Industrial Consumers Group v. Corp. Com'n, 96,228.

Decision Date07 July 2006
Docket NumberNo. 96,228.,96,228.
Citation138 P.3d 338
PartiesKANSAS INDUSTRIAL CONSUMERS GROUP, INC., Raytheon Aircraft Company, Cessna Aircraft Company, Buzzi Unicem USA, Goodyear Tire & Rubber Company, Coffeyville Resources Refining & Marketing, LLC, Spirit Aerosystems, Inc., Protectionone, Inc., the Boeing Company, and the Kansas Hospital Association, Petitioners/Appellants, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Respondent/Appellee.
CourtKansas Court of Appeals

James P. Zakoura and Arthur E. Rhodes, of Smithyman & Zakoura, Chartered, of Overland

Park, for appellant Kansas Industrial Consumers Group, Inc.

Scott Ray Ediger, Susan B. Cunningham, and Dana A. Bradbury, of Kansas Corporation Commission, of Topeka, for appellee.

Martin J. Bregman, of Westar Energy, Inc. and Kansas Gas and Electric Company, of Topeka, and Michael Lennen, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, for intervenors Westar Energy, Inc. and Kansas Gas and Electric Company.

Sarah J. Loquist, of Hinkle Elkouri Law Firm L.L.C., of Wichita, for intervenor Unified School District No. 259.

Before MALONE, P.J., GREEN and CAPLINGER, JJ.

MALONE, P.J.

The Kansas Industrial Consumers Group, Inc. (KIC), representing large commercial and industrial consumers of electricity, collectively and individually appeal the order of the Kansas Corporation Commission (Commission) approving a net revenue increase for Westar Energy, Inc. (WEI) and Kansas Gas and Electric Company (KG & E) of approximately $3,000,000. The petitioners challenge various aspects of the Commission's order with respect to calculations of the utilities' rates and rate design.

The Parties

This public utility rate application was filed jointly by WEI and KG & E. Both WEI and KG & E are Kansas corporations. In 1992, WEI's predecessor, The Kansas Power and Light Company (KPL), acquired all the common stock of KG & E. KPL became Western Resources and then WEI. KG & E's operations are concentrated in central and southeastern Kansas, and WEI's operations are concentrated in central and eastern Kansas. Throughout the record, WEI is referred to as Westar North and KG & E as Westar South.

KIC is a corporation whose purpose is to represent, advance, and protect the interests of commercial, industrial, and other large volume users of energy. Throughout the proceeding, KIC represented Cessna Aircraft Company; Raytheon Aircraft Company; Buzzi Unicem USA; Goodyear Tire & Rubber Company; Coffeyville Resources Refining & Marketing, LLC; Spirit AeroSystems, Inc.; ProtectionOne, Inc.; The Boeing Company; and the Kansas Hospital Association. KIC and all the organizations it represented appealed from the final order of the Commission. The Boeing Company, however, has since been dismissed as an appellant.

The Proceedings Below

On May 2, 2005, WEI and KG & E (collectively Westar) filed a joint application with the Commission to change their electric utility rates. Westar requested an increase of its revenue requirement for Westar North in excess of $47,800,000 and an increase of its revenue requirement for Westar South in excess of $36,000,000, based upon test year data for the year ending December 31, 2004.

A number of parties were permitted to intervene in the agency proceeding, including the Citizens' Utility Ratepayer Board (CURB) and Unified School District No. 259 (USD 259). KIC was also permitted to intervene after disclosing the entities it was representing. Other intervenors that participated below, but are not involved in this appeal, included the City of Wichita, the Sierra Club, the Kroger Co., the Kansas Power Pool, and the United States Department of Defense.

After the filing of voluminous prefiled testimony by all the parties, the Commission held evidentiary hearings from October 17 to November 3, 2005. The parties were then permitted to file posthearing briefs setting forth their respective positions on the numerous issues raised during the hearings.

On December 28, 2005, the Commission issued its initial order on Westar's application. The Commission's 127-page order addressed a myriad of issues, resolving some in favor of and many against Westar's rate request. The Commission rejected Westar's request for an aggregated revenue increase of approximately $84,000,000. Instead, the Commission found that Westar North's revenue requirement had increased by $24,207,000, but that Westar South's revenue requirement had decreased by $21,156,550. This resulted in an aggregated revenue requirement increase for Westar of $3,050,494. The Commission estimated the average residential customer's bill in Westar North's service area would increase 5.1%, while the average residential customer's bill in Westar South's service area would decrease 4.8%.

KIC, CURB, and USD 259 filed timely petitions for reconsideration raising numerous issues. The Commission's staff also filed a petition for clarification, and Westar filed a petition for specific reconsideration, for clarification, and for submission of additional evidence. On February 13, 2006, the Commission granted the staff's request for clarification, but it denied all the remaining issues raised by the parties. The order constituted a final agency action.

KIC and its participating organizations (Petitioners) filed a timely petition for judicial review with this court. Westar and USD 259 intervened. Thereafter, USD 259 and CURB filed separate petitions for judicial review.

Standard of Review

Pursuant to K.S.A. 66-118c, this court's review of an order of the Commission is in accordance with the Act for Judicial Review and Civil Enforcement of Agency Actions (KJRA), K.S.A. 77-601 et seq. On appeal, the Commission's findings are presumed valid, and its order may only be set aside if it is unlawful, is not supported by substantial competent evidence, is without foundation in fact, or is otherwise unreasonable, arbitrary, or capricious. Western Resources, Inc. v. Kansas Corporation Comm'n, 30 Kan.App.2d 348, 351, 42 P.3d 162, rev. denied, 274 Kan. 1119 (2002). The party challenging the legality of the Commission's order bears the burden of proof pursuant to K.S.A. 77-621(a)(1). Citizens' Utility Ratepayer Bd. v. Kansas Corporation Comm'n, 28 Kan.App.2d 313, 315, 16 P.3d 319 (2000), rev. denied 271 Kan. 1035 (2001).

This court has previously held that a Commission's 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.]" Farmland Industries, Inc. v. Kansas Corporation Comm'n, 24 Kan.App.2d 172, 175, 943 P.2d 470, rev. denied 263 Kan. 885 (1997). An order is considered "`reasonable' if it is based on substantial competent evidence. [Citation omitted.]" 24 Kan.App.2d at 175, 943 P.2d 470. The Commission's action is arbitrary and capricious if it is unreasonable or without foundation in fact. Farmland Industries, Inc. v. Kansas Corp. Comm'n, 25 Kan.App.2d 849, 852, 971 P.2d 1213 (1999).

The Commission is granted broad discretion by the legislature in weighing the competing interests involved in utility rate cases. The court does not have the authority to substitute its judgment for that of the Commission. The court must recognize that the Commission's decisions "involve complex problems of policy, accounting, economics, and other special knowledge." Western Resources, Inc., 30 Kan.App.2d at 352, 42 P.3d 162. The court may reverse or nullify a Commission order only when the decision is "`"so wide of the mark as to be outside the realm of fair debate. [Citations omitted.]"'" Williams Natural Gas Co. v. Kansas Corporation Comm'n, 22 Kan.App.2d 326, 335, 916 P.2d 52, rev. denied 260 Kan. 1002 (1996).

Retail Energy Cost Adjustment

In their first issue on appeal, Petitioners challenge the Commission's order permitting Westar to include a retail energy cost adjustment (RECA) in its rates. Westar had proposed to include a RECA, which would be calculated based on a fuel adjustment charge less an off-systems sales adjustment. The primary purpose of any type of energy cost adjustment (ECA) clause is to pass through to the consumer any increases or decreases in the cost of energy, while avoiding the costly and time-consuming process of a formal hearing to consider a general revision to all rates.

Petitioners contend the Commission's order altered its 1991 merger order, discussed below, and there was not substantial competent evidence to support the Commission's deviation from that prior order. Petitioners contend no evidence was presented that the effects of the merger had changed to warrant reinstatement of the pass-through provision. Petitioners also contend the Commission failed to explain the basis for its change in position.

In 1991, KPL and KG & E merged into a single entity known as KPL. Their merger was presented to the Commission for approval in KCC Docket Nos. 172,745-U and 172,155-U. In a 110-page order issued November 15, 1991, the Commission approved the merger subject to various conditions. The Commission discussed numerous arguments various parties had made against the proposed merger. However, none of the parties appeared to have raised any concern about the utilities' ECA clauses in their existing rates. The Commission's primary focus in the merger order was the proper method in treating the acquisition premium paid by KPL to KG & E shareholders, whether the benefits of the merger would outweigh merger costs and result in a benefit to ratepayers, and how cost savings should be divided between ratepayers and shareholders.

The first mention of the ECA clauses was raised sua sponte by the Commission in discussing an appropriate tracking system that would verify cost savings achieved by the merger. The Commission rejected the utilities' proposed tracking system and instead ordered that an index mechanism be...

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