Kentucky Indus. Utility Customers, Inc. v. Kentucky Utilities Co., s. 97-SC-1091-D

• Decision Date: 17 December 1998
• Docket Number: 97-SC-1095-DG,Nos. 97-SC-1091-D,s. 97-SC-1091-D
• Parties: Util. L. Rep. P 26,697 KENTUCKY INDUSTRIAL UTILITY CUSTOMERS, INC. and Lexington-Fayette Urban-County Government, Appellants, v. KENTUCKY UTILITIES COMPANY; Commonwealth of Kentucky, ex rel. A.B. Chandler, III; Attorney General; Jefferson County, Kentucky, ex rel. Michael E. Conliffe, Jefferson County Attorney; Metro Human Needs Alliance; People Organized and Working for Energy Reform and Kentucky Public Service Commission, Appellees. Commonwealth of Kentucky, ex rel. A.B. Chandler, III, Attorney General, Appellant, v. Kentucky Public Service Commission; Kentucky Utilities Company; Kentucky Industrial Utility Customers, Inc.; Jefferson County, Kentucky ex rel. Michael E. Conliffe, County Attorney; Lexington-Fayette Urban County Government; Metro Human Needs Alliance Association; and People Organized and Working for Energy Resources, Appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 493

983 S.W.2d 493

Util. L. Rep. P 26,697

KENTUCKY INDUSTRIAL UTILITY CUSTOMERS, INC. and Lexington-Fayette Urban-County Government, Appellants, v. KENTUCKY UTILITIES COMPANY; Commonwealth of Kentucky, ex

rel. A.B. Chandler, III; Attorney General; Jefferson

County, Kentucky, ex rel. Michael E. Conliffe, Jefferson

County Attorney; Metro Human Needs Alliance; People

Organized and Working for Energy Reform and Kentucky Public

Service Commission, Appellees.

Commonwealth of Kentucky, ex rel. A.B. Chandler, III, Attorney General, Appellant, v. Kentucky Public Service Commission; Kentucky Utilities

Company; Kentucky Industrial Utility Customers, Inc.;

Jefferson County, Kentucky ex rel. Michael E. Conliffe,

County Attorney; Lexington-Fayette Urban County Government;

Metro Human Needs Alliance Association; and People

Organized and Working for Energy Resources, Appellees.

Nos. 97-SC-1091-DG, 97-SC-1095-DG.

Supreme Court of Kentucky.

Dec. 17, 1998.

Michael L. Kurtz, Boehm, Kurtz & Lowry, Cincinnati, OH, for KUIC, Appellant.

Edward W. Gardner, Lexington-Fayette Urban County Government, Lexington, Elizabeth E. Blackford, Assistant Attorney General, Frankfort, for Appellants.

Richard F. Newell, Kendrick R. Riggs, Ogden, Newell & Welch, Louisville, for KUC, Appellee.

John R. McCall, Douglas M. Brooks, Louisville Gas & Electric Co., Louisville, for KUC, Appellee.

Elizabeth E. Blackford, Assistant Attorney General, Frankfort, J. Bruce Miller, Louisville, for Jefferson County, Appellee.

Carol M. Raskin, Legal Aid Society, Inc., Louisville, and, Anthony G. Martin, Lexington, for People Organized and Metro Human Needs, Appellee.

Richard G. Raff, Deborah T. Eversole, Kentucky Public Service Commission, Frankfort, for Appellee.

WINTERSHEIMER, Justice.

This appeal is from a decision of the Court of Appeals which affirmed in part and reversed in part a judgment of the Franklin Circuit Court which had found that KRS 278.183 is constitutional, but that it had been applied retroactively in violation of KRS 446.080(3) by the Public Service Commission. That part of the PSC order which allowed Kentucky Utilities to recover an environmental surcharge which included environmental costs incurred before January 1, 1993 was vacated and remanded to the PSC for further determination. This case is one of first impression involving the interpretation of KRS 278.183, the Environmental Surcharge Statute.

The major issues presented are whether KRS 278.183 violates Section 2 of the Kentucky Constitution and whether the statute, if constitutional, permits a surcharge for those projects built before the statute was enacted.

Kentucky Utilities Company filed an application for an environmental surcharge with the Public Service Commission pursuant to KRS 278.183 on January 20, 1994. The application requested authority to increase rates for approximately 430,000 ratepayers located in 77 Kentucky counties. The requested rate increase was $23 million per year after the second full year of the operation of the surcharge. The surcharge rate increase included both residential, industrial and commercial customers.

KRS 278.183 was adopted by the Kentucky General Assembly in 1992 and is commonly known as the Environmental Surcharge Statute. The act was a codification of S.B. 341, 1992 Ky.Acts. ch. 102 § 1, which provided in pertinent part as follows:

WHEREAS, it is hereby declared the policy of the General Assembly to foster and encourage the continued use of Kentucky coal by electric utilities serving the Commonwealth; and

WHEREAS, electric utilities should have incentive to use Kentucky coal in deciding how to best achieve and maintain compliance with the Federal Clean Air Act as amended and those environmental requirements which apply to coal combustion wastes and by-products from facilities utilized for production of energy from coal;

NOW, THEREFORE,

Be it enacted by the General Assembly of the Commonwealth of Kentucky:

SECTION 1. A NEW SECTION OF KRS CHAPTER 278 IS CREATED TO READ AS FOLLOWS:

(1) Notwithstanding any other provision of this chapter, effective January 1, 1993, a utility shall be entitled to the current recovery of its costs of complying with the Federal Clean Air Act as amended and those federal, state, or local environmental requirements which apply to coal combustion wastes and by-products from facilities utilized for production of energy from coal in accordance with the utility's compliance plan as designated in subsection (2) of this section. These costs shall include a reasonable return on construction and other capital expenditures and reasonable operating expenses for any plant, equipment, property, facility, or other action to be used to comply with applicable environmental requirements set forth in this section. Operating expenses include all costs of operating and maintaining environmental facilities, income taxes, property taxes, other applicable taxes, and depreciation expenses as these expenses relate to compliance with the environmental requirements set forth in this section.

The recovery of the costs involved is to be made by a surcharge subject to review and approval by the PSC. KRS 278.183(2).

The legislative intent of the statute was to promote the use of high sulfur Kentucky coal by permitting utilities to surcharge their customers for the cost of a scrubber which is part of a power plant that cleans high sulfur coal in order to meet the acid rain provisions of the Federal Clean Air Act amendments of 1990. This Court recognizes that both high sulfur and low sulfur coal are mined in Kentucky. The high sulfur coal is mined primarily in Western Kentucky whereas low sulfur coal is mined primarily in Eastern Kentucky. The legislature believed that some Kentucky coal was in a disfavored position because high sulfur coal was the product that required pollution control devices. In order to balance the preference for coal produced in the western part of the United States, regulations were enacted which allowed utilities to immediately recover fuel cost increases due to the use of coal produced in the western part of the United States. Prior to 1992, a utility could increase its rates only pursuant to the Fuel Adjustment Clause or as a general rate case. A general rate case pursuant to KRS 278.190 is a lengthy procedure in which a new base rate is approved only after thorough examination of all operations and costs by the PSC. In 1992, the General Assembly enacted the statute involved in this case which allows utilities to use Kentucky coal and collect the costs of cleaning high sulfur coal. The effect is that the statute provides an alternate procedure to increasing the base rate by allowing utilities to recover the costs of environmental compliance by means of a surcharge rather than by opening a general rate case.

I. Due Process

Ratepayers have a right to expect reasonable utility rates. Regulators and utilities alike should respect that right. The proper standard to be applied in judicial review is the rational basis test, and the statute is constitutional if it is rationally related to a legitimate interest. In this statute, the General Assembly acknowledged a state-wide need to continue the use of Kentucky coal so as to provide jobs and other economic benefits in Kentucky. There is a legitimate government interest in securing a sound economy. Cf. Kentucky Harlan Coal Co. v. Holmes, Ky., 872 S.W.2d 446 (1994); Hayes v. State Property and Buildings Commission, Ky., 731 S.W.2d 797 (1987). KRS 278.183 is rationally related to an important governmental purpose of securing a sound economy and does not violate the substantial due process rights of the ratepayer. It is well established that in order to succeed in either a procedural or substantive due process claim, such claimant must demonstrate a legitimate entitlement to a vested property interest. Board of Regents v. Roth, 408 U.S. 564, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972). Utility ratepayers have no vested property interest in the rates they must pay for a utility service despite the fact that it is provided by a regulated monopoly. Smith v. Southern Bell Telephone & Telegraph, 268 Ky. 421, 104 S.W.2d 961 (1937); Wright v. Central Kentucky Natural Gas Co., 297 U.S. 537, 56 S.Ct. 578, 80 L.Ed. 850 (1936).

Kentucky Industrial Utility Customers, Inc. argues that the statute either on its face or as applied by the PSC does not allow a balancing of interests of investors and ratepayers, and therefore violates constitutional due process. It is well settled that rate making is a legislative function and the power vested in the legislature to make rates may be exercised by it either directly or through some appropriate agency. Commonwealth, ex rel. Stephens v. South Central Bell Telephone Co., Ky., 545 S.W.2d 927 (1976). Duquesne Light Co. v. Barasch, 488 U.S. 299, 109 S.Ct. 609, 102 L.Ed.2d 646 (1989), leaves the decision on what rate setting procedures best meet individual needs to the individual states. See also National-Southwire Aluminum Co. v. Big Rivers Electric Corp., Ky.App., 785 S.W.2d 503 (1990), which states in part that there is no litmus test for establishing fair, just and reasonable rates, and there is no single prescribed method for accomplishing that goal. Consequently, the legislature can engage in rate making directly, or delegate that authority to the Commission. The Constitution does not prevent the General Assembly itself from performing an initial balancing of interests and then delegating the specific rate making authority to the Commission. The preamble to the Environmental Surcharge Statute, as well as the statute, indicates that the legislature balanced a variety of competing interests.

In this case, the protestants have already received the "judicial model of an evidentiary hearing" that the United States Supreme Court determined was not required in all instances, even if a constitutionally protected property right exists. Mathews...