New England Utilities v. Hydro-Quebec
| Decision Date | 15 June 1998 |
| Docket Number | Civil Action No. 97-12545-PBS. |
| Citation | 10 F.Supp.2d 53 |
| Parties | NEW ENGLAND UTILITIES, Plaintiff, v. HYDRO-QUEBEC, Defendant. |
| Court | U.S. District Court — District of Massachusetts |
David H. Erichsen, Hale & Dorr, Boston, MA, for Plaintiff.
Damian R. LaPlaca, H. Glenn Alberich, LeBoeuf, Lamb, Greene & MacRae, L.L.P., Boston, MA, for Defendant.
This case concerns an arbitration of a pricing dispute between New England Utilities ("NEU"), which is a group of American power companies, and Hydro-Quebec, a Canadian power company from which NEU purchases power. The parties disagree over whether two different "costs" should be included in the complex pricing formula in their long-term so-called Firm Energy Contract (the "Contract"). The dispute was aired at a three-week arbitration hearing in Boston before George A. Avery of the American Arbitration Association ("AAA"), who on October 10, 1997 adopted NEU's interpretation of its payment requirements to Hydro-Quebec.
Within days of the arbitrator's decision, NEU filed an action in Massachusetts Superior Court seeking to confirm the award under the Massachusetts Uniform Arbitration Act. Mass.G.L. c. 251, § 11. Hydro-Quebec filed a timely notice of removal to federal court based on diversity jurisdiction. 28 U.S.C. §§ 1332, 1441(a) & 1446(b). Hydro-Quebec then moved to vacate the Arbitrator's decision based on two "errors of law," which, Hydro-Quebec argues, are reviewable by this Court pursuant to the arbitration clause of the Contract. NEU responds (1) that Hydro-Quebec's motion to vacate was untimely under Massachusetts arbitration law; (2) that the Court's review should be limited to state or federal statutory standards less rigorous than "error of law"; and (3) that, in any event, the Arbitrator committed no legal error.
After hearing, the Court concludes that the motion to vacate is timely and that judicial review for arbitral errors of law is appropriate under the parties' agreement, but that the Arbitrator did not commit legal error in excluding the two costs. Therefore, the Court ALLOWS NEU's Motion to Confirm and DENIES Hydro-Quebec's Motion to Vacate the Decision of the Arbitrator.
The factual background recited here is based exclusively on the factual findings of the Arbitrator in his October 10, 1997 decision and on the Contract between the parties, dated October 14, 1985.
NEU is an unincorporated group of public and private utilities, each member of which is a participant in the New England Power Pool ("NEPOOL"), a common physically interconnected electric generation and transmission system for the New England region.1 (Arb'r Dec. at 1.) Twenty companies and plants are listed in the Contract as members of NEU, including large regional companies, such as New England Power Company and The Connecticut Light and Power Company, and others which are far smaller. (Contract Supp. III.) A NEPOOL Management Committee, made up of executives of some of the participating utility companies, acts on behalf of all member companies of NEU.
Hydro-Quebec, a Crown corporation of Quebec, Canada, is headquartered in Montreal.
The contractual arrangement that is the centerpiece of this dispute arose out of the recognition by some of the NEPOOL Participants in the 1970s that they were relying too heavily for their energy needs on fossil fuel, principally oil and coal, at a time when the future supply of fossil fuel was potentially unreliable and expensive. Across the northern border was Hydro-Quebec, a "major vertically integrated utility" with vast power generation capabilities relying not on fossil fuel but rather, as the name suggests, on hydro-electric power from sources in the northern part of the province of Quebec. (Arb'r Dec. at 18.) Sensing a compatible relationship, NEU and Hydro-Quebec agreed to physically interconnect their systems and arrange the delivery of power from Quebec to New England. (Id. at 18-19.)
The parties initially entered into an "Energy Contract" (not implicated in this case) which "provided for [Hydro-Quebec] energy sales to NEPOOL on an as-available basis." (Id. at 20.) The subsequent "Firm Energy Contract," the Contract under which this dispute arises, was signed on October 14, 1985 and is effective through August 31, 2004, at the latest. (Contract Art. 21.0.) NEU agreed to pay for a fixed annual quantity of energy from 1985 until August 31, 2000, and Hydro-Quebec agreed to make that fixed amount available across an agreed-upon "Interconnection" on the international border. (Contract Art. 2.1.) The fixed annual quantity is seven terawatt-hours of energy, or seven million megawatt-hours (MWh). (Id.)
The Contract's pricing structure is complicated. The price is a rate, measured in United States Dollars per megawatt-hour of energy ($/MWh). The rate is based on a "reference price," which was initially set by the Contract at $32.25/MWh.2 The "price applicable for each megawatthour of Contract Energy delivered" is calculated by multiplying the reference price times the ratio of (i) certain of NEPOOL's current fossil fuel costs to (ii) the same fossil fuel costs as they were in 1983. The historical 1983 "cost," the denominator of the ratio, was fixed by the Contract at the rate of $40.33/MWh. In other words, any variation in the rate paid by NEU to Hydro-Quebec depends exclusively on the costs NEU incurs each year for its traditional source of electricity, fossil fuel.
The use of NEU's fossil fuel costs, seemingly unrelated to the deal, as a price gauge was mutually beneficial to the parties. As the Arbitrator found, "[u]se of this approach met NEPOOL's goal of reducing the output of its fossil-fired plants and [Hydro-Quebec's] goal of creating an attractive market for its hydro-generated surplus based, not on the low production cost of hydro-generation, but on the higher production cost of the fossil-fired facilities it would supplant." (Arb'r Dec. at 19.) Said another way, for every nickel NEU saved on costs devoted to fossil fuel, it received a marginally lower rate on energy purchased from Hydro-Quebec. Hydro-Quebec, on the other hand, would presumably see an increase in volume sold to NEU of its hydro-electric power as NEU attempted to reduce its fossil fuel reliance.
The variable current fossil fuel cost figure in the Contract Energy price ratio is at the heart of this controversy between the parties. The cost figure, referred to in the Contract as the Annual Weighted NEPOOL Fossil Energy Cost ("AWNFEC"), is derived from another formula found in Supplement I of the Contract. (A copy of Supplement I is attached to this opinion as Appendix A.) The AWNFEC is "based on the actual experience of the NEPOOL Participants during the twelve-month period starting September 1st and ending August 31st." (Contract Supp. I.) It is a ratio of absolute cost (in U.S. Dollars) to energy (in MWh). Specifically, the AWNFEC
shall be the quotient obtained from dividing
1) the total cost of the Fossil Fuel burned by NEPOOL Participants for the production of electrical energy during such twelve-month period, by
2) the total net electric energy generated from Fossil Fuel by the NEPOOL Participants during such twelve-month period.
(Contract Supp. I (emphasis added).) Supplement I of the Contract devotes several pages of text to the derivation of the numerator of the formula.3 Several clauses are particularly relevant. First, the Supplement reads: "The cost of the Fossil Fuel burned by each NEPOOL Participant in any applicable twelve-month period shall be summed to yield the total for NEPOOL for such period." Almost immediately below that sentence, the Supplement continues: "The total cost of the Fossil Fuel burned will be made up of the following four components." After that introduction, four "Items" of cost are detailed under the following headings: "Fossil Fuel Cost Delivered"; "Fuel Additive Cost"; "Fossil Fuel Unloading Cost"; and "Fossil Fuel Handling Cost."
The 50-page Contract also contains a broad arbitration clause: "Any dispute between the parties with respect to this Contract shall not be submitted to any court, but shall instead be submitted to arbitration upon request of any party ...." (Contract Art. 22.0.) The parties agreed that any arbitration "shall be conducted in accordance with the Commercial Arbitration Rules, as supplemented by the Supplementary Procedures for International Commercial Arbitration, of the American Arbitration Association (AAA)." Finally, the Arbitration Clause contains this critical language:
The arbitration proceeding shall be conducted in Boston, Massachusetts or such other places as may be agreed to by the parties. In construing this Contract, the Arbitrator shall apply the laws of Quebec. The Arbitrator shall have no power to amend or add to this Contract. Subject to such limitation, the decision of the Arbitrator shall be final and binding on all parties except that any party may petition a court of competent jurisdiction for review of errors of law.
(Id. (emphasis added).) In addition to the reference to Quebec law in the arbitration clause, the Contract contains a general choice of law provision indicating that the "Contract shall be governed by and construed in accordance with the laws of Quebec." (Contract Art. 16.0.)
The record contains little or no information on the performance of this Contract prior to several years ago. In 1996, both parties demanded arbitration of disputes over pricing of energy sold by Hydro-Quebec to NEU. First, on July 11, 1996, NEU filed with the AAA a Demand for Arbitration in which it contested its obligation to pay an invoice submitted by Hydro-Quebec for additional payments due for periods for which NEU had already paid Hydro-Quebec for power delivered. The June 11, 1996 invoice "called for payments of certain amounts alleged to be due [Hyd...
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