Holyoke Water Power Co. v. F.E.R.C.

• Decision Date: 22 August 1986
• Docket Number: No. 85-1052,85-1052
• Citation: 799 F.2d 755
• Parties: HOLYOKE WATER POWER COMPANY and Holyoke Power and Electric Company, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, New England Power Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 755

799 F.2d 755

255 U.S.App.D.C. 102

HOLYOKE WATER POWER COMPANY and Holyoke Power and Electric Company, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent New England Power Company, Intervenor.

No. 85-1052.

United States Court of Appeals, District of Columbia Circuit.

Argued Jan. 10, 1986.

Decided Aug. 22, 1986.

As Amended Aug. 22, 1986.

Robert P. Wax, with whom James R. McIntosh, Hartford, Conn., was on brief for petitioners.

John N. Estes, Atty., Federal Energy Regulatory Com'n, Washington, D.C., for respondent.

Barbara J. Weller, Deputy Sol. and Leslie J. Lawner, Atty., Federal Energy Regulatory Com'n, Washingtion, D.C., were on brief, for respondent.

Peter G. Flynn, Providence, R.I., was on brief for intervenor, New England Power Co.

Before STARR, Circuit Judge, J. SKELLY WRIGHT and MacKINNON, Senior Circuit Judges.

Opinion for the Court filed by Circuit Judge STARR.

Dissenting opinion filed by Senior Circuit Judge MacKINNON.

STARR, Circuit Judge:

Under the well-settled doctrine known as Mobile-Sierra, ¹ 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 Holyoke'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 Holyoke 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 Holyoke'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 Holyoke 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 (...