Greeley Gas Co. v. State Corp. Com'n of State of Kan.

• Decision Date: 01 March 1991
• Docket Number: No. 65931,65931
• Parties: , Util. L. Rep. P 26,059 GREELEY GAS COMPANY, Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Appellee. CITIZENS' UTILITY RATEPAYERS BOARD, Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Appellee.
• Court: Kansas Court of Appeals

Page 167

807 P.2d 167

15 Kan.App.2d 285, Util. L. Rep. P 26,059

GREELEY GAS COMPANY, Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Appellee.

CITIZENS' UTILITY RATEPAYERS BOARD, Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Appellee.

No. 65931.

Court of Appeals of Kansas.

March 1, 1991.

Syllabus by the Court

1. Under the facts of this case, the utility, a subchapter S corporation, did not produce substantial competent evidence to support its claim for allowance, as part of its cost of service, of income taxes paid by its shareholders on earnings of the utility.

2. The filed rate doctrine described in Nantahala Power & Light v. Thornburg, 476 U.S. 953, 106 S.Ct. 2349, 90 L.Ed.2d 943 (1986), and Mississippi Power v. Miss. ex rel. Moore, 487 U.S. 354, 108 S.Ct. 2428, 101 L.Ed.2d 322 (1988), is applied. Under the filed rate doctrine, the Federal Energy Regulatory Commission (FERC) has exclusive authority to determine the reasonableness of certain wholesale rates, and states cannot bar regulated utilities from passing through to customers the FERC-mandated rates.

3. The Kansas Corporation Commission has the power to determine whether the FERC-filed rate is reasonably incurred. So long as the KCC does not interfere with the federal regulatory scheme, it may, in a proper case, deem the FERC-mandated expense imprudently incurred, without overlapping the regulatory function of FERC.

4. Under the peculiar facts and circumstances of this utility rate case, even though the Kansas Corporation Commission has made no finding of imprudence in FERC-mandated expenses, the KCC's order precludes the utility from ever recovering the FERC-filed rate. Accordingly, the KCC's purchase gas adjustment incentive tariffs violate the filed rate doctrine.

5. In a review of the Kansas Corporation Commission's decision allowing a public utility to pass on to ratepayers the cost of social and athletic club dues, it is held the utility presented no evidence to show that those dues were reasonable or provided any benefit to Kansas ratepayers. As a result, the utility may not pass through to ratepayers those dues as part of its cost of service.

James G. Flaherty and Richard C. Byrd, of Anderson, Byrd & Richeson, Ottawa, for appellant Greeley Gas Co.

Shari Albrecht, Acting Gen. Counsel, and Robert A. Fox, Asst. Gen. Counsel, of State Corp. Com'n, for appellee.

William G. Riggins, Consumer Counsel, Topeka, and Patricia R. Hackney, Lawrence, for intervenor Citizens' Utility Ratepayers Bd.

Before ELLIOTT, P.J., and LARSON and PIERRON, JJ.

ELLIOTT, Judge:

In this utility rate case, Greeley Gas Company (Greeley) seeks judicial review of the Kansas Corporation Commission's (KCC) order disallowing the inclusion of state and federal income tax in Greeley's cost of service and requiring Greeley to change its purchase gas adjustment (PGA) tariffs to 80/20 incentive tariffs. Additionally, the Citizens' Utility Ratepayers Board (CURB) has intervened in Greeley's appeal and also filed its own application for judicial review, seeking reversal of the KCC's allowance of social and athletic club dues in Greeley's cost of service.

We affirm in part and reverse in part.

The Income Tax Issue

Because Greeley has elected subchapter S corporate status, income tax is paid by the shareholders rather than by the corporation itself, which would be the case if Greeley were a C corporation. See 26 U.S.C. §§ 1361-78 (1988).

The KCC and CURB urge that, because Greeley's shareholders pay the taxes on the earnings of the corporation based on a proportionate share of their ownership, Greeley itself had no tax liability. KCC and CURB argue that ratepayers should not be required to pay the shareholders' tax liabilities. See Monarch Gas Co. v. Commerce Com., 51 Ill.App.3d 892, 366 N.E.2d 945 (1977); FPC v. United Gas Pipe Line Co., 386 U.S. 237, 243-44, 87 S.Ct. 1003, 1007-08, 18 L.Ed.2d 18 (1967).

Greeley argues that income taxes paid on behalf of the corporation (which apparently was at a rate lower than that for corporate taxpayers) should be recognized as part of corporate Greeley's cost of service. See K.A.R. 82-1-231(c)(11)(A).

A strong argument can be made favoring Greeley's position. In Suburban Util. Corp. v. Public Util. Com'n., 652 S.W.2d 358 (Tex.1983), the Texas Supreme Court allowed the taxes paid by shareholders of a subchapter S corporation to be recovered from ratepayers.

The Texas court reasoned that the utility is entitled to a reasonable cost of service allowance for income taxes actually paid by the shareholders on the corporate utility's taxable income or for the taxes it would be required to pay as a C corporation, whichever is less. 652 S.W.2d at 364. The court simply recognized the realities of the situation: (1) regardless of who paid, the taxes were on the income of the utility and were "inescapable business outlays." 652 S.W.2d at 364; and (2) including taxes in cost of service expenses was well established. 652 S.W.2d at 363. And cf. Moyston v. New Mexico Public Service Commission, 76 N.M. 146, 412 P.2d 840 (1966) (sole proprietor utility).

The KCC and CURB argue the Texas courts in two later cases have abandoned the position taken in Suburban. We disagree. Although the later cases disallowed tax expenses not actually incurred by the utility, neither involved a subchapter S corporation or the precise issue presented in the instant case. As we read the cases, Suburban is still good law in Texas. See Public Utility Com'n. v. Houston Lighting, 748 S.W.2d 439 (Tex.1987); Southern Union Gas v. Railroad Com'n of Tex., 701 S.W.2d 277 (Tex.App.1985).

On the other hand, evidence was presented in the present case that to allow Greeley's shareholders' full tax expense in cost of service would result in an after-tax return on equity of 17 to 18%. (The KCC allowed Greeley a rate of return of 14.15%.) Obviously, the KCC must have the discretion to make adjustments, in a proper case, to prevent excess rates of return.

In the instant case, however, Greeley simply did not provide the KCC with substantial competent evidence of what the shareholders' actual income tax liability on Greeley's earnings was. Greeley's expert Richard Treich merely testified that typically the net earnings of a subchapter S corporation are taxed at the shareholders' tax rate of 28%. He admitted, however, that the individual tax rate could range from 15 to 33% and further admitted that the 28% rate used in the rate application was just an estimate and that none of the taxpayers' income tax returns had been examined to ascertain what rate was actually paid.

In addition, seven of Greeley's shareholders are minors and three shareholders are trusts, facts not considered in the 28% estimate.

Even under the reasoning of Suburban, it was Greeley's burden to establish the income taxes actually paid by its shareholders on its behalf.

In the present case, had the KCC recognized the reasoning of Suburban and allowed the estimated income tax expense in Greeley's cost of service, it would have, in our opinion, been allowing an expense unsupported by substantial competent evidence.

Based on Greeley's lack of competent evidence to support its position, the KCC's disallowance of the income tax expense is affirmed.

The PGA 80/20 Incentive Tariffs Issue

The KCC, by imposing the PGA 80/20 incentive tariff, ordered that Greeley can pass through to the ratepayer only 80% of any increase in its gas costs and, likewise, only 80% of any decrease in gas costs.

On this issue, Greeley's primary argument is that the PGA incentive tariff violates the filed rate doctrine:

"The filed rate doctrine ensures that sellers of wholesale power governed by FERC can recover the costs incurred by their payment of just and reasonable FERC-set rates. When FERC...