Rural Telephone Service Co. v. Kansas Corporation Comm'n, 90,452

• Decision Date: 18 July 2003
• Docket Number: No. 90,452,90,452
• Parties: RURAL TELEPHONE SERVICE COMPANY, INC., Petitioner, v. KANSAS CORPORATION COMMISSION, Respondent.
• Court: Kansas Court of Appeals

31 Kan.App.2d 760

72 P.3d 937

RURAL TELEPHONE SERVICE COMPANY, INC., Petitioner, v. KANSAS CORPORATION COMMISSION, Respondent.

No. 90,452

Court of Appeals of Kansas

Opinion filed July 18, 2003.

Mark E. Caplinger and James M. Caplinger, of James M. Caplinger, Chartered, of Topeka, for appellant Rural Telephone Service Company, Inc.

Anne E. Bos and Eva Powers, assistants general counsel, Susan B. Cunningham, general counsel, of Topeka, for appellee Kansas Corporation Commission.

Thomas E. Gleason, Jr., of Gleason & Doty, Chartered, of Lawrence, for intervenor Independent Telecommunications Group.

Before JOHNSON, P.J., PIERRON and GREEN, JJ.

JOHNSON, J.:

Rural Telephone Service Company, Inc. (Rural) appeals from the final order of the Kansas Corporation Commission (KCC or Commission) which approved Rural's revised rate tariffs, but which also reduced the payments Rural receives from the Kansas Universal Service Fund (KUSF) in order to offset the increased revenue the Commission estimated would be generated by the revised tariffs. We reverse and remand for further proceedings.

Rural is a rate of return KCC-regulated class B telephone utility having less than 20,000 access lines. Rural commenced the case now before us by filing an application for revised tariffs, pursuant to K.S.A. 66-117, which requires all regulated public utilities to file changes in rates, tolls, charges, etc., at least 30 days prior to the proposed effective date of the change. Rural's filing proposed an increase to certain service charges (e.g., line connection and reconnection charges), an addition of certain calling features (e.g., telemarketer block), an increase in the cost of some existing calling features (e.g., voice mail), a decrease in the cost of some existing calling features (e.g., automatic redial), and an addition of a package of calling features offered at a discounted price. The KCC stayed the effective date of the proposed changes and commenced an investigation. Ultimately, the KCC considered the tariff application in the context of its prior actions involving Rural's rates and subsidies, thus requiring a brief historical recitation to fully understand the appeal issue presented.

The controversy on appeal involves the KCC's implementation of the Kansas Telecommunications Act of 1996 (KTA), K.S.A. 66-2001 et seq., which was enacted shortly after the Federal Communications Act of 1996, 47 U.S.C. § 151 et seq., effected a deregulation of the telecommunications industry. Traditionally, local exchange carriers (LECs) subsidized the cost of local telephone services through higher intrastate access and toll charges. The KTA required that "[r]ates for intrastate switched access, and the imputed access portion of toll, shall be reduced over a three-year period with the objective of equalizing interstate and intrastate rates in a revenue neutral, specific and predictable manner." K.S.A. 66-2005(c). The KCC was authorized to rebalance local service rates to help offset the intrastate access and toll charge reductions, but the KTA also created the KUSF to subsidize that portion of the mandatory reductions which was not offset by local service increases, thus ameliorating the impact on local service customers.

All telecommunication carriers contribute to KUSF in a manner prescribed by the KCC and then KUSF monies are distributed to qualifying telecommunications carriers to help defray financial losses caused by the deregulation process. K.S.A. 66-2008(b). At first, KUSF was based on the actual revenues lost because of the mandatory reductions. K.S.A. 1996 Supp. 66-2008(a). Subsequently, the fund became cost-based and the amended statutory provision required that by 2006, all KUSF support was to be based on each carrier's "embedded costs, revenue requirements, investments and expenses." K.S.A. 66-2008(e); see Citizens' Utility Ratepayer Bd. v. Kansas Corporation Comm'n, 264 Kan. 363, 385, 956 P.2d 685 (1998) (revenue neutrality provisions of KTA are transitional; KCC may consider costs). In other words, KUSF support would be based on each carrier's specific revenue requirements as determined by that carrier's actual circumstances, rather than simply calculating the revenues the carrier lost because of the deregulatory rate rebalancing. This methodology assures that each LEC receives only the amount of subsidy it needs and precludes a windfall to those LECs that are using noncompetitive services to subsidize the services subject to competition.

In 1999, the KCC began the KUSF cost-based review process by initiating a docket to determine how to calculate appropriate cost-based payments from KUSF to Sprint and Southwestern Bell Telephone Company (SWBT), the two largest KUSF recipients. The KCC delayed review of KUSF payments to rural LECs pending further action of the Federal Communications Commission (FCC). In September 2000, the KCC began its review of KUSF payments to Rural, which was receiving the third largest KUSF distribution, after Sprint and SWBT. To complete the KUSF audit, the KCC ordered Rural to supply detailed information on costs, revenues, and rates based on a test year ending December 31, 1999. The audit resulted in a determination that Rural was over-earning by $723,614 and the KCC's June 25, 2001, order reduced Rural's KUSF payments accordingly. This order was not appealed.

In January 2002, Rural filed an application with the KCC for supplemental KUSF funding (supplemental KUSF proceeding). Rural's application purported to show that the company had invested over 12 million dollars in its physical plant after the 1999 audit docket test year. KCC's Staff opposed Rural's application, claiming the application was an attempt to circumvent rate case regulation through an improper vehicle. The KCC agreed and dismissed the application without a hearing on May 8, 2002. Rural apparently did not appeal this dismissal.

Also in January 2002, Rural filed a petition under K.S.A. 66-2007 seeking to increase its base service rates by $1.50 per line (rate docket). Under K.S.A. 66-2007, the KCC had no discretion to reject the rate increase unless at least 15% of Rural's customers objected to the increase. The KCC ultimately approved the requested rate increase on April 23, 2002. In its order, the KCC noted it was concerned that Rural's petition was filed so quickly after the completion of Rural's audit docket. It indicated that although it could not adjust KUSF support in conjunction with this rate change, it would "consider the impact of this increase on the KUSF in relevant dockets that are pending or are opened in the future."

On May 9, 2002, shortly after the approval of its local service rate increase and the dismissal of its request for supplemental KUSF, Rural filed the subject tariff application (tariff docket). KCC Staff sent Rural's counsel a letter dated June 6, 2002, advising Rural that due to the close proximity of the tariff application to the recent audit, any rate changes in the tariff had to be revenue neutral, absent a showing that extra revenue was necessary. The correspondence included requests for information on how many customers subscribed to existing services and how many customers Rural anticipated would subscribe to new services.

On June 7, 2002, the KCC suspended the effective date of the tariff for 240 days, finding that a full investigation of the application was warranted. See K.S.A. 66-117. The suspension order made no mention of the potential for KUSF adjustments. Other than the data requests relating specifically to the tariff application, the KCC did not order or request information about Rural's costs, expenses, or revenue requirements.

On September 30, 2002, KCC Staff submitted a memorandum to the Commissioners, noting Rural's recent local exchange rate increase and indicating that the proposed tariff would increase Rural's annual revenue by $60,984. Pointing to the prior reduction in Rural's KUSF support in the audit docket, the Staff suggested Rural would again be over-earning because of the projected increased revenues from the revised tariff. Accordingly, Staff recommended the KCC approve Rural's tariff subject to a corresponding decrease in Rural's KUSF payments to offset the additional revenue generated by the revised tariffs.

On October 9, 2002, the KCC entered its order in conformance with Staff recommendations. The order specifically found and concluded that the tariff revisions were reasonable. On October 18, 2002, Rural filed a timely petition for reconsideration, which was denied by order, dated November 7, 2002. On December 6, 2002, Rural filed a timely petition for judicial review in the Graham County District Court. Rural asserted that the KCC's order was a nonrate hearing order properly appealed to the district court, that the KCC lacked authority to reduce its KUSF funding because such an adjustment can only be effected in an audit or general rate case investigation, and that the KCC's actions were unlawful, unreasonable, arbitrary, and capricious. In January 2003, the KCC filed a motion to transfer and a motion to dismiss in response to Rural's petition for judicial review. The KCC asserted that because Rural's application called for rate increases and resulted in the reductions of Rural's KUSF payments, the KCC's orders constitute rate orders; therefore, the matter should be transferred to the Court of Appeals pursuant to K.S.A. 66-118a(d). Rural opposed the motion. Following a hearing and after taking the matter under advisement, the district court transferred the case to the Court of Appeals as a "rate hearing." On appeal, Rural does not challenge the transfer.

The case was docketed in this court on April 3, 2003. The Independent Telecommunications Group, Columbus, et al., a consortium of rural telecommunications companies, was allowed to intervene.

In its brief, Rural contends that the KCC acted unlawfully and unreasonably. Specifically, Rural contends that...