Kansas Industrial Consumers v. Kansas Corporation Comm'n, 88,012.

• Decision Date: 08 March 2002
• Docket Number: No. 88,012.,88,012.
• Citation: 42 P.3d 110,30 Kan. App.2d 332
• Parties: KANSAS INDUSTRIAL CONSUMERS, Petitioner/Appellant, v. THE STATE CORPORATION COMMISSION OF THE STATE OF KANSAS, Respondent/Appellee.
• Court: Kansas Court of Appeals

30 Kan. App.2d 332

42 P.3d 110

KANSAS INDUSTRIAL CONSUMERS, Petitioner/Appellant, v. THE STATE CORPORATION COMMISSION OF THE STATE OF KANSAS, Respondent/Appellee.

No. 88,012.

Court of Appeals of Kansas.

Opinion filed March 8, 2002.

David J. Roberts and James P. Zakoura, of Smithyman & Zakoura, Chartered, of Overland Park, for appellant.

Caroline Ong, advisory counsel, and Susan B. Cunningham, general counsel, of the Kansas Corporation Commission, for appellee.

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

Kirk T. May and Matthew T. Geiger, of Rouse Hendricks German May PC, of Kansas City, Missouri, for intervenor The Goodyear Tire & Rubber Company.

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

Martin J. Bregman, Executive Director, Law, of Western Resources, Inc., of Topeka; Michael Lennen, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita; and James M. Fischer, of Fischer & Dority, P.C., of Jefferson City, Missouri, for intervenor Western Resources, Inc., and Kansas Gas and Electric Company.

Before RULON, C.J., LEWIS and KNUDSON, JJ.

KNUDSON, J.:

Kansas Industrial Consumers (KIC) filed this petition for judicial review from a final order of the Kansas Corporation Commission (KCC) in an electric utility rate proceeding instituted by Western Resources, Inc. (WRI) and Kansas Gas and Electric Company (KGE). KIC companies include: Atchison Casting Corporation, The Boeing Company, Farmland Industries, Inc., Delphi Automotive Systems, Inc., L.L.C., Hercules Cement Corporation d/b/a Heartland Cement Company, Kansas Hospital Association, and Raytheon Aircraft Company.

Jurisdiction is conferred upon this court under K.S.A. 2001 Supp. 66-118a(b) and in accordance with the Act for Judicial Review and Civil Enforcement of Agency Actions (KJRA), K.S.A. 77-601 et seq. We note in a separate but related proceeding, WRI and KGE have also filed a petition for judicial review from the KCC's order. See Western Resources, Inc. v. Kansas Corporation Comm'n, 30 Kan. App.2d 348, 42 P.3d 162 (2002).

On appeal, KIC challenges the KCC's calculation of revenue requirements of WRI and KGE. Specifically, KIC questions the KCC's adoption of a hypothetical equity structure and its findings regarding revenues and operating expenses. We conclude the KCC acted within its authority, and there exists substantial competent evidence to support its findings.

The KCC Proceedings

In November 2000, WRI filed an application with the KCC, seeking approximately a $92,000,000 rate increase for its electric service division. On the same date, Kansas Gas and Electric Company (KGE), a wholly owned subsidiary of WRI, also filed an application with the KCC for a rate increase of almost $58,000,000. Both applications were consolidated into the same agency docket, 01-WSRE-436-RTS. Public hearings were held by the KCC in April 2001 across the state.

Various parties intervened in the proceedings before the KCC. In addition to WRI and KGE, the intervenors included Unified School District No. (U.S.D. 259), Citizens' Utility Ratepayer Board (CURB), City of Wichita, City of Topeka, the Empire District Electric Company (Empire), Kansas Municipal Energy Agency, The Goodyear Tire & Rubber Company (Goodyear), ONEOK, Inc. d/b/a Kansas Gas Service Company, and the Southcentral Municipal Energy Agency.

The KCC held evidentiary hearings on the applications from May 17, 2001, through June 4, 2001. Thereafter, all the parties had the opportunity to file post-hearing trial briefs and reply briefs.

On July 25, 2001, the KCC issued a decision on the rate applications. The order dealt with a wide variety of issues pertaining to the revenue requirements of WRI and KGE. In conclusion, the KCC ordered a decrease of KGE's revenue requirement by over $41,000,000 and increased WRI's revenue requirement by $18,470,583. Timely petitions for reconsideration attacking various portions of the initial order were filed by KIC, KCC Staff, WRI and KGE, and the City of Wichita.

On September 5, 2001, the KCC issued its order on reconsideration. In this order, the KCC made various adjustments with respect to the restricted share unit adjustment and the Board of Directors' fees, and to account for increased coal prices, corporateowned life insurance, and revenues from the sale of electricity from Jeffries Energy Center to Empire. The KCC also clarified the effective date of interest synchronization and its ruling as to the ONEOK savings adjustment. The end result was a determination that WRI had an increased revenue requirement of $25,401,336 and KGE had a decrease in its revenue requirement of $41,062,598.

Timely petitions for reconsideration were filed from the order on reconsideration by KIC, WRI and KGE, and Goodyear. The petitions for reconsideration were denied in the KCC's final order of October 11, 2001. KIC filed this timely petition for judicial review.

Standard of Review

Pursuant to K.S.A. 66-118c, this court's review of an order of the KCC is in accordance with the KJRA, K.S.A. 77-601 et seq. In its brief, KIC contends the KCC erroneously interpreted or applied the law, that the KCC's order is not supported by substantial evidence, and that the KCC's decision is otherwise unreasonable, arbitrary, or capricious. Those claims of error are consistent with the scope of review under the KJRA. See K.S.A. 77-621.

On appeal, the KCC's findings are presumed valid, and its order may only be set aside by the court if it is not supported by substantial competent evidence, is without foundation in fact, or is otherwise unreasonable, arbitrary, or capricious. Williams Natural Gas Co. v. Kansas Corporation Comm'n, 22 Kan. App.2d 326, 334-35, 916 P.2d 52, rev. denied 260 Kan. 1002 (1996).

It has been repeatedly recognized that the legislature vested the KCC with broad discretion and its findings are presumed valid on review. Because discretion is delegated to the KCC, the courts do not have authority to substitute their judgment for that of the KCC. Moreover, the KCC's decisions involve complex problems of policy, accounting, economics, and other special knowledge that go into fixing utility rates. As a result, the court may not set aside a KCC order merely because the court would have arrived at a different conclusion had it been the trier of fact. The court may reverse or nullify a KCC order only when the decision "`is so wide of the mark as to be outside the realm of fair debate.'" Williams Natural Gas, 22 Kan. App.2d at 335 (quoting Kansas Gas & Electric Co. v. Kansas Corporation Comm'n, 239 Kan. 483, 497, 720 P.2d 1063 [1986]).

The Use of a Hypothetical Equity Structure

In this first issue, KIC argues Kansas law prohibits the KCC from utilizing a hypothetical capital structure for a public utility when determining rates. KIC appears to argue that any "hypothetical" capital structure, by its terms, is based on costs not actually incurred by the utility and is, therefore, unlawful.

In its initial order, the KCC adopted a hypothetical capital structure for WRI and KGE because of the debt/equity imbalance with a stand-alone utility operation. Staff recommended a capital structure of 51.62% long-term debt, 44.14% common stock, 0.90% preferred stock, and 3.34% accumulated deferred investment tax credits. WRI and KGE agreed this structure was not unreasonable, as did KIC. The KCC concluded this recommendation was the most reasonable and valid; the KCC found it was directly related to the actual conditions and operations of the utility and was based on a detailed cash-flow analysis. In adopting a hypothetical capital structure, the KCC indicated it would adjust the interest expense factor through interest synchronization to prevent WRI from collecting from ratepayers income tax expense it would not actually pay. The KCC determined the interest synchronization need only be applied if a stand-alone utility with the unusual high debt capital structure actually came into existence; the KCC also held that if the stand-alone utility of this nature did not materialize or materialized for only an insignificant amount of time, the adjustment would not be applied and the interim rates, upon motion, would be made permanent. KIC attacks both of these determinations.

Did KIC Preserve This Issue for Review?

The KCC argues KIC did not preserve this issue for review. First, the KCC notes KIC agreed that Staffs proposed hypothetical capital structure, which the KCC adopted, was reasonable and supported by the evidence. The KCC also contends KIC has changed the theory of its case on appeal.

In its post-hearing brief filed with the KCC, KIC addressed the capital structure issue. KIC argued WRI's and KGE's hypothetical capital structure would overcharge Kansas retail electric customers. KIC cited its own witness' testimony that proposed a hypothetical 14% equity factor, with the condition that revenues generated based on this factor be limited to the electrical operations and not be allowed to flow to WRI's nonregulated companies. KIC also recognized that CURB's hypothetical structure of 39% equity and Staffs proposed 44.14% allocations were supported by material and credible evidence. In its brief, KIC seemed to recognize the capital structure issue was being determined in the "extraordinarily unusual circumstance" of a public utility with no equity and a significant debt unrelated to its electric operations.

After the KCC filed its initial order adopting Staff's proposed 44.14% equity figure, KIC filed a timely petition for reconsideration. In this petition, KIC argued the KCC should adjust the equity component from the 44.14% to a level of no more than 35%, the actual equity component reflected in WRI's filings with the Securities and Exchange Commission (SEC). KIC argued that Staff's recommendation, as adopted by the KCC, was conditioned on an...