Farmland Industries, Inc. v. State Corp. Com'n of State of Kan.

• Decision Date: 28 January 1999
• Docket Number: No. 82,055,82,055
• Citation: 25 Kan.App.2d 849,971 P.2d 1213
• Parties: FARMLAND INDUSTRIES, INC., Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Appellee. Western Resources, Inc., Kansas Gas and Electric Company, Citizens' Utility Ratepayer Board, and City of Wichita, Intervenors.
• Court: Kansas Court of Appeals

Page 1213

971 P.2d 1213

25 Kan.App.2d 849

FARMLAND INDUSTRIES, INC., Appellant, v. The STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Appellee Western Resources, Inc., Kansas Gas and Electric Company Citizens' Utility Ratepayer Board, and City of Wichita, Intervenors.

No. 82,055.

Court of Appeals of Kansas.

Jan. 28, 1999.

Syllabus by the Court

1. Contracts freely and fairly made, including those made in the field of public utilities, are favorites of the law. As a result, before a contract can be abrogated, the contract must be determined unreasonable.

2. Regarding the Kansas Corporation Commission's (KCC) role in establishing utility rates, the KCC must be given wide discretion in choosing its methodology in setting rates. As a result, the KCC is not required to use one particular formula or method in valuing a public utility's property for rate-making purposes. The KCC should receive and consider all evidence relevant to determining a reasonable value and then decide what formula, or combination of formulae, should be used under the facts and circumstances of the case.

3. The full rights of due process present in a court of law do not automatically attach to a quasi-judicial hearing. Nevertheless, the right to the cross-examination of witnesses in a quasi-judicial or adjudicatory proceeding is one of fundamental importance and is generally, if not universally, recognized as an important requirement of due process.

4. When the KCC is considering utility rate changes based on studies and underlying equations that are developed from a proprietary computer program, the failure to furnish such a program to an interested party is not a denial of due process, when the record shows that all of the necessary information entered into that program has been made available to the interested party and that program was not essential for performing the necessary calculations.

5. When a case is remanded from the appellate courts, the KCC has the power, subject to judicial review, to correct errors in the rate-making process without setting retroactive rates.

James P. Zakoura and David J. Roberts, of Smithyman & Zakoura, Chartered, of Overland Park, and Edmund S. Gross, of Farmland Industries, Inc., of Kansas City, Missouri, for appellant.

John J. McNish, advisory counsel, Glenda Cafer, general counsel, and Paula Lentz, assistant general counsel, of the Kansas Corporation Commission, for appellee.

Martin J. Bregman, of Western Resources, Inc., of Topeka, for intervenors Western Resources, Inc., and Kansas Gas and Electric Company.

Walker Hendrix and A. Brady Cantrell, of Citizens' Utility Ratepayer Board, of Topeka, for intervenor Citizens' Utility Ratepayer Board.

Gary E. Rebenstorf, city attorney, and Joe Allen Lang, first assistant city attorney, and Gregg D. Ottinger, of Duncan & Allen, of Washington, D.C., for intervenor City of Wichita.

Before GREEN, P.J., and ELLIOTT, J., and WAHL, S.J.

GREEN, P.J.

This case involves a petition for judicial review by Farmland Industries, Inc. (Farmland). Farmland challenges the Kansas Corporation Commission's (KCC) approval of a rate design settlement. We affirm.

The public utilities Kansas Gas and Electric Company (KGE) and Kansas Power and Light Company (KPL) are owned by Western Resources, Inc. (WRI). In January 1997, the KCC approved a nonunanimous settlement which reduced KGE's rates by $65 million and KPL's rates by $10 million. The KCC also adopted the WRI/KCC Staff rate design proposal. Under the settlement, special contract customers were ineligible for a rate reduction.

In Farmland Industries, Inc. v. Kansas Corporation Comm'n, 24 Kan.App.2d 172, 943 P.2d 470, rev. denied 263 Kan. ---- (1997) (Farmland I ), this court affirmed the KCC's decision to approve the nonunanimous settlement and to use a combined cost-of-service study for the purpose of achieving closer parity between the rates of KGE and KPL. We, however, disapproved the rate design, determining that the rate design was not supported by substantial competent evidence. 24 Kan.App.2d at 202, 943 P.2d 470. We remanded for further proceedings on this issue.

On remand, rate design proposals were submitted by the following parties: Farmland, Kansas Industrial Consumers (KIC), Citizens' Utility Ratepayer Board (CURB), KCC's Staff (Staff), and WRI. After hearings, the KCC adopted the WRI/Staff rate design as a compromise of competing interests.

Standard of Review

A party challenging the validity of an agency action has the burden of proving its invalidity. K.S.A. 77-621(a)(1). The standards of judicial review used in evaluating an agency action are defined in K.S.A. 77-621(c). This court shall grant relief only if it determines any one or more of the following standards is applicable:

"(4) the agency has erroneously interpreted or applied the law;

"(5) the agency has engaged in an unlawful procedure or has failed to follow prescribed procedure;

....

"(7) the agency action is based on a determination of fact, made or implied by the agency, that is not supported by evidence that is substantial when viewed in light of the record as a whole, which includes the agency record for judicial review, supplemented by any additional evidence received by the court under this act; or

"(8) the agency action is otherwise unreasonable, arbitrary or capricious." K.S.A. 77-621(c).

Briefly summarizing the scope of appellate review, our Supreme Court in Zinke & Trumbo, Ltd. v. Kansas Corporation Comm'n, 242 Kan. 470, 475, 749 P.2d 21 (1988), stated:

"If KCC action is constitutionally authorized by statute, it is presumed valid on review unless it is not supported by substantial competent evidence and is so wide of its mark as to be outside the realm of fair debate, or is otherwise unreasonable, arbitrary, or capricious and prejudices the parties."

Regarding the KCC's role in setting utility rates, in Kansas Gas & Electric Co. v. Kansas Corporation Comm'n, 239 Kan. 483, 720 P.2d 1063 (1986), the court pointed out that the KCC must be afforded wide discretion in choosing its methodology to approach the complex problems it faces. A public utility is not bound to use any one particular formula or method in valuing a public utility's property for rate-making purposes. Instead, the KCC should receive and consider all evidence relevant to determining a reasonable value and then decide what formula, or combination of formulae, should be used under the facts and circumstances of the case. 239 Kan. at 495-96, 720 P.2d 1063.

In determining whether the KCC erred in interpreting or applying the law, K.S.A. 77-621(c)(4), this court will need to consider questions of law. An appellate court has unlimited review of a question of law. Foulk v. Colonial Terrace, 20 Kan.App.2d 277, 283, 887 P.2d 140 (1994), rev. denied 257 Kan. 1091 (1995).

To assure the KCC has engaged in lawful procedures and followed prescribed procedures, K.S.A. 77-621(c)(5), the KCC must render a written decision that is concise and contains a specific statement of relevant law and basic facts that support the decision. The KCC is not required to state factual findings in minute detail, but must be specific enough to allow judicial review of the reasonableness of the order. To guard against arbitrary action, conclusions of law must be supported by findings of fact supported by evidence in the record. Zinke, 242 Kan. at 475, 749 P.2d 21.

To determine whether the KCC's action is supported by substantial evidence, K.S.A. 77-621(c)(7), the record must contain evidence "which possesses something of substance and relevant consequence, and which furnishes a substantial basis of fact from which the issues tendered can reasonably be resolved." Southwestern Bell Tel. Co. v. Kansas Corporation Commission, 4 Kan.App.2d 44, 46, 602 P.2d 131 (1979), rev. denied 227 Kan. 927 (1980).

The KCC action cannot be unreasonable, arbitrary, or capricious. See K.S.A. 77-621(c)(8). The Kansas Supreme Court has defined unreasonable action as action taken without regard to the benefit or harm of all interested parties. An agency's action is arbitrary and capricious if it is unreasonable or without foundation in fact. Zinke, 242 Kan. at 474-75, 749 P.2d 21.

Finally, in reviewing an agency order, a court must give due account to the harmless error rule. K.S.A. 77-621(d). If the agency error did not prejudice the parties, the agency's action must be affirmed. Zinke, 242 Kan. at 475, 749 P.2d 21. With the standards of review in mind, we turn to the substantive issues.

First, Farmland argues that the KCC erred in determining that Farmland and other special contract customers were ineligible to participate in the rate reduction. Further, Farmland contests the KCC's conclusion that it is not a captive customer to the KGE system. It argues these special contracts do not arise from arms-length negotiations because WRI has a retail electric monopoly that provides exclusive service within its electric service territory. See K.S.A. 66-1,171 et seq.

On the other hand, the KCC maintains that once a private contract has been approved, the contract can be set aside or otherwise interfered with only if the KCC finds the contract is unreasonable and is adversely affecting public welfare. In Kansas Power & Light Co. v. Mobil Oil Co., 198 Kan. 556, 559, 426 P.2d 60 (1967), the court pointed out that contracts freely and fairly made, including those made in the field of public utilities, are favorites of the law. Contracts negotiated by public utilities are subject to curtailment, even to the point of abrogation, by exercise of the State's police power if the contract in some measure adversely affects public welfare. 198 Kan. at 559, 426 P.2d 60.

The KCC properly determined that Farmland and other special contract customers were not a class of customers eligible to participate in the KGE rate reductions. First, the contracts are individually negotiated based upon the value of the...