Opinion ID: 2123906
Heading Depth: 1
Heading Rank: 5

Heading: confiscatory rates

Text: Although the Court of Appeals did not conduct a de novo review on the question of whether the municipalities set confiscatory rates in their ordinances, further review in this appeal requires a de novo review of KN's equity actions against the municipalities. Section 19-4604 of the Municipal Natural Gas Regulation Act states in part: Every rate made, demanded, or received by any utility shall be just and reasonable. Section 19-4612(1) of the act provides: The municipality, in the exercise of its power under the Municipal Natural Gas Regulation Act to determine just and reasonable rates for public utilities, shall give due consideration to the public need for adequate, efficient, and reasonable natural gas service and to the need of the utility for revenue sufficient to enable it to meet the cost of furnishing the service, including adequate provisions for depreciation of its utility property used and useful in rendering service to the public, and to earn a fair and reasonable return upon the investment in such property. Examining a state's regulatory power in setting rates for a utility, the U.S. Supreme Court stated in Bluefield Co. v. Pub. Serv. Comm., 262 U.S. 679, 690, 43 S.Ct. 675, 678, 67 L.Ed. 1176 (1923): Rates which are not sufficient to yield a reasonable return on the value of the property used at the time it is being used to render the service are unjust, unreasonable and confiscatory, and their enforcement deprives the public utility company of its property in violation of the Fourteenth Amendment. This is so well settled by numerous decisions of this Court that citation of the cases is scarcely necessary. The Court further stated: A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties.... 262 U.S. at 692, 43 S.Ct. at 679. Therefore, in setting rates that may be charged by a utility, a state cannot set rates which are unjust, unreasonable, and confiscatory and which, therefore, deprive the utility of property without the due process of law guaranteed by U.S. Const. amend. XIV and Neb. Const. art. I, § 3. See Bluefield Co. v. Pub. Serv. Comm., supra . Thus, the standard for a permissible gas rate under the Municipal Natural Gas Regulation Act is the constitutional standard required for due process. A government-established rate for a utility is confiscatory when the rate fails to produce a return on investment equal to the return realized on investments which have risks corresponding to those of the utility. See, Power Comm'n v. Hope Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944); Los Angeles Gas Co. v. R.R. Comm'n., 289 U.S. 287, 53 S.Ct. 637, 77 L.Ed. 1180 (1933); Bluefield Co. v. Pub. Serv. Comm., supra . In a collateral attack on a rate or rates set by an ordinance, the burden is on a utility to show that the municipally established rate is unjust, unreasonable, and confiscatory in violation of the constitutional right to due process. See Kansas-Nebraska Nat. Gas Co., Inc. v. City of Sidney, 186 Neb. 168, 181 N.W.2d 682 (1970). See, also, Knoxville v. Water Co., 212 U.S. 1, 29 S.Ct. 148, 53 L.Ed. 371 (1909) (courts may enjoin enforcement of utility rates set by an ordinance when the rates are confiscatory and, therefore, invalid under the due process guarantee of the U.S. Constitution). There is no formula for determining whether a rate is confiscatory; rather, a decision whether a rate is confiscatory is based on a consideration of all the relevant evidence. See Los Angeles Gas Co. v. R.R. Comm'n., supra . Proceeding to a de novo review based on the record before us, but disregarding exhibits 1 to 8, which were not offered as substantive evidence, we now consider the ultimate question in this case: Did KN prove that the rates municipally established by ordinance were confiscatory? Dr. R. Charles Moyer, a professor of finance, conducted a study for KN to determine the appropriate rate of return on KN's property used for supplying natural gas to the public. According to Dr. Moyer's study and his testimony at trial, KN's shareholders were entitled to a return of between 13.6 and 14.7 percent on their investment, so that the shareholders would receive a rate of return the same as that received on other investments in similar businesses. To arrive at the rates proposed to the municipalities, KN used the 13.6-percent return expressed in Moyer's study and contends that anything less than a 13.6-percent return is confiscatory. Exhibits other than exhibits 1 to 8 show that the rates municipally established by ordinance would allow KN a return ranging from a high of 1.92 percent to a low of .5 percent and, in one rate area, even a loss of 2.64 percent. Although the municipalities' expert witness testified that KN's rate of return should be 12.2 percent rather than 13.6 percent, the major dispute relates to some assumptions underlying KN's projected expenses and revenues as factors for the increased rates. One of KN's assumptions involved the sales price for products extracted from natural gas before the gas is sold to KN's retail customers. When natural gas is taken from the ground, it contains numerous heavy hydrocarbons that have value independent of the natural gas. KN operates extraction plants at Scott City, Kansas, and Casper, Wyoming, where substances such as propane, butane, natural gasoline, and helium are extracted from the natural gas and sold on the open market. The revenues from the sales of these byproducts are subtracted from KN's cost of providing natural gas to its customers, reducing KN's rates charged in retail sales of natural gas. In projecting the amount of revenues from sales of these byproducts, KN estimated a sales price of $.32 per gallon, which was based on the actual average price obtained from sales during the year ending January 31, 1990. The actual average price during the 4 calendar years preceding 1990 was a per-gallon price of $.31 in 1986, $.28 in 1987, $.27 in 1988, and $.28 in 1989. The Dahlen report suggests that the proper estimated sales price for the byproducts is $.51 per gallon, which was the average sales price of KN's byproducts in September 1990, soon after Iraq's invasion of Kuwait and a worldwide increase in fuel prices based on an anticipated shortage of petroleum products. By March 1991, after the Gulf War, the average price obtained by KN for its byproducts had dropped to $.34 per gallon. Consequently, the Dahlen report's estimate of $.51 per gallon is an inordinately high estimate of prices obtainable in future sales of byproducts. KN's price estimate for future sales of gas byproducts appears more reasonable. Moreover, use of the municipalities' unrealistic price of $.51 per gallon for KN's byproducts results in an increase of nongas revenue and a corresponding decrease in rates based on gas sales. However, when the unrealistic price for byproducts is removed from the equation, the gas rates prescribed by the municipalities cause a reduction ranging from 3.7 to 4.99 percent in the rate of return of KN's equity. Another disputed assumption is KN's estimated revenue from transporting natural gas through its pipelines for other natural gas suppliers. In 1985, the Federal Energy Regulatory Commission (FERC) issued a series of opinions which were designed to stimulate competition through open access to natural gas pipelines. After obtaining FERC approval, pipeline companies can charge a fee for transporting gas for other gas suppliers. The FERC allows pipeline companies to engage in market-responsive pricing and has established maximum and minimum prices that can be charged for transportation services. Within the limits set by the FERC, pipeline companies can charge different prices for transporting natural gas, depending on what the supplier-customer is willing and able to pay. Suppliers that have no alternative transportation are charged the maximum rate, while suppliers that have alternative fuels or alternative means of transportation are charged a lower or discounted rate. KN received permission from the FERC to become an open access transporter on May 1, 1989. Based on historical data, KN estimated receipts of $8.1 million per year for transportation services during the period when KN's proposed rates would be effective. The municipalities contend that KN must calculate its rates based on the maximum rate allowed by the FERC rather than the discounted rate for transportation services. Therefore, according to the municipalities, KN's transportation revenue should be adjusted upward by $6.8 million to $14.9 million. The municipalities' argument ignores economic reality. In sales of transportation services to customers with alternative sources of fuel or alternative means of getting natural gas to a desired location, KN must offer discounts. If KN did not offer discounts to its transportation customers, KN would supply fewer transportation services and, correspondingly, would experience a decrease in transportation revenue as a factor for eventual retail gas rates. Also, if the municipalities' increase of $6.8 million in transportation revenue is used with a corresponding and necessary decrease in gas rates, elimination of the $6.8 million in transportation revenue leaves rates that cause decreases ranging from 4.69 percent to 2.76 percent on KN's equity, depending on the particular locale of a municipality. Therefore, KN's assumptions regarding transportation revenue are more reasonable than are the municipalities' assumptions. In addition to the two disputed assumptions which we have discussed, the municipalities take issue with numerous additional assumptions underlying KN's request for increased rates. Nevertheless, even if the municipalities had adopted rates based only on the municipalities' erroneous assumptions regarding product revenue and transportation revenue, the combined effect of the two assumptions discussed is to decrease the return on KN's equity to a level below that which investors could earn from investments in other similar businesses. Therefore, the municipalities failed to pass rate ordinances that afforded a reasonable rate of return on the value of KN's property used for public service. For that reason, the rates set by the municipalities are confiscatory and deprive KN of its property without due process of law, a violation of U.S. Const. amend. XIV and Neb. Const. art. I, § 3.