Wheatland Elec. Coop., Inc. v. City of Garden City

Decision Date03 December 2021
Docket Number123,061
Citation61 Kan.App.2d 343,504 P.3d 447
Parties WHEATLAND ELECTRIC COOPERATIVE, INC., Appellant, v. CITY OF GARDEN CITY, Kansas, Appellee.
CourtKansas Court of Appeals

James M. McVay, of Wheatland Electric Cooperative, Inc., and Allen G. Glendenning, of Watkins Calcara, Chtd., of Great Bend, for appellant.

Timothy J. Sear, Frank Caro Jr., and Andrew O. Schulte, of Polsinelli PC, of Kansas City, Missouri, and Randall D. Grisell, of Doering, Grisell & Cunningham, P.A., of Garden City, for appellee.

Before Buser, P.J., Hill and Isherwood, JJ.

Hill, J.:

All Kansas public utilities are regulated by the State of Kansas. To further this regulatory policy, the Legislature enacted the Retail Electric Suppliers Act, K.S.A. 66-1,170 et seq. The Act directs the Kansas Corporation Commission to decide what entity is responsible for providing electricity to Kansas consumers located outside our cities.

In a case of first impression, this appeal presents us with three questions that arise from applying the Act. First, can an oral agreement between a city manager and the general manager of an electric cooperative allowing the city to provide electricity to a territory outside that city be enforceable, even though that agreement has not been approved by the Commission as required by the Act? Second, can the equitable doctrines of laches, estoppel, and waiver render such a contract valid, even though that contract is void according to the statutes? Third, may a supplier of electricity receive compensation under the Act after a city annexes part of that supplier's territory even if the supplier had not been serving customers in the area because of an informal agreement between the parties?

How this appeal arose.

When Garden City annexed some adjacent land where an ethanol plant was located, Wheatland Electric Cooperative, Inc., a public utility that supplies electricity in central and western Kansas and eastern Colorado, claimed it had exclusive rights to provide electricity in that territory and sued the City for compensation, citing the Act as authority. The district court granted summary judgment to the City on three grounds.

• Wheatland had transferred its service rights to the City years earlier by oral agreement.
• The equitable doctrines of laches, estoppel, and waiver bar Wheatland from repudiating its agreement with the City.
• Because Wheatland had not provided electricity to any consumers in the annexed territory before it was annexed, it has no right to compensation under the Act after the territory was annexed.

Wheatland brings this appeal.

The record reflects a history of cooperation between the parties and a handshake agreement.

Under the Act, the Commission regulates the supply of electricity by public utilities to customers located outside the corporate boundaries of cities. The Commission has divided all of the state into territories, and each territory generally has just one electricity supplier serving all consumers within it. The Commission assigned to Wheatland the service area surrounding Garden City in 1977. Wheatland maintained the exclusive rights to provide retail electric service in all of that area until at least 2004 or 2005. In fact, Wheatland generates and provides electricity to Garden City and Garden City, in turn, supplies electricity to consumers within the city limits.

Sometime in 2004 or 2005, Garden City's city manager met with Wheatland's general manager to discuss retail electric service at a site just outside the city limits. The site was within Wheatland's service area, but Garden City, the retail electric supplier within its own limits, wanted to supply electricity to the site at a subsidized rate as part of an incentive package to attract an ethanol plant. Because of certain financing conditions, the company building the ethanol plant did not want to be located in an area annexed by Garden City. This is important because Garden City could have simply annexed the land at that time or at any time after that.

Wheatland's general manager agreed to let Garden City supply electricity to the ethanol plant. The general manager and the city manager did not discuss the arrangement again, and there was never a written agreement. Neither Garden City's City Commission nor Wheatland's Board of Trustees formally authorized or ratified this agreement. And neither party submitted the agreement to the Commission for its approval.

Under the agreement, Garden City, in 2007, began supplying electricity to the ethanol plant and an office building containing the plant's offices. Then in 2012, the City began supplying electricity to two more businesses in the same area. The City spent around $800,000 to construct the infrastructure necessary to supply electricity to the four customers. Wheatland either supported or did not object to Garden City supplying electricity to these other customers. Wheatland, in fact, earned about $1.9 million from 2007 to 2013 by selling electricity to the City that the City then sold to the ethanol plant.

Few relationships last forever. A new general manager took over at Wheatland in 2012. In 2015, the new manager wrote to the City, saying that Wheatland wanted to begin supplying electricity to the ethanol plant and asking the City to work with it on a transition plan. The City rejected that request, stating that it had a contractual relationship with Wheatland and that it intended to keep supplying the plant with electricity. Wheatland informed the City that it no longer agreed to any arrangement with the City and that it was Wheatland's right and obligation to supply electricity to the plant. Wheatland's manager wrote in terms of acquiescence:

"If it is true that Wheatland acquiesced to the City serving [the ethanol plant], it certainly is no longer the case. ... We recently determined that [the ethanol plant] is still within Wheatland's certified service territory. Therefore, Wheatland has a right and obligation to serve this load.
"Therefore, Wheatland puts the city on notice that it no longer will agree, if it ever formally did, that the City would be allowed to serve [the ethanol plant]."

Two years later, in 2017, Wheatland filed a complaint against Garden City with the Commission. The complaint asked the Commission to order Garden City to stop supplying electricity to the plant. In a reply to the Commission's certified questions, Wheatland described several scenarios under which it could begin supplying electricity to the plant. Those included paying local access charges to Garden City to use its infrastructure or purchasing a substation from Garden City, which would allow immediate service, and installing a mobile substation, which would take six to eight weeks to build.

Garden City argued to the Commission that Wheatland had ceded the territory based on the oral agreement and asked the Commission to ratify the agreement by transferring service rights for the area from Wheatland to the City. But employing a different strategy, Garden City then annexed the three parcels of land that contained the ethanol plant and the other customers it had been serving. After that, Garden City moved to dismiss Wheatland's complaint, saying there was no longer a case or controversy because the Commission lacked jurisdiction over electric service within city limits. Wheatland acknowledged that the annexation had rendered its petition moot. Garden City designated itself the new electric supplier for the customers in the annexed territory.

In the end, the Commission dismissed Wheatland's complaint and chided the parties. The Commission found that "Garden City, by providing retail electric service outside of its city boundaries without Commission authority, and Wheatland, by acquiescing to and allowing such unauthorized service by Garden City, both violated K.S.A. 66-1,173." The Commission also noted that it could rightfully assess civil penalties under K.S.A. 66-138 for the failure to follow the Act's requirements, but it ultimately refrained from doing so. In conclusion, the Commission held that it was "troubled by the resources that have been consumed, some at ratepayer expense, in the Commission's adjudication of a Complaint that should have been avoided by the parties’ adherence to the law."

After the Commission dismissed the complaint, Wheatland sued Garden City in Finney County District Court seeking compensation under K.S.A. 2017 Supp. 66-1,176. That statute requires "fair and reasonable" compensation to be paid to an electric supplier that has part of its service area annexed. If the parties cannot agree on what compensation is "fair and reasonable," then the statute permits the supplier to receive "an amount equal to two times the gross revenues attributable to the customers in the terminated territory" over the next year. K.S.A. 2017 Supp. 66-1,176(c)(3). Wheatland sought more than $7 million based on that provision. That amount reflects two times the gross revenues attributable to the four customers in the area Garden City annexed. Nearly all that revenue is attributable to the ethanol plant's electricity usage.

Both Wheatland and Garden City submitted their cases to the district court through motions for summary judgment. Wheatland argued that any agreement it had with Garden City was void because the Act requires the Commission to approve any agreements that alter service areas, and the Commission had never done that. Because of that, Wheatland contended that it had retained the exclusive rights to supply electricity in the area that Garden City annexed, so it was entitled to compensation under K.S.A. 2017 Supp. 66-1,176. Garden City argued that it had a contractual right to serve the disputed territory, that the compensation statute did not apply because Wheatland had no customers in the territory, and that various equitable principles should prevent Wheatland from receiving compensation.

The court ruled on both motions for summary judgment. It denied Wheatland's motion,...

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