Opposition Brief — Kansas Gas & Electric Co. v. State Corp. Commission

Supreme Court, U.S,

FILED

APR 23 1987

ct ANIOL, JR.

RK

In THE —

Supreme Court of the United States

OCTOBER TERM, 1986

No. 86-781

KANSAS GAS AND ELECTRIC COMPANY,

Appellant,

V.

STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS,

Appellee.

On Appeal from the Supreme Court of Kansas

APPELLANT'S REPLY TO MOTION TO DISMISS

FOR LACK OF CASE OR CONTROVERSY

RALPH BUSH FOSTER EDGAR M. ROACH, JR.*

JAMES S. HAINES, JR. THOMAS E. GRAHAM

Kansas Gas and HUNTON & WILLIAMS

Electric Company One Hannover Square

201 N. Market Street Fayetteville Street Mall

Wichita, KS 67201 Raleigh, NC 27602

(316) 261-6573 (919) 899-3000

RICHARD D. GARY

LAURENCE E.. SKINNER

HUNTON & WILLIAMS

707 E. Main Street

Richmond, VA 23212

(804) 788-8200

Attorneys for Kansas Gas and Electric Company

* Ccunsel of Record

April 23, 1987

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TABLE OF CONTENTS

Page

a siaoaneetisdnatnslioniing 1

ARGUMENT Si 2k Ee EAT 3

A. KG&E Continues to Suffer Injury ......................... 3

B. Exceptions to the Mootness Doctrine ..................-- 3

1. Capable of Repetition, Yet Evading Review.. 3

i | ER ee EN 8

8 ARENAS RS Eto ERNE ae EE Te ene rN 9

TABLE OF AUTHORITIES

Cases

Intermountain Gas Co. v. Idaho Public Utility

Commission, 98 Idaho 718, 571 P.2d 1119 (Idaho

RRR SES CTIR aie ae en tO A ea aE 7

Michigan Bell Telephone Company v. Public Serv-

ice Commission, 85 Mich. App. 163, 270 N.W.2d

Te | miner een eer 7

National Association of Greeting Card Publishers

v. United States Postal Service, 462 U.S. 810

CO cine Miceli atch atbutsedclicladiacdshttsoene 6

Southern Pacific Terminal Company v. Interstate

“Commerce Commission, 219 U.S. 498 (1911)...... 5, 6

State ex rel. Missouri Public Service Company v.

Fraas, 627 S.W.2d 882 (Mo. Ct. App. 1981) ...... 7

Super Tire Engineering Company v. McCorkle, 416

A S| IRESRRES SIR Aerie ens ne ae Sr Cea 8

United States v. W.T. Grant Company, 345 U.S.

OR RRA RISTO rite Sas 5,9

Weinstein v. Bradford, 423 U.S. 147 (1975) ........... 8

peasenahdncern nt ee et

4

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

No. 86-781

KANSAS GAS AND ELECTRIC COMPANY,

Appellant,

V.

STATE CORPORATION COMMISSION

OF THE STATE OF KANSAS,

Appellee.

_ On Appeal from the Supreme Court of Kansas

APPELLANT’S REPLY TO MOTION TO DISMISS

FOR LACK OF CASE OR CONTROVERSY

On April 13, 1987, Appellee filed a motion to dismiss

this appeal for mootness or lack of a case or controversy.

For the reasons set forth below, the Court should deny

that motion, hear oral argument and decide this case on

the merits.

BACKGROUND

On September 27, 1985, the State Corporation Commis-

sion of the State of Kansas (KCC) issued a rate order

(1985 Order) setting rates for Kansas Gas and Electric

Company (KG&E) to reflect the addition to rate base

of KG&E’s new nuclear plant, the Wolf Creek Generating

2

Station (Wolf Creek). The 1985 Order granted only a

portion of the rate increase requested by KG&E. In set-

ting rates, the KCC disallowed significant portions of

KG&E’s prudent investment in Wolf Creek because it

found those amounts represented physical and economic

excess capacity. The KCC’s “economic excess capacity”

disallowance was achieved by valuing Wolf Creek at

$1290/kW, instead of its prudent net original cost of

$2376/kW. As a result of the KCC’s disallowances, it

denied KG&E a current return on 78 percent of its

prudent investment in Wolf Creek.

KG&E appealed the 1985 Order to the Kansas Su-

preme Court arguing that the end result of the Order

was confiscatory in violation of the Fifth and Fourteenth

Amendments to the United States Constitution and that

the arbitrary use of an economic value for only Wolf

Creek was a violation of KG&E’s Fourteenth Amendment

right to equal protection. The Kansas Court affirmed the

1985 Order and KG&E appealed the case to this Court.

During the pendency of the appeals, KG&E took nu-

merous steps to mitigate the devastating effects of the

1985 Order. It reduced the dividend on common stock by

50 percent, eliminated 200 jobs, froze officers’ salaries, re-

duced civic and charitable contributions and refinanced a

large portion of its outstanding debt. As a result of these

steps, KG&E was able to continue its operations with a

very small profit margin.

On March 11, 1987, the KCC issued a subsequent rate

order (1987 Order) dealing with KG&E’s investment in

Wolf Creek. This Order, which since has become final,

did not set higher rates for KG&E, but instead changed

the valuation of Wolf Creek for ratemaking purposes and

made permanent the rates established in the 1985 Order.

In the 1987 Order, the KCC valued Wolf Creek for

ratemaking purposes at its full prudent net original cost

of $2376/kW instead of the $1290/kW “economic valua-

3

tion” used in the 1985 Order. The KCC did not find the

valuation it used in the 1985 Order erroneous and has

never repudiated the use of an economic valuation method.

Rather, the major inducement for the KCC to revalue

Wolf Creek was a plan proposed by KG&E that would

avoid increasing rates to customers as a result of the

revaluation. Under KG&E’s plan, the KCC would revalue

Wolf Creek at its prudent net original cost and, in re-

turn, KG&E agreed to combine with its utility operating

revenue an $800 million stream of income from nonutility

property purchased by shareholders.' As a result KG&E’s

rates will remain essentially the same.

ARGUMENT

Appellee contends that the 1987 Order renders the

present appeal moot because the 1987 Order grants KG&E

“virtually all” the relief requested (Motion at 3), and

therefore no “issue, case, or controversy exists between

KG&E and the KCC” (Motion at 8). The 1987 Order

does not render this case moot. KG&E continues to suf-

fer injury from the 1985 Order which this Court should

address. Further, even if the 1987 Order provided a com-

plete remedy, this case falls into an exception to the moot-

ness doctrine. Given the possibility that the KCC will

repeat the use of the valuation method in the future, the

Court should hear this appeal.

A. KG&E Continues to Suffer Injury

As will be discussed in greater detail in KG&E’s brief

on the merits due to be filed with the Court on May 9,

1987, KG&E’s appeal presents two major issues. These

issues arise out of the valuation method used by the KCC

in its 1985 Order. First, KG&E contends that as a re-

sult of the valuation of Wolf Creek at $1290/kW, KG&E

received a return on its prudent investment so low that it

1 Normally earnings from such property would benefit only

shareholders.

4

constitutes confiscation of KG&E’s property without just

compensation. Second, KG&E argues that the valuation

method used by the KCC resulted in a discriminatory

classification that violates KG&E’s equal protection

rights. Although the 1987 Order changes that method,

KG&E continues to suffer injury from the 1985 Order.

The KCC correctly points out that the valuation method

for Wolf Creek imposed in its 1985 Order was superceded

in the 1987 Order. The valuation method adopted in

1985 is no longer in effect. Valuation of Wolf Creek at

$1290/kW, however, was in effect from the issuance of

the original Order on September 27, 1985, until March

11, 1987, when the new Order was issued.

KG&E suffered significant injury during that period.

First, as a result of the valuation, KG&E’s rates in effect

from September 1985 to March 1987 were such that the

return to KG&E’s shareholders resulted in confiscation

of KG&E’s property without just compensation. The 1987

Order does not provide for collection of this past con-

fiscation. Second, KG&E’s financial health was placed in

serious jeopardy. As discussed above, KG&E took drastic

steps to recover its financial health. For example, im-

mediately after the 1985 Order, KG&E reduced the divi-

dend to common shareholders by one-half and refinanced

a large portion of its debt. In doing so, KG&E: has been

forced to pay higher interest rates than if the KCC had

valued Wolf Creek properly. These higher interest rates

will continue to injure KG&E into the future.? Third,

to persuade the KCC to revalue Wolf Creek in the 1987

Order, KG&E made several major concessions concerning

2 KG&E has not requested relief in the form of retroactive rates

to compensate for the past confiscation or the actions taken to

restore financial health. Nonetheless, those injuries have occurred

and provide an example of the harm that KG&E is threatened with

if the KCC returns to the valuation method used in the 1985

Order. Such an action by the KCC would require KG&E to begin

this appeal process once again.

5

its investments. For example, to help keep rates at the

current level, KG&E agreed to combine with utility op-

erating revenue income from nonutility property pur-

chased with shareholder funds. Fourth, because the KCC

has never repudiated its “economic valuation” method,

KG&E continues to be threatened by the possible future

imposition of the valuation used in the 1985 Order. This

threat continues to cloud KG&E’s financial outlook and

makes the task of obtaining financing more expensive and

more difficult. These injuries were not redressed by the

1987 Order and therefore review by this Court is neces-

sary.

B. Exceptions to the Mootness Doctrine

This Court has developed two related doctrines dealing

with the possibility of future harm to a party. First, if

a controversy is capable of repetition, yet evades review,

this Court will decide the case instead of finding it moot.

Southern Pacific Terminal Company v. Interstate Com-

merce Commission, 219 U.S. 498 (1911). Likewise, a

reasonable expectation that the complaining party again

will be subjected to the challenged conduct despite the

defendant’s voluntary cessation of the conduct pending

full litigation of the issues provides a reason for this

Court to decide the case. United States v. W.T. Grant

Company, 345 U.S. 629 (1953). Both of these principles

apply to the present case.

1. Capable of Repetition, Yet Evading Review

The 1985 Order challenged in this appeal is capable

of repetition. The KCC has continuing jurisdiction over

the rates set for KG&E and has the power under Kansas

law to require KG&E to establish and maintain just and

reasonable rates. K.S.A. §§ 66-101, 101b. Further, the

KCC at any time may upon complaint from a customer,

or on its own motion, investigate KG&E’s existing rates

and, if it finds them unjust or unreasonable, may or-

der substitute rates. K.S.A. § 66-101d. Therefore, the

6

KCC has the opportunity at any time to repeat the rate-

making treatment imposed on KG&E in the 1985 Order.

The KCC is well aware of this, and stated it repeatedly

in the 1987 Order:

. . . we have not foreclosed the possibility of further

challenge to the [rates set for Wolf Creek].... Nor

is our action inconsistent with the possibility that at

some point after the increases become effective that

it would be appropriate to examine the reasonable-

ness of KG&E’s earnings. . . . any customer of

KG&E, as well as the Commission staff, is always

free to file a complaint alleging that KG&E’s rates

are unreasonable.

a * w *

Of course, the Commission also continues to have the

right to reexamine all elements of KG&E’s revenue

requirements should it appear that its earnings or

rates are unreasonably high.

Motion at Al8, A33.

The continuing nature of the ratemaking process was ©

central to the Court’s decision against mootness in South-

ern Pacific, supra. In that case, the Court noted that

issues decided in orders of the Interstate Commerce Com-

mission (ICC) may influence future proceedings. Because

the proceedings of the ICC are continuing, issues relevant

to future cases “ought not to be, as they might be, de-

feated by short term orders, capable of repetition yet

evading review. .. .” Southern Pacific, 219 U.S. at 515.

The Court recognized in National Association of Greet-

ing Card Publishers v. United States Postal Service, 462

U.S. 810 (1983) that a subsequent rate order does not

automatically render a case moot. That case involved a

challenge to rates set for the United States Postal Service

by the Postal Rate Commission. While the litigation was

pending, the challenged rates were modified. The Court

recognized that postal rates frequently are in effect too

briefly for litigation concerning them to be completed be-

a

fore they are superceded and therefore held that modifica-

tion of the challenged rates did not moot the controversy.

Id. at 820, n. 14. In fact, the Court noted that in two

previous cases, challenged rates had been superceded be-

fore judicial review could be concluded. Jd. Because is-

sues presented would be central to future proceedings

and a reasonable expectation existed that the petitioner

would be affected by the future proceedings, the Court

refused to find the case moot.

Other courts have also recognized that a rate order

issued during the pendency of an appeal of a prior rate

order does not moot the controversy surrounding the first

order. See e.g., State ex rel. Missouri Public Service

Company v. Fraas, 627 S.W.2d 882 (Mo. Ct. App. 1981) ;

Michigan Bell Telephone Company v. Public Service

Commission, 85 Mich. App. 163, 270 N.W.2d 546 (Mich.

Ct. App. 1978); Intermountain Gas Co. v. Idaho Public

Utility Commission, 98 Idaho 718, 571 P.2d 1119 (Idaho

1977). The Missouri Court of Appeals recognized that

under the general rule of mootness, when rates cannot

be amended prospectively because they have been super-

ceded by a subsequent rate order, a case is considered

moot. Fraas, supra. The court held, however, that an

exception is made when the issue presented is of a recur-

ring nature and of general public interest and impor-

tance. The court decided to hear the case because a legal

principle was involved on which a ruling was necessary

for future guidance.

The rationale set forth by this Court in National As-

sociation of Greeting Card Publishers and in the state

court decisions cited above holds true for KG&E. KG&E

certainly will be affected in future proceedings by a de-

cision in this case. This Court has recognized that in

cyclically recurring actions, a particular decision “by its

continuing and brooding presence, casts what may well

be a substantial adverse effect on the interests of the

petitioning parties.” Super Tire Engineering Company

ee

8

v. McCorkle, 416 U.S. 115, 122° (1974); see also Wein-

stein v. Bradford, 423 U.S. 147, 148 (1975) (citing

Super Tire). The 1985 Order issued by the KCC had a

devastating effect on KG&E’s financial condition. The

possibility that the KCC will repeat the ratemaking

treatment used in the 1985 Order will have a “substan-

tial adverse effect” on KG&E’s ability to obtain future

financing. Therefore, KG&E seeks assurance that the

confiscatory and inherently punitive ratemaking treat-

ment will not be imposed at some future date. Further,

the issues in this case have national significance. As

stated in KG&E’s Jurisdictional Statement, utilities

across the country have invested in nuclear generating

plants awaiting final ratemaking treatment. The Brief

of Amicus Curiae of the Edison Electric Institute In

Support of Jurisdictional Statements, discusses the effect

of large disallowances already imposed on utilities and

stresses the importance to future ratemaking of a deci-

sion in this case.

2. Voluntary Cessation

The KCC has never repudiated the valuation method it

used in the 1985 Order. In fact, the KCC stated in the

1987 Order that “there is no firm basis for reassessing

the cost efficiencies of Wolf Creek.” Motion at A30. The

KCC revalued Wolf Creek at its prudent net original

cost only because KG&E presented it with an innovative

plan that satisfied the KCC’s concerns. “In the applica-

tion before us, KG&E has proposed a method for dealing

with the issue of value in a way that deals successfully

with our concerns. .. .” Id. The KCC, however, explic-

itly reserved the right to revisit the question of valua-

tion for Wolf Creek: “Of course, if the predicates to

the valuation were to change, . . . the analysis of this

Commission could also change.” Jd. at A30-A31.

The KCC’s actions in the 1987 Order amount to volun-

tary cessation of conduct with a reasonable expectation

9

that the conduct will be repeated. This Court recognized

in United States v. W.T. Grant Company, 345 U.S. 629,

632 (1953), that voluntary cessation of conduct does not

deprive the Court of the power to hear and determine

the case. Otherwise, the “defendant is free to return to

his old ways.” Jd. at 632. The Court stated that al-

though the defendant could attempt to demonstrate that

there is no reasonable expectation that the wrong will be

repeated, the burden on the defendant to prove that it

will not engage in the challenged practice in the future

is a heavy one. /d. at 633.

Here, the KCC has not even attempted to meet this

heavy burden. In the 1987 Order it explicitly reserved

the right to examine the valuation of Wolf Creek in the

future and the 1987 Order, as well as the KCC’s instant

motion, are glaringly silent about the valuation method

the KCC would use to value Wolf Creek if KG&E’s rates

were challenged in a future proceeding.

CONCLUSION

KG&E suffered significant injury during the time the

1985 Order was in effect and continues to suffer injury

as a result of that Order. Further, a reasonable expec-

tation exists that the methods used in the 1985 Order

will be imposed on KG&E in the future.

The fundamental issues involved in KG&E’s appeal are

central to utility ratemaking. A resolution of questions

involving the constitutional standard for confiscation in

a state ratemaking proceeding is important not only to

KG&E but to utilities throughout the country. This Court

has not decided a case that applies the constitutional test

for confiscatory rates in a state ratemaking proceeding

in a very long time. Also, the question of how the consti-

tutional requirement of equal protection should be ap-

plied in utility ratemaking functions has never been ad-

dressed by this Court. Future ratemaking by state com-

10

missions and review by state courts will certainly be

affected by a decision in this case. This case presents the

Court with an opportunity to clarify the constitutional

standards applicable to ratemaking.

For the reasons stated herein, the Court should deny

the KCC’s Motion to Dismiss, hear oral argument and

decide the case on the merits.

Respectfully submitted,

RALPH BUSH FOSTER . EDGAR M. ROACH, JR.*

JAMES §. HAINES, JR. THOMAS E. GRAHAM

Kansas Gas and HUNTON & WILLIAMS

Electric Company One Hannover Square

201 N. Market Street Fayetteville Street Mall

Wichita, KS 67201 Raleigh, NC 27602

RICHARD VD. GARY

LAURENCE E. SKINNER

HUNTON & WILLIAMS

707 E.-Main Street

Richmond, VA 23212

Attorneys for Kansas Gas and Electric Company

* Counsel of Record

April 23, 1987