371 P.3d 923
Kan. Ct. App.2016Background
- KCP&L (a utility subsidiary of Great Plains Energy) sought a $67.3 million rate increase based on a test year July 2013–June 2014 with adjustments through March 2015; the Kansas Corporation Commission granted a $48.67 million increase.
- The proceeding narrowed at hearing to four contested issues, principally the appropriate return on equity (ROE) and whether flotation costs should be included in ROE.
- Four experts testified on ROE: KCP&L’s Hevert (recommended 10.30%), Commission Staff’s Gatewood (recommended 9.0–9.5%), CURB’s Woolridge (8.55%), and Walmart’s Chriss (trend evidence; no independent calculation).
- Key contested methodological points: choice/size of proxy groups, long‑term growth (nGDP) assumptions used in DCF and CAPM models, treatment of flotation costs (adjust ROE vs. treat as operating expense/pro‑forma adjustment).
- The Commission adopted a middle‑ground ROE (near Staff’s range), rejected Hevert’s high growth assumptions and upward flotation adjustment for lack of quantified unrecovered flotation costs, and explained balancing investor and ratepayer interests.
Issues
| Issue | KCP&L’s Argument | Commission/Staff/CURB Argument | Held |
|---|---|---|---|
| Appropriate ROE | Hevert: investors expect ~10.3%; company needs higher ROE (higher risk, reduced dividends) | Gatewood/Woolridge: market/forecast data support lower ROE (9.0–9.5% or 8.55%); Hevert used overly optimistic growth and narrow proxy group | Commission’s ROE supported; court affirms (substantial evidence supports middle ground, cannot reweigh experts) |
| Growth input for DCF/Multi‑stage DCF | Hevert: long‑term growth ~5.6% (80‑yr GDP mean) | Gatewood/Woolridge: use lower nGDP (~4.3–4.5%) based on Fed, SSA, EIA; Hevert’s rate is unrealistically high | Commission credited lower nGDP estimates; Hevert’s growth inputs were unreliable |
| Choice/size of proxy group | KCP&L: Hevert selected 13 closely comparable firms | Staff/CURB: larger proxy sets (22 etc.) give more reliable picture; adjust for mergers/dividends/revenue mix | Commission found Staff/CURB proxy choices reasonable and declined to adopt Hevert’s narrower set |
| Treatment of flotation costs | KCP&L: flotation should increase ROE (Hevert added upward adj.) and be recovered as capital cost | Staff: no ROE adj without evidence of unrecovered flotation; treat as pro‑forma operating expense or amortize if proven | Commission declined to include flotation in ROE absent quantified unrecovered costs; court held change was not arbitrary given record and ample notice/opportunity to respond |
Key Cases Cited
- Home Telephone Co. v. Kansas Corporation Comm'n, 31 Kan. App. 2d 1002 (Kan. Ct. App. 2003) (agency reversal of long‑standing treatment without adequate notice can be arbitrary)
- Bluefield Co. v. Public Service Comm'n, 262 U.S. 679 (U.S. 1923) (utility rates must allow opportunity to earn a return comparable to investments with similar risk)
- Southwestern Bell Telephone Co. v. State Corporation Commission, 192 Kan. 39 (Kan. 1963) (courts review overall reasonableness of rate to ensure utility can remain financially stable)
- Kansas Gas & Electric Co. v. Kansas Corporation Comm'n, 239 Kan. 483 (Kan. 1986) (utility ratemaking is legislative in nature and agencies have broad discretion)
- Kansas Industrial Consumers v. Kansas Corporation Comm'n, 30 Kan. App. 2d 332 (Kan. Ct. App. 2002) (standard for overturning commission order: outside "zone of reasonableness")