Farmland Industries, Inc. v. Kansas Corporation Comm'n

• Decision Date: 21 November 2001
• Docket Number: No. 87, No. 500., No. 485[1]
• Parties: FARMLAND INDUSTRIES, INC., and VULCAN MATERIALS COMPANY, Appellants, v. KANSAS CORPORATION COMMISSION, Appellee. UNIVERSITY OF KANSAS MEDICAL CENTER, CARGILL, INC., GENERAL MOTORS CORPORATION, OWENS-CORNING FIBERGLAS, and PROCTER & GAMBLE MANFACTURING, INC., (The Kansas Industrial Consumers), Appellants, v. KANSAS CORPORATION COMMISSION, Appellee.
• Court: Kansas Court of Appeals

29 Kan. App.2d 1031

37 P.3d 640

FARMLAND INDUSTRIES, INC., and VULCAN MATERIALS COMPANY, Appellants, v. KANSAS CORPORATION COMMISSION, Appellee.

UNIVERSITY OF KANSAS MEDICAL CENTER, CARGILL, INC., GENERAL MOTORS CORPORATION, OWENS-CORNING FIBERGLAS, and PROCTER & GAMBLE MANFACTURING, INC., (The Kansas Industrial Consumers), Appellants, v. KANSAS CORPORATION COMMISSION, Appellee.

Nos. 87,485¹, 87,500.

Court of Appeals of Kansas.

Opinion filed November 21, 2001.

James P. Zakoura and David J. Roberts, of Smithyman & Zakoura, Chartered, of Overland Park, for appellants Farmland and Vulcan Materials Company.

John McNish, advisory counsel, Paula Lentz, assistant general counsel, and Susan B. Cunningham, general counsel, of the Kansas Corporation Commission, for appellee.

C. Edward Peterson and Stuart W. Conrad, of Finnegan, Conrad & Peterson, L.C., of Kansas City, Missouri, for intervenor Midwest Gas Users' Association.

Niki Christopher and Walker A. Hendrix, of Topeka, for intervenor Citizens' Utility Ratepayer Board.

James G. Flaherty and Daniel D. Covington, of Anderson, Byrd, Richeson, Flaherty & Henrichs, L.L.P., of Ottawa, for intervenors UtiliCorp United, Inc., d/b/a Peoples Natural Gas Company and Kansas Public Service Company, and Greeley Gas Company, a division of Atmos Energy Corporation.

John P. DeCoursey and Larry M. Cowger, of Overland Park, for intervenor Kansas Gas Service Company, a division of ONEOK, Inc.

Robert B. Van Cleave, of Gates & Clyde, Chartered, of Overland Park, and Robert C. Johnson and Lisa C. Langeneckert, of St. Louis, Missouri, for intervenor Kansas Energy Group.

No. 87,500

Frank W. Lipsman, of Bryan Cave, LLP, of Overland Park, and Diana M. Vuylsteke, of Bryan Cave, LLP, of St. Louis, Missouri, for appellants.

John McNish, advisory counsel, Paula Lentz, assistant general counsel, and Susan B. Cunningham, general counsel, of the Kansas Corporation Commission, for appellee.

Robert B. Van Cleave, of Gates & Clyde, Chartered, of Overland Park, and Robert C. Johnson and Lisa C. Langeneckert, of St. Louis, Missouri, for intervenor Kansas Energy Group.

C. Edward Peterson and Stuart W. Conrad, of Finnegan, Conrad & Peterson, L.C., of Kansas City, Missouri, for intervenor Midwest Gas Users' Association.

James G. Flaherty and Daniel D. Covington, of Anderson, Byrd, Richeson, Flaherty & Henrichs, L.L.P., of Ottawa, for intervenors UtiliCorp United Inc., d/ b/a Peoples Natural Gas Company and Kansas Public Service Company, and Greeley Gas Company, a division of Atmos Energy Corporation.

Niki Christopher and Walker A. Hendrix, of Topeka, for intervenor Citizens' Utility Ratepayer Board.

Larry M. Cowger and John P. DeCoursey, of Overland Park, for intervenor Kansas Gas Service Company, a Division of ONEOK, Inc.

Before ELLIOTT, P.J., MARQUARDT and BEIER, JJ.

ELLIOTT, J.:

Farmland Industries, Inc. (Farmland), Vulcan Materials Company (Vulcan), and Kansas Industrial Consumers (KIC) (collectively petitioners) filed separate appeals challenging several orders issued by the Kansas Corporation Commission (KCC) allocating refunds that local distribution companies (LDCs) received from upstream participants in the natural gas industry to qualified low-income residential consumers.

We heard arguments on the two cases on the same day, and we are filing one opinion to dispose of both appeals. We affirm. The Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. § 3301 et seq. (1994), allowed producers to charge an amount in excess of the statutory maximum price in order to recover the cost of State severance taxes. 15 U.S.C. § 3320(a)(1) (repealed effective 7/26/ 89). Prior to the NGPA, the federal regulatory agency had permitted producers to include in their prices the cost of Kansas ad valorem taxes. See Federal Power Commission Opinion No. 699-D, 52 F.P.C. 915 (1974).

Commencing in 1983, numerous parties filed pleadings with the Federal Energy Regulatory Commission (FERC) challenging producers' actions in using the cost of Kansas ad valorem taxes to exceed the maximum NGPA price. Initially, FERC ruled the practice to be lawful under the NGPA. Sun Exploration & Production Co., 36 FERC ¶ 61,093 (1986); see Northern Natural Gas Co., 38 FERC ¶ 61,062 (1987). Thus began the long and tortured history of this litigation.

After considerable delay, FERC changed its position and ruled the Kansas ad valorem tax was not a "severance tax" under NGPA; FERC ordered the producers to refund the excess charges and also ordered the pipelines to flow through the refunds to their customers, the LDCs. Colorado Interstate Gas Co., 65 FERC ¶ 61,292, at 62,374 (1993). Three years later, the D.C. Circuit Court affirmed FERC's ruling that Kansas ad valorem taxes were not "severance" taxes under federal law. Public Service Co. of Colorado v. F.E.R.C., 91 F.3d 1478, 1484-86 (D.C. Cir. 1996), cert. denied 520 U.S. 1224 (1997).

Between 1983 and 1988, tariffs filed by LDCs in Kansas all contained purchased gas adjustment clauses (PGA) or cost of gas riders (COGR) permitting the LDCs to pass on their natural gas commodity cost (selling price from pipeline to LDC) to their customers. Based on the clauses, Kansas ad valorem taxes were passed on to retail customers.

After 1988, the KCC permitted commercial and industrial customers in Kansas to purchase natural gas directly from producers and marketers and pay only transportation costs to pipelines and LDCs for delivery of the gas. As a result, these LDCs' current "sales" customers are a small number of commercial customers and residential users.

Under the tariffs on file with the KCC in 1988, LDCs were not permitted to keep the refunds they were receiving from pipelines. The tariffs required any refunds received to be passed on through PGA or COGR provisions. The tariffs also contained general language allowing the KCC to make case-by-case determinations for the distribution of supplier refunds.

In May 1998, the KCC opened a generic investigation to establish general policies for the handling of tax refunds the Kansas LDCs were receiving from the pipelines, concluding it had jurisdiction to require LDCs to pass the refunds on to customers, to the extent the customers were not under FERC jurisdiction. Separate dockets were opened for each LDC.

Between 1984 and 1988, Vulcan was a retail customer of Peoples Natural Gas Company (PNG), a division of UtiliCorp. After 1988, Vulcan ceased buying gas from PNG and commenced purchasing and transporting gas directly from a pipeline.

During the 1983 to 1988 time frame, Farmland purchased gas for its various facilities in Kansas from United Cities Gas Company (now Greeley Gas Company [Greeley]), PNG, and Kansas Gas Service Company, a division of ONEOK, Inc. (KGS).

KIC is a group including Cargill, Inc., General Motors Corporation, Owens-Corning Fiberglas Corporation, Procter & Gamble, and the University of Kansas Medical Center, all of whom are former sales customers of KGS.

At one point, the KCC determined that a portion of the overcharge refunds would be distributed to large industrial and commercial consumers who were sales customers of the LDCs between 1983 and 1988. The KCC stated that sales customers who actually paid the excess charges had an "equitable interest" in the refunds and should, therefore, receive refunds to the extent possible. Each of these separate KCC orders, however, stated no refunds would be made until other legal issues were resolved.

Natural gas prices began to rapidly increase in late 2000, and the KCC established a task force to address methods for mitigating expected increasing gas prices during the upcoming winter. KGS and other LDCs sought to amend their refund distribution plans in light of the increasing gas prices, to allocate a portion of the refund accounts to present sales customers to alleviate the consequences of a harsh winter.

In January 2001, the KCC issued an order permitting KGS to refund $5.6 million to existing sales customers via its COGR, but requiring KGS to retain in escrow the funds allocated to the former large industrial customers.

Later in January 2001, the Kansas Senate and Kansas House passed resolutions urging the KCC to pass on the ad valorem tax refunds to residential consumers "to the extent allowed by law." S. Res. 1808 and H. Con. Res. 6006.

The Citizens' Utility Ratepayer Board (CURB) then sought residential ratepayer relief, requesting immediate distribution of all ad valorem tax refunds in accordance with the House and Senate resolutions. The KCC granted reconsideration of its prior order and set a schedule for evidentiary hearings on the overcharge distribution plans. No evidentiary hearings had been held in 1999, but the KCC ruled that changed circumstances—including the prior winter's harsh weather, the significant increase in gas prices, and the increase in refunds received by the LDCs—warranted such hearings. The KCC indicated it would reconsider the plans previously approved in 1999, in light of the changed circumstances. The KCC also consolidated the separate dockets for the various LDCs into a single docket.

The KCC then issued its initial order finding residential customers were the least able to absorb the increases in gas costs which occurred in 2000 to 2001. The KCC also noted that most of the large industrial consumers left the LDC systems as sales customers after 1988, requiring LDC costs to be spread among smaller customers.

Accordingly, the KCC determined the claims of the large industrial consumers failed to justify a continuation of the prior distribution plans and ordered the LDCs to submit new plans for the distribution of refunds to their current low-income customers. The eligible customers were defined as at or below 300% of federal poverty level. Several motions for reconsideration were filed, and KCC staff moved for a clarification. The KCC issued an order denying all the parties' motions for reconsideration and clarifying...