City of Chanute v. Kansas Gas and Elec. Co.

Decision Date01 June 1983
Docket NumberNo. 83 1104.,83 1104.
Citation564 F. Supp. 1416
PartiesCITY OF CHANUTE, City of Iola, and City of Fredonia, Plaintiffs, v. KANSAS GAS AND ELECTRIC COMPANY, Defendant.
CourtU.S. District Court — District of Kansas

Charles Apt, Glaves, Weil & Evans, Wichita, Kan. and Charles F. Wheatley, Jr., Don Charles Uthus, Peter A. Goldsmith, Wheatley & Wollesen, Washington, D.C., for plaintiffs.

Ralph Foster, J. Michael Peters, Wichita, Kan., for defendant.

Kansas Corp. Com'n, Brian J. Moline, Topeka, Kan., amicus curiae.

MEMORANDUM

CROW, District Judge.

Plaintiff cities of Chanute, Fredonia and Iola (cities) have filed this action against Kansas Gas and Electric Company (KG & E) alleging violations of Sections 1 & 2 of the Sherman Act, Section 3 of the Clayton Act, and K.S.A. §§ 50-101, 50-112. Cities have brought suit under the appropriate jurisdictional statutes, 15 U.S.C. § 15 and K.S.A. §§ 50-108, 50-115. The matter is presently before the court on cities' motion for preliminary injunction pursuant to 15 U.S.C. § 26, which authorizes injunctive relief in a private suit premised on the Sherman or Clayton Acts.

The court has had the benefit of testimony presented during an evidentiary hearing held May 12, 13, and 24, 1983, and has reviewed the briefs submitted by the parties. Prior to the hearing, the Kansas Corporation Commission (KCC) filed a motion for permission to participate in the case as an Amicus Curiae, a motion which the court granted. The court has also reviewed the brief filed by the KCC which addresses certain public interest considerations involved in this case.

The court previously informed the parties by an order dated May 27, 1983, of its decision to grant cities' motion for a preliminary injunction. The timing of that order was necessitated by the June 1, 1983 date, when the city of Fredonia will be able to begin receiving power from the Nearman Creek generating plant under its contract with the Kansas Municipal Energy Agency. The court wished to provide the parties with as much time as possible under the circumstances to make the necessary arrangements for wheeling the Nearman Creek power. This memorandum sets forth the court's reasons for granting the motion for preliminary injunction.

Factual Background

Each plaintiff city owns and operates its own electric generation and distribution system. They distribute electricity at retail to customers within their respective service areas. Their service areas include customers within each city, and extend outward to a 3-mile boundary from the city limits. The cities generate some of the power they sell at retail, and supplement their generation capabilities with power purchased at wholesale from Kansas Gas and Electric Company to meet their additional energy demands. The cities have been able to realize a net profit from the operation of their own utility systems.

KG & E is an investor-owned public utility which generates, purchases, transmits at wholesale, and distributes at retail, electric power. Its service area comprises 81,000 square miles of Southeast Kansas. It supplies retail power to 140 cities, and wholesale power to 25 cities. It owns or controls the only electric transmission facilities connected to the cities' distribution lines, and is presently the only supplier of wholesale electric power to the cities. KG & E serves its retail customers in service areas certified by the Kansas Corporation Commission. KG & E serves customers in certified areas adjacent to each of the cities' service areas. KG & E also sells retail power, under franchise agreements, to a company located within Iola's city limits and a company outlying the city limits of Fredonia.

KG & E previously entered into interconnection agreements with the cities. Each contract contains a schedule A, which enables the cities to purchase firm power, or electricity available upon request, from KG & E. Its agreement which Chanute began on July 1, 1970, for an initial period of 20 years. An agreement with Fredonia commenced March 15, 1961, for an initial period of 25 years, and an agreement with Iola commenced April 13, 1962, for an initial 25-year period. These contracts contain many similar terms, including a provision that rate change requests are limited in frequency to, at most, every five years. It is undisputed that this provision is presently a favorable one for the cities. While there is a provision for transmitting power of one municipal customer of KG & E to another, it is also undisputed that the interconnection agreements are silent on the issue of use of KG & E's transmission facilities to transmit power generated by a source other than KG & E.

KG & E is currently seeking a rate change under these contracts. The contracts provide that in the event negotiation over rate change requests are unavailing, the matter is to be submitted to arbitration. Cities have taken the position in arbitration that their current rate should remain unchanged, while KG & E has requested increases in both demand and energy charges. See Amendment No. 32 Schedule A of plaintiffs' exhibits 2, 5 and 9, and plaintiffs' exhibits 4 and 8. The city of Iola will incur whatever energy rate is finally approved, however based upon its past experience of not paying demand charges it does not anticipate incurring the cost of whatever demand rate is ultimately approved. The parties presently await the decision of the arbitrators.

KG & E has adopted a position with regard to furnishing the future firm power energy needs of its municipal wholesale customers. Testifying before the FERC on June 22, 1981, the president of KG & E, Wilson Cadman, responded to questions concerning this position:

"Q So would you say this is a fundamental shift in policy by your company that up to this time you have been willing to serve municipals at wholesale, but for the future you feel you're not going to serve them at wholesale; they ought to fend for themselves?
A We'll continue to serve them at wholesale as their needs arise. It is not our intention to build new capacity. They have another option.
Q Well, to the extent that you have served all-requirements municipal customers for years, it's your position that to the extent they need future requirements, growth, that you are not going to serve them. They've got to look elsewhere.
A If they can do that, if they have that option open to them, as do the generating municipals, then yes, that would be the case. Here again you have to look at a slightly different kind of arrangement.
Q Well, when did you make this basic policy change, Mr. Cadman?
A Can't give you an exact date, but it's an accumulation of things. It's an accumulation of regulatory lag, spiraling interest rates of high cost of construction. It's just a number of things that have caused many policy changes in our business.
. . . . .
Q Now, to the extent that a municipal's request of the company for additional firm power required you to construct new facilities, then I take it from what you've been indicating to me earlier today it would be the company position that you would not provide any additional firm power to that municipal. Is that correct?
A Yes. That is our philosophy, except under whatever contractual obligation we have, which I believe I said we would not in any way intend to repudiate."

Plaintiffs' Exhibit 1. KG & E's position was characterized by Ernest A. Leaman, manager of rates for the utility, as a policy designed to encourage municipalities to develop their own power plans to accommodate future growth needs.

Each city has acquired an outside source of supplemental electricity. On December 1, 1982, Fredonia entered into a contract with the Kansas Municipal Energy Agency to purchase five megawatts, or 5,000 kilowatts, of participation power in the Nearman Creek generating plant, operated by the Kansas City, Kansas, Board of Public Utilities, for the estimated 30-year life of the plant. Fredonia is scheduled to begin receiving this power June 1, 1983, and will be liable for demand charges whether or not energy is transmitted. Patrick R. Flynn, superintendent of Fredonia, estimates that demand charges would be $28,500 per month, and further estimates the total for the remainder of 1983 to be in excess of $199,000, which would increase in 1984 to $410,000, and in 1985 $499,000. At least part of this loss would be offset by the fact that power rates under Fredonia's current contract with KG & E are presently lower than the anticipated delivery cost of the Nearman Creek power.

Chanute and Iola each received 5-year allocations of federally generated hydro-electric power from the Southwestern Power Administration (SWPA) scheduled to begin January 1, 1984. Chanute has been allocated 1,100 kilowatts in 1984 and an additional 700 kilowatts in 1985. Iola has been allocated 800 kilowatts in 1984 and an additional 600 kilowatts in 1985. James A. Wilson, superintendent of public utilities for Iola until his retirement two months ago, testified that SWPA preferential power, power available to a public utility, has never been made available to Iola in the past. Ronald L. Reed, director of Chanute's electric utility, agreed that SWPA hydropower is one of the lowest cost power sources available. Mr. Reed, as well as Mr. Wilson, anticipate that the cities will seek, at the conclusion of their five-year allotment, to continue their allocations as a preference customer. It is not disputed that rates under the cities' current contracts with KG & E are presently lower than the estimated delivery costs of SWPA power.

A condition to receiving the SWPA power is that Chanute and Iola secure necessary transmission arrangements by January 1, 1984. The cities' understanding is that arrangements for transmission should be in place this summer. The SWPA announced these allocations in the Federal Register on March 24, 1980, and provided:

"In the event the assumptions set forth above prove invalid, or the preference customer (all
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