Southwestern Elec. Co-Op., Inc. v. F.E.R.C., 02-1168.

• Decision Date: 07 November 2003
• Docket Number: No. 02-1168.,02-1168.
• Citation: 347 F.3d 975
• Parties: SOUTHWESTERN ELECTRIC COOPERATIVE, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Soyland Power Cooperative, Inc., Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

347 F.3d 975

SOUTHWESTERN ELECTRIC COOPERATIVE, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Soyland Power Cooperative, Inc., Intervenor.

No. 02-1168.

United States Court of Appeals, District of Columbia Circuit.

Argued October 10, 2003.

Decided November 7, 2003.

On Petition for Review of Orders of the Federal Energy Regulatory Commission.

Michael R. Postar argued the cause for petitioner. With him on the briefs was Eli D. Eilbott.

David H. Coffman, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Cynthia A. Marlette, General Counsel, and Dennis Lane, Solicitor.

William D. DeGrandis argued the cause for intervenor. With him on the brief was Bruce D. Ryan.

Before: RANDOLPH, ROGERS, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

Southwestern Electric Cooperative, Inc. ("Southwestern") challenges four orders of the Federal Energy Regulatory Commission relating to its withdrawal from the Soyland Power Cooperative, Inc. ("Soyland"). The parties entered into a series of agreements for accomplishing the withdrawal. Due to ambiguities in the agreements, the Commission endeavored to interpret the agreements in a manner that best reflected the parties' intent, consistent with the public interest. On appeal, Southwestern contends that the Commission erred by failing to dismiss Soyland's counterclaims as barred under the Closing Agreement and Mutual Release ("Release") and, alternatively, as unduly discriminatory. Southwestern additionally contends that the Commission was arbitrary and capricious in construing and applying the withdrawal formula.

We hold that the Commission's interpretation of the Release, namely that Southwestern would be released from further liability for its withdrawal obligations to Soyland only once it paid the amount that was ultimately due under the parties' agreements, was reasonable. By contrast, Southwestern's interpretation relies on an exception in the Release while both ignoring anterior language in the Release that limits its effect to prior acts or omissions, and also failing to account adequately for the ambiguity of what constitutes a default under the Release. The Commission also reasonably concluded that there was insufficient evidence of undue discrimination, particularly in light of the fluidity of the situation of other contemporaneously withdrawing members. Accordingly, because Southwestern's other challenges did not show the Commission's construction and application of the parties' agreements to be arbitrary and capricious, but a reasonable effort to reflect the parties' intent, we deny the petition for review.

I.

Southwestern Electric Cooperative is an electricity distributor serving customers in rural Illinois. Soyland Power Cooperative provides its member-owners with electricity generation and transmission services. All Soyland members are electricity distribution cooperatives in rural Illinois. In 1976, Southwestern entered into a long-term all-requirements wholesale power contract with Soyland that was due to expire in 2015. Southwestern thereby became a member of Soyland, and was represented on Soyland's Board of Directors. Until 1996, Soyland had operated subject to rules of the Rural Electrification Administration, now the Rural Utilities Service ("RUS"), pursuant to the terms of a large loan. RUS required the cooperative to secure the loan by entering into long-term, full-requirements wholesale power contracts with all its members. After paying off its $1.1 billion debt to RUS in 1996, however, Soyland became subject to regulation by the Federal Energy Regulatory Commission. Pursuant to § 205 of the Federal Power Act ("FPA"), 16 U.S.C. § 824d, and the Commission's regulations, 18 C.F.R. pt. 35, Soyland filed its wholesale power contracts, formula rate for recovery of its costs under those contracts, and its 1997 budget. The Commission accepted those contracts and the formula rate. Soyland Power Coop., Inc., Letter Order, Docket No. ER96-2967 ff. (May 21, 1997).

Relieved of its obligation to maintain the long-term contracts with its members, Soyland formed a special Buyout Evaluation Committee to develop a method for members to withdraw from the cooperative. The committee's formation was spurred by Southwestern's expressed desire, previously frustrated, see United States v. Southwestern Elec. Coop., Inc. v. Soyland Power Coop., No. 86-3419 (S.D.Ill.Dec. 28, 1987) (Memorandum and Order), to cancel prematurely its contract with Soyland. The President of Southwestern's Board of Directors, who held one of his cooperative's two seats on the Soyland Board, served on the committee. The committee, aided by outside consultants, devised a Withdrawal Policy. The Policy was adopted unanimously by Soyland's Board of Directors, including both Southwestern representatives.

The Withdrawal Policy included a formula for satisfying withdrawing members' obligations to the remaining Soyland members. The Board sought to ensure that the nonwithdrawing members would not bear added costs as a result of the early withdrawal of members like Southwestern. Therefore, withdrawing members were required to make a withdrawal payment sufficient to cover their share, among other things, of Soyland's long-term agreements with third parties. The Withdrawal Policy required withdrawing members to make a lump-sum payment, as calculated by Soyland using a Withdrawal Formula, contained in Attachment A of the Withdrawal Policy. The Attachment, entitled "Methodology for Computing Lump Sum Payment of Member Withdrawal," included an "Example of Application," which consisted of 23 "items." Each "item" described how a particular component of the formula might be estimated and allocated among members, and each provided a "reference" to serve as a basis for the item's computation.

Pursuant to the Withdrawal Policy, Southwestern entered into a Withdrawal Agreement with Soyland on November 4, 1996. The Commission approved the Withdrawal Policy and the Withdrawal Agreement by order of May 21, 1997. The parties also signed a Release on May 30, 1997, which freed each party from "any and all claims," "known or unknown," arising from "any act or omission ... prior to the date of this [Release]...." The Release provided an exception for "any such claim ... arising out of a failure by Withdrawing Member to perform its obligations under the Withdrawal Agreement...." On May 31, 1997, Southwestern made its exit payment of $40,594,311, as calculated by Soyland. It withdrew from Soyland the following day. As provided for by the parties' agreements, the withdrawal payments were twice recalculated by Soyland, reducing Southwestern's payment to $40,383,030.

On December 8, 1998, Southwestern filed a complaint with the Commission for a refund of approximately $12 million based on Soyland's alleged miscalculation of the withdrawal payment. See 63 Fed. Reg. 71,456 (Dec. 28, 1998). Soyland counterclaimed, seeking an upward adjustment of approximately $3 million of Southwestern's withdrawal payment. The Commission, in the first order on review, 86 FERC ¶ 61,217 (1999) ("Hearing Order"), dismissed the complaint in part, denied Southwestern's motion to reject the counterclaims, and established a refund effective date. The Commission set for hearing the computation of the withdrawal payment under the Withdrawal Policy, which it treated as akin to a formula rate.

Following the hearing, the Administrative Law Judge ("ALJ") ruled that Soyland had miscalculated various aspects of the withdrawal payment. See 90 FERC ¶ 63,001 (2000) ("Initial Decision"). He rejected Soyland's counterclaims as "unduly discriminatory," because they sought additional amounts from Southwestern that Soyland had not sought from two other contemporaneously withdrawing members, which had not filed complaints with the Commission. The ALJ also rejected Southwestern's claim that the mandatory Opt-Out Fee paid by Soyland to Illinois Power, its electricity supplier, as a result of Southwestern's withdrawal had been passed on incorrectly to Southwestern. On the whole, however, the ALJ granted Southwestern much of the relief it had sought. Both parties requested rehearing.

In the second order on review, Opinion No. 450, 95 FERC ¶ 61,254 (2001), the Commission summarily affirmed most of the ALJ's rulings, but reversed the finding that Soyland's counterclaims were unduly discriminatory. The Commission reasoned that "undue discrimination" in the FPA context only applies where there is a formula rate disparity, as opposed to when that rate is applied in different ways to particular fact situations. Because the same formula was used for both Southwestern and the other two withdrawing members, Corn Belt Electric Cooperative, Inc. ("Corn Belt") and Edgar Electric Co-operative Association ("Edgar"), there was no undue discrimination. The Commission noted that it did not have "anything approaching a complete record of how Corn Belt and Edgar's rates were calculated pursuant to the Withdrawal Agreement, as they neither intervened in this proceeding nor filed complaints over the manner in which Soyland made their calculations." Id. at 61,885. The parties sought rehearing.

In the third order on review, Opinion No. 450-A, 97 FERC ¶ 61,008 (2001), the Commission changed course, resolving most issues in Soyland's favor and rejecting Southwestern's undue discrimination argument on the weight of the evidence. While noting that it was "conceivable" that different calculations based on the same rate could constitute undue discrimination, the Commission found the evidence before it insufficient to establish a prima facie case. The Commission also reversed several of the ALJ's findings as misreading the parties' intent in reaching the Withdrawal Agreement. These findings included whether Southwestern must pay a share...