Massachusetts Mun. Wholesale Elec. Co. v. Town of Danvers

• Decision Date: 22 August 1991
• Citation: 411 Mass. 39,577 N.E.2d 283
• Parties: , Util. L. Rep. P 26,146 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY et al. 1 v. TOWN OF DANVERS et al. 2
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 283

577 N.E.2d 283

411 Mass. 39, Util. L. Rep. P 26,146

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY et al.¹ v. TOWN OF DANVERS et al. ²

Supreme Judicial Court of Massachusetts,Suffolk.

Argued May 9, 1991.

Decided Aug. 22, 1991.

Alan K. Posner, Alan D. Mandl and Mark W. Corner, Boston, with him, for Shrewsbury Elec. Light Plant, et al.

Earle C. Cooley, Roy P. Giarrusso, Boston, and Nathan S. Paven, Quincy, with him, for Hudson Light and Power Dept., et al.

Garrick F. Cole, Boston, for West Boylston Mun. Light Plant.

Howard J. Roin, Michele Odorizzi, Chicago, Ill., and Kevin J. Lesinski, Boston, with him, for intervenor.

Gerald J. Caruso, Nicholas J. Scobbo, Jr. and Ann Ryan-Small, Boston, with him, for plaintiff.

Francis P. McHugh, Jr., Asst. Town Counsel, East Boston, was present but did not argue, for Town of Danvers, et al.

GREANEY, Justice.

In this case we are asked to construe power sales agreements between the Massachusetts Municipal Wholesale Electric Company (MMWEC) and utilities in Massachusetts. These agreements are part of a project created to finance the acquisition of electric power from the Seabrook nuclear power project by utilities and municipalities in Massachusetts and surrounding States, including Vermont. The Vermont Supreme Court determined that the power sales agreements between MMWEC and certain utilities in Vermont were void ab initio. The remaining municipalities and utilities in Massachusetts (defendants) now claim that this decision by the Vermont Supreme Court has rendered their agreements invalid and unenforceable. In the alternative, they argue that they are not required, under their agreements, to step up their obligations in order to cover payments no longer being made by the Vermont utilities. A judge of the Superior Court determined that the defendants' agreements continue to be valid, and that the defendants are required to step up their obligations under their agreements. We agree with this conclusion.

The factual and procedural background of the case is as follows. MMWEC is a public instrumentality of the Commonwealth created in 1975 for the purpose of financing the purchase of electric power by utilities within and outside of Massachusetts. See St.1975, c. 775. Its membership is made up of cities and towns in Massachusetts having municipal electric departments. MMWEC acts as a wholesaler, purchasing electricity in bulk from large generating facilities and then selling the electricity to its members, and to other utilities and municipal electric systems within and outside of Massachusetts. Under this arrangement, small utilities and municipal electric systems are able to aggregate their resources and enjoy the economic benefits associated with centralized power facilities providing electricity at lower cost to their ratepayers.

When there is sufficient interest in an electric power facility, MMWEC creates a planning, acquisition, and finance vehicle, called a "project," through which MMWEC acquires an ownership interest in a facility. Member municipal electric departments and other utilities enter into contracts with MMWEC to obtain shares of the project's capability by means of a document known as a power sales agreement (PSA). They thereby become participants in the project, and are required to make periodic payments for their shares of the project's capability. ³

For any given project, MMWEC is authorized to issue long-term revenue bonds to finance the costs of constructing or acquiring ownership interests in the electric power facility. Because of the inherent uncertainty involved in projects to construct electric power facilities and acquire supplies of electric power, the cost of financing such projects is typically high. In creating MMWEC, the Legislature recognized this fact and provided for methods to insulate lenders from the uncertainty, thereby making it possible to obtain financing more economically.

The most important protection for lenders is known as the "take or pay" provision. Principal and interest on the bonds are paid solely from the payments made by participants under the PSAs. The Legislature, therefore, permits MMWEC to insert provisions in the PSAs which impose an unconditional obligation on the participants to make their payments "whether a facility is undertaken, completed, operable or operating and notwithstanding the suspension, interruption, interference, reduction or curtailment of the output of a facility." St.1975, c. 775, §§ 5(t )(ii), 6(a )(ii). These take or pay provisions thus allow MMWEC to place the risk that a project will fail exclusively on the participants who enter contracts with MMWEC, guaranteeing MMWEC's stream of revenues and the bondholders' repayment regardless of the success of the project. As a result of this protection, MMWEC is able to obtain more favorable interest rates on its bonds.

In addition to the take or pay provisions, the Legislature authorized MMWEC to include in its PSAs "step-up" provisions that provide, "in the event of default by any party thereto in the performance of its obligations thereunder, for other parties to assume the obligations and succeed to the rights and interests of the defaulting party, pro rata or otherwise as may be agreed upon in the contract." Id. at § 6(a ). This provision also contributes to the security of the bonds and the reduced interest rates because it places the risk that one participant will default under the agreement--and cease to make payments or meet other obligations--on the remaining participants rather than on the bondholders.

In 1980, MMWEC received approval from the Massachusetts Department of Public Utilities (DPU) to acquire a 6% ownership interest in two nuclear power plants under construction in the town of Seabrook, New Hampshire. MMWEC acquired its interest from the facility's owner, Public Service Company of New Hampshire, which was having difficulty financing the project. The acquisition of this interest was known as "Project 6," and it was financed by the issuance of general revenue bonds. The bonds were secured by PSAs (Project 6 PSAs), which had been entered into by MMWEC and various utilities and municipal electric power systems. The Massachusetts participants had an 80% stake in the project, and out-of-state participants took the remaining 20%. The Project 6 PSAs contain a take or pay provision, a step-up provision, and various other provisions authorized by the Legislature which were designed to insulate bondholders from the risks involved with Project 6. A general bond resolution was also executed, which was interrelated with the Project 6 PSAs.

In 1986, the Vermont Department of Public Services, an agency representing Vermont consumer interests, filed a lawsuit in the Vermont courts which challenged the legal authority of the eight municipal and cooperative utilities from Vermont that were involved in Project 6 to execute and perform their Project 6 PSAs. On September 8, 1988, the Vermont Supreme Court determined that all eight Vermont utilities lacked authority to enter into their Project 6 PSAs. That court held that those PSAs were void ab initio and that the Vermont utilities had no obligations under them. Vermont Dept. of Pub. Serv. v. Massachusetts Mun. Wholesale Elec. Co., 151 Vt. 73, 558 A.2d 215 (1988), cert. denied, 493 U.S. 872, 110 S.Ct. 202, 107 L.Ed.2d 155 (1989).

On March 31, 1989, MMWEC issued bills to the remaining participants for monthly power costs that expressly increased each participant's payments pro rata to cover an amount equal to the 14.94% of the project capability which was no longer being paid for by the Vermont utilities. This increase was based on the step-up provision in the Project 6 PSAs. MMWEC has included this step-up in every bill since March 31, 1989.

Following MMWEC's action, lawsuits were brought by some of the utilities and by MMWEC in the Superior Court and in the Supreme Judicial Court for Suffolk County. Eventually all the defendants joined the actions, as did Continental Bank, N.A., which acts as the trustee for the bondholders. In the lawsuits, MMWEC sought a declaration that the Project 6 PSAs with the defendants remained in effect, and that the step-up provisions in the agreements had been triggered. The utilities sought a declaration that the Vermont decision invalidated their PSAs and, in the alternative, that the step-up provisions were not applicable to the situation. A preliminary injunction was entered in the Supreme Judicial Court for Suffolk County ordering the defendants to continue to satisfy their obligations under their Project 6 PSAs.

All the actions were consolidated into the present action, which was transferred to the Superior Court for decision. In the Superior Court, all parties, except Continental Bank, moved for partial summary judgment on two issues: (1) whether the Project 6 PSAs were void due to the failure of a condition precedent that MMWEC have in effect valid PSAs for 100% of the power to be sold, and (2) whether the nonpayment of MMWEC's bills by the Vermont utilities after the Vermont decision constituted a "default" under the agreements such that the step-up provision in each PSA was brought into effect. Continental Bank moved for summary judgment on all issues.

After a hearing on the pending summary judgment motions, a judge of the Superior Court decided that the defendants' Project 6 PSAs were valid, and that "the voiding ab initio by the Vermont Supreme Court effected a default within the meaning of the governing documents and thus brought into play all the results, in terms of step-up and the like, that what one might call a garden variety default of simple non-payment would have triggered." Pursuant to Mass.R.Civ.P. 64, 365 Mass. 831 (1974), the judge reported the case (the facts being undisputed), and the correctness of his decision to the Appeals Court, and stayed all further proceedings in the Superior Court. We transfer...