OTECC v. Co-Gen Co.

• Decision Date: 21 June 2000
• Citation: 168 Or. App. 466,7 P.3d 594
• Parties: OREGON TRAIL ELECTRIC CONSUMERS COOPERATIVE, INC., an Oregon corporation, Appellant—Cross-Respondent, v. CO-GEN CO., an Oregon general partnership, D.R. Johnson Lumber Co., an Oregon corporation, Strawberry Mountain Power Company, an Oregon corporation, and Jodi Johnson Prairie Trust, Respondents—Cross-Appellants.
• Court: Oregon Court of Appeals

7 P.3d 594

168 Or. App. 466

OREGON TRAIL ELECTRIC CONSUMERS COOPERATIVE, INC., an Oregon corporation, Appellant—Cross-Respondent, v. CO-GEN CO., an Oregon general partnership, D.R. Johnson Lumber Co., an Oregon corporation, Strawberry Mountain Power Company, an Oregon corporation, and Jodi Johnson Prairie Trust, Respondents—Cross-Appellants.

(96-CV-0203 ST; CA A98842)

Court of Appeals of Oregon.

Argued and Submitted October 15, 1998.

Decided June 21, 2000.

Barbee B. Lyon, Portland, argued the cause for appellant—cross-respondent. With him on the briefs was Tonkon Torp LLP.

Arden E. Shenker argued the cause for respondents—cross-appellants. With him on the briefs were Robert T. Mautz and Mautz, Baum & O'Hanlon LLP and Michael J. Gentry and Tooze, Duden, Creamer, Frank & Hutchison. Before De MUNIZ, Presiding Judge, and HASELTON and LINDER, Judges.

LINDER, J.

This is a declaratory judgment action in which plaintiff, Oregon Trail Electric Consumers Cooperative, Inc. (OTECC), appeals and defendants, Co-Gen Co., et al.¹ (Co-Gen), cross-appeal. OTECC sought a declaration that, under a 1984 contract for the purchase of electricity, the circuit court could modify the negotiated purchase price upon a finding that the price is contrary to the public interest. OTECC also sought a related "declaration" modifying the prices. To resolve the issues presented by the action, the trial court bifurcated the trial. In the first phase, the trial court would decide whether, under the contract, the negotiated price was subject to modification and, if so, whether the circuit court was the correct entity to make the modification. If both questions were answered in the affirmative, the trial court in the second phase was to determine whether the negotiated price should be modified and, if so, by how much. The trial court never reached the second phase because it concluded that the contract did not give OTECC a right to seek modification of the purchase price. The trial court therefore entered judgment for Co-Gen accordingly.

By way of appeal, cross-assignment of error, and cross-appeal, the parties raise a host of issues relating to the trial court's conclusions about the applicable law, its interpretation of the contract, its ruling on OTECC's motions to amend the complaint, and its denial of Co-Gen's motion for attorney fees. The central issue, however, is that of the contract's meaning. We begin there and turn to the other issues sequentially. On both the appeal and the cross-appeal, we affirm.

I. BACKGROUND

The contract that is the focus of this dispute was entered into in 1984 between CP National Corporation (CP) and Prairie Wood Products (Prairie), which, respectively, are OTECC's and Co-Gen's predecessors in interest.² Now that the contract has been assumed by OTECC and Co-Gen, it effectively provides for OTECC to purchase energy from Co-Gen through the end of 2005. The contract sets a fixed price schedule for those energy purchases. Significantly, it further provides that the contract prices "are subject to modification, to the extent the Oregon Public Utility Commissioner, or his successor, may modify the agreed payments upon a finding that such payments are contrary to public policy." The interpretation of that provision, Article IV.B of the contract, is the centerpiece of this case.

Co-Gen is a "cogeneration facility"—or "cogenerator"—as was Prairie. Cogenerators are a distinctive class of energy production facilities. As we previously have described them, cogenerators produce two forms of useful energy, such as electric power and steam. See generally Snow Mt. Pine Company v. Maudlin, 84 Or.App. 590, 593, 734 P.2d 1366,

rev. den. 303 Or. 591, 739 P.2d 571 (1987), aff'd on subsequent appeal by Snow Mountain Pine Co. v. PUC, 102 Or. App. 687, 795 P.2d 611,

rev. den. 310 Or. 612, 801 P.2d 840 (1990), cert. den. 499 U.S. 961, 111 S.Ct. 1585, 113 L.Ed.2d 650 (1991). In producing the two energy forms, cogenerators use significantly less fuel than would be required to produce the two independently. Id. Because of those potential fuel and energy savings, and against the backdrop of the fuel shortages and rapidly escalating energy prices that prevailed in the 1970s, section 210 of the Public Utility Regulatory Policies Act of 1978, 16 USC § 824a-3 (PURPA), was enacted to encourage the development of cogeneration facilities. See Snow Mt. Pine Company, 84 Or.App. at 593,

734 P.2d 1366 (discussing PURPA).

One of the key ways in which PURPA fosters development of cogeneration facilities is by ensuring that they have a market for the energy they produce. PURPA achieves that by requiring electric utilities to purchase energy from cogenerators. See id. at 594, 734 P.2d 1366 (discussing PURPA, its implementing regulations, and parallel state statutes); FERC v. Mississippi, 456 U.S. 742, 750, 102 S.Ct. 2126, 72 L.Ed.2d 532 (1982). Significantly, however, the price that the utility must pay for the energy is open to negotiation. The price must be "sufficient to encourage the production of energy," which, pursuant to Oregon's implementing legislation, requires the price to be not less than the purchasing utility's "avoided costs." Snow Mt. Pine Company, 84 Or.App. at 595,734 P.2d 1366. Avoided costs are the expenses the utility would incur to generate the same energy itself or, alternatively, what the utility would pay to buy energy from another source.³

Under PURPA, a cogenerator can enter into a long-term contract (as well as other forms of "legally enforceable obligations") that requires the cogenerator to sell, and a utility to buy, power over the course of many years. When a cogenerator elects to do that, the cogenerator may have the price determined in one of two ways. First, the cogenerator can opt to have the purchase price calculated upon delivery of the energy to the utility. Id. at 595-96, 734 P.2d 1366. Alternatively, the cogenerator may choose to have the price fixed in the contract. In that event, the price is based on a projection of avoided costs "over the life of the obligation, as calculated `at the time the obligation is incurred.'" Id. If the cogenerator opts for a fixed contract price and the parties cannot agree on that price, it is set (or was set, at the time of this contract) by the Public Utility Commissioner (Commissioner). Id. at 599, 734 P.2d 1366.

The parties' contract in this case arises under that regulatory scheme. As a cogeneration facility, Prairie was entitled to require CP, as an electric utility, to purchase energy from it. Prairie chose to do so pursuant to a long-term contract, one that would bind the parties for 20 years (i.e., through the year 2005). In setting the purchase price, Prairie opted to contract for fixed prices, rather than for prices determined upon delivery of the energy.

When the parties' contract negotiations were underway, PURPA was relatively new, as were cogeneration energy contracts. In their negotiations, the parties disagreed about how avoided costs should be calculated. Ultimately, they used an avoided cost schedule that the Commissioner believed at the time was correct, even though the costs in that schedule were higher than CP's actual avoided costs. For CP, that meant that the price for energy supplied by the cogenerator was more than CP was paying its current energy supplier and more than CP expected to pay in the future. That meant in turn that, if CP could not adjust its rates to pass the higher costs on to its customers, it would lose money. As at least a partial concession to using that schedule, the parties agreed to a clause providing that the agreement would not be effective until various approvals were obtained from the Commissioner, in a form satisfactory to CP. That provision was designed to ensure that CP's utility rates would be adjusted based on the price of the energy purchased under the cogeneration contract, thus shifting the cost to CP's customers.

During that same period, CP was involved in negotiations with Snow Mountain Pine Company (Snow Mountain), another cogenerator that similarly disagreed with CP as to which schedule of avoided costs should be used. The Snow Mountain contract is not directly relevant here, but what happened in connection with it provides relevant context for this case. In the Snow Mountain negotiations, the parties failed to reach agreement on the price. CP could not persuade Snow Mountain, as it had persuaded Prairie in this case, to include in the contract a provision that the price would be effective only if the Commissioner permitted CP to adjust its rates for its customers accordingly. When negotiations fell through, Snow Mountain filed a complaint with the Commissioner, seeking to have him settle the price issue. Administrative litigation, including two appeals to this court, eventually led to a determination that the parties should base the price on the lower schedule of avoided costs that CP urged should be used (i.e., the same schedule that CP was unsuccessful in persuading Prairie to use in the negotiations for this contract). See Snow Mt. Pine Company, 84 Or.App. at 597-601,

734 P.2d 1366,

aff'd on subsequent appeal by Snow Mountain Pine Co.,

102 Or.App. at 689,

795 P.2d 611.

By then, however, this contract had been signed, had been approved by the Commissioner, and had become effective. CP bypassed the administrative remedies it could have pursued to have the Commissioner set the price and to litigate the issue of the appropriate schedule of avoided costs. Consequently, CP—and now OTECC—was left with a valid and enforceable contract. OTECC's only remedies are those, if any, provided by the contract.

Those events were the prelude to this litigation. OTECC filed this declaratory judgment action to seek relief from what it views as the excessively high energy prices set by the contract. As the contractual basis for relief, OTECC relied on Article IV.B of the contract, which states:

"The prices set forth

...