DUKE ENERGY KENTUCKY, INC. (F/K/A THE UNION LIGHT, HEAT, AND POWER COMPANY) V. COMMONWEALTH OF KENTUCKY, EX REL., JACK CONWAY, ET AL.
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2009-SC-000134-DG
KENTUCKY PUBLIC SERVICE COMMISSION
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APPELLANT
ON REVIEW FROM COURT OF APPEALS
CASE NO . 2007-CA-001635-MR
FRANKLIN CIRCUIT COURT NOS. 02-CI-00499,
02-CI-01628, 03-CI-01189, 04-CI-01308, AND 06-CI-00269
V.
COMMONWEALTH OF KENTUCKY, EX REL. JACK
CONWAY ; AND DUKE ENERGY KENTUCKY, INC .
(F/K/A THE UNION LIGHT, HEAT, AND POWER COMPANY)
AND
APPELLEES
2009-SC-000150-DG
DUKE ENERGY KENTUCKY, INC. (F/K/A THE
UNION LIGHT, HEAT, AND POWER COMPANY)
V.
-
APPELLANT
ON REVIEW FROM COURT OF APPEALS
CASE NO. 2007-CA-001635-MR
FRANKLIN CIRCUIT COURT NOS. 02-CI-00499,
02-CI-01628, 03-CI-01189, 04-CI-01308, AND 06-CI-00269
COMMONWEALTH OF KENTUCKY, EX REL. JACK
CONWAY; AND KENTUCKY PUBLIC SERVICE COMMISSION
APPELLEES
OPINION OF THE COURT BY CHIEF JUSTICE MINTON
AFFIRMING, IN PART, AND REVERSING AND REMAND ING. IN PART
We granted discretionary review of these cases to decide whether the
Kentucky Public Service Commission (PSC) had the plenary authority to allow a
utility to adjust its rates by imposing a surcharge or rider aimed at recovering
-D
costs associated with the utility's program to accelerate improvement of its gas
distribution mains . We hold that so long as the rates established by the utility
were fair, just, and reasonable, the PSC has broad ratemaking power to allow
recovery of such costs outside the parameters of a general rate case and even
in the absence of a statute specifically authorizing recovery of such costs .
I. PROCEEDINGS IN THE COURT OF APPEALS AND TRIAL COURT.
The Court of Appeals held that the PSC lacked this plenary authority
absent a statute specifically allowing the recovery of such costs outside a
general rate case. To that extent, the Court of Appeals affirmed trial court
orders invalidating the rider as it existed before the enactment of Kentucky
Revised Statutes (KRS) 278.5091 in 2005. But the Court of Appeals reversed
trial court orders invalidating the rider after the enactment, of KRS 278.509
because the Court of Appeals disagreed with the trial court's ruling that
KRS 278.509 was unconstitutional. By our holding today, we disagree with the
Court of Appeals' view that the legitimacy of the rider depended upon the
enactment of a specific statute authorizing recovery of that particular cost
outside a general rate case. Accordingly, we reverse, in part, affirm, in part,
KRS 278.509 provides:
Notwithstanding any other provision of law to the contrary, upon application by a
regulated utility, the commission may allow recovery of costs for investment in
natural gas pipeline replacement programs which are not recovered in the existing
rates of a regulated utility. No recovery shall be allowed unless the costs shall have
been deemed by the commission to be fair, just, and reasonable .
and remand to the trial court with directions to reinstate the PSC orders
allowing for the rider or surcharge .2
II. FACTS .
As stated by the Court of Appeals, the instant controversy:
involves five consolidated appeals by the Attorney General from the
Public Service Commission's (PSC) orders over a five-year period
approving and implementing a portion of Duke Energy Kentucky,
Inc.'s (f/k/a the Union Light, Heat and Power Company (Duke))
rate schedule known as the Accelerated Main Replacement
Program (AMRP) Rider.
Neither party takes issue with the Court of Appeals' recitation of the relevant
facts, which stated as follows:
In 2001, Duke developed a program to improve its gas
distribution mains. The company owned approximately 1000 miles
of mains, including over 150 miles of cast iron and bare steel
mains dating back to 1887 and 1907 . Because cast iron and bare
steel mains leak more frequently than those constructed from
coated steel or polyethylene, Duke at first intended to replace the
aging mains over a fifty-year period . However, because of the age
of the mains to be replaced, Duke implemented the AMRP to
replace all mains within ten years.
In May 2001, confronted with increases in its capital
expenditures, Duke filed an application with the Commission [PSC]
pursuant to KRS 278.180 for an adjustment of its general rates
and, in the same filing, sought approval to employ the AMRP Rider
2
The terms rider and surcharge are not well-defined under Kentucky law. From our
examination of the briefs, it appears to us that the parties may use the term rider
to refer to a formula rather than a particular dollar amount used in the ratemaking
process to recover costs of the AMRP program and that the parties may use the
term surcharge to refer to the particular dollar amount actually imposed on
consumers to recover such costs . See also KRS 278 .010(12) (defining rate as "any
individual or joint fare, toll, charge, rental, or other compensation for service
rendered or to be rendered by any utility, and any rule, regulation, practice, act,
requirement, or privilege in any way relating to such fare, toll, charge, rental, or
other compensation, and any schedule or tariff or part of a schedule or tariff
thereof' without further defining such terms as fare, toll, charge, schedule, or tariff.)
to streamline recovery of the costs associated with the main
replacement program. The Attorney General intervened in the
2001 rate case and opposed the AMRP Rider contending that the
PSC had no authority to permit a surcharge to recover costs
incurred after a general rate case without conducting a new
general rate case . It asserted that single-issue ratemaking is not
permitted under the statutory scheme unless the General
Assembly specifically permits the procedure.
The PSC concluded that its authority was derived from its
general powers conferred by KRS 278.030 and 278 .040 to
establish "fair, just and reasonable" rates and KRS 278 .290, to
revaluate new construction, extensions, and additions to utility
property. On January 31, 2002, the PSC authorized Duke to
implement the AMRP Rider for a three-year period subject to
annual review of new AMRP costs during that period. Under the
surcharge formula, Duke was permitted to automatically recover
its return on investment of the preceding year's increase in plant
investment incurred under the replacement program for three
years following the completion of the 2001 general rate case . After
the expiration of three years, if Duke intended to continue the
program, it was required to file a new general rate application. The
Attorney General appealed.
In the years that followed, the PSC approved each of Duke's
annual applications for adjustments to the AMRP Rider and the
Attorney General appealed each ruling to the Franklin Circuit
Court. The final PSC order appealed was entered on December 22,
2005 . As directed by the PSC's 2001 order, on February 25, 2005,
Duke filed its next general rate case and sought approval of the
continuation of the AMRP Rider. Again, the Attorney General
intervened .
While the Attorney General's appeals from the prior orders
and Duke's 2005 rate case were pending, the Kentucky General
Assembly passed KRS 278.509. As it did before, the PSC relied on
its plenary rate-making powers but also relied on what it perceived
as its specific authority conferred by the newly enacted
KRS 278 .509 and approved the rider. The Attorney General
appealed .
The Franklin Circuit Court consolidated the Attorney
General's appeals and, after the parties filed cross-motions for
summary judgment, vacated and remanded the orders of the PSC
pertaining to the AMRP rider. It held that KRS 278 .509 was
unconstitutional in violation of the title and single-subject
provisions of Section 51 of the Kentucky Constitution, and that the
PSC's authority under KRS 278 .030 and 278 .040 . did not permit
the PSC to perform an interim review on a single cost absent
specific statutory authority . The court concluded that the PSC's
authority to consider any expense was limited to a general rate
filing. Duke appealed.3
III. ANALYSIS.
This appeal presents questions of statutory interpretation, so we
review de novo the lower courts' determinations about the scope of the
PSC's authority.4
As noted by the Court of Appeals, a party challenging a PSC action
in court bears the burden of proving that the PSC's action is
unreasonable or unlawful under KRS 278.430. And, as further noted by
the Court of Appeals, the PSC is a "creature of statute"; and, thus, the
lawfulness of its action depends on whether the PSC's action exceeded its
statutory authority. Differing with the Court of Appeals, we conclude
that the PSC's ratemaking actions were within its statutory ratemaking
authority, which we read somewhat more broadly than does the Court of
Appeals.
3
4
The Court of Appeals' recitation of facts also indicates that the trial court granted
the PSC and utilities a stay "of any effect the circuit court's order may have on
surcharge proceedings other than the AMRP Rider, pending the outcome of this
appeal" after the Attorney General issued an opinion stating that "because there
was no explicit, direct, or statutory power to authorize such clauses, the PSC had
no authority to approve the [fuel adjustment] surcharge."
See Artrip v. Noe, 311 S.W.3d 229, 231 (Ky. 2010) ("Statutory interpretation is a
question of law and this Court reviews it de novo.") .
The broad role of the PSC in regulating and investigating utilities to
ensure that utilities comply with state law is set forth in KRS 278 .040, which
provides, in pertinent part:
(1) The Public Service Commission shall regulate utilities and
enforce the provisions of this chapter. . . .
(2) The jurisdiction of the commission shall extend to all
utilities in this state. The commission shall have exclusive
jurisdiction over the regulation of rates and service of utilities, but
with that exception nothing in this chapter is intended to limit or
restrict the police jurisdiction, contract rights or powers of cities or
political subdivisions .
(3) The commission may adopt, in keeping with
KRS Chapter 13A, reasonable regulations to implement the
provisions of KRS Chapter 278 and investigate the methods and
practices of utilities to require them to conform to the laws of this
state, and to all reasonable rules, regulations and orders of the
commission not contrary to law.5
Because utilities are allowed to charge consumers only "fair, just, and
reasonable rates" under KRS 278 .030(1), the PSC must ensure that utility
rates are fair, just, and reasonable to discharge its duty under KRS 278 .040 to
ensure that utilities comply with state law .
As a key part of its duty to ensure that utility rates charged comply with
state law, the PSC must approve or deny any requested changes in a utility's
rate . KRS 278 .180 governs how rate changes must be made . The statute
requires that utilities generally give the PSC thirty days' notice of any proposed
rate change and that the PSC order rate changes only after giving the utility the
Emphasis added.
same amount of notice .6 In other words, KRS 278 .180 does not require any
particular process to allow a utility to change its rates other than complying
with notice requirements .
KRS 278 .190 covers the subject of "[p]rocedure when new schedule of
rates filed ." Apparently the Court of Appeals construed this statute as
requiring a certain process (a general rate case) in most cases in which some
sort of new rate is requested or filed. Some of the factors that may be
considered by the PSC in ratemaking within general rate cases or otherwise,
specifically those regarding valuation of utility property, are established in
KRS 278 .290.7 But the plain language of KRS 278 .190 does not actually
6
KRS 278 .180 (Changes in rates, how made) provides that:
(1) Except as provided in subsection (2) of this section, no change shall be made by
any utility in any rate except upon thirty (30) days' notice to the commission,
stating plainly the changes proposed to be made and the time when the
changed rates will go into effect . However, the commission may, in its
discretion, based upon a showing of good cause in any case, shorten the notice
period from thirty (30) days to a period of not less than twenty (20) days . The
commission may order a rate change only after giving an identical notice to the
utility. The commission may order the utility to give notice of its proposed rate
increase to that utility's customers in the manner set forth in its regulations .
7
(2) The commission, upon application of any utility, may prescribe a less time
within which a reduction of rates may be made .
We note that the PSC states in its brief that KRS 278.180 "is not implicated here."
We believe that the PSC means that there has been no allegation that notice
requirements under KRS 278 .180 were violated in this case .
The Court of Appeals noted the utilities' argument that the trial court failed to
consider KRS 289.290(1), and the Court of Appeals stated that this "statute
delineates the factors to be considered when fixing utility rates and has been
interpreted to afford the PSC broad discretion ." Citing National-Southwire
Aluminum Co. v. Big Rivers Elec. Corp., 785 S .W .2d 503 (Ky.App . 1990)) .
KRS 278.290 (Valuation of utility property in connection with rates, service or
issuance of securities -- Unit Rate Base) states:
(1) Subject to the provisions of subsection (2) of this section, the commission may
ascertain and fix the value of the whole or any part of the property of any utility
require that the PSC proceed with a general .rate case or other particular
process every time some new rate or change in rates is requested . To the
contrary, the statute simply provides that upon filing of a schedule of new
rates, the PSC "may" conduct a "hearing concerning the reasonableness of the
new rates" on its own motion or if a complaint is filed by any person
challenging the rates as unreasonable or otherwise contrary to law under
KRS 278.260 .8 'If a complaint is filed by a person challenging rates as
unreasonable or contrary to law, other provisions of KRS Chapter 278,
in so far as the value is material to the exercise of the jurisdiction of the
commission, and may make revaluations from time to time and ascertain the
value of all new construction, extensions and additions to the property of the
utility. In fixing the value of any property under this subsection, the
commission shall give due consideration to the history and development of the
utility and its property, original cost, cost of reproduction as a going concern,
capital structure, and other elements of value recognized by the law of the land
for rate-making purposes.
The commission shall not value or revalue the property of any utility unless the
valuation or revaluation is necessary or advisable in order to determine the
legality or reasonableness of any rate or service or of the issuance of securities,
and then only after an investigation affecting the rate, service or securities has
been instituted by the commission upon complaint or application or upon its
own motion, and a hearing has been held on reasonable notice .
s
(3) In any rate investigation where the utility serves two (2) or more municipalities,
the commission may, in computing the rate of return on the property used and
useful, take as the base for the computation the valuation of the system as a
whole, but may make a differential in the case of an individual municipality in
proportion to the increased cost of service, if the utility can show that such a
differential should be allowed.
KRS 278.190 covers "Procedure when new schedule of rates filed -- Suspension of
new rate schedule -.- Burden of Proof -- Refunds ." KRS 278.190(1) states:
"Whenever any utility files with the commission any schedule stating new rates,
the commission may, upon its own motion, or upon complaint as provided in
KRS 278.260, and upon reasonable notice, hold a hearing concerning the
reasonableness of the new rates." (Emphasis added .) Subsections (2), (3) and (4)
respectively establish that the PSC may suspend the new rate schedule under
certain circumstances, that the utility bears the burden of proof to show that
increased rates are just and reasonable, and that the PSC may order a utility to
make refunds under certain circumstances .
KRS 278 .2609, KRS 278 .270 10 and KRS 288.280, 11 authorize the PSC to
conduct investigations and hearings and enter appropriate orders concerning
9
KRS 278 .260 (Jurisdiction over complaints as to rates or service Investigations --- Hearing) states:
(1) The commission shall have original jurisdiction over complaints as to rates or
service of any utility, and upon a complaint in writing made against any utility
by any person that any rate in which the complainant is directly interested is
unreasonable or unjustly discriminatory, or that any regulation, measurement,
practice or act affecting or relating to the service of the utility or any service in
connection therewith is unreasonable, unsafe, insufficient or unjustly
discriminatory, or that any service is inadequate or cannot be obtained, the
commission shall proceed, with or without notice, to make such investigation as
it deems necessary or convenient. The commission may also make such an
investigation on its own motion . No order affecting the rates or service
complained of shall be entered by the commission without a formal public
hearing .
(2) The commission shall fix the time and place for each hearing held by it, and
shall serve notice thereof upon the utility and the complainant not less than
twenty (20) days before the time set for the hearing. The commission may
dismiss any complaint without a hearing if, in its opinion, a hearing is not
necessary in the public interest or for the protection of substantial rights .
(3) The complainant and the person complained of shall be entitled to be heard in
person or by an attorney and to introduce evidence .
to KRS 278 .270 (Orders by commission as to rates) states:
Whenever the commission, upon its own motion or upon complaint as provided in
KRS 278.260, and after a hearing had upon reasonable notice, finds that any rate
is unjust, unreasonable, insufficient, unjustly discriminatory or otherwise in
violation of any of the provisions of this chapter, the commission shall by order
prescribe a just and reasonable rate to be followed in the future .
KRS 278 .280 (Orders by commission as to service -- Extension of service) states:
(1) Whenever the commission, upon its own motion or upon complaint as provided
in KRS 278.260, and after a hearing had upon reasonable notice, finds that the
rules, regulations, practices, equipment, appliances, facilities or service of any
utility subject to -its jurisdiction, or the method of manufacture, distribution,
transmission, storage or supply employed by such utility, are unjust,
unreasonable, unsafe, improper, inadequate or insufficient, the commission
shall determine the just, reasonable, safe, proper, adequate or sufficient rules,
regulations, practices, equipment, appliances, facilities, service or methods to
be observed, furnished, constructed, enforced or employed, and shall fix the
same by its order, rule or regulation .
(2) The commission shall prescribe rules for the performance of any service or the
furnishing of any commodity of the character furnished or supplied by the
utility, and, on proper demand and tender of rates, the utility shall furnish the
rates or services . Hearings are not necessarily required to resolve the
complaint . 12 And these statutes do not mandate that a complaint compels a
general rate case under KRS 278.190.
The Court of Appeals stated in its opinion that "KRS 278 .030 and
KRS 278.040 expressly grant the PSC plenary ratemaking authority." Yet, it
answered the question of whether KRS 278.030 and KRS 278 .040 gave the PSC
the authority to approve the AMRP Rider outside the context of a general rate
case in the negative. 13 Apparently the Court of Appeals read KRS 278 .190 as
requiring the filing of a general rate case for any changes in rate because its
opinion stated that: "KRS 278 .190 establishes the procedure to be followed
when a rate change is sought, referred to as a general rate case." On the other
hand, latter portions of its opinion suggest that this requirement might not
apply where the issue was not "amenable" to general rate proceedings . But, as
noted previously, the plain language of KRS 278 .190 does not necessarily
commodity or render the service within the time and upon the conditions
provided in the rules .
(3) Any person or group of persons may come before the commission and by
petition ask that any utility subject to its jurisdiction be compelled to make any
reasonable extension . The commission shall hear and determine the
reasonableness of the extension, and sustain or deny the petition in whole or in
per .
12
KRS 278.260(2) .
13
The Court of Appeals included within the legal analysis portion of its opinion a
subheading entitled, "WHETHER KRS 278.030 AND KRS 278 .040 CONFERRED
AUTHORITY UPON THE PSC TO APPROVE THE AMRP RIDER." After reviewing
other caselaw concerning other issues of ratemaking outside general rate cases,
the Court of Appeals concluded "that the PSC cannot authorize the imposition of a
surcharge for the main replacement program proposed by Duke without specific
statutory authorization ."
require the filing of a general rate case any time a utility seeks a change in its
rates.
Noting the "complex and lengthy procedure" of a general rate case
customarily employed when a utility seeks to change its rates under
KRS 278.190, the Court of Appeals reviewed case law concerning whether more
expedited proceedings involving isolated issues in ratemaking might be
allowable without specific statutory authority14 and determined that cases
approving such expedited proceedings for isolated issues involved issues that
were "not amenable to review via a general rate increase" and were
distinguishable from the instant case because "[tlhe present controversy does
not involve capital expenditures that are unanticipated, fluctuating, or beyond
Duke's control, or threaten its solvency." So the Court of Appeals decided that
the AMRP surcharge was "amenable to the test-year review concept. to be
14
Specifically, the Court of Appeals cited National-Southwire Aluminum Co,
785 S.W .2d at 503, in which the Court of Appeals affirmed a trial. court order
affirming a PSC order allowing a utility to offer variable rates solely to aluminum
smelter customers based on fluctuating aluminum prices . No specific statute
allowed the PSC to approve utility rates employing this particular type of variable
rate ; and, in fact, one statute prohibited utilities from unreasonably treating
different types of customers differently. But the Court of Appeals in NationalSouthwire found the differential treatment of the aluminum smelters reasonable
due to various factors . See id. at 514-15.
The Court of Appeals also cited Kentucky Industrial Utility Customers, Inc. v.
Kentucky Utilities Co., 983 S.W.2d 493 (Ky.1998), as indicating that "[olur highest
Court has specifically recognized with approval the prevailing view that separate
rate proceedings for fuel adjustment expenses are valid." But because fuel
adjustment clauses were not at issue in that case, our statements to the effect that
fuel adjustment clauses are generally accepted was dicta. Fuel adjustment clauses
are not specifically, explicitly permitted by any statute, although there is a
regulation, 807 Kentucky Administrative Regulations (KAR) 5:056, which purports
to permit them. It appears that Kentucky appellate courts have never directly
addressed the validity of fuel adjustment clauses.
followed in ageneral rate case, and is a replacement cost to be considered in a
general rate increase case ."
The Attorney General similarly argues that the PSC, as a creature of
statute, only has those powers that are expressly granted to it by statute or are
necessarily implied for it to be able to exercise its enumerated powers and
responsibilities . i s
While the power to approve the AMRP rider at issue may not have been
expressly granted by statute before the enactment of KRS 278.509, we,
nonetheless, conclude that the PSC has the power to allow such a rider based
upon (1) its plenary ratemaking authority derived from KRS 278 .030 and KRS
278.040, which essentially require that the PSC act to ensure that rates are
"fair, just and reasonable" and (2) the absence of any statutes specifically
requiring a particular procedure when determining if rates are fair, just, and
reasonable . 16
15
16
In Public Service Commission v. Cities of Southgate and Highland Heights,
268 S.W.2d 19 (Ky. 1954), this Court concluded that the PSC's power included not
only powers expressly provided by statute but could also encompass powers
necessarily implied to take action to meet its statutory duties . Specifically, in that
case this Court concluded that the PSC had the implied power to approve or
disapprove a utility systems sale, despite the lack of express statutory authority to
do so, because of the PSC's general statutory authority under KRS 278 .040 to
regulate utility service. See id . at 21 . We note that Highland Heights did not
involve questions of the PSC's ratemaking authority, unlike the present case .
While we recognize that the PSC has discretion in fulfilling its statutory duty of
insuring that rates are fair, just, and reasonable, we do not hold that the PSC has
unlimited power to do whatever it wants in regards to ratemaking . For example, in
South Central Bell Telephone Co. v. Util. Reg. Comm'n, 637 S .W .2d 649 (Ky. 1982),
we recognized that the PSC (or its predecessor) could not use its plenary
ratemaking authority for purposes other than insuring that rates were fair, just,
and reasonable ; specifically we held that the Commission could not order a rate
that was too low to be "fair, just, and reasonable" to penalize a utility for poor
service because statutes required separate procedures for dealing with ratemaking
Despite the Court of Appeals' findings that the AMRP was amenable to
general rate case proceedings, 17 we find nothing in the statutes that mandates
that this rider or the calculation of the actual monetary surcharge could only
be approved through a general rate case. Although, undoubtedly, such a rider
or surcharge could be approved through a general rate case -- and here the
AMRP rider was initially approved in this manner - KRS 278 .190(1) states
simply that the PSC "may" hold a hearing "concerning the reasonableness of
the new rates" when a utility files a schedule setting new rates. So the statute
does not command such a hearing upon the filing of new rates .
Nor does it require that all possible factors be considered in the hearing.
KRS 278.192 states that the Commission may allow a utility to use either a
historical 12-month test period or a forward-looking 12 month test period to
determine the reasonability of a general rate increase . Similarly,
807 KAR 5 :001 § 10 requires that applications for general adjustment of rates
must be supported by either a historical 12-month test period or a forwardlooking 12-month test period. But nothing requires that a utility can only
recover costs for the previous year, as the Attorney General contends, rather
17
issues and dealing with service issues . Id. at 651-54. Although South Central Bell
does indicate that the PSC's ratemaking power "will be strictly construed[,]" see id.
at 653, we do not read it as inconsistent with our opinion here, given that the
ratemaking challenged in South Central Bell stemmed from an improper purpose
inconsistent with the statutory duty to ensure that rates are "fair, just, and
reasonable" to utilities as well as customers.
In fact, Duke Energy and the PSC point out that the AMRP rider (a formula) was
approved through a general rate case, and that only the particular monetary
cost/surcharge (not the rate or formula itselfl would change from year to year
subject to PSC approval (at least for first three years) in expedited proceedings.
such test periods appear aimed at predicting future costs when determining if
proposed rates are fair, just, and reasonable . 18
Occasionally, the legislature has seen fit to enact a statute concerning a
specific ratemaking issue. 1 9 But the PSC and utilities argue that these statutes
actually limit the PSC's ratemaking powers rather than expand them . They
also point to fuel adjustment clauses, which have long been used and have
been recognized as valid by courts in other jurisdictions, 20 despite the lack of a
specific statute permitting these (although a regulation permitting such fuel
adjustment clauses premised on KRS 278 .030 exists) . 21 They contend that the
PSC has implied authority to deal with specific ratemaking issues outside the
context of a general rate proceeding unless specifically limited by statute .
Their argument is contrary to the Court of Appeals' view that the PSC's powers
1s
19
20
21
See generally 73B C.J.S. Public Utilities § 105 (2010) ("The purpose of using a test
year is to establish with a reasonable degree of accuracy revenue and expenses
that a public utility will experience during the period when new rates will be in
effect .") .
See, e.g., KRS 278.183 (allowing surcharge to recover costs associated with
compliance with Federal Clean Air Act and other environmental legislation) .
This Court noted in dicta that approval of other fuel adjustment clauses in
expedited proceedings outside general rate cases has been accepted in many other
jurisdictions in Kentucky Industrial Utility Customers, Inc. v. Kentucky Utilities Co.,
983 S.W.2d at 498. But this Court was not faced with deciding the validity of a
fuel adjustment clause there . More precisely, we determined whether KRS 278 .183
(permitting allowance of environmental surcharges to help utilities recoup costs of
complying with environmental legislation) was constitutional and could be applied
retroactively to allow recoupment of costs incurred before KRS 278.183 was
enacted .
See 807 KAR 5:056 (regulating fuel adjustment clauses and stating that the
statutory authority for the regulation is KRS 278.030(1)). Naturally, a regulation
must be authorized by statute to be valid. See Commonwealth v. Chestnut,
250 S.W.3d 655, 662 (Ky. 2008) ("an administrative agency cannot by its rules and
regulations, amend, alter, enlarge or limit the terms of legislative enactment .")
(internal quotation marks omitted) . Because the issue is not directly presented to
us in this case, we express no opinion about whether 807 KAR 5:056 is valid.
are only those expressly and specifically enumerated by statute or those
actions required under "disaster" situations where such measures are required
to rescue utilities from the brink of bankruptcy.22
We decline to reach the utility's argument that other statutes dealing
with specific ratemaking issues limit rather than expand their power because
those specific ratemaking issues are not before us . But we simply find nothing
in other statutes in KRS Chapter 278 that would forbid the PSC from allowing
a rider or surcharge for the costs at issue here before the enactment of
KRS 278 .509 . In fact, we find nothing in the statutes that would prohibit
"single-issue ratemaking" -- contrary to the Attorney General's arguments.23
Although the Attorney General contends that the utilities were able to
obtain a guaranteed return on their investment or obtained a double recovery
of costs, he shows us no evidence of record that such events occurred . 24 And
we note that the PSC required annual review of the surcharge and, on
22
23
24
To the extent that the Court of Appeals opinion holds that the PSC may only
authorize the recovery of costs without specific statutory authorization only where
the facts of the case present a danger such as a utility facing immediate
bankruptcy or discontinuance of service, we reject such a view as being contrary to
the PSC's general powers and plenary authority.
To the extent that the PSC has established its own policy against "single-issue
ratemaking," as suggested by the Attorney General's brief, it appears that the PSC
would have discretion whether to retain or discard such a policy or determine
whether it has been violated under the facts of a particular case given its plenary
ratemaking authority circumscribed primarily by its duty to ensure that rates are
"fair, just and reasonable" and the lack of clear statutory prohibition against
"single issue ratemaking ."
The Attorney General has not contended that use of the AMRP rider in expedited
proceedings actually resulted in higher rates than those that would have resulted if
AMRP riders/ surcharges were subjected to an annual general rate case process,
nor clearly argued that the end result (the actual rate charged to customers) was
not fair, just, and reasonable .
occasion, modified it. So the facts indicate that the PSC acted to ensure that
the rates were fair, just, and reasonable by expedited annual proceedings to
review the application of the rider or surcharge.2s
In sum, we agree with the view that the PSC had the plenary authority to
regulate and investigate utilities and to ensure that rates charged are fair, just,
and reasonable under KRS 278.030 and KRS 278.040. This authority allowed
the PSC to allow the rider and to re-calculate the dollar amount of the
surcharge in expedited annual proceedings even before the effective date of
KRS 278 .509, which expressly clarified (but did not create) the PSC's authority
to allow recovery of the cost of natural gas pipeline replacement not covered by
existing rates so long as the rates are fair, just, and reasonable . So we reverse
the lower court decisions to the contrary and reinstate the PSC's orders
allowing for the recovery of these costs.
Contrary to the conclusion of the Court of Appeals that the statutes
unambiguously denied the authority to allow the AMRP rider and, thus, no
deference was owed to the administrative agency's interpretation under
Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc.,26 we find
25
26
The PSC has also alleged that it took other protective measures benefiting
consumers, such as requiring certificates of need before any mains were replaced
and requiring the surcharge to be disclosed as a separate line item on customers'
bills. We need not extensively review all protective measures actually or allegedly
taken as we conclude that the PSC's plenary ratemaking authority under
KRS 278 .030 and KRS 278.040, the lack of statutory prohibition against recovery
of these particular costs, and the lack of argument that the end result was unjust
and unreasonable lead us to conclude that the lower courts lacked justification to
disturb the challenged PSC orders here .
467 U.S. 837 (1984) .
nothing in the statutes disallowing the AMRP rider, although, we similarly find
no real ambiguity in the statues . We conclude that. because the statutes
generally recognize a duty to establish "fair, just, and reasonable" rates without
necessarily requiring a particular procedure to deal with isolated ratemaking
issues, the Hope doctrine that "[it is] the result reached rather than the method
employed which is controlling" 27 is applicable . Applying this doctrine to the
instant case, we conclude that the lower courts erred when disturbing the
challenged orders of the PSC.
In summary, since there was no statutory authority forbidding it to do
so, the PSC's plenary powers were sufficient to permit it to approve the
AMRP rider even before the enactment of KRS 278 .509. KRS 278 .509 is, thus,
merely a legislative codification and approval of the lawful actions the PSC had
already taken as to the AMRP program. So we reverse the portion of the Court
of Appeals' opinion that upheld the trial court's reversal of PSC orders
predating the enactment of KRS 278 .509 and affirm on other grounds the
portion of the \Court of Appeals' opinion reinstating the PSC orders following
the enactment of KRS 278 .509.28
27
2s
National-Southwire, 785 S .W.2d at 510, citing Federal Power Comm'n v. Hope
Natural Gas Co., 320 U.S . 591 (1944) .
As we hold the PSC had the authority to approve the AMRP rider even prior to the
enactment of KRS 278.509, we need not reach whether the Court of Appeals erred
in reversing the trial court's ruling that KRS 278.509 violated Section 51 of the
Kentucky Constitution .
IV. CONCLUSION .
For the foregoing reasons, the opinion of the Court of Appeals is affirmed,
in part, and reversed, in part; and this case is remanded to the Franklin Circuit
Court with directions to reinstate the challenged orders of the PSC.
Minton, C .J .; Abramson, Cunningham, Noble, Scott, and Venters, JJ.,
sitting. Abramson, Cunningham, Noble, and Scott, JJ., concur. Venters, J.,
dissents by separate opinion. Schroder, J., not sitting.
VENTERS, J., DISSENTING : I respectfully dissent. The Court of Appeals
correctly determined that prior to the 2005 enactment of KRS 278.509, the PSC
had no statutory authority to approve the requested rate increases other than
through the general rate-making process established in KRS 278 .190. By
granting the increased rates so that Appellants could expedite the recovery of
certain long-term capital expenditures, the PSC side-stepped its own
regulations (807 KAR 5:001 § 10) and the closer public scrutiny inherent in
KRS 278.190. That KRS 278.509 was specifically adopted to provide legislative
cover for rate changes involved here simply highlights the fact that, without
such legislation, the rate changes were not authorized . The Court of Appeals
properly struck down the pre-2005 rate increases.
COUNSEL FOR APPELLANT/ APPELLEE
KENTUCKY PUBLIC SERVICE COMMISSION :
Anita Brooks Mitchell
David Shawn Samford
Gerald Edward Wuetcher
Helen C. Helton
Kentucky Public Service Commission
211 Sower Boulevard
P. O. Box 615
Frankfort, Kentucky 40602-0615
COUNSEL FOR APPELLANT/APPELLEE
DUKE ENERGY KENTUCKY, INC.
(F/K/A THE UNION LIGHT,
HEAT, AND POWER COMPANY)
Jason Patrick Renzelmann
M. Holliday Hopkins
Sheryl G. Snyder
Frost, Brown, Todd, LLC
400 West Market Street
32nd Floor
Louisville, Kentucky 40202-3363
COUNSEL FOR APPELLEE COMMONWEALTH
OF KENTUCKY, EX REL. JACK CONWAY:
Dennis Gordon Howard, II
Assistant Attorney General
Office of Rate Intervention
Office of the Attorney General
1024 Capitol Center Drive, Suite 200
Frankfort, Kentucky 40601
Lawrence Wilson Cook
Office of Attorney General
1024 Capital Drive, Suite 200
Frankfort, Kentucky 40601
COUNSEL FOR AMICUS CURIAE
ATMOS ENERGY CORPORATION:
John Newton Hughes
124 West Todd Street
Frankfort, Kentucky 40601
Mark R. Hutchinson
Wilson, Hutchinson 8v Poteat
611 Frederica Street
Owensboro, Kentucky 42301
COUNSEL FOR AMICUS CURIAE
BIG RIVERS ELECTRIC CORPORATION:
James M. Miller
Sullivan, Mountjoy, Stainback 8v Miller, PSC
100 St. Ann Building
P. O . Box 727
Owensboro, Kentucky 42302-0727
COUNSEL FOR AMICUS CURIAE
COLUMBIA GAS OF KENTUCKY, INC . :
Richard S . Taylor
225 Capital Avenue
Frankfort, Kentucky 40601
Stephen B. Seiple
200 Civic Center Drive
P. O. Box 117
Columbus, Ohio 43216-0117
COUNSEL FOR AMICUS CURIAE
DELTA NATURAL GAS COMPANY, INC . :
Robert M. Watt, III
Stoll, Keenon, Ogden PLLC
300 West Vine Street, Suite 2 100
Lexington, Kentucky 40507
COUNSEL FOR AMICUS CURIAE
EAST KENTUCKY POWER COOPERATIVE:
David Arthur Smart
General Counsel
East Kentucky Power Cooperative
4775 Lexington Road
P. O . Box 707
Winchester, Kentucky 40392-0707
Roger R. Cowden
Lexington Financial Center
250 West Main Street, Suite 2800
Lexington, Kentucky 40507-1749
COUNSEL FOR AMICUS CURIAE
JACKSON ENERGY COOPERATIVE CORPORATION:
Clayton Otis Oswald
Taylor, Keller, Dunaway 8v Tooms, PLLC
1306 West 5th Street
P. O. Box 905
London, Kentucky 40473-0905
COUNSEL FOR AMICUS CURIAE
KENERGY CORP. :
Frank N. King, Jr.
Dorsey, King, Gray, Norment & Hopgood
318 Second Street
Henderson, Kentucky 42420
COUNSEL FOR AMICUS CURIAE
KENTUCKY ASSOCIATION OF ELECTRIC COOPERATIVES, INC . :
Daniel T. Yates
Governmental Affairs and Member Counsel
Kentucky Association of Electric Cooperatives, Inc.
4515 Bishop Lane
P. 0 . Box 32170
Louisville, Kentucky 40218-4507
COUNSEL FOR AMICUS CURIAE
KENTUCKY POWER COMPANY:
Mark Richard Overstreet
Stites & Harbison, PLLC
,421 West Main Street
P. O . Box 634
Frankfort, Kentucky 40602-0634
COUNSEL FOR AMICUS CURIAE
KENTUCKY RURAL WATER ASSOCIATION, INC. :
Damon R. Talley
112 North Lincoln Boulevard
P. O. Box 150
Hodgenville, Kentucky 42748
COUNSEL FOR AMICUS CURIAE
KENTUCKY UTILITIES COMPANY AND
LOUISVILLE GAS AND ELECTRIC COMPANY :
Allyson Kay Sturgeon
E. on U.S ., LLC
220 West Main Street
P. 0. Box 32030
Louisville, Kentucky 40202
Deborah Tully Eversole
Kendrick Riggs
William Duncan Crosby, III
Stoll, Keenon, Ogden, PLLC
2000 PNC Plaza
400 West Jefferson Street
Louisville, Kentucky 40202-2828
COUNSEL FOR AMICUS CURIAE
TAYLOR COUNTY RURAL ELECTRIC COOPERATIVE CORPORATION:
Robert M. Spragens, Jr.
Spragens &, Higdon, PSC
15 Court Square
P. 0 . Box 681
Lebanon, Kentucky 40033-0681
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