Midwest Gas Users Ass'n v. State Corp. Commission

• Decision Date: 23 January 1981
• Docket Number: No. 52260,52260
• Citation: 5 Kan.App.2d 653,623 P.2d 924,226 Kan. 792
• Parties: MIDWEST GAS USERS ASSOCIATION and Armco, Inc., Applicants, v. STATE CORPORATION COMMISSION et al., Respondents.
• Court: Kansas Court of Appeals

Page 924

623 P.2d 924

5 Kan.App.2d 653

MIDWEST GAS USERS ASSOCIATION and Armco, Inc., Applicants, v. STATE CORPORATION COMMISSION et al., Respondents.

No. 52260.

Court of Appeals of Kansas.

Jan. 23, 1981.

Review Denied March 25, 1981.

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. Under the constitutional separation of powers, the regulation of public utilities is legislative in nature. The legislature created the Kansas Corporation Commission and granted it full and exclusive authority and jurisdiction to supervise, control and regulate the public utilities of this state and, when acting in the exercise of its delegated powers, the Commission is not a quasi-judicial body.

3. The matter of rate design involves a policy decision which is legislative in nature, and the Commission's orders in that regard demand utmost deference from the judicial branch.

4. On judicial review of an order of the Kansas Corporation Commission in a utility rate case, it is held that the order of the Commission, which authorized an annual increase in revenue allowed the utility to be charged entirely to the large commercial and large industrial classifications of its Kansas customers, was reasonable and lawful.

Stuart W. Conrad, W. H. Bates, and Alfred R. Hupp of Lathrop, Koontz, Righter, Clagett, Parker & Norquist, Kansas City, Mo., and Thomas L. Theis of Sloan, Listrom, Eisenbarth, Sloan & Glassman, Topeka, for applicants.

Terence L. Mundorf, Asst. Gen. Counsel, Wichita, and Brian J. Moline, Gen. Counsel, Wichita, for respondent State Corp. Commission.

Milo M. Unruh, Wichita, for the amicus curiae, Vulcan Materials Co., Chemical Division.

Before SPENCER, P. J., and ABBOTT and MEYER, JJ.

SPENCER, Judge:

In this matter we are concerned only with the rate structure (design) by which The Gas Service Company (hereinafter "Gas Service") may realize increased revenue of $3,153,729, as authorized by order of the Kansas Corporation Commission entered under date of March 5, 1980.

On June 20, 1979, Gas Service filed its application with the Commission for permission to increase retail rates to Kansas customers by an amount sufficient to realize additional annual revenue of $12,749,314. Midwest Gas Users Association and Armco, Inc., (hereinafter collectively "Midwest") were granted leave to intervene. After rehearing before the Commission was denied, Gas Service and Midwest applied for judicial review pursuant to K.S.A. 66-118a. Gas Service subsequently dismissed its application and the parties now before this court are Midwest and the Commission. Vulcan Materials Company, Chemicals Division, has filed its brief amicus curiae.

Gas Service has four service classifications: general (primarily residential), small commercial/industrial, large commercial, and large industrial. Residential and small commercial/industrial users are considered "firm" customers in that gas service to those users is to be provided to the extent possible regardless of demand. Large commercial and large industrial users are considered "interruptible" customers in that service to those users may be curtailed at times when total demand on the system exceeds supply. Because of this and certain historical factors, interruptible customers have traditionally paid lower rates per unit of gas consumed than firm customers.

Of the amount requested by Gas Service, the Commission authorized the annual increase in revenue of $3,153,729 to be charged entirely to the large commercial and large industrial classifications. The net effect is: (1) firm customers pay none of the authorized rate increase, and (2) the difference in rates, which still favors the interruptible customers, has been lessened by $.0893 per mcf, the amount found by the Commission to be sufficient to realize the authorized increase in revenue. The propriety of this rate structure is the sole issue on appeal.

I

Evidence before the Commission demonstrated that the rate increase sought by Gas Service was due to increased general operating expenses. The increased cost of gas to Gas Service was not involved in the rate increase because such is automatically passed through to consumers by means of the "purchased gas adjustment" (PGA).

Evidence regarding rate structure is to be found mainly in the testimony of three witnesses. W. R. Chaney testified for Gas Service. He recommended a uniform increase to each class of customers per mcf of gas consumed. He stated that, in establishing a rate structure, consideration must be given to the recognized decline in gas reserves. Historically, he explained, gas distribution systems were established to serve residential customers. Service to interruptible customers was made possible by periods of surplus inherent within the system, and the addition of interruptible customers to the system was initially of benefit to the residential customer. The interruptibles must necessarily have available an alternative source of fuel. The first priority of a gas utility must be to the firm customers. Continuation of service to the interruptibles in a period of declining reserves can be justified, in his opinion, only "if the price received from such sale is appropriate."

Dennis Kies testified for Midwest. He presented a cost analysis of Gas Service based upon a three-day peak period from December 31, 1978, to January 2, 1979, and concluded that the interruptibles were already subsidizing the firm customers. His recommendation was a uniform percentage increase in rates to the different classes of customers, thus maintaining the existing proportionate differentials between them.

Fred Adam, utilities division director for the Commission, testified regarding the Commission staff's proposed rate design. He was in agreement with Chaney on the need to recognize the diminution of gas reserves. He added that specific recognition must be given to the effect of present consumption on future costs. In his opinion, the firm customers were subsidizing the interruptibles. Since new gas supplies benefit primarily the low priority interruptibles by making it possible for them to continue to receive service, they are subsidized by the residential and small commercial consumers, the higher priority customers, to the extent that the interruptibles pay less than the full cost of the new "replacement" gas. Adam also testified regarding the Natural Gas Policy Act, 15 U.S.C. § 3301 et seq. (Supplement III, 1979). He explained that under the Act the price of natural gas is to be gradually deregulated with a phased-in program of price escalations. The Act also provides for the adoption, by the Federal Energy Regulatory Commission, of incremental pricing regulations whereby natural gas will be priced at the level of alternative fuels first to certain large industrial boiler fuel facilities, and later subject to Congressional review, to other industrial users. Adam recommended placing the entire authorized increase on the interruptibles.

The Commission, after summarizing the evidence and rejecting Kies' cost-of-service study, found:

"Both Mr. Chaney and Mr. Adam recognized in their testimony that the rate design adopted by this Commission must recognize the economic impact of the diminution of gas reserves on the utility and its customers. Both witnesses stated that rates established for industrial and commercial sales should recognize the economic impact to the higher priority domestic and commercial customers from continuing to provide service to lower priority users (large industrial and large commercial). This utility's first priority is to serve its firm (residential) customers and the cost of providing additional gas to meet needs of industrial and large commercial customers must be recognized....

"While rates in the past have been 'cost based,' the Natural Gas Policy Act has created a new and unique situation in rate making. The Act has basically three aspects which affect this case. First, the result of deregulation through, at least 1985, results in constant price escalation to natural gas. Secondly, it entails a departure from fully allocated cost based rates. Third, a principal purpose of the NGPA and incremental pricing is to shelter the firm (residential) customer from the impact of deregulation by, in the first instance, increasing industrial and commercial rates. The overall goals of the NGPA are to encourage conservation, protect the firm (residential) customers from the impact of price deregulation, and price gas at the cost of its replacement. The Commission, being mindful of the above, in order to implement a form of incremental pricing consistent with the NGPA and in conformance with the testimony and evidence heard, makes the following specific findings:

"D. The rate design adopted by this Commission will be to increase the LC and LI schedules as reflected in Appendix C by approximately 8.93 cents per Mcf. This will result in Applicant receiving sufficient additional revenue to cover the increase authorized by this order. Additionally, Applicant will establish an additional tariff which will follow the federally mandated incremental pricing for nonexempt sales up to the federal price ceiling. The currently existing PGA will be appropriate to flow-through the benefit from this additional tariff. Nonexempt customers will pay, under this tariff, the difference between the rates authorized herein and the ceiling price for alternate fuel.

"The Commission believes that this plan will allow Applicant appropriate revenue and the rates resulting therefrom will still be lower than the replacement cost of gas, and will accomplish the purposes of federally mandated incremental...