, 67 L.Ed. 1176 (1923). "A rate of return is generally considered to be fair if it covers utility operating expenses, debt service, and dividends, if it compensates investors for the risks of investment, and if it is sufficient to attract capital and assure confidence in the enterprise's financial integrity." State ex rel. Mo. Gas Energy, 186 S.W.3d at 383 (internal quotation omitted); see also Fed. Power Comm'n v. Hope Nat. Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 88 L.Ed. 333 (1944).

In Missouri, section 393.270.4 governs, in part, the PSC's authority to fix utility rates, and states the following:

In determining the price to be charged for gas, electricity, or water the commission may consider all facts which in its judgment have any bearing upon a proper determination of the question although not set forth in the complaint and not within the allegations contained therein, with due regard, among other things, to a reasonable average return upon capital actually expended and to the necessity of making reservations out of income for surplus and contingencies.

"The rate of return is, essentially, the amount that a utility must pay to secure financing from debt and equity investors." State ex rel. Pub. Counsel v. Pub. Serv. Comm'n, 274 S.W.3d 569, 573 (Mo.App.W.D.2009). "To determine the proper rate of return, the commission should factor ‘(i) the ratio of debt and equity to total capital, and (ii) the cost and (iii) weighted cost for each of these capital components.’ " Id. at 573–74 (quoting State ex rel. Mo. Gas Energy, 186 S.W.3d at 383 ).

"Determining a rate of return on equity, however, is imprecise and involves balancing a utility's need to compensate investors against its need to keep prices low for consumers." Id. at 574. Missouri courts have consistently held that the PSC is not required to utilize any specific methodology to calculate a just and reasonable return in setting rates. State ex rel. Praxair, Inc. v . Pub. Serv. Comm'n , 328 S.W.3d 329, 339 (Mo.App.W....