Court Opinion

ID: 9615961
Source: CourtListenerOpinion
Date Created: 2023-08-22 04:42:09.406183+00
Date Added: 2024-06-11T18:03:53.996553
License: Public Domain

Schroeder, C.J.,
dissenting: Viewing the “end result” of the orders of the Kansas Corporation Commission (KCC) from the record presented to this court for review, it is readily apparent the orders are unlawful, unreasonable, arbitrary and capricious.
In Power Comm’n v. Hope Gas Co., 320 U.S. 591, 88 L. Ed. 333, 64 S. Ct. 281 (1944), the United States Supreme Court addressed the considerations to be taken into account by the Federal Power Commission in setting “just and reasonable” rates for natural gas companies, as required by sec. 4(a) of the Natural Gas Act of 1938, 15 U.S.C. § 717 (1982). In applying the standard requiring “just and reasonable” rates, the Hope court emphasized the focus of inquiry is upon the end result or “total effect” of the rate order, rather than the rate-setting method employed. The court described the rate determination process as a balancing process between the various interests, including the consumer and the investor.
Rates set within the “broad zone of reasonableness” cannot be attacked as confiscatory if, in the balancing test, proper consideration is given the interests of the utilities’ investors, the present ratepayers, the future ratepayers, and the public. Permian Basin Area Rate Cases, 390 U.S. 747, 770, 20 L. Ed. 2d 312, 88 S. Ct. 1344, reh. denied 392 U.S. 917 (1968).
A more detailed examination of these various interests and the law applicable to this case will be discussed later. Of prime importance to my reasoning, which brands the decision of the KCC in this case as arbitrary and confiscatory, are several established facts.
First: Counsel for the KCC admitted, in argument of this case before the Kansas Supreme Court, that the initial decision of the utilities to build a nuclear reactor plant at Wolf Creek for the generation of electricity was not an imprudent decision. The general nature of the admission concedes the generating capacity of the Wolf Creek plant as planned was reasonable.
*517Second: In January 1977, the Nuclear Regulatory Commission (NRC), the successor to the Atomic Energy Commission, issued a temporary work authorization permit for the construction of a nuclear facility on Wolf Creek in Coffey County for the generating capacity planned by the utilities.
Third: The KCC determined a total of $183 million, or about 10% of the costs of construction of the Wolf Creek facility attributable to Kansas, was inefficiently and imprudently incurred. On this sum the utilities were denied both a recovery of and a return on that portion of the costs of construction. Without conceding this to be a proper determination, for purposes of my dissent it will be assumed the determination was within the evidence presented and within the discretionary power of the KCC. (The KCC made this determination using perfect hindsight without taking into consideration the information and data available to the utilities when the decisions were made.)
The court in its opinion attributes vast expertise to the KCC to regulate utilities in the public interest. The opinion also states that to guard against arbitrary action the KCC is required to state expressly its findings of fact and conclusions of law. This concession by the court, however, does not warrant the court’s abrogating its function of review on appeal as mandated by the legislature. Kansas Bd. of Regents v. Pittsburg State Univ. Chap. of K-NEA, 233 Kan. 801, 830, 667 P.2d 306 (1983) (Schroeder, C.J., dissenting).
The historical background and other factual recitations related in the court’s opinion will not be restated, and further discussion will proceed on the assumption the reader is familiar with this information. In my opinion, the KCC has simply refused to recognize reality concerning the economic conditions of national scope encountered by the utilities after entering into the contract for construction of the Wolf Creek facility.
Figuratively speaking, the record discloses the KCC, from the time of its initial investigation into the cost overruns at the Wolf Creek plant in 1979, began loading its guns with ammunition for bear to ambush the utilities with the rate orders it eventually entered, after the utilities applied to the KCC to authorize a rate increase.
Legislation was enacted in 1984 (K.S.A. 66-128 through 66-128k) and amended in 1985 (K.S.A. 66-101 et seq.). This legisla*518tion was referred to by Robert Vancrum as The Wolf Creek Excess Cost — Excess Capacity Bill, 33 Kan. L. Rev. 475 (1985). The legislation is broad in scope and was enacted in anticipation of rate increases from 40% to 110% when the Wolf Creek plant became operational. This legislation as construed and as applied by the KCC is unconstitutional. It was enacted seven years after construction of the Wolf Creek facility was begun in 1977. True, it was enacted before the utilities made application for a rate increase, but it was applied to the utilities as a penal statute by the KCC to force a gigantic forfeiture of capital investment. As this legislation was applied, it is arguably an ex post facto law. While the United States constitutional provision (art. 1, sec. 10) prohibiting the enactment of ex post facto laws by the states is applied primarily to criminal enactments, it has also been extended to civil statutes that are penal in nature. The courts look to the purpose of the statute to see if it is punitive or penal. See Flemming v. Nestor, 363 U.S. 603, 613-18, 4 L. Ed. 2d 1435, 80 S. Ct. 1367 (1960); American Power and L. Co. v. Securities and Ex. Com’n, 141 F.2d 606 (1st Cir. 1944), aff'd 329 U.S. 90, 91 L. Ed. 103, 67 S. Ct. 133 (1946); Dock Watch Hollow Quarry Pit v. Tp. of Warren, 142 N.J. Super. 103, 361 A.2d 12 (1976), aff'd 74 N.J. 312, 377 A.2d 1201 (1977); Springer v. Whalen, 68 App. Div. 2d 1011, 415 N.Y.S.2d 106 (1979).
Furthermore, as construed and as applied by the KCC the legislative enactment is confiscatory — violative of the due process clause of the U.S. Constitution. It is the taking of private property for public use without just compensation. Power Comm’n v. Pipeline Co., 315 U.S. 575, 86 L. Ed. 1037, 62 S. Ct. 736 (1942); Bluefield Co. v. Pub. Serv. Comm., 262 U.S. 679, 67 L. Ed. 1176, 43 S. Ct. 675 (1923); Smyth v. Ames, 169 U.S. 466, 42 L. Ed. 819, 18 S. Ct. 418 (1898); Williams v. City of Wichita, 190 Kan. 317, 341, 374 P.2d 578 (1962) (Schroeder, J., dissenting).
The legislative enactments of 1984 and 1985 pertaining to Wolf Creek need not be held unconstitutional, if there is any way to uphold their constitutional validity. This can be done by construing the legislative enactments to require compliance with Hope and other state and federal decisions which mandate that rates set for public utilities fall within the “broad zone of reasonableness” by a balancing process between the various inter*519ests — the interest of the utility investors, the present ratepayers, the future ratepayers, and the public.
Taking into consideration the equation which requires the balancing of the various interests and the three factual considerations heretofore enumerated, what did the KCC do?
It heard the testimony of 479 consumers of electricity; 475 of them were present ratepayers. Their common voice was one of opposition to increased electric utility rates. It is apparent the end result of the KCC order reflects almost a complete disregard of the other interest groups in the equation.
With focus on the major issue in this case, determination of the rate base attributed to the Kansas portion of the Wolf Creek facility, how did the KCC accomplish its result? First, the KCC made a deduction of 10% imprudent construction costs from the rate base, for which no income on or recovery of capital is permitted. This forecloses further penalty for imprudent management decisions.
Second: The KCC then made a major deduction from the rate base of those construction costs attributable to excess physical capacity. This is a deduction based on all construction costs of the Wolf Creek plant attributable to Kansas over and above the used and useful portion needed for the generation of electricity to supply present and reserve needs which the KCC projected to the 1990 anticipated need. However, to determine excess generating capacity of the Wolf Creek facility the KCC included the electric generating capacity of two Hawthorn fossil fuel plants that had been decommissioned and put in mothballs. The effect of this was to increase the excess capacity of the Wolf Creek facility, which resulted in a larger deduction from the rate base for excess physical capacity. This was done in the face of notification to the utilities in the early 1960s that fossil fuels were being depleted and would eventually become unavailable for the generation of electricity.
Many public utility commissions in other states have made no deduction for excess capacity from the rate base. Re Iowa-Illinois Gas & E. Co., 56 P.U.R. 4th 361 (Ill. 1983); Re Public Service Co. of Indiana, 51 P.U.R. 4th 6 (Ind. 1983); Re Cleveland Electric Illum. Co., 46 P.U.R. 4th 63 (Ohio 1982); Re Pacific Power & Light Co., 63 P.U.R. 4th 642 (Or. 1984).
Third: Not content with the end result after the enormous deduction for excess physical capacity from the rate base, the *520KCC then made a further enormous deduction from the portion of the Wolf Creek facility attributable to Kansas for what it termed “excess economic capacity.” This portion of the Wolf Creek plant costs excluded from the rate base (representing investment in “excess economic capacity”) is not warranted because it represents a further deduction from that portion of the plant which the KCC specifically found to be used and useful. This additional exclusion from the rate base is simply a double-whammy for “excess capacity.”
No cases have been cited to this court, and our research has disclosed none, where any court has upheld an exclusion of excess economic capacity from the rate base similar to what the KCC has done here. State commissions where an attempt was made rejected the deduction of excess economic capacity from the rate base. Re Washington Water Power Co., 60 P.U.R. 4th 503 (Idaho 1984); Re Union Electric Co., 67 P.U.R. 4th 218 (Ill. 1985); Re Union Electric Co., 72 P.U.R. 4th 444 (Iowa 1986).
The method used by the KCC to determine “excess economic capacity” was the unprecedented revaluation of the Wolf Creek facility to generate electricity as a hypothetical coal plant. It compared the cost of generating one megawatt of electricity in a newly constructed hypothetical coal plant to the cost of generating one megawatt of electricity in the Wolf Creek facility based on the construction costs of the Wolf Creek facility. It is conceded electricity generated from a nuclear energy plant requires greater capital investment in the initial construction, but it is much cheaper to operate once the plant is constructed. A coal plant costs less to construct, but it is more expensive to operate.
The KCC refused to permit the utilities in this case to present their evidence that the Wolf Creek facility was the most efficiently built nuclear energy facility in the United States as of the time it was constructed.
The fallacy in the determination made by the KCC to deduct “excess economic capacity” from the rate base is disclosed by an analysis of the reasons for the tremendous increase in construction costs after initial construction began. Approximately 50% of the increased costs encountered by the utilities in constructing the Wolf Creek facility were attributable to changing regulatory safety requirements imposed by the federal Nuclear Regulatory Commission following the Three Mile Island nuclear accident in *521Pennsylvania. These costs were not anticipated when construction of the Wolf Creek facility began. There was no way the utilities could avoid these costs imposed by the Nuclear Regulatory Commission. The construction and operation of nuclear power plants has been preempted by federal law in the form of the Atomic Energy Act. In Northern States Power Company v. State of Minnesota, 447 F.2d 1143, 1154, (8th Cir. 1971), the court said:
“[W]e hold that the federal government has exclusive authority under the doctrine of pre-emption to regulate tire construction and operation of nuclear power plants, which necessarily includes regulation of the levels of radioactive effluents discharged from the plant.” (Emphasis added.)
The United States Supreme Court in Pacific Gas & Elec. v. Energy Resources Comm’n, 461 U.S. 190, 75 L. Ed. 2d 752, 103 S. Ct. 1713 (1983), held broadly that “the Federal Government has occupied the entire field of nuclear safety concerns,” and that “the NRC [has] exclusive authority over plant construction and operation.” 461 U.S. at 212. Regulation in the field of the traditional state area of utility rate regulation may not stand when, as here, it transgresses upon areas reserved to the federal government. While the KCC is not required to value the Wolf Creek facility at the value requested by the utilities, the KCC must not preclude a return on costs required to comply with federally mandated nuclear safety regulations.
Indirectly, the KCC by deducting from the rate base its determination of “excess economic capacity” has refused to honor the costs attributable to federal preemption.
Obviously, a conflict exists between the KCC’s orders and the prior decision of the NRC that the Wolf Creek facility would be needed. Fuel diversity was needed when the Wolf Creek facility was planned.
If the orders of the KCC are upheld in this case, potential owners of future nuclear power plants will choose not to build such plants because they will not be permitted to recover the costs mandated by the federal government’s nuclear safety regulations. This prospect clearly stands as an obstacle to the important federal goals found in the Atomic Energy Act of encouraging the development of nuclear power and the goal of encouraging the use of fuels other than oil and natural gas found in the Fuel Use Act.
*522Directing attention to the admission of the KCC that the initial decision of the utilities to construct the Wolf Creek facility was a prudent decision, it is inconceivable the KCC would not have issued a siting permit for the plant’s construction had such permit been required. Where a siting permit has been issued by the KCC, a finding of lack of prudence in capacity planning for a facility which in whole or in part represents excess capacity shall not be made. Reasonable action by the KCC should have taken this into consideration. The KCC smugly states in its brief, however, that no siting permit was issued. Furthermore, authorization of the KCC under K.S.A. 66-128e to exclude from value of utility property for rate-making purposes that portion of the costs attributable to investment in excess capacity, which were incurred due to lack of prudence in facility planning, has no application in this case. The entire cost of the Wolf Creek facility attributable to Kansas was found to be prudent, except for the 10% found to be imprudent. Findings by the KCC in determining the rate base in this case are clearly inconsistent.
The perfect hindsight approach taken by the KCC to support its orders was taken from the testimony of its expert witness, Dr. Richard A. Rosen.
On cross-examination Dr. Rosen said his research firm was very new to the field of nuclear economics; that it only started to consider nuclear economics in 1980. He testified that everywhere they turned at that time they found a tremendous lack of research. He testified the planning and decision-making process of the utilities concerning the Wolf Creek facility was seriously inadequate and at the end of 1981 the reasonable and prudent course of action for the utilities should have been to abandon the project; that the losses incurred after 1981 should be borne 100% by the shareholders; and that the losses that occurred prior to 1981 should be shared 50-50 between the shareholders and the ratepayers. Actually, abandonment of construction prior to completion of the Wolf Creek project is academic because the project was never abandoned.
Dr. Rosen’s statements are amusing because, according to case law, had the project been abandoned the total expenditures for the first five years of construction would have been “sunk costs.” That is, the investors would not be permitted to recover either income on or return of their capital investment under the law in *523some states. Citizens Action v. Northern Indiana Public, 485 N.E.2d 610 (Ind. 1985); Dayton Power Light Co. v. Pub. Util. Comm., 4 Ohio St. 3d 91, 447 N.E.2d 733 (1983).
The specific after the fact test proposed by Dr. Rosen violates the well-established rules for determining the prudence of management decision-making. His proposal violates basic tenets of fairness by radically altering the “rules of the game” after the investors’ funds have been committed.
Cases relied upon by the KCC to support its deduction of “excess economic capacity” from the rate base and burden the investors with these excess economic costs do not support its action. The KCC contends the investors assumed these risks under its authority to allocate such risk to them. The “risk-sharing” cases cited by the KCC fall into one of four categories, none of which concerns excess economic capacity — abandoned or cancelled plant, plant that is not used and useful, legislative caps on nuclear investment, and plant failure.
The KCC argues the utilities are not denied recovery of capital expenditure on those costs deducted from the rate base for “excess physical capacity” and “excess economic capacity” because the utilities will be permitted to recover these costs by an annuál depreciation allowance over the life of the Wolf Creek facility. This is misleading. In the KCC order the following is stated:
“We find that some carrying costs associated with the debt and preferred stock costs of capital should be accrued. Such carrying costs, however, should only be those associated with the portion of Wolf Creek excluded on a physical excess capacity basis valued at the same economic value as the portion included in rate base.”
A regulatory body may not arbitrarily use the asserted, lower cost of a fictional facility instead of the historical cost of an actual facility in assigning a value to the facility in question for rate base purposes, particularly where that is done selectively to achieve the lowest possible rate base. The KCC cites no cases whatsoever where the concept of risk sharing, or any other concept, was used to justify hypothetical coal plant revaluation of a nuclear generating facility.
The Iowa State Commerce Commission, upon Union Electric Company’s application for a rate increase based on the Callaway nuclear plant in Missouri, was faced with the argument that there were cheaper cost alternatives to a nuclear plant, such as a *524coal-fired plant, and only the cost of the lower-cost alternative should be allowed in the rate base. Re Union Electric Co., 72 P.U.R 4th 444, 450 (Iowa 1986). There the Commission responded and held:
“The evidence showed that when the Callaway project was planned in the 1970s, a nuclear plant was a reasonable alternative. Union Electric’s choice to ‘go nuclear’ was prudent when made. Now that a nuclear plant has been completed, Union Electric should be allowed to collect rates consistent with the operation of a nuclear plant, rather than some other type of plant. Attributing the cost of an alternate type of generating plant to the Callaway plant is illogical.” (Emphasis added.)
See also In the Matter of the Application of Southern California Edison Company before the Public Utilities Commission of the State of California, Application 85-05-144 (December 18, 1985), rejecting the question of retroactive “value based” rate making relating to the Palo Verde Nuclear Generating Station.
Without any precedent for its revaluation, the KCC asserts that it has properly allocated to the investors the “risk” that Wolf Creek construction costs would exceed that of a coal plant. But the investors in the Wolf Creek facility did not “assume the risk” of any unprecedented, arbitrary denial of a return on precedent construction costs of used and usable Wolf Creek capacity, merely because they exceeded the construction costs of a coal plant of the same size.
Imputing imprudent construction costs of 10% to KEPCo is, in my opinion, erroneous. KEPCo buys electrical energy at wholesale, having no generating facilities of its own. The lines over which electricity is supplied to the various cooperatives in KEPCo are ownedby KG&E. KG&E would not supply electricity to KEPCo unless KEPCo bought into the Wolf Creek facility. Therefore, KEPCo had no choice if it was to continue supplying electricity to its cooperatives. Furthermore, in KEPCo the consumers of electricity are the owners of the Cooperative. Therefore, shifting the risk to the investors is simply shifting the burden to the consumers.
It is respectfully submitted the orders of the KCC should be reversed and the case remanded to the KCC for the establishment of just and reasonable rates.