Hanson v. Kansas Corp. Comm'n ( 2021 )

IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 119,834
RICHARD L. HANSON, CIRCLE H FARMS LLC, ROME FARMS LLC,
STEGMAN FARMS PARTNERSHIP,
Appellees,
v.
KANSAS CORPORATION COMMISSION, Respondent,
and
TEXAS-KANSAS-OKLAHOMA GAS, LLC,
Appellant.
SYLLABUS BY THE COURT
1.
Under the Kansas Judicial Review Act, K.S.A. 77-601 et seq., a court shall grant
judicial relief from an agency action only if it determines there exists one or more of the
eight circumstances enumerated in K.S.A. 77-621(c).
2.
K.S.A. 77-621(c)(3) authorizes judicial relief when an agency action fails to
decide an issue requiring resolution. When addressing a challenge under K.S.A. 77-
621(c)(3), a reviewing court exercises unlimited review.
3.
K.S.A. 77-621(c)(4) authorizes judicial relief when an agency action is based on
the agency's erroneous interpretation or application of the law. A reviewing court
exercises unlimited review of the agency's interpretation or application of the law without
deference to the agency.
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4.
K.S.A. 77-621(c)(7) authorizes judicial relief when an agency action is based on a
determination of fact, made or implied by the agency, that is not supported to the
appropriate standard of proof by evidence that is substantial when viewed in light of the
record as a whole. This includes the agency record, supplemented by any additional
evidence received by the court under the KJRA. K.S.A. 77-621(d) defines substantial
evidence "'in light of the record as a whole'" to include evidence both supporting and
detracting from the agency's factual findings.
5.
Kansas courts do not consider an issue unless it is ripe.
Review of the judgment of the Court of Appeals in 58 Kan. App. 2d 82, 464 P.3d 357 (2020).
Appeal from Stevens District Court; BRADLEY E. AMBROSIER, judge. Opinion filed July 16, 2021.
Judgment of the Court of Appeals affirming in part and reversing in part the district court is affirmed on
the issues subject to review. Judgment of the district court is affirmed in part and reversed in part. The
case is remanded to the Kansas Corporation Commission with directions.
Jeremy L. Graber, of Foulston Siefkin LLP, of Topeka, argued the cause, and C. Edward Watson
II, and Daniel J. Buller, of the same firm, were with him on the briefs for appellant.
Lee Thompson, of Thompson Law Firm, LLC, of Wichita, argued the cause and was on the briefs
for appellees.
The opinion of the court was delivered by
BILES, J.: A natural gas utility company appeals from two lower court decisions
that held it unlawfully billed its customers. See Hanson v. KCC, 58 Kan. App. 2d 82, 95,
464 P.3d 357 (2020) (declaring the utility's billing practice was "neither honest nor fair").
The utility argues a Kansas Corporation Commission order that upheld the company's
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billing calculation deserves more deference. The controversy arises after three customers
who bought gas for their irrigation operations alleged the utility overcharged them by
distorting the energy content of the gas sold. The customers claim this overpriced their
gas by about 9.5%. But the Commission determined the utility did not violate state law
even though it acknowledged that for each cubic foot of gas the utility sold, it charged its
customers for the energy that would have been contained in a more concentrated gas of
the same volume.
We affirm the lower courts' judgment that the utility's invoicing practice was
"unjust, unreasonable, [or] unfair" under K.S.A. 66-1,206(a). We remand the case to the
Commission to fashion an appropriate remedy. See K.S.A. 66-1,205(b) (empowering
Commission to require natural gas public utilities "to make such improvements and do
such acts as are or may be required by law to be done"); K.S.A. 66-1,206(a) (empowering
Commission to substitute "such other regulations, practice, service or act as it determines
to be just, reasonable and necessary").
FACTUAL AND PROCEDURAL BACKGROUND
In 2007, Texas-Kansas-Oklahoma Gas, LLC, began selling natural gas in Kansas
to residential and nonresidential customers acquired from Anadarko Gas Gathering
Company. In 2010, the Commission conditionally granted TKO a limited certificate of
public convenience and authority, with final approval in 2012. The Commission allowed
TKO to serve specific customers transferred from Anadarko and to negotiate individual
contracts for natural gas service with nonresidential customers. This meant traditional
utility rate making at the Commission level did not take place. The certificated rate for
customer sales was the price set by private contract. But as the panel correctly observed,
it is undisputed TKO is a "'[n]atural gas public utility'" under K.S.A. 66-1,200 et seq.
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Hanson, 58 Kan. App. 2d at 91; see also K.S.A. 66-104 (definition of public utility
subject to agency's supervision).
In 2014, Richard L. Hanson, a residential customer, along with Circle H Farms
LLC, Rome Farms LLC, and Stegman Farms Partnership, complained to the Commission
about TKO's billing practices. Hanson is no longer a party. The three remaining are
nonresidential customers who bought gas for agricultural irrigation purposes, referred to
here as "the Irrigators." As TKO explains, their contracts with TKO refer only to a rate
per MMBtu (metric million British thermal units). The rate is on an "index plus" basis,
meaning the price fluctuates based on a published index, plus a fixed additur (e.g., index
plus $.50 per MMBtu). The Irrigators explained in their complaint:
"The rates and charges of TKO appear to calculate volume using a pressure base
of 13.45 psia [pounds per square inch absolute] and a btu factor measured at a pressure
base of 14.73 psia, an inconsistency and inaccuracy which results in customers being
charged approximately 9.5% more for irrigation gas than is justified under commonly
accepted industry standards, as historically interpreted and applied by the Kansas
Corporation Commission."
The Irrigators argued "the rates charged by TKO to [them] . . . for the sale of
natural gas are unreasonable, unfair, unjust . . . and are therefore unlawful and void."
(Emphasis added.) As for why TKO's rates were unlawful, they alleged, "The
calculations and billing practices employed by TKO [used] inaccurate or false pressure
base numbers." (Emphasis added.) Said another way, the Irrigators presented two distinct
but interrelated issues—unlawful rates and unlawful billing practices. TKO denied the
allegations.
The Irrigators brought these challenges to the Commission under K.S.A. 66-
1,205(a), which provides:
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"Upon a complaint in writing made against any natural gas public utility
governed by this act that any rates or rules and regulations of such natural gas public
utility are in any respect unreasonable, unfair, unjust, unjustly discriminatory or unduly
preferential, or both, or that any rule and regulation, practice or act whatsoever affecting
or relating to any service performed or to be performed by such natural gas public utility
for the public, is in any respect unreasonable, unfair, unjust, unreasonably inefficient or
insufficient, unjustly discriminatory or unduly preferential, . . . the commission may
proceed, with or without notice, to make such investigation as it deems necessary."
(Emphases added.)
And in their prayer for relief, the Irrigators asked:
"Upon confirmation of the truth of the allegations of unfair, unjust and
discriminatory rates, complainants ask the Commission to enter an order:
"(a) substituting such rates or rules and regulations as the Commission
determines to be just, reasonable and necessary;
"(b) adjusting the rates of TKO as to all future sales of natural gas and adjustment
of the measurements, calculations, and practices which are the gist of the problem; and,
"(c) investigate and compute the amount of charges or rates which have been
overbilled and with respect to past sales made under such unfair and discriminatory terms
or rates to issue a show cause order as to why TKO should not refund all overcharges
shown to have been imposed since August, 2007 or the first date of each jurisdictional
meter which TKO operates."
It is important to appreciate three important aspects to the calculation making up
the Irrigators' gas bills: (1) price, which is the dollar amount charged per MMBtu, (2)
volume (Mcf or MMcf), which is the cubic feet delivered to the customer at a pressure
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base, and (3) energy, which is an amount of MMBtu's in the measured cubic foot as the
designated pressure base. Our concern here is with the pressure base factor used when
measuring volume because TKO applied a different pressure base when it sold the gas to
the Irrigators than the one used to measure the energy content by volume when TKO
bought the gas from third-party suppliers. As the district court explained:
"Natural gas is delivered by TKO to irrigators through a positive displacement
meter which generates the volumes per thousand cubic feet (Mcf). When gas is sold
pursuant to contracts which base pricing on heating values (Btu's) it is necessary to
convert the volumes of Mcf's to reflect the volume based on the heating value expressed
per MMBTu's.
"Measurement of molecules of natural gas depends on the pressure because
natural gas is compressible. If the pressure of a fixed quantity of gas [molecules]
increases, the volume decreases. If pressure decreases, the volume increases."
The Court of Appeals provided this succinct description of the technical aspects
underlying the Irrigators' complaint:
"To convert the volume of gas sold in Mcf into MMBTU (its heat content), the
gas company uses a formula incorporating the gas' temperature, pressure, and chemical
composition. In particular, as a report by Commission staff observed, 'the reference
temperature and pressure of the BTU calculation are critical to creating a fungible unit of
measurement.' The sticking point in this case is the reference pressure—or the pressure
base—used by TKO in that calculation. The pressure base (measured in pounds per
square inch absolute or psia) is essentially the average pressure the natural gas is under
when its heating value and volume are measured.
"The volume of a gas is inversely proportional to its pressure. Thus, when other
factors such as temperature and the number of molecules of a gas remain constant, higher
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pressure compresses the gas, while lower pressure allows the gas molecules to expand
into a greater volume." Hanson, 58 Kan. App. 2d at 86.
Leo Haynos, the Chief Engineer of the Commission's Utility Division, prepared
two staff reports for the agency proceedings. He explained that although TKO's contracts
were priced based on energy (MMBtu), volume (MMcf) still mattered because volume is
"the surrogate way of measuring energy." And since there is "no good way to measure"
the heat content, he said, "we measure volume, and we convert it to energy." So, he
added, for utilities like TKO that resell gas purchased from suppliers the pressure base at
"the purchase point" and the pressure base at "the sales point" must be identical.
But here TKO's use of a lower reference pressure at its sales point to customers
increased the gas volume delivered without accounting for the corresponding MMBtu
reduction. And recall that TKO's contracts refer only to a rate per MMBtu. In Haynos'
words, "to price the gas for the customer in dollars per million BTUs ($/MMBTU), TKO
simply multiplies the volume calculated at 13.45 psia by its suppliers' BTU value
(obtained at 14.73 psia)." By doing this, Haynos continued, TKO misrepresented the
amount of energy (MMBtu) delivered to the Irrigators. He offered two possible ways to
correct this misrepresentation—either negotiate with customers to use the 13.45 psia
pressure base by disclosing it and agreeing to it, or use the same pressure base as the
suppliers so the energy factor remains reasonably constant.
Haynos' second staff report concluded:
"[T]his manipulation of the gas volume sold without performing a corresponding
modification of the BTU content for that volume overstates the BTU value of the gas sold
by approximately 9.5%. Because TKO's contracts with its customers state a price in
$/MMBTU, overstating the amount of BTUs purchased results in overcharging the
customer by 9.5%."
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The Commission's order
After a two-day evidentiary hearing, the Commission decided the Irrigators failed
to carry their burden of proving "TKO's rates or practices with regard to them are
unreasonable."
As to the rate question, the Commission largely relied on Haynos' report stating
that TKO's "gas sales rate even with the misapplied BTU adjustment may be a reasonable
rate" for the region. It noted TKO's contracts did not include reference to a pressure base
or specifics about calculating the BTU value of the gas. Similarly, the Commission
continued, neither the conditional nor final certificates issued to TKO referenced a
specific pressure base. And it cited Kansas Gas and Elec. Co. v. State Corp. Comm'n,
239 Kan. 483, 488, 720 P.2d 1063 (1986), to support its conclusion that rates are just and
reasonable if they are within a "zone of reasonableness," balancing the interests of: "(1)
the utility's investors vs. the ratepayers; (2) the present ratepayers vs. the future
ratepayers; and (3) the public interest." Finally, the Commission held private contracts for
service, such as those with the Irrigators, that set rates consistent with those filed with the
Commission should be respected unless "the public welfare is being adversely affected
by such contracts," citing Kansas Power & Light Co. v. Mobil Oil Co., 198 Kan. 556,
559, 426 P.2d 60 (1967).
Regarding TKO's billing practice, the Commission also relied on Hanson's
testimony that there was no regulatory requirement for a utility to use the same pressure
base as its suppliers when calculating the gas volume delivered to customers. And it
rejected the agency's staff recommendation to use Docket 34,856-U Rule, Rules and
Regulations Relating to Standards of Quality, Pressure, Accuracy of Measurement,
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Safety and Service of Natural Gas in the State of Kansas, January 16, 1961. As
characterized by the Commission,
"[t]he 34,856-U Docket Rule offers a standard measurement when a pressure base is not
determined. What the reading of the 34,856-U Docket Rule and the testimony suggests is
that there is not necessarily a violation for using a different pressure base—the actual
violation here is that it was not disclosed. Therefore, the Commission cannot hold that
the 34,856-U Docket Rule is a hardline rule on what pressure base shall be utilized and
in turn cannot deduce that TKO is using an improper billing practice or charging unjust
or unreasonable rates on that basis." (Emphasis added.)
The Commission then quoted staff testimony that "TKO gas sales contracts,
signed by the Complainants and filed with the Commission do not contain any reference
to a pressure base or specifics on calculating the BTU value of the gas." And with this
perspective it held it would not evaluate this matter under either the 34,856-U Docket
Rule or K.A.R. 82-3-101(a)(36) (generally defining "Gas [cubic foot]" as meaning "the
volume of gas contained in one cubic foot of space at a standard pressure base and at a
standard temperature base. The standard pressure base shall be 14.65 pounds per square
inch absolute, and the standard temperature base shall be 60 degrees Fahrenheit.").
As to its comment that "the actual violation here is that it was not disclosed," the
Commission explained nondisclosure was reasonable because TKO negotiated its
contracts with the Irrigators "with the price term established therein without reference to
any pressure base for measurement." The Commission also noted TKO had used the
same pressure base since it began operations in Kansas, and that its negotiated contracts
with the Irrigators expressly allowed TKO to use a billing methodology "to derive the
revenue it calculated it needed to support the business of providing sufficient and
efficient service of a natural gas public utility." Finally, it concluded TKO's prices were
"among the lowest in the region." In short, the Commission concluded that even though
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TKO engaged in the complained of practice, it was not necessarily unreasonable, unfair,
or unjust because using a different pressure base from the one used by suppliers did not
violate either TKO's contracts or its certificate as a public utility.
The Irrigators asked for reconsideration, arguing the Commission misconstrued
their complaint as simply attacking the reasonableness of TKO's rates, as opposed to their
request for relief in which they sought "investigation and enforcement of TKO's practices
and measurement of MMBtu's by the Commission in the exercise of its duty to regulate
practices, charges and exactions of the utility." And they contended the Commission's
order "confuses a 'rate' with a billing under the rate and approves a charge based on a
unilateral and undisclosed alteration of the measurement of MMBtu's."
The Commission refused to change its decision. It said it understood the Irrigators'
request for reconsideration to raise three points:
"First, the Complainants assert that the Commission improperly narrowed the scope of
their complaint to one of contract abrogation. Second, the Complainants contend that the
Commission has ignored Complainants' request for investigation into TKO's billing
practices and instead turned its focus to a determination of whether the contract rates are
just and reasonable. Finally, the Complainants argue that the Commission has erred by
disregarding alleged facts that through its billing practices, TKO has manipulated,
altered, adjusted or otherwise circumvented the Commission's authority thus resulting in
a per se unjust act."
The Commission disagreed that its reasoning ignored the Irrigators' arguments
against TKO's billing methodology. It explained the billing practice was consistent with
its contracts. In the Commission's view, the Irrigators were "asking [it] to change the
terms of or at the very least read into their contracts with TKO a term that is absent." To
that extent, it concluded, the Irrigators were essentially asking to abrogate "part if not the
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whole of the contracts," and therefore it found they had not met the burden of proving
TKO's use of a different pressure base was unlawful. The Commission acknowledged
"there are standards or calculation methodologies that may be applicable." But it again
emphasized TKO's contracts were silent on the pressure base to be used, and that both
Hanson, who gave evidence as a consulting engineer, and Haynos testified TKO was not
obliged to use a particular reference pressure. The Commission stated, "Hanson and
Haynos' comments were substantial against [the Irrigators'] purported factual support that
TKO's billing practices are unreasonable."
The KJRA appeal in the lower courts
The Irrigators appealed to the district court under the Kansas Judicial Review Act,
K.S.A. 77-601 et seq. They advanced four grounds for relief from the Commission's
decision: (1) the agency failed to consider their billing error claim; (2) it erroneously
interpreted and applied the law; (3) its final order was based on factual findings not
supported by substantial evidence; and (4) its ultimate ruling was arbitrary and
capricious. See K.S.A. 77-621(c)(3), (4), (7), and (8). The court agreed with the Irrigators
on all points, observing: "TKO unilaterally inflated the measurement of the volume
component specified in the contracts for the expressed purpose of meeting its revenue
needs." It concluded:
"The Order at issue if sustained would approve an erroneous manipulation of
billing volumes of MMBtu's without notice, approval or consideration by either the
Commission or customers. The Order's attempt to avoid that determination by paying
homage to rate making principles based on contract terms flies in the face of a liberal
construction of the governing statutes and the uncontroverted evidence that TKO's billing
practices unfairly inflated billings of MMBtu's by 9.5% from the first date it began
operating in Kansas. Such practices are unfair, unjust and unreasonable. In sum, the
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Order is factually, logically and legally erroneous, not supported by the record or the
evidence and arbitrary and capricious."
The district court remanded the case to the Commission to calculate how much
TKO overbilled the Irrigators since 2007 and then to order the utility to refund that
amount. TKO appealed.
A Court of Appeals panel affirmed the district court in part and reversed in part. It
agreed the Commission erred in its analysis of TKO's billing methodology. But the panel
altered the district court's refund directive and instead ordered the Commission to decide
an appropriate remedy that balances the interests of the customers and the public. It
noted: "K.S.A. 66-1,206(a) vests the Commission with authority to craft a remedy when
a natural gas public utility's rates or practices are found to be 'unreasonable, unjust, [or]
unfair.'" Hanson, 58 Kan. App. 2d at 96.
The panel's decision, however, limited its legal basis for granting judicial relief to
K.S.A. 77-621(c)(3) (agency failed to resolve an issue requiring resolution) and (c)(4)
(agency erroneously applied the law). Hanson, 58 Kan. App. 2d at 95. It did not address
the district court's additional KJRA justifications for judicial relief under subsections
(c)(7) (agency action based on facts not supported by the record) and (c)(8) (agency
action otherwise unreasonable, arbitrary, or capricious).
TKO petitioned this court for further judicial review, which we granted. The
Irrigators filed a conditional cross-petition for review, which we denied. Jurisdiction is
proper. See K.S.A. 20-3018(b) (providing for petitions for review of Court of Appeals
decisions); K.S.A. 60-2101(b) (Supreme Court has jurisdiction to review Court of
Appeals decisions upon petition for review).
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THE PANEL'S GRANT OF RELIEF UNDER K.S.A. 77-621(c)(3)
Under the KJRA, a court shall grant judicial relief from an agency action only if it
determines there exists one or more of the eight circumstances enumerated in K.S.A. 77-
621(c). The panel held the Commission "failed to decide the central issue in the
Irrigators' complaint." (Emphasis added.) Hanson, 58 Kan. App. 2d at 95. This undecided
issue, in the panel's view, was the legality of TKO's billing practices, citing K.S.A. 77-
621(c)(3). TKO argues the panel erred in this respect because the Commission's order
carefully considered that matter. We agree with TKO.
Standard of review
When resolving an issue seeking judicial relief under K.S.A. 77-621(c)(3)
(authorizing judicial relief if "the agency has not decided an issue requiring resolution"),
this court exercises unlimited review. And typically when subsection (c)(3) is implicated,
remand to the agency to consider the undecided issue is appropriate unless the question
the agency did not resolve is a purely legal one. Compare Pittsburg State Univ./Kansas
Nat. Educ. Ass'n v. Kansas Bd. of Regents/Pittsburg State Univ., 280 Kan. 408, 429, 122
P.3d 336 (2005) (remanding the case to the agency for additional findings; citing K.S.A.
77-621[c][3]), with In re Tax Protest of Emil Liston Foundation, 13 Kan. App. 2d 353,
355, 771 P.2d 77 (1989) (noting K.S.A. 77-621[c][3] authorized court to decide a
question of law when the agency failed to do so).
Discussion
In their complaint to the Commission, the Irrigators raised two separate, but
closely related, questions—rates and practices. And the Commission plainly ruled on
both. On the billing question, it considered various reasons why TKO's unilaterally
selected pressure base was not unlawful. And as previously noted, the Commission
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addressed head on the Irrigators' claim in their request for reconsideration that the agency
ignored the billing practice issue in its original order. The Commission explained TKO's
billing practice was consistent with the contracts, the Irrigators had not met their burden
of proving TKO's use of a different pressure base was unlawful, and that both Hanson
and Haynos had testified TKO was not obliged to use a particular reference pressure.
Based on those points, the Commission denied reconsideration, noting it "simply could
not find that Complainants proved manipulation, misrepresentation, or
unreasonableness." That holding effectively resolved the issue the panel held was
unresolved. Hanson, 58 Kan. App. 2d at 95.
To be sure, the panel disagreed with the Commission's rationale, but that does not
mean the Commission failed to decide "an issue requiring resolution" under K.S.A. 77-
621(c)(3). The panel's reliance on that statutory basis for granting judicial relief from an
agency action was misplaced.
THE PANEL'S GRANT OF RELIEF UNDER K.S.A. 77-621(c)(4)
The next question is whether the panel erred when it determined the Commission
"erroneously applied the law" under K.S.A. 77-621(c)(4). Hanson, 58 Kan. App. 2d at
95. On this point, we agree with the panel, although this is a more involved question that
necessarily implicates another statutory ground for judicial relief—K.S.A. 77-621(c)(7)
("[T]he agency action is based on a determination of fact, made or implied by the agency,
that is not supported to the appropriate standard of proof by evidence that is substantial
when viewed in light of the record as a whole."). Said differently, facts are needed to
make the point, so we must decide if the facts found by the Commission are supported by
the agency record. See Atkins v. Webcon, 308 Kan. 92, 102, 419 P.3d 1 (2018) (affirming
the Court of Appeals as being right for the wrong reason); Supreme Court Rule
8.03(b)(6)(C)(ii) (2021 Kan. S. Ct. R. 54).
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Standard of review
Judicial review of an agency's interpretation and application of the law is
permitted under K.S.A. 77-621(c)(4) and is unlimited without deference to the agency's
view. Via Christi Hospitals Wichita v. Kan-Pak, 310 Kan. 883, 890, 451 P.3d 459 (2019);
May v. Cline, 304 Kan. 671, 675, 372 P.3d 1242 (2016); Douglas v. Ad Astra Information
Systems, 296 Kan. 552, 559, 293 P.3d 723 (2013) (rejecting the doctrine of deference to
an agency on questions of law).
Subsection (c)(7) requires review of factual determinations for evidence "that is
substantial when viewed in light of the record as a whole." Our caselaw has "defined
substantial evidence as evidence possessing something of substance and relevant
consequence to induce the [agency's] conclusion." Redd v. Kansas Truck Ctr., 291 Kan.
176, 183, 239 P.3d 66 (2010). Subsection (d) provides:
"For purposes of this section, 'in light of the record as a whole' means that the
adequacy of the evidence in the record before the court to support a particular finding of
fact shall be judged in light of all the relevant evidence in the record cited by any party
that detracts from such finding as well as all of the relevant evidence in the record, . . .
cited by any party that supports such finding, including any determinations of veracity by
the presiding officer who personally observed the demeanor of the witness and the
agency's explanation of why the relevant evidence in the record supports its material
findings of fact. In reviewing the evidence in light of the record as a whole, the court
shall not reweigh the evidence or engage in de novo review." K.S.A. 77-621(d).
When conducting the factual analysis, subsection (d) requires a reviewing court to
assess the evidence both supporting and contradicting the agency's findings, examine the
agency's credibility determinations, and review the agency's explanation as to why the
15
evidence sustains its findings. Atkins, 308 Kan. at 97. And even though subsection (d)
demands a reviewing court look at contradicting evidence and assess the agency's
credibility decisions, it nevertheless instructs that "the court shall not reweigh the
evidence or engage in de novo review." (Emphasis added.) K.S.A. 77-621(d). See
generally Frick Farm Properties, L.P. v. State Dep't of Agric., Div. of Water Res., 289
Kan. 690, 709, 216 P.3d 170 (2009) ("An appellate court views all the evidence in a light
most favorable to the prevailing party, and it does not reweigh competing evidence or
assess the credibility of witnesses. This court must accept all evidence and inferences that
support or tend to support the findings as true, and this court must disregard all
conflicting evidence.").
Finally, Kansas courts "recognize that an agency ruling within its area of expertise
is entitled to some deference." Wasson v. United Dominion Industries, 266 Kan. 1012,
1018, 974 P.2d 578 (1999). But see Ft. Hays St. Univ. v. University Ch., Am. Ass'n of
Univ. Profs, 290 Kan. 446, 457, 228 P.3d 403 (2010) (agency's statutory interpretation "is
not afforded any significant deference on judicial review"). This deference to expertise,
however, must be employed cautiously so as not to violate the express statutory standard
of review mandated by K.S.A. 77-621.
Discussion
As quoted above, K.S.A. 66-1,205(a) defines the circumstances under which the
Commission may review a complaint about a natural gas public utility's rates or practices.
And if the Commission finds unreasonable, unfair, or unjust rates or practices, K.S.A. 66-
1,206(a) authorizes it to take action, providing in relevant part:
"If after investigation and hearing the rates or rules and regulations of any natural
gas public utility governed by this act are found unjust, unreasonable, unfair, . . . the
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commission shall have the power to establish, and to order substituted therefor, such
rates or rules and regulations as the commission determines to be just, reasonable and
necessary. If it is found that any regulation, practice or act, relating to any service
performed or to be performed by such natural gas public utility for the public is in any
respect unreasonable, unjust, unfair, . . . the commission may substitute therefor such
other regulations, practice, service or act as it determines to be just, reasonable and
necessary. . . ." (Emphases added.) K.S.A. 66-1,206(a).
The panel interpreted both K.S.A. 66-1,205(a) and K.S.A. 66-1,206(a), holding
that "unreasonable" means "'[n]ot guided by reason; irrational or capricious'"; "unjust"
means "'[c]ontrary to justice; not fair or reasonable'"; and "unfair" means "'[n]ot honest,
impartial or candid; unjust.'" Hanson, 58 Kan. App. 2d at 95. The panel held:
"Regardless of the rates included in TKO's contracts, the company's billing practice
meets these definitions. TKO's calculations caused the company to inform its customers
they were using—and to charge them for—9.5% more MMBTUs of gas than they
actually received. This practice was neither honest nor fair." (Emphasis added.) 58 Kan.
App. 2d at 95. And we note K.S.A. 66-1,207 requires the statutory provisions applicable
to this controversy and all statutory grants of power, authority, and jurisdiction to the
Commission "shall be liberally construed, and all incidental powers necessary to carry
into effect the provisions of this act are expressly granted to and conferred upon the
commission."
We look then to how the panel and district court came to a different conclusion
than the Commission. As previously explained, the Commission gave a detailed
justification as to why TKO's practice was lawful while giving at least seven reasons for
rejecting the Irrigators' complaint. And under the KJRA, a reviewing court must examine
those rationales within K.S.A. 77-621's boundaries. See K.S.A. 77-621(a)(2) ("[T]he
validity of agency action shall be determined in accordance with the standards of judicial
review provided in this section.").
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TKO claims the Commission's "order, its factual findings, and its subject matter
expertise regarding a complex area of public utility law" deserve judicial deference. The
Irrigators, on the other hand, contend deference is unwarranted in this instance because
the evidence does not support the agency's outcome. The Irrigators have the better
argument. To arrive at its decision, the Commission explicitly considered: (1) Hanson's
testimony, (2) Haynos' testimony, (3) the contracts, (4) the 34,856-U Docket Rule, (5)
TKO's consistent use of a 13.45 psia pressure base in its Kansas operations, (6) TKO's
revenue requirement, and (7) the reasonableness of the rates charged. Of those, the
Commission considered the first three a substantial evidentiary basis to rule against the
Irrigators.
First, the Commission noted, "Hanson explicitly stated that there is no requirement
that a utility such as TKO must use the same pressure base as their supplier." (Emphasis
added.) But when viewed in full, his testimony actually undermines the Commission's
rationale. He testified:
"[A. Hanson]. . . . The problem with TKO's calculations is they are using 13.45
as a pressure base for calculating the actual standard cubic feet of volume, but they are
applying a Btu factor of 14.73 to that gas, which inflates the total MMBtu's by 9.5
percent.
"[Q.] Is there any requirement or standard for TKO to use the same pressure base
as the supplier?
"[A.] No, there is no requirement. The only requirement is the requirement to use
the same pressure for the volume calculation and the Btu per cubic foot.
....
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"[A.] . . . [T]hat is the reason that most people adopt the pressure base of their
supplier because the supplier will have the Btu calculation at their pressure base. And so
generally . . . the company receiving gas from that supplier will go ahead and adopt that
same pressure base, not necessarily, but it just makes it easier because you don't have to
convert the Btu cubic foot that way.
....
"[A.] . . . The meter measures the actual cubic feet at whatever pressure it goes
through at. And then you convert it to your standard pressure base and that is generally
14.73. However, you could have whatever pressure base you really want to. . . . [P]eople
use the pressure base of their supplier because they have already got the Btu's from their
suppliers at that—whatever pressure base it is for their supplier." (Emphasis added.)
In essence, Hanson's testimony established that although there was no requirement
to use the same reference pressure as the suppliers, there was a need to use the same
pressure base for both the volume factor and the energy factor. Otherwise, a different
pressure base would inflate or deflate the heat content—MMBtu—that is measured in
volume. He said, "[P]eople use the pressure base of their supplier," because it is easier.
So when considered in context, the Commission's reliance on Hanson's isolated statement
that there was no requirement to use the same number as the supplier misses the mark.
A similar problem occurred when the Commission considered Haynos' testimony
that "it does not matter what pressure base one uses so long as that pressure base is
disclosed in the tariff or contract." This, of course, does not support the Commission's
order because TKO's contracts did not disclose any pressure base. And the Commission
seemed to recognize this in its final order when stating "the actual violation here is that it
was not disclosed." Its reasoning that no error occurred because the contracts were silent
about the pressure base, therefore, makes little sense in light of the problem, which is not
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what pressure base TKO used to measure the delivered gas but how TKO manipulated it
when invoicing customers.
In its order, the Commission also emphasized TKO "negotiated its contracts with
[the Irrigators] with the price term established therein without reference to any pressure
base for measurement; that TKO has not changed its method of calculating its customer
bills over the time in question; and that the [Irrigators] accepted these terms until filing
their Complaint." This implies the Commission believed the Irrigators somehow caused,
or acquiesced in, TKO's use of an energy content per Mcf measured at a higher pressure
as the amount of energy contained in each Mcf of the customers' usage metered at the
lower 13.45 psia pressure base. But again the record contradicts this.
To begin with, nothing in the record supports a reasonable belief the Irrigators
negotiated contract terms. Kirk Heger testified for Circle H Farms. He said he did not
have a written contract with TKO until 2011. And even though Heger intervened in
TKO's certificate proceedings as the Southwest Kansas Irrigation Association's president
and conceded he did not object at that time, he noted TKO had not "disclosed to the
Commission or to [him] that [it was] using a different pressure base to measure volume
than [it] used to calculate the Btu factor." Tron Stegman, as a representative of Stegman
Farms, agreed that he started paying TKO's invoices in 2007. But he also noted they did
not have a written contract until September of 2011 and that contract did not explain how
the MMBtu would be calculated.
The agency's final order correctly notes: "(1) Rome Farms' agreement does not
appear to have been completed or executed"; (2) "Circle H Farms was unable to locate or
produce an original contract assumed by TKO at the time of transfer of service"; and (3)
Stegman Farms "did not have a contract with TKO prior to 2011 and had no contract with
TKO's predecessor." But then the Commission incongruously suggested the parties
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negotiated their contracts. That is not supported by the record. And the fact TKO
consistently used 13.45 psia for invoicing purposes throughout its time doing business in
Kansas does not excuse its unilateral and arbitrary tampering with the energy amount it
charged the Irrigators for without disclosing what it was doing. Haynos testified:
"[A. Haynos]. . . . [I]t's really about Btu per given volume. . . . When you use a
pressure base as a reference point, if you are going to use 13.45, fine, you can use
whatever you want for a reference point provided you use the same data or reference
points throughout all of your calculation. If you don't, you have two different reference
points, you can't get it to be fungible.
....
"Q. If the contract between TKO and its customers had a pressure base of 13.45,
would we have a dispute here?
"A. Not necessarily . . . . [Y]ou can't just apply it to your volume. You have to
apply it to your Btu value as well. That's the problem." (Emphasis added.)
Haynos also testified, "If you have no mention of a pressure base in your . . .
contract . . . , we believe it goes back to the only requirement that would be there, the
standard, which would be the old 1961 docket." But the Commission determined this rule
was inapplicable because "[w]hat the reading of the 34,856-U Docket Rule and the
testimony suggests is that there is not necessarily a violation for using a different pressure
base" and decided "the 34,856-U Docket Rule is [not] a hardline rule on what pressure
base shall be utilized . . . ." Admittedly, neither party seems to disagree about this
conclusion, but again the evidence suggests—as well as the Commission's own
findings—that "the actual violation here is that it was not disclosed." (Emphasis added.)
And it is undisputed TKO never disclosed its use of a different pressure base.
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As to TKO's revenue requirements, the Commission noted the parties' agreements
authorized TKO to use a billing method that would meet its revenue requirement "to
support the business of providing sufficient and efficient service of a natural gas public
utility." August Ankum, who testified for TKO, said that given its revenue requirements,
TKO should have received the same aggregate amount of money from its customers,
even if it followed the Irrigators' preferred billing practice, so the parties' disagreement
over pressure base "in no way means that [the Irrigators] have been overbilled." From this
perspective, all TKO would have had to do was adjust its rates to meet its revenue
requirement, leaving the customers no better or worse off because the customers' invoices
would be the same.
But Haynos countered Ankum's analysis, noting TKO does not have a
Commission-established revenue requirement. Rather, TKO set its own revenue
requirement when negotiating contracts with its customers. And TKO could have
negotiated to satisfy its revenue needs while telling its customers about the pressure base
discrepancy that altered the energy content of the gas it sold to them.
Lastly, the order appears partially based on the Commission's factual finding that
TKO's ultimate price remained reasonable despite its nondisclosure. That finding is
supported by Haynos' second staff report: "TKO gas sales rate even with the misapplied
BTU adjustment may be a reasonable rate." But this leaves it necessary for judicial
review purposes to decide whether that alone was enough to support rejection of the
Irrigators' complaint about TKO's unlawful billing practice. We think not given the broad
statutory directive. See Hanson, 58 Kan. App. 2d at 95.
Considering the record as a whole, significant aspects of the Commission's factual
basis are not supported by the evidence in the agency record. This is not simply because
contradictory evidence exists, but because supporting evidence is lacking. At the same
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time, the more important facts are undisputed. The Commission appears to have recast
the testimony from Hanson and Haynos on which it chiefly relied, while ignoring the
relevant points about how the pressure base alteration affected customers. This
combination of contradictory evidence and lack of supporting evidence discredits the
order's validity and justifies judicial relief from the agency action under the KJRA.
In its opinion, the panel appropriately interpreted K.S.A. 66-1,205(a) by giving
effect to its plain language. See Hanson, 58 Kan. App. 2d at 95. And its ultimate decision
reversing the Commission's ruling is correct. The Irrigators met their burden of proving
TKO engaged in a billing practice that was unreasonable, unfair, or unjust because the
utility unilaterally lowered the pressure base for the volume factor without adjusting the
energy factor to account for the pressure base difference, and did not disclose what it was
doing to either its customers or the Commission. TKO billed the Irrigators at a contract
rate based on energy consumed but charged them for more energy (MMBtu's) than they
received—regardless of whether the final amount the customers paid was reasonable.
And even if we accept TKO's representation in its brief that MMBtu measurement is
inherently imprecise, its billing practice stealthily injected an additional imprecision into
its customer charges. TKO's calculating method constitutes an unlawful practice.
Of the seven considerations the Commission provided to support its decision, only
the reasonable rates finding has a modicum of evidentiary support, but this is insufficient
to carry the day on a billing practice complaint in light of the remaining uncontroverted
evidence and statutory requirements. The Commission erred when it concluded the
undisclosed "pressure base" practice did not violate K.S.A. 66-1,205(a) and K.S.A. 66-
1,206(a). And despite TKO's argument to the contrary, remand is not required for the
Commission to consider again the legal question of whether this undisclosed and material
pricing practice violated state law. See State v. Wilson, 308 Kan. 516, 527, 421 P.3d 742(2018) ("[T]he record is fully developed with respect to the narrow question of law
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presented, and the parties do not dispute the relevant facts. For these reasons, a remand is
unnecessary."). We affirm the panel's decision reversing the Commission on this point.
REMEDY
When the district court found TKO's billing practice unlawful, it remanded the
case "to the Commission to calculate and order that TKO make refunds to its irrigation
customers based on the 9.5% overbilling from the date TKO first began operations in
Kansas in 2007 to the present." (Emphasis added.) The panel held K.S.A. 66-1,206(a)
grants the Commission the authority to initially craft an appropriate remedy when faced
with a utility's unlawful practice under K.S.A. 66-1,205(a), rather than the district court.
Hanson, 58 Kan. App. 2d at 96-97. We agree with the panel.
But that is not the precise question advanced by TKO in this court. The
Commission ruled it "only had [administrative] jurisdiction over TKO from April 12,
2010 to the present." And the panel did not reach TKO's alternative argument that the
district court ignored the Commission's jurisdictional finding by ordering a refund dating
back to 2007. Hanson, 58 Kan. App. 2d at 97 ("Because we are reversing the court's
refund order, we need not decide whether the timeframe of the previously ordered
refunds—from 2007, not 2010—was also erroneous."). Here, TKO resurrects its
jurisdictional question and asks us to give the Commission direction about its
jurisdictional reach if we agree with the panel to remand for imposition of a remedy,
which we do.
Like the panel, we fail to see why this should be considered now. This
jurisdictional issue is either not ripe since the Commission has yet to craft an appropriate
remedy, or moot since the panel reversed the district court's refund order. See State ex
rel. Morrison v. Sebelius, 285 Kan. 875, 896, 179 P.3d 366 (2008) (courts do not consider
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issues that are not ripe); State v. Roat, 311 Kan. 581, 586, 466 P.3d 439 (2020) (generally
courts do not address moot issues). This is a fatal defect in achieving further judicial
review at this juncture. See Sierra Club v. Mosier, 305 Kan. 1090, 1102, 391 P.3d 667(2017) ("Kansas courts do not consider issues unless the issues are ripe, meaning they
have 'taken fixed and final shape rather than remaining nebulous and contingent.'"). We
decline to address this anticipatory question.
Judgment of the Court of Appeals affirming in part and reversing in part the
district court is affirmed on the issues subject to review. Judgment of the district court is
affirmed in part and reversed in part. The case is remanded to the Kansas Corporation
Commission with directions.
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