Holyoke Water Power Company and Holyoke Power and Electric Company v. Federal Energy Regulatory Commission, New England Power Company, Intervenor

799 F.2d 755, 255 U.S. App. D.C. 102, 1986 U.S. App. LEXIS 28182

• Court: Court of Appeals for the D.C. Circuit
• Decided: August 22, 1986
• Docket: 85-1052
• Status: Published

Opinions

STARR, Circuit Judge:

Under the well-settled doctrine known as Mobile-Sierra1 the legality of a proposed rate increase by a seller of electric power turns on the terms of the contract governing the relationship between the purchasers and seller of electricity. This case calls upon us to review the Federal Energy Regulatory Commission’s interpretation of a contract executed in 1957 concerning the sale of electric power in Massachusetts. For the reasons that follow, we defer to the Commission’s interpretation of the contract and deny the petition for review.

I

In the mountains of Western Massachusetts is situated the 148-megawatt Mt. Tom electric generating facility. The plant is owned and operated by the Holyoke Water Power Company (HWP). HWP sells the entire output of the Mt. Tom plant to its wholly-owned subsidiary, Holyoke Power and Electric Company (HP & E), which under the terms of the same agreement sells 39% of Mt. Tom’s output back to its parent company, HWP. Under a separate contract, HP & E sells 23% of the Mt. Tom facility’s output to Western Massachusetts Electric Company, an affiliate of the two Holyoke Companies (Holyoke) and a wholly-owned subsidiary of Northeast Utilities situated to the south in Hartford, Connecticut. Under the third and last contract, HP & E sells the remaining 38% of Mt. Tom’s output to New England Power Co., which is neither an affiliate nor otherwise a part of the Northeast Utilities system. In the background is the final member of the cast of characters, the First National Bank of Boston. First National is a party to each of the three power contracts as trustee under a mortgage indenture and deed of trust between Mt. Tom’s owner, HWP, and the Old Colony Trust Company, which provided the original construction financing for the facility and to whose duties and privileges First National has succeeded.

Each of the power contracts prescribes monthly rates based on a demand charge and an energy charge.² Thirty pages of the contract are devoted to specifying the components of the cost-related formula for determining those charges. The contract formula rate proved satisfactory to all the parties from the inception of Mt. Tom’s operations in 1960 until the last day of July 1984,³ when Holyoke filed a proposed unilateral rate increase with the Commission. Holyoke justified its proposed rate on the ground that the rate formula agreed upon by the parties caused it “to earn an inadequate rate of return.” Brief for Petitioners at 11.

While the affiliated companies all fell into line with respect to the price hike, as did First National as trustee, New England Power objected. In its filings of protest, New England Power contended that Ho-lyoke’s proposed unilateral rate increase was not permitted under the contract and was thus illegal under the Mobile-Sierra doctrine. First, New England Power argued that the contract provides for a specified rate formula not subject to unilateral modification by Holyoke. Second, it argued that the contract specifically provides for only one situation, not applicable, in which the seller could effect a unilateral rate increase. In response, Holyoke argued that the contract authorized the challenged price hike by virtue of a contractual provision expressly incorporating Massachusetts law, including a provision of state law permitting unilateral rate increases subject to temporary suspension and subsequent modification by the governing regulatory authority.

Acting with dispatch, the Commission suspended the proposed rate increases pending review of the contract in light of the Mobile-Sierra arguments advanced by New England Power. Shortly thereafter, the Commission adopted an interpretation of the contract that partly incorporated the competing positions of both Holyoke and New England Power. The Commission agreed with New England Power that the rate formula contained in the contract would, standing alone, prohibit any rate changes not agreed upon by the parties. But the Commission also agreed with Ho-lyoke that the contractual reference to state law reflected the parties’ intent that the contract rate be subject to review and determination by the pertinent regulatory body. The Commission declined, however, to embrace Holyoke’s position that the contractual reference to state law conferred upon Holyoke the right to change rates prior to approval of the governing regulatory body. On the heels of the Commission’s denial of rehearing in January 1985, Holyoke filed the present petition for review.

II

Holyoke’s principal argument before us is that the Commission misinterpreted the significance of the reference to Massachusetts law in section 6.06(a) of the contract.⁴ It is undisputed, however, that in construing this contractual provision FERC applied the proper legal principle that “state law is relevant only to the extent intended by the parties.” Joint Appendix (J.A.) at 219 (Supplemental Order at 4); see Appalachian Power Co. v. FPC, 529 F.2d 342, 347 n. 35 (D.C.Cir.), cert. denied, 429 U.S. 816, 97 S.Ct. 58, 50 L.Ed.2d 76 (1976).

The Commission crafted a reasonable construction of section 6.06(a) in rejecting Holyoke’s view that this provision incorporated Massachusetts’ procedural mechanism permitting unilateral rate increases. FERC concluded that the reference in section 6.06(a) to “Chapter 164 of the General Laws of Massachusets” triggered the application of section 94A of that chapter. As Holyoke concedes, the Commission’s conclusion in this respect was fully justified since under Chapter 164 contracts such as those at issue here are expressly governed by section 94A. See Brief for Petitioners at 21. The Commission also adopted Ho-lyoke’s position (and rejected New England Power’s contrary view) that section 6.06(a) of the agreement subjected the contract rate to review and determination by the regulatory body having jurisdiction. In our view, no other reading of section 6.06(a) was possible in light of the clear language in that provision mandating regulatory oversight and in light of the requirement in section 94A of Chapter 164 that utility contracts provide for such oversight or else be rendered void.

Holyoke faults FERC, however, for failing to draw the inference that the contractual reference to Chapter 164 also unequivocally evinces the intent of the parties to subject the contractual rate formula to section 94 of that chapter, which provides for unilateral rate increases effective upon filing (subject to temporary suspension and later alteration by the regulatory authority). But, as the Commission emphasized in both its orders under review, section 6.06 of the contract by its express terms “only incorporates the provisions of Chapter 164 ‘insofar as the same may be applicable to this agreement.’ ” J.A. at 219 (Supplemental Order at 4) (emphasis added by Commission); see also J.A. at 236 (Order Denying Rehearing at 2). Moreover, Holyoke expressly conceded before the Commission and this court that the requirement for regulatory oversight in section 94A of Chapter 164 may be satisfied by subjecting the contract price to review and determination under either section 94 or section 93. See Brief for Petitioners at 22-24, 27, 29; J.A. at 197, 225.⁵ Holyoke’s admission that Massachusetts law permitted “the parties [to] include Section 93 as the only rate review mechanism in their contract,” Brief for Petitioners at 27, is quite significant because Section 93 provides for rate changes effective only upon regulatory approval. Thus, this case is entirely distinguishable from those in which the contract incorporated state law and state law allowed for only one type of filing. Cf. Richmond Power & Light v. FPC, 481 F.2d 490, 500 (D.C.Cir.) (finding contractual reference to state law controlling on issue of whether utility could unilaterally raise rates when state law provided for one rate review procedure), cert. denied, 414 U.S. 1068, 94 S.Ct. 578, 38 L.Ed.2d 473 (1973).

Under these circumstances, the Commission quite reasonably looked to the remainder of the agreement to determine whether the parties intended to incorporate section 94. As the Commission correctly observed, the agreement contains no provision authorizing Holyoke to file rate increases with an immediate effective date (after notice and suspension) whenever it chooses. The absence of such a provision is not surprising in view of the elaborate fixed rate formula set out in the contract. Rather, section 6.06(b) of the agreement allows Ho-lyoke to file a rate increase with an immediate effective date only when the contract rate has been reduced by government order and only in an amount not to exceed the reduction.⁶ Those conditions, as all readily admit, are not present here. As a result, we are persuaded by the conclusion of the Commission that its textual analysis of section 6.06(a) was “bolstered” by the specific unilateral-increase vehicle expressly agreed to by the parties in section 6.06(b). J.A. at 220 (Supplemental Order at 5).

In our view, therefore, section 6.06(a) of the contract can reasonably be interpreted to provide for the regulatory oversight required by section 94A of applicable state law without granting Holyoke the right to effect a unilateral modification of the rate formula set forth with great detail elsewhere in the contract. Cf. Kansas Cities v. FERC, 723 F.2d 82, 88 (D.C.Cir.1983) (contractual provisions subjecting agreed-upon rates to regulatory oversight are generally construed to authorize rate changes upon approval of the Commission applying a “just and reasonable” standard). Although Holyoke’s more expansive interpretation of section 6.06(a) may also be reasonable, we nonetheless cannot overturn a Commission interpretation that is, without doubt, “amply supported both factually and legally.”⁷ Gulf States Utilities Co. v. FPC, 518 F.2d 450, 457 (D.C.Cir.1975), (quoting United Gas Pipe Line Co. v. Memphis Light, Gas & Water Division, 358 U.S. 103, 114, 79 S.Ct. 194, 200, 3 L.Ed.2d 153 (1958)).

Denied.

1 . United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373 (1956); FPC v. Sierra Pacific Power Co., 350 U.S. 348, 76 S.Ct. 368, 100 L.Ed. 388 (1956); see Richmond Power and Light v. FPC, 481 F.2d 490, 492-493 (D.C.Cir.), cert. denied, 414 U.S. 1068, 94 S.Ct. 578, 38 L.Ed.2d 473 (1973). The rate-setting provisions of the contract are controlling except when overriden by the Commission’s power to adjust rates in the public interest. Mobile, 350 U.S. at 344, 76 S.Ct. at 380; Cities of Bethany v. FERC, 727 F.2d 1131, 1142 (D.C.Cir.), cert. denied, 469 U.S. 917, 105 S.Ct. 293, 83 L.Ed.2d 229 (1984).

2 . Although New England Power did not challenge Holyoke’s attempt to amend the other two contracts, the Commission examined all three contracts because they contain substantially identical provisions. Joint Appendix at 217.

3 . Over this twenty-four year span the parties made only six minor amendments, all by mutual consent.

4 . Because Holyoke and the Commission find § 6.06(b) relevant to interpreting 6.06(a), we reproduce all of § 6.06 below:

Sec. 6.06 Regulation:

(a) This agreement is made subject to present or future municipal, state or federal laws or ordinances and to present or future regulations or orders properly issued by governmental regulatory bodies having jurisdiction, and the obligations of the Parties hereunder are conditioned upon authorization by the Federal Power Commission of the issuance of securities by HWP for financing of the Mt. Tom Facilities, and approval of Exhibit A hereto by the Massachusetts Department of Public Utilities, in accordance with Massachusetts Acts of 1926, Chapter 147.

In particular, the prices to be paid for electricity to be delivered hereunder, as set forth herein, shall be subject to review and determination by the Massachusetts Department of Public Utilities in any proceeding brought under Chapter 164 of the General Laws of Massachusetts, as amended, to the extent provided for and in accordance with the provisions of said chapter, insofar as the same may be applicable to this agreement.

(b) If any reduction in the charges for electricity that would otherwise be payable hereunder is required, at any time or from time to time, by law or by order of any governmental regulatory body having jurisdiction, including courts, HWP and/or HP & E shall be free to take any steps necessary or appropriate in accordance with the then laws and rules, regulations and orders of governmental regulatory bodies having jurisdiction, including the filing of new rate schedules, in order to receive from NEPCO for the electricity sold hereunder amounts no greater than those which would be payable by NEPCO in the absence of such reduction and such amounts shall be paid by NEPCO.

5 . The dissent would grant Holyoke’s petition for review on the ground that the Commission failed to recognize that Holyoke’s own interpretation of the statute was, in point of fact, erroneous. Dissent at 765-766. We do not, however, reach the merits of the dissent’s statutory analysis. This court lacks jurisdiction to reverse the Commission on the basis of an error raised by the court sua sponte if the error was not "urged" before the Commission in the rehearing application. 16 U.S.C. § 825/(b) (1982); see, e.g., Federal Power Comtn’n v. Colorado Interstate Gas Co., 348 U.S. 492, 498-99, 75 S.Ct. 467, 471, 99 L.Ed. 583 (1955) (construing identical provision in section 19(b) of the Natural Gas Act); Rhode Island Consumers’ Council v. Federal Power Comm’n, 504 F.2d 203, 212 (D.C.Cir. 1974) (same). A fortiori, we may not reverse the Commission for relying on petitioners’ own interpretation of Massachusetts law.

Although this point was never argued by petitioners, the dissent also chooses to elucidate at length on its conclusion that "no utility can initiate a rate change under § 93." Dissent infra, at 770 (emphasis deleted). Even assuming this conclusion is correct, we believe it provides no basis for reversing the portion of the Commission’s decision which is before us. If rate increases cannot be initiated by a utility under section 93, the Commission arguably erred by allowing Holyoke to seek a prospective rate increase from the Commission. But as all the parties and the dissent recognize, ”[t]his important ruling ... is not challenged on appeal.” Dissent at 764; see also Reply Brief for Petitioners at vii n. 4.

The dissent fears that our failure to reach out and decide these issues may create "precedent that saddles the agency, the reviewing court, and perhaps even future litigants with an incorrect construction of the statute.” Dissent at 769. To the contrary, our express refusal to resolve issues on which the dissent opines creates no precedent except for that of deference to the statutory bar on judicial resolution of errors not urged before the agency. Of course, our decision will not bar the Commission from considering the points raised by the dissent if they are presented in a future filing request. Moreover, the dissent wrongly assumes that a court reviewing an administrative decision must resolve all issues of pure law arguably bearing on the correctness of that decision. For example, under settled principles a court will not consider legal bases for affirming an agency’s decision that were not relied upon in the agency's decision. SEC v. Chenery, 318 U.S. 80, 63 S.Ct. 454, 87 L.Ed. 626 (1943). The dissent recognizes as much when it refuses to consider New England Power’s arguments that specific language in sections 94 and 94A contradicts Holyoke’s view that section 94 authorizes unilateral rate increases for purposes of this type of contract. See Brief for New England Power at 14, 19.

6 . Holyoke argues that the office of section 6.06(b) was exceedingly limited in nature, aimed it is said at protecting the trustee — First National — by securing New England Power’s express waiver of the right to contest the specific sort of unilateral hike envisioned by that subsection. Assuming this waiver theory should not be avoided as contrary to public policy, cf. Papago Tribal Utility Auth. v. FERC, 723 F.2d 950, (D.C.Cir.1983), cert. denied, 467 U.S. 1241, 104 S.Ct. 3511, 82 L.Ed.2d 820 (1984), neither the plain language of the provision nor the contract as a whole requires such an interpretation. At any rate, we cannot reject the Commission’s reasonable interpretation of section 6.06(b) because Holyoke offers a plausible, albeit less than compelling, alternative. See United Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., 358 U.S. 103, 114-15, 79 S.Ct. 194, 200-01, 3 L.Ed.2d 153 (1958); Kansas Cities v. FERC, 723 F.2d 82, 87 (D.C.Cir.1983).

7 . We recognize full well that the task of interpretation is rendered all the more difficult by the considerable passage of time since the contracts were framed and the rather different legal milieu obtaining then. Nevertheless, the difficulty of the task of divining the parties’ intent under changed circumstances is all the more reason for this court to defer "to the judgment of the expert agency that deals with agreements of this sort on a daily basis.” Kansas Cities, 723 F.2d at 87.