Opinion ID: 1678864
Heading Depth: 1
Heading Rank: 4

Heading: Retroactivity of KRS 278.183

Text: The final significant issue is whether the statute was retroactively applied. The protestants argue that the fundamental legislative intent of the statute is to equalize the financial consequences of a utility's decision as between scrubbing and fuel switching to meet the requirements of the Clean Air Act. The issue relates to the request by the Utility for prospective recovery of the costs of 15 projects. Eight of the 15 projects relate to federal, state or local environmental requirements other than the Clean Air Act of 1990. The Commission order allowed the Utility to recover costs incurred after June 1, 1994, for compliance with the Clean Air Act of 1990 and other environmental requirements applicable to coal facilities used to generate electricity. The PSC used the current net book value of the pre-1993 projects rather than the original investment in determining the amount of the costs. The circuit judge refused to impose a surcharge for environmental costs incurred by the Utility years before the event of the Clean Air Act. The Court of Appeals held that KRS 278.183 allows recovery of costs that are to be used to comply with the applicable environmental requirements that are not already included in existing rates. KRS 278.183(1) and (2). This would include costs of projects already completed but not included in existing rates as well as projects completed in the future. Only the current costs of such projects were recoverable as distinguished from past costs. The Commission and the Utility contend that the order of the Commission was not unlawfully retroactive because the environmental capital costs from 1983 to 1992 recovered through the surcharge are currently being carried on the accounting records of the Utility at net depreciated costs. The Commission and the Utility respond that because the 1983-1992 environmental capital costs have been depreciated in value prior to their inclusion in the surcharge of 1994, the statute has not been applied retroactively. KRS 446.080(3) states no statute shall be construed to be retroactive unless expressly so declared. This is a principle fundamental to statutory construction in Kentucky. The courts have consistently upheld this admonition and have declared that there is a strong presumption that statutes operate prospectively and that retroactive application of statutes will be approved only if it is absolutely certain the legislature intended such a result. This is particularly true when the legislation is substantive and not remedial, and new rights and new duties are created. We cite only a few of the numerous cases which confirm that principle as follows: Gould v. O'Bannon, Ky., 770 S.W.2d 220 (1989); Hudson v. Commonwealth, Ky., 597 S.W.2d 610 (1980); Roberts v. Hickman County Fiscal Court, Ky., 481 S.W.2d 279 (1972); Webster County Soil Conservation Dist. v. Shelton, Ky., 437 S.W.2d 934 (1969); Davis v. Commonwealth Life Ins. Co., Ky., 284 S.W.2d 809 (1955); City of Covington v. Sohio Petroleum Co., Ky., 279 S.W.2d 746 (1955); ITT Commercial Finance Corp. v. Madisonville Recapping, Ky.App., 793 S.W.2d 849 (1990). There is simply no evidence of a clear legislative intent that the surcharge is to be applied retroactively. The statute expressly declares that the law is to become effective January 1, 1993. There is nothing inherent in the nature of the statute which requires, by necessity, any retroactive application. The surcharge permits a utility to submit its compliance plan for meeting environmental requirements to the Commission for approval. The plain and unambiguous language of the statute indicates that no surcharge is to be allowed until after Commission approval of a compliance plan. Clearly, this is necessarily a prospective exercise. There is no reason to believe that the legislature intended that the PSC approve, after the fact, actions by the Utility which have occurred more than ten years previous. It is of no consequence that the 1983-1992 environmental capital costs included in the surcharge in 1994 have been reduced by depreciation. KRS 446.080(3) prohibits applying statutes retroactively to any costs which occurred prior to January 1, 1993, the stated effective date of the surcharge statute. The fundamental rule in statutory interpretation is to give effect to the legislative intent. Wesley v. Bd. of Education of Nicholas County, Ky., 403 S.W.2d 28 (1966). A statute should not be interpreted so as to bring about an absurd or unreasonable result. The policy and purpose of the statute must be considered in determining the meaning of the words used. Cf. Wade v. Comm., Dept. of Treasury, Ky.App., 840 S.W.2d 215 (1992). The primary intent as expressed by the legislative preamble is to promote the use of high sulfur Kentucky coal by permitting a surcharge for scrubbing equipment. Many of the costs authorized for recovery in the surcharge were used by the Utility years before there was any thought of the Clean Air Act of 1990. During the 1983-1992 period, the earnings of the Utility were presumed to be at an appropriate level, even after the environmental capital expenditures were made. If they were not, the Utility could have sought a rate increase through a general rate case. The retroactive application of the statute here gives the Utility a financial windfall by allowing recovery of costs which have long ago been booked, taxes and accounted for in the annual reports to the shareholders and countless state and federal regulatory filings. Such a result runs directly counter to the clear legislative intent. The legislation involved is substantive and not remedial. The surcharge creates a new right for all electric utilities, that is, the right to recover expenses as well as a return on and a return of capital costs associated with environmental projects without filing a general rate case. The law also requires consumers to pay for the costs of the environmental compliance plan through the surcharge. These new rights and responsibilities did not exist before the enactment of the surcharge. Therefore, the statute is a substantive change to the Public Utility Code and was not intended to remedy any past wrong or codify an existing procedure. It was only intended to apply to the Utility's future obligation to comply with new environmental laws. The costs recovery section of the statute, which is Section (2), must be read together with the compliance plan in Section (1). The Court of Appeals concluded that the statute was not applied retroactively by authorizing surcharge recovery for the going-forward capital costs of the project built before the effective date of the law. This type of analysis does not consider that the compliance plan approval is a prerequisite to the surcharge recovery and that the compliance plan cannot be made up of assets developed as much as ten years before the effective date of the law. Moreover, the analysis used by the Court of Appeals improperly applied traditional rate-making accounting principles to the new surcharge. The Court of Appeals made reference to the fact that current statutes require utilities to maintain their system of accounts in accordance with the guidelines established by the Federal Energy Regulatory Commission, and that such accounting and rate making allow capital assets to be depreciated and recovered in rates over their useful lives. Consequently, the surcharge for the net-book costs of the historical assets in question were not retroactive. We agree with the cogent argument presented by the KIUC that this is selective application of traditional rate-making principles so as to benefit the Utility. In a typical general rate case, all the assets and liabilities included on the books of the utility for as long as the utility has been in existence are considered. Here, the traditional rules about rate making have been completely changed. Instead of examining all the elements of a rate base necessary to provide electric service, the surcharge looks specifically at only one element of the cost of service, that is, the environmental compliance plan charges at a date certain, which is January 1, 1993, the effective date of the statute. In addition, the statute begins by stating that notwithstanding any other provision of this chapter ... This is a clear indication that the General Assembly intended to consider the surcharge separately without regard to any other rate-making statutes. The PSC is not required to set any rate based on the accounting entries of the utility it supervises. Fern Lake Co. v. Public Service Com'n, Ky., 357 S.W.2d 701 (1962). The accountants for the Utility do not establish the rates for the consuming public. Only the regulatory commission has that responsibility. It should be understood that the judgment originally rendered by the circuit court did not mean that the Utility will be denied rate recovery for its environmental projects built before January 1, 1993, the effective date of KRS 278.183. It only means that such recovery can be achieved through a general adjustment to rates, not the specialized surcharge procedure. It is the holding of this Court that KRS 278.183 is constitutional but that it has been applied retroactively in violation of KRS 446.080(3) by the Public Service Commission order which allows Kentucky Utility Company to recover environmental expenditures incurred before January 1, 1993. The decision of the Court of Appeals is affirmed in part and reversed in part. All costs associated with the environmental capital projects built before January 1, 1993, the effective date of KRS 278.183, cannot be included in the surcharge. Therefore, this portion of the case is remanded to the Public Service Commission for a specific calculation of the appropriate rate adjustment. All concur.