Kan. Appeals Court Affirms State USF Cap

A $30 million Kansas cap on state USF is constitutional, the Kansas Court of Appeals ruled last week. The court affirmed a decision by the state’s Shawnee District Court in Blue Valley Tele-Communications v. Kansas Corporation Commission (KCC).

The state appeals court rejected Blue Valley and other rural local exchange carriers’ challenge of the Kansas USF (KUSF) cap. The cap became law in 2013 but wasn't reached until 2021. When that happened, the KCC prorated KUSF payments to RLECs. The carriers sued the commission, arguing implementing the cap was an unconstitutional taking in violation of the Fifth and 14th amendments since they wouldn’t be able to earn a state-prescribed rate of return on investments.

Judge Angela Coble disagreed. “We find that some undefined diminished profit -- the amount of which is unclear because the RLECs did not provide that evidence -- does not alone amount to an unconstitutional taking.” Judges Stephen Hill and Gordon Atcheson joined the opinion in case 125352. The RLECs’ attorneys didn’t comment Thursday.

U.S. Supreme Court and Kansas case law show “the district court correctly held that a reduction in profit does not amount to a confiscatory taking under the Fifth Amendment,” Coble said. In the 1989 case Duquesne Light v. Barasch (488 U.S. 299), the U.S. Supreme Court rejected utilities' argument that implementing a new Pennsylvania law constituted a taking and said a profit reduction isn't always confiscatory, said Coble: Unlike in that case, the Kansas law wasn’t new.

Although "there is some evidence ... the RLECs will experience diminished profits, no specific numbers or other concrete evidence were provided as to the magnitude of the lost profits,” the judge said. "The mere fact that the RLECs will lose profits, in and of itself, is not enough to establish a constitutional taking. The RLECs have simply not shown that their loss of profits, without evidence of the precise loss and resulting effect on their bottom lines, falls outside the range of reasonableness such as to be considered unjust and thus confiscatory.”

The cap also doesn’t violate a Kansas law requiring LECs to choose rate-of-return or price-cap regulation, wrote Coble. "RLECs are free to continue operating under rate of return regulation, they must simply do so with the understanding that any KUSF support to RLECs is capped at $30 million.” She also rejected RLECs’ argument that the cap violates state law saying KUSF support may be modified only as a result of changes to intrastate embedded costs, revenue requirements, investments or expenses. Those factors are used determine KUSF support, but the law also says explicitly that the support is subject to the annual cap, she said.

The court also rejected an argument the cap violates a state law that says carriers of last resort are entitled to recover their costs in that role. "The RLECs presented no evidence to show that they are unable to recover the costs of serving as the carrier of last resort,” wrote Coble. “Again, they only argued they would realize less profit. As the district court succinctly held: 'The RLECs conflate costs with profit,' and we agree.”