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No. 102,881 No. 102,933 IN THE COURT OF APPEALS OF THE STATE OF KANSAS WHEATLAND ELECTRIC COOPERATIVE, INC., Appellee, v. ADRIAN POLANSKY, SECRETARY, KANSAS DEPARTMENT OF AGRICULTURE, DIVISION OF WATER RESOURCES, Appellant.

SYLLABUS BY THE COURT 1. When an administrative agency is authorized to adopt regulations, those regulations are presumed valid, and the party challenging them has the burden to show that they are invalid. If the regulations are consistent with the underlying statutes and are appropriate and reasonable, they must be upheld.

2. The consumptive-use regulations adopted by the Kansas Department of Agriculture's Division of Water Resources in K.A.R. 5-5-8 are valid.

3. On the facts of this case, application of the Division of Water Resources' consumptive-use regulations has not been shown to have taken any property rights without due compensation.

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4. An agency action may be set aside under K.S.A. 77-621(c)(8) if it is unreasonable, arbitrary, or capricious. An action is unreasonable when it is taken without regard to the benefit or harm to all interested parties or is without foundation in fact, and an action is arbitrary and capricious if it is unreasonable or lacks any factual basis. Essentially, the test under K.S.A. 77-621(c)(8) determines the reasonableness of the agency's exercise of discretion in reaching its decision based upon the agency's factual findings and the applicable law.

5. Useful factors that may be considered in determining whether an agency action is unreasonable, arbitrary, or capricious include whether: (1) the agency relied on factors that the legislature had not intended it to consider; (2) the agency entirely failed to consider an important aspect of the problem; (3) the agency's explanation of its action runs counter to the evidence before it; and (4) whether the agency's explanation is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

6. On the facts of this case, the Division of Water Resources' application of its consumptive-use regulations was not unreasonable, arbitrary, or capricious.

7. K.S.A. 2009 Supp. 82a-718(a) does not authorize the Division of Water Resources to declare that a water right has been partially abandoned.

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Appeal from Shawnee District Court; FRANKLIN R. THEIS, judge. Opinion filed November 4, 2011. Affirmed in part and remanded with directions.

Brett W. Berry, of Kansas Department of Agriculture, and Adam C. Dees, legal intern, for appellant.

Mark A. Rondeau, of Watkins Calcara, Chartered, of Great Bend, for appellee.

Before MCANANY, P.J., LEBEN, J., and MERLIN G. WHEELER, District Judge, assigned. LEBEN, J.: When Wheatland Electric Cooperative asked the Division of Water Resources to change characteristics of the company's water rights, the Division approved the changes but limited the amount of water that Wheatland could use under the rights. The district court that reviewed the Division's decision remanded the case to the Division to reconsider the rights' consumptive-use limitation, and the Division then initiated abandonment proceedings and terminated the unused portions of those rights. The district court reviewed the Division's actions again, this time finding that the division couldn't partially terminate Wheatland's water rights. Both parties appealed. In addition to refuting Wheatland's claims that the Division couldn't limit the rights' consumptive use, the Division insists that it could declare a partial abandonment of the rights.

The Division is correct that it could limit the rights' consumptive use, but it is wrong that it has the authority to abandon part of a water right. The Kansas Water Appropriation Act specifically allows the Division's chief engineer to place limitations on water-rights changes that are necessary to protect the public's interest. The Division's regulations follow this statutory authority and are therefore valid. But the Act doesn't allow water rights to be partially abandoned--under the statute's plain language, only total nonuse of water under the right allows abandonment.

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FACTUAL AND PROCEDURAL BACKGROUND In 1954 and 1955, the Kansas Department of Agriculture's Division of Water Resources approved two vested water rights, FI 168 and FI 229, and a water appropriation right, Application 2,342. A vested right is the right to continue the preKansas Water Appropriation Act water use up to the previously used maximum quantity and diversion rate. K.S.A. 82a-701(d); K.S.A. 82a-730. An appropriation right, on the other hand, is acquired by complying with the Kansas Water Appropriation Act's application provisions; when the chief engineer approves the application, he or she establishes the right to divert from a specific water supply a specific quantity of water at a specific diversion rate. K.S.A. 82a-701(f), 82a-705. Water uses include, but are not limited to, domestic, municipal, irrigation, industrial, and recreational. K.S.A. 82a707(b). In this case, FI 168's original use was irrigation; FI 229's and Application 2,342's original uses were industrial.

In the beginning, the Garden City Company owned all three rights. After the water diverted under FI 229 and Application 2,342 cooled the Garden City Company's power plant, the company used the water for irrigation under FI 168. In 1957, Wheatland Electric Cooperative bought the power plant and all three water rights from the Garden City Company.

In the 1990's, Wheatland decided to transform itself into a water utility to help curb the City of Garden City's inferior water-quality problem: Wheatland would collect water that it diverted under FI 168, treat the water in a reverse-osmosis treatment plant, and then sell the water to the city. Up until this time, despite the 1957 sale, the Garden City Company had still been using FI 168 to irrigate. A dispute arose between the companies, and Wheatland paid the Garden City Company for any interest that the company had in FI 168 and for 74 acres of FI 168's 280-acre place of use, i.e., the tract of
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land that the water right could be used on. The 280 acres has been subdivided into 44 parcels that have various owners; Wheatland owns four of those parcels, including the 74-acre tract.

To make its water-treatment goal possible, Wheatland needed to change FI 168's use type from irrigation to municipal and the place of use from Wheatland to Garden City. Wheatland applied for these changes in March 2002. At the same time and to further effect its goal, Wheatland applied to change FI 229's place of use and Application 2,342's type of use and place of use.

In August 2002, the Division conducted a hearing at which the parties presented evidence on the rights' historic water usage. The chief engineer approved Wheatland's requested changes, but reduced FI 168's water usage from 840 acre-feet of water a year to 91 acre-feet a year. The Division also limited FI 229's and Application 2,342's water usage.

When Wheatland asked the Secretary of Agriculture to administratively review the Division's decision, the Secretary declined to exercise review. Wheatland then petitioned the Shawnee County District Court to review the Division's decision. The district court examined several specific issues related to the Division's decision, finding that the Division correctly refused to address various contentions from intervening landowners that Wheatland had abandoned FI 168, as the Division had not conducted formal abandonment proceedings under K.S.A. 2009 Supp. 82a-718(a). The district court also found that the record didn't show that Wheatland had voluntarily limited its rights under K.A.R. 5-7-5.

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The district court concluded that the Division could limit Wheatland's right when changing the right's use, but that the Division should have calculated the limitation based on the 280-acre place of use, not just the 74-acre parcel that Wheatland owned. In reversing and remanding the Division's order that limited FI 168's consumption, the district court also asked the Division to question whether Wheatland's actions throughout the proceedings showed that it was voluntarily reducing its rights:

"[T]his issue is remanded back to the agency with the direction to reconsider the consumptive use entitlement under FI 168 in light of the order fixing this right on January 27, 1955[,] . . . or to make a finding that Wheatland voluntarily intended to relinquish or reduce a portion of its rights under FI 168 or otherwise intended to effect only a partial change in use under FI 168."

The court affirmed the Division's other orders. Wheatland appealed the district court's order to this court, but we dismissed the appeal as premature because the district court's remand instructions meant that its order wasn't a final, appealable judgment.

The chief engineer interpreted the district court's remand order as requiring the Division to initiate abandonment proceedings; Wheatland objected to the Division's authority to do so when Wheatland had only filed a change application. Nevertheless, the Division conducted an abandonment hearing on June 7, 2006. Those proceedings were stayed while the parties determined whether Wheatland exclusively owned FI 168 or whether the right's ownership was scattered among the separate parcels' various owners. Wheatland brought a quiet title suit in district court to establish its ownership over FI 168; the district court deemed Wheatland FI 168's owner in February 2008.

The Division then completed the abandonment proceedings and issued its order in May 2008. The order relied heavily on the Division's chief engineer's report that showed

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that at most 84 acres of FI 168's place of use could be irrigated from 1987 to 2002--the rest had been converted to residential and commercial uses. The Division held that Wheatland had abandoned the other 196 non-irrigable acres. The Division concluded a partial abandonment was statutorily allowed, that it didn't need to notify Wheatland of the abandonment, and that the abandonment order complied with the district court's remand instructions.

When the Secretary of Agriculture again declined to review the Division's decision, Wheatland petitioned the Shawnee County District Court to do so. Upon review, the district court disagreed with the Division that K.S.A. 2009 Supp. 82a-718(a) authorizes partial terminations of vested water rights because the Division's interpretation would essentially eliminate a vested right's vested nature. The district court also held that no published administrative regulation gave the Division the power to partially terminate a vested right. The district court set aside the Division's order. Wheatland appealed the district court's first ruling that the Division could limit the water rights' usage, and the Division appealed the court's ruling against its partial-abandonment order.

ANALYSIS Kansas courts have a limited ability to review state agency actions. See K.S.A. 77621(c). The Kansas Judicial Review Act (KJRA) allows this court to decide the issues that the parties have raised in this case: (1) whether the Division's consumptive-use regulations are unconstitutional; (2) whether the Division acted beyond its jurisdiction; (3) whether the Division erroneously interpreted or applied the law; (4) whether the Division failed to follow proper procedures; and (5) whether the Division acted arbitrarily or unreasonably. K.S.A. 77-621(c)(1), (2), (4), (5), (8).

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1. Consumptive-Use Reduction Proceeding The Division's Consumptive-Use Regulations Are Valid. Wheatland argues that the consumptive-use regulations that the Division applied to reduce FI 168's water usage exceed the agency's allowable power under the Water Appropriation Act and violate the Act's fundamental notion of "first in time, first in right." Under Wheatland's view, if the water-rights owner proposes to change the use to another approved use, that change must be approved and the Division can't reduce the amount of water that may be consumed under the permit.

The Division responds that the Act protects the pre-1945 beneficial use to which the vested right was actually applied, not any beneficial use to which it could be changed. The Division insists that its consumptive-use regulations, which explicitly allow reducing the amount of water to be used when the Division approves a change-of-use application, serve the Act's purpose of ensuring that the water resources are put to beneficial use and that changes in vested rights don't impinge on other water rights.

The Division is certainly right that it has this authority under administrative regulations it has adopted. K.A.R. 5-5-8(b) provides that "[e]ach approval of a change application shall be conditioned by the chief engineer with the terms, conditions and limitations the chief engineer deems necessary to protect the public interest . . . ." Wheatland contends that this regulation is invalid because it exceeded the Division's statutory authority. We must determine whether the Division did exceed this authority.

First, when an administrative agency is authorized to adopt regulations, those regulations are presumed valid, and the party challenging the regulations has the burden to show that they are invalid. Barbury v. Duckwall Alco Stores, 42 Kan. App. 2d 693,
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Syl.

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