KN Energy, Inc. v. Great Western Sugar Co.

• Decision Date: 14 January 1985
• Docket Number: No. 82SC322,82SC322
• Citation: 698 P.2d 769
• Parties: KN ENERGY, INC., a Kansas corporation, Petitioner, v. The GREAT WESTERN SUGAR COMPANY, a Delaware corporation, Respondent, and Northern Natural Gas Co., a Delaware corporation, Defendant.
• Court: Colorado Supreme Court

Page 769

698 P.2d 769

KN ENERGY, INC., a Kansas corporation, Petitioner, v. The GREAT WESTERN SUGAR COMPANY, a Delaware corporation, Respondent and Northern Natural Gas Co., a Delaware corporation, Defendant.

No. 82SC322.

Supreme Court of Colorado En Banc.

Jan. 14, 1985.

Rehearing Denied Feb. 4, 1985.

Certiorari Denied June 17, 1985. See 105 S.Ct. 3489.

Bruce D. Pringle, James A. Clark, Baker & Hostetler, Denver, William R. Smith, Hershberger, Patterson, Jones & Roth, Wichita, Kan., John T. Miller, Washington, D.C., for petitioner KN Energy, Inc.

Hardin Holmes, Kenneth L. Starr, Jeffrey Reiman, Holmes & Starr, P.C., Denver, for respondent The Great Western Sugar Co.

John H. Cheatham, III, Washington, D.C., for amicus curiae Interstate Natural Gas Ass'n of America.

DUBOFSKY, Justice.

We granted certiorari to review Great Western Sugar Company v. Northern Natural Gas Company, 661 P.2d 684 (Colo.App.1982), ¹ in which the Court of Appeals affirmed a district court order granting partial summary judgment on the liability of KN Energy, Inc. (KN) arising from its natural gas supply contract with Great Western Sugar Company (GW), as well as a subsequent jury verdict awarding damages to GW. The Court of Appeals also affirmed a number of the district court's evidentiary rulings. We limited certiorari review to the following issues: (1) whether the district court erred in granting partial summary judgment on liability; and (2) whether the district court erred in excluding from evidence certain expert testimony, a number of Federal Energy Regulatory Commission (Commission) orders, ² tariffs filed before the Commission by KN, and a number of KN's certificates of public convenience and necessity. We affirm the decision of the Court of Appeals.

KN is a natural gas pipeline company regulated by the Commission under the provisions of the Natural Gas Act. 15 U.S.C. § 717 et seq. (1976). Beginning in 1955, KN executed a series of contracts with GW obligating KN to supply the natural gas requirements of GW's sugar processing plants in Ovid and Sterling, Colorado, and Scottsbluff, Nebraska. The initial contract for each site provided that service to GW's boilers and dryers was "interruptible" ³ and that KN

in its absolute discretion and without liability to Buyer for damages or otherwise shall have the right to and at any time with or without notice may interrupt in whole or in part delivery of natural gas to Buyer as and whenever from time to time Vendor in its sole judgment may deem necessary or expedient for conservation of gas for domestic use or industrial use having prior classification.

This language remained in all KN-GW agreements until March 1973, when KN revised the provision to permit interruptions in order to meet the demands of "users having a higher priority of service." ⁴

The agreements between KN and GW also contained a "force majeure" clause, which provided that KN would not be liable for any failure of delivery resulting from any of a series of enumerated supervening circumstances, including the "order or requirement of competent authority...." In addition, beginning in March 1973, KN inserted the following clause into the contracts:

This agreement and the respective rights and obligations of the parties hereto are subject to all valid and applicable laws and orders, rules and regulations of duly constituted authorities having jurisdiction or control over the parties, KN's facilities and gas supply, or any transaction contemplated hereby.

KN also supplied gas indirectly to a GW sugar plant in Goodland, Kansas, through a service agreement with the People's Natural Gas Division of the Northern Natural Gas Company (People's-Northern). People's-Northern in turn transmitted the gas to GW under a sales agreement. The service agreement between KN and People's-Northern provided for delivery of

all the natural gas required by Buyer from day to day up to the amount of the Billing Demand plus ... the Winter Period Demand on a firm basis but in no case is Seller to be required to furnish on any day a volume larger than the then existing Billing Demand plus ... the Winter Period Demand.... Seller also agrees to make deliveries of gas to Buyer in daily volumes in excess of the Billing Demand plus ... the Winter Period Demand on an interruptible basis when gas and facilities are available for making such deliveries.

Billing Demand plus Winter Period Demand comprised the gas supplied on a firm basis. People's-Northern sold only interruptible gas to GW for its Goodland boilers and dryers. The agreement contained clauses concerning force majeure and the effect of administrative regulations similar to the clauses contained in the service agreements between KN and GW.

From 1955 until November 1973, KN determined when to interrupt both its direct and indirect gas service to GW by utilizing what the parties refer to as the "historical twenty-four to thirty-six hour analysis." Under this analysis, KN's gas dispatchers estimated anticipated demand for the coming twenty-four to thirty-six hours on the basis of weather forecasts. If, due to the estimated demand, KN would be unable to maintain sufficient pressure in its pipelines to serve its firm customers, KN would cut off gas supply to its interruptible customers, including GW. In estimating its ability to maintain pipeline pressure, KN did not distinguish among its available sources of gas; pressure was maintained by withdrawing gas from both production and storage fields.

On November 7, 1973, KN instituted a new policy for determining when to sever service to interruptible customers. Under this policy, known as the "storage withdrawal interruption policy," gas deliveries to interruptible customers were to be cut off whenever KN withdrew gas from storage, regardless of KN's ability to maintain pipeline pressure by using gas from storage. ⁵

On November 8, 1973, KN representatives met with GW representatives at the GW offices in Denver. At that meeting, KN proposed that the gas sales contract then in effect be terminated and replaced with a new contract in order to incorporate certain changes in the rate schedule; the KN representatives reassured GW that, other than the rate changes, the proposed new contract would be "identical" to the previous agreement. The KN representatives testified that they notified GW at that time of KN's new policy regarding interruption of service. ⁶ One of the GW representatives present at the meeting denied being informed of the change in policy. After the meeting GW executed the new contract to be effective on November 14, 1973. With the exception of the rate changes, the contract adopted was identical to the March 1973 contract.

Early in 1978, GW instituted an action for damages against People's-Northern and KN, alleging that the defendants had breached their contractual gas delivery obligations by instituting the storage withdrawal interruption policy, ⁷ and that the defendants had fraudulently failed to disclose this change in policy. The defendants moved to refer GW's claims to the Commission, asserting that the Commission had primary jurisdiction over such claims. The district court denied the motion.

In November 1978, GW moved for partial summary judgment against KN on the ground that, as a matter of law, KN had breached its contractual obligations for delivery of gas to the Ovid, Sterling and Scottsbluff plants by unilaterally changing the standard under which it determined when to interrupt delivery. KN filed a cross-motion for summary judgment, contending that the contract unambiguously permitted KN to exercise its discretion in determining what circumstances required interruption of service; that certain Commission orders, as well as KN's tariffs and certificates of public convenience and necessity on file with the Commission, required KN's change in interruption policy; and that because the policy change was lawful, there was no basis for a claim of fraud. The district court granted GW's motion and denied KN's motion, ruling that the plain language of the contract required KN to adhere to its earlier twenty-four to thirty-six hour historical analysis and that the contract did not allow KN to withhold storage gas from GW. The court also determined that the contract language was consistent with the parties' course of dealing from 1964 until November 1973.

GW filed a second motion for partial summary judgment against KN, arguing that KN's storage withdrawal interruption policy was also in breach of its service agreement with People's-Northern and that KN was liable to GW for the breach because GW was a third party beneficiary of the agreement. The district court ruled that, as a matter of law, the service agreement obligated KN to deliver interruptible gas to Northern as long as it was physically able to do so, that the 1973 policy change regarding interruption resulted in a breach of the agreement, and that GW was a direct beneficiary of the service agreement. However, the court denied the motion for summary judgment, ruling that the factual question of whether KN and People's-Northern intended to confer benefits upon GW or a class of customers that included GW was for the jury to decide.

At trial, the court directed a verdict in favor of People's-Northern on the fraud claim at the close of the plaintiff's case-in-chief. Following the presentation of evidence, the jury found that KN was not liable on the fraud claim and that People's-Northern was not liable on the contract claim. The jury awarded GW $775,000 in damages arising from the breach of KN's direct gas sales contracts with GW. The jury also found that GW was an intended beneficiary of the service agreement between KN and People's-Northern, and awarded GW $225,000 in damages arising from breach of the agreement. Following the jury verdicts, the court awarded pre-judgment interest and costs to GW, and entered a judgment against KN in the amount of $1,350,229.

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