Court of Appeals of Missouri, Western District, Second Division
IN THE MATTER OF KANSAS CITY POWER & LIGHT COMPANY'S REQUEST FOR AUTHORITY TO IMPLEMENT A GENERAL RATE INCREASE FOR ELECTRIC SERVICE, Appellant,
MISSOURI PUBLIC SERVICE COMMISSION, Respondent. and MIDWEST ENERGY CONSUMERS' GROUP, Appellant,
from the Public Service Commission
Before: Karen King Mitchell, Presiding Judge, Cynthia L.
Martin, Judge and Gary D. Witt, Judge
D. Witt, Judge.
case consolidates two appeals from a rate case involving
Kansas City Power & Light Company's
("KCPL") request for a rate increase from the
Public Service Commission ("PSC"). KCPL appeals
from the Report and Order ("Report and Order") of
the PSC in its most recent general rate case, pursuant to
Section 386.510. KCPL raises five points on appeal,
challenging the return on equity granted by the PSC, the
methods used to calculate that rate of return, the rejection
of a "tracker" accounting mechanism, the PSC's
refusal to include certain transmission costs in a fuel
adjustment clause, and the denial of certain rate case
expenses. We affirm the PSC's Report and Order.
Energy Consumers' Group ("MECG") is an
unincorporated association that is comprised of large
consumers of energy, which was permitted to intervene in
KCPL's rate case. MECG appeals from the Compliance Tariff
Order, which implemented the Report and Order. MECG raises
seven points of error, each challenging the September 16
Compliance Tariff Order that concluded the Final Compliance
Tariff sheets filed by KCPL complied with the PSC's
September 2 Report and Order. Each point of error challenges
the process and procedure by which the PSC issued its
Compliance Tariff Order. MECG's appeal is dismissed as
a regulated public utility under the jurisdiction of the PSC
of the State of Missouri under Chapters 386 and 393. The PSC
is charged with the authority to set the rates that KCPL is
allowed to charge consumers pursuant to section 393.150. On
October 30, 2014, KCPL filed tariff sheets that would
implement a general rate increase for its retail electric
utility service. KCPL requested an increase on its return on
equity from 9.7% to 10.3%. In addition, KCPL asked the PSC to
adopt a fuel adjustment clause under section 386.266 and to
use an accounting deferral mechanism for certain items of
implementation of the new tariffs was suspended until
September 29, 2015 to allow for full rate case proceedings. A
number of parties intervened and participated in the
proceedings, including MECG. A test year of twelve months,
ending on March 31, 2014 and extended to December 31, 2014,
was agreed to by the parties and adopted by the PSC. The PSC
also established a "true-up" period to run through
May 31, 2015. Public hearings were conducted and evidentiary
hearings were held over a number of days. The parties filed
post-hearing briefs and the case was submitted to the PSC on
August 3, 2015.
Report and Order, the PSC set KCPL's return on equity to
9.5%. The PSC denied KCPL's request for an accounting
deferral mechanism known as a "tracker" for certain
expenses. The PSC permitted KCPL to implement a fuel
adjustment clause, but only for "true" purchased
power, approximately 7.3% of the costs charged to KCPL by the
Southwest Power Pool. Finally, the PSC allowed KCPL to
recover approximately 74.26% of its expenses on the rate
case. Timely applications for rehearing were filed and
appeal follows. Further details regarding the relevant
disputed issues are outlined as applicable in the analysis
sections of each point below.
Standard of Review
order from the PSC is presumed to be valid, and the burden of
proof is on the party challenging the order, by clear and
satisfactory evidence, to show that the order is either
unlawful or unreasonable. See In re Laclede Gas Co.,
417 S.W.3d 815, 819 (Mo. App. W.D. 2014); Section 386.430.
review of the PSC's Report and Order is two-fold.
State ex rel. Pub. Counsel v. Pub. Serv.
Comm'n, 397 S.W.3d 441, 446 (Mo. App. W.D. 2013).
First, we must determine whether the PSC's order was
An order's lawfulness depends on whether the [PSC's]
order and decision was statutorily authorized. When
determining whether the order is lawful, we exercise
independent judgment and must correct erroneous
interpretations of the law. Because the [PSC] is purely a
creature of statute, its powers are limited to those
conferred by statute either expressly, or by clear
implication as necessary to carry out the powers specifically
Id. at 446-47 (internal quotations and citations
omitted). "Second, we must determine whether the
[PSC's] order was reasonable." Id. at 447.
"In determining whether the Commission's order is
reasonable, we consider (1) whether it was support[ed] by
substantial and competent evidence on the whole record, (2)
whether the decision was arbitrary, capricious, or
unreasonable, and (3) whether the [PSC] abused its
discretion." Id. (internal quotations and
"We consider the evidence, along with all reasonable
supporting inferences, in the light most favorable to the
Commission's order. [State ex rel. Mo. Gas Energy v.
Pub. Serv. Comm'n, 186 S.W.3d 376, 382 (Mo. App.
W.D. 2005).] "[I]f substantial evidence supports either
of two conflicting factual conclusions, '[we are] bound
by the findings of the administrative tribunal.'"
State ex rel. AG Processing, Inc. v. Pub. Serv.
Comm'n, 120 S.W.3d 732, 735 (Mo. banc 2003) (quoting
Amway Corp. v. Dir. of Revenue, 794 S.W.2d 666, 668
(Mo. banc 1990)). The determination of witness credibility is
left to the Commission, '"which is free to believe
none, part, or all of the testimony."' Mo. Gas
Energy, 186 S.W.3d at 382 (quoting Commerce Bank,
N.A. v. Blasdel, 141 S.W.3d 434, 456-57 n.19 (Mo. App.
W.D. 2004)). "It is only where a Commission order is
clearly contrary to the overwhelming weight of the evidence
that we may set it aside." Id. Additionally,
with regard to issues within the Commission's expertise,
"we will not substitute our judgment for that of the
Commission." [Union Elec. Co. v. Pub. Serv.
Comm'n, 136 S.W.3d 146, 151 (Mo. App. W.D. 2004)].
State exrel. Pub. Counsel v. Mo. Pub. Serv.
Comm'n, 289 S.W.3d 240, 246-47 (Mo. App. W.D. 2009).
by Kansas City Power & Light Company
One - Return on Equity
KCPL's Point One on appeal, KCPL argues the PSC erred in
choosing a return on equity ("ROE") of 9.5% and in
refusing regulatory treatment that recognizes certain known
future cost increases because the impact of these
determinations is unreasonable and unlawful as it is
Supreme Court has decided that a public utility, as a matter
of constitutional right,
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; but it
has no constitutional right to profits such as are realized
or anticipated in highly profitable enterprises or
speculative ventures. The return should be reasonably
sufficient to assure confidence in the financial soundness of
the utility and should be adequate, under efficient and
economical management, to maintain and support its credit and
enable it to raise the money necessary for the proper
discharge of its public duties.
Bluefield Waterworks & Improvement Co. v. Pub. Serv.
Comm'n of W.Va., 262 U.S. 679, 692-93 (1923).
"A rate of return is generally considered to be fair if
it covers utility operating expenses, debt service, and
dividends, if it compensates investors for the risks of
investment, and if it is sufficient to attract capital and
assure confidence in the enterprise's financial
integrity." State ex rel. Mo. Gas Energy, 186
S.W.3d at 383 (internal quotation omitted); see also Fed.
Power Comm'n v. Hope Nat. Gas Co., 320 U.S. 591,
Missouri, section 393.270.4 governs, in part, the PSC's
authority to fix utility rates, and states the following:
In determining the price to be charged for gas, electricity,
or water the commission may consider all facts which in its
judgment have any bearing upon a proper determination of the
question although not set forth in the complaint and not
within the allegations contained therein, with due regard,
among other things, to a reasonable average return upon
capital actually expended and to the necessity of making
reservations out of income for surplus and contingencies.
rate of return is, essentially, the amount that a utility
must pay to secure financing from debt and equity
investors." State ex rel. Pub. Counsel v. Pub. Serv.
Comm'n, 274 S.W.3d 569, 573 (Mo. App. W.D. 2009).
"To determine the proper rate of return, the commission
should factor '(i) the ratio of debt and equity to total
capital, and (ii) the cost and (iii) weighted cost for each
of these capital components.'" Id. at
573-74 (quoting State ex rel. Mo. Gas Energy, 186
S.W.3d at 383).
a rate of return on equity, however, is imprecise and
involves balancing a utility's need to compensate
investors against its need to keep prices low for
consumers." Id. at 574. Missouri courts have
consistently held that the PSC is not required to utilize any
specific methodology to calculate a just and reasonable
return in setting rates. State ex rel. Praxair, Inc. v.
Pub. Serv. Comm'n, 328 S.W.3d 329, 339 (Mo. App.
W.D. 2010). This Court has outlined the following principles
governing review of the PSC's determination of an ROE.
The Commission has considerable discretion in rate setting
due to the inherent complexities involved in the rate setting
process. State ex rel. Associated Natural Gas Co. v.
Public Serv. Comm'n, 706 S.W.2d 870
(Mo.App.1985). It is not the theory or methodology,
but the impact of the rate order which counts. State ex
rel. Missouri Water Co. v. Public Serv. Comm'n, 308
S.W.2d 704, 714 (Mo. 1957). Missouri courts do not set
utility rates. State ex rel. GTE North, Inc. v. Missouri
Pub. Serv. Comm'n, 835 S.W.2d 356, 361
(Mo.App.1992). "If the total effect of the rate
order cannot be said to be unjust and unreasonable, judicial
inquiry under the Act is at an end." Associated
Natural Gas, 706 S.W.2d at 873 (quoting Federal
Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591,
602-03, 64 S.Ct. 281, 287-88, 88 L.Ed. 333 (1944)). Where
ratemaking is at issue, determinations by the Commission are
favored by a presumption of validity.
State ex rel. Office of the Pub. Counsel v. Pub. Serv.
Comm'n, 938 S.W.2d 339, 344 (Mo. App. W.D. 1997).
set KCPL's ROE at 9.5%, down from the previous return on
equity of 9.7%. KCPL had requested a new return on equity
rate at somewhere between 9.7% and 10.3%. There is not a
single way to determine a proper ROE. Therefore, analysts
utilize three generally accepted methods to estimate a fair
ROE: the Discount Cash Flow Method ("DCF"), the
Risk Premium Method, and the Capital Asset Pricing Method
("CAPM"). Analysts generally balance their use of
all three methods to determine a recommended ROE.
expert witnesses testified as to their opinions regarding the
ROE. One witness, Robert Hevert ("Hevert"), offered
testimony on behalf of KCPL. He recommended an ROE of 10.3%,
within a range of 10.0% to 10.6%. The PSC determined that
Hevert's estimate was too high. The PSC found
Hevert's (1) constant growth DCF results were based on
excessive and unsustainable long-term growth rates, (2)
multi-stage DCF was based on a flawed accelerating dividend
cash flow timing and an inflated gross domestic product
growth estimate as a proxy for long-term sustainable growth,
(3) CAPM was based on inflated market risk premiums, and (4)
bond yield plus risk premium was based on inflated equity
Gorman ("Gorman") testified on behalf of the
Missouri Industrial Energy Consumers and MECG. He testified
that based on returns on equity awarded by other commissions,
a reasonable ROE for KCPL would be 9.5% or less. He
recommended an ROE of 9.1% within a range of 8.8% and 9.4%.
Maureen Reno ("Reno") offered testimony on behalf
of the U.S. Department of Energy and the Federal Executive
Agencies and recommended an ROE of 9.0% within a recommended
range of 8.2% and 9.6%. Finally, Zephania Marevangepo
("Marevangepo") offered testimony on behalf of the
technical staff of the PSC. She recommended an ROE of 9.25%
within range of 9.0% and 9.5%.
found the estimates from Gorman, Reno, and Marevangepo were
reasonable and accurate estimates of the current market cost
of capital for KCPL. The upper ends of the recommendations
from these three analysts were 9.4% to 9.6%. The PSC
concluded that these recommendations relied on verifiable and
independent market data and accepted market-based rate of
return models. The PSC also considered a number of additional
factors, including recent indicators of growth and the
reduction of risk to KCPL by the PSC's approval of a fuel
adjustment clause, which would support a reduced return. KCPL
found that an ROE of 9.5% would allow KCPL to compete in the
capital market for funds needed to maintain its financial
further justify its chosen ROE of 9.5%, the PSC found that,
in general, state public utility commissions are reducing
authorized returns on equity to follow declines in capital
market costs. The PSC looked at industry authorized returns
on equity for fully litigated cases, which in 2014 was 9.63%
and in the first quarter of 2015 was 9.57%. The PSC uses
these comparisons because KCPL must compete with other
utilities in the country for the same capital. Since the last
established ROE of 9.10%, the PSC found that market
capital costs for Missouri electric utilities are lower as a
result of increases in stock prices and decreases in bond
yields and utility dividend yields. In addition, since April
of 2015, capital markets and general economic indicators have
indicated expanding macroeconomic growth and increasing
on the other hand, argues that the PSC made its decision
contrary to evidence of a consistent pattern of KCPL earning
below its authorized ROE. KCPL presented evidence that U.S.
regulatory commissions were approving ROEs that averaged
9.83% during the second quarter of 2015. KCPL also argued
that it has a riskier profile than most other U.S. utilities
that would justify a higher ROE. KCPL takes issue with the
approach taken by the PSC to determine the ROE by relying on
historical costs to set rates. KCPL argues that the PSC's
reliance on historical data will fail to reflect KCPL's
current expenses when the new rates take effect, which KCPL
claims will be higher than historical costs indicate due to a
number of factors, a phenomenon called "regulatory
counters that its approach to calculating the ROE strikes the
appropriate balance between considering historical costs in
setting the ROE and looking at future variables. The test
year is the primary mechanism through which the PSC
determines appropriate rates. The PSC focuses on four factors
during the test year: (1) the rate of return the utility has
an opportunity to earn; (2) the rate base upon which a return
may be earned; (3) the depreciation costs of plant and
equipment; and (4) allowable operating expenses. These
factors are considered to determine the utility's revenue
requirement, which is the amount of revenue taxpayers must
generate to pay the costs of producing the utility's
services they receive while yielding a reasonable rate of
return. The PSC's use of a true-up audit and hearing is
designed to balance the historical data with known and
measureable subsequent and future changes; these are
generally limited only to accounts affected by a significant
known and measurable change, such as a new labor contract,
new tax rate, or the completion of a new capital asset. This
procedure is designed to reduce regulatory lag.
Court's role is not to determine what a reasonable ROE is
but rather to review the record to see if the PSC's
decision is lawful and supported by competent and substantial
evidence. State ex rel. Pub. Counsel, 397 S.W.3d at
447. We must defer to the Commission's decisions
regarding the credibility of witnesses and not second-guess
issues that are within the PSC's area of expertise.
See State ex rel. Pub. Counsel, 289 S.W.3dat247.
Evaluation of expert testimony is left to the Commission
which "may adopt or reject any or all of any
witnesses' testimony." State ex rel. Associated
Natural Gas Co. v. Public Service Comm'n, 706 S.W.2d
870, 880 (Mo. App. W.D. 1985). Since the testimony of both
experts was properly presented to the Commission, it was up
to the Commission to choose between the conflicting evidence
presented as to the propriety of including the cost of the
storage gas in the new rate calculations.
State ex rel. Associated Nat. Gas Co. v. Pub. Serv.
Comm'n, 37 S.W.3d 287, 294 (Mo. App. W.D. 2000).
that the decision of the PSC was lawful and supported by
competent and substantial evidence. First, three experts each
testified credibly, as found by the PSC, as to an appropriate
ROE. The chosen ROE of 9.5% was within the ranges of the
recommendations of these three experts. The PSC found the
testimony of expert Gorman credible that an ROE as low as
9.1% would maintain KCPL's financial integrity and
ability to attract capital. Gorman's analysis included an
evaluation of the risks and uncertainties faced by utilities
comparable to KCPL, thus complying with the Supreme
Court's guidance in Bluefield. See Bluefield
Waterworks, 262 U.S. at 692. Further, the PSC determined
that an ROE of 9.5% was close to the average of comparable
utilities, which in 2014 was 9.63% and in the first quarter
of 2015 was 9.57%. This Court has previously approved a
"zone of reasonableness" established by the PSC
that considered a return on equity within 100 basis points
(i.e. 1.0% above or below) the national average as
presumptively reasonable. See State ex rel. Pub.
Counsel, 274 S.W.3d at 574; In re Permian Basin Area
Rate Cases, 390 U.S. 747, 767 (1968)("courts are
without authority to set aside any rate selected by the
Commission [that] is within a 'zone of
reasonableness'"). Here, the zone of reasonableness
within the national average, as found by the PSC, is 8.63% to
10.63%. An ROE of 9.5% falls squarely within the zone of
reasonableness. Also, we have held that where the ROE falls
within the range recommended by the expert witnesses and is
in keeping with the average for other similarly situated
entities, in the absence of any other significant showing
that the figure established is unreasonable, this Court must
defer to the PSC. See State ex rel. Noranda Aluminum,
Inc. v. Pub. Serv. Comm'n, 356 S.W.3d293, 311 (Mo.
App. S.D. 2011).
KCPL complains that the PSC only looked to
"fully-litigated" cases rather than to all other
rate cases to determine comparable returns on equity, KCPL
has cited no authority that would suggest the PSC's
reliance on fully-litigated cases is improper. Our role is
not to second-guess issues that are within the PSC's area
of expertise and we will not do so here. See State ex
rel. Pub. Counsel, 289 S.W.3d at 246-47. KCPL relies
extensively on past actual returns on equity to argue
reducing its ROE here is unreasonable, but such comparisons
are only of limited value as the PSC cannot compensate KCPL
for previous unearned equity but may only use that
information in its calculations of a reasonable return going
forward. See State ex rel Mo. Gas Energy, 186 S.W.3d
at 383 (the law does not require that rates yield any
particular return and past losses are not considered in
deciding whether a new rate is confiscatory).
although KCPL complains that the historical test-year model
with a true-up period does not adequately take into account
regulatory lag, the PSC has adapted its methodology to
attempt to account for regulatory lag. The true-up period
established by the PSC was designed to remediate some of the
negative effects of regulatory lag by taking into account
known and measurable subsequent or future changes to
KCPL's expenses. Again, the PSC is not obligated to use
any set methodology in making its ROE determinations but must
exercise its considerable discretion and expertise in finding
an ROE that is just and reasonable. See State ex rel.
Praxair, Inc., 328 S.W.3d at 339. Determinations of the
PSC have the presumption of validity that will not be upended
for the sole reasons that KCPL believes it has a better way
to calculate an ROE. Id. ("Where ratemaking is
at issue, determinations by the [PSC] are favored by a
presumption of validity.") The best way to account for
regulatory lag is a question of methodology and is best
addressed by the expertise of the PSC, which this Court will
not second-guess. See State ex rel. Pub. Counsel,
289 S.W.3d at 246-47.
that KCPL's chosen return on equity was lawful and
supported by substantial and competent evidence. Point One is
Two and Three - Tracking Mechanisms and Forecasts
claims in Points Two and Three on appeal are largely
intertwined and, therefore, will be considered together. In
its case in chief and in direct testimony, KCPL requested
that the PSC grant it the use of tracking
mechanisms for expenses related to certain
transmission fee expenses, property tax expenses, and
CIP/cyber-security expenses. In sur-rebuttal testimony, KCPL
suggested, in the alternative to the requested tracking
mechanisms for these expenses, in the event those mechanisms
were denied by the PSC, that its estimates of future expenses
regarding the above categories be added to the figures from
which the PSC calculates KCPL's revenue requirements.
denied KCPL's request to use tracking mechanisms as to
each of these categories of expenses. This is the subject of
KCPL's Point Three on appeal, considered first, in which
KCPL claims the PSC erred in denying its request for a
"tracker" accounting deferral mechanism because the
legal conclusion by the PSC that only
"extraordinary" items could be deferred as
regulatory assets is unlawful and unreasonable because it is
contrary to the Uniform System of Accounts
("USOA"), adopted by the PSC, because the USOA does
not require that revenues, expenses, gains or losses be
"extraordinary" in order to be deferred as a
regulatory asset or liability.
has the power, pursuant to section 393.140(4), to prescribe
uniform methods of keeping accounts. The PSC has adopted a
rule that requires utilities to use the USOA to maintain
their books and records. See 4 CSR 240-20.030.
KCPL's arguments regarding the USOA and its alleged right
to use a tracking accounting deferral mechanism completely
ignore that the PSC's decision that only extraordinary
expenses should be allowed such treatment is a policy
decision that has been made by the PSC and is not dictated by
whether, in the abstract, the USOA provides a mechanism to
defer costs, whatever the type. The PSC has decided that the
"use of trackers should be limited because they violate
the matching principle, tend to unreasonably skew ratemaking
results, and dull the incentives a utility has to operate
efficiently and productively under the rate regulation
approach employed in Missouri." The manager of the
PSC's auditing unit testified that the PSC will issue
accounting authority orders ("AAOs"), which serve
to allow a utility to deviate the normal method of accounting
for certain expenses, most often associated with
"extraordinary" events. The request by KCPL for the
"tracking" accounting mechanism is the same as a
request for an AAO, as it seeks to book a particular cost,
normally charged as an expense on a utility's income
statement in the current period, to the utility's balance
sheet as a regulatory asset or regulatory liability. The
manager testified that the PSC
in prior cases has stated that the standards for granting the
authority to a utility to defer costs incurred outside of a
test year as a regulatory asset are: 1) that the costs
pertain to an event that is extraordinary, unusual and
unique, and not recurring; ...