Kansas Power & Light Co. v. Mobil Oil Co.

• Decision Date: 08 April 1967
• Docket Number: No. 44691,44691
• Citation: 198 Kan. 556,426 P.2d 60
• Parties: The KANSAS POWER AND LIGHT COMPANY, Appellee, v. MOBIL OIL COMPANY and Cities Service Oil Company, Appellants.
• Court: Kansas Supreme Court

Page 60

426 P.2d 60

198 Kan. 556

The KANSAS POWER AND LIGHT COMPANY, Appellee, v. MOBIL OIL COMPANY and Cities Service Oil Company, Appellants.

No. 44691.

Supreme Court of Kansas.

April 8, 1967.

Syllabus by the Court

1. Contracts which are freely arrived at and fairly made are favorites of the law.

2. The law recognizes the right of common carriers and public utilities to enter into private contracts with their customers concerning services to be rendered by them.

3. Because of the public interest with which the business of common carriers and public utilities is affected, private contracts negotiated by them are subject to be curtailed or even abrogated through the exercise of the state's police power, provided such contracts adversely affect the public's interest.

4. Private contracts may not be waved aside by mere lip service invocation of police power. Before a private contract may be curtailed or abrogated through the medium of the police power, it must be made to appear that in some measure it adversely affects the welfare of the public. (Following Wichita Railroad and Light Co. v. Court of Industrial Relations, 113 Kan. 217, 214 P. 797.)

5. Where rates are set by private contract for the transportation of natural gas, they may not be abrogated by order of the State Corporation Commission until after the existing contract rates have been investigated by the Commission and a finding made that the same are unreasonable and affect adversely the welfare of the public. (Following Central Kansas Power Co. v. State Corporation Commission, 181 Kan. 817, 316 P.2d 277.)

6. Commission approval to a change in charges set by private contract for the transportation of natural gas cannot be given in a desultory fashion or through routine procedures.

7. The record in an action to recover deficiency charges for the transportation of natural gas is examined and it is held that under the circumstances and for the reasons shown in this opinion the plaintiff may not prevail.

James L. Grimes, Jr., Topeka, argued the cause, and Robert L. Webb, Ralph W. Oman, Philip E. Buzick, William B. McElhenny, James D. Waugh, Donald J. Horttor, Terry L. Bullock, Stewart L. Entz, and James E. Smith, Topeka, were with him on the brief for appellee.

Richard Jones, Wichita, argued the cause, and W. R. Harrison, Casper, Wyo., and Gentry Lee, Cecil C. Cammack, Alfred O. Holl, and George Conger, Bartlesville, Okl., were with him on the brief for appellants.

FONTRON, Justice.

This appeal grows out of an action commenced by the Kansas Power and Light Company, the plaintiff and appellee in this case, to collect deficency charges for transporting natural gas produced from wells owned by Mobil Oil Company and Cities Service Oil Company, the defendants and appellants herein. Summary judgment was entered for the plaintiff, and the defendants have appealed. For convenience, the parties will be designated as plaintiff, or KPL, on one side, and as defendants, or Mobil and Cities Service, on the other.

From the record we glean the following facts: In January, 1956, the parties executed a twenty-year contract in which plaintiff agreed to buy certain quantities of natural gas from Mobil's predecessor, and from Cities Service (similar contracts being made between KPL and other producers in the Spivey-Grabs Field in Kingman County). The contracting parties recognized that the future production of gas from that field might exceed KPL's needs and accordingly they agreed that if, at the end of five years, excess gas was being produced from the defendants' wells, KPL would release such gas to the defendants and would transport it to a processing plant at a reasonable cost to be negotiated by the parties. The contract contained a further provision requiring arbitration of matters on which the parties were unable to agree.

As had been contemplated, excess gas was produced from the defendants' wells (as was true with other wells in the field) and a supplemental agreement was made in 1961 under which KPL was to transport the defendant's gas to Anadarko. No agreement could be reached as to the reasonable cost of transportation and the parties agreed to waive arbitration of that matter and to submit this question to the State Corporation Commission of Kansas in proceedings which KPL agreed to initiate within a reasonable time. It was agreed that an interim charge of 3.5cents per MCF would be made, but that whatever charge the Commission should find to be reasonable was to relate back to gas already delivered.

KPL did not initiate proceedings before the Commission, as it had agreed, but instead filed a schedule, hereafter referred to as Trans 1, setting up a charge of 3.79cents per MCF plus a deficiency charge of like amount in the event total deliveries from the defendants fell below a certain volume. Upon learning of this action, the defendants, apparently in conjunction with other producers in the same field, initiated proceedings themselves to have the Commission determine the reasonable cost of gathering and transporting their excess gas.

Assuming jurisdiction, the Commission set the matter for hearing and conducted a thorough investigation, hearing extensive testimony and considering a diversity of factors. On October 18, 1962, the Commission filed its order, in which it found the reasonable cost of gathering and transporting the defendants' excess gas was 2.5cents per MCF and that the charge then on file, or then being made, was not a reasonable charge for such services. The Commission concluded by ordering KPL to file and put into effect, within thirty (30) days, the 2.5cents per MCF rate and to refund the amount of all overcharges. Copies of this order were furnished all parties.

In response to this order the plaintiff, on November 21, 1962, filed a second schedule, designated as Trans 2, setting out the 2.5cents per MCF transportation charge and, in addition, listing a deficiency charge of like amount. Minutes of the Commission for that date read that it was 'moved and carried' that this filing among others, 'be noted and filed.' The recod does not show that copies of Trans 2 were furnished to Mobil or to Cities Service.

Matters seemed to have gone along smoothly until, on December 20, 1963, KPL sent statements to the defendants claiming amounts due for deficiencies occurring during the year August 27, 1962 to August 27, 1963. So far as the record reveals, and for that matter, so far as the plaintiff contends, this was the first actual notice either Mobil or Cities Service had of the deficiency charge provision included in Trans 2. Correspondence then passed between the parties, in which each defendant denied owing KPL any amount whatever. Eventually this suit was filed to recover the indebtedness allegedly due from each defendant.

The conflicting theories of the parties may be summarized briefly: The plaintiff contends that once Trans 2 was filed by the Commission, the charges set forth in that document became the legal rates to be charged and that, by statutory mandate, KPL was required to collect such charges until the same might be changed by Commission order.

In opposition, the defendants assert that once the Commission found the reasonable cost of transporting their excess gas to be 2.5cents per MCF, that cost became the contract rate and that, under their agreements with the plaintiff, KPL was bound by the 2.5cents MCF rate and could not charge or collect a higher price until that rate was legally changed by the Commission.

We agree with the rationale underlying the defendants' position. Very simply, our view is this: KPL agreed, in a written contract whose validity is not disputed, to transport excess gas produced from the defendants' wells at a reasonable cost, such cost to be determined by the Kansas State Corporation Commission; after comprehensive investigation the Commission found the reasonable cost to be 2.5cents per MCF and ordered KPL to put that rate into effect and to refund overcharges; and that by virtue of the Commission's finding that 2.5cents per MCF was the reasonable transportation cost, that figure became the contract rate.

It is an ancient legal maxim that contracts freely and fairly made are favorites of the law. This, we believe, is as true in the field of public utilities as it is elsewhere. Many years ago, the right of public utilities and common carriers to enter into contracts for the sale of their services was expressly recognized by statute, and today K.S.A. 66-108 requires that all contracts between common carriers or public utilities, pertaining to services to be rendered by them, be filed with the State Corporation Commission.

The right of public utilities to negotiate private contracts with their customers was accorded judicial recognition in Central Kansas Power Co. v. State Corporation Commission, 181 Kan. 817, 316 P.2d 277, where this court said:

'The Kansas Public Utility Act expressly recognizes that gas sales rates to individual customers may be set by private contract, by providing that such contracts shall be filed for approval by the commission (G.S.1949, 66-108). The act indicates no purpose to abrogate private rate contracts as such. (pp. 826-827, 316 P.2d p. 285.)

Because of the public interest with which the business of common carriers and public utilities is affected, private contracts negotiated by them, it is true, are subject to curtailment, or even to abrogation, through the medium of the exercise of the state's police power, provided the public welfare is being adversely affected by such contracts. (Wichita Railroad and Light Co. v. Court of Industrial Relations, 113 Kan. 217, 214 P. 797; Central Kansas Power Co. v. State Corporation Commission, supra.) However, this court said in Wichita Railroad and Light Co. v. Court of Industrial Relations, supra:

'But contracts cannot be...