856 F.2d 361 (1st Cir. 1988), 87-1935, Boston Edison Co. v. F.E.R.C.

Docket Nº:87-1935.
Citation:856 F.2d 361
Party Name:BOSTON EDISON COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. City of Holyoke Gas and Electric Department, et al., Intervenors.
Case Date:September 06, 1988
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 361

856 F.2d 361 (1st Cir. 1988)




City of Holyoke Gas and Electric Department, et al., Intervenors.

No. 87-1935.

United States Court of Appeals, First Circuit

September 6, 1988

        Heard June 6, 1988.

Page 362

        Carmen L. Gentile with whom James H. McGrew, Bruder, Gentile & Marcoux, Washington, D.C. and Wayne R. Frigard, Boston, Mass., were on brief, for petitioner.

        Joseph S. Davies with whom Catherine C. Cook, Gen. Counsel, and Jerome M. Feit, Sol., Washington, D.C., were on brief, for respondent.

        P. Daniel Bruner with whom Frances E. Francis and Spiegel & McDiarmid, Washington, D.C., were on brief, for intervenors.

        Before COFFIN and SELYA, Circuit Judges, and ACOSTA, [*] District Judge.

        SELYA, Circuit Judge.

        Boston Edison Company ("BECO") petitions for review of certain orders of the Federal Energy Regulatory Commission ("FERC" or the "Commission") refunding plant addition interest costs ("PAI") to some thirteen municipal agencies (the "intervenors"). We recount the history of the proceeding and then address the principal questions presented.


        Between 1974 and 1975, BECO entered into long-term energy contracts with the municipal agencies for the sale of fixed percentages of the electricity produced at "Pilgrim I," a nuclear power plant in Plymouth, Massachusetts. The contracts were filed with FERC pursuant to the Federal Power Act ("Act"), 16 U.S.C. Secs. 824 et seq. (1982). Each contract ran between BECO and a single municipal agency. They were, however, similar in style and content. Each comprised a "basic agreement" and four appendices. The basic agreement was a standard form which varied only as to dates, customers' identities, ratable amounts of energy to be purchased, entitlement percentages, and the like. The appendices were uniform. 1 Because the several unit power contracts are, for our purposes,

Page 363

functionally identical, we treat the arrangement as if only a single contract ("Contract") existed between petitioner and the thirteen intervenors.

        As we have mentioned, see supra note 1, Appendix "C" of the Contract governed the purchasers' payment obligations. It contained a financing formula for use in calculating billing rates. In 1980, BECO for the first time began invoicing the intervenors for PAI. On February 3, 1987, the intervenors filed a joint complaint with FERC, asserting that the PAI surcharges were impermissible and subjected them to a higher incremental debt cost than permitted by the financing formula. FERC granted summary judgment in the intervenors' favor, and issued an order requiring BECO to refund all PAI charges collected since 1980, with interest thereon, notwithstanding a claims limitation provision in the Contract. City of Holyoke Gas and Electric Dep't v. Boston Edison Co., No. EL87-13-000, 40 F.E.R.C. p 61,007 (July 2, 1987). Thereafter, FERC denied BECO's request for rehearing. City of Holyoke Gas and Electric Dep't v. Boston Edison Co. Nos. EL87-13-001, 002, 40 F.E.R.C. p 61,303 (September 17, 1987). We have jurisdiction of BECO's ensuing review petition under 16 U.S.C. Sec. 825 l (b) (1982).


        Petitioner contends that FERC erred in granting summary judgment in favor of the municipal agencies and in rejecting the proffer of extrinsic evidence. We are not convinced.

  1. Standard of Review.

            Generally speaking, we have accorded deference to agency expertise in contract interpretation cases where the agency's interpretation "has a reasonable basis in the contract terms, the [relevant] Act's policies and the Board's expertise...." NLRB v. C.K. Smith & Co., 569 F.2d 162, 167 (1st Cir.1977), cert. denied, 436 U.S. 957, 98 S.Ct. 3070, 57 L.Ed.2d 1122 (1978). Nevertheless, the traditional rule has been that agency decisions based on pure questions of law may be reviewed de novo. See Texas Gas Transmission Corp. v. Shell Oil Co., 363 U.S. 263, 268-70, 80 S.Ct. 1122, 1125-27, 4 L.Ed.2d 1208 (1960) (meaning of contract subject to de novo review where Commission "professed to dispose of the case solely upon its view of the result called for by the application of canons of contract construction employed by the courts, and did not in any wise rely on matters within its special competence"). Some circuits read Texas Gas expansively. See, e.g., Mid Louisiana Gas Co. v. FERC, 780 F.2d 1238, 1243 (5th Cir.1986) (when agency's reading "relies solely on the language of the ... agreement itself, rather than on any technical or factual expertise," no deference accorded). Others take a more isthmian view. See, e.g., Columbia Gas Transmission Corp. v. FPC, 530 F.2d 1056, 1059 (D.C.Cir.1976) ("there is room, in review of administrative agencies, for some deference to their views even on matters of law like the meaning of contracts ... where the understanding of the documents involved is enhanced by technical knowledge of industry conditions and practices"); see also National Fuel Gas Supply Corp. v. FERC, 811 F.2d 1563, 1570 (D.C.Cir.) (suggesting that, as a matter of routine, reviewing courts should defer to plausible agency interpretations of contracts within regulated industry), cert. denied, --- U.S. ----, 108 S.Ct. 200, 98 L.Ed.2d 151 (1987). This circuit has yet to carve its niche along this continuum.

            In the present case, BECO suggests that we are bound to follow Texas Gas literally, while FERC urges that we ought not do so. FERC's exhortation strikes a responsive chord, as there is obvious merit in the proposition that agencies always--or almost always--exercise some measure of expertise when interpreting contracts germane to their administrative fields. Then, too, the Supreme Court's recent repudiation of the idea that courts need not exhibit any deference to an agency on "pure" questions of statutory law, see Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-45, 104 S.Ct. 2778, 2781-83, 81 L.Ed.2d 694 (1984), may well adumbrate a similar result as to

    Page 364

    "pure" questions of contract interpretation. Be that as it may, we leave definitive resolution of our place on the continuum for another day. Here, all roads lead to Rome. When we scrutinize these agreements in light of the relevant principles of contract law, without ceding special deference to the agency's interpretation, our reading of them vis-a-vis the PAI point comports exactly with FERC's. For that reason, we need not decide today how much, if any, deference should be accorded to an agency's resolution of a "pure" question of contract law under less certain circumstances.

  2. Relevant Contract Provisions.

            The Contract, which purports to "constitute the entire understanding" between the parties "superseding any and all previous understandings," Contract p D-5.6, provides that each intervenor will pay a fixed percentage "of the sum of all of the costs incurred by [BECO] by virtue of: (1) the construction of, or any modifications or additions to the Unit ... and (2) the operation and maintenance of the Unit...." Id. at p C-1.0, reprinted in AppC at 1. The contractual payment equation, see id. at p C-2.0, reprinted in AppC at 1-2, includes both "capacity charges" and "monthly energy charges." The former are defined as comprising the sum of "demand charges" plus "investment expenses." Id. at p C-6.1, reprinted in AppC at 6. The latter, which are subject to a mathematically precise formula, see id. at p C-7.0, reprinted in AppC at 10, are not in issue in this proceeding.

            The terms "demand charges" and "investment expenses" are themselves further defined. It is clear that petitioner cannot recover the PAI as an investment expense. This is so because, as Appendix "C" explains, the Contract caps total interest costs, and also specifically limits the construction interest expense which can be recaptured by BECO as an "investment expense." The cap is fashioned by "Factor BI," see AppC at 9, which restricts BECO's interest costs to the "weighted average of interest rates of all bond issues existing at the time of commercial operation of the Unit, revised as required to reflect refinancings of debt issues existing at the time of the commercial operation date." Id. The application of Factor BI leaves no doubt but that the financing formula is too inelastic to encompass petitioner's actual plant addition interest expense. The parties agree, for the purposes at hand, that "the interest cost of debt existing at the commercial operation date of the unit, as subsequently refinanced, is 8.06%." 40 F.E.R.C. at p 61,013 n. 10. Conversely, "[a]djustment of the interest cost to reflect issuances during construction of the plant additions results in a debt cost of 12.852%." Id.

            Undaunted by the Factor BI barricade, petitioner resorted to the catch-all clause in the compendium of includable demand charges, see Contract p C-6.2.4, reprinted in AppC at 7, as a recoupment vehicle. Beginning in 1980, BECO billed the PAI costs which it incurred via the catch-all clause, reasoning that Factor BI applied only to the interest expense associated with the original construction of Pilgrim I and the refinancings of that indebtedness. BECO pointed to a general statement in the agreement to demonstrate that it was the parties' intent that the intervenors would pay "the sum of all of the costs incurred" by the utility. See Contract p C-1.0, reprinted in AppC at 1. Because of this paramount principle, and because Factor BI limited recovery of PAI qua investment expense, BECO argued that equity--and the central theme of the arrangement--demanded that it be permitted to recover the full PAI cost in some other manner, as through the catch-all...

To continue reading