24 Kan. App. 2d 172
No. 78,637
FARMLAND INDUSTRIES, INC., BOARD OF COMMISSIONERS OF JEFFERSON COUNTY, KANSAS, KANSAS PIPELINE PARTNERSHIP, BOEING COMPANY, GENERAL MOTORS CORPORATION, VULCAN MATERIAL, INC., CEREAL FOOD PROCESSORS, INC., and HEARTLAND CEMENT COMPANY, Appellants, v. THE STATE CORPORATION COMMISSION OF KANSAS, Appellee.
WESTERN RESOURCES, INC., KANSAS GAS AND ELECTRIC COMPANY, CITIZENS' UTILITY RATEPAYER BOARD, and CITY OF WICHITA, Intervenors.
SYLLABUS BY THE COURT
1. K.S.A. 77-621, regarding the scope of judicial review of an administrative agency action, is construed and applied.
2. K.A.R. 82-1-231, regarding public utility rate applications, is construed.
3. Under the facts of this case, although the nature of the utilities' applications before the Kansas Corporation Commission changed from an integrated rate plan to a cost-of-service rate proceeding, the initial notice furnished to the utilities' customers was adequate to inform customers of the main scope of the utilities' applications.
4. K.A.R. 82-1-225(c), regarding intervention by a party in a proceeding before the Kansas Corporation Commission, is construed.
5. Because the Kansas Corporation Commission has broad powers in setting just and reasonable electric rates, it has the power to approve a nonunanimous settlement agreement.
6. K.A.R. 82-1-241, regarding an intervenor's application for compensation under the Public Utility Regulatory Policies Act of 1978, is construed.
Appeal from Kansas Corporation Commission. Opinion filed August 1, 1997. Affirmed in part, reversed in part, and remanded.
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 Farmland Industries, Inc.
Daniel D. Owen, of Shughart Thomson & Kilroy, P.C., of Overland Park, for appellant Board of Commissioners of Jefferson County.
Fred J. Logan, Jr., of Logan & Logan, of Prairie Village, for appellant Kansas Pipeline Partnership.
Robert C. Johnson and Diana M. Schmidt, of Peper, Martin, Jensen, Maichel and Hetlage, of St. Louis, Missouri, and Robert Van Cleave, of Gates & Clyde, Chartered, of Overland Park, for appellants Boeing Company, General Motors Corporation, Vulcan Material, Inc., Cereal Food Processors, Inc., and Heartland Cement Company.
Larry M. Cowger, John J. McNish, and Janette W. Corazzin, of the Kansas Corporation Commission, for appellee.
J. Michael Peters and Martin J. Bregman, of Western Resources, Inc., and Kansas Gas and Electric Company, of Topeka, John D. Petersen and Frank A. Caro, Jr., of Polsinelli, White, Vardeman & Shalton, a Professional Corporation, of Overland Park, and Mike Lennen, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, for intervenors Western Resources, Inc., and Kansas Gas and Electric Company.
Walker Hendrix, of Citizens' Utility Ratepayer Board, of Topeka, for intervenor Citizens' Utility Ratepayer Board.
Gregg D. Ottinger, of Duncan & Allen, of Washington, D.C., Gary E. Rebenstorf, city attorney, and Joe Allen Lang, first assistant city attorney, for intervenor City of Wichita.
Before GREEN, P.J., ELLIOTT, J., and WAHL, S.J.
GREEN, J.: This case involves a number of challenges to the Kansas Corporation Commission's (KCC) approval of two nonunanimous settlement agreements setting revenue requirements and rate design charges for electricity of two public utilities. The two utilities, Kansas Gas and Electric Company (KGE) and Kansas Power and Light Company (KPL), are owned by Western Resources, Inc. (WRI). Nevertheless, the utilities exist as separate entities for tax and rate-making purposes. Seeking judicial review of the order approving these settlements, Farmland Industries, Inc. (Farmland), Kansas Pipeline Partnership (KPP), Kansas Industrial Consumers (KIC), and the Board of Commissioners of Jefferson County (Jefferson County) all filed petitions for review. The appellants challenge the sufficiency of the evidence supporting KCC's order and allege that the notice furnished to KGE and KPL customers was inadequate.
Farmland is a commercial customer that uses between $12 and $15 million worth of electricity annually. KPP is a natural gas utility that has been deeply involved in promoting competitive energy markets in Kansas. KIC is a group of large consumers of electricity and gas in the state of Kansas, which includes Boeing Company, General Motors Corporation, Vulcan Material, Inc., Cereal Food Processors, Inc., and Heartland Cement Company. Jefferson County has a significant number of KPL residential customers living within its boundaries.
The intervenors were WRI; the Citizens' Utility Ratepayer Board (CURB), a state agency created to represent residential and small commercial ratepayers in proceedings to regulate public utilities; and the City of Wichita, a party that pays a $12 million-a-year electric bill to KGE and that is concerned with the difference between the higher rates of KGE and the lower rates of KPL.
In August 1995, WRI, on behalf of KGE, KPL, and WRI's natural gas division, filed three applications with KCC. WRI proposed an integrated rate plan that would take effect at the same time in all three cases. As a result of changes in depreciation and proposed increases in natural gas rates, WRI proposed rate reductions for KGE customers of $8.7 million a year for 7 years and no change in KPL rates for 7 years. In December 1995, KCC scheduled public hearings and directed KPL and KGE to furnish notice to customers of the applications and hearings. Although WRI's original three applications were consolidated on November 1, 1995, KCC later directed that the natural gas proceeding be handled separately.
On May 22, 1996, WRI moved to amend its applications in support of its present rates, requesting permission to file its own cost-of-service studies. On June 14, 1996, KCC granted WRI's request to amend its application to allow filing of cost-of-service information and restarted the 240-day time period of K.S.A. 1996 Supp. 66-117(b), effective May 22, 1996. The amended application changed the proceedings into a traditional cost-of-service rate case for KGE and KPL. No additional notice was sent to KPL and KGE customers about changes in the nature of the proceedings.
On August 9, 1996, WRI, KCC staff (Staff), CURB, and the City of Wichita asked KCC to approve a nonunanimous settlement agreement resolving the amount of money the utilities would be allowed to collect in rates and how this amount would be spread among KGE and KPL customers. During the hearings for approval of the settlement, Gary C. Harpster, a KPP witness, testified that Staff had made an error in analyzing WRI's cost of service. As a result, Staff increased the amount it contended KGE was over-earning by $32 million. Based on the possible impact of this error on the settlement negotiations, KCC rejected the settlement agreement.
After an amended settlement was submitted, KCC conditionally approved it and set hearings to begin on November 5, 1996. Following the hearings, KCC orally approved the amended settlement agreement. After KCC approved the amended settlement agreement, Staff and WRI submitted a proposal on rate design. At the same time, Farmland, KIC, and CURB submitted the customers' proposal on rate design. KCC adopted Staff and WRI's proposal and rejected the customers' proposal.
Standard of Review
Our standard of review is set forth in K.S.A. 77-621, which codifies principles repeatedly recognized by the Kansas courts. See Kansas Gas & Electric Co. v. Kansas Corporation Comm'n, 239 Kan. 483, 497, 720 P.2d 1063 (1986); Midwest Gas Users Ass'n v. Kansas Corporation Commission, 3 Kan. App. 2d 376, 380-81, 595 P.2d 735, rev. denied 226 Kan. 792 (1979). The party asserting the agency action is invalid has the burden of proving its invalidity. K.S.A. 77-621(a)(1).
In Midwest, our court stated:
| "A court has no power to set aside [a KCC] order unless it finds that the commission acted unlawfully or unreasonably. [Citation omitted.] An order is 'lawful' if it is within the statutory authority of the commission, and if the prescribed statutory and procedural rules are followed in making the order. [Citation omitted.] An order is generally considered 'reasonable' if it is based on substantial competent evidence. [Citation omitted.]
"The legislature has vested the commission with wide discretion and its findings have a presumption of validity on review. [Citation omitted.] Since discretionary authority has been delegated to the commission, not to the courts, the power of review does not give the courts authority to substitute their judgment for that of the commission. [Citation omitted.] The commission's decisions involve the difficult problems of policy, accounting, economics and other special knowledge that go into fixing utility rates. It is aided by a staff of assistants with experience as statisticians, accountants and engineers, while courts have no comparable facilities for making the necessary determinations. [Citation omitted.] Hence a court may not set aside an order of the commission merely on the ground that it would have arrived at a different conclusion had it been the trier of fact. It is only when the commission's determination is so wide of the mark as to be outside the realm of fair debate that the court may nullify it. [Citations omitted.]" 3 Kan. App. 2d at 380-81.
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In Zinke & Trumbo, Ltd. v. Kansas Corporation Comm'n, 242 Kan. 470, 473-75, 749 P.2d 21 (1988), our Supreme Court noted that after a court considers all the named reasons for vacating an agency order, the legislature provided administrative bodies with an escape clause by requiring in K.S.A. 77-621(d) that courts give "due account" to the harmless error rule. Therefore, if the agency error did not prejudice the parties, the agency's action must be affirmed. Summarizing briefly the scope of appellate review, the court states:
| "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." 242 Kan. at 475. |
With these standards of review in mind, we turn to the substantive issues.
I. WAS NOTICE TO KGE AND KPL CUSTOMERS PROPER?
Sufficiency of notice is a legal question. Therefore, this court may substitute its judgment for that of the agency. Crawford v. Kansas Dept. of Human Resources, 17 Kan. App. 2d 707, 708, 845 P.2d 703, (1989), rev. denied 246 Kan. 766 (1990). However, this court gives due deference to the agency's expertise and technical knowledge of the subject it is charged with regulating. See State Dept. of SRS v. Public Employee Relations Board, 249 Kan. 163, 166, 815 P.2d 66 (1991).
A. Was the notice given adequate?
Although KCC and WRI argue that no notice of the rate-making process was due ratepayers, we will first address the issue of whether the notice given was adequate. If we determine that the notice was adequate, we need not address KCC's and WRI's arguments that no notice was required.
Appellants argue that notice given KGE and KPL customers was inadequate because it did not advise ratepayers of the true nature of the proceeding after it became a traditional cost-of-service rate case. In Mullane v. Central Hanover Tr. Co., 339 U.S. 306, 314, 94 L. Ed 865, 70 S. Ct. 652 (1950), the Court noted that while the fundamental requisite of due process of law is the opportunity to be heard, this right has little reality or worth unless one is informed of the pending matter and can decide whether to participate. The Court discussed the inadequacy of providing notice by publication and the preference for personal service, especially when names and addresses of trust beneficiaries are known and available. 339 U.S. at 317-18. Yet, the Court recognized that interests must be balanced to determine what notice is required in a particular situation. 339 U.S. at 314. "A construction of the Due Process Clause which would place impossible or impractical obstacles in the way [of the State reaching a final decision] could not be justified." 339 U.S. at 313-14. Notice should be more than a mere gesture; it should be reasonably calculated, depending upon the practicalities and peculiarities of the case, to apprise interested parties of the pending action and afford them an opportunity to present their case. 339 U.S. at 314-15.
Here, appellants correctly assert that under the Due Process Clause, the notice used by KCC must inform interested parties of proceedings which may directly or adversely affect legally protected interests. See Walker v. Hutchinson City, 352 U.S. 112, 1 L. Ed. 2d 178, 77 S. Ct. 200 (1956). In Walker, the City of Hutchinson instituted condemnation proceedings against a landowner, but the only notice given was publication in the official city newspaper. Referring to its decision in Mullane, the Court recognized "the impossibility of setting up a rigid formula as to the kind of notice that must be given; notice required will vary with circumstances and conditions." 352 U.S. at 115. But in Walker, no compelling or persuasive reason existed for not giving direct notice, particularly since the City knew the landowner's name and address. 352 U.S. at 116.
Here, KCC ordered notice be given in its order of December 19, 1995, stating:
| "10. The Commission directs Applicants to provide notice of the applications and hearings by method of first class mailing to all its customers by mailing the attached notice. Notice shall be received by each customer prior to the public hearings. In addition, the Commission directs Applicants to publish the attached notice of public hearings in newspapers of general circulation in and around Applicant's general service territory." |
The notice begins with a description of the application:
| "Western Resources has filed an application with the Kansas Corporation Commission requesting a $36 million natural gas rate increase for both KPL and KG&E customers, an electric rate reduction of $61 million over a seven year period at a rate of $8.7 million per year for KG&E electric customers; and to accelerate the depreciation of the Wolf Creek Generating Station." |
The notice continues by listing the time and place for four public hearings, inviting written comments, and advising of a scheduled technical hearing. The notice then gives a more detailed discussion of the proposal. It describes WRI's request for an increase of natural gas rates and discusses the proposal for electric rate reductions, stating:
| "Western Resources requested permission to reduce electric rates $8.7 million per year in seven annual increments. At the end of seven years the annual reduction would equal $61 million for KG&E customers. The proposed rate reduction would result from a request by Western Resources to accelerate the depreciation of the Wolf Creek Generating Station by $50 million per year for seven years.
"In its application, Western Resources said accelerated depreciation of Wolf Creek and the resulting reduction in electric rates is necessary to be competitive in a changing electric energy market. Under the proposed plan, Western Resources stated electric rates for KPL customers should remain unchanged for the next seven years."
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The notice closed by providing a telephone number for more information about the proposal or the public hearings.
In the Kansas Administrative Procedure Act, notice of a formal hearing must be given to all parties and persons who have sought to intervene. K.S.A. 77-518(a). The form of the notice is prescribed by K.S.A. 77-518(c) and must include the name and reference number of the proceeding as well as a general description of the subject matter. K.S.A. 77-518(c)(3). However, the detailed notice of K.S.A. 77-518(c) may be replaced with a brief statement "indicating the subject matter, parties, time, place and nature of the hearing, manner in which copies of the notice to the parties may be inspected and copied and name and telephone number of the presiding officer." K.S.A. 77-518(e).
Under its power to develop reasonable rules and regulations regarding the filing of all schedules of rates by public electric utilities, K.S.A. 1996 Supp. 66-101c, the KCC has promulgated regulations that specify the form of applications in rate cases depending upon the classification of the utility. K.A.R. 82-1-231. KPL and KGE are class A electric utilities. K.A.R. 82-1-204(p)(1)(A). If a class A utility proposes changes in tariffs that "will result in a major increase in its rates or charges" (K.A.R. 82-1-231[b][2]), it must submit an application and schedule conforming with the requirements of K.A.R. 82-1-231(c). Subsection (1) of 82-1-231(c) states: "Each application by a class A utility which proposes a major increase in rates or charges shall be accompanied by schedules which will indicate to the commission the nature and extent of the proposed changes." The form, order, and titles of an application are prescribed by 82-1-231(c)(4), which includes a specific section regarding notice to the public:
| "(B) Section 2: General information and publicity. This section shall describe the means generally employed by the utility to acquaint the general public that would be affected by the proposed rate change with the nature and extent of the proposal. This section may include, but is not limited to statements concerning newspaper articles and advertisements, meetings with public officials, civic organizations and citizen groups, and shall include general information concerning the application which will be of interest to the public and suitable for publication." |
K.A.R. 82-1-231 continues by specifying information to include in the notice.
KCC and WRI argue that because the proceedings involve a substantial decrease in electric rates, K.A.R. 82-1-231 does not apply since no increase in rates was proposed. This argument is flawed. The statutory authorization giving KCC power to establish and maintain just and reasonable rates is not limited to increasing rates. Instead, the KCC has power to set rates "reasonably necessary . . . to maintain reasonably sufficient and efficient service" from electric public utilities. K.S.A. 1996 Supp. 66-101b. The ability to establish and maintain "efficient" service suggests the legislature anticipated an occasion might arise in which a public utility would be required to reduce rates.
Also, Farmland points out that the phrase "major increase in rates or charges" is a term of art defined in K.A.R. 82-1-231(b)(4). Thus, a "major increase in rates or charges" occurs not only when the charges relate to a general increase in revenue allegedly needed to obtain a fair rate of return, K.A.R. 82-1-231(b)(4)(A), but also when
| "(B) material changes in operations, facilities or cost of service occur subsequent to the test year employed in any major rate decision . . .; or
"(C) the proposed changes will, in the opinion of the commission, materially affect the public interest." K.A.R. 82-1-231(b)(4).
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It is debatable whether any of the definitions of "major increase in rates or charges" apply to the original applications in this case. No general increase in revenue was requested; no test year was employed. The KCC did not state that in its opinion the proposed changes materially affected the public interest. Yet, KCC set four public hearings "for the purpose of receiving public comments from WRI and KG&E customers with regard to the proposed rate increases and other relief sought shall be held." KCC also specified notice be mailed first class to all KPL and KGE customers and be published "in newspapers of general circulation in and around Applicant's general service territory."
Appellants cite to the Kansas Supreme Court decision in Suburban Medical Center v. Olathe Community Hosp., 226 Kan. 320, 597 P.2d 654 (1979), where the court summarized procedures needed to comply with due process as follows:
| "An administrative hearing, particularly where the proceedings are judicial or quasi-judicial, must be fair, or as it is frequently stated, full and fair, fair and adequate, or fair and open. The right to a full hearing includes a reasonable opportunity to know the claims of the opposing party and to meet them. In order that an administrative hearing be fair, there must be adequate notice of the issues, and the issues must be clearly defined. All parties must be apprised of the evidence, so that they may test, explain, or rebut it. They must be given an opportunity to cross-examine witnesses and to present evidence, including rebuttal evidence, and the administrative body must decide on the basis of the evidence." 226 Kan. 320, Syl. ¶ 4. |
Appellants assert that the dramatic change in the nature of WRI's applications, from when the applications were initially filed and notice was made until their final resolution a year and a half later, gave customers no opportunity to understand the nature of the new proceeding. Appellants point in particular to WRI's amendment of the application on May 22, 1996, that changed the nature of the proceeding to a more traditional cost-of-service rate hearing. Farmland asked KCC to provide new notice to KPL and KGE customers based upon this change, but it was denied. Appellants argue this violated the requirements of due process.
Regarding notice to KPL and KGE customers, KCC argues that the original notice required in the KCC order of December 19, 1995, adequately advised the customers of WRI's position throughout the proceedings and informed them of the nature of the proceedings. WRI consistently sought to decrease rates for KGE customers and did not request an increase for KPL customers.
Distinguishing this case from Mullane and Walker, WRI asserts that KGE and KPL electric customers have no property interest in rates charged for electric service similar to the direct property interests of plaintiffs in those two cases. Instead, WRI argues interests of ratepayers in this proceeding are adequately protected by KCC and CURB, both public agencies. We reject this argument. Although both agencies are charged with representing public interests, if notice to ratepayers is required, it cannot be satisfied by notice to a state agency, unless allowed by statute. Further, notice to KCC and CURB cannot act as a substitute for notice reasonably calculated to inform interested parties of proceedings that may affect their legal interests.
To bolster their argument, some appellants mention this court's statement in Western Resources, Inc. v. Kansas Corporation Comm'n, 23 Kan. App. 2d 664, 666, 937 P.2d 964 (1997), that "administrative agencies must ensure litigants their day in court. This includes proper notice as a prerequisite to valid agency action." In Western Resources, KCC did not advise WRI that consolidation of dockets was for a limited purpose until after the case had been decided and appealed to this court. This court found KCC did not have the power to go back and restructure the entire proceeding at that late date. Consequently, Western Resources is easily distinguishable from the present case.
Also, appellants rely upon a decision by the United States Court of Appeals for the Fifth Circuit to support their argument that notice was inadequate. In North Alabama Exp., Inc. v. U.S., 585 F.2d 783 (5th Cir. 1978), the court found that notice published in the Federal Register by a motor common carrier was misleading and was jurisdictionally defective because it failed to give opposing carriers, or members of the public, proper notice and a chance to be heard. The court stated: "In the administrative context, due process requires that interested parties be given a reasonable opportunity to know the claims of adverse parties and an opportunity to meet them." 585 F. 2d at 786. The court held that because adequate notice goes to the very jurisdictional validity of the proceeding, the Interstate Commerce Commission could not rescue the notice by arguing about what one could or did infer from the notice. The court ordered the agency action stayed pending republication in the Federal Register and an opportunity for interested persons to be heard. 585 F.2d at 790 and n.5.
Nevertheless, this proceeding and the notice provided to KPL and KGE customers are easily distinguishable from North Alabama. Here, the information furnished by the notice ordered by KCC was not inaccurate. Although the nature of the proceeding changed from a "creative" integrated rate plan involving WRI's two electric divisions and its natural gas division to a traditional cost-of-service rate proceeding for WRI's two electric divisions, the general description of the purpose of the proceeding did not become inaccurate or misleading. The proceeding was initiated to determine future electric and natural gas rates. The notice told KPL and KGE customers that WRI was seeking a decrease in rates for KGE electric customers, no change in rates for KPL electric customers, and an increase in natural gas rates for KPL and KGE customers. The notice afforded customers who were interested parties notice of the subject matter to be considered and of the opportunity to participate in the hearing. Therefore, we find that the notice furnished to KPL and KGE customers under the KCC order of December 19, 1995, was adequate.
B. Was notice to the Secretary of Administration adequate?
Farmland argues that the notice KCC furnished the Secretary of Administration (Secretary) was inadequate. Under K.S.A. 66-117a, KCC must notify the Secretary of any rate hearing in which the State of Kansas will be affected as a consumer by a proposed change in rates. KCC notified the Secretary on August 22, 1996, by facsimile followed by mail service. The acting Secretary responded on August 26, 1996, informing KCC that he would not intervene. Therefore, any deficiency in providing notice to the Secretary was waived by the Secretary.
WRI and KCC assert that even if notice to the Secretary and KPL and KGE customers was improper, appellants have no standing to complain because all of them, even Jefferson County, had notice. Because this court finds that the notice given was adequate to meet constitutional and statutory requirements, this issue is moot. This court will not address issues that are moot. See Shanks v. Nelson, 258 Kan. 688, Syl. ¶ 2, 907 P.2d 882 (1995).
C. Was Jefferson County denied due process by not receiving written notice of the formal hearing or by being limited in its participation in the proceedings?
Hearings conducted by KCC must comply with provisions of the Kansas Administrative Procedure Act. K.S.A. 1996 Supp. 66-101d. Under K.S.A. 77-518(a), if a formal hearing is to be conducted, KCC is required to give "reasonable written notice at least 10 days prior to the hearing to all parties and to all persons who have filed written petitions to intervene in the matter."
Jefferson County petitioned to intervene on September 13, 1996. Intervention was granted on October 1, 1996. Apparently, Jefferson County was not served with a copy of this order. However, in its brief, Jefferson County states that its counsel obtained a copy of the October 1 order "in the middle of October when [he] came to the Commission building to inquire about the status of the case." The October 1 order also adopted a procedural schedule for the case, with a hearing set for October 29, 1996.
Jefferson County cites cases it asserts support reversing the KCC order when procedural due process has not been accorded to litigants. In those cases, the commission took action that was not warranted without furnishing the interested parties a notice. Shark v. Northern States Power Co., 477 N.W.2d 251, 255 (N.D. 1991) (When less than 20 day's notice was given to public, commission should have granted short continuance of hearing on complex, technical matters regarding new method of cost recovery.); VEPCO v. State Corp. Comm., 226 Va. 541, 312 S.E.2d 25 (1984) (Commission's summary dismissal of second component of company's two-part rate increase request 3 weeks after the application was filed and with no indication that summary dismissal was being considered was improper.).
These cases are distinguishable from the situation faced by Jefferson County. When Jefferson County sought to intervene on September 13, 1996, it had the burden to become informed about the status of the case. Jefferson County makes no argument that it was denied access to this information or the contents of the record. It was incumbent upon Jefferson County to make its own inquiries into the state of the proceedings.
This raises the related issue of the limitation of Jefferson County's intervention. In its motion, Jefferson County asked permission "to submit comments to protect the interest of its ratepayers." In its October 1 order, KCC granted Jefferson County's motion to intervene, stating:
| "Jefferson County is a governmental unit having a similar interest to that of the City of Wichita. Under these facts and circumstances, the motion to intervene is granted. However, the Commission notes that notice was provided by publication and billing inserts. The failure of Jeffer |