OTECC v. Co-Gen Co.

Citations: 7 P.3d 594; 168 Or. App. 466; 2000 Ore. App. LEXIS 985Docket: 96-CV-0203 ST CA A98842

Court: Court of Appeals of Oregon; June 21, 2000; Oregon; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Oregon Trail Electric Consumers Cooperative, Inc. (OTECC) initiated a declaratory judgment action against Co-Gen Co. and others regarding a 1984 electricity purchase contract, seeking a court declaration for the modification of the negotiated price based on public interest findings. The trial court bifurcated the proceedings to first determine the contract's provisions on price modification and whether the court had jurisdiction for such modification. Ultimately, the trial court ruled that OTECC lacked the right to seek price modification under the contract, leading to a judgment in favor of Co-Gen. Both parties appealed, raising various legal issues, but the core dispute centered on the contract's interpretation. The contract, originally established between CP National Corporation and Prairie Wood Products, provided for fixed price energy purchases by OTECC until 2005, with a clause allowing price modifications if deemed contrary to public policy by the Oregon Public Utility Commissioner. The case highlighted the unique nature of cogeneration facilities, which produce multiple forms of energy. The Court of Appeals affirmed the trial court's ruling on both the appeal and the cross-appeal.

Cogeneration facilities significantly reduce fuel consumption compared to separate energy production. In response to 1970s fuel shortages and rising energy prices, Section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted to promote cogeneration. PURPA mandates that electric utilities purchase energy from cogenerators to ensure a market for their output. The purchase price is negotiable but must be at least equal to the utility's avoided costs, which reflect expenses the utility would incur to generate the energy itself or purchase it from another source.

Cogenerators can enter long-term contracts obligating utilities to buy power for extended periods. They may choose to set prices based on either delivery or a fixed rate determined at the contract's inception, with the latter based on projected avoided costs over the contract's duration. If the parties cannot agree on a fixed price, it is set by the Public Utility Commissioner.

In this case, Prairie, a cogeneration facility, secured a 20-year contract requiring CP, an electric utility, to purchase energy. Prairie opted for fixed prices during negotiations, which led to a disagreement on how to calculate avoided costs. They ultimately adopted a schedule deemed correct by the Commissioner, even though it reflected costs higher than CP's actual avoided costs. This resulted in CP paying more for the cogenerated energy than for its current supply, risking financial losses unless it could adjust rates to pass these costs onto customers. To address this, the contract included a clause stipulating that the agreement would not take effect until necessary approvals were obtained from the Commissioner, ensuring rate adjustments would cover the cogeneration costs. CP was simultaneously negotiating with another cogenerator, Snow Mountain, over similar avoided cost issues.

The Snow Mountain contract serves as contextual background but is not directly applicable to the current case. During negotiations for this contract, CP was unsuccessful in convincing Snow Mountain to include a provision that would allow price adjustments based on the Commissioner’s approval of CP's customer rates. After negotiations failed, Snow Mountain sought the Commissioner’s intervention to resolve the pricing dispute, leading to administrative litigation that concluded with a pricing determination based on CP's proposed lower avoided costs schedule. However, by this time, the contract had already been executed and approved by the Commissioner, rendering it valid and enforceable. CP did not pursue administrative remedies for price setting, resulting in OTECC being bound by the contract terms.

OTECC has initiated a declaratory judgment action challenging the high energy prices established in the contract, citing Article IV.B, which allows for price modification if deemed contrary to public policy by the Oregon Public Utility Commissioner. OTECC seeks a declaration that the prices from 1995 to 2005 are subject to modification under this clause. The trial court interpreted the price-modification clause as not granting the Commissioner authority to alter the contract price but merely recognizing potential regulatory modifications. The court concluded that the Commissioner lacks regulatory power to alter prices post-approval due to the limitations imposed by PURPA. Consequently, OTECC was deemed ineligible for price modification under the contract. Additionally, the court noted that public policy considerations also support maintaining long-term contracts at fixed prices.

On appeal, OTECC contests both the trial court's interpretation and its jurisdictional ruling, which hinges on the contract's mention of the Public Utility Commissioner, raising questions about whether disputes regarding modification authority should be resolved in circuit court or through administrative proceedings before the Public Utility Commission.

OTECC asserts circuit court jurisdiction based on its belief that the contract allows for modifications and that the parties are no longer under the PUC's regulatory oversight, thus claiming that such authority now lies with the circuit court. However, the trial court identified a clearer jurisdictional basis, stating that the case requires a declaration of the parties' rights under the contract, which falls within circuit court jurisdiction. The court affirmed that determining contractual rights is a common-law issue, allowing both the agency and circuit court to have jurisdiction over the contract's construction.

The trial court then examined the price-modification clause in Article IV.B. The principles of contract interpretation dictate that, absent ambiguity, the court determines contract meaning as a matter of law. A provision is ambiguous if it lacks a definite significance or can be reasonably interpreted in multiple ways. Ambiguities allow consideration of extrinsic evidence to discern the parties' intentions. The trial court sought extrinsic evidence to assess the clause's clarity and relied heavily on the testimony of John Gould, the attorney who drafted the clause. Gould was noted as the only party with significant insight into its intended meaning, while other involved parties had limited or vague recollections about its application.

Gould's testimony clarified that the price-modification provision in question is a 'Mobile-Sierra' clause, which allows a regulator to modify power purchase contracts in the public interest. He referenced two Supreme Court cases that established the regulator's inherent authority to alter negotiated rates. The trial court analyzed this testimony, concluding that the clause's language, particularly the phrase 'to the extent,' was intentionally and clearly defined. The court determined that Article IV.B does not grant new modification powers to the Commissioner but acknowledges the existing authority to modify rates where appropriate. The trial court's opinion left some ambiguity regarding whether it deemed the clause ambiguous or not but ultimately reached the same conclusion regardless. It stated that the contract's text and any relevant extrinsic evidence together reveal the provision's meaning. The disputed clause indicates that contract prices can be modified if the Commissioner finds them contrary to public policy. OTECC contended that the prices should only be modified if the Commissioner finds them contrary to public policy, suggesting a different interpretation that would require rephrasing the sentence. However, the trial court appropriately sought extrinsic evidence to ascertain the intended meaning, recognizing that specialized contractual language in the utility industry may have specific connotations. Gould, who drafted the clause, confirmed it was based on the Mobile-Sierra doctrine from the cited Supreme Court cases.

The cases referenced do not involve the Public Utility Regulatory Policies Act (PURPA) but focus on federal energy statutes, providing context for the regulatory environment when the disputed contract clause was drafted. In the Mobile-Sierra cases, contracts were established with fixed prices for long-term power sales. Subsequently, one party sought unilateral price modifications under federal regulations allowing agencies to review prices deemed unjust or unreasonable. The Court determined that these statutes did not grant parties a right to request reviews nor did they empower agencies to modify prices independently. Therefore, by agreeing to fixed prices, the parties waived their right to seek modifications based on claims of unjustness or unreasonableness. The preservation of long-term contracts led the Court to mandate agencies to deny such modification requests.

The Court differentiated between the authority for reviewing unjust prices and the agencies' ability to unilaterally modify prices in the public interest. It asserted that while parties could not unilaterally alter contracts for their own benefit, regulatory agencies retained the authority to adjust prices when contrary to public interest, regardless of contractual agreements. Gould's testimony indicated that the price-modification clause was meant to reflect the Mobile-Sierra doctrine, clarifying that while the contract set firm prices, it acknowledged potential regulatory modifications for public policy reasons. The clause did not authorize price changes but recognized the possibility of regulatory intervention.

The trial court concluded that the clause's meaning was clear, supported by Gould's testimony. OTECC did not contest the trial court's factual findings, instead arguing against Gould's interpretation of the clause, claiming the parties intended for future price modifications. However, evidence indicated that Prairie's representatives had only a vague understanding of the clause's purpose, while CP's representative believed the contract did not allow for price modifications.

The trial court determined that Gould possessed the only significant understanding of the price-modification clause within the contract, influenced by the uncertainty surrounding the regulatory implications of the Public Utility Regulatory Policies Act (PURPA) at the time of negotiation. While CP (Gould's client) sought modification of prices, Prairie opposed any flexible pricing arrangement. Gould inserted the clause with the belief that it would allow state regulators to adjust prices deemed contrary to public interest. Prairie's attorney, however, believed the clause lacked enforceability under PURPA. The trial court found that both parties maintained distinct interpretations of the clause without discussing their beliefs, leading to a misalignment in expectations. OTECC's assertion that the clause creates an independent contractual right to price modification is contradicted by the trial court's findings, which indicated that the clause merely recognized the potential for regulatory modification, not an independent right. OTECC further argued that the trial court's interpretation rendered the clause superfluous, in violation of legal principles requiring effect to be given to all contract terms. However, the trial court concluded that the clause served a limited purpose related to the Commissioner's regulatory authority. OTECC's arguments against the trial court's interpretation, including those based on ORS 42.240 and ORS 42.260, were found unpersuasive, affirming the trial court's understanding of the agreement.

The contract in question is classified as a Mobile-Sierra provision, which limits the interpretation of its terms under ORS 42.240, as no common intention beyond that provision exists. ORS 42.260 is also deemed inapplicable since the price-modification clause lacks multiple valid interpretations. The primary issue is the extent of the Commissioner's regulatory authority to modify contract prices, and it is established that state and federal regulators do not possess such power. Courts have consistently ruled that state regulators cannot alter prices set by cogeneration contracts under PURPA, which aims to protect long-term contracts from utility-type regulation. OTECC argues that PURPA allows for flexible pricing agreements that may include price modifications based on public policy, but this interpretation is contested by Co-Gen, which questions whether PURPA permits any price adjustments beyond the utility's avoided costs at contract inception or delivery. The court finds it unnecessary to resolve this debate, as the price-modification clause is confirmed to be a Mobile-Sierra provision. The contract's flaw lies in attempting to leverage state regulatory authority for price modifications, which PURPA prohibits. Therefore, the trial court correctly concluded that neither the Commissioner nor the court had post-approval authority to change the prices. Although OTECC's predecessor may face higher costs than if avoided costs had been used, the court will not alter the contract's original meaning. Ultimately, the trial court's interpretation stands—OTEC cannot modify the contractually fixed prices, and judgment is affirmed in favor of Co-Gen.

The trial court determined that OTECC's price-modification clause was "unhelpful" to its case, reasoning that OTECC's assertion of prices exceeding avoided costs being contrary to public policy was flawed. The court emphasized that public policy encompasses more than just avoided costs and includes the right to fix prices at the time power obligations are incurred. It referenced two cases, indicating that the public interest required to override a negotiated private contract rate is significantly more stringent than that applied to other utility rate issues. OTECC disputed the trial court's logic and claimed the ruling was premature since the initial trial phase was solely focused on contract interpretation, not on public policy implications of the contract prices.

Additionally, OTECC argued against the trial court's denial of its motion to amend its complaint to include rescission or reformation claims. The trial court's decision, reviewed for abuse of discretion, was grounded in ORCP 23 B, which allows for amendments in response to issues tried by consent. Since OTECC did not seek to amend until after the trial court's ruling, and because the court found that rescission or reformation were not tried, it denied the request. OTECC's attempts to argue that these claims were implicitly tried relied solely on closing arguments, which the trial court found insufficient.

OTECC contends that the issue of mutual mistake was fully tried, justifying its request to amend its complaint to include claims of reformation or rescission based on mutual mistake. While mutual mistake can be grounds for such claims, OTECC fails to demonstrate that the opposing party, Co-Gen, shared the same mistaken belief regarding price modifications in catastrophic situations. The evidence cited by OTECC does not substantiate a mutual mistake, as it relies on a passing remark made by an attorney during closing arguments, which does not indicate that the issue was tried by consent. The trial court's judgment that the mutual mistake issue was not adequately tried is upheld, as OTECC did not assert that Co-Gen needed to show prejudice for the amendment request to be denied, nor did it provide evidence that would necessitate such a showing. 

In Co-Gen's cross-appeal regarding attorney fees, it claimed that OTECC's action for declaratory relief violated Oregon Public Utility Commission orders, justifying its counterclaim under ORS 756.185(1). This statute allows for damages and attorney fees if a public utility engages in prohibited actions or fails to act as required. However, the trial court deemed the counterclaim meritless and rejected Co-Gen's request for $427,952.25 in fees. Co-Gen's appeal lacks a substantive argument explaining how OTECC's actions constituted violations of the relevant statutes, leading the court to decline to further investigate the claim.

Co-Gen failed to establish that OTECC qualifies as a public utility under ORS 756.185(1), rendering its argument without merit. The appellate court affirmed the trial court's decision on both appeal and cross-appeal. Co-Gen, comprised of defendants including D.R. Johnson Lumber Co. and Strawberry Mountain Power Company, previously contended that CP was the actual party of interest due to a contractual requirement for Co-Gen’s consent to assign CP's interest, which was deemed waived by the trial court following an exclusive dealing with OTECC post-approval by the Public Utility Commission (PUC). Co-Gen did not contest this ruling on appeal.

The term "avoided costs" is defined statutorily as the incremental costs an electric utility would incur but for purchasing from a qualifying facility, such as a cogenerator. Additionally, the contract's reference to a single Commissioner was updated to a three-member Commission in 1985. Co-Gen did not dispute the court's jurisdiction and refrained from addressing OTECC's position directly, focusing instead on general merits.

The doctrine of primary jurisdiction, which allows agencies to address specific issues before courts, does not apply here as both parties agree that neither is currently under PUC regulation regarding energy pricing. Therefore, the court has no reason to defer its jurisdiction. OTECC argued that contract interpretation, typically a legal question, should be reviewed de novo because the case is equitable in nature. However, the court indicated that previous rulings suggest de novo review would only apply if the contract interpretation were foundational to a subsequent specific performance claim.

A potential conflict exists regarding whether the holding in Abercrombie remains valid following the Oregon Supreme Court's decision in Yogman v. Parrott. Yogman, which did not reference Abercrombie despite its proximity in time, established that extrinsic evidence may only be used for contract interpretation if the contract text is ambiguous. The Ninth Circuit has suggested that Yogman implicitly overrules Abercrombie, particularly concerning the use of extrinsic evidence under Oregon law. However, the current stance maintains that any disavowal of Abercrombie should come explicitly from the Oregon Supreme Court, which did not occur in Yogman. Moreover, Abercrombie's interpretation aligns with ORS 42.220, which, once established, becomes a part of the statute. Precedents have relied on Abercrombie, reinforcing its validity. 

Additionally, a claim by OTECC that extrinsic evidence is inadmissible due to an integration clause was not properly raised on appeal, as OTECC did not challenge the trial court's admission of such evidence or its consideration in contract interpretation. The presence of an integration clause does not prevent a court from assessing extrinsic evidence to determine ambiguity in contract terms, even if the contract is fully integrated, as established in prior cases like Abercrombie and State v. Triad Mechanical, Inc. Lastly, ORS 42.230 emphasizes that a judge's role is to ascertain the content of a contract rather than to alter its terms.

Congress did not intend to apply traditional ratemaking principles to sales by qualifying facilities to utilities under the Public Utility Regulatory Policies Act (PURPA). Qualified cogenerators are exempt from state and federal utility rate regulations, as evidenced by case law, including Freehold Cogeneration v. Board of Regulatory Commissioners of New Jersey and Afton Energy, Inc. v. Idaho Power Co. Changes to contract prices based on regulatory determinations that they are contrary to public interest would impose utility-type regulation, which Congress specifically rejected when enacting PURPA. The financial impact on OTECC's ratepayers is unclear, but records indicate that the Bonneville Power Administration has mitigated some of OTECC's financial obligations. The opinion dismissing OTECC's argument does not endorse its reliance on Engelcke, which dealt with amendments in a context pre-dating the Oregon Rules of Civil Procedure. OTECC argues that it is not a public utility subject to regulation under the Public Utility Commission's framework, and this assertion has not been contested by Co-Gen. The court will not assess the applicability of ORS 756.185(1) to a cogeneration facility since Co-Gen did not address this foundational issue.