Williams Natural Gas Co. v. State Corp. Com'n of State of Kan.

• Decision Date: 14 May 1996
• Docket Number: No. 75730,75730
• Citation: 22 Kan.App.2d 326,916 P.2d 52
• Parties: , Util. L. Rep. P 26,548 WILLIAMS NATURAL GAS COMPANY, Petitioner/Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Respondent/Appellee.
• Court: Kansas Court of Appeals

Page 52

916 P.2d 52

22 Kan.App.2d 326, Util. L. Rep. P 26,548

WILLIAMS NATURAL GAS COMPANY, Petitioner/Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS Respondent/Appellee.

No. 75730.

Court of Appeals of Kansas.

May 14, 1996.

Review Denied July 25, 1996.

Syllabus by the Court

1. Rules relating to the standard of review on appeal of orders by the Kansas Corporation Commission are set forth and interpreted.

2. In a multiple-order case before the Kansas Corporation Commission, no petition for reconsideration of one or more of the multiple orders is required to exhaust administrative remedies when the following facts are present:

a. The party in question has previously filed petitions for reconsideration of one or more of the multiple orders issued in which all errors claimed on appeal have been brought to the attention of the Kansas Corporation Commission; and

b. the order or orders from which no petition for reconsideration was filed have modified previous orders in favor of the party in question so that such party cannot be said to have been "aggrieved" by the order or orders.

3. The Kansas Corporation Commission has no power to permit an entity to add to its rate base or otherwise recover costs which were not incurred by that entity but were incurred by a previous unrelated entity and were not later acquired by the entity seeking recovery of such costs.

Kevin M. Fowler and John C. Frieden, of Frieden, Haynes & Forbes, Topeka, and David P. Batow, General Counsel, and Gary W. Boyle, Senior Counsel, of Williams Natural Gas Company, Tulsa, Oklahoma, for appellant.

Larry Cowger, David J. Heinemann, and Christopher G. Arth, Assistants General Counsel, of the Kansas Corporation Commission, Topeka, for appellee.

Richard W. Hird, James P. Zakoura, and David J. Roberts, of Smithyman & Zakoura, Overland Park, for intervenor Kansas Pipeline Partnership.

Before BRAZIL, C.J., and LEWIS and GREEN, JJ.

LEWIS, Judge:

In March 1994, Kansas Pipeline Partnership (KPP) and Kansas Natural Partnership (KNP), collectively the Joint Applicants, filed an application before the Kansas Corporation Commission (KCC) for a rate increase. There were several intervenors in the rate case at the KCC level. The only intervenor who remains a party on appeal is Williams Natural Gas Company (WNG). For that reason, we need not identify the other intervenors. KPP and KNP merged as a result of the KCC hearings and no longer have separate identities. However, we will still refer to them as Joint Applicants or by their separate former identities in this opinion.

In summary, the entities still litigating on appeal are the Joint Applicants, the KCC, and WNG. WNG is aggrieved by the action taken by the KCC and occupies the position of the appellant. The other parties all seek to uphold the order of the KCC and are in the position of appellees.

The record of the KCC hearing is voluminous. After considering all the evidence, the KCC granted relief to the Joint Applicants in the form of a multi-faceted rate increase. WNG argues that the KCC erred in allowing the Joint Applicants to recover certain "market entry costs" and certain "carrying costs." There are other issues associated with the "market entry costs" on appeal that, for reasons which will become apparent, are moot. The facts on which the rate increase in question was granted are set forth in a very abbreviated manner in this opinion.

The factual background of this particular rate case began in 1984. In that year, Kansas Pipeline Company, L.P., (KPCLP) and Phenix Transmission Company (Phenix) were granted certificates of convenience and necessity to operate as intrastate natural gas suppliers.

KPCLP and Phenix were formed and granted certificates of convenience and necessity to introduce competition into the natural gas marketplace comprising the state of Kansas. WNG is an interstate natural gas supplier and, as such, is regulated by the WNG has been relatively successful in maintaining its position in the natural gas market. For instance, KPCLP's and Phenix's KCC certification required those entities to make all of their deliveries through Western Resources, Inc. (WRI). KPCLP and Phenix both attempted to do business with WRI but were not successful. That failure can be explained in various ways, but it is apparent that WRI at that time was doing its business with WNG. Thus, WNG is affixed with considerable blame for the failure of KPCLP and Phenix.

Federal Energy Regulatory Commission. It appears from the record that in 1984 and for some years prior thereto, WNG had a virtual monopoly[22 Kan.App.2d 328] over the natural gas market in the state of Kansas. The KCC desired to eliminate this monopoly and granted certain concessions to KPCLP and Phenix in the hopes that these entities would successfully create at least a duopoly in the market.

Both KPCLP and Phenix were failed ventures. They did not earn the revenues anticipated and apparently lost considerable amounts in operating revenues. There are a variety of reasons for the failure of these entities, but the KCC and the Joint Applicants blame WNG and WRI. In fact, the KCC specifically blamed WRI for KPP's "lag in developing business." It found that KPP's problems were due to the fact that "WRI was either unable or unwilling to alter or to potentially place in jeopardy its long-term relationship with WNG." In order to punish WRI for not doing business with KPP, the KCC has authorized nearly $4 million in market entry costs to be recovered by direct billing only WRI.

In 1990, the Joint Applicants were formed. KPP was formed as a partnership between Kansas Pipeline Company and OKM Gas Pipeline Company. KPP was formed "for the purpose of acquiring and operating the natural gas pipeline assets of KPCLP." (Emphasis added.) KNP was formed as a partnership between Kansas Natural, Inc., and OKM Gas Pipeline Company "for the purpose of acquiring and operating the pipeline assets of KNI (formerly Bishop which was formerly Phenix)." The new entities were formed; KPCLP's certificate of convenience and necessity was transferred to KPP, and Phenix's certificate of convenience and necessity was transferred to KNP.

It appears that the Joint Applicants paid approximately $44 million for the pipeline assets of KPCLP and Phenix. It is clear that only the assets of KPCLP and Phenix were purchased. This is to say that this was an assets-only sale; there was no purchase of stock, no outright assumption of debts or past sins as may occur when the stock of a corporation is purchased instead of its assets. In other words, the Joint Applicants are not the lawful successors of KPCLP and Phenix; they are only entities which purchased the assets of KPCLP and Phenix.

In 1991, in a largely ex parte proceeding, the Joint Applicants obtained certain "accounting orders" from the KCC. WNG was not a party to this proceeding and did not seek to intervene. KNP was authorized by the KCC to amortize over 30 years "all of those authorized amounts permitted by the Commission to be earned by KNP, but not earned, in the period May 1985, through November 30, 1990, due to litigation initiated against the Commission and KPP by others, as well as other causes." The KPP accounting order contained the same language but limited the period covered to a period from January 1985 to October 31, 1988. We should note that factually neither of the Joint Applicants existed during the period of time covered by the special accounting orders and, despite the language of those orders, could not possibly have been authorized to earn the amounts referred to in the special accounting orders. The Joint Applicants did not come into existence until 1990, and it appears that not even the KCC could have authorized or enabled a nonexistent entity to earn money during a time that it did not exist.

The next significant event is the current rate case. The Joint Applicants have won a rate increase, and WNG opposes it. The Joint Applicants blame WNG for most of their problems, past, present, and future. They suggest that WNG's only motive is to preserve its monopoly position and that it is doing everything it can to "prevent or frustrate the entry of the Applicants as market participants."

WNG argues that the rate increase granted to the Joint Applicants gives them an unfair competitive edge. WNG suggests that even though its prices for natural gas are much lower than those of the Joint Applicants, certain entities such as WRI are bound by contract to purchase natural gas from the Joint Applicants, regardless of the difference in price.

The atmosphere in which this case was tried appears to have been one of mutual hostility and suspicion. This attitude continues to evidence itself on the appellate level. In essence, the argument is made that the KCC orders were directed at breaking up a monopoly and that this is such a laudable goal that the orders must be upheld. While we acknowledge that the goal of the KCC to introduce competition into the sale of natural gas was a laudable one, we do not believe that goal increased the power or authority of the KCC beyond the rule of law.

The KCC issued a number of orders in this case dealing with many different issues. WNG's only claim of error is directed at the "market entry costs" allowed to be recovered by the Joint Applicants. There is no claim of error as to any of the other orders issued by the KCC in this case.

At this point, we pause to note that it is difficult to precisely define what is meant by market entry costs. Despite that difficulty, we will use that term in this opinion. In general, these market entry costs are losses or shortfalls in revenue which were experienced by KPCLP and Phenix from 1985 through 1990. They appear to be somewhat in the nature of net operating losses. By whatever name we use to describe them, they were incurred by KPCLP and Phenix, and the KCC order treats them as assets of the Joint...