Appendix — Kansas Gas & Electric Co. v. State Corp. Commission

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Supreme Court, US.

86-781 FILED

NOV 14 1986

Nos. JOSEPH F. span)

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

KANSAS GAS AND ELECTRIC COMPANY,

. Appellant,

STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS,

Appellee.

KANSAS CITY POWER & LIGHT COMPANY,

. Appellant,

STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS,

Appellee.

On Appeal from the Supreme Court of Kansas

APPELLANTS’ APPENDIX TO

JURISDICTIONAL STATEMENTS

JAMES B. LIBERMAN * EDGAR M. ROACH *

BisHop, LIBERMAN & CooK THOMAS E. GRAHAM

1155 Avenue of the Americas HUNTON & WILLIAMS

New York, NY 10036 P.O. Box 109

(212) 704-0100 Raleigh, NC 27602

Counsel for Kansas City Power (919) 899-3000

& Light Company Counsel for Kansas Gas

and Electric Company

* Counsel of Record

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EE EO Se eRe “nanan ne arent —* a oe

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TABLE OF CONTENTS

Appendix A—Opinion of the Kansas Supreme Court....

Appendix B—Denial of Rehearing by Kansas Supreme

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Appendix C—Order of the Kansas Corporation Com-

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Appendix D~-Order Denying Rehearing (KG&E) .........

Appendix E—Order Denying Application for Rehear-

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Appendix F—Order of the Kansas Corporation Com-

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Appendix G—Order Denying Rehearing (KCPL) .........

Appendix H—Order Denying Application for Rehear-

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Appendix I—Notices of Appeal -..................22.2221.e:cceeee-e-

Appendix J—Excerpts from the Kansas Public Utility

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Appendix K—Published Article in The Wall Street

Journal dated Thursday, October 2,

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Page

APPENDIX A

Opinion of the Kansas Supreme Court

“

IN THE SUPREME COURT

OF THE STATE OF KANSAS

JANUARY TERM, 1986

No. 58,914

KANSAS GAS AND ELECTRIC COMPANY,

Applicant/Appellant,

STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS,

Respondent/ Appellee.

No. 58,917

KANSAS CITY POWER & LIGHT COMPANY,

Applicant/ Appellant,

STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS,

Respondent/ Appellee.

No. 58,918

KANSAS ELECTRIC POWER COOPERATIVE, INC.,

Applicant/A ppellant,

STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS, |

Responuent/ Appellee.

Filed June 13, 1986

SYLLABUS BY THE COURT

1. KANSAS CORPORATION COMMISSION—Nuelear

Power Plant—Valuation of Property for Rate-making

Purposes—KCC Determination. The record is ex-

amined in three consolidated appeals from orders of

the Kansas Corporation Commission determining the

valuation of the Wolf Creek nuclear generating fa-

cility for rate-making purposes and it is held that the

KCC did not err in excluding from the rate base (1)

certain costs of construction found to have been im-

prudently incurred, (2) certain costs found to con-

stitute excess physical capacity, and (3) certain

costs found to constitute excess economic capacity.

2. SAME—Electrical Utilities—Rates—KCC Determina-

tion. The Kansas Corporation Commission, in setting

the rates for an electrical utility, should have as its

goal the fixing of the rates, within a zone of reason-

ableness after balancing the interests of the utility’s

investors, the ratepayers, and the public.

3. SAME—Public Utilities—Rates—No Constitutional

Requirement that Rates Be Set at Level that Will

Guarantee Return on Capital Investment. There is

no constitutional requirement that a utility’s rates be

set by a regulatory authority at a sufficiently high

level to guarantee a return on its capital investments,

irrespective of the interests of the ratepayers and the

public.

4. SAME—Nuclear Power Plant—Statutory Authority

of KCC to Set Rates. The Kansas statutes which give

the power and authority to the Kansas Corporation

Commission to fix the rates for a public utility

(K.S.A. 66-101 et seg.) are analyzed and discussed

in relation to the Wolf Creek nuclear generating fa-

cility.

5. PUBLIC UTILITIES—Statutory Authority for KCC

Determination of Valuation of Property for Rate-mak-

ing Purposes—Constitutionality of Statutes. K.S.A.

66-128 et seg., are not unconstitutional because of

vagueness or as an unlawful delegation of legisla-

tive authority.

6. KANSAS CORPORATION COMMISSION—Public

Utilities—Valuation of Property for Rate-making

Purposes—KCC Determination. The Kansas Corpo-

ration Commission is not bound to use any particu-

lar formula, or combination of formulae, in valuing a

public utility’s property for rate-making purposes.

Any evidence having a bearing on reasonable value

may be considered, and the KCC may then use any

formula or combination of formulae that it may be-

lieve necessary for arriving at a reasonable basis for

rate-making purposes.

7. PUBLIC UTILITIES—Electric Generating Property

—Construction Costs—Rebuttable Presumption as to

Lack of Prudence by Utility’s Incurring Cost Over-

runs. K.S.A. 66-128g(b), which creates a rebuttable

presumption that construction costs of a generating

plant or facility have been incurred due to a lack of

prudence as to that portion of the total costs which

exceed 200% of the original cost estimate, is not un-

constitutional as a violation of due process of law.

8. KANSAS CORPORATION COMMISSION—Nuclear

Power Plant—Construction Cost Disallowance Due to

Excess Economic Capacity—Balancing of Interests.

In determining that a portion of the construction

costs of the Wolf Creek nuclear generating facility

should be disallowed because it constituted excess

economic capacity, the Kansas Corporation Commis-

sion did not err in using a risk-sharing approach

in balancing the interests of the investors and the

ratepayers.

9. SAME—Nuclear Power Plant—KCC Rate Base De-

termination Does Not Encroach on Federal NRA

Safety Requirements. The determination of the rate

base for revenue purposes by a state regulatory

agency does not encroach on the power of the federal

Nuclear Regulatory Agency to establish and regu-

late the safety requirements of nuclear generating

plants.

Review of decisions of Kansas Corporation Commis-

sion. Opinion filed June 13, 1986. Affirmed.

James Haines and Jonathan L. Heller, of Wichita, and

Edgar M. Roach, Jr., of Hunton & Williams, of Raleigh,

North Carolina, argued the cause, and Ralph Foster, of

Wichita, Richard D. Gray and Laurence E. Skinner, of

Hunton & Williams, of Richmond, Virginia, and Thomas

E. Graham, of the same firm, of Raleigh, North Caro-

lina, were with them on the briefs for appellant Kansas

Gas and Electric Company.

Lowell L. Smithson, of Spencer, Fane, Britt & Browne,

of Kansas City, Missouri, argued the cause, and Russell

W. Baker, Jr. avd Curtis E. Woods, of the same firm,

Charles S. Schnider, of the same firm, of Overland Park,

and Warren B. Wood, of Overland Park, were with him

on the briefs for appellant Kansas City Power and Light

Company.

Clifford L. Bertholf and John Philip Kassebaum, of

Kassenbaum & Johnson, of Wichita, argued the cause and

were on the briefs for appellant Kansas Electric Power

Cooperative, Inc.

Brian J. Moline, general counsel, and Donald A. Low,

director of utilities, argued the cause, and LuAnn C.

Dixon, John Ray Rosacker, Robert L. Bezek, Jr., and

Richard_Hird, assistants general counsel, were with them

on the brief for appellee Kansas Corporation Commission.

Patrick H. Donahue, of Kansas Legal Services, Inc., of

Topeka, argued the cause, and William G. Riggins, of the

same organization, was with him on the brief for in-

tervenor Mary Margaret Rogers.

Robert T. Stephan, attorney general, and Carl M. An-

derson, assistant attorney general, were on the brief

for intervenor Office of the Attorney General.

Robert Vinson Eye, of Irigonegaray, Eye & Florez, of

Topeka, was on the brief for intervenor Alliance for

Liveable Electric Rates (ALERT).

Dwight A. Corrin, of Corrin & Krysl, Chartered, of

Wichita, was on the brief for intervenor Electric Shock

Coalition.

John Dekker, city attorney, and Joe Allen Lang, as-

sistant city attorney, were on the brief for intervenor

City of Wichita and Cities of Cheney, Clearwater, Derby,

Garden Plain, Goddard, Kechi, Potwin and Whitewater.

C. Edward Peterson, of Perry & Hamill, of Overland

Park, was on the brief for intervenor Johnson County

Joint Intervenor Group.

OPINION

The opinion of the court was delivered by

PrAGER, J.: This is a consolidation of three appeals

by three electrical utilities from orders of the State Cor-

poration Commission (KCC) granting in part and deny-

ing in part the requests of the utilities for rate increases

due to the commercial operations of the Wolf Creek

Generating Station (Wolf Creek) near Burlington, Kan-

sas. The three utilities are Kansas Gas and Electric

Company (KGE), Kansas City Power and Light Com-

pany (KCPL), and Kansas Electric Power Cooperative,

Inc. (KEPCo). The KCC is the appellee. There are also

a number of intervenors, including the Kansas Attorney

General and various individuals and organizations rep-

resenting interested citizens and the public.

Historical Background

The legal issues presented in this case are not peculiar

to Kansas but are the natural result of the national con-

troversy over the construction of nuclear power plants

which has developed over the past thirty years. On De-

cember 8, 1953, in his address to the United Nations,

President Dwight D. Eisenhower announced his “Atoms

for Peace” program. Among other subjects, he spoke of

using the atom “to serve the peaceful pursuits of man-

kind.” He spoke of providing abundant electrical energy

in the power-starved areas of the world and envisioned

the cooperation of the nations of the world to serve the

needs rather than the fears of mankind. The possibility

that nuclear energy could be used to improve rather than

to destroy the world excited most Americans. Today,

three decades later, the future of nuclear power is un-

certain and the national debate has not been resolved.

In 1953, the Atomic Energy Commission, an agency

created by Congress to supervise atomic energy and its

development, allocated funds for a demonstration nuclear

plant at Shippingport, Pennsylvania. The reactor used

in that plant was very small and, by modern standards,

its output of electricity was very modest. During the

1960s, several private companies developed nuclear re-

actors and marketed them to utilities at prices competi-

tive with conventional generators. Between 1965 and

1975, the nuclear industry was perhaps the fastest grow-

ing major industry in the United States.

During the 1960s, KGE used naturai gas to generate

its electricity. Some time during the late 1960s, KGE

was notified by its natural gas supplier that the utility’s

access to natural gas eventually would end. At that time,

KGE was experiencing a growth in demand for electricity

of approximately seven percent per year. KCPL, an

electrical utility in northeast Kansas, was experiencing

the same growth in demand. Both utilities, like many

others around the country, faced the decision of whether

to generate electricity from coal or from natural gas or

from nuclear power. Studies were commissioned which

suggested that nuclear power rather than coal or natural

gas was the most cost efficient and environmentally sound

alternative for expansion of electrical capacity. As a re-

sult, KGE and KCPL, and later KEPCo, decided to take

the nuclear route. KGE and KCPL each took 47% shares

in the project, and KEPCo took a 6% share.

In January of 1977, the Nuclear Regulatory Commis-

sion (NRC), the successor to the Atomic Energy Com-

mission, issued a temporary work authorization permit

for the construction of a nuclear facility on Wolf Creek

in Coffey County. In May of 1977, major construction

work began. It was estimated in February of 1973 that

the cost of constructing the nuclear plant at Wolf Creek

would be in the neighborhood of $525,000,000. The ultimate

cost of construction amounted to about $3,000,000,000,

almost a six-fold increase.

It is clear that three unforeseen events occurred during

the mid-1970s which affected the relative attractiveness

of the nuclear option and brought about a tremendous

increase in the cost of construction. After several nuclear

power plants were constructed, a series of accidents oc-

curred which intensified the debate over the use of nu-

clear energy. At the Three Mile Island accident in March

1979, a mechanical malfunction, compounded with human

errors, brought the Three Mile Island nuclear reactor

close to a meltdown. This required the utilities to increase

their efforts to improve plant safety. New safety equip-

ment, which the NRC required, added millions of dollars

to the costs of nuclear plant construction at Wolf Creek

and elsewhere.

Another important factor was the change in “energy

economics” that occurred during the 1970s. When OPEC

in 1973-74 raised the price of oil, making nuclear power

even more attractive, orders for nuclear reactors in-

creased. A second oil shock occurred in 1979 when, fol-

lowing the overthrow of the Shah of Iran, the price of

oil reached $40 per barrel. The American people re-

sponded to the oil crisis and an unexpected and dramatic

decline in the demand for oil followed. The demand for

energy also diminished. Electrical utilities, which had

already implemented plans to substantially increase their

supply of electricity, now discovered that the supply

greatly exceeded the demand for electricity. Some utili-

ties responded to this new economic environment by can-

celing plans for additional generating facilities including

scheduled nuclear plants, some of which were then under

construction.

A third unforeseen development which the utilities

faced in the construction of nuclear plants was the in-

creased inflation of the 1970s, the effect of which was to

increase substantially the cost of building a nuclear

plant. By adding millions to interest costs, cost overruns

strained the cash flow positions of some utilities and thus

impeded the ability of some utilities to raise capital to

complete these projects. All of these unforeseen changes

affected the Wolf Creek project. The project was de

layed both by the post-Three Mile Island safety standards

and construction problems which developed at the site.

Although the original plans called for the Wolf Creek

plant to start producing electricity in April 1981, pro-

duction did not commence until September 1985. There

is an excellent discussion of this historical background in

an article by Professor Robert H. Jerry, II, entitled

Introduction to Wolf Creek Symposium, 33 Kan. L. Rev.

419 (1985).

As the time for commencement of operations at the

Wolf Creek plant approached, the three utilities involved

in this case filed petitions with the KCC requesting the

granting of appropriate electrical rates for the electricity

to be produced. At this same time, regulatory agencies

in other states were faced with the same or similar

problems. In some states, state regulatory agencies had

to determine whether the costs of an abandoned nuclear

plant should be included in an electrical utility’s rate

base. Where a nuclear plant had been completed and

placed in operation, the state regulatory agency had the

problem of determining whether the inflated construction

costs of a nuclear facility had to be included in the rate

base in a manner which would financially hurt the rate-

payers, the consumers, and the general public. It is this

same basic problem which was faced by the KCC in the

case now before us.

Constitutional and Legal Principles Applicable

in Rate-making Decisions

Before turning to the specific issues raised in this case,

it would be helpful to discuss some of the general con-

stitutional and legal principles applicable to rate-making

decisions by state regulatory agencies. An important

question to be considered is what a regulatory agency

should seek to accomplish in such a case. The leading

eases in this area clearly indicate that the goal should

be a rate fixed within the “zone of reasonableness” after

the application of a balancing test in which the interests

of all concerned parties are considered. In rate-making

cases, the parties whose interests must be considered and

balanced are these:

(1) The utility’s investors vs. the ratepayers;

(2) the present ratepayers vs. the future ratepayers;

and

(3) the public interest.

The leading case in this area which has been followed by

various state regulatory agencies is Power Comm’n v.

Hope Gas Co., 320 U.S. 591, 88 L. Ed. 333, 64 S. Ct.

281 (1944). The issue presented in Hope was whether

there was a requirement of constitutional dimension that

utility rates set by regulatory authorities be set at suffi-

ciently high levels to guarantee, irrespective of counter-

10a

vailing consumer interests, the continued financial inte-

grity of the utilities concerned. Stated in another way,

is a public utility entitled in every case to a reasonable

return on its capital investments as a matter of law

without regard to the interests of the ratepayers and

consumers? In Hope, the United States Supreme Court

addressed the considerations to be taken into account by

the Federal Power Commission in setting “just and rea-

sonable” rates for natural gas companies, as required by

§ 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 that the

focus of inquiry is properly upon the end result or “total

effect” of the rate order, rather than upon the rate-

setting methods employed. The court described the rate-

setting process as a balancing process involving the

weighing of certain enumerated interests of the con-

sumer and of the investor. The court stated that the

rate-making process involves a balancing of the investor

and the consumer interests, and that public utility regu-

lation does not insure that the business shall produce

net revenues.

The decision in Hope was followed by Permian Basin

Area Rates Cases, 390 U.S. 747, 770, 20 L. Ed. 2d 312,

88 S. Ct. 1844, reh. denied 392 U.S. 917 (1968), which

held that the “just and reasonable” standard of the

Natural Gas Act coincides with the applicable constitu-

tional standards and any rate selected by a regulatory

commission within the “broad zone of reasonableness”

cannot properly be attacked as confiscatory.

There is an excellent discussion of these cases in Penn-

sylvania Elec. v. Pennsylvania Pub. Util., Pa. ;

502 A.2d 130 (1985), where the Supreme Court of Penn-

sylvania had before it an appeal in an electrical utility

rate case involving a nuclear generating plant which

had been so severely damaged as to render it no longer

useful in the public service. The question was whether

lla

the costs associated with the damaged nuclear plant

should be removed from the rate base of the utilities.

The court concluded that the Pennsylvania commission

was not precluded from eliminating from the utility’s

rate base all costs associated with the unit of the nuclear

power plant involved in a near meltdown or in determin-

ing that another unit which had previously been shut

down for refueling and which remained shut down by

order of NRC likewise was no longer useful in public

service because its return to service was not imminent

or certain. The court held that the decisions of the

United States Supreme Court in Hope and Permian

Basin Area Rate Cases did not establish, as a constitu-

tional requirement, that the end result of a rate-emaking

body’s adjudication must be the setting of rates at a

level that will, in any given case, guarantee the continued

financial integrity of the utility. Rather, Hope requires

only that the regulatory authority balance competing

consumer and investor interests to determine just and

reasonable rates providing a return on used and useful

property.

The Pennsylvania Supreme Court noted In re: Jersey

Central Power & Light Co., No. A-162-81T2 (July 28,

1983), cert. den. 95 N.J. 217, 470 A.2d 433 (1983), which

involved similar facts and where a similar result was

reached. An appeal was taken to the United States Su-

preme Court which was subsequently dismissed for want

of a substantial federal question. Jersey Central Power

& Light Co. v. Board of Public Utilities of New Jersey,

466 U.S. 947, 80 L. Ed. 2d 533, 104 S. Ct. 2146 (1984).

This balancing concept is supported by other federal

court decisions. In Smyth v. Ames, 169 U.S. 466, 544,

42 L. Ed. 819, 18 S. Ct. 418 (1898), the Supreme Court

stated that it cannot be admitted that a railroad corpora-

tion maintaining a railroad under the authority of the

state may fix its rates with a view solely to its own

interests, and ignore the rights of the public. Washing-

12a

ton Gas Light Co. v. Baker, 188 F.2d 11, 19 (D.C. Cir.

1950), holds that the valuation included in the rate base

must meet the test of justness and reasonableness to the

consumer as well as to the investor. In FPC v. Memphis

Light, Gas & Water Div., 411 U.S. 458, 474, 36 L. Ed. 2d

426, 93 S. Ct. 1723 (1973), the Supreme Court expressly

recognized that rates cannot be determined just and rea-

sonable unless consumer interests are protected. In ad-

dition, a number of state courts have held that utility

rates must not be set so high as to constitute an unrea-

sonable burden on the ratepayers. State, Ex. Rel. Allain

v. Miss. Public Serv. Com’n, 435 So. 2d 608, 624 (Miss.

1983); New England Tel. & Tel. Co. v. Public Utilities,

390 A.2d 8, 30 (Me. 1978); Central Me. Power Co. v.

P. U. C., 150 Me. 257, 278, 109 A.2d 512 (1954).

The Supreme Court of Kansas has likewise recognized

and applied the “zone of reasonableness” concept in

Southwestern Bell Tel. Co. v. State Corporation Com-

mission, 192 Kan. 39, 386 P.2d 515 (1963). Syllabus

| 17 states as follows:

“There is an elusive range of reasonableness in

calculating a fair rate of return. A court can only

concern itself with the question as to whether a rate

is so unreasonably low or so unreasonably high as

to be unlawful. The in-between point, where the

rate is most fair to the utility and its customers, is

a matter for the State Corporation Commission’s

determination.”

At page 58 of the opinion, the court recognizes the deci-

sion of the United States Supreme Court handed down in

Power Comm’n v. Hope Gas Co., 320 U.S. 591, which is

discussed heretofore. See also Midwest Gas Users Ass’n

v. Kansas Corporation Commission, 5 Kan. App. 2d 653,

659, 623 P.2d 924, rev. denied 229 Kan. 670 (1981).

All of these cases clearly support the general principle

_that a state regulatory agency, in setting a rate for a

" public utility, must have as its goal a rate fixed within

13a

the “zone of reasonableness” after an application of a

balancing test in which the interests of all concerned

parties are considered.

Kansas Statutory Provisions Applicable

to Rate-making Cases

Under the constitutional separation of powers doctrine,

the regulation of public utilities is legislative in nature.

The legislature created the Kansas Corporation Commis-

sion and granted it full and exclusive authority and juris-

diction to supervise, control, and regulate the public utili-

ties of this state and, when acting in the exercise of its

delegated powers, the Commission is not a quasi-judicial

body. Cities Service Gas Co. v. State Corporation Com-

mission, 201 Kan. 223, 440 P.2d 660 (1968); Midwest

Gas Users Ass’n v. Kansas Corporation Commission, 5

Kan. App. 2d 653.

Thus, public utility rate making is a legislative func-

tion, whether it is regulated by an administrative body

or by the legislature itself. Prior to 1984, the legislature

empowered the KCC by broad, non-specific statutes to

exercise the rate-making function. By K.S.A. 66-101, the

State Corporation Commission was given the authority

to supervise and control public utilities and was em-

powered to do all things necessary and convenient for

the exercise of such authority. K.S.A. 66-141 (Weeks),

now K.S.A. 66-10lg, provided that the statutory provi-

sions granting authority, power, and jurisdiction to the

Commission shall be liberally construed. K.S.A. 66-107

(Weeks), now K.S.A. 66-101b, provided the KCC with

authority to require a public utility to furnish reason-

ably efficient and sufficient service and to establish “just

and reasonable” rates.

During the 1984 legislative session, the Kansas legisla-

ture was faced with the controversy over the Wolf Creek

power plant. With estimates predicting that electric

power bills would increase from 40% to 110% when the

14a

plant became operational, the demand from consumer

groups, the media, and even large business users to “do

something” about Wolf Creek had created a political

imperative. The result was the passage of House Bill

2927, codified as K.S.A. 66-128 through 66-128k, which

substantially broadened and made more specific the statu-

tory authority of the Commission in rate-making cases

to address such issues as excess capacity, management

inefficiency, and imprudence in the acquisition, construc-

tion, or operation of a generating plant. For an excel-

lent discussion of the 1984 legislation see the article by

Robert Vancrum, entitled The Wolf Creek Excess Cost—

Excess Capacity Bill, 33 Kan. L. Rev. 475 (1985).

K.S.A. 66-128 authorizes the KCC to determine the

reasonable value of “ail or whatever fraction or percent-

age of the property” of any public utility which is used

and required to be used in its services to the public within

the State of Kansas whenever the Commission deems the

ascertainment of such value necessary in order to en-

able the Commission to fix fair and reasonable rates.

K.S.A. 66-128a provides that nothing in K.S.A. 66-128b

through 66-1281 shall be construed to limit the authority

of the KCC to review and evaluate the efficiency or

prudence of any actions, including acquisition of excess

capacity, or operating practices of any public utility for

the purpose of establishing fair and reasonable rates.

K.S.A. 66-128b provides that the KCC may require a

public utility to defer the inclusion of all or any portion

of the reasonable value of property determined not cur-

rently used and required to be used for public service

and may require the phase-in of such value over any

period of time and in such increments as it may deter-

mine to be appropriate.

K.S.A. 66-128¢ provides that the KCC, in determining

the reasonable value of property under 66-128, shall have

the power to evaluate the efficiency or prudence of ac-

quisition, construction, or operating practices of that

15a

utility. In the event the KCC determines that a portion

of the costs of acquisition, construction, or operation were

incurred due in whole or in part to a lack of efficiency

or prudence, or were incurred in the acquisition or con-

struction of excess capacity, the Commission shall have

the power and authority te exclude those portions of the

costs from the revenue requested by the utility. This

section defines “excess capacity” to mean any capacity in

excess of the amount used and required to be used to

provide adequate and reliable service to the public within

the State of Kansas as determined by the Commission.

The Commission is empowered, within its discretion, to

prohibit or reduce the return on all costs which were

incurred in constructing, maintaining or operating excess

capacity.

K.S.A. 66-128e authorizes the KCC to exclude from the

value of utility property for rate-emaking purposes that

portion of the costs attributable either to investment in

excess capacity which was incurred due to lack of pru-

dence in facility planning or lack of prudence in plant

acquisition, construction, or operation. However, a find-

ing of lack of prudence in capacity planning for a facility

which in whole or in part represents excess capacity

shall not be made by the KCC when a siting permit

authorizing the construction of the facility has been is-

sued under K.S.A. 66-1,162. It should be noted that, in

the present case, there was no siting permit issued for

the construction of Wolf Creek.

K.S.A. 66-128¢ is devoted to a recitation of the various

factors to be considered by the Commission in making

the determination of “prudence” or lack thereof in deter-

mining the reasonable value of electric generating prop-

erty. K.S.A. 66-128¢ provides as follows:

“66-128¢. . . . (a) The factors which shall be con-

sidered by the commission in making the determi-

nation of ‘prudence’ or lack thereof in determining

16a

the reasonable value of electric generating property,

as contemplated by this act shall include without

limitation the following:

“(1) A comparison of the existing rates of the

utility with rates that would result if the entire cost

of the facility were included in the rate base for that

facility;

“(2) a comparison of the rates of any other utility

in the state which has no ownership interest in the

facility under consideration with the rates that would

result if the entire cost of the facility were included

in the rate base;

“(3) a comparison of the final cost of the facility

under consideration to the final cost of other facili-

ties constructed within a reasonable time before or

after construction of the facility under considera-

tion;

“(4) a comparison of the original cost estimates

made by the owners of the facility under considera-

tion with the final cost of such facility;

“(5) the ability of the owners of the facility

under consideration to sell on the competitive whole-

sale or other market electrical power generated by

such facility if the rates for such power were deter-

mined by inclusion of the entire cost of the facility

in the rate base;

“(6) a comparison of any overruns in the con-

struction cost of the facility under consideration with

any cost overruns of any other electric generating

facility constructed within a reasonable time before

or after construction of the facility under considera-

tion;

“(7) whether the utility having an ownership in-

terest in the facility being considered has provided

a method to ensure that the cost of any decommis-

17a

sioning, any waste disposal or any cost of clean-up.<% ;

of any incident in construction or operation of such

facility is to be paid by the utility;

“(8) inappropriate or poor management decisions

in construction or operation of the facility being

considered ;

“(9) whether inclusion of all or any part of the

cost of construction of the facility under considera-

tion, and the resulting rates of the utility therefrom,

would have an adverse economic impact upon. the

people of Kansas;

“(10) whether the utility acted in the general

public interest in management decisions in the ac-

quisition, construction or operation of the facility;

“(11) whether the utility accepted risks in the

construction of the facility which were inappropriate

to the general public interest to Kansas;

“(12) any other fact, factor or relationship which

may indicate prudence or lack thereof as that term

is commonly used.

“(b) The portion of the cost of a plant or facility

which exceeds 200% of the ‘original cost estimate’

thereof shall be presumed to have been incurred due

to a lack of prudence. The commission may include

any or all of the portion of cost in excess of 200%

of the ‘original cost estimate’ if the commission finds

by a preponderance of the evidence that such costs

were prudently incurred. As used in this act ‘origi-

nal cost estimate’ means:

“(1) For property of an electric utility which has

been constructed without obtaining an advance per-

mit under K.S.A. 60-1,159 et seg., and amendments

thereto, the ‘definitive estimate’; and

“(2) for property of an electric utility which has

been constructed after obtaining an advance permit

18a

under K.S.A. 66-1,159 et seg., and amendments there-

to, the cost estimate made by the utility in the process

of obtaining the advance permit.”

The other provisions enacted in 1984 are not material

in this case and need not be mentioned.

In 1985, the legislature adopted additional statutory

amendments to clarify the Commission’s authority, power,

and jurisdiction to supervise and control public utilities.

See K.S.A. 66-101 through 66-10lh. These various stat-

utes grant to the KCC broad authority to do all things

necessary and convenient for the establishment of just

and reasonable rates in order to maintain reasonably suf-

ficient and efficient service from electric public utilities.

The Commission is given powers to investigate and to

hold hearings. K.S.A. 66-10lg declares that the statu-

tory powers shall be liberally construed, and all incidental

powers necessary to carry into effect the provisions of

the act are expressly granted to and conferred upon the

Commission. It should be noted that all of these statu-

tory amendments passed in 1984 and 1985 were in full

force and effect at the time the KCC orders were entered

in the three cases now before us on this appeal.

In their briefs, the utilities challenge the constitution-

ality of these statutes for a variety of reasons. They

argue that K.S.A. 66-128 et seg. are unconstitutionally

vague because an ordinary person exercising ordinary

common sense could not understand their provisions. We

find no merit to this contention. The thrust of the KCPL

argument claiming vagueness is that “prudence” is not

defined anywhere in the statutes. In our judgment, the

statutory provisions are as definite and clear as reason-

ably could be expected in a statute of this type. The

Kansas statutory provisions are much more definite and

certain than statutes involving the same subject matter

found in other jurisdictions. We also note that K.S.A.

66-128g(12), in effect, states that “prudence or lack

thereof” means as that term is commonly used. Black’s

19a

Law Dictionary 1104 (5th ed. 1979) defines “prudence”

as “[clarefulness, precaution, attentiveness and good

judgment.”

The utilities also attack K.S.A. 66-128 et seg. as an

unlawful delegation of legislative authority because the

statutory provisions do not contain reasonably clear

standards to control the KCC in the exercise of its au-

thority. It is well established in Kansas that a delega-

tion of legislative authority to an administrative body

must fix a reasonably clear standard which governs the

exercise of that authority. State, ex rel., v. Fadely, 180

Kan. 652, 308 P.2d 5387 (1957); State, ex rel., v. Hines,

163 Kan. 300, 182 P.2d 865 (1947).

In this case, the statutes enacted in 1984 and 1985

authorize the Commission to apply certain prescribed

standards and requirements in setting the rates for the

various utilities. The KCC’s expertise in the field is vast,

and the Commission must, of necessity, have considerable

discretion in order to regulate utilities in the public in-

terest. The statutes also contain a protection against

arbitrary action by the KCC. The KCC is required to

state expressly its findings of fact and conclusions of

law. Such a provision prevents arbitrary action and fa-

cilitates judicial review, thus insuring a lawful exercise

of legislative authority.

One other matter should be noted in regard to the de-

termination of rate-making cases. In arriving at its

decision, the KCC, of necessity, must be afforded a wide

diseretion in the methodology to be utilized in approach-

ing the complex problems involved. The field of public

utility regulation is a highly complex field and requires

a great amount of expertise in arriving at a result which

is fair and just to all interested parties.

In Southwestern Bell Tel. Co. v. State Corporation

Cominission, 192 Kan. 39, Syl. 13, we find the following

language:

20a

“A public utility has no vested right in any one

particular formula or method, and the State Cor-

poration Commission is not bound to use any par-

ticular formula, or combination of formulae, in val-

uing a public utility’s property for rate making pur-

poses. The State Corporation Commission should

receive and consider all evidence which has a rele-

vant bearing on reasonable value and then determine

what formula, or combination of formulae, it believes

should be used under the facts and circumstances of

the case to arrive at a reasonable value of the prop-

erty for rate making purposes.”

See also Central Kansas Power Co. v. State Corporation

Commission, 221 Kan. 505, 512, 561 P.2d 779 (1977).

Scope of Review

We should next consider the scope of judicial review

where an appeal is taken to the courts from an order

of the KCC in a rate-making case. The scope of review.

is discussed in the decision of the Court of Appeals in

Midwest Gas Users Ass’n v. Kansas Corporation Com-

mission, 3 Kan. App. 2d 376, 380-81, 595 P.2d 735, rev.

denied 226 Kan. 792 (1979), where the court stated:

“K.S.A. 1978 Supp. 66-118d limits judicial review

of an order by the commission to determining

whether the order is ‘lawful’ or ‘reasonable,’ Kansas

Gas & Electric Co. v .State Corporation Commission,

218 Kan. 670, Syl. 71, 544 P.2d 1896 (1976). A

court has no power to set aside such an order unless

it finds that the commission acted unlawfully or

unreasonably. Jones v. Kansas Gas and Electric Co.,

222 Kan. 390, 396-7, 565 P.2d 597 (1977). An order

is ‘lawful’ if it is within the statutory authority of

the commission; and if the prescribed statutory and

procedural rules are followed in making .the order.

Central Kansas Power Co. v. State Corporation Com-

mission, 221 Kan. 505, Syl. 1 1, 561 P.2d 779 (1977).

—

2la

An order is generally considered ‘reasonable’ if it is

based on substantial competent evidence. Jones v.

Kansas Gas and Electric Co., 222 Kan. 390, Syl { 2.

“The legislature has vested the commission with

wide discretion and its findings have a presumption

of validity on review. Central Kansas Power Co. v.

State Corporation Commission, 221 Kan. at 511.

Since discretionary authority has been delegated to

the commission, not to the courts, the power of re-

view does not give the courts authority to substitute

their judgment for that of the commission. Central

Kansas Power Co. v. State Corporation Commission,

206 Kan. 670, 675, 482 P.2d 1 (1971). The com-

mission’s decisions involve the difficult problems of

policy, accounting, economics and other special know]-

edge that go into fixing utility rates. It is aided by

a staff of assistants with experience as statisticians,

accountants and engineers, while courts have no com-

parable facilities for making the necessary determi-

nations. Southwestern Bell Tel. Co. v. State Corpora-

tion Commission, 192 Kan. 39, 48-9, 386 P.2d 515

(1963). Hence a court may not set aside an order

of the commission merely on the ground that it

would have arrived at a different conclusion had it

been the trier of fact. It is only when the commis-

sion’s determination is so wide of the mark as to be

outside the realm of fair debate that the court may

nullify it. Kansas-Nebraska Natural Gas Co. v.

State Corporation Commission, 217 Kan. 604, 617,

538 P.2d 702 (1975); Graves Truck Line, Inc. v.

State Corporation Commission, 215 Kan. 565, Syl.

15, 527 P.2d 1065 (1974).”

These same rules were recognized in Ash Grove Cement

Co. v. Kansas Corporation Commission, 8 Kan. App. 2d

128, 650 P.2d 747 (1982), and also by this court in

Oilfield Fluid Motor Carriers v. Kansas Corporation

Comm’n, 234 Kan. 983, 986, 677 P.2d 982 (1984).

22a

In 1984, the Kansas legislature codified these prin-

ciples when it enacted the “Act for Judicial Review and

Civil Enforcement of Agency Action” contained in

K.S.A. 77-601 through 77-627. K.S.A. 77-603 makes the

act applicable to all agencies not specifically exempted

by statute. K.S.A. 77-621 specifically sets forth the scope.

of review of administrative decisions by the courts and

provides as follows:

“77-621. Scope of review. (a) Except to the ex-

tent that this act or another statute provides other-

wise:

“(1) The burden of proving the invalidity of

agency action is on the party asserting invalidity;

and

“(2) the validity of agency action shall be deter-

mined in accordance with the standards of judicial

review provided in this section, as applied to the

agency action at the time it was taken.

“(b) The court shall make a separate and distinct

ruling on each material issue on which the court’s

decision is based.

“(c¢) The court shall grant relief only if it deter-

mines any one or more of the following:

“(1) The agency action, or the statute or rule and

regulation on which the agency action is based, is

unconstitutional on its face or as applied;

“(2) the agency has acted beyond the jurisdiction

conferred by any provision of law;

“(3) the agency has not decided an issue requir-

ing resolution ;

“(4) the agency has erroneously interpreted or

applied the law;

“(5) the agency has engaged in an unlawful pro-

cedure or has failed to follow prescribed procedure;

23a

“(6) the persons taking the agency action were

improperly constituted as a decision-making body or

subject to disqualification ;

“(7) the agency action is based on a determina-

tion of fact, made or implied by the agency, that is

not supported by evidence that is substantial when

viewed in light of the record as a whole, which in-

cludes the agency record for judicial review, supple-

mented by any additional evidence received by the

court under this act; or

“(8) the agency action is otherwise unreasonable,

arbitrary or capricious.

“(d) In making the foregoing determinations, due

account shall be taken by the court of the rule of

harmless error.”

K.S.A. 66-118a provides that the Court of Appeals

shall have exclusive jurisdiction of proceedings for re-

view of an order or decision of the State Corporation

Commission arising from a rate hearing when a public

utility is a necessary party. Here, the consolidated ap-

peal was transferred from the Court of Appeals to the

Supreme Court under the authority of K.S.A. 20-3018 (c)

and K.S.A. 20-3017.

Proceedings before the KCC

In 1979, when the problem of rapidly increasing con-

struction costs of Wolf Creek became evident, a docket

was created by the KCC for the purpose of initiating a

general investigation of the projected costs so that data

could be collected for use in rate cases which would be

filed after the Wolf Creek facility was completed. In

November of 1984, each of the three utilities filed an ap-

plication requesting proposed rate increases to become

effective at the time the Wolf Creek plant went into op-

eration.

24a

The magnitude of the rate increases sought was un-

precedented in Kansas. KCPL suggested a phase-in of

the increased rates over a four-year period. The first-

year increase requested was in the amount of $45.3 mil-

lion, a 25% increase. Over the phase-in period, a total

increase of $110.6 million was sought for a 65% increase

over current rates. KGE proposed a phase-in proposal

seeking a 40% increase in the amount of $144.9 million

in 1985 and four subsequent annual increases for a total

of $373 million. The percentage increase in rates at the

end of the phase-in period for KGE would be 106%, as

opposed to a one-time 95% increase. KEPCo sought a

40% increase in its rates in the amount of $26.9 million

annually.

In requesting the proposed rate increases, the utilities

sought to recover their shares of various expenses for

Wolf Creek, including operations and maintenance, fuel,

and annual funding for decommissioning of the plant.

Furthermore, the companies sought a return on the total

construction costs of the Wolf Creek plant through an-

nual depreciation expenses and, in addition, a return on

the costs of construction at an overall rate of return.

The KCC held hearings on the applications for rate

increases during the months of May, June, and July of

1985. The Commission heard the testimony of over 160

technical witnesses and admitted several hundred ex-

hibits. The 58-volume transcript covers 17,830 pages.

The Commission held 19 public hearings at various places

in the companies’ service territories, hearing the testi-

mony of 475 ratepayers. Briefs were then submitted to

the KCC by counsel for the utilities, the Commission

staff, and various intervenors. On September 27, 1985,

the KCC issued its order granting in part and denying

in part the rate increases requested by the utilities.

Motions for a rehearing were filed and heard. The origi-

nal orders of the KCC were modified in certain respects

and the balance of the motions were denied in November

25a

1985. The utilities sought judicial review of the orders

of the KCC in the Court of Appeals. The cases were

subsequently transferred to the Kansas Supreme Court

and consolidated into one appeal.

The overall effect of ie KCC orders may be sum-

marized as follows:

(1) The utilities received virtually all they requested

as expenses to operate and maintain the plant and to

decommission it at the end of its life.

(2) The KCC determined that a total of $183 million,

or about 10% of the costs of construction of the Wolf

Creek plant, was inefficiently and imprudently incurred.

The utilities were denied both a recovery of and a return

on that portion of the costs of the construction.

(3) The KCC allowed all of the remaining 90% of the

Wolf Creek construction costs to be recovered through

annual depreciation expenses over the expected life of

the plant.

(4) Of that 90%, no current return or profit was

permitted on approximately $944 million on the basis

that a portion of the costs constituted excess physical

capacity, because it was not used and required to be used

to provide current services to the ratepayers. The dis-

allowance for the excess physical capacity was allocated

in the amount of approximately $716 million to the rate

base of KGE and $228 million to the rate base of KCPL.

As to KEPCo, the KCC found that it did not have ex-

cess physical capacity and, therefore, no deduction from

its rate base was reonired. The excluded amounts will

remain eligible in the future for a rate of return as the

excess capacity is utilized to serve the ratepayers.

(5) Of the remaining 90% of capital costs which

were held to be prudently incurred, the KCC disallowed

the sum of approximately $266 million on the basis that

it constituted excess economic capacity. The disallow-

26a

ance for excess economic capacity was allocated to reduce

the rate base of KGE approximately $193 million and

to reduce the rate base of KCPL approximately $73

million. No deduction was made for this factor from the

rate base of KEPCo. The capital costs on which a re-

turn was disallowed were subject to increases in the

future, if the economic value increases in comparison

with other plants. Thus, the amounts excluded at the

time of the order will remain eligible in the future for

a rate of return to each utility.

(6) Although, as noted above, no return was allowed

on those construction costs found to be imprudent or for

the costs found to be excess physical capacity and ex-

cess economic capacity, the KGE and KCPL carrying

costs will be recovered by being amortized over the life

of the plant on a straight-line basis,

Stated simply, the utilities were not and will not be

permitted to recover the 10% of the construction costs

found to be imprudently incurred. The utilities are per-

mitted to recover all of the 90% of the total construction

costs found to be prudently incurred through annual de-

preciation expense over the expected life of the plant. The

KCC set limitations on the right of the utilities to a re-

turn on that portion of the construction costs found to

constitute excess physical capacity and excess economic

capacity with the possibility of those costs being included

in the rate base at some time in the future.

The three basie areas of dispute in this appeal arise

from the deductions of those portions of the construction

costs from the rate base of each utility found to be im-

prudent costs of construction, excess physical capacity,

and excess economic capacity.

In connection with these areas of dispute, the utilities

have raised many issues of law for the court’s considera-

tion. We will discuss each of the basic areas of dispute

separately.

27a

Deduction of Imprudent Construction Costs

from the Rate Base

The rate-setting approach for the KCC is divided into

two phases—revenue required and rate design. By “rev-

enue required” is meant the additional money, if any,

that the company needs to meet its obligations and also

to have an opportunity to earn a fair profit. Rate de- -

sign is the process by which the revenue requirement will

be spread over the various classes of customers. That

process is not involved in this appeal.

In order to arrive at the revenue requirement, three

factors must be carefully analyzed by the KCC:

(1) The rate base;

(2) The operating expenses; and

(3) The percentage rate of return to be applied to

the rate base.

The basic issues presented in this case involve the

determination of the rate base. The “rate base’ may

be defined as the dollar amount of a given utility’s in-

vestment in the plant and property ‘“‘used and required to

be used” in supplying the service that the utility has un-

dertaken to furnish. The rate base is the valuation

sought under the provisions of K.S.A. 66-128. The rate

base includes items such as the value of generation and

transmission facilities and rights-of-way, and equipment

of all kinds. Ordinarily, discarded and abandoned prop-

erty due for retirement is excluded from the rate base.

It is the rate base on which the owners of the utilities

have a right to earn a fair return. The rate base mul-

tiplied by the fair rate of return yields a sum in dollars

that the KCC considers reasonable.

There are a number of methods which regulatory agen-

cies use in determining the rate base for a particular

utility. The original cost of construction of a facility

28a

may be utilized but may be reduced where a portion of

the cost is due to imprudent or unjustified expenses. See

San Diego Land & Town Co. v. Jasper, 189 U.S. 439,

47 L. Ed. 892, 23 S. Ct. 571 (1903). Another method

used to establish the rate base is the determination of

the fair or reasonable value of the property. K.S.A. 66-

128 provides that the KCC shall determine the reason-

able value of the property of the utility which is used:

and required to be used in its services to the public

in order to enable the Commission to fix fair and reason-

able rates. In State, ex rel. v. Telephone Co., 115 Kan.

236, 261, 223 Pac. 771 (1924), it was held that the

original cost is not the measure of the rate base but

rather the “going-concern value” of the plant. In South-

western Bell Tel. Co. v. State Corporation Commission,

192 Kan. 39, as noted heretofore, it was held that the

KCC is not bound to use any particular formula, or com-

bination of formulae, in valuing a public utility’s prop-

erty for ratemaking purposes. Any evidence having a

bearing on reasonable value may be considered, and the

KCC may then use any formula or combination of for-

mulae that it may believe necessary for arriving 2’ a

reasonable basis for rate-making purposes.

At the hearing before the KCC, a great deal of ex-

pert testimony was presented by the utilities showing

that great efficiency and prudence was used by the con-

tractor in the construction of the Wolf Creek plant. To

the contrary, the staff of the KCC presented other com-

petent experts who testified that a substantial portion

of the construction costs was insufficiently and impru-

dently incurred. The findings of the KCC set forth this

testimony in great detail. It would serve no useful pur-

pose to restate the testimony of the various expert wit-

nesses who testified on behalf of the parties. As noted

heretofore, the KCC disallowed a total of approximately

$183,000,000 or about 10% of the total cost of construc- -

tion as costs which were imprudently incurred.

‘ii

29a

The KCC’s disallowance for imprudent construction

costs consisted of three distinct quantifications:

(1) $37,961,400 of direct and associated indirect costs

attributable to disallowed man-hour overruns;

(2) $244,561,400 of indirect and overhead costs at-

tributable to disallowed schedule delays; and

(3) $450,000 of the fees paid to the primary contrac-

tor, Daniel International Corporation, for work which

was not performed and which was performed by other

contractors.

There is substantial, competent evidence in the record

to support the disallowances in each of these categories.

There was evidence from which the KCC could reason-

ably find that KGE and KCPL, as owners of the plant,

were imprudent and inefficient in the manner in which

they supervised the construction of the plant. We recog-

nize, of course, that there was expert testimony to sup-

port findings of both imprudence on the one hand and

prudent management control on the other. Perhaps if

this court had the obligation and authority to deter-

mine this issue, it might have decided it differently.

However, because there is substantial, competent evi-

dence in the record to support the findings of the KCC

as to imprudent construction costs, we are bound by.

those findings and cannot substitute our judgment for

that of the Commission.

The utilities, however, raise a number of legal issues

specifically relating to the finding of imprudent costs.

They maintain that the KCC, in determining imprudent

costs, applied an unreasonable standard of perfection

rather than mere prudence, although they recognize that

K.S.A. 66-128¢ afforded the Commission the power to

evaluate the construction of Wolf Creek and to exclude

construction costs incurred as the result of imprudence

or mismanagement. They complain that there is no def-

inition of prudence in the statutes.

30a

In construing statutes, words and phrases should be

construed according to context and approved usage of

the language, and words in common use are to be given

their natural and ordinary meaning. Jackson v. City of

Kansas City, 2835 Kan. 278, 680 P.2d 877 (1984). As

noted heretofore in this opinion, the word “prudence”

has a common and ordinary meaning. The various fac-

tors listed in K.S.A. 66-128g(a) provide sufficient guide-

lines for determining prudence which obviates the need

for a definition of the term.

The utilities complain that the KCC did not accept

their evidence consisting of a comparative analysis of the

construction costs and schedules at Wolf Creek with

similar factors at other nuclear power plants constructed

during the same period. The KCC rejected this evidence

on the basis that the comparative analysis was incom-

plete, misleading, or irrelevant, and did not support the

owners’ conclusions. This the KCC had a right to do.

The utilities argue that the KCC used hindsight in

determining imprudence rather than considering perform-

ance as of the time construction was in progress. This

contention is not supported by the record. We hold that

the KCC did not determine the issue of imprudence solely

on the basis of hindsight, but rather on the basis of

substantial, competent evidence.

The owners attack K.S.A. 66-128g(b) as violative of

due process because it creates a rebuttable presumption

that construction costs of a plan or facility have been

incurred due to a lack of prudence as to that portion of

the total ¢ »*s which exceeded 200% of the “original cost

estimate.” Presumptions may be created by statute if

there is a rational connection between the fact proved

and the fact presumed. The test in this case is whether

a logical inference of management imprudence can be

drawn from evidence of total cost greater than 200%

of the original cost estimate, or whether there is some

3la

justification in public policy for such an inference to be

drawn. In our judgment, management imprudence can

reasonably be inferred from the fact a particular project

cost exceeded by more than 200% the definitive estimate.

Other states by statute have imposed a cap or limitation

on the construction costs of nuclear plants. Re Seabrook

Unit No. 1, 63 P.U.R. 4th 673 (Conn. 1984.) We believe

that the presumption is logical in the context of utility

regulation, where the ratepayer normally reimburses the

utility for its expenses. The fact that there is such a

presumption does not determine the issue, for the KCC

still has the duty to examine the reasonableness of the

construction costs, which is exactly what the KCC did

regarding the Wolf Creek costs in this case.

The utilities next maintain that K.S.A. 66-128¢ only

authorizes the KCC to exclude the imprudent costs of

construction from the révenue requested and not from the

utility’s base rate. That statute provides, in substance,

that the KCC, in determining the reasonable value of

property under K.S.A. 66-128, shall have the power to

evaluate the efficiency or prudence of acquisition, con-

struction or operating practices of that utility. If in-

efficiency or imprudence is found, the KCC has the right

to exclude all or a part of those costs from the revenue

requested by the utility. As noted above, it is the rate

base which must first be determined before an appropri-

ate return may be allowed by a regulatory agency. The

rate base is the major focal point of a rate proceeding.

In order for the KCC to reduce a utility’s requested reve-

nue increase by costs found to be inefficiently or im-

prudently incurred, it must, of necessity, reduce the rate

base by the amount of the cost disallowance.

In the past, the Kansas courts have held that the ex-

clusion of certain disallowances from the rate base is a

discretionary function of the KCC. Kansas City Power &

Light Co. v. KCC, 224 Kan. 86, 88, 578 P.2d 254 (1978) ;

Kansas-Nebraska Natural Gas Co. v. Kansas Corporation

—————

82a

Commission, 4 Kan. App. 2d 674, 610 P.2d 121, rev.

denied 228 Kan. 806 (1980).

KEPCo, in its brief, takes the position that the KCC

decision disallowing imprudent construction costs in

KEPCo’s rate base is unlawful on the basis that the

Commission cannot make such a disallowance without

finding KEPCo itself to be imprudent. KEPCo argues

that the disallowance for imprudent construction costs

cannot be attributed to KEPCo, because those cost over-

runs were imprudently incurred prior to its acquisition

of a 6% ownership in the Wolf Creek plant. In its order,

the Commission found as follows:

“20. The Commission finds that KEPCo should be

held accountable for its proportional share of cost

incurrence found to be imprudent notwithstanding

the fact that many of the costs found to be im-

prudent were incurred prior to the purchase of

KEPCo’s six percent interest in 1981. The record

appears clear that KEPCo did not analyze the cause

of Wolf Creek cost overruns to determine the reason-

ableness of incurrence prior to its 1981 purchase of

a six percent share. ...

“Having failed to inquire into the reasonableness

of Wolf Creek cost incurrence prior to (or subse-

quent to) its purchase of an interest in Wolf Creek,

the Commission finds that imprudence in cost in-

currence prior to the purchase of KEPCo’s interest

should be imputed to KEPCo and that KEPCo is

responsible for imprudence in cost incurrence subse-

quent to the purchase of its interest. The Commis-

sion finds that K®PCo ratepayers should be shielded

from imprudently incurred costs and herein excludes

such costs from KEPCo’s rate base. The Commission

distinguishes imprudently incurred costs which are

excluded from rate base from questions of economic

loss resulting from excessively expensive capacity.

33a

The latter costs are appropriately shared by rate-

payers and owners. That objective is achieved in the

case of KEPCo by collection of costs through rates.”

The Commission disallowed $22,818,000 from KEPCo’s

rate base. None of the parties have cited a case directly

on point. K.S.A. 66-128¢ expressly provides the Commis-

sion with the authority to evaluate the efficiency or

prudence of acquisition as well as construction practices

of that utility in disallowing imprudent costs.

In the present case, the Commission found that KEPCo

failed to analyze the causes or determine the reasonable-

ness of the Wolf Creek cost overruns prior to its acquisi-

tion or purchase of Wolf Creek in 1981. Thus, we believe

that it was within the Commission’s power to disallow

those amounts of overruns from KEPCo’s rate base.

Furthermore, if a portion of the cost of construction was

imprudently incurred, that situation would not be

changed simply because KEPCo purchased a share of the

plant at a later time. KEPCo is not in the position of a

bona fide purchaser for value. It takes its share of owner-

ship in the plant subject to any imprudent construction

disallowance.

The KCC’s duty was to determine the fair value of the

plant. In so doing, it had the authority to eliminate those

portions of the construction costs which were inefficiently

or imprudently incurred. The KCC requested KEPCo to

come up with a plan to take care of any financial prob-

lems caused by its order by means of a surcharge or

otherwise. In our judgment, the KCC had the power to

handle the matter in that way. Although the parties

apparently agree that KEPCo’s shareholders and rate-

payers are the same people, we will leave it up to the

future determinations of the KCC as to the appropriate

action required to solve any problems that might remain.

KEPCo may still appeal any later order it deems unlaw-

ful or otherwise improper.

84a

We have considered all of the contentions of the utili-

ties and the evidence in the record in this case and have

concluded that the KCC’s disallowance of those construc-

tion costs it found to have been imprudently incurred

was supported by substantial, competent evidence, was

within the statutory powers of the KCC, and was neither

unlawful, arbitrary, nor capricious.

Deduction of Excess Physical Capacity from the

Rate Base

The KCC, in its order, found that approximately

$944,000,000 of the prudent construction costs should be:

excluded from the rate base for the reason that a por-

tion of these costs constituted excess physical capacity,

because part of the plant was not “used or required to be

used” to provide current services to the ratepayers. This

disallowance for excess physical capacity was allocated in

the amount of approximately $716,000,000 to the rate

base of KGE and $228,000,000 to the rate base of KCPL:

No deduction was made from the rate base of KEPCo.

KGE and KCPL maintain that this order of the KCC

was unreasonable and unlawful.

The cases in this field hold that a utility is not neces-

sarily entitled to a return and profit on its investment in

a new generating plant simply because it acted prudently

in deciding to build and in actually constructing the plant.

It is the usual practice for a state regulatory commission

to inquire whether a new plant is “used and useful in

rendering service to the public.” The Kansas statutes

enacted in 1984 varied this test slightly. K.S.A. 66-128

requires the KCC to determine the reasonable value of

all or whatever fraction or percentage of the property of

any public utility which is “used and required to be

used” in its service to the public within the State of

Kansas.

K.S.A. 66-128¢ defines “excess capacity” to mean any

capacity in excess of the “amount used and required to

85a

be used” to provide adequate and reliable service to the

public. The KCC is authorized in its discretion to pro-

hibit or reduce the return costs incurred in constructing,

maintaining, or operating excess capacity. K.S.A. 66-

128b authorizes the Commission to require a public utility

to defer inclusion of the reasonable value of property

determined to be not currently used and required to be

used and may require the phase-in of such value over any

period of time or in such increments as it deems to be

appropriate.

Other state regulatory commissions have reached

similar results under the simpler and more traditional

“used and useful” test by determining: (1) Whether the

utility has constructed excess capacity; (2) what effect

such excess capacity should have on the calculations of

the revenue requirement; and (3) which plants to exclude

from the rate base in the event of excludable excess ca-

pacity. The statutory provisions for excluding excess

capacity are intended to prohibit a utility from earning

a return on an investment which is not being used to

accomplish the utility’s ultimate gual of providing services

to its customers.

In determining the excess physical capacity of Wolf

Creek in this case, the KCC stated that the factors to be

considered are: (1) Peak demand or responsibility, (2)

reserve margin, and (3) available capacity. In determin-

ing available capacity, the Commission used the com-

panies’ accredited capacity figures. The Commission also

found certain generation facilities were available for use

even though the companies claimed such facilities had

been retired, including KCPL’s Hawthorn Units 1 and 2.

The Commission ultimately found that 327 megawatts

(MW) of KGE’s available capacity and 314 MW of

KCPL’s available capacity were not used and required to

be used and thus constituted excess physical capacity. It

must be emphasized again that the KCC did allow a full

recovery of those costs through depreciation. The KCC

86a

denied KGE and KCPL only a return or profit on those

costs. The KCC also recognized that inclusion in the rate

of such costs or a portion thereof would be subject to

future KCC orders as more of Wolf Creek became used

and required to be used.

The KCC recognized that, in determining excess ca-

pacity, electric utilities must be permitted to plan for

the future and that it would be ridiculous to construct

generating plants only when the need arises and without

anticipating future growth. Kensas Gas & Electric Co.

v. State Corporation Commission, 218 Kan. 670, 677, 544

P.2d 1396 (1976). The KCC selected the year 1990 as

the reference year, allowing for five years of projected

growth in peak demand from 1985, when Woif Creek was

to commence its operations. The KCC thus set a five-year

period for a planning horizon or load forecast.

The KCC also determined the reserve margins for each

utility sufficient to cover any day-to-day variations in

operating conditions. All utilities must have some reserve

capacity to protect against shortages caused by occasional

plant shutdowns. The utility should be able to recover

investments in, and a profit on, that reserve capacity.

The problem is to establish a reserve margin that is high

enough to provide reliable and adequate service, but not

so high that customers are charged for unnecessary plant

capacity. The expert witnesses suggested that a 15%

to 25% reserve margin was required. The KCC con-

sidered the testimony of the various experts and found

that a reserve margin of 20% was justified.

The utilities maintain that the Commission did not

apply proper legal standards in determininy excess ca-

pacity. We find this contention to be without merit. The

standards applied were those required by the 1984 Kansas

statutes discussed;above.

The utilities contend that the Commisson arbitrarily,

unreasonably, and erroneously chose the year 1990 to

calculate the owners’ system capacity balances. In its

87a

findings, the Commission noted that the selection of a

reference year was difficult, because no witnesses had

proposed standards for selection of a reference year. We

cannot say that the selection of 1990 was arbitrary. It

provided a five-year planning horizon perspective which

is reasonable. We hold that the selection of the reference

year of 1990 was not arbitrary. This is especially true

because the Commission, in its order, recognized that if

there were changes in the demand for electricity in the

years to some, the owners could seek the Commission’s

approval to include more of Wolf Creek in the rate base.

Likewise, the contention of the utilities that the Com-

mission’s peak demand forecast did not consider any pos-

sible increase in the demand for electricity generated by

lower rates is not persuasive. If future power demands

exceed the KCC’s forecast because of price elasticity, the

utilities may request another hearing before the Com-

mission.

KCPL maintains that the Commission’s inclusion of 41

MW of purchased power in KCPL’s available capacity

while excluding all purchased power in determining

KEPCo’s available capacity is a denial of equal protection

of the law. The Commission took the position that KEPCo

is not similarly situated with KGE and KCPL. Prior to

Wolf Creek, the operations of KEPCo were totally re-

liant on purchased power to meet their load requirements.

KEPCo elected to become an owner of a share of the

electric generating plant at Wolf Creek rather than re-

maining a wholesaler of electricity. KEPCo is different

from the other two utilities because KEPCo is an electric

cooperative, not a shareholder utility. The difference is

discussed in Sekan Electric Coop. Ass’n v. Kansas Cor-

poration Commission, 4 Kan. App. 2d 477, 609 P.2d 188

(1980), where an electric cooperative was treated differ-

ently from an investor-owned utility in regard to “equity

returned capital.” The court pointed out that a co-

operative does not secure equity by stock offerings in the

marketplace and a return large enough to pay dividends

38a

is not required to attract equity capital or to make a

cooperative financially sound.

KEPCo is a nonprofit generating and transmitting

wholesale distributor of electricity to its member rural

electric cooperatives. The shareholders or stockholders are

the ratepayers. The record shows that KEPCo was re-

quired to purchase a portion of tk.» electricity transmitted

to obtain the lines to get the electricity to its customers.

KEPCo and the other utilities are not similarly situated

and we cannot say that the Commission’s order violated

KCPL’s right to equal protection.

KCPL contends that the Commission erroneously in-

cluded KCPL’s Hawthorn Units 1 and 2 in determining

that utility’s available capacity because those units have

been retired from service. The addition of those units

added an additional 130 MWs to KCPL’s available ca-

pacity in 1990. The evidence presented by KCPL showed

that Hawthorn Units 1 and 2 are fossil fuel-fired plants

placed in inactive reserve by KCPL in 1984 and retired

on December 31, 1984, but they could be rehabilitated

in the future, if an additional need for electricity arose.

The Commission found that the units were retired only

in an accounting sense and were “retired” long before the

previously scheduled retirement dates of 1991, which

would correspond with a normal 40-year life for fossil

fuel steam plants. Furthermore, although the evidence

regarding Hawthorn Units 3 and 4 was similar, the

Commission did not include them in the available capacity.

We have concluded that the Commission acted reasonably

and considered the interests of all parties in arriving at

its decision.

KGE complains that the finding of the Commission that

a portion of Wolf Creek is excess capacity is unreason-

able because Wolf Creek replaced the older KGE gas/oil

units, which Wolf Creek was constructed to and did

displace. We find no merit to this contention. It was

the construction of Wolf Creek that created the excess

39a

capacity. A regulatory Commission has broad discretion

to determine which plant constitutes excess capacity.

Furthermore, as older units become so obsolete that their

retirement is necessary, that fact will be reflected in

future orders of the Commission.

We have considered all of the legal issues raised by the

utilities and considered the record as a whole. We have

concluded that there is substantial, competent evidence to

support the findings of the KCC in determining excess

physical capacity, and that the Commission followed the

statutory standards and exercised its discretion in a law-

ful manner.

Deduction of Excess Economic Capacity from the

Rate Base

After determining that disallowances from the rate

base should be made for imprudent construction costs and

excess physical capacity, the Commission concluded that

an economic evaluation of Wolf Creek was necessary. The

Commission was impressed by testimony that, apart from

whether excess physical capacity exists, a nuclear plant

may represent capacity which is not economical because

it has excessive capital costs when compared to alterna-

tive types of generating facilities.

The Commission found from the evidence that Wolf

Creek was an extraordinarily expensive means of provid-

ing electric generating capacity. It valued Wolf Creek

at a cost of $1290 per KW, which included an allowance

for the lower operational costs of Wolf Creek compared to

coal plants. The Commission considered the costs of

construction of a goal generating plant as a benchmark

for its evaluation because the greater capital costs for

the Wolf Creek nuclear facility were of doubtful economic

benefit to the ratepayers. The Commission concluded that

no profit or return on that economically inefficient excess

should be allowed KGE or KCPL. However, as part of

an overall risk-sharing approach, the Commission did

40a

allow total recovery of those costs through depreciation.

Because the KEPCo sharehclders are the same people as

the ratepayers, the Commission found that risk sharing

was accomplished without an explicit exclusion from

KEPCo’s rate base.

In determining that there should be a disallowance

from the rate bases of KGE and KCPL for excess eco-

nomic capacity, the Commission balanced the interests of

the utility investors with the interests of the ratepayers.

In doing so, it used a risk-sharing approach. In Kansas

Gas & Electric Co. v. State Corporation Commission, 218

Kan. at 674, this court stated that, in fixing the rates of

an electrical utility under K.S.A. 66-128, the Commission

has a two-phase duty in determining the rate base:

(1) To determine the property of a utility used or

required to be used in its services to the public, and

(2) to ascertain the reasonable value of such property

whenever it deems the ascertainment of such value is

necessary to fix fair and reasonable rates. K.S.A. 66-128

was amended in 1984 to authorize the Commission to

determine the fraction or percentage of a facility that

is used and required to be used.

Under K.S.A. 66-128c, the Commission is empowered

to evaluate the efficiency or prudence of acquisition, con-

struction, or operation of a utility. One of the factors to

be considered for determination of the reasonable value

of electric generating property set forth in K.S.A. 66-

128g is factor No. 11, which requires the Commission to

consider whether the utility accepted risks in the con-

struction of the facility which were inappropriate to the

general public interest to Kansas. That is obviously a

legislative recognition of the risk-sharing approach.

In using the risk-sharing approach to arrive at the

reasonable value of Wolf Creek, the Commission looked

to the factors in K.S.A. 66-128g¢(a) and discussed the

evaluation with respect to (1) the owners’ decision to

4ia

build and continue Wolf Creek; (2) the economic impact

and rate comparisons; and (3) the risk assumptions and

sharing which included a finding that the owners accepted

enormous risks in building Wolf Creek.

The utilities contend, in substance, that the Commis-

sion erred in applying its risk-sharing approach and that —

it should have evaluated Wolf Creek at its actual prudent

cost without consideration of the impact of the proposed

rate increases on the ratepayers and the general public.

The balancing of the rights of the investors and rate-

payers and consideration of risk sharing is not a new

procedure in Kansas. In Kansas Power & Light Co. v.

Kansas Corporation Commission, 5 Kan. App. 2d 514,

525-29, 620 P.2d 329 (1980), rev. denied 229 Kan. 670

(1981), the Court of Appeals addressed the Commission’s

treatment of a KP&L gain on the sale of its office build-

‘ing in Salina. KP&L treated the gain as outside its

accounts for rate-making purposes. The Commission

treated the gain as appropriate for rate making and

allowed the gain to flow through to the ratepayers. The

court recognized the balancing of gains and losses be-

tween ratepayers and stockholders and mentioned the risk

of loss of investment capital as a factor to be considered.

In Southwestern Bell Tel. Co. v. State Corporation

Commission, 192 Kan. 39, 389 P.2d 515 (1963), which

is discussed earlier in the opinion, this court recognized

that the Commission should receive and consider any evi-

dence which has a relevant bearing on reasonable value

and then determine what formula, or combination of for-

mulae, it believes should be used under the facts and cir-

cumstances of the case to arrive at a reasonable value of

the property for rate-making purposes.

There are cases in other jurisdictions which hold that _

the present fair value of generating facilities cannot ex-

ceed the present cost of constructing a substitute system

of modern design, capable of generating and distributing

the same quantity of power at less operating expense.

42a

See Utilities Comm. v. Power Co., 285 N.C. 377, 206

S.E.2d 269 (1974). In Utilities Comm. v. Power Co.,

285 N.C. 398, 206 S.E.2d 283 (1974), the court stated

that neither original cost nor replacement cost are a

measure of fair value but only indicators thereof. The

term “just and reasonable rates” imports flexibility in

the exercise of a complicated regulatory function by a

specialized decision-making body and this was not in-

tended to confine the ambit of regulatory discretion to

an absolute or mathematical formula but rather to con-

fer on the regulatroy authority the power to make and

apply policy concerning the appropriate balance between

prices charged to utility customers and returns on capi-

tal to utility investors consonant with constitrtional

protections applicable to both. Pennsylvania, etc. v. Penn-

sylvania Gas, 492 Pa. 326, 337, 424 A.2d 1213 (1980),

cert. denied 454 U.S. 824 (1981).

The Commission referred to other jurisdictions which

have recognized “risk sharing” as a valid approach to the

problem of excess capacity and cancelled plant situations.

Iowa Planners Net. v. Iowa State Commerce, 373 N.W.

2d 106, 110. (Iowa 1985); Phila. Electric Co. v. Pa.

P.U.C., 61 Pa. Commw. 325, 483 A.2d 620 (1981); Re

Carolina Power and Light Co., 49 P.U.R. 4th 188 (N.C.

1982); Re Otter Tail Power Co., 44 P.U.R. 4th 219

(N.D. 1981). See, Re Nine Mile Point No. 2 Nuclear

Station, 62 P.U.R. 4th 455 (N.Y. 1984); and Colton,

Excess Capacity: Who Gets the Charge from the Power

Plant?, 34 Hastings L. J. 1133, 1146-49 (1983), where

the Commission applied risk sharing to capital costs

which exceeded construction costs.

The utilities raise a number of legal issues attacking

the disallowance for excess economic capacity. They

maintain that the imposition of a reasonable value meth-

odology after Wolf Creek was already constructed and

placed into service would deny the utilities a fair oppor-

tunity to earn a fair return on‘ their investment. They

ates a

43a

question the sufficiency of the evidence to support the

findings of the Commission. We find these contentions

to be without merit. In our judgment, the statutory pro-

visions adopted in 1984, coupled with the prior decisions

of the Kansas courts, gave to the KCC a broad author-

ity to evaluate the Wolf Creek generating plant, includ-

ing the use of the risk-sharing approach in determining

excess economic capacity.

The utilities argue that the Commission’s use of a

reasonable value methodology was invalid because it de-

nied recovery of expenses actually incurred which were

necessary to comply with safety regulations of the NRC.

In this case, the utilities were allowed to recover all of

the costs of Wolf Creek except the disallowance for im-

prudent costs. The Commission simply denied the utili-

ties a return on that portion of Wolf Creek which rep-

resented physical or economic excess capacity. Thus, the

amount of the Wolf Creek costs that resulted from com-

pliance with NRC safety requirements are to be re-

covered by the utilities., Furthermore, the utilities’ ar-

gument that the orders of the KCC interfere with safety

regulations of the NRC has been rejected by the United

States Superme Court. In Pacific Gas & Elec. v. Energy

Resources Comm’n, 461 U.S. 190, 75 L. Ed. 2d 752, 103

S. Ct. 1713 (1983), the United States Supreme Court

stated that although Congress intended that the federal

government should regulate the radiological safety as-

pects involved in the construction and operation of nu-

clear plants, the states retain their traditional responsi-

bility in the field of regulating electrical utilities for

determining questions of need, reliability, cost, and other

related state concerns. The determination of the rate

base by the Commission in this case does not in any

way encroach on the power of the NRC to establish and

regulate the safety requirements of nuclear plants.

The utilities also complain that the KCC does not have

the authority to phase-in the rate increases over a period

44a

of five years. We find this contention to be without

merit. In the first place, we note that KGE and KCPL

requested in their rate application that the KCC phase-in

their proposed rate increases. The Commission did just

that. Furthermore, K.S.A. 66-128b specifically author-

izes the Commission to phase-in “the reasonable value

of property determined not currently used or required

to be used.” The phasing-in of increased rates over a

period of time has the effect of balancing the interests

of the current ratepayers and the interests of future

ratepayers. In addition, phasing-in the value of prop-

erty as a part of the rate base is a useful tool which

the KCC may use in balancing the interests of the in-

vestors and the ratepayers.

KCC’s Method of Allocating the KPCL Rate Base

and Cost of Services Between

Kansas and Missouri

Because of the fact that KCPL provides electrical serv-

ice to customers in both Kansas and Missouri, that utility

has raised an issue regarding the Commission’s allocation

of the rate base and cost of service between those two

states. KCPL contends that the method of allocation

used was arbitrary, unconstitutional, unlawful, and con-

fiscatory.

Because of the interstate nature of KCPL’s business,

the regylatory commissioners in both Kansas and Mis-

souri are required to allocate KCPL’s operating costs

and plant investment between the residents of those

states. One commonly used method of allocating a public

utility’s costs is termed the “coincident peak” or “C.P.”

method. This method allocates operating costs and plant

investment to the jurisdictions actually served by a util-

ity based upon the percentage of total system demand

contributed by customers in the serviced jurisdictions

during certain periods of time. KCPL took the position

that, since the demand of Kansas customers is at its

very highest in the four summer months when air-con-

45a

ditioning usage is at its greatest, the 4 C.P. method

should be used in making the allocation. The KCC staff

disagreed. Although agreeing that KCPL’s total amount

of generating capacity may be determined by summer

peak cost, it found that total capacity is determined by

all twelve months of the year. The staff recommended

that the 12 C.P. allocation be used, because it recognized

KCPL’s capacity requirements throughout all 12 months

: of the year. The Commission found that the 12 C.P.

allocation factor is the most appropriate method of al-

locating KCPL’s production costs and transmission plant

value between the jurisdictions because it better recog-

nizes KCPL’s investment in base-load facilities used year

round and not solely during the summer peak months.

We cannot say that the Commission’s adoption of the

12 C.P. method was unreasonable or in any way illegal.

We note that KGE requested and the Commission adopted

the 12 C.P. methodology in connection with the KGE

plants. At the time the KCC made its decision, KCPL’s

case was still pending before the Missouri commission.

In the event that consistent methodology is not adopted

by Kansas and Missouri, KCPL can make an applica-

tion to the KCC for relief.

ee ee oe ee

The Reasonableness of the Overall Result

As we stated at the beginning of this opinion, in a

rate-making case, the goal of the KCC, as a state regu-

latory agency, should be to establish a rate within the

“zone of reasonableness” after application of a balancing

test in which the interests of all concerned parties are

considered. In our judgment, the KCC has accomplished

that result.

The KCC acted within its statutory powers. The utili-

ties received virtually all of the operating expenses that °°

they requested to operate and maintain the plant and

to decommission it at the end of its life. The KCC elimi-

nated approximately 10% of the costs of construction

—————————————— ————————

46a

which it found to be inefficiently and imprudently in-

curred. All of the remaining 90% of the Wolf Creek

construction costs are to be recovered through annual

depreciation expenses over the life of the plant. It is

only the return or profit on certain costs which has been

restricted by the Commission. The disallowances for

excess physical capacity and excess economic capacity

were properly determined by the use of recognized

methodology as the Commission proceeded to determine

a fair valuation of the Wolf Creek property. The KCC

left-the door open for the possibility that portions of the

construction costs found to constitute excess physical ca-

pacity and excess economic capacity might be included

in the rate bases at some time in the future. We find

no error in any actions taken or orders entered by the

KCC.

The orders of the Kansas Corporation Commission are

affirmed.

SCHROEDER, C.J., dissenting: Viewing the “end re-

sult” of the orders of the Kansas Corporation Commis-

sion (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. 383, 64 S. Ct. 281 (1944), the United States Su-

preme 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 re-

quiring “just and reasonable” rates, the Hope court em-

phasized 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.

47a

pn en OS BS eee

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 inter-

ests 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 ad-

mission concedes the generating capacity of the Wolf

Creek plant as planned was reasonable.

Second: In January 1977, the Nuclear Regulatory Com-

mission (NRC), the successor to the Atomic Energy

Commission, issued a temporary work authorization per-

mit 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 im-

prudently 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 hind-

sight without taking into consideration the information

————@xa

48a

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 legisla-

ture. Kansas Bd, of Regents v, Pittsburg State Univ,

Chap. of K-NEA, 288 Kan, 801, 880, 667 P.2d 806 (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 concern-

ing the economic conditions of national scope encountered

by the utilities after entering into the contract for con-

struction 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 evertually 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 legislation was referred to by Robert Vancrum as

The Wolf Creek Excess Cost—Haceas Capacity Bill, 38

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 become

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

ze <a

49a

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 legisla-

tion 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,

863 U.S, 608, 618-18, 4 L. Ed. 2d 1485, 80 S, Ct, 1867

(1960); American Power and L. Co, v, Securities and

Kx, Com’n, 141 F.2d 606 (1st Cir, 1944), aff'd 829 U.S.

90, 91 L. Ed. 108, 67 8, Ct. 188 (1946); Dock Watch

Hollow Quarry Pit v. Tp. of Warren, 142 N.J. Super.

108, 861 A.2d 12 (1976), aff'd 74 NJ, 812, 877 A.2d

1201 (1977); Springer v. Whalen, 68 App, Div, 2d 1011,

415 N.Y.8.2d 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,, 815 U.S.

575, 86 L. Ed, 1087, 62 8, Ct. 786 (1942); Bluefield Co,

v, Pub, Serv, Comm., 262 U.S 679, 67 L. Ed, 1176, 48

S. Ct. 675 (1928); Smyth v, Ames, 169 U.S, 466, 42 L.

Kd, 819, 18 8, Ct. 418 (1898); Williams v, City of

Wichita, 190 Kan,, 817, 841, 874 P.2d 578 (1962)

(Schroeder, J., dissenting).

The legislative enactments of 1984 and 1985 pertain-

ing 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 fed-

eral decisions which mandate that rates set for public

utilities fall within the “broad zone of reasonableness”

50a

by a balancing process between the various interests—

the interest of the utility investors, the present rate-

payers, 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 ef 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, determina-

tion 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 manage-

ment 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 generat-

ing 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

5la

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 lowa-lllinois Gas & E. Co., 56 P.U.R. 4th 361 (II.

1983); Re Publie Service Co. of Indiana, 51 P.U.R. 4th

6 (Ind, 1983); Re Cleveland Electric Ilium. Co., 46 P.U.R.

4th 68 (Ohio 1982); Re Pacific Power & Light Co., 63

P.U.R. 4th 642 (Or. 1984).

Third: Not content with the end result after the enor-

mous deduction for excess physical capacity from the rate

base, the KCC 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 eco-

nomic 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 ex-

clusion of excess economic capacity from the rate base

similar to what the KCC has done here. State commis-

sions where an attempt was made rejected the deduction

of excess economic capacity from the rate base. Re Wash-

ington 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 generat-

ing one megawatt of electricity in a newly constructed

52a

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 en-

countered 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 ac-

cident in Pennsylvania. These costs were not anticipated

when construction of the Wolf Creek facility began.

There was no way the utilities could avoid these costs im-

posed by the Nuclear Regulatory Commission. The con-

struction 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 1148, 1154 (8th Cir. 1971), the

court said:

“[Wle hold that the federal government has ex-

clusive authority under the doctrine of pre-emption

to regulate the construction and operation of nuclear

power plants, which necessarily includes regulation

of the levels of radioactive effluents discharged from

the plant.” (Emphasis added. )

58a

The United States Supreme Court in Pacific Gas & Elec.

v. Energy Resources Comm’n, 461 U.S. 190, 75 L. Ed.

752, 103 S. Ct. 1713 (1983), held broadly that “the Fed-

eral Government has occupied the entire tield 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 regula-

tions.

Indirectly, the KCC by deducting from the rate base

its determination of “excess economic capacity” has re-

fused to honor the costs attributable to federal preemp-

tion.

Obviously, a confiict 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 per-

mitted 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 encourag-

ing the use of fuels other than oil and natural gas found

in the Fuel Use Act.

Directing 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.

54a

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 Ca-

pacity 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 per-

mit 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 plan-

ning, 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

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 iirm

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 con-

cerning 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 be-

tween 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, accord-

ing to case law, had the project been abandoned the total ©

55a

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 some 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 in-

vestors assured these risks under its authority to al-

locate 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, legis-

lative 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 eco-

nomic capacity” because the utilities will be permitted

to recover these costs by an annual depreciation allow-

ance 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

56a

— valued at the same economic value as the portion in-

cluded in rate base.”

A regulatory body may not arbitrarily use the as-

serted, lower costs 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, par-

ticularly where that is done selectively to achieve the

lowest possible rate base. The KCC cites no cases what-

soever where the concept of risk sharing, or any other

concept, was used to justify hypothetical coal plant re-

valuation 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 alter-

natives to a nuclear plant, such as a coal-fired plant, and

only the cost of the lower-cost alternative should be al-

lowed in the rate base. Re Union Electric Co., 72 P.U.R.

4th 444, 450 (Iowa 1986). There the Commission re-

sponded and held:

“The evidence showed that when the Callaway

project was planned in the 1970’s, 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 Elec-

trict 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.

57a

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 ex-

ceed that of a coal plant. But the investors in the Wolf

Creek facility did not “assume the risk” of any unprece-

dented, arbitrary denial of a return on precedent con-

struction 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 elec-

trical energy at wholesale, having no generating facilities

of its own. The lines over which electricity is supplied

to the various cooperatives in KEPCo are owned by

KG&E. KG&E would not supply electricity to KEPCo

unless KEPCo brought 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.

APPENDIX B

Denial of Rehearing by Kansas Supreme Court

IN THE SUPREME COURT

OF THE STATE OF KANSAS

No. 85-58914-A S

85-58917-A S$

85-58918-A S

STATE CORPORATION COMMISSION OF THE

KANSAS GAS AND ELECTRIC Co.,

Applicant

Vv.

STATE OF KANSAS,

You are hereby notified of the following action

in the above entitled case:

Motion for rehearing.

Respondent

Motion for rehearing denied.

Date July 17, 1986

Yours very truly,

LEWIS C. CARTER

Clerk

Supreme Court

taken

APPENDIX C

Order of the Kansas Corporation Commission (KG&E)

THE STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS

Before Commissioners: Michael Lennen, Chairman

Margalee Wright

Keith R. Henley

Docket No. 120,924-U

IN THE MATTER OF A GENERAL INVESTIGATION BY THE

COMMISSION OF THE PROJECTED COSTS AND RELATED

MATTERS OF THE WOLF CREEK NUCLEAR GENERATION

FACILITY AT BURLINGTON, KANSAS

Docket No. 142,098-U

84-KG&E-197-R

IN THE MATTER OF THE APPLICATION OF KANSAS GAS AND

ELECTRIC COMPANY REQUESTING PROPOSED CHANGES

IN ITS CHARGES FOR ELECTRIC SERVICES

ORDER

NOW, the above-captioned matters come before the

State Corporation Commission of the State of Kansas

for consideration and determination of the application

of Kansas Gas and Electric Company (KG&E or appli-

cant) for approval of changes in its charges for electric

service.

‘iii iii |

Having considered the evidence and testimony, the files

and records and being fully advised in the premises, the

Commission’s findings and conclusions are set forth

hereinbelow.

I. APPEARANCES

1. The following parties entered an appearance in the

above captioned matters.

For the Applicant, KG&E,

Mr. James Haines \

Mr. Jonathan Heller

Mr. John DeCoursey

Kansas Gas and Electric Company

201 North Market Street

P.O. Box 208

Wichita, Kansas 67201

Mr. Gerald T. McNeive

Kansas City, Missouri

Mr. Edgar Roach

Raleigh, North Carolina

Mr. Richard Gary

Mr. Lawrence Skinner “i

Richmond, Virginia

For Kansas City Power and Light Company (KCPL),

Mr. Warren-B. Wood

Legal Counsel

Kansas City Power and Light Company

8730 Neiman Road

Overland Park, Kansas 66214

Mr. A. Drue Jennings

Mr. Mark C. Sholander

Mr. Mark G. English

1330 Baltimore

Kansas City, Missouri

For Kansas Electric Power Cooperative, Inc. (KEPCo),

Mr. Phillip Kassebaum

Mr. Clifford Bertholf

Kassebaum & Johnson

Attorneys at Law

125 North Market Street

Fifteenth Floor

Wichita, Kansas 67202

For the Kansas Corporation Commission Staff and the

public generally,

Mr. Brian Moline

Mr. Robert Fillmore

Mr. Don Low

Ms. LuAnn Dixon

Mr. Dana Gorman

Mr. John Rosacker ;

Mr. Kirby Vernon

Mr. Brad Bailey

Ms. Mary Ann Neath

Kansas Corporation Commission

State Office Building

Fourth Floor

Legal Department

Topeka, Kansas 66612

For the Intervenor,

Office of the Attorney General,

Mr. Robert T. Stephan

Attorney General

Mr. Wayne Hundley

Deputy Attorney General

Mr. Carl M. Anderson

Assistant Attorney General

Consumer Protection Division

and Antitrust Division

Judicial Center

Second Floor

Topeka, Kansas 66612

we a

4c 4

; Dr. Malcolm R. Burns

Lawrence, Kansas

For the Intervenor,

Alliance for Liveable Electric Rates (ALERT),

Mr. Robert V. Eye

IRIGONEGARAY, EYE & FLOREZ

Attorneys at Law

1535 Southwest 29th Street

Topeka, Kansas 66611

For the Intervenor,

Electric Shock Coalition,

Mr. Steven M. Dickson

Ms. Judy A. Pope

McCULLOUGH, WAREHEIM, & LABUNKER

Attorneys at Law -

1507 South Topeka Boulevard

Topeka, Kansas 66612

For the Intervenor,

Vulcan Materials Company, Chemical Division,

Mr. Milo M. Unruh, Sr.

Mr. Milo M. Unruh, Jr.

ARN, MULLINS, UNRUH, KUHN & WILSON

Attorneys at Law

300 West Douglas Avenue, Suite 330

Wichita, Kansas 67202

For the Intervenor,

Kansas Power and Light/Gas Service Company,

Mr. John K. Rosenberg

Kansas Power and Light Company

Legal Department

818 Kansas Avenue

Topeka, Kansas 66601

Mr. David Claycomb, | ;

Kansas City, Missouri

For the Intervenor,

Mary Margaret Rogers,

Mr. William Riggins

Mr. Patrick H. Donahue

Kansas Legal Services

112 West Sixth Street

Topeka, Kansas 66603

For the Intervenor,

Kansas Independent Oil and Gas Association (KIOGA),

Mr. Donald P. Schnacke

Kansas Independent Oil and Gas Association

1400 Merchants National Bank Building

Topeka, Kansas 66614

Mr. Jack Glaves

GLAVES, WEIL, EVANS & HOKE

Attorneys at Law

120 South Market Street

Wichita, Kansas 67202

For the Intervenors,

Electro Dynamics, Inc. and Thermo Dynamics, Inc.,

Mr. Richard Byrd

James G. Flaherty

Anderson, Byrd & Richeson

Attorneys at Law

P.O. Box 7

Ottawa, Kansas 66067

For the Intervenors,

St. Francis Hospital of Wichita, Inc.; Boeing Military

Airplane Company; Ash Grove Cement Company; Beech

Aircraft Corporation; Coleman Company; Derby Refin-

ing Company; Farmland Industries; General Portland

Cement Company; Hesston Corporation; Monarch Cement

Company; Texaco Refining and Marketing, Inc.; and

Total Petroleum, Inc.

Mr. Thomas M. Van Cleave, Jr.

McANANY, VAN CLEAVE & PHILLIPS

Attorneys at Law

112 Village Professional Building

Prairie Village, Kansas 66208

Mr. Robert C. Johnson

Mr. George Pond

PEPER, MARTIN, JENSEN, MAICHEL and HET-

LAGE |

Attorneys at Law

720 Olive Street, Floor 24

St. Louis, Missouri, 63101

For the Intervenors,

City of Countryside, Kansas; City of Mission, Kansas;

City of Roeland Park, Kansas; City of Overland Park,

Kansas; City of Merriam, Kansas; City of Lenexa, Kan-

sas; Johnson County Community College; Johnson County

Commercial and Industrial Users; Johnson County Board

of County Commissioners; City of Blue Valley, Kansas,

Mr. C. Edward Peterson

HAMILL, NEILL & DWYER

Attorneys at Law

5809 Reeds Road

Mission, Kansas 66202

For the Intervenors,

City of Wichita, Kansas; City of Clearwater, Kansas;

City of Derby, Kansas; City of Goddard, Kansas; City

of Garden Plain, Kansas; City of Cheney, Kansas; City

of Potwin, Kansas; and City of Whitewater, Kansas

Mr. John Dekker

Mr. Joe Allen Lang

Office of the City Attorney of Wichita, Kansas

Department of Law

City Hall, Thirteenth Floor

455 North Main Street

Wichita, Kansas 67202

OSes

For the Intervenor,

~ Johnson County Community College,

Mr. Robert F. Lytle

Attorney at Law

5100 West 95th Street

P.O. Box 8030

Prairie Village, Kansas 66208-0030

For the Intervenor,

NCK Electric Cooperative, Inc.,

Mr. Rodney Peake

Attorney at Law

1836 M Street

Belleville, Kansas 66935

For the Intervenor,

United States Air Force,

Mr. Robert A. Bersak

The United States Air Force

Headquarters

Utility Litigation Team

HQ USAF/ULT

Stop 21

Tyndall AFB, Florida 32403

Lt. Derek M. Fox

United States Air Force

McConnell Air Force Base

Wichita, Kansas 67202

2. Four hundred seventy-seven (477) members of the

public appeared on their own behalf and on the behalf of

others at nineteen (19) public hearings conducted be-

tween June 4 and June 20, 1985. A complete list of

those who testified at the public hearings is contained in

an attached Appendix.

8c |

Il. INTRODUCTION

1. This Order concerns two interrelated dockets,

120,924-U and 142,098-U, both of which relate to com-

mercial operation of the Wolf Creek Generating Station

(WCGS). To determine whether the WCGS was fully

operational and dedicated to commercial service the Com-

mission established in-service criteria. The owners of the

WCGS, through their operating agent KG&E, affirmed

by affidavit the in-service criteria had been satisfied and

declared the WCGS to be in commercial service as of

1:16 a.m., September 3, 1985. Staff confirmed by affidavit

filed September 10, 1985, that the aforementioned in-

service criteria had been satisfied and that the WCGS

should be considered in-service at the date and time

attested to by the owner utilities.

2. Docket No. 120,924-U was created in 1979 for the

purpose of initiating a “general investigation of the

projected costs and related matters of the Wolf Creek

Nuclear Generating Facility at Burlington, Kansas.” One

of the primary functions of the general investigation

docket was to allow staff to begin collecting data relevant

to the anticipated commercial operation of WCGS and the

related rate applications so that staff’s investigation

would not have to be completed within the 240 day

suspension period prescribed by K.S.A. 66-177 for the

investigation and hearing of rate applications and the

issuance of final orders.

3. Docket No. 142,098-U was created on November 8,

1984, upon the filing by KG&E of an application request-

ing proposed changes in its charges for electric service

based upon, inter alia, the commercial operation of the

WCGS. KG&E amended its application on January 31,

1985. KG&E requested approval of rates designed to in-

crease total company revenue by 144.9 million dollars in

1985. The 1985 rate proposal represents the first of five

annual rate increases proposed by KG&E. The annual

revenue increases proposed for the following four years

would be the subject of future rate proceedings.

4. KCPL and KEPCo also applied for approval to in-

crease their rates for electric service due to the com-

mercial operation of Wolf Creek. Docket No. 142,099-U

was created on November 8, 1984, upon the filing by

KCPL of its rate application requesting proposed changes

in its charges for electric service based upon, inter alia,

the commercial operation of Wolf Creek. KCPL amended

its application on January 31, 1985. Both the original

and the amended application request Commission ap-

proval of a one time increase in revenues of 90.5 million

dollars, or, in the alternative, a 110.6 million dollar rate

increase to be phased in over a four year period.

5. Docket No. 142,100-U was created on November

14, 1984, upon the filing by KEPCo of its WCGS rate

application. KEPCo filed an amended application on

February 1, 1985. In its application, KEPCo requested a

$26,984,410 increase in annual revenue, representing ap-

proximately a 40 percent increase in revenue presently

collected from KEPCo’s member distribution cooperatives.

The Commission’s findings with regard to Docket Nos.

142,099-U and 142,100-U are set out in separate orders.

6. As noted, the above-referenced applications for rate

relief and the general investigation are based primarily

upon the investment in, and the commercial operation of

the WCGS. Thus, there are issues common to all of the

above referenced dockets. In an Order dated March 29,

1985, the Commission found six Wolf Creek related issues

were to be designated common issues to be heard on a

common record in accordance with K.A.R. 82-1-224(a).

The six issues were identified as follows:

(1) the reasonableness of the cost, acquisition and

construction of the Wolf Creek generating sta-

tion including, but not limited to, a comparison

10¢

of the actual cost with the definitive or original

cost estimate;

(2) the reasonableness of the cost of operation of

Wolf Creek including overhead, maintenance, \

personnel, appropriate depreciation rate and in-

creased insurance costs;

(3) determination of the appropriate methods of

waste disposal and decommissioning and the

reasonableness of the respective costs;

(4) all issues relating to the use of nuclear fuel and

the status of the licensing of Wolf Creek;

(5) whether the collective management decisions to

construct and the collective management deci-

sions to continue construction on a year to year

basis were economically prudent; and

(6) whether any portions of cost of acquisition, con-

struction or operation of Wolf Creek were in-

curred due to lack of efficiency or prudence,

including, but not limited to, consideration of

those factors to be considered pursuant to K.S.A.

1984 supp. 66-128¢ (a).

7. In addition, the issues of excess capacity or the

need for power, as they relate to one or more of the

six issues set forth above, are common issues properly

presented either on the common record or on the record

of the company specific docket. Furthermore, any other

issues not specifically identified but which relate to, or

bear upon, the six issues enumerated above may be

presented as part of the common record.

8. Consistent with the identification of common issues,

in an order dated August 13, 1985, the Commission con-

cluded Docket Nos. 120,924-U, 142,098-U, 142,099-U and

142,100-U would be consolidated pursuant to K.A.R. 81-

2-224(a) for the purpose of hearing evidence concerning

the common issues on a common record.

lle

9. The scope of this order is limited to the Commis-

sion’s findings with regard to the common issues ad-

dressed in Docket No. 120,924-U and 142,098-U jointly

and the KG&E specific issues addressed in Docket No.

142,098-U. Issues identified and addressed by the Com-

mission in its deliberations concerning the common issues

of Docket No. 120,924-U and 142,098-U include:

(1) the efficiency and prudence of the Wolf Creek

acquisition/construction process ;

(2) excess generating capacity;

(3) the reasonable value of Wolf Creek capacity;

(4) the decommissioning of a nuclear power plant;

(5) Wolf Creek operating and maintenance expense;

(6) Wolf Creek depreciation rate;

(7) performance standards;

(8) the need for appropriate funding for payment

of dividends during the construction of Wolf

Creek;

(9) the appropriate ratemaking treatment of fines

and penalties relating to Wolf Creek;

(10) an examination of a leasing arrangement for

nuclear fuel; and

(11) the need for periodic reporting concerning load

growth equivalent availability, capacity factor,

operating and maintenance costs, decommission-

ing estimates, forced and scheduled outages and

insurance coverage.

10. With regard to the issues specifically related to

KG&E’s rate application, through direct testimony and

cross-examination, staff and applicant took opposing posi-

tions in the following areas: the nature of the rate relief;

the inclusion of the Jeffrey Energy Center Unit No. 4

12¢

Turbine Generator in the rate base as a part of the spare

part inventory for Jeffrey Units 1 through 3; the flow-

through of the benefit of the interest expense deduction

attributable to excluded Wolf Creek rate base, the in-

clusion of the ad valorem tax expense associated with

any excluded Wolf Creek plant in the KG&E cost of

service; the proper level of expense related to the opera-

tion and maintenance of LaCygne Generating Stations

Units 1 and 2; phase-in of the rate increase; the value

of SWPA power in the allocation process for generating

municipals and KEPCo; the value of Generating Munici-

pal owned generating plant; and the revenue require-

ments for KG&E.

11. The hearing of common issues in Docket No.

120,924-U and 142,098-U commenced May 13, 1985, at

the Kansas Statehouse, Old Supreme Court Chambers,

Third Floor, Topeka, Kansas. KG&E company-specific

rate issues in Docket No. 142,098-U were called for

hearing on July 15, 1985, and concluded July 22, 1985.

12. A complete list of witnesses called to testify on

behalf of the applicants, staff and intervenors in Docket

Nos. 120,924-U and 142,098-U is attached hereto as an

Appendix. The Commission also heard testimony from

ratepayers at public hearings conducted at the following

times and locations:

June 4 Wichita Century II Complex

9 a.m. 225 W. Douglas

1-7 p.m.

June 5 Wichita Century II Complex

9 a.m.

1-7 p.m.

June 6 Lindsborg Bethany College

1 p.m.

June 6 Newton Bethel College

7:30 p.m. North Newton

13c

June 7 Meade Veterans’ Bldg.

1 p.m. 115 E. Belle

June 7 El Dorado Butier Cty. Comm. College

7 p.m. 901 S. Haverhill Rd.

Junel10 Topeka Capitol Bldg.

7 p.m. 3rd Floor-Room 313 S

Junell Paola Paola High School

7 p.m. 405 N. Hospital Drive

Junel12 __— Pittsburg Pittsburg Memorial

7 p.m. Auditorium

503 North Pine

June13 Overland Park Johnson Cty. Comm. College

9 a.m. 12345 College Blvd.

1-7 p.m.

June18 lola Bowlus Fine Arts Center

7 p.m. 205 East Madison

June19 Independence Memorial Hall

7 p.m. Civic Center (Basement)

Locust & Penn Ave.

June20 Beloit Municipal Bldg.

7 p.m. 119 North Hersey

The record was closed upon the filing of briefs by the

parties August 30, 1985, and receipt on September 16,

1985, of staff’s affidavit regarding commercial operation.

III. JURISDICTION AND NOTICE

1. The Kansas Corporation Commission has the power

and authority to require all public utilities doing busi-

ness in Kansas to provide reasonably efficient and suffi-

cient service and to establish and maintain just and

reasonable rates. K.S.A. 66-107. Unless the State Corpo-

ration Commission otherwise orders, no common carrier

or public utility over which the Commission has control

shall make effective any changed rate, or rates of such

public utilities or common carrier, except by filing the

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same with the Commission at least 30 days prior to the

proposed effective date thereof. K.S.A. 66-117. The State

Corporation Commission has the authority to review and

evaluate the efficiency and prudence of any action, in-

cluding acquisition of excess capacity, or operating prac-

tices of any public utility or common carrier for the

purpose of establishing fair and reasonable rates. K.S.A.

6-128a. An order of the Commission establishing just

and reasonable rates must be based upon substantial

competent evidence. Jones v. Kansas Gas and Electric

Company, 222 Kan. 390 (1977).

2. KG&E is a corporation organized and existing un-

der the laws of the State-ef Kansas with its principal

place of business at 201 North Market Street, Wichita,

Kansas. KG&E is an electric public utility within the

meaning of K.S.A. 66-101 et seg. and it holds appropriate

certificates of convenience and necessity to engage in the

business of the sale of electric service at retail for do-

mestic, commercial, and industrial uses in the State of

Kansas.

3. KCPL is a corporation organized and existing un-

der the laws of the State of Missouri, with its principal

place of business located at 1330 Baltimore Avenue,

Kansas City, Missouri. KCPL is an electric public utility

within the meaning of K.S.A. 66-101 et seg. and it holds

appropriate certificates of convenience and necessity to

engage in the business of the sale of electric service at

retail for domestic, commercial and industrial uses in

the State of Kansas.

4. KEPCo is a corporation organized and existing un-

der the State of Kansas with its principal place of busi-

ness located at 5990 Southwest 28th Street, Topeka,

Kansas. KEPCo is an electric public utility within the

meaning of K.S.A. 66-101 et seg. and it holds appropriate

certificates of convenience and necessity to engage in

the business of the sale of electric services at wholesale

15¢

to tweny-five rural electric cooperative members in the

State of Kansas.

5. The following parties were granted leave to inter-

vene in Docket Nos. 120,924 aiud/or 142,098-U: Kansas

Natural Resource Council; Boeing Military Aircraft Com-

pany; Cities of Wichita, Clearwater, Derby, Goddard,

Garden Plain, Overland Park, Olathe, Lenexa, Shawnee,

Merriam, Countryside, Mission, Roeland Park, White-

water, Potwin, Kechi and Cheney, Kansas; Alliance for

Livable Electric Rates (ALERT); Electric Shock Coali-

tion; United States Air Force; Robert T. Stephan, At-

torney General of the State of Kansas; Conoco, Inc.:

Kansas Independent Oil and Gas Association (KIOGA) ;

Kansans for Sensible Energy; Vulcan Materials Co.,

Chemical Division; Johnson County Board of Commis-

sioners; Johnson County Community College; Hospital

and Industrial Group; KPL/Gas Service; Blue Valley

Unified School District No. 229; Johnson County Com-

mercial & Industrial Energy Consumers; Olathe Unified

School District; Shawnee Mission School District No.

512; Vulean Materials; Electro Dynamics, Inc.; NCK

Electric Cooperative; Mary Margaret Rogers; and the

Wichita Area Chamber of Commerce.

6. KG&E verified that it published notice of hearing

in Docket Nos. 120,924-U and 142,098-U in 43 news-

papers of general circulation in the KG&E service area

between the dates of March 27 and April 4, 1985. In

addition, notice was posted in a conspicuous public place

in KG&E’s business offices in Kansas. Notice was also

served by direct mail to each party of record in Docket

Nos. 120,924-U and 142,098-U; by direct mail to each

intervenor in KG&E’s last rate proceeding before this

Commission, Docket No. 136,380-U; and commencing

March 12, 1985, and continuing through April 10, 1985,

by mail to all of KG&E’s Kansas customers as an insert

in the regular monthly bills sent to those customers.

16c )

7. Notice of the pendency of the above-referenced ap-

plications, the general investigation and the hearings con-

ducted with regard thereto having been given, the Com-

mission finds notice reasonable and proper. Further, the

Commission finds that it has jurisdiction to hear and

decide the KG&E rate application and the issues related -

thereto.

IV. EFFICIENCY AND PRUDENCE OF THE WOLF

CREEK ACQUISITION/CONSTRUCTION PROCESS

A. INTRODUCTION

1. In valuing utility property for ratemaking pur-

poses, if the Commission determines that all or a portion

of the costs of acquisition, construction, or operation of

a generating facility were incurred due to a lack of

efficiency or prudence or were incurred in the acquisition

or construction of excess capacity, then the Commission

may exclude all or a portion of such costs from eligi-

bility for recovery through rates in accordance with

K.S.A. 1984 Supp. 66-128¢e which provides as follows:

The state corporation commission, in determining the

reasonable value of property under K.S.A. 66-128,

and amendments thereto, shall have the power to eval-

uate the efficiency or prudence of acquisition, con-

struction or operating practices of that utility. In

the event the state corporation commission deter-

mines that a portion of the costs of acquistion, con-

struction or operation were incurred due in whole or

in part to a lack of efficiency or prudence, or were

incurred in the acquisition or construction of excess

capacity, it shall have the power and authority to

exclude all or a portion of those costs from the

revenue requested by the utility.

For the purpose of this act, “excess capacity”

means any capacity in excess of the amount used and

required to be used to provide adequate and reliable

17¢c

service to the public within the state of Kansas as

determined by the commission. The commission may

in its discretion prohibit or reduce the return on

costs which were incurred in constructing, maintain-

ing or operating excess capacity.

2. In the event that the Commission finds a public

utility to have imprudently incurred costs relating to the

acquisition, construction, or operation of utility plant or

if the Commission finds excess capacity to have resulted

from imprudence in facility planning, the Commission

may not allow recovery of carrying or financing charges

on costs so incurred after the date of its finding. K.S.A.

1984 Supp. 66-128e provides, in pertinent part, as

follows:

In the event the commission finds that a portion of

the costs were attributable either to investment in

excess capacity which were incurred due to lack of

prudence in facility planning or were incurred due

to lack of prudence in plant acquisition, construc-

tion or operation, the commission shall exclude that

portion of the carrying or finance charges incurred

after the date of its finding, and no part of the

carrying or finance costs excluded shall ever be or

become part of the reasonable value of public utility

property so used and required to be used. For the

purposes of this section only, 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 by the commission when a siting permit

authorizing the construction of the facility has been

issued under K.S.A. 66-1,162 and amendments thereto

prior to the passage of this act. The commission also

shall not authorize the recovery as operating ex-

pense or in any other manner of the carrying or

finance costs so excluded.

Nothing in this act shall limit the commission’s

authority to adjust revenue requirements of any

18c

public utility if the commission determines the reve- |

nue requirement requested results in whole or in

part from inefficiency or a lack of prudence.

3. The Commission must consider the prudence “fac-

tors” listed in K.S.A. 1984 Supp. 66-128g(a) in assess-

ing whether construction costs were prudently incurred

and in determining whether such costs should be re-

covered through rates.

The factors which shall be considered by the com-

mission in making the determination of “prudence” 3

or lack thereof in determining the reasonable value ;

of electric generating property, as contemplated by

this act shall include without limitation the following:

(1) A comparison of the existing rates of the util-

ity with rates that would result if the entire cost of

the facility were included in the rate base for that

facility;

(2) a comparison of the rates of any other utility

in the state which has no ownership interest in the

facility under consideration with the rates that would

result if the entire cost of the facility were included

in the rate base;

(3) a comparison of the final cost of the facility

under consideration to the final cost of other facilities

constructed within a reasonable time before or after

construction of the facility under consideration;

(4) a comparison of. the original cost estimates

made by the owners of the facility under considera-

tion with the final cost of such facility;

(5) the ability of the owners of the facility under

consideration to sell on the competitive wholesale or

other market electrical power generated by such fa-

cility if the rates for such power were determined

by inclusion of the entire cost of the facility in the

rate base;

19¢

(6) a comparison of any overruns in the construc-

tion cost of. the facility under consideration with

any cost overruns of any other electric generating

facility constructed within a reasonable time before

or after construction of the facility under considera-

tion;

(7) whether the utility having an ownership in-

terest in the facility being considered has provided

a method to ensure that the cost of any decommission-

ing, any waste disposal or any cost of clean-up of

any incident in construction or operation of such

facility is to be paid by the utility;

(8) inappropriate or poor management decisions

in construction or operation of the facility being

considered ;

(9) whether inclusion of all or any part of the

cost of construction of the facility under considera-

tion, and the resulting rates of the utility there-

from, would have an adverse economic impact upon

the people of Kansas;

(10) whether the utility acted in the general

public interest in management decisions in the ac-

quisition, construction or operation of the facility;

(11) whether the utility accepted risks in the con-

struction of the facility which were inappropriate to

the general public interest of Kansas;

(12) any other fact, factor or relationship which

may indicate prudence or lack thereof as that term

is commonly used.

4. In light of these statutes and the general empower-

ing statutes in Chapter 66, we have reviewed the own-

ers’ Management Performance Evaluation, Reconciliation

Management Summary, and WCGS cost reconciliation and

schedule testimony. In addition, we have studied the

Touche Ross and Project Management Associates (PMA)

20c

reports, and evaluated the owners’ criticisms of these re-

ports. Our assessment of the WCGS costs and construc-

tion management follows.

B. PLANNING, ORGANIZATION AND CONTROL OF

THE PROJECT AND ITS COST

Initial Period (1973-1977)

1. The owners and staff each presented evidence and

testimony to evaluate the owners’ management perform-

ance during the initial phases of the Wolf Creek project.

The witness for the owners, Mr. Charles L. Huston, as-

serted in his testimony and Exhibit G-KGE-1, that the

owners’ decision to join the nuclear power plant stand-

ardization group, or SNUPPS, was the “most significant

event of the entire project.” Because of this association,

asserts Mr. Huston, the owners were able to avail them-

selves of the knowledge of other utilities with experience

in constructing nuclear power plants and to accrue sav-

ings in engineering, licensing and procurement, as well

as other areas. (Exhibit G-KGE-1, Schedule 1, p. 10).

Staff witness Thomas J. Flaherty came to the same con-

clusion in his testimony. He stated:

The advantages available to the Owners from par-

ticipation far outweigh the potential disadvantages

whether considered on an economic or non-economic

basis. The ability to spread the cost of design among

a number of utilities provides immediate economic

benefits that also accrue to the ratepayers. More-

over, the ability to rely on the technical expertise of

other experienced and participating utilities serves to

increase the knowledge base of the Owners and pro-

vides for increasing familiarity over time based on

the previous situations similarly experienced by these

utilities. This tie-in to a broader network was par-

ticularly important given the lack of design, construc-

tion or construction management experience of the

Owners. (TR. Vol. XVII, p. 4790).

2lc |

Mr. Flaherty further acknowledged the positive effects of

the decision to join SNUPPS when he discussed the sav-

ings in cost and schedule that resulted from the reduc-

tion of design hours and licensing effort by spreading the

cost over a number of plants. (TR. Vol. XII, p. 4905-

4906).

2. Witnesses for the staff and owners agree that the

owners’ selection of major contractors was appropriate.

Mr. Huston discussed the selection of the major architect/

engineer and the engineering management of the project

in Chapter III of the “Management Performance Evalua-

tion.” (Exhibit G-KGE-1). He observed that:

The SNUPPS utilities selected Bechtel Power Cor-

poration based upon its having the greatest amount

of nuclear project engineering experience of any firm

in the industry and the strength of its proposed

project team. Executive management committed by

Bechtel to the SNUPPS project was strong. (Exhibit

G-KGE-1, p. 50).

Mr. Flaherty testified that while the evaluation process

for the selection of the lead architect/engineer was lim-

ited, the “selection of Bechtel resulted in obtaining the

largest and most experienced architect/engineer in the

nuclear power industry.” (TR. Vol. XVII, p. 4792). Mr.

Huston described the selection process for choosing the

major site constructor, Daniel International Corporation

(DIC), in Chapter VI of Exhibit G-KGE-1. Mr. Flaherty

evaluated that process in his report. He concluded that:

The evaluation and selection process used by the Wolf

Creek owners was comprehensive in scope and gave

appropriate consideration to economic, experience

and capability factors. The evaluation and selection

process employed included an assessment of the

strengths and weaknesses of each organization.

& * * * *

The selection of DIC as the constructor for the Wolf

Creek project was reasonable and prudent based on

22c

the information available to the Wolf Creek Owners.

The selection process was comprehensive in scope...

and involved the scrutiny of senior management of

the Owner utilities. (Exhibit G-Staff-63, p. VI-27

and 28).

Staff witness Flaherty’s findings relative to the selection

of the contractor for the nuclear steam supply system

and the turbine generator supplier were that the selec-

tion processes were comprehensive and thorough. (Ex-

hibit G-Staff-63, p. VI-29 and 30). He summarized his

findings regarding the owners’ efforts in contractor selec-

tion in his testimony:

In each case, multiple bidders were requested to par-

ticipate in the bidding process and were thoroughly

evaluated on both objective and subjective bases.

Home office or other site visits were made to further

evaluate submitted material. Although the process

for selection of Bechtel as the lead A/E was sig-

nificantly less comprehensive, the overall process fol-

lowed for selection of major vendors and contractors

was appropriate and was conducted with thorough

consideration of a wide variety of factors. (TR. Vol.

XVII, p. 4792).

3. During the early stages of the project, the company

adopted an overall management philosophy described as

construction “monitoring” by both staff and owner wit-

nesses. Staff witness Flaherty asserted that the initial

philosophy could be characterized as “that of contractor

monitoring and rendering approval or denial to contrac-

tor recommendations.” (TR. Vol. XVII, p. 4791). Mr.

Huston discussed the owners’ early construction manage-

ment philosophy in his exhibit:

The initial concept [of construction management]

was to have one contractor serve as the Construction

Manager of all site activities with limited Owner in-

volvement . .. (Emphasis added). (Exhibit G-

KGE-1, Schedule 1, p. 167).

oo ee eee i eed al

Mr.

23¢

Flaherty asserted that this approach to managing

the Wolf Creek Generating Station was inadequate:

lack

The initial management philosophy as apparently

developed did not provide the necessary emphasis to

the project management function. Given the size and

complexity of the proposed project, a more structured

and stronger approach toward management of the

contractor effort would be necessary to provide the

level of oversight commensurate with potential risks.

This was particularly true in light of emerging

trends and conditions with respect to nuclear power

and the lack of relevant experience of the Owners.

(Exhibit G-Staff-63, p. VI-14).

Flaherty attributed the inadequacy to the owners’

of understanding of the nature of the project:

. . . the Owners did not fully appreciate the com-

plexity and magnitude of the task facing them in

the design, licensing, and construction of a nuclear

generating facility. Relying on the same manage-

ment approach which had been used -in the past to

support the construction of gas/oil-fired generating

facilities was insufficient for directing a nuclear con-

struction program. (TR. Vol. XVIII, p. 4797).

In Mr. Flaherty’s opinion, the effect of the owners’

“monitoring” role was reflected in subsequent inefficient

performance by the prime construction contractor:

. . . the initial level of management involvement

was not sufficient enough to support . . . effective

project management. With a greater level of in-

volvement earlier in the project it is likely that some

of the problems experienced related to DIC perform-

ance and overall project progress could have been

avoid (sic) or mitigated. (TR. Vol. XVII, p. 4799).

The form of the contract between the constructor

and the owners for the plant was addressed by the owners

Sait SA ———

24c

as well as the staff. Witnesses for the owners and staff

testified that industry practice for construction of nu-

clear power plants had dictated the use of a cost-plus

type contract by the owners. In his report, Mr. Flaherty

stressed the importance of the owners’ direct involvement

in administering cost-plus type contracts and asserted

that:

Given the high level of financial commitment to

Wolf Creek, a more extensive and experienced proj-

ect construction organization should have been es-

tablished at project inception. Not only would this

additional monitoring capability provide an organ-

ization to better challenge claims for increased cost

or schedule delays by various vendors or contractors,

but it would have provided the top management of

the Owners ,a better understanding of project prob-

lems, ete., which would have facilitated the compre-

hensiveness and the timing of corrective management

_actions by the Owners. (Exhibit G-Staff-63, p. VII-

19).

5. The Commission finds that management perform-

ance in the initial stages of the project was reasonable

and appropriate in the selection of major contractors

and in the decision to participate in the SNUPPS or-

ganization. However, the Commission finds that inherent

problems arose from the management philosophy adopted

by the owners in the early years. The evidence is per-

suasive that the owners neither defined nor understood

the scope of the project. We find that the monitoring

role was inefficient, ineffective, and inappropriate under

-the circumstances. The owners’ initial philosophy led to

management inefficiencies and ineffectiveness and con-

tributed to poor contractor performance during certain

phases of the project. The lack of effective, efficient man-

agement on the part of the owners at the outset limited

the owners’ ability to control costs and schedule to the

detriment of the ratepayers.

NT |

25c

Early Construction Period (1978-1980)

1. Mr. Huston testified concerning the effectiveness

of the owners’ management performance during con-

struction of the Wolf Creek Generating Station. He as-

serts that “the owner and contractors exerted exception-

ally strong and effective management and achieved com-

mensurately outstanding results” in some areas. He also

asserts that less than outstanding, but still acceptable,

performance occurred in areas of labor productivity and

overtime. (TR. Vol. I, p. 154). At page 189 of Exhibit

G-KGE-1, Management Performance Evaluation, Mr.

Huston states, “In 1979 and eary 1980, it was apparent

that construction performance was less than required by

the schedule and the budget.” He then concluded in his

testimony that the owners’ overall management perform-

ance for the project was good. (TR. Vol. I, p. 163). Mr.

Gary Fouts, construction manager of the project since

1979, voiced his opinion of the owners’ approach to con-

struction management prior to 1980 in his testimony.

He testified that since the owners had no prior experience

in nuclear construction management, it was proper and

reasouable fur them to select a contractor (DIC) with

nuclear construction experience and entrust that, contrac-

tor with the overall construction management of the

project. He asserted that from the period 1976-1978

there was no need to change the approach, but that the.

owners increased their involvement in 1979-1980 when

construction problems arose and the project entered a

more complex phase. (TR. Vol. XXXV, p. 10478-10479).

2. Witnesses for the staff asserted that prior to 1980

construction performance never achieved expected levels.

Mr. Flaherty criticized the owners’ “monitoring” role, the

size of the owners’ initial project staff commitments and

the level of management involvement. (TR. Vol. XVII,

p. 4819). Criticisms of the early phases of construction

management were also contained in the 1980 report sub-

26c

mitted to the Commission by Cresap, McCormick and

Paget, Inc. That report stated:

Several factors lead to the consultants to conclude

that early phases of construction management were

unsatisfactory.

—Owner-utility involvement at the headquarters

level was insufficient.

—Staffing of KG&E’s construction management or-

ganization was grossly inadequate. (Exhibit G-

Staff-188, p. V11-26).

8. Witnesses for the owners assert that while prob-

lems in construction occurred at Wolf creek as they do

at all major construction projects, the owners’ responses

to the problems were timely and effective. (Fouts, TR.

Vol. XXXV, p. 10478; Brown, TR. Vol. XXX, p. 9024;

Huston, TR. Vol. III, p. 499-500). Mr. Flaherty con-

tends that the level of management attention was insuf-

ficient to diagnose problems soon enough to arrest po-

tentially harmful conditions:

It’s a question of why the problem necessarily sur-

faced and could it have been diagnosed sooner. (TR.

Vol. XVII, p. 4946).

A more relevant point would be how did the situa-

tion get to that particular point, without having

been arrested earlier, and that’s the kind of thing

we’re talking about in terms of the lack of project

management capabilities in the early years may

have precipitated a result of that kind,... (TR. Vol.

XVII, p. 4957).

Mr. Flaherty pointed out that other consultants, includ-

ing those employed by the owners, had concluded that

the owners’ management efforts should have been greater

at an earlier point in time. He asserted that in view of

ar eee

27¢c

the level of investment, the owners should have placed

more emphasis on the project. (TR. Vol. XVII, p. 4875-

4876).

4. Special staff witness Lawton C. Mitchell asserted

that the owners’ management performance was deficient

in four respects: a) lack of experience on the part of

constructor; b) lack of commitment by the owners and

constructor; ¢c) lack of an effective cost control and

scheduling system; and d) failure of the constructor to

develop an effective quality program. (TR. Vol. XVII,

p. 5085-5086).

(a) Mr. Mitchell asserted that more than half of the

DIC management and supervisory personnel assigned to

Wolf Creek had three years or less nuclear experience

when they arrived at Wolf Creek. The combination of

the owners’ inexperience with the inexperience of the

major constructor compounded the difficulty of attaining

a degree of effectiveness on a nuclear project. (TR. Vol.

XVH; p. 5085).

(b) Staff witness Flaherty asserted in his report that

the owners did not adequately staff the project:

The KG&E Construction Organization was under-

staffed at the time the Wolf Creek project mobilized

for construction. A total personnel complement of

only 6 people did not provide adequate coverage to

represent the Owners’ interests and level of risk

associated with the project.

The limited number of KG&E construction personnel

made monitoring of project costs, schedule, and/or

manpower impractical at the time the project fully

mobilized for construction. At best, the personnel

available would have the resources to deal with the

progress of the project on an exception basis only;

that is, the Owner personnel would be in a position

28c

to only deal with problems which were brought to

their attention by vendors or contractors. (Exhibit

G-Staff-63, p. VIII-18).

Staff witness Mitchell testified that the prime contractor

demonstrated a lack of. commitment by failing to ag-

gressively recruit and hire nonmanual personnel during

the 1979-1980 time frame. (TR. Vol. XVII, p. 5085).

In his report, Mr. Mitchell stated that the ratio ofnon-

manual to manual labor was inordinately low throughout

1979-1980, and he suggested that this low level of non-

manual personnel support could have contributed to poor

craft and quality performance during that time period.

(Exhibit G-Staff-63, p. XI-15). Mr. Mitchell cited prob-

lems that occurred in issuing and implementing proce-

dures, processing reports, interpreting inspection proce-

dures, performing inspections, reporting progress, and

planning material and manpower levels for specific work

operations. (Exhibit G-Staff-63, p. XI-19 and 20).

systems used by DIC lacked sufficient data to effectively

understand performance or to control costs. (TR. Vol.

XVII, p. 5086). He further asserted that the deficiency

resulted from a management decision rather than the

lack of computer software.

This is not a function of deficiencies in computer

software but the result of a management decision

to collect costs at a higher level than that which

is necessary to ascertain cost causation. (TR. Vol.

XVII, p. 5086).

Cresap, McCormick and Paget, Inc., in its 1980 report

to the Commission, asserted that the owners’ budgeting

process for the project suffered from major deficiencies:

The Wolf Creek Plant’s budgeting process has five

major deficiencies:

—weak budget development and review procedures

29c

—inconsistent accounting for budgeted items

—inadequate budget reports

—insufficient performance analysis and follow-up

practices

—cumbersome systems that support budget develop-

ment and control. (Exhibit G-Staff-188, p. IX-11

and 12).

Mr. Mitchell testified further that the scheduling system

in place by DIC suffered from the lack of manpower

loading. (Exhibit G-Staff-63, p. XI-22). He testified that

an owners’ control group was established to provide an

independent review of costs and schedule delays, but, that

the group was not established until 1980. (Exhibit G-

Staff-63, p. XI-29 and 30). Cresap, McCormick and

Paget, Inc., in its 1980 report to the Commission, iden-

tified problems with the scheduling system and stated:

Inability of the constructor to accurately anticipate

manpower requirements has had a number of ad-

verse consequences for project schedule and cost.

* * * *

Some temporary overstaffing has also occurred, and

this has resulted in reduced labor productivity. (Ex-

hibit G-Staff-188, p. VII-8).

Mr. Huston, witness for the owners, identified similar

problems in his 1979 report to the owners:

Electrical activities in the DIC CPM had not been

leveled with available manpower.

The six-month look-ahead schedule did not con-

tain adequate definitions of various commodities; it

did not provide management appropriate informa-

tion to identify what work needed to be performed

or in what sequence the work should be undertaken.

In the quantity tracking system, installation of

bulk items was reported as complete prior to accept-

380c

ance by Quality Control. It should be recognized

that significant rework occasionally resulted from

these QC inspections. (Exhibit G-Staff-63, p. XI-29).

He testified that the scheduling problem went unsolved

for a period of time and that in his judgment, the logic

in the schedule should have been corrected earlier. (TR.

Vol. III, p. 5384). In April 1980, Mr. Huston concluded

in a report to the owners:

... The current schedule program provides the data

management needs in the civil and major equipment

areas but is lacking in the piping, instrumentation,

and electrical areas.

The constructor has a CPM program with the capa-

bility to define priority schedule activities. However,

problems with logic, durations, and completeness pre-

vent it from presenting a total picture of critical

project activities.

The optimum size work force can work on the

proper sequence of activities only when a schedule

is prepared that accurately identifies this work

sequence.

The Owners need to improve and strengthen their

schedule interface with the constructor. (Exhibit G-

Staff-5, p. 11).

Mr. Huston continued to voice concerns about the sched-

uling program in September 1980 (Exhibit G-Staff-6)

and in January 1981 when he stated:

DIC and Startup still have not gotten together and

input system restraints into the CPM schedule.

Although DIC has worked on their CPM program

in recent months, it still suffers from the basic flaw

of not having been manpower loaded.

81le

DIC has not scheduled instrumentation work and

there is still no adequate definition of the scope of

work to be done.

* os * *

DIC has not prepared manpower curves which re-

flect the requirements of the new schedule. It is

difficult for DIC to effectively manage their work

without them. (Exhibit G-Staff-7, pp. 1 and 2).

(d) Mitchell asserted that DIC failed to develop an ef-

fective quality program which led to increased scrutiny

of the project by the Nuclear Regulatory Commission

(NRC). (TR. Vol. XVII, p. 5086). He further testified

that while many of the shortcomings in the program

were identified early in the project, similar problems oc-

curred throughout the life of the project. The NRC

expressed concern with the owners’ management controls

and in 1979 threatened the project with a civil penalty

if the improvement was not made. (Exhibit G-Staff-63,

p. XI-31). The owners were assessed a $40,000 civil pen-

alty early in 1983 for failure to adequately control ac-

tivities affecting the quality of safety-related systems.

(Exhibit G-Staff-63, p. XI-33). Cresap, McCormick and

Paget in 1980 identified similar problems with the qual-

ity assurance program. (Exhibit G-Staff-188, p. VII 24

and 25).

5. The Commission finds that the owners’ management

of the project prior to 1981 was clearly inefficient and

ineffective. The evidence is persuasive that the monitor-

ing role adopted by the owners was inappropriate, pro-

duced ineffective management, and resulted in a lack

of project control. The ensuing inefficiencies and lower-

ing of labor productivity are reflected in schedule de-

lays and increased costs that occurred during various

periods of construction. The Commission recognizes that

there was no realistic alternative to the cost-plus nature

of the contract utilized by the owners for construction

32c

of the project. However, the Commission finds that the

level of concern and commitment on the part of the own-

ers in this time frame was not sufficient to administer

a cost-plus type contract. In view of the nature of the

contract, the cost and schedule control systems adopted

by the owners were inadequate and did not provide the

requisite degree of control.

6. We find that lack of management attention coupled

with the lack of efficient, effective management on the

part of the owners resulted in scheduled delays and in-

creased costs that could have been mitigated by strong

management action earlier in the project.

Mid-years of Construction (1981-1982)

1. Mr. Huston, witness for the owners, asserted that

as the project entered the more complex stages of con-

struction (mechanical, piping, electrical, instrumentation

and startup work), the owners elected to increase their

construction management staff. In addition to the ex-

pansion of the on-site staff, the owners removed some

portions of work and the contract administrat

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