Moundridge Tel. Co. v. Kan. Corp.
| Decision Date | 25 November 2015 |
| Docket Number | No. 114,064.,114,064. |
| Citation | 361 P.3d 523 (Table) |
| Parties | MOUNDRIDGE TELEPHONE COMPANY, INC., Appellant, v. KANSAS CORPORATION COMMISSION, Appellee. |
| Court | Kansas Court of Appeals |
Thomas E. Gleason, Jr., and Mark Doty, of Gleason & Doty, Chtd., of Lawrence, for appellant.
Brian Fedotin, deputy general counsel and chief appellate counsel, of Kansas Corporation Commission, for appellee.
This administrative proceeding began when Moundridge Telephone Company, Inc., (Moundridge) filed an application for additional funding from the Kansas Universal Service Fund (KUSF) with the Kansas Corporation Commission (Commission). Several months later, Moundridge sought to withdraw its application. The Staff of the Commission objected to the attempt to withdraw and alternatively requested the Commission convert the proceeding into an audit of Moundridge's finances to determine its appropriate KUSF entitlement.
The Commission converted the proceeding into an audit and after accepting evidence and hearing testimony, the Commission determined that Moundridge was, in fact, overearning and reduced its KUSF from roughly $250,000 to $0. Moundridge timely filed for reconsideration of the Commission's order. That motion was denied, and Moundridge appeals under K.S.A. 66–118a. Because we find that Moundridge has failed to carry its burden of establishing the Commission's ruling was improper under any provision of the Kansas Judicial Review Act, we affirm.
Moundridge is a rural telephone company authorized by the Commission to operate in east central Kansas. Moundridge is a rural local exchange carrier (RLEC) that elected to be regulated by the Commission under a traditional rate of return scheme. Moundridge also is designated as a carrier of last resort (COLR) under K.S.A.2014 Supp. 66–2009. Moundridge operates approximately 2500 access lines to customers in the Moundridge and Goessell, Kansas, service areas.
In early September 2014, Moundridge filed an application with the Commission seeking additional support from the Kansas Universal Service Fund (KUSF). Specifically, Moundridge asserted that its current support from KUSF, together with its earnings, were inadequate to provide enough revenue to allow it to provide sufficient and efficient service to its customers. Moundridge provided a substantial amount of confidential financial documentation which the company stated showed it was entitled to an additional $725,000–plus in KUSF funding based on a test year ending December 31, 2013. It also presented the prefiled testimony of its president, Carl C. Krebiel, and an expert witness, Tim J. Morrissey.
Moundridge, a Subchapter S corporation, is a wholly owned subsidiary of Emmental, Inc. Emmental, Inc., provides management services to Moundridge and its nonregulated affiliated entities. The subsidiaries of Moundridge include Moundridge Telecom, which provides long-distance telecommunication services. Another subsidiary is Zaziwil, Inc., which functions as a holding company for the group's investments. Moundridge also provides labor and other services to Mid–Kansas Cable Services, Inc., a separate company which provides cable television and high-speed internet services and acts as an agent for Alltel wireless services by selling cellular telephone service plans, phones, and accessories. Finally, Mid–Kansas Cable shares common officers and directors with KCC Rentals, Inc., which owns a building leased to Moundridge for outside plant employees. There is significant overlap in officers, directors, and employees between all related entities.
As is routine in most applications seeking KUSF support or rate increases, the Commission issued an order suspending Moundridge's application for 240 days as provided in K.S.A. 66–117and ordered its Staff to complete a full investigation of the application. In early October 2014, the Commission issued a scheduling order setting forth deadlines for the filing of prefiled testimony by Staff responding to Moundridge's application, any rebuttal testimony, as well as a cutoff date for discovery.
Two months later, and just 5 weeks before Staff's prefiled testimony was due, Moundridge filed a pleading entitled “Withdrawal of Application.” The pleading gave no explanation as to why Moundridge was withdrawing its application or why it decided it no longer needed the additional KUSF funds.
Shortly thereafter, Staff for the Commission filed a motion opposing the withdrawal of Moundridge's application. In the alternative, Staff requested the Commission convert the proceedings into a Commission-initiated audit under the Commission's authority to manage the KUSF. Staff argued that it had spent considerable time reviewing Moundridge's application. Staff further reported that its initial review of the application suggested that Moundridge did not need additional KUSF monies and that it was, in fact, overearning and that its current KUSF allotment should be reduced. Moundridge objected to Staff's request on a variety of grounds not ultimately raised in this appeal. The court granted Staff's motion and issued an order converting the docket into a KUSF audit of Moundridge, with all orders, filings, and discovery incorporated into the converted proceeding. Moundridge sought reconsideration of this order, which was denied by the Commission except for modification of the procedural schedule. Although Moundridge continued to challenge the Commission's authority to convert its application proceeding into a KUSF audit throughout the proceedings, that issue is not raised on appeal.
Meanwhile, the Commission's Staff filed testimony of four Staff employees, Andria Finger, Chad Unrein, Adam Gatewood, and Katie Figgs. Staff also presented the testimony of an independent CPA, Ann Diggs, and consultant Roxie McCullar. Finger and Diggs testified that Moundridge's application had overstated its net intrastate Rate Base and had an unreasonably high rate of return. Unrein recommended various adjustments to Moundridge's income statements. Gatewood recommended the use of a hypothetical capital structure to determine Moundridge's appropriate return on equity and testified that Moundridge's actual capital structure was heavily weighted in equity capital. According to information provided in its testimony, Moundridge's actual capitalization was 4.66% debt and 95.34% equity capital. CPA Diggs also recommended alterations in the manner in which Moundridge allocated its costs and expenses between its regulated business and its nonregulated affiliates and took issue with Moundridge's payroll costs. Thus, based on its calculations and adjustments, Staff found that Moundridge was overearning more than its annual level of KUSF and, accordingly its KUSF should be changed to $0.
Shortly before the public hearing, Moundridge and Staff filed a Joint List of Contested Issues. Those issues included: (1) the appropriate capital structure of Moundridge; (2) whether funding Moundridge lost from the Federal Universal Service Fund (FUSF) should be imputed to its revenues; (3) the proper amount of depreciation expenses; (4) rate case/audit expenses; (5) disallowance of intrastate employee compensation; (6) disallowance of intrastate management fees; and (7) allocation of intrastate expenses to nonregulated entities.
The Commission heard live testimony from various witnesses on February 25, 2015. Thereafter, several posthearing briefs and motions were filed. Moundridge's original posthearing brief did not address the income tax issue raised by one of the Commissioners during the hearings. In its brief, however, Staff not only responded to Moundridge's various arguments but also addressed the income tax issue. Staff cited K.S.A.2014 Supp. 79–32,117(c)(xx)(1)indicating that shareholders of Subchapter S corporations paid 25% in federal income taxes on the company's pass-through income, but no state income taxes. Staff stated that additional schedules would be provided to the Commission that would comply with judicial precedent that the lowest income tax burden would be calculated for purposes of determining Moundridge's income tax expense.
On April 27, 2015, the Commission issued its order setting Moundridge's cost-based universal service support at $0. After setting forth the procedural history of the proceeding, the Commission first addressed the question of the appropriate capital structure that should be used in calculating Moundridge's rate of return. Although Staff and Moundridge agreed on the cost of capital to be used in the rate of return calculation, the Commission discussed Moundridge's actual capital structure, which was equity-heavy. Staff proposed a hypothetical capital structure of 60% equity and 40% debt. The Commission reviewed the testimony of witnesses for both parties and acknowledged Moundridge's argument that it faced greater risk because of its need to upgrade its network infrastructure. After this review, the Commission rejected Moundridge's arguments and adopted the hypothetical 60–40 capital structure recommended by Staff finding that the ratio struck a better balance between the interests of Moundridge's investors and Kansas consumers who contribute to KUSF.
Next, the Commission addressed the effect of recent changes in the federal universal service fund process which resulted in the adoption of K.S.A.2014 Supp. 66–2008(e)(2). As noted in Bluestem Telephone Co. v. Kansas Corporation Comm'n,(No. 112,364, this day decided), the Federal Communications Commission (FCC) issued the USF/ICC Transformation Order (Transformation Order). In the Matter of Connect America Fund,26 FCC Rcd 17663 (2011). In the Transformation Order, the FCC determined that the FUSF system established in 1996 was not effective in encouraging the best technological expansion by carriers receiving support for high cost areas. Transformation Order, 26 FCC Rcd at 17672, ¶ 18.
In response to the FCC's major revisions, the Kansas Legislature am...
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