Twin Valley Telephone, Inc. v. Kansas Corporation Comm'n

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NOT DESIGNATED FOR PUBLICATION

No. 115,284

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

TWIN VALLEY TELEPHONE, INC.,
Petitioner,

v.

THE STATE CORPORATION COMMISSION OF THE
STATE OF KANSAS,
Respondent.


MEMORANDUM OPINION

Appeal from Kansas Corporation Commission. Opinion filed June 17, 2016. Affirmed.

Thomas E. Gleason, Jr., and Mark Doty, of Gleason & Doty, Chtd., of Lawerence, for petitioner.

Dustin L. Kirk, special assistant attorney general, of Kansas Corporation Commission, of Topeka,
for respondent.

Before ATCHESON, P.J., STANDRIDGE and POWELL, JJ.

Per Curiam: Twin Valley Telephone, Inc., has appealed a ruling of the Kansas
Corporation Commission rejecting the company's request for a significantly enhanced
government subsidy to offset the cost of providing landline services to about 5,000
customers in the north central part of the state. Twin Valley has presented no legally
persuasive argument the KCC erred. The KCC's order conforms to a legislative directive
in K.S.A. 2015 Supp. 66-2008(e)(2) that state subsidies not be used to replace reductions
in federal subsidies, and the decision does not constitutionally take Twin Valley's
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property without just compensation. We, therefore, affirm the agency action denying the
requested subsidy.

FACTUAL BACKGROUND

We dispense with any extended discussion of the evolution of the
telecommunications industry over the past two decades and the interplay of state and
federal regulation of that industry, including various price supports and subsidies to
encourage both technological advances and provision of reasonably priced services to
otherwise economically unattractive customers. Although that history provides a
backdrop to the issue before us, it is neither integral to nor determinative of the proper
resolution. A mere sliver of that complex regulatory scheme figures in this case. The
curious may find Bluestem Telephone Co. v. Kansas Corporation Comm'n, 52 Kan. App.
2d 96, 363 P.3d 1115 (2015), and In re FCC 11-161, 753 F.3d 1015 (10th Cir. 2014),
useful portals to the acronym-laden historical story.

More pertinent here, Twin Valley provides traditional telephone service to rural
customers in a limited geographical area. In doing so, Twin Valley has agreed to operate
as a publicly regulated enterprise providing a high quality service at a reasonable cost to
customers who would otherwise face the prospects of having no available landline
telephones or paying excessively steep rates for them. As with other companies operating
in the public interest subject to substantial government regulation, Twin Valley is
permitted to earn a reasonable rate of return for its shareholders. See Southwestern Bell
Tel. Co. v. State Corporation Commission, 192 Kan. 39, 60-61, 386 P.2d 515 (1963);
Kansas City Power & Light Co. v. Kansas Corporation Comm'n, 52 Kan. App. 2d 514,
542-43, ___ P.3d ___ (2016); Moundridge Telephone Co. v. Kansas Corporation
Comm'n, No. 114,064, 2015 WL 7693784, at *15 (Kan. App. 2015) (unpublished
opinion), rev. denied 304 Kan. ___ (2016). The KCC oversees the intrastate regulation of
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telephone and other telecommunication service providers, including Twin Valley, and
reviews rate requests and other aspects of their financial operations.

Historically, the federal government has provided various economic incentives,
including subsidies, to companies providing landline telephone service to underserved or
difficult-to-serve populations to offset the high capital outlay and continuing costs of
reaching those groups. Government policymakers and regulators at the state and federal
levels concluded that in a purely free-market model those customers would not be served
at all or would face some combination of exorbitant rates and inferior services. Consistent
with federal law, the Kansas Legislature has established the Kansas Universal Service
Fund (KUSF) to augment available federal subsidies. K.S.A. 2015 Supp. 66-2008. As
part of its charge, the KCC also regulates the KUSF. Twin Valley has received and
continues to receive KUSF subsidies. This case is about how much the company should
get.

Telecommunications carriers, telecommunications public utilities, and wireless
service providers offering intrastate services in Kansas contribute to the KUSF and may
recoup those contributions through the rates they charge their customers. K.S.A. 2015
Supp. 66-2008(a). In effect, the customers of otherwise profitable telecommunications
providers contribute to a pool that helps reduce the cost of landline telephone service
available to rural customers through carriers such as Twin Valley.

Over the last 5 years, the federal government has revamped its
telecommunications regulations and subsidies to provide greater economic incentives for
broadband and internet with a concomitant reduction in financial support for landline
telephone service. In 2013, the Kansas Legislature modified the statutes governing the
KUSF to significantly curtail the allocation of those monies to make up for lost federal
subsidies. K.S.A. 2015 Supp. 66-2008(e)(2).

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As a result of the federal recalibration, Twin Valley lost High Cost Loop
subsidies, one form of federal financial support. In 2014, Twin Valley asked the KCC to
authorize a substantially larger subsidy from the KUSF as a result. The KCC audited
Twin Valley to assess the financial need for and legal appropriateness of the requested
increase. Following the audit, the KCC received extensive written testimony and
documentary evidence from its staff and from Twin Valley. The KCC issued an order
approving an increase of about $13,000 in KUSF support to Twin Valley not directly
connected to lost federal High Cost Loop subsidies and denying an increase of $856,627
specifically to offset that loss. Twin Valley has appealed the KCC's order and challenges
the denial of the additional $856,627 in KUSF subsidies. We understand that Twin
Valley continues to receive several million dollars a year from the KUSF—payments that
are not at issue in this dispute.

LEGAL ANALYSIS

We consider KCC orders under the Kansas Judicial Review Act (KJRA), K.S.A.
2015 Supp. 77-601 et seq. Twin Valley, therefore, has the burden to show a material error
in the KCC's decision. K.S.A. 2015 Supp. 77-621(a)(1). The KJRA outlines the specific
grounds on which a court may set aside an agency determination, including errors of law,
unsupported factual findings, and constitutional defects. K.S.A. 2015 Supp. 77-621(c). If
an issue turns on an interpretation of a statute or some other question of law, we review
without deference to the agency's legal analysis. Redd v. Kansas Truck Center, 291 Kan.
176, 187-88, 239 P.3d 66 (2010); Kansas Dept. of Revenue v. Powell, 290 Kan. 564, 567,
232 P.3d 856 (2010). Judicial review is more limited when an agency's findings of fact
have been challenged. A reviewing court may reject a factual finding only if it lacks
substantial support in the evidence considering "the record as a whole" in light of the
governing standard of proof. K.S.A. 77-621(c)(7).

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For its first point on appeal, Twin Valley questions an accounting device the KCC
staff used to comply with the statutory limitation on the KUSF imposed in K.S.A. 2015
Supp. 66-2008(e)(2). The statute, in pertinent part, requires:

"Notwithstanding any other provision of law, no KUSF support received by a
local exchange carrier electing pursuant to subsection (b) of K.S.A. 66-2005, and
amendments thereto, to operate under traditional rate of return regulation shall be used to
offset any loss of federal universal service fund support for such carrier, except that such
limitation on KUSF support shall not preclude recovery of reductions in intrastate access
revenue pursuant to subsection (c) of K.S.A. 66-2005, and amendments thereto." K.S.A.
2015 Supp. 66-2008(e)(2).

Basically, the legislature prohibited use of the KUSF to make up for the loss of federal
subsidies to local telephone carriers that have chosen to be regulated through a traditional
rate-of-return model. Twin Valley indisputably is such a carrier. The statute contains a
narrow exception allowing the KUSF to replace reductions in intrastate access revenue.
The exception, however, does not apply to cuts in federal High Cost Loop subsidies.

For purposes of the audit, the KCC staff treated the amount by which the High
Cost Loop subsidy was reduced as if Twin Valley had actually received that money from
the federal government. In other words, the staff considered the change in the High Cost
Loop payment as revenue or a plus rather than as a loss or a negative. According to the
staff, to do otherwise would result in a violation of K.S.A. 2015 Supp. 66-2008(e)(2)
because the calculation of the KUSF subsidy due Twin Valley would include an amount
offsetting the loss of that federal subsidy.

On appeal, Twin Valley doesn't really dispute the KCC's reasoning and offers no
alternative accounting method that would better or more fairly accommodate the dictates
of K.S.A. 2015 Supp. 66-2008(e)(2). Rather, Twin Valley argues treating the lost subsidy
as a revenue source would have untoward effects for other purposes such as evaluating
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any rate adjustments the company might seek. Superficially, Twin Valley's argument
seems to rest on a valid premise—counting what is actually a loss of revenue as a receipt
of revenue would have a distorting effect on the company's overall financial picture. But
the argument is irrelevant. The narrow issue here is whether Twin Valley should receive
an additional payment from the KUSF to replace the now-missing High Cost Loop
subsidy. The KCC's accounting tool appears to be an acceptable way to look at that
precise determination in conformity with K.S.A. 2015 Supp. 66-2008(e)(2). This court so
recognized in Moundridge Telephone Co., 2015 WL 7693784, at *12.

Accounting devices and number crunching aside, K.S.A. 2015 Supp. 66-
2008(e)(2) represents a clear legislative directive precluding exactly what Twin Valley
wants here—more from the KUSF because it is getting less from the federal government.
The legislature has made an unmistakable policy choice that the KCC and this court must
respect. The KCC has done so, and we do likewise. Our reading of K.S.A. 2015 Supp.
66-2008(e)(2) squares with this court's conclusion in Moundridge Telephone Co. The
court found that the KCC correctly deployed the same accounting device in that case "to
ensure KUSF support is not used to offset Moundridge's loss of federal HCL support[,]"
thereby conforming to dictates of K.S.A. 2015 Supp. 66-2008(e)(2). Moundridge
Telephone Co., 2015 WL 7693784, at *13. We agree and, therefore, reject Twin Valley's
point.

Twin Valley next argues that the KCC's approach denies the company any
opportunity to recover the lost federal subsidy from any source in contravention of its
right to a reasonable rate of return for its investors as a telecommunications carrier
regulated in the public interest. We have touched on this point already. Twin Valley's
argument rests on a faulty premise—that the KCC's accounting tool in treating the lost
High Cost Loop subsidy as revenue would be applied outside of the narrow circumstance
presented here. We do not understand that to be the KCC's position. Even if it were,
however, we fail to see how Twin Valley necessarily would be entitled to relief in this
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case. The tool has been properly applied here, as we have explained and as our colleagues
found in Moundridge Telephone Co., 2015 WL 7693784, at *13. Were the KCC to treat
the loss of High Cost Loop subsidies as revenue in some other case, say a requested rate
increase from Twin Valley, the argument the company now raises would be joined in a
concreted, defined legal dispute. In the context before us, however, it is little more than a
hypothetical.

To address Twin Valley's request for an increased allocation from the KUSF in
this case, the KCC treated the lost federal subsidy in a way that adheres to the directive in
K.S.A. 2015 Supp. 66-2008(e)(2). Although the same treatment might be inappropriate in
determining some other sort of request from Twin Valley, the company offers nothing
more than that abstract legal proposition as a basis for relief from the KCC order. Twin
Valley can't prevail on the grounds that an accounting tool correctly applied in this case
could be inaptly applied to an entirely different set of legal and factual circumstances.

Twin Valley seems to recognize the manifest flaw in that position and offers no
distinct argument for the point. Rather, the company simply identifies the issue and
argues it as an adjunct to the third and final point on appeal: The KCC's denial of the
increased KUSF subsidy amounts to a taking of property without just compensation in
violation of the Fifth Amendment to the United States Constitution. We now turn to that
constitutional argument.

The Fifth Amendment, among other things, precludes the federal government from
taking private property without paying the owners a fair price for their loss. See United
States v. Causby, 328 U.S. 256, 261-62, 66 S. Ct. 1062, 90 L. Ed. 1206 (1946); American
Exp. Travel v. Sidamon-Eristoff, 669 F.3d 359, 370 (3d Cir. 2012). The protections of the
Takings Clause have been incorporated through the Fourteenth Amendment to the United
States Constitution and, therefore, apply to the actions of state and local government
entities. See Palazzolo v. Rhode Island, 533 U.S. 606, 617, 121 S. Ct. 2448, 150 L. Ed.
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2d 592 (2001). The Takings Clause commonly applies to the government's physical
appropriation of privately owned real or personal property for public use, such as the
condemnation of farmland for a highway. But government regulation of privately owned
utilities and other businesses operating in the public interest may diminish their value to a
degree creating a constitutionally compensable taking. See Duquesne Light Co. v.
Barasch, 488 U.S. 299, 307-08, 109 S. Ct. 609, 102 L. Ed. 2d 646 (1989); Kansas Gas &
Electric Co. v. Kansas Corporation Comm'n, 239 Kan. 483, 488-90, 720 P.2d 1063
(1986); Kansas City Power & Light Co., 52 Kan. App. 2d at 542-44. The parties
acknowledge those signposts.

Utility regulation, however, reflects a distinct and sometimes arcane application of
Fifth Amendment takings jurisprudence. See Duquesne Light Co., 488 U.S. at 307 (The
"partly public, partly private status of utility property creates its own set of questions
under the Takings Clause of the Fifth Amendment."). Against this background, Twin
Valley's briefing on this score seems imprecise and fails to present an especially focused
contention. The KCC grapples with what amounts to an abstract proposition and presents
a similarly disengaged response.

As we size up the constitutional issue, Twin Valley argues for a compensable
taking of its property because its investors will receive an inadequate rate of return
without the increased KUSF subsidy. For purposes of this case, the parties agree (or at
least don't dispute) that 7.26% would be a reasonable rate of return for Twin Valley's
investors during the relevant time. Twin Valley offered expert testimony that the denial
of its request for an additional KUSF subsidy of $856,627 would yield a 4.64% rate of
return. The KCC staff did not directly dispute that calculation. Twin Valley contends the
reduced rate of return amounts to a constitutional taking of its property without
compensation. In other words, as we understand the claim, Twin Valley says the
investors effectively have been forced to dedicate the company's property (and their
investment) to a public purpose without fair recompense.
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We put aside some potential and perhaps only superficial weaknesses in Twin
Valley's argument. First, we assume that the KCC's refusal to allow an increased subsidy
amounts to a taking of Twin Valley's property for constitutional purposes. But we aren't
convinced of the underlying legal premise that the agency's rejection of a greater subsidy
should be treated in the same fashion as, for example, a forced reduction in prices
charged the company's customers or even the denial of a requested price increase.
Subsidies look to be of a different character than revenues derived from actual sales or
other business operations. Moreover, the precipitating action here was the federal
government's decision to cut existing High Cost Loop subsidies, suggesting any
ostensible takings claim ought to be directed at that decision rather than at the KCC's
order.

Second, we assume Twin Valley could not enhance its rate of return to investors
by cutting costs or by increasing prices. The record appears to be silent as to manageable
cost cutting, and Twin Valley has speculated that a price increase would prompt many
customers to seek alternative telecommunications services, presumably from wireless
providers. We question whether the denial of a subsidy could be considered a
constitutional taking without direct, substantive evidence—if only in the form of well-
grounded expert testimony—that alternative business practices to either cut costs or
increase revenues would be ineffective in achieving a reasonable rate of return for
investors.

Even discarding those considerations, Twin Valley's approach remains
constitutionally infirm. Twin Valley essentially argues that a KCC order resulting in any
rate of return for a regulated business less than what has been determined to be "the
reasonable rate" amounts to a compensable constitutional taking. That broadly framed
argument is legally untenable, and we reject it. Twin Valley has not argued that the
difference between the reasonable rate of return defined in this case and the lower rate of
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return the company will realize without the enhanced KUSF subsidy is of such a
magnitude as to create a government taking. Nor has Twin Valley advanced some legal
test or economic formula for determining when a deviation from an established rate of
return amounts to a taking requiring compensation. So Twin Valley effectively says any
shortfall between the projected actual rate of return and the determined reasonable rate of
return violates the Takings Clause.

Without acknowledging as much, Twin Valley asks for a new rule to establish
regulatory takings in the context of government orders affecting utilities and other private
businesses operated in the public interest. Twin Valley cites no case authority supporting
either that rule or a government taking requiring compensation in circumstances similar
to those presented here.

The settled legal standard permits a fair amount of economic play in establishing a
constitutionally acceptable rate of return for a private company operating in an industry
regulated in the public interest. And the standard tolerates rates of return that at least
periodically fall measurably short of a predetermined reasonable rate without finding a
constitutional deprivation. In Duquesne Light Co., the United States Supreme Court
briefly surveyed nearly a century of regulatory law and reiterated the settled principle that
"the Constitution protects utilities from being limited to a charge for their property
serving the public which is so 'unjust' as to be confiscatory." 488 U.S. at 307. The Court
cited what it characterized as the landmark decision in Power Comm'n v. Hope Natural
Gas Co., 320 U.S. 591, 602, 605, 64 S. Ct. 281, 88 L. Ed. 333 (1944), for the proposition
that the United States Constitution prescribes no particular method for determining
reasonable rates for public utilities, thus supporting the principle that there is a
"constitutional range of reasonableness" within which state regulatory agencies may act.
Duquesne Light Co., 488 U.S. at 310, 312.

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In Hope, the Court recognized that the "end result" of the governmental regulatory
process cannot be "unjust and unreasonable" from the perspective of the regulated
company or its investors. 320 U.S. at 603. Consistent with Hope, the Court has since
declared: "All that is protected against, in a constitutional sense, is that the rates fixed by
the [government] be higher than a confiscatory level." FPC v. Texaco, Inc., 417 U.S. 380,
391-92, 94 S. Ct. 2315, 41 L. Ed. 2d 141 (1974). And that a rate within a "broad zone of
reasonableness" conforming to otherwise appropriate regulations will not be considered
confiscatory in the face of a constitutional challenge. Permian Basin Area Rate Cases,
390 U.S. 747, 770, 88 S. Ct. 1344, 20 L. Ed. 2d 312 (1968).

The Kansas Supreme Court, not surprisingly, has expressly embraced those
constitutional principles in evaluating KCC orders. Kansas Gas and Electric Co., 239
Kan. at 488-91. The court emphasized the zone-of-reasonableness consideration in
explaining judicial review of those orders for constitutional sufficiency. 239 Kan. at 488-
91. As the decision notes, 239 Kan. at 490-91, the Kansas Supreme Court had outlined
the mandate for rate-making review in much the same way 13 years earlier:

"There is an elusive range of reasonableness in calculating a fair rate of return. A
court can only concern itself with the question as to whether a rate is so unreasonably low
or so unreasonably high as to be unlawful. The in-between point, where the rate is most
fair to the utility and its customers, is a matter for the State Corporation Commission's
determination." Southwestern Bell Tel. Co., 192 Kan. 39, Syl. ¶ 17.

That remains the benchmark. See Moundridge Telephone Co., 2015 WL 7693784, at *26.

Measured against that benchmark, Twin Valley's constitutional takings argument
comes up short. As we have said, Twin Valley has simply argued that anything less than
the determined "reasonable rate" amounts to a constitutional taking demanding just
compensation. But the law is otherwise. The Takings Clause does not require an exact
match but a rate of return within a range of reasonableness. A rate of return must be so
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low—outside that reasonable range—as to be confiscatory to trigger constitutional relief.
Twin Valley has not shown that a 4.64% rate of return for the relevant time period to be
unreasonable or confiscatory given the circumstances of this case and the administrative
record.

Affirmed.