Midwest Gas Users Ass'n v. State Corp. Commission
| Decision Date | 01 June 1979 |
| Docket Number | 50670,Nos. 50380,s. 50380 |
| Citation | 595 P.2d 735,3 Kan.App.2d 376 |
| Parties | MIDWEST GAS USERS ASSOCIATION and Seymour Foods, Inc., Applicants/Appellants, v. STATE CORPORATION COMMISSION of Kansas, Respondent/Appellee. |
| Court | Kansas Court of Appeals |
Syllabus by the Court
1. Determining the total revenue requirements of a utility to give it a reasonable return and designing a rate schedule (I. e., pricing the product to particular classes of customers to permit the utility to recover the revenue to which it is entitled) are separate processes which entail different and distinct considerations.
2. Subjective factors which make a strict cost analysis approach to rate design unrealistic, both in attainment and in terms of operation, include (a) the unfeasibility and impracticability of measuring and incorporating specific serving costs to customers in a rate schedule; (b) the fact that the sum of differential or marginal costs would not equal the total costs of the utility's operations (I. e., the revenues equaling the sum of the costs of all of a utility's services to individual customers would not be sufficient to recapture the costs of doing business); and (c) the fact that costs relevant to total revenue requirements are different from those that are sought to be applied in determining specific rates.
3. In designing a rate structure the corporation commission has wide discretion in determining the factors upon which it will rely. It is not required to apply a cost-of-service formula to each class of customer or to each customer within a class, but may consider other factors including the value of the service to each class.
4. For rate design purposes cost studies may be required by the commission or may be offered by a party, but the weight to be given the resulting data when offered is peculiarly within the domain of the KCC.
5. While the general rule is that one class of utility customers is not to be burdened with costs created by another, a rate structure approved by the corporation commission will be upheld by the courts unless the evidence indisputably demonstrates a violation of that principle.
6. That a utility derives a higher rate of return from sales to one class of customers than from sales to another does not make its rate schedule unjust or unreasonable.
7. In a proceeding to review orders of the state corporation commission approving a rate schedule for the retail sale of natural gas, it is held: (a) The commission was authorized to weigh value of service more heavily than cost of service; (b) it does not clearly appear that the schedule requires one class of customers to bear costs created by another; (c) the commission could properly consider the rising cost of gas and the apparently impending gas shortage; (d) the commission's findings of fact were adequate; (e) the commission could properly clarify the language of its original order in an order denying a rehearing; (f) the rate schedule is not shown to be unlawful or unreasonable.
W. H. Bates of Lathrop, Koontz, Righter, Clagett, Parker & Norquist, Kansas City, Mo., and Thomas L. Theis of Sloan, Listrom, Eisenbarth, Sloan & Glassman, Topeka, for applicants-appellants.
Walker A. Hendrix, Sp. Counsel, and Bruce E. Miller, Gen. Counsel of the State Corp. Com'n, Topeka, for respondent-appellee.
Donal D. Guffey, Kansas City, Mo., and Richard C. Byrd of Anderson, Byrd & Richeson, Ottawa, for intervenor The Gas Service Co.
Before FOTH, C. J., and SPENCER and MEYER, JJ.
In this case we are asked to find unreasonable a rate schedule for the retail sale of natural gas proposed by the Gas Service Company and approved by the Kansas Corporation Commission. We are unable to so find.
The issues in this case were first raised on December 9, 1976, when the Company filed an application for a rate increase with the KCC. That application was assigned Docket No. 110,038-U. Appellant Midwest Gas Users Association intervened in that proceeding. Midwest is an association, many of whose members are customers of the Company who are assigned to an "interruptible" status. When total demand on the Company's system exceeds its capacity, service to interruptible customers may be curtailed or cut off. Interruptible customers who wish to continue operations during forseeable periods when their gas supply is cut off necessarily have available alternative sources of fuel and the physical capacity to utilize such alternatives. Appellant Seymour Foods, Inc., is an industrial "interruptible" customer who separately intervened, but who joined Midwest in all previous proceedings and in this court. We thus have no issue as to Midwest's standing, and all references to "Midwest" are equally applicable to Seymour.
Midwest's objection to the Company's application went not to the amount of the requested increase but to the proposed rate structure. Its claim was that the rate schedule placed too much of the burden of the increase on "interruptible" customers and too little on the Company's "firm" customers, such as residential users, who have a guaranteed supply regardless of demand. The KCC approved the rate schedule and Midwest sought review (under the then provisions of K.S.A. 66-118c) in the district court of Jefferson County. That court affirmed the KCC in November, 1978, and Midwest appealed to this court.
In the meantime, on January 30, 1978, the Company filed a second application for a rate increase, including a new rate schedule. That proceeding was assigned KCC Docket No. 113,728-U. Midwest (and Seymour) again intervened making the same objections to the proposed rate structure. The KCC authorized part of the rate increase sought, and in its order again approved a rate schedule containing the same features deemed objectionable by Midwest in the first proceeding. Midwest again sought judicial review, this time in this court under the 1978 amendment to K.S.A. 66-118a giving us exclusive jurisdiction of such proceedings, in lieu of the district court. (Laws 1978, ch. 265, § 1, effective July 1, 1978.) The review proceeding in this court was commenced while the earlier proceeding was still pending in the district court.
The two proceedings were consolidated in this court. The KCC and the Company moved to dismiss the appeal in the earlier proceeding on the grounds of mootness, citing Six Cities v. State Corporation Commission, 213 Kan. 413, 516 P.2d 596 (1973). That position may technically be correct, since the later rate schedule supersedes the earlier one and, since no stay bond was posted, revenues collected under the earlier schedule are not subject to refund. We nevertheless decline to dismiss because of the close interrelationship of the two proceedings, including an identity of issues and the fact that the order entered and much of the testimony taken in the earlier proceeding were relied on and incorporated by reference in the later one. While our discussion is largely in terms of the later proceeding, it applies in principle to both. Since we affirm in both, the result is the same.
It should be noted at the outset that neither of the rate increases sought was based on the increased cost of gas to the Company. Higher prices from the Company's wholesale supplier (Cities Service Gas Pipeline Company), when authorized by the federal regulatory agency, are passed on to the Company's retail customers by "purchased gas adjustments." Those price increases are preauthorized by the KCC and do not require KCC approval each time they are encountered, although their effect will later be incorporated in a proposed rate which Is submitted for approval. Rather, the increases sought here are the result of increased operating expenses.
As previously noted, Midwest's objection is not to the amount of the total rate increase allowed, but to the manner in which the increase is to be spread among the Company's customers. That proposal is to increase the rates charged to each customer by a uniform amount (the proposal was $.0435) per thousand cubic feet (Mcf) of gas consumed. This makes the increase Proportionately higher for "interruptible" customers because they have always paid lower rates than the Company's firm customers. Although the rate schedule covers a number of different classes of customers, the following incomplete and highly condensed table from the latest application will illustrate the result:
base rate increase new rate percentage increase
--------- -------- -------- -------------------
Domestic & small $2.9589 .0435 $3.0024 1.47
Commercial/industrial
(firm customers)
Large commercial $1.1476 .0435 $1.1911 3.79
(interruptible)
Large industrial $1.1449 .0435 $1.1884 3.80
(interruptible)
The "base rate" is the charge per Mcf for the first "block" of gas consumed each month. Rates decrease as usage increases, with lower rates prescribed for each additional block.
The historical justification for the rate discrepancy demonstrated has been this: A utility must have the plant and distribution capacity to meet its firm customers' peak demand for a gas company, the winter months. During the slack season there will necessarily be excess capacity; the interruptible customers take the product during the slack season with only a minimal cost to the utility for additional distribution lines, thus purchasing a commodity that would otherwise go unsold. Any revenue from such sales over the direct cost of making them helps meet fixed costs. Thus such sales, even at reduced rates, are seen as benefiting the firm customers by permitting the reduction of their rates by the amount of "profit" derived from the interruptibles, while preserving the utility's overall return on its rate base. The rates set seek to achieve a balance between the elements of demand and the quantity of the commodity consumed.
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