In the Matter of Kansas City Power&Light Company's Request for Authority to Implement a General Rate Increase for Electric Service, And Midwest energy Consumers' Group v. Missouri Public Service Commission

Missouri Court of Appeals
Western District

IN 'I`HE MATTER OF KANSAS CITY

POWER & LIGHT COMPANY'S
REQUEST FOR AUTHORITY TO
IMPLEMENT A GENERAL RATE

INCREASE FOR ELECTRIC
SERVICE,

Appellant,
and

MIDWEST ENERGY CONSUMERS'
GROUP,

Appellant,

V.

MISSOURI PUBLIC SERVlCE
COMMISSION,

Respondent.

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WD79125 Consolidated with
WD79143 and WD79189

OPINION FILED: September 6, 2016

Appeal from the Public Service C_ommission

Before Division Two: Karen King Mitchell, Presiding Judge, Cynthia L. Martin, Judge
and Gary D. Witt, Judge

This case consolidates two appeals from a rate case involving Kansas City Power

& Light Company‘s ("KCPL") request for a rate increase from the Public Service

Commission ("PSC"). KCPL appeals from the Report and Order ("Report and Order") of
the PSC in its most recent general rate case, pursuant to Section 386.510.1 KCPL raises
five points on appeal, challenging the return on equity granted by the PSC, the methods
used to calculate that rate of return, the rejection of a "tracker" accounting mechanism,
the PSC's refusal to include certain transmission costs in a fuel adjustment clause, and the
denial of certain rate case expenses We affirm the PSC's Report and Order.

Midwest I'inergy Consumers' Group ("MECG") is an unincorporated association
that is comprised of large consumers of energy, which was permitted to intervene in
KCPL's rate case. l\/IECG appeals from the Compliance Tariff Order, which
implemented the Report and Order, MECG raises seven points of error, each challenging
the September 16 Compliance Tariff Order that concluded the Final Compliance Tariff
sheets filed by KCPL complied with the PSC's September 2 Report and Order. Each
point of error challenges the process and procedure by which the PSC issued its
Compliance Tariff ()rder. MECG's appeal is dismissed as moot.

Factual Background

KCPL is a regulated public utility under the jurisdiction of the PSC of the State of
Missouri under Chapters 386 and 393. The PSC is charged with the authority to set the
rates that KCPL is allowed to charge consumers pursuant to section 393.150. On
October 30, 2014, KCPL filed tariff sheets that would implement a general rate increase

for its retail electric utility service. KCPL requested an increase on its return on equity

' All statutory references are to the Revised Statutes of Missouri 2000 as currently supplemented, unless
otherwise indicated

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from 9.7% to 10.3%. In addition, KCPL asked the PSC to adopt a fuel adjustment clause
under section 386.266 and to use an accounting deferral mechanism for certain items of
expenditure

The implementation of the new tariffs was suspended until September 29, 2015 to
allow for full rate case proceedings A number of parties intervened and participated in
the proceedings including MECG. A test year of twelve months, ending on March 31,
2014 and extended to December 31, 2014, was agreed to by the parties and adopted by
the PSC. The PSC also established a "true-up" period to run through May 31, 2015.
Public hearings were conducted and evidentiary hearings were held over a number of
days The parties filed post-hearing briefs and the case was submitted to the PSC on
August 3, 2015.

In its Report and Order, the PSC set KCPL's return on equity to 9.5%. The PSC
denied KCPL's request for an accounting deferral mechanism known as a "tracker" for
certain expenses. The PSC permitted KCPL to implement a fuel adjustment clause, but
only for "true" purchased power, approximately 7.3% of the costs charged to KCPL by
the Southwest Power Pool. Finally, the PSC allowed KCPL to recover approximately
74.26% of its expenses on the rate case. Timely applications for rehearing were filed and
denied.

This appeal follows Further details regarding the relevant disputed issues are

outlined as applicable in the analysis sections of each point below.

Standard of Review

An order from the PSC is presumed to be valid, and the burden of proof is on the
party challenging the order, by clear and satisfactory evidence, to show that the order is
either unlawful or unreasonable See ln re Laclea’e Gas Co., 417 S.W.3d 815, 819 (Mo.
App. W.D. 2014); Section 386.430.

Judicial review of the PSC's Report and Order is two-fold. State ex rel. Pub.
Counsel v. Pub. Se/'v. Comm'n, 397 S.W.3d 441, 446 (Mo. App. W.D. 2013). First, we
must determine whether the PSC's order was lawful. Ia’.

An order's lawfulness depends on whether the [PSC's] order and decision

was statutorily authorized When determining whether the order is lawful,

we exercise independent judgment and must correct erroneous

interpretations of the law. Because the [PSC] is purely a creature of statute,

its powers are limited to those conferred by statute either expressly, or by
clear implication as necessary to carry out the powers specifically granted.

Ia’. at 446-47 (internal quotations and citations omitted). "Second, we must determine
whether the [PSC'sj order was reasonable." la'. at 447. "In determining whether the
Commission's order is reasonable, we consider (l) whether it was support[ed] by
substantial and competent evidence on the whole record, (2) whether the decision was
arbitrary, capricious or unreasonable, and (3) whether the [PSC] abused its discretion."
Id. (internal quotations and footnote omitted).

"We consider the evidence, along with all reasonable supporting
inferences in the light most favorable to the Commission's order. [State ex
rel. Mo. Gas Energy v. Pub. Serv. Comm'n, 186 S.W.3d 376, 382 (Mo.
App. W.D. 2005).] "[I]f substantial evidence supports either of two
conflicting factual conclusions, '[we are] bound by the findings of the
administrative tribunal."' State ex rel. AG Processing, lnc. v. Pub. Serv.
Comm'n, 120 S.W.3d 732, 735 (Mo. banc 2003) (quoting Amway Corp. v.
Dir. of Revenue, 794 S.W.2d 666, 668 (Mo. banc 1990)). The

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determination of witness credibility is left to the Commission, "'which is
free to believe none, part, or all of the testimony."' Mo. Gas Energy, 186
S.W.3d at 382 (quoting Commerce chk, N.A. v. Blasa'el, 141 S.W.3d 434,
456»57 n.l9 (l\/lo. App. W.D. 2004)). "It is only where a Commission
order is clearly contrary to the overwhelming weight of the evidence that
we may set it aside." Ia’. Additionally. with regard to issues within the
Commission's expertise, "we will not substitute our judgment for that of the
Commission." [Union Elec. Co. v. Pub. Serv. Comm'n, 136 S.W.3d 146,
151 (l\/Io. App. W.D. 2004)].

State ex rel. Pub. Counsel v. Mo. Pub. Serv. Comm'n, 289 S.W.3d 240, 246-47 (Mo. App.

W.D. 2009).

Appeal by Kansas City Power & Light Comgany

MB

Point One - Return on Eguig;

In KCPL's Point One on appeal, KCPL argues the PSC erred in choosing a return
on equity ("ROE") of 9.5% and in refusing regulatory treatment that recognizes certain
known future cost increases because the impact of these determinations is unreasonable

and unlawful as it is confiscatory.

The Supreme Court has decided that a public utility, as a matter of constitutional
right,

is entitled to such rates as will permit it to earn a return on the value of the
property which it employs for the convenience of the public equal to that
generally being made at the same time and in the same general part of the
country on investments in other business undertakings which are attended
by corresponding[] risks and uncertainties; but it has no constitutional right
to profits such as are realized or anticipated in highly profitable enterprises
or speculative ventures The return should be reasonably sufficient to
assure confidence in the financial soundness of the utility and should be
adequate, under efficient and economical management, to maintain and
support its credit and enable it to raise the money necessary for the proper
discharge of its public duties

Bluefield Waterworks & Improvement Co. v. Pub. Serv. Comm'n of W. Va., 262 U.S. 679,
692-93 (1923). "A rate of return is generally considered to be fair if it covers utility
operating expenses debt service, and dividends, if it compensates investors for the risks
of investment, and if it is sufficient to attract capital and assure confidence in the
enterprise's financial integrity." State ex rel. Mo. Gas Energy, 186 S.W.3d at 383
(internal quotation omitted); see also Fed. Power Comm’n v. Hope Nat. Gas Co., 320
U.S. 591, 603 (1944).

In Missouri, section 393.270.4 governs, in part, the PSC's authority to fix utility
rates, and states the following:

In determining the price to be charged for gas, electricity, or water the

commission may consider all facts which in its judgment have any bearing

upon a proper determination of the question although not set forth in the

complaint and not within the allegations contained therein, with due regard,

among other things, to a reasonable average return upon capital actually

expended and to the necessity of making reservations out of income for

surplus and contingencies

"The rate of return is, essentially, the amount that a utility must pay to secure
financing from debt and equity investors." State ex rel. Pub. Counsel v. Pub. Serv.
Comm'n, 274 S.W.3d 569, 573 (Mo. App. W.D. 2009). "To determine the proper rate of
return, the commission should factor '(i) the ratio of debt and equity to total capital, and
(ii) the cost and (iii) weighted cost for each of these capital components."' Id. at 573-74
(quoting State ex re/. Mo. Gas Energy, 186 S.W.3d at 383).

"Determining a rate of return on equity, however, is imprecise and involves

balancing a utility's need to compensate investors against its need to keep prices low for

consumers." Id. at 574. Missouri courts have consistently held that the PSC is not

required to utilize any specific methodology to calculate a just and reasonable return in

setting rates State ex )'el. Praxair, lnc. v. Pub. Serv. Comm'n. 328 S.W.3d 329, 339 (Mo.
App. W.D. 2010). 'l`his Court has outlined the following principles governing review of

the PSC's determination of an ROE.

The Commission has considerable discretion in rate setting due to the
inherent complexities involved in the rate setting process State ex rel.
Associated Natural Gas C0. v. Public Serv. Comm’n, 706 S.W.2d 870
(Mo.App.l985). lt is not the theory or methodology, but the impact of the
rate order which counts State ex rel. Missouri Water Co. v. Public Serv.
Comm'n, 308 S.W.2d 704, 714 (Mo.1957). Missouri courts do not set
utility rates State ex rel. GTE North, lnc. v. Missouri Pub. Serv. Comm'n,
835 S.W.2d 356, 361 (Mo.App.l992). "If the total effect of the rate order
cannot be said to be unjust and unreasonable, judicial inquiry under the Act
is at an end." Assocz'ated Natural Gas, 706 S.W.2d at 873 (quoting Fea’eral
Power Comm’n v. Hope Natural Gas C0., 320 U.S. 591, 602-03, 64 S.Ct.
281, 287-88. 88 L.Ed. 333 (1944)). Where ratemaking is at issue,
determinations by the Commission are favored by a presumption of
validity.

State ex rel. Ojice of the Pub. Counsel v. Pub. Serv. Comm'n, 938 S.W.2d 339, 344 (Mo.
App. W.D. 1997).

The PSC set KCPL's ROE at 9.5%, down from the previous return on equity of
9.7%. KCPL had requested a new return on equity rate at somewhere between 9.7% and
10.3%. There is not a single way to determine a proper ROE. Therefore, analysts utilize
three generally accepted methods to estimate a fair ROE: the Discount Cash Flow

Method ("DCF"), the Risk Premium Method, and the Capital Asset Pricing Method

("CAPM").2 Analysts generally balance their use of all three methods to determine a
recommended R()E.

Four expert witnesses testified as to their opinions regarding the ROE. One
witness, Robert Hevert ("Hevert"), offered testimony on behalf of KCPL. He
recommended an R()E of 10.3%, within a range of 10.0% to 10.6%. The PSC
determined that Hevert's estimate was too high. The PSC found Hevert's (1) constant
growth DCF results were based on excessive and unsustainable long-term growth rates,
(2) multi-stage DCF was based on a flawed accelerating dividend cash flow timing and
an inflated gross domestic product growth estimate as a proxy for long-term sustainable
growth, (3) CAPM was based on inflated market risk premiums, and (4) bond yield plus
risk premium was based on inflated equity risk premiums

Michael Gorman ("Gorman") testified on behalf of the Missouri Industrial Energy
Consumers and MECG. He testified that based on returns on equity awarded by other
commissions a reasonable ROE for KCPL would be 9.5% or less He recommended an
ROE of 9.1% within a range of 8.8% and 9.4%. Maureen Reno ("Reno") offered
testimony on behalf of the U.S. Department of Energy and the Federal Executive
Agencies and recommended an R()E of 9.0% within a recommended range of 8.2% and

9.6%. Finally, Zephania Marevangepo ("Marevangepo") offered testimony on behalf of

2 The DCF method assumes that a stock's current price accurately represents the present value of all
expected future cash flows for the utility. The Risk Premium method assumes that investors require a higher return
to assume a greater risk. Generally, common equity investments have greater risk than bonds because bonds have
more security for payment in bankruptcy proceedings than common equity. The CAPM assumes that the investor's
required ROE is equal to a risk-free rate of interest plus the product of a company-specific risk factor and the
expected risk premium on the market portfolio.

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the technical staff of the PSC, She recommended an ROE of 9.25% within range of 9.0%
and 9.5%.

The PSC found the estimates from Gorman, Reno, and Marevangepo were
reasonable and accurate estimates of the current market cost of capital for KCPL. The
upper ends of the recommendations from these three analysts were 9.4% to 9.6%. The
PSC concluded that these recommendations relied on verifiable and independent market
data and accepted market-based rate of return models The PSC also considered a
number of additional factors including recent indicators of growth and the reduction of
risk to KCPL by the PSC's approval of a fuel adjustment clause, which would support a
reduced return. KCPL found that an ROE of 9.5% would allow KCPL to compete in the
capital market for funds needed to maintain its financial health.

To further justify its chosen ROE of 9.5%, the PSC found that, in general, state
public utility commissions are reducing authorized returns on equity to follow declines in
capital market costs The PSC looked at industry authorized returns on equity for fully
litigated cases which in 2014 was 9.63% and in the first quarter of 2015 was 9.57%. The
PSC uses these comparisons because KCPL must compete with other utilities in the
country for the same capital. Since the last established ROE of 9.70%, the PSC found
that market capital costs for Missouri electric utilities are lower as a result of increases in
stock prices and decreases in bond yields and utility dividend yields In addition, since
April of 2015, capital markets and general economic indicators have indicated expanding

macroeconomic growth and increasing returns

KCPL, on the other hand, argues that the PSC made its decision contrary to
evidence of a consistent pattern of KCPL earning below its authorized ROE. KCPL
presented evidence that U.S. regulatory commissions were approving ROES that averaged
9.83% during the second quarter of 2015. KCPL also argued that it has a riskier profile
than most other U.S. utilities that would justify a higher ROE. KCPL takes issue with the
approach taken by the PSC to determine the ROE by relying on historical costs to set
rates KCPL argues that the PSC's reliance on historical data will fail to reflect KCPL's
current expenses when the new rates take effect, which KCPL claims will be higher than

historical costs indicate due to a number of factors, a phenomenon called "regulatory

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lag.

The PSC counters that its approach to calculating the ROE strikes the appropriate
balance between considering historical costs in setting the ROE and looking at future
variables The test year is the primary mechanism through which the PSC determines
appropriate rates The PSC focuses on four factors during the test year: (l) the rate of
return the utility has an opportunity to earn; (2) the rate base upon which a return may be
earned; (3) the depreciation costs of plant and equipment; and (4) allowable operating
expenses These factors are considered to determine the utility's revenue requirement,
which is the amount of revenue taxpayers must generate to pay the costs of producing the
utility's services they receive while yielding a reasonable rate of return. The PSC's use of
a true-up audit and hearing is designed to balance the historical data with known and
measureable subsequent and future changes; these are generally limited only to accounts

affected by a significant known and measurable change, such as a new labor contract,

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new tax rate, or the completion of a new capital asset. This procedure is designed to
reduce regulatory lag.

This Court's role is not to determine what a reasonable ROE is but rather to review
the record to see if the PSC's decision is lawful and supported by competent and
substantial evidence State ex rel. Pub. Counsel, 397 S.W.3d at 447. We must defer to
the Commission's decisions regarding the credibility of witnesses and not second-guess
issues that are within the PSC's area of expertise See State ex rel. Pub. Counsel, 289
S.W.3d at 247.

Evaluation of expert testimony is left to the Commission which "may adopt

or reject any or all of any witnesses' testimony." State ex rel. Associated

Natural Gas Co, v. Public Service Comm'n, 706 S.W.2d 870, 880 (Mo.

App. W.D. 1985). Since the testimony of both experts was properly

presented to the Commission, it was up to the Commission to choose

between the conflicting evidence presented as to the propriety of including

the cost of the storage gas in the new rate calculations
State ex rel. Associated Nat. Gas Co. v. Pub. Serv. Comm'n, 37 S.W.3d 287, 294 (Mo.
App. W.D. 2000).

We find that the decision of the PSC was lawful and supported by competent and
substantial evidence First, three experts each testified credibly, as found by the PSC, as
to an appropriate ROE. The chosen ROE of 9.5% was within the ranges of the
recommendations of these three experts The PSC found the testimony of expert Gorman
credible that an R()E as low as 9.1% would maintain KCPL's financial integrity and
ability to attract capital. Gorman's analysis included an evaluation of the risks and

uncertainties faced by utilities comparable to KCPL, thus complying with the Supreme

Court's guidance in Blue]l`ela’. See Bluejield Waterworks, 262 U.S. at 692. Further, the
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PSC determined that an R()E of 9.5% was close to the average of comparable utilities,
which in 2014 was 9.63% and in the first quarter of 2015 was 9.57%. This Court has
previously approved a "zone of reasonableness" established by the PSC that considered a
return on equity within 100 basis points (i.e. 1.0% above or below) the national average
as presumptively reasonable See State ex rel. Pub. Counsel, 274 S.W.3d at 574; In re
Permian Basz'n Area Rate Cases, 390 U.S. 747, 767 (l968)("courts are without authority
to set aside any rate selected by the Commission [that] is within a ‘zone of
reasonableness'"). Here, the zone of reasonableness within the national average, as found
by the PSC, is 8.63% to 10.63%. An ROE of 9.5% falls squarely within the zone of
reasonableness Also, we have held that where the ROE falls within the range
recommended by the expert witnesses and is in keeping with the average for other
similarly situated entities in the absence of any other significant showing that the figure
established is unreasonable this Court must defer to the PSC. See State ex rel. Noranda
Aluml`num, Inc. v. Pub. Serv. Comm'n, 356 S.W.3d 293, 311 (Mo. App. S.D. 2011).
Although KCPL complains that the PSC only looked to "fully-litigated" cases
rather than to all other rate cases to determine comparable returns on equity, KCPL has
cited no authority that would suggest the PSC's reliance on fully-litigated cases is
improper. Our role is not to second-guess issues that are within the PSC's area of
expertise and we will not do so here See State ex rel. Pub. Counsel, 289 S.W.3d at 246-
47. KCPL relies extensively on past actual returns on equity to argue reducing its ROE
here is unreasonable but such comparisons are only of limited value as the PSC cannot

compensate KCPL for previous unearned equity but may only use that information in its

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calculations of a reasonable return going forward See State ex rel. Mo. Gas Energy, 186
S.W.3d at 383 (the law does not require that rates yield any particular return and past
losses are not considered in deciding whether a new rate is confiscatory).

Second, although KCPL complains that the historical test-year model with a true-
up period does not adequately take into account regulatory lag, the PSC has adapted its
methodology to attempt to account for regulatory lag. The true-up period established by
the PSC was designed to remediate some of the negative effects of regulatory lag by
taking into account known and measurable subsequent or future changes to KCPL's
expenses Again, the PSC is not obligated to use any set methodology in making its ROE
determinations but must exercise its considerable discretion and expertise in finding an
ROE that is just and reasonable See State ex rel. Praxair, Inc., 328 S.W.3d at 339.
Determinations of the PSC have the presumption of validity that will not be upended for
the sole reasons that KCPL believes it has a better way to calculate an ROE. Id. ("Where
ratemaking is at issue determinations by the [PSC] are favored by a presumption of
validity.") The best way to account for regulatory lag is a question of methodology and is
best addressed by the expertise of the PSC, which this Court will not second-guess See
State ex rel. Pub. Cozmsel, 289 S.W.3d at 246-47.

We find that KCPL's chosen return on equity was lawful and supported by

substantial and competent evidence Point One is denied

Points Two and Three - Tracking Mechanisms and Forecasts

KCPL's claims in Points Two and Three on appeal are largely intertwined and,

therefore will be considered together. In its case in chief and in direct testimony, KCPL

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requested that the PSC grant it the use of tracking mechanisms3 for expenses related to
certain transmission fee expenses property tax expenses and CIP/cyber-security
expenses In sur-rebuttal testimony, KCPL suggested, in the alternative to the requested
tracking mechanisms for these expenses in the event those mechanisms were denied by
the PSC, that its estimates of future expenses regarding the above categories be added to
the figures from which the PSC calculates KCPL's revenue requirements

The PSC denied KCPL's request to use tracking mechanisms as to each of these
categories of expenses This is the subject of KCPL's Point Three on appeal, considered
first, in which KCPL claims the PSC erred in denying its request for a "tracker"
accounting deferral mechanism because the legal conclusion by the PSC that only
"extraordinary" items could be deferred as regulatory assets is unlawful and unreasonable
because it is contrary to the Uniform System of Accounts ("USOA"), adopted by the
PSC, because the USOA does not require that revenues expenses gains or losses be
"extraordinary" in order to be deferred as a regulatory asset or liability.

The PSC has the power, pursuant to section 393.140(4), to prescribe uniform
methods of keeping accounts The PSC has adopted a rule that requires utilities to use
the USOA to maintain their books and records See 4 CSR 240-20.030. KCPL's
arguments regarding the USOA and its alleged right to use a tracking accounting deferral
mechanism completely ignore that the PSC's decision that only extraordinary expenses

should be allowed such treatment is a policy decision that has been made by the PSC and

3 For the purposes of this discussion, the "tracking mechanism" we refer to is an accounting deferral
mechanism that rts-characterizes an income statement item ("revenues, expenses gains or losses") in a current
period as a balance sheet item ("regulatory assets" or "regulatory liabilities") that would be addressed in a fixture rate

proceeding

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' Wae~.a.-.f-ww "

is not dictated by whether, in the abstract, the US()A provides a mechanism to defer
costs whatever the type The PSC has decided that the "use of trackers should be limited
because they violate the matching principle tend to unreasonably skew ratemaking
results and dull the incentives a utility has to operate efficiently and productiver under
the rate regulation approach employed in Missouri." The manager of the PSC's auditing
unit testified that the PSC will issue accounting authority orders ("AAOs"), which serve
to allow a utility to deviate the normal method of accounting for certain expenses most
often associated with "extraordinary" events The request by KCPL for the "tracking"
accounting mechanism is the same as a request for an AAO, as it seeks to book a
particular cost, normally charged as an expense on a utility's income statement in the
current period, to the utility's balance sheet as a regulatory asset or regulatory liability.
The manager testified that the PSC

in prior cases has stated that the standards for granting the authority to a

utility to defer costs incurred outside of a test year as a regulatory asset are:

l) that the costs pertain to an event that is extraordinary, unusual and

unique and not recurring; and 2) that the costs associated with the event are

material.
In deciding that only extraordinary costs qualify for deferral, the PSC has followed the
USOA's guidance that "it is the intent that net income shall reflect all items of profit and
loss during the period." 18 CFR Part 101, General lnstruction 7 . An exception to this
general rule is for "extraordinary items" as defined by the USOA.

KCPL makes an exceedingly perplexing argument that because USOA's

Definition 31, which defines "Regulatory Assets and Liabilities," includes no requirement

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that items so categorized must qualify as "extraordinary," then KCPL must be allowed
deferral treatment for certain of its expenses Definition 31 states in full:
Regulatory Assets and Liabilities are assets and liabilities that result from
rate actions of regulatory agencies Regulatory assets and liabilities arise
from specific revenues expenses gains or losses that would have been
included in net income determination in one period under the general
requirements of the Uniform System of Accounts but for it being probable:
A. that such items will be included in a different period(s) for purposes of
developing the rates the utility is authorized to charge for its utility

services; or

B. in the case of regulatory liabilities that refunds to customers not
provided for in other accounts will be required

18 CFR Part 10. This definition, relied upon by KCPL, provides no support for KCPL's
argument that it must be allowed to defer any expense of its choosing The definition
recognizes that certain expenses that would normally be included in net income for one
period may become a regulatory asset or liability if it is probable that the item would be
included in a different period for purposes of developing the rates the utility is authorized
to charge for its services The PSC, however, remains the authority that determines when
an item may be included in a different accounting period for the purpose of developing
authorized rates 'f he PSC has followed the guidance in 18 CFR Part 101, General
lnstruction 7, that costs should not be deferred to another accounting period except for
"extraordinary items"

The PSC is granted wide discretion in determining the methodology it chooses to
determine an ROE. State ex rel. Ojjice of the Pub. Counsel, 938 S.W.2d at 344; State ex

rel. Praxair, lnc., 328 S.W.3d at 339. The PSC has historically utilized the test year and

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true-up procedure to determine appropriate future rates because the historical test year's
expenses can be used to determine reasonable future rates See e.g., State ex rel. Noranda
Aluminum, Inc., 356 S.W.3d at 318 ("Past expenses are used as a basis for determining
what rate is reasonable to be charged in the future in order to avoid further excess profits
or future losses [ . . . . ]") The PSC also utilizes a true-up audit and hearing, which
adjusts the historical test year figures for known and measurable subsequent or future
changes See State ex rel. Mo. Pub. Serv. Co. v. Fraas, 627 S.W.2d 882, 888 (Mo. App.
W.D. 1981) (discussing the PSC's use of "a modified version of the projected year model
by utilizing a test year which was adjusted to take into account known and measurable
future changes That concept was implemented by the holding of what the Commission
denominates as 'a true-up hearing."') Whether a cost should be afforded different
treatment and merits a deferral directly impacts the PSC's chosen methodology for setting
rates and is necessarily a discretionary judgment that is within the expertise of the PSC
and not this Court. Which costs a utility is able to defer would impact the PSC's chosen
method to determine rates and is a matter properly confined to the PSC's expertise As
such, we will not second-guess the PSC's reasoned decision that only extraordinary items
may qualify for deferral treatment.4 See State ex rel. Pub. Counsel, 289 S.W.3d at 246-
47 (this Court must defer to the PSC on issues within its expertise).

Accordingly. Point Three is denied

4 lt is unnecessary for this Court to decide whether, as argued by MECG, the use of a tracker accounting
mechanism would constitute retroactive ratemaking

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In Point Two on appeal, KCPL argues the PSC erred in rejecting KCPL's request
that trending principles and forecasts be considered in setting future rates because
Missouri law prohibits the PSC from relying exclusively on historical expenses and
ignoring relevant substantial and competent evidence that for the period covered by the
new rates there will be new and significant mandatory cost increases for critical
infrastructure protection ("CIP"), cyber-security, Southwest Power Pool transmission
costs and property taxes

KCPL sought the approval to use a tracking mechanism for transmission expenses
for the Southwest Power Pool ("SPP"), CIP and cybersecurity, and property taxes in its
case-in-chief. ln sur-rebuttal testimony, KCPL suggested, in the alternative to the
requested tracking mechanism for these expenses in the event this mechanism was
denied by the PSC, that its estimates of future expenses regarding the above categories be
added to the figures from which the PSC calculates KCPL's revenue requirements

Regarding SPP transmission expenses the PSC found that KCPL incurs fees as it
sends and receives power though the SPP, a Regional Transmission Organization. The
PSC found that these costs for KCPL have increased over the past several years but that
the projected fees would decrease in the future and constitute ordinary and recurring
operating costs Regarding cybersecurity and CIP costs the PSC found that KCPL's
cybersecurity and CIP costs were projected to increase primarily in 2015 and decrease for
the following two years Compliance costs would then be an ongoing cost for the

foreseeable future Finally, regarding the property tax expenses KCPL found that even

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though these costs had been and may continue to rise those rates were included in normal
operating costs and could be reasonably calculated on an annualized basis

The PSC in its Report and Order, as explained supra, denied the use of a tracking
mechanism for these expenses ln its Report and Order, the PSC also denied KCPL's
request to add specific estimated future costs in the calculation of KCPL's revenue
requirement The PSC found the following with regard to each requested expense First,
the requests to add the projected future costs to KCPL's revenue requirement did not
come until surrebuttal testimony and as such violated PSC Rule 4 CSR 240-2.130(7)(A),
which requires that direct testimony "shall include all testimony and exhibits asserting
and explaining that party's entire case-in-chief." The PSC found that KCPL's failure to
include its estimates and requests in its case-in-chief prevented other parties from having
a sufficient opportunity to conduct discovery or provide testimony on the matters
Second, the PSC found that KCPL failed to adequately explain how it arrived at its
estimates and how the Commission has the legal authority to grant KCPL's requested
relief.

In determining rates the PSC may consider all facts that in its judgment have a
bearing on the proper determination of rates See Section 393.270.4; State ex rel. Pub.
Counsel, 397 S.W.3d at 447-48. Relevant facts of course include forecasts of future
costs See Fraas. 627 S.W.2d at 886 ("the Commission must make an intelligent forecast
with respect to the future period for which it is setting the rate; rate making is by

necessity a predictive science").

19

mg g

The PSC was within its authority to reject the inclusion of the specific amounts
requested by KCPL for these projected costs in calculating KCPL's revenue requirement,
as the requests were made for the first time in surrebuttal. Section 386.410 grants to the
PSC the power to adopt and prescribe the rules governing its hearing procedures The
PSC has adopted numerous rules and regulations governing its procedures including 4
CSR 240-2.130. 4 CSR 240-2.130(7)(A) provides that party's direct testimony shall
include "all testimony and exhibits asserting and explaining that party's entire case-in-
chief." Most direct testimony is pre-filed with the PSC in advance of the hearing. See 4
CSR 240-2.130(7)-(9). T hese procedures are important due to the highly technical nature
of the issues presented at the hearing, in that it affords other parties a reasonable
opportunity to provide evidence in response Therefore, supplementing direct testimony
is generally not allowed See 4 CSR 240-2.130(10). It is not disputed that KCPL, for the
first time in surrebuttal, requested that its specific forecasted SPP transmission expenses
CIP/cyber-security costs and property taxes be included in its revenue requirements As
found by the PSC, allowing KCPL to make this request for the first time in surrebuttal
precluded other parties from conducting discovery on the issue and from presenting
evidence to refute KCPL's allegations The PSC had the authority to reject the projected
costs in its calculations on this basis

However. we reject KCPL's suggestion that, in refusing to include KCPL's specific
forecasts of future costs into KCPL's revenue requirement, the PSC has abandoned its
duty to take into account projections of KCPL's future costs when it set its ROE.

Regarding the SPP transmission fees the PSC adopted as credible the expenses and

20

revenues forecasted by expert Karen Lyons ("Lyons"), Utility Regulatory Auditor for the
PSC. Lyons's testimony took into account that although KCPL's transmission costs have
increased, the amount charged by SPP is projected to decrease in the future Similarly,
the PSC considered evidence regarding the projected costs of ClP/cyber-security through
the testimony of PSC staff that the PSC found credible Staff testified that although costs
related to CIP and cyber-security would increase primarily in 2015, thereafter the costs
would decrease far the next two years Finally, with regard to property taxes the PSC
accepted testimony that although those taxes were projected to increase the costs could
be reasonably calculated and an annualized level included in expenses The PSC did
consider projected costs in its calculations when it set KCPL's rates contrary to KCPL's
allegation on appeal that the PSC relied solely on historical data.

Point Two is denied

Point Four - Transmission Expenses in Fuel Adiustment Clause

In Point F our on appeal, KCPL argues the PSC erred in denying KCPL the
authority to use a fuel adjustment clause to recover certain transmission costs because it
is unreasonable and unlawful as contrary to the Filed Rate Doctrine and the United States
Constitution's Supremacy Clause in that the PSC's decision ignores that KCPL's
transmission costs are set by a federal tariff approved by the Federal Energy Regulatory
Commission ("FERC") and the PSC's order improperly causes its FERC-approved costs
to be trapped and unrecoverable.

KCPL requested and was granted, the implementation of a fuel adjustment clause

("FAC") in its new rates An FAC is a statutory mechanism that allows for periodic rate

21

adjustments outside of a general rate case to reflect decreases and increases in a utility's
incurred fuel and purchased power costs See State ex rel. Union Elec. Co. v. Pub. Serv.
Comm'n, 399 S.W.3d 467, 482-83 (Mo. App. W.D. 2013). KCPL is a member of SPP,
which is a regional transmission organization. KCPL sells all of the power it generates
into the SPP market and purchases back from SPP 100% of the electricity it sells to
customers KCPL requested the authority to include all of its wholesale transmission
expenses and revenues into its FAC. The PSC allowed only transmission expenses for
"true" purchased power to be recovered through the FAC and those related only to off-
system sales KCPL was denied the inclusion in the FAC of costs related to: (a)
scheduling the external and internal movement of power over the transmission system;
(b) upgrading and maintaining the transmission systems; and (c) fees charged by SPP and
FERC to support their operations

Section 386.266 provides the PSC with the authority to approve an FAC. That
section provides that

any electrical corporation may make an application to the commission to

approve rate schedules authorizing an interim energy charge or periodic

rate adjustments outside of general rate proceedings to reflect increases and

decreases in its prudently incurred fuel and purchased-power costs,

including transportation The commission may, in accordance with

existing law. include in such rate schedules features designed to provide the

electrical corporation with incentives to improve the efficiency and cost-

effectiveness of its fuel and purchased-power procurement activities
Section 386.266.1 (emphasis added); see also 4 C.S.R. 240-20.090(1)(€).

The regulation defines "fuel and purchased power costs" which must be

considered in calculating a fuel adjustment 4 CSR 240-20.090(1)(B). The

definition varies depending upon whether off-system sales revenues and
associated costs are "reflected" in the fuel adjustment clause If off-system

22

sales revenues and associated costs are not reflected in the fuel adjustment
clause then "fuel and purchased power costs only reflect the prudently
incurred fuel and purchased power costs necessary to serve the electric
utility's Missouri retail customers" 4 CSR 240-20.090(1)(B)1. If off-
system sales revenues and associated costs are reflected in the fuel
adjustment mechanism, then "fuel and purchased power costs reflect both:

(A) The prudently incurred fuel and purchased power costs necessary to

serve the electric utility's Missouri retail customers and (B) The prudently

incurred fuel and purchased power costs associated with the electric utility's

off-system sales" 4 CSR 240_20.090(1)(B)2.
State ex rel. Union Elec. Co., 399 S.W.3d at 485.

The PSC found that the statute only allows the utility to use an FAC to recover
transportation costs of "true" purchased power, which would not include power generated
by KCPL, sold to SPP and then bought back from SPP, but only power purchased by
KCPL that was not generated by KCPL. "True" purchased power, as defined by the PSC,
amounts to approximately 7.3% of KCPL's wholesale transmission expenses The PSC
determined that the expenses incurred by KCPL to transmit its power from its own
generation resources to its own load (approximately the remaining 92.7% of wholesale
transmission expenses) are not for "purchased power" within the meaning of the statute

KCPL does not challenge on appeal the PSC's interpretation of the statute Rather,
KCPL only argues that the PSC's refusal to allow KCPL to recover all of its transmission
expenses and other costs associated with the SPP through the FAC runs afoul of the
"Filed Rate Doctrine" and is contrary to the principles of federal preemption. ln support
of its argument, KCPL cites State ex rel. Association National Gas Company v. Public

Service Commission, which explains that the Supremacy Clause "holds that interstate

power rates fixed by the FERC must be given binding effect by state utility commissions

23

determining intrastate rates." 954 S.W.2d 520, 530-32 (Mo. App. W.D. 1997). KCPL
also cites Nantahala Power and Light Company v. Thornburg, which explains that a
"state utility commission setting retail prices must allow, as reasonable operating

expenses costs incurred as a result of paying a FERC-determined wholesale price." 476

U.S. 953, 965 (1986).
This Court has explained the filed rated doctrine as follows

The federal preemption and filed rate doctrine invoked by KCP & L~GMO
involves the relationship between the federal and state rate-setting
authorities FERC regulates the transmission and sale of electric energy in
interstate commerce and the sale of such energy at wholesale in interstate
commerce however, such regulation extends only to those matters that are
not subject to regulation by the states 16 USC § 824(a). "Because of the
potential conflict between the federal and state rate-setting agencies the
'filed rate doctrine' was developed as an outgrowth of straightforward
principles of [f]ederal preemption and the Supremacy [C]lause."
§ Associated Natural Gas Co., 954 S.W.2d at 530 (citing Nantahala Power &
§§ Light Co. v. Thornburg, 476 U.S. 953, 963, 106 S.Ct. 2349, 90 L.Ed.2d 943
(1986); Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577, 101 S.Ct. 2925, 69
L.Ed.2d 856 (1981)). The filed rate doctrine requires "that interstate power
rates filed with FERC or fixed by FERC must be given binding effect by
state utility commissions determining intrastate rates." Nantahala, 476
U.S. at 962. 106 S.Ct. 2349. The filed rate doctrine prohibits a state
regulatory commission from "trapping" FERC-approved costs by
preventing a distributor from fully recovering those costs from its retail
customers Ia’. at 970, 106 S.Ct. 2349.

State ex rel. KCP&L Greater Mo. Operations Co. v. Mo. Pub. Serv. Comm’n, 408 S.W.3d
153, 164 (Mo. App. W.D. 2013). "Trapping" of rates occurs where "costs under a FERC
tariff are categorically excluded from consideration in retail rates" and the regulated
entity "cannot fully recover its costs of purchasing at the FERC-approved rate." Entergy

La., Inc. v. La. Pub. Serv. Comrn'n, 539 U.S. 39, 48 (2003).

24

l
l

KCPL's reliance on this case law to argue that the PSC is required to allow KCPL
to include all of its wholesale transmission expenses in an FAC is misplaced The issue
before this Court is not whether the PSC is required to permit KCPL to recover the full
costs of FERC-approved tariff and rate schedules lt is clear that it is Rather, the issue is
whether KCPL is entitled to recover these costs through an FAC or whether the PSC has
the discretion to allow some of the costs related to SPP be recovered through an FAC
while including the remaining SPP costs in its decision determining general rates KCPL
has cited no authority whatsoever that it is entitled to use an FAC in the first instance
The FAC is merely a mechanism available pursuant to Missouri statute, that helps
address the volatility of transmission costs for the utility.

KCPL asserts that the PSC's "determination that 92.7% of future increases in
[KCPL's] SPP transmission expenses can only be recovered in a general rate case
amounts to a disallowance of the transmission expenses that it pays under the SPP tariff."
Of course this allegation is not a fact but rather another assertion by KCPL that the
methods used by the PSC to determine appropriate rates are unsatisfactory KCPL
provides no support that it will be foreclosed from recovering its SPP fees through its
general rates The PSC had before it testimony to the contrary that

[a]llowing KCPL to flow increases of [all of its] wholesale transmission

expenses through an FAC would allow KCPL to recover the Missouri

jurisdictional portion of these increases between base rate proceedings
without considering whether KCPL has any offsetting changes in its non-

transmission and non-fuel revenues and expenses This could allow KCPL
to over-recover its total costs

25

The FAC is a creation of Missouri statute and not mandated by Nantahala or the Filed
Rate Doctrine Those cases and subsequent cases stand for the proposition that state
utility commissions in setting retail rates "must allow, as reasonable operating expenses
costs incurred as a result of paying a FERC-determined wholesale price" and may not
"conclude in setting retail rates that the FERC-approved wholesale rates are
unreasonable." Nantahala, 476 U.S. at 965-66. The PSC's conclusion that, pursuant to
Missouri law, an FAC may only include transmission expenses for "true" purchased
power and the remaining costs must be considered as other costs in setting the general
rates does not run afoul of these principles The Nantahala decision itself explains that
there need not be a direct correlation between wholesale power prices and retail rates Id.
at 967-68. The Nantahala court agreed with the proposition that a state commission
"may treat the proposed rate increase as it treats other filings and investigate the
overall financial structure of [the power company] to determine whether the company has
experienced savings in other areas which might offset the increased price." Id. (quoting
NarragansettElec. Co. v. Burke, 381 A.2d 1358, 1363 (R.I. 1977)).

Accordingly. we find that the PSC's decision to include only "true" purchased
power transmission costs in the FAC does not run afoul of the Filed Rate Doctrine or the
Supremacy Clause.

Point Four is denied

Point Five - Rate Case Expenses
In Point Five on appeal, KCPL argues the PSC erred in implementing a formula

that disallowed over 8270,000 in rate case expenses because this formula was

26

14 n inc

unreasonable and unlawful because the formula was an improperly adopted rule under
section 536.021 and the PSC failed to find that any of these expenses were imprudent, but
instead simply used a ratio of requested-to-award revenues as part of a new formula
ostensibly developed for all Missouri utilities

KCPL sought the recovery of rate case expenses from the PSC, which are the
incremental costs incurred by the utility directly related to its application to change its
general rate levels KCPL's total rate case expense as of August 12, 2015 was
$l,024,304. Staff of the PSC and the OPC alleged that certain expenses regarding expert
witnesses and the costs of outside attorneys should be disallowed as they were imprudent.
The PSC did not find any of the specific costs as imprudent because it determined that
there is no "accessible appropriate standard for determining whether one consultants
analysis was truly unnecessary or if one attorney's expertise is worth more than
another's" However, the PSC found that a significant portion of the expenses in this case
were "driven primarily by issues raised by KCPL, which has complete control over the
content and methodologies proposed in its rate cases." The PSC also found that KCPL
has incurred rate case expenses "substantially higher than historical levels and higher
than other utilities in Missouri." According to the PSC, this was because KCPL pursued
issues in its case for the benefit of only shareholders which are highly discretionary and
"typically allocated entirely to shareholders." Therefore, the PSC decided that it was
reasonable that KCPL shareholders cover a portion of KCPL's rate case expense

According to the PSC. it has the legal authority to apportion rate case expenses between

27

ratepayers and shareholders and it is appropriate to do so here where the inclusion of all
the rate case expenses for payment by ratepayers would not be just and reasonable

The PSC chose to use a formula in this case that would "directly link KCPL's
recovery of rate expense to both the reasonableness of its issue positions and the dollar
value sought from customers in this rate case." The PSC decided to link KCPL's
percentage recovery of rate case expenses to the percentage of its rate increase request
that the PSC found just and reasonable The formula is expressed as follows: (Revenue
Requirement Approved / Original Revenue Requirement Requested) x 100 = allowable
percentage of rate case expense Minus the costs of the depreciation study conducted by
KCPL, which the PSC found should be fully allocated to ratepayers the net rate case
expense was $961,417. The PSC authorized the recovery of $713,907, representing a
recovery of 74.26% of the rate case expenses

KCPL raises two primary objections to the PSC's determination regarding rate
case expenses First. KCPL argues that in using this formula the PSC has participated in
unlawful rulemaking KCPL argues that the formula used by the PSC is a new policy of
general applicability because it did not rely upon factual findings and a judgment on
imprudence.

"Whether an agency decision should be promulgated as a rule is a
determination that is guided by section 536.010(6)...." Dep’t of Soc.
Services, Div. of Med. Services v. Little Hills Healthcare, L.L.C., 236
S.W.3d 637. 641 (Mo. banc 2007). Section 536.010(6) of the act provides
that the term "rule" means "each agency statement of general applicability
that implements interprets or prescribes law or policy, or that describes the

organization, procedure or practice requirements of any agency [subject to
certain exceptionsj."

28

Mo. Ass'n of Nurse Anestltetists, Inc. v. State Bd. of Registration for Healing Arts, 343

S.W.3d 348, 356 (l\/lo. App. W.D. 2011). The PSC argues that it did not engage in

improper rulemaking because the method devised to determine a just and reasonable

inclusion of rate case expenses was tied to the facts of this case and was not a statement
of general applicability

The PSC found that this formula was appropriate for this case based on a number

of factors The PSC found the following:

The evidence shows that the expenses in this case are driven primarily by
issues raised by KCPL, which has complete control over the content and
methodologies proposed when it files its rate cases ln this case KCPL has
requested three new trackers, two of which have never been requested
before in Missouri. KCPL has also requested recovery in rates of the
expenses from the Clean Charge Network, which is a type of expense that
has never been raised in a rate case before this Commission. Each of these
issues are unique to KCPL, and while KCPL always has the opportunity to
pursue new and unique issues in a rate case the decision to do so is entirely
with[in] KCPL's power. ln addition, KCPL has pursued some issues that
only directly benefit shareholders such as the La Cygne accounting
authority and, of course a higher ROE. In recent rate cases KCPL has
incurred rate case expenses substantially higher than historical levels and
higher than other utilities in Missouri.

Further, the PSC explicitly recognized that the approach taken in this case is not

§ applicable to all cases but is fact specific. The PSC explained

lt is understood that some of the issues litigated in this case do not directly
affect the overall revenue requirement granted by the Commission; but it is
also clear that the vast majority of the litigated issues do have a direct or
indirect impact on the revenue requirement Accordingly, percentage
sharing is a reasonable approach to correlating recovery of rate case
expense to the relationship between the amount of litigation that benefited
both ratepayers and shareholders and that which benefitted only
shareholders

29 t

Contrary to KCPL's argument, the PSC clearly established that the formula was proper in
this case due to the unique circumstances of this rate case and it was not announcing a
new policy of general applicability to all utilities Accordingly, we find that the PSC did
not engage in improper rulemaking due to their specific findings supported by the
record, that KCPL's litigation strategy, which in large part inured to the benefit of
shareholders rather than ratepayers necessitates the use of this formula in this specific
case to justly and reasonably allocate rate case expenses between KCPL's ratepayers and
shareholders

Second, KCPL argues the use of the formula is unlawful because it denied the
recovery of rate case expenses without a specific finding that any of the expenditures
were imprudent.

Section 393.130.1 provides that all charges demanded by a utility must be just and
reasonable The Missouri Supreme Court has found that within this power "necessarily
includes the power and authority to determine what items are properly includable in a
utility's operating expenses and to determine and decide what treatment should be
accorded such expense items" State ex rel. City of West Plains v. Pub. Serv. Comm'n,
310 S.W.2d 9251 928 (Mo. banc 1958); see also State ex rel. KCP&L Greater Mo.
Operations Co., 408 S.W.3d at 162-66. "The PSC employs a 'prudence' standard to
determine whether a utility's costs meet this statutory requirement." State ex rel. KCP&L
Greater Mo. Operalions Co., 408 S.W.3d at 163 (citing State ex rel. Associated Nat. Gas
Co., 954 S.W.2d at 528).

The PSC has defined its prudence standard as follows:

30

T_ s M} d

[A] utility's costs are presumed to be prudently incurred.... However, the
presumption does not survive “a showing of inefficiency or improvidence”

[W]here some other participant in the proceeding creates a serious doubt
as to the prudence of an expenditure then the applicant has the burden of

dispelling these doubts and proving the questioned expenditure to have
been prudent, (Citations omitted).

State ex rel. Associated Nat. Gas, 954 S.W.2d at 528. The utility still has the burden of
proof to show its expenses are just and reasonable O/j’ice of Pub. Counsel v. Mo. Pub.
Serv. Comm'n, 409 S.W.3d 371, 376 (Mo. banc 2013).

ln State ex rel. KCP&L Greater Missouri Operations Company, this Court
considered the decision by the PSC that it would be unjust and unreasonable to require
ratepayers to pay for the added transmission costs of electricity transmitted from a
location in Mississippi, where KCPL could transport the electricity from Missouri for a
lower price 408 S.W.3d at 162. Even though the PSC found that the decision to include
the Mississippi generation fleet in the utility's operations was prudent, the added
transportation costs associated with transporting the electricity to Missouri were not. Id.
at 162-63. We found that so long as the PSC determined that the expenditure was
imprudent and that the imprudence would harm ratepayers the denial of the recovery of
that expenditure from ratepayers was lawful and reasonable Id. at 163.

Regarding rate case expenses the PSC recognized that rate cases are both
beneficial to shareholders of a utility and also utility customers but in different ways
Shareholders benefit from the rate case expenses as the costs are incurred to increase the

utility's revenues and profitability Customers benefit by having a healthy utility. In this

31

case the PSC found that a standard prudency review of each expenditure in the rate case
would not be possible and, even if conducted, would not provide a strong incentive for
KCPL to impose cost controls because the utility holds all the information needed to
identify imprudence. Therefore the PSC did not identify any line item expense as
explicitly imprudent. but rather found that the costs incurred by KCPL, as a whole in
pursuing its litigation strategy that in large part inured to the sole benefit of shareholders
were imprudent. An expert testified for the Staff of the PSC that, in similar contexts
highly discretionary costs that do not benefit customers such as charitable donations
political lobbying expenses and incentive compensation tied to earnings per share are
typically allocated entirely to shareholders

We will not say the PSC did not have the authority to determine that expenses
incurred by KCPL for the sole benefit of its shareholders were imprudent such that it
would be unjust and unreasonable to require ratepayers to bear the burden of those
expenses Here where the PSC has found a certain category of expenditures imprudent,
it would not make sense to require the PSC to do a line item review of the costs
associated with the expenditure to determine whether each cost associated with KCPL’s
litigation strategy was imprudent. The majority of costs for example those related to
infrastructure and transmission costs are transparent and verifiable by the PSC, Rate
case expenses are opaque shielded from effective oversight by privilege and
confidentiality lt would be an abdication of the PSC's responsibility to set just and
reasonable rates to allow a utility to benefit from imprudently incurred litigation

expenses Serious doubt as to the prudency of KCPL's litigation strategy was raised by

32

the parties and it was KCPL's burden to prove that its expenses (i.e. the expenses related
to the litigation strategy found by the PSC to have been solely for the benefit of
shareholders) were just and reasonable KCPL does not argue on appeal that its litigation
strategy was prudent but only that the remedy crafted by the PSC was not within its
power. We find that the remedy crafted by the PSC was a reasonable exercise of the
PSC's discretion and expertise in determining just and reasonable expenses to be borne by
ratepayers
Point Five is denied

Conclusion of KCPL Appeal

The Report and Order of the Public Service Commission is affirmed
Appeal by Midwest Energy Consumers' Group

KCPL initiated its rate case in October of 2014 by filing its proposed tariff sheets
with the PSC. The proposed tariff sheets were scheduled to become effective thirty days
after the filing on November 29, 2014. The PSC, however, suspended the effective dates
for the proposed tariffs on November 5, 2015 for a period of 11 months to provide time to
study the proposed rate increase to hold hearings and to determine if the proposed tariffs
were just and reasonable

MECG is an unincorporated association that is comprised of large consumers of
energy, which was permitted to intervene in KCPL's rate case at a pre-hearing conference
on November 24, 2014. At this same pre-hearing conference it was established that the
PSC would need to issue its Report and Order no later than September 2, 2015 in order to

meet the September 29, 2015 effective date of the proposed tariffs Evidentiary hearings

33

were held June 15-19, 29-30, and July 1 of 2015. MECG participated throughout the rate
case On August 3. 2015, after the submission of final briefs by the parties the case was
submitted for deliberation and decision to the PSC.

The PSC issued its Report and Order on September 2, 2015. The PSC rejected
KCPL's proposed tariff sheets from October of 2014 and authorized KCPL to file tariff
sheets that complied with the Report and Order no later than September 8, 2015. The
PSC ordered its staff to file its recommendation regarding the approval of the compliance
tariff sheets no later than September 14, 2015. The PSC also ordered any other parties to
respond to the compliance tariff sheets no later than September 14, 2015. MECG did not
and is not appealing the September 2, 2015 Report and Order, MECG appeals the
September 16 Compliance Tariff Grder, discussed infra.

KCPL filed its compliance tariff sheets on September 8, 2015. KCPL also filed a
motion that requested expedited approval of the compliance tariff sheets in light of the
thirty-days' notice and publication period required by section 393.140(11).5 On
September 14, the staff of the PSC filed its recommendation, supported by affidavits to

reject or suspend KCPL's compliance tariff sheets due to issues regarding language in the

5 Section 393.140(| l) states in relevant part, the following:

Unless the commission otherwise orders no change shall be made in any rate or charge, or in any
form of contract or agreement, or any rule or regulation relating to any rate charge or service or
in any general privilege or facility, which shall have been filed and published by a gas corporation,
electrical corporation. water corporation, or sewer corporation in compliance with an order or
decision of the commission, except after thirty days' notice to the commission and publication for
thirty days as required by order of the commission, which shall plainly state the changes proposed
to be made in the schedule then in force and the time when the change will go into effect. The
commissioner good cause shown may allow changes without requiring the thirty days' notice
under such conditions as it may prescribe

(emphasis added).
34

fuel adjustment clause tariff sheets The following day, September 15, 2015, KCPL
withdrew the contested fuel adjustment clause tariff sheets and filed new ones that
addressed the PSC's concerns ("Final Compliance Tariffs"). Contemporaneously on
September 15, the staff of the PSC and KCPL filed ajoint motion for approval of all the
compliance tariff sheets supported by affidavits of three staff members of the PSC,

Also on September 15, MECG filed its Objection to Tariffs Objection to
Affidavits and Request for Hearing. MECG objected to the Final Compliance Tariffs and
the staffs pleading and affidavits that were used as evidentiary support for the PSC's
decision to approve the Final Compliance Tariffs MECG also requested a hearing to
cross-examine the staff regarding the contents of their affidavits and to determine
whether there was substantial and competent evidence to support the PSC's finding that
the Final Compliance Tariffs complied with the Report and Grder. On September 16,
2015, the PSC issued its Order Regarding Compliance Tariff Sheets ("Compliance Tariff
Order") that concluded that the Final Compliance Tariffs were consistent with the Report
and Order and were effective on September 29, 2015.

On September 29, 2015, the PSC issued its order denying MECG's Objections and
Request for Hearing, finding that the matter was no longer a contested case MECG filed
its Application for Rehearing, which was denied

On appeal. MECG raises seven points of error, each challenging the September 16
Compliance Tariff Order that concluded the Final Compliance Tariff sheets filed by
KCPL complied with the PSC's September 2 Report and Order. Each point of error

challenges the process and procedure by which the PSC issued its Compliance Tariff

35

Order. MECG argues the PSC erred in issuing its Compliance Tariff Order because: (1)
the PSC unlawfully expedited the 30-day notice period in section 393.140(11) to an
unreasonable fifteen hours (Point One); (2) there was not good cause to expedite the
notice period (Point Two); (3) section 393.140(11) does not authorize the PSC to
expedite the thirty-day statutory publication period (Point Three); (4) there were not
adequate findings of fact to support the PSC's Compliance Tariff Order (Point Four); (5)
the PSC's Compliance Tariff Order was not supported by substantial and competent
evidence (Point Five); (6) the PSC denied MECG the opportunity to cross-examine the
PSC's staff witnesses regarding the contents of their affidavits in support of the
Compliance Tariff Order (Point Six); and (7) the PSC denied MECG the opportunity to
present evidence to show that KCPL's compliance tariffs did not comply with the
September 2 Report and Order (Point Seven).
Analysis

Before we can address the merits of MECG's appeal, we must first consider the
PSC's argument that MECG's appeal is moot. "A threshold question in any appellate
review of a controversy is the mootness of the controversy." Kansas City Power & Light
Co. v. Midwest Energy Consumers Grp., 425 S.W.3d 142, 144 (Mo. App. W.D. 2014).
"A moot issue is one upon which, if we resolved it in the appellant's favor, our holding
would have no practical effect." Id. (quoting T.C.T. v. Shajinia, 351 S.W.3d 34, 36 (Mo.
App. W.D. 2011)). "When an event occurs that makes a decision on appeal unnecessary

or makes it impossible for the appellate court to grant effectual relief, the appeal is moot

36

and generally should be dismissed." Id. (quoting State ex rel. Chastain v. City of Kansas
City, 968 S.W.2d 232,237(1\/10.App. W.D. 1998)).

MECG appeals from the PSC's Compliance Tariff Order, which approved the
Final Compliance Tariffs filed by KCPL on September 15, 2015. Should this Court
vacate the Compliance Tariff Order, it would be as if that order had never been made
See State ex rel. O]j‘t`ce of Pub. Counsel v. Pub. Serv. Comm'n, 266 S.W.3d 842, 843 (Mo.
banc 2008) ("The general rule is that when an order or judgment is vacated, the
previously existing status is restored and the situation is the same as though the order or
judgment had never been made.") ln such a scenario, by operation of section
393.140(11), the Final Compliance Tariffs filed by KCPL on September 15, 2015 would
have gone into effect by the non-action of the PSC. See Section 393.140(11); see also
State ex rel. Laclede Gas Co. v. Pub. Serv. Comm'n, 535 S.W.2d 561, 566 (Mo. App.
1976)6. Further, section 393.140(11) provides that after the tariffs are filed and take
effect, no corporation is able to "demand, collect or receive a greater or less or different
compensation for any service rendered or to be rendered than the rates and charges
applicable" at that time This is called the "filed rate doctrine" and constitutes a general
rule against "retroactive ratemaking." See e.g., State ex rel. AG Processing v. Pub. Serv.
Comm'n, 340 S.W.3d 146, 150 (Mo. App. W.D. 2011). Therefore, even if this Court

were to find some error by the PSC regarding the Compliance Tariff Order, by virtue of

6 "The 'file and suspend' provisions of the statutory sections quoted above lead inexorably to the conclusion
that the Commission does have discretionary power to allow new rates to go into effect immediately or on a date
sooner than that required for a full hearing as to what will constitute a fair and reasonable permanent rate. This
indeed is the intended purpose of the file and suspend procedure Simply by non-action, the Commission can permit
a requested rate to go into effect."

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section 393.140(1 l). the Final Compliance Tariffs became effective and now, because of
the filed rate doctrine this Court can provide no meaningful relief to MECG.
MECG concedes in briefing before this Court that it agrees with the above

analysis that prior to 2011 this case would have been moot absent an exception to the

mootness doctrine MECG argues however, that section 386.520, enacted in 2011,
makes the case no longer moot. Section 386.520.2 provides in relevant part:

2. With respect to orders or decisions issued on and after July 1, 2011, that
involve the establishment of new rates or charges for public utilities that are
not classified as price-cap or competitive companies there shall be no stay
or suspension of the commission's order or decision, however:

(1) ln the event a final and unappealable judicial decision determines that a
commission order or decision unlawfully or unreasonably decided an issue
or issues in a manner affecting rates then the court shall instruct the
commission to provide temporary rate adjustments and, if new rates and
charges have not been approved by the commission before the judicial
decision becomes final and unappealable prospective rate adjustments '§;

lt appears that the application of this particular statute is a matter of first

impression. The parties have not identified any cases actually interpreting this section or
discussing how this section could impact the previously discussed general rule against
retroactive ratemaking To interpret a statute we begin with the language chosen by the
legislature "lf the intent of the legislature is clear and unambiguous by giving the
language used in the statute its plain and ordinary meaning, then we are bound by that
intent and cannot resort to any statutory construction in interpreting the statute " State ex
rel. Union Elec. Co.. 399 S.W.3d at 479-80 (quoting Goerlitz v. City of Maryville, 333

S.W.3d 450, 455 (l\/lo. banc 2011)).

38

When determining the meaning of statutory language the whole act must
be taken into consideration, and the words of one section or statute must be
read in the context of other statutes on the same subject as well as with
cognate sections We presume that the legislature intended that each word,
clause sentence and provision of a statute have effect and should be given

meaning.

In re KCP&L Greater Mo. Operations Co., 408 S.W.3d 175, 186 (Mo. App. W.D. 2013)

(internal citations and quotations omitted).

Section 386.520.2 and its subparts only apply to orders and decisions of the PSC

ll

"that involve the establishment of new rates or charges for public utilities
MECG's sole argument that its appeal is not moot relies upon the operation of section
386.520.2 in the event that this Court finds error regarding the process and procedure
followed by the PSC with respect to the PSC's Compliance Tariff Order. Therefore, the
first question that must be answered is whether section 386.520.2 is even applicable to

the PSC's action with respect to the Compliance Tariff Order.

This Court has recently explained the process and procedures used to establish

new rates for a utility as follows:

The PSC was created and established to regulate public utilities that operate
in Missouri. § 386.040; State ex rel. Offt`ce of Pub. Counsel v. Mo. Pub.
Serv. Comrn'n, 331 S.W.3d 677, 681 (Mo. App. W.D. 2011). "The PSC is
authorized to approve rate schedules for electrical corporations typically
during a general rate case, as long as the rate is just and reasonable both to
the utility and to its customers." O]j’z`ce of Pub. Counsel, 331 S.W.3d at 681
(citing § 393.150).

Usually, a rate case begins when a utility files a schedule with the PSC,
stating a new rate § 393.150.1. The new rate schedule becomes effective
automatically unless the PSC suspends it under section 393.150.1. When a
proposed rate schedule is suspended pursuant to section 393.150.1, the PSC
must provide notice to the affected parties hold a full hearing, and consider

39

all relevant factors before approving any new rate O]j‘ice of Pub. Counsel,
331 S.W.3d at 681.

After a new rate is approved, the utility publishes a proposed tariff sheet.
See State ex rel. AG Processing, Inc. v. Pub. Serv. Comm'n, 276 S.W.3d
303, 305 (Mo. App. W.D. 2008). "'A tariff is a document which lists a
public utility[’s] services and the rates for those services."' State ex rel. Mo.
Gas Energy v. Pub. Serv. Comm'n, 210 S.W.3d 330, 337 (Mo. App. W.D.
2006) (quoting Bauer v. Sw. Bell Tele. Co., 958 S.W.2d 568, 570 (Mo.
App. E.D. 1997)). The PSC reviews the proposed tariff sheets to determine
whether the proposed tariffs comply with the order approving the new rate
See Mo. Gas Energy, 210 S.W.3d at 337. Only after the PSC's review and
approval do the proposed tariffs take effect, See 4 CSR 240-3.010(28).

"ln the context of cases before the [PSC], the terms 'tariff‘ and 'rate
schedule' are synonymous." State ex rel. AG Processing, Inc. v. Pub. Serv.
Comm'n, 311 S.W.3d 361, 364 n.3 (Mo. App. W.D. 2010). In practice it is
common in a rate case for the PSC to approve a new rate in an initial report
and order with findings of fact and conclusions of law, and then to issue
one or more subsequent orders approving the proposed tariff sheets that
implement the previously approved rate change See, e.g., State ex rel.
Office of Pub. Counsel v. Pub. Serv. Comm'n, 236 S.W.3d 632, 634-35
(Mo. banc 2007); AG Processing, Inc., 276 S.W.3d at 305.

In re KCP & L Greater Mo. Operations Co., 408 S.W.3d at 178.

When are the new rates and charges "established"? We think it is clear that "new

§ rates and charges" are established for a public utility in the contested case after a formal

hearing, and set by the PSC's Report and Order. The PSC is charged with adopting rules

to govern its own hearing procedures Section 386.410. The record in a formal hearing

stands as submitted for consideration by the PSC after the recording of all the evidence

or, if applicable the filing of briefs and oral argument See 4 CSR 240.2.150(1). The
Report and Order is the culmination of the PSC's formal hearing wherein interested
parties are provided the opportunity to conduct discovery, submit and question evidence

§ and present their case before the PSC, The Report and Order then establishes the new

40

rates and charges that the utility then implements by filing new tariffs Subsequent orders
from the PSC, such as the Compliance Tariff Grder, merely assure that the subsequent
tariffs submitted by a utility comply with the substantive findings in the PSC's Report and
Order. See e.g., State ex rel. Aquila, Inc. v. Pub. Serv. Comm’n, 326 S.W.3d 20, 25 (Mo.
App. W.D. 2010) (orders issued subsequent to the Report and Order merely determined
whether the utility complied with the mandates and substantive standards adopted by the
PSC in its Report and ()rder).

After the PSC issues its Report and Order, there is no longer a contested case
Chapter 386 governs the procedures before the PSC. The Missouri Administrative
Practices Act ("MAPA"), Chapter 536, applies to proceedings before the PSC where
there is a procedural gap in Chapter 386. See State ex rel. Noranda Aluminurn, Inc., 24
S.W.3d at 244-45; State ex rel. Co]j"man v. Pub. Serv. Cornrn'n, 121 S.W.3d 534, 539
(Mo. App. W.D. 2003) (averruled on other grounds)7. Chapter 386 does not discuss the
distinction between a contested and noncontested case so instead we turn to MAPA.
State ex rel. Cojj"man, 121 S.W.3d at 539. "Normally, determining whether a case is
contested or noncontested is of crucial importance because it determines not only the
procedural requirements that the administrative proceeding must satisfy but also the type
and extent of review which the circuit and appellate courts may employ." Id.

The answer to whether a matter before the PSC is contested or noncontested

depends on the answer to a single question: ls the PSC required by law to hold a hearing?

7 State ex rel. Co_/]inan repeatedly refers to Chapter 368, which is a chapter pertaining to loan and
investment companies However, Cojj"man repeatedly refers to Noranda, which in fact discusses the application of
MAPA to the PSC and Chapter 386. It appears that the references to Chapter 368 in Cojinan are a mistake and
were intended to refer to Chapter 386.

41

lf the answer is yes then the matter is a contested case Ia'.; see also Section 536.010(4).
The requirement to hold a hearing can be imposed expressly by statute or ordinance
State ex rel. Coj’man, 121 S.W.3d at 539. The requirement to hold a hearing may also be
imposed by due process principles where for example the agency decision "concerns a
protected property interest." Id.; see also State ex rel. Yarber v. McHenry, 915 S.W.2d
325, 328 (Mo. banc 1995). A "hearing" under MAPA has been interpreted to mean a
proceeding in which "a measure of procedural formality is followed." City of Valley Park
v. Arrnstrong, 273 S.W.3d 504, 507 (Mo. banc 2009). Such formalities in a contested
case generally include notice of the issues oral evidence taken upon oath or affirmation
and cross-examination of witnesses the making of a record, adherence to evidentiary
rules and written decisions including findings of fact and conclusions of law. Id. (citing
Hagely v. Bd. of Educ. of Webster Groves Sch. Dist., 841 S.W.2d 663, 668 (Mo. banc
1992)).

Pursuant to statute and the PSC's adopted rules the PSC may suspend filed tariffs
to conduct full rate case proceedings See Section 393.150.1. The rules of procedure for
those hearings are set forth in Chapter 386 and also in rules adopted by the PSC pursuant
to section 386.410. 'l`hose rules include provisions regarding service upon parties 4 CSR
240-2.080, rules regarding discovery, 4 CSR 240-2.090, and rules regarding the
presentation of evidence 4 CSR 240-2.130. Pursuant to 4 CSR 240-2.150(1), "[t]he
record of a case shall stand submitted for consideration by the commission after the
recording of all evidence or, if applicable after the filing of briefs or the presentation of

oral argument." Thereafter, the PSC's order must be in writing and issued as soon as

42

practicable after the record has been submitted, stating its conclusions 4 CSR 240-
2.150.2. Since the case at this point is a contested case and Chapter 386 does not specify
what would constitute adequate findings of fact, Missouri courts have applied MAPA,
which requires that
[ejvery decision and order in a contested case shall be in writing, and
except in default cases or cases disposed of by stipulation, consent order or
agreed settlement, the decision, including orders refusing licenses shall
include or be accompanied by findings of fact and conclusions of law. The
findings of fact shall be stated separately from the conclusions of law and

shall include a concise statement of the findings on which the agency bases
its order.

State ex rel. Pub. Counsel, 274 S.W.3d at 576 (quoting Section 536.090).

After the record of the case is submitted and the PSC issues its final report and
order, the procedural protections afforded rate case proceedings expire After the PSC
issues its final report and order, the only right afforded the parties is the right to seek
rehearing See Section 386.500; 4 CSR 240-2.160. The PSC need only grant a rehearing
"if in its judgment" there is a "sufficient reason therefor [ . . . .]" Section 386.500. MECG
has identified no requirement by statute or rule that after the close of evidence and after
the PSC issues its final Report and Order, that each subsequent order issued by the PSC
to ensure compliance with its substantive findings in the Report and Order must be
preceded by a hearing The contested case at that point is closed. ln this case MECG
requested a hearing when it filed its objections to the proposed compliance tariffs and
affidavits in support thereof, which was denied by the PSC, We see no statute or rule that
would require new contested proceedings to consider a challenge to new tariffs filed

pursuant to the PSC's Report and Order.

43

This result aligns with the "file and suspend" procedure adopted by the PSC and
utilized in this case in which the PSC is granted the discretion, in the first instance to
decide whether to approve a filed tariff without a formal hearing See Sections 393.150.1
and 393.140(11); State ex rel. Cojjfman, 121 S.W.3d at 541 (review of PSC's decision to
approve a tariff under a file and suspend case is for abuse of discretion). Here, the initial
tariffs filed by KCPL were suspended so that a formal hearing on the issues could be
conducted The hearing was conducted, which resulted in the final Report and Order, at
which point the contested case closed The PSC in its Report and Order rejected KCPL's
tariffs and ordered KCPL to file new tariffs complying with the Report and Order. The
Report and ()rder provided the other parties an opportunity to comment upon the
compliance tariff sheets for the benefit of the PSC's deliberations but, at that point, no
party had a right to a hearing before the PSC decided whether the compliance tariffs
actually complied with the Report and Order.

Having established that no rule or statute required a hearing prior to the
Compliance Tariff Order, the next issue is whether due process requires a hearing State
ex rel. Co]j"man, 121 S.W.3d at 539. This issue has been settled that "there is no
protected property interest in a particular utility rate." Id.,' State ex rel. Jackson Cty. v.
Pub. Serv. Comm'n 532 S.W.2d 20, 31 (Mo. banc 1975). As there is no protected
property interest in utility rate due process does not require a hearing State ex rel.

Co]j”man, 121 S.W.3d at 539. Therefore we find that the PSC is not required to hold a

44

hearing prior to issuing subsequent orders implementing compliance tariffs to ensure they
conform to the substantive findings and conclusions reached in the Report and Order.8

Accordingly, pursuant to MAPA, subsequent orders issued by the PSC to ensure
compliance with its Report and Order are orders issued in a noncontested case Orders in
a noncontested case are not subject to reasonableness review as the PSC is not required to
issue findings of fact. State ex rel. Pub. Counsel v. Pub. Serv. Comrn'n, 210 S.W.3d 344,
354-55 (Mo. App. W.D. 2006); see also In re KCP & L Greater Mo. Operations Co., 408
S.W.3d at 190 n. 19 ("an order approving tariffs is not the type of PSC order that contains
findings of f`act. an element essential to a review of reasonableness therefore generally,
reasonableness is not a proper basis to challenge an order approving tariffs.") As there
are extensive procedural protections in place in Chapter 386 to govern the establishment
of rates we think it is reasonable to conclude that subsequent orders issued in an
uncontested case to implement the findings of the contested case cannot be said to
"establish" rates

Further, by its very terms section 386.520.2 only applies in instances where there
is an unappealable judicial decision that has determined that the PSC's order "unlawfully
or unreasonably decided an issue or issues in a manner affecting rates" (emphasis added).

As explained above MECG did not challenge the September 2 Report and Order

8 The parties have not identified any cases directly addressing the specific issue of whether orders issued to
implement the findings of the Report and Order are orders in a contested case or a noncontested case This Court in
the past has treated such orders as noncontested ln State Public Service Commission v. Missouri Gas Energy, this
Court treated such an order as being entered in a noncontested case as that was the PSC's finding and that finding
was not challenged on appeal. 395 S.W.3d 540, 544 (Mo. App. W.D. 2013). Other cases have also suggested
although not directly addressed that these orders arise out of a noncontested case See In re KCP&L Greater Mo.
Operations Co., 408 S.W.3d at 190 n.l9 (compliance tariff orders are generally not orders that require findings of
fact and not subject to reasonableness review).

45

establishing KCPL's rates MECG only argues on appeal that the PSC erred in the
process and procedure afforded to MECG to review and challenge the compliance tariff
orders MECG has not even challenged on appeal the substantive finding by the PSC that
the Compliance Tariff Order does comply with the Report and Order. Even if we were to
find that the process and procedure followed by the PSC was deficient, there would not
be a finding by this Court that the PSC had decided an issue unlawfully or unreasonably
in a manner affecting rates

The Report and Order of the PSC is the culmination of the hearing required by law
and is the order of the PSC establishing new rates or charges for public utilities
Subsequent orders by the PSC ensuring compliance with the Report and Order are orders
issued in a non-contested case merely implementing the previous decision of the PSC.
As such, we find that Section 386.520.2 is inapplicable to MECG's challenge to the
Compliance Tariff Order. Pursuant to the filed rate doctrine this Court cannot provide
any meaningful relief even if MECG's appeal were meritorious

Even if an appeal is moot, we may exercise our discretion to consider an appeal if
one of two narrow exceptions are met. State ex rel. Mo. Energy Dev. Ass'n v. Pub. Serv.
Comm'n, 386 S.W.3d 165, 176 (Mo. App. W.D. 2012).

First, the issue may be considered if the case becomes moot after it has

been argued and submitted Additionally, the issue may be considered if it

is one of general public interest and importance recurring in nature and will

otherwise evade appellate review unless the court exercises its discretionary

jurisdiction.
Id. (internal citations omitted). The first exception is not applicable here as the case

became moot prior to argument and submission.

46

»---.,

The question, therefore is whether the issues presented by MECG are ones of
general public interest and importance recurring in nature and would otherwise evade
appellate review. We find that that MECG's appeal and the issues presented therein are
not the type that are likely to evade appellate review. This Court has in fact considered
other cases in which parties have challenged the process and procedure used by the PSC
to approve compliance tariffs See e.g., State ex rel. Ojj‘z`ce of the Pub. Counsel v. Pub.
Serv. Comrn'n, 409 S.W.3d 522 (Mo. App. W.D. 2013) (granting writ of mandamus upon
finding that PSC order approving compliance tariffs did not provide a reasonable time for
review under Section 386.490.1). We find that the issues raised by MECG are not likely
to evade appellate review and we decline to exercise our discretion to consider MECG's
moot appeal.

Conclusion

The decision of the PSC is affirmed and MECG's appeal is dismissed as moot.

f

Gary D. Wittljludgel R

All concur

47