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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Matanuska Electric Association v. Chugach Electric Association, Inc. (02/16/2007) sp-6100
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
| MATANUSKA ELECTRIC | ) |
| ASSOCIATION, | ) |
| ) Supreme Court Nos. S- 12146/12165 | |
| Appellant/ | ) |
| Cross-Appellee, | ) Superior Court No. |
| ) 3AN-99-08152 CI | |
| v. | ) |
| ) O P I N I O N | |
| CHUGACH ELECTRIC | ) |
| ASSOCIATION, INC., | ) |
| ) No. 6100 - February 16, 2007 | |
| Appellee/ | ) |
| Cross-Appellant. | ) |
| ) | |
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Peter A. Michalski, Judge.
Appearances: Kyle W. Parker, Rebecca S.
Copeland, and David J. Mayberry, Patton Boggs
LLP, Anchorage, for Appellant and Cross-
Appellee. James E. Torgerson, Heller Ehrman
LLP, and Carol Johnson, Chugach Electric
Association, Inc., Anchorage, for Appellee
and Cross-Appellant.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
FABE, Justice.
I. INTRODUCTION
Matanuska Electric Association, Inc. (MEA) filed a
complaint with the superior court alleging that Chugach Electric
Association, Inc. breached its duties under the parties agreement
to act in good faith and conform to prudent utility practice when
it entered into a rate lock with respect to certain long-term
debt. In connection with an assessment of whether Chugach could
amortize its expenses relating to the rate lock, the Regulatory
Commission of Alaska made a determination that Chugachs actions
with respect to the rate lock were reasonable. Following the
Commissions decision, Chugach moved for summary judgment on MEAs
breach of contract claim. The superior court granted summary
judgment under the doctrines of primary agency jurisdiction and
res judicata, concluding that the Commission had considered and
ruled on the issue whether Chugach conformed with prudent utility
practice under the agreement. MEA appeals, arguing that the
primary agency jurisdiction doctrine and res judicata were
erroneously applied because the Commission did not have
jurisdiction to hear MEAs breach of contract claim. Chugach
cross-appeals, arguing that collateral estoppel should also have
been applied to prevent MEA from relitigating the issue whether
Chugachs use of the rate lock conformed to the prudent utility
practice standard. We affirm the superior courts grant of
summary judgment to Chugach on collateral estoppel grounds.
II. FACTS AND PROCEEDINGS
MEA and Chugach are electric utility corporations. In
1989 they entered into a modified agreement for the sale and
purchase of electric power and energy (the Agreement). Section
17 of the Agreement provides: Each party to this Agreement
covenants and agrees to act in good faith under this Agreement
and the terms cited herein, including the obligation . . . to act
and perform in a manner consistent with Prudent Utility Practice.
The facts giving rise to MEAs breach of contract claim
are summarized as follows:
In order to raise capital, Chugach issued two
sets of bonds in 1991. As of December 31,
1998 Chugach had $23,205,000 in outstanding
bonds due in 2002 and $217,705,000 in
outstanding bonds due in 2022. These bonds
had a blended interest rate of 9.04%, which
Chugach noted was higher than the interest
rates that would accrue on debt of the same
maturity originated in todays market. Rather
than defease or otherwise refinance this
debt, Chugach hedged against future rises in
interest rates by entering into a treasury
rate lock agreement. According to MEA,
Chugachs failure to refinance required MEA to
pay higher prices on the electricity it
bought from Chugach.[1]
MEA filed a complaint against Chugach alleging breach
of contract, stating:
By failing to timely address the adverse
financial consequences associated with the
Series A Bonds, at a time when the Bonds are
priced significantly above current market
rates, [Chugach] has breached the covenant of
good faith as well as the covenant to conform
to Prudent Utility Practice set forth in
Section 17 of the [Agreement].
This is the second time MEAs breach of contract claim
has come before us. In Matanuska Electric Assn, Inc. v. Chugach
Electric Assn, Inc. (MEA 2004),2 we reversed a determination by
the superior court that the Agreements prudent utility practice
provisions did not apply to Chugachs debt management practices,
and remanded to the superior court for consideration of whether
Chugach breached the prudent utility practice provisions of the
contract by entering into the rate lock transaction.
In MEA 2004, we also considered whether MEAs breach of
contract claim should be stayed or dismissed under the doctrine
of primary agency jurisdiction.3 On the facts before us in MEA
2004, the Commission had not yet considered whether Chugachs
actions with respect to the rate lock were reasonable.4 We
concluded:
[T]the questions of whether Chugach failed to
abide by prudent utility practices in its
debt management practices, and the amount of
damages caused by this failure, were
initially presented to the Commission. The
Commission declined to resolve these
questions. Accordingly, although the
doctrine of primary agency jurisdiction would
normally apply to a case such as this one, we
find that the Commission has waived its
primary jurisdiction.[5]
We also concluded that the doctrines of res judicata
and collateral estoppel were not applicable because the
Commission did not adjudicate the merits of MEAs claim.6
While MEA 2004 was on appeal, the Commission exercised
its jurisdiction to assess the impact of the rate lock on rates
charged by Chugach, and reached a decision that Chugachs actions
with respect to the rate lock were reasonable. The Commissions
decision, issued on January 31, 2003 (Order 26), is set forth in
relevant part below:
The parties agreed that a utility could
manage its debt with either a bond defeasance
or a rate lock agreement. A bond defeasance
is the purchase of a portfolio of
creditworthy government bonds in a manner
that allows the cash flow from those bonds to
fund the debt service requirements of
existing higher interest bonds. The treasury
rate lock is a financing tool that Chugach
used in conjunction with a redemption
strategy to protect itself against the cost
of interest rates increasing between early
1999, when they were at historic lows, and
March 2002, when it could first refinance its
high interest long-term debt. The rate lock
agreement is a simple contract under which
Chugach traded the possible benefits it might
capture from lower interest rates in 2002 in
exchange for protection against the possible
expense that it would incur if interest rates
rose instead. The hedge against the
potential rise in interest rates Chugach
selected was a treasury rate lock contract
with Lehman Brothers Financial Products.
In determining the proper treatment of the
expense associated with the rate lock, we
look at Chugachs situation at the time of
refinancing. In 1991, Chugach refinanced its
long-term debt at 9.14 percent and was
actively looking for opportunities to
refinance and lower its cost of long-term
debt and provide less restrictive debt
covenants. From 1995 to 2002, Chugach
repurchased over $113 million of its original
$262 million long-term bonds. During this
time, in compliance with Docket U-87-35,
Chugach was increasing its equity ratio,
raising it from 20 percent in 1992 to 29.2
percent in 2000.
During 1998 and 1999, interest rates were
lower than they had been for many years. In
order to take advantage of these rates,
Chugach explored options to ensure that it
would be able to take advantage of the lower
interest rates when the 1991 bonds were
callable in 2002. During this same time,
relations between Chugach and its Wholesale
Customers were very contentious. MEA
proposed that Chugach enter into a classic
defeasance of its long-term debt. MEA then
went so far as to initiate an acquisition of
Chugach for Chugachs failure to defease debt.
MEA also requested that we conduct a
management audit into why Chugach did not
defease its debt. As a result of this
uncertainty, Standard and Poors placed
Chugach on credit watch, potentially leaving
Chugach in a less favorable environment for
hedging what were, at that time, very low
interest rates. Working with financial
advisors, Chugach chose to enter into the
rate lock.
We now have a divergence of expert witness
opinions advocating for and against the rate
lock. MEA argued that Chugach was imprudent
for entering into the rate lock and that it
should have used the defeasance mechanism.
Chugach stated that it studied and compared
the rate lock against other available
alternatives, including defeasance and was
not taking action until 2002. Chugachs
decision to hedge against rising interest
rates was supported by the assessment done by
Seagraves and Hein and utilizing the rate
lock provided the most advantageous hedging
mechanism. Chugach opined that it was a
prudent decision to hedge and that the rate
lock was reasonable. In retrospect, taking
no action may have been a viable option.
However, hedging against interest rate
movement up or down must be viewed from the
perspective of the time the transaction was
entered into rather than from critical
hindsight.
AEG&T/HEA and HEA and MEA criticized the
strategy and methods that Chugach employed in
this endeavor. MEA believes that Chugach has
imprudently managed its debt and that
entering into rate lock transactions was
unnecessary. MEA opined that Chugach acted
imprudently in 1991 when it refinanced its
RUS debt and placed nearly all of its total
indebtedness in two large fixed-rate bond
offerings. MEA criticized Chugach for again
failing to diversify its debt when the 1991
bonds became callable in March 2002 and were
refinanced. MEA alleged that if Chugach had
properly diversified its debt in 1991, or
subsequently when the opportunity presented
itself, a rate lock would not have been
necessary.
The reasonableness of the rate lock is
contingent on whether Chugach should have
been concerned that the low interest rates
available in 1998 and 1999 were going to
remain at those levels or would rise and
Chugach would lose a significant advantage
for refinancing the 1991 bonds. We find it
was reasonable for Chugach to be concerned
about the stability of the low interest rates
available in 1999. Chugach was aware of
forecasts that interest rates would rise by
the 2002 window for refinancing the 1991
bonds. The risk of rising interest rates
warranted a conservative approach and the use
of a hedging mechanism that would protect its
ability to refinance. Chugach did not reach
this conclusion in isolation. Goldman Sachs
worked with them to find an approach that
took advantage of the low interest rates and
determined the best time to act.
Subsequently, Chugach retained Seagraves &
Hein as advisors who assisted them in
selecting from various options. We are also
reassured that the Chugach Board of Directors
was actively involved in this decision,
including having an independent consultant
advise them.
We are persuaded by Chugachs assertion that
there are few perfect hedges against rising
or falling interest rates. The purpose of a
hedge is to reduce risk, which was Chugachs
stated intent. The rate lock executed by
Chugach accomplished the hedge by requiring a
payment from Lehman Brothers if borrowing
rates rose between the executions of the rate
lock in March 1999 and February 2002 when
Chugach could refinance their 1991 bonds. If
interest rates declined after March 1999, the
amount of money Chugach would need to borrow
in 2002 to refinance would be increased to
include the amount of the settlement payment
with the higher principal payments resulting
from the increase in total principal offset
by the lower interest payments.
We reject the additional argument that the
costs associated with the rate lock should be
disallowed because the refinancing occurred
outside the test period. Synchronization
issues are addressed in a later portion of
this order.
We allow Chugach to recover rate lock
expenses by amortizing these expenses,
$5,713,060 over the life of the refinanced
bonds.
The Commission also stated:
MEA requested that we initiate a management
audit to investigate Chugachs financial
management . . . . We reject MEAs proposal.
We find no evidence that Chugach is
mismanaged and warrants further
investigation. Chugach has operated without
significant base rate modification for
approximately 15 years. During that same
period, Chugachs bond rating was upgraded.
On remand from MEA 2004, Chugach moved for summary
judgment based on the Commissions 2003 decision. On August 22,
2005, Superior Court Judge Peter A. Michalski granted summary
judgment in favor of Chugach based on the doctrines of primary
agency jurisdiction and res judicata. The superior court
reasoned that since the Commission had exercised its primary
jurisdiction and determined that the rate was reasonable, the
Commissions findings would preclude a contrary determination that
Chugachs use of the rate lock violated prudent utility practice.
The superior court also recognize[d] that the Commissions rate
decision of January 31, 2005 adjudicated the merits of MEAs
complaint regarding the debt lock and Chugachs debt management
practice.
MEA appeals. Chugach cross-appeals, arguing that the
Commissions decision also prevents MEA from litigating its
mismanagement claim under the doctrine of collateral estoppel.
III. DISCUSSION
A. Standard of Review
We review questions concerning the application of the
doctrine of primary agency jurisdiction de novo, as they present
questions of law.7 Whether res judicata or collateral estoppel
apply are questions of law, and are therefore reviewed de novo.8
We also review a superior courts grant of summary judgment de
novo, drawing all reasonable factual inferences in favor of the
non-movant, and affirming where the record presents no genuine
dispute of material fact and the movant is entitled to judgment
as a matter of law.9
B. MEAs Financial Mismanagement Breach of Contract Claim
Was Not Barred by Res Judicata.
Under the doctrine of res judicata, a final judgment in
a prior action bars a subsequent action if the prior judgment was
(1) a final judgment on the merits, (2) from a court of competent
jurisdiction, (3) in a dispute between the same parties (or their
privies) about the same cause of action.10 The superior court
granted summary judgment to Chugach in part based on the doctrine
of res judicata when concluding that the Commissions 2005 rate
decision addressed the merits of MEAs complaints about the debt
lock and Chugachs debt management. MEA appeals the superior
courts ruling, arguing that the Commission could neither hear
MEAs breach of contract claim nor award MEA the compensatory
damages it seeks. Therefore, MEA maintains the Commission was
not a court of competent jurisdiction to hear the contract claim
and the application of res judicata was erroneous.
According to the Restatement (Second) of Judgments, res
judicata does not apply to extinguish the claim when the
plaintiff is unable to annex all of its claims of relief or seek
all desired remedies before the first tribunal.11 Section
26(1)(c) of the Restatement excepts from the application of res
judicata cases where
[t]he plaintiff was unable to rely on a
certain theory of the case or to seek a
certain remedy or form of relief in the first
action because of the limitations on the
subject matter jurisdiction of the courts or
restrictions on their authority to entertain
multiple theories or demands for multiple
remedies or forms of relief in a single
action, and the plaintiff desires in the
second action to rely on that theory or to
seek that remedy or form of relief.[12]
With respect to agency determinations, the Restatement
(Second) of Judgments, section 83(1) provides that a valid and
final adjudicative determination by an administrative tribunal
has the same effects under the rules of res judicata, subject to
the same exceptions and qualifications, as a judgment of a court.
In particular, the Restatement notes that
[a]n adjudicative determination of a claim by
an administrative tribunal does not preclude
relitigation in another tribunal of the same
or a related claim based on the same
transaction if the scheme of remedies permits
assertion of the second claim notwithstanding
the adjudication of the first claim.[13]
The comments to section 83 further explain that
administrative tribunals often have limited jurisdiction and thus
claim preclusion should not apply if a plaintiff could not raise
a specific claim or seek certain remedies before the
administrative tribunal:
[T]he jurisdiction of administrative agencies
is usually defined in terms of specified
substantive legal provisions, for example,
workers compensation, tax obligations,
regulation of a specified business,
discrimination in employment, etc. Since the
tribunals authority is delimited in
substantive legal terms, the tribunal
ordinarily lacks authority to adjudicate
claims arising out of the transaction in
question but based upon other substantive
legal premises. Thus, a workers compensation
commission usually lacks authority to
consider claims for punitive damages for
injuries intentionally inflicted on an
employee in the course of employment; an
employment discrimination agency may lack
authority to consider claims based on breach
of contract. These limitations on authority
of the tribunal should carry corresponding
limitations on the scope of claim for
purposes of the rule of claim preclusion.[14]
The comments to section 83 also note that the exception stated in
section 26(1)(c) is particularly important in considering claim
preclusion with respect to an administrative agency
determination.15
As MEA argues, the jurisdiction of the Commission is
limited, for while the Commission has the power to investigate,
upon complaint or upon its own motion, the rates,
classifications, rules, regulations, practices, services, and
facilities of a public utility and hold hearings on them[,]16 its
ability to provide remedies is limited to setting rates.17
Moreover, the Commission acknowledged the limitations of its
jurisdiction, based on the provisions of the Agreement, when it
remarked in Order 26:
The contractual commitment . . . has a clear
dispute resolution mechanism. Specifically,
Section 27(c) provides that a party is
entitled to seek immediate judicial
enforcement of this Agreement in the Superior
Court for the State of Alaska. Thus, MEA
presented its argument in an inappropriate
forum; MEA must seek redress in Superior
Court. After approval of wholesale power
contracts, our jurisdiction becomes limited
to issues relating to rates.
Chugach argues that our decision in Matanuska Electric
Assn, Inc. v. Chugach Electric Assn, Inc., (MEA 2002),18 was a
pronouncement that the Commission has jurisdiction to interpret
the Agreement in all respects. But our holding in MEA 2002 was
limited to resolution of disputes under section 9(d) of the
Agreement, which governs the process Chugach is to follow before
implementing a rate change.19 This case, by contrast, involves a
challenge arising under section 17, which addresses good faith
and prudent utility practice. We concluded in MEA 2002:
Because 9(d) of the [purchase and sale
agreement] expressly deals with issues lying
within the commissions core area of
jurisdiction changes in rates, charges or
other tariff provisions and because 9(e)(3)
evinces the parties intent to submit to the
commission any rate-related disputes arising
under the [purchase and sale agreement], we
conclude that interpretation of 9(d) was
within the jurisdiction of the commission.[20]
The parties did not submit any rate-related disputes arising
under section 17 to the jurisdiction of the Commission, and the
issue of good faith does not appear to fall within the
Commissions core area of jurisdiction changes in rates.
Therefore, MEA 2002 is not binding as to the question of the
Commissions ability to interpret section 17 of the Agreement.
Here, MEA sought remedies in the superior court for the
alleged breach of contract, including financial mismanagement on
the part of Chugach. Because the Commission did not have the
jurisdiction to provide all of the remedies in this contract
dispute except for those relating to rates, res judicata did not
apply.
C. Collateral Estoppel Provides an Independent Basis for
Affirming the Judgment.
We next turn to Chugachs cross-appeal of the superior
courts decision that collateral estoppel did not apply to the
Commissions decision. On cross-appeal, Chugach argues that
Chugachs 2000 Rate Case which included extensive discovery, a
multi-week hearing with direct and cross-examination and a long
written decision by a three-commissioner panel was more than an
adequate substitute for a judicial procedure. Collateral
estoppel precludes the relitigation of MEAs Mismanagement Claim.
MEA argues that there is no identity of the issues between the
Commissions decision that the costs of the rate lock are an
allowable cost and a determination whether Chugach violated its
contractual duties to MEA under good faith and prudent utility
practices and that therefore collateral estoppel does not apply
in this case.
The doctrine of collateral estoppel is applicable
where:
(1) the party against whom the preclusion is
employed was a party to or in privity with a
party to the first action; (2) the issue
precluded from relitigation is identical to
the issue decided in the first action; (3)
the issue was resolved in the first action by
a final judgment on the merits; and (4) the
determination of the issue was essential to
the final judgment.[21]
We have recognized that [p]rinciples of finality may be applied
to the decisions of administrative agencies if, after
case-specific review, a court finds that the administrative
decision resulted from a procedure that seems an adequate
substitute for judicial procedure and that it would be fair to
accord preclusive effect to the administrative decision.22 A
comparison of the issues reveals that precisely the same
questions that would be considered by the superior court in
adjudicating MEAs breach of contract claim were resolved through
the Commissions Order 26.
MEA filed a statement of issues with the Commission
asking it to consider the following with respect to Chugachs
financial management:
Whether the expenses related to
[Chugachs] acquisition of the speculative
hedging instruments known as the rate lock
were prudently and necessarily incurred.
Whether [Chugach] acted contrary to the
prudent utility practices standard by
consolidating nearly all of its total
indebtedness in two large, fixed-rate bond
offerings[.]
Whether [Chugach] acted contrary to the
prudent utility practices standard by failing
to diversify its debt consistent with sound
financial management principles.
Whether [Chugach] acted contrary to the
prudent utility practices standard by failing
to refinance high cost debt to take advantage
of changing interest rates and provide its
consumers with the lowest debt costs.
Whether [Chugach] acted contrary to the
prudent utility practices standard when it
purchased speculative hedging instruments
known as the rate lock.
Whether [Chugach] violated the prudent
utility practices standard by failing to
manage the rate lock instruments consistent
with sound financial management practices.
MEA thus squarely placed before the Commission the
question whether Chugachs actions were consistent with prudent
utility practices. Chugach also filed a statement of issues with
the Commission on November 5, 2002. Chugach argued that its debt
management practices with respect to the rate lock were prudent.
And the Commission decided the issue of the prudence of Chugachs
actions in its decision. The Commission noted Chugachs use of
financial advisors and the Boards use of an independent
consultant before entering into the rate lock. The Commission
found it was reasonable for Chugach to be concerned about the
risk of rising interest rates, and this warranted the use of the
hedging mechanism. The Commissions determination that Chugachs
actions were reasonable was essential to its decision to allow
Chugach to recover rate lock expenses by amortizing them.
Because the issues were vigorously contested before the
Commission, it is fair to apply the doctrine of collateral
estoppel to the question whether Chugach complied with prudent
utility practice.23 Therefore, we conclude that the grant of
summary judgment to Chugach was appropriate based on collateral
estoppel grounds.24
IV. CONCLUSION
We AFFIRM the superior courts grant of summary judgment
to Chugach on collateral estoppel grounds.
_______________________________
1 Matanuska Elec. Assn, Inc. v. Chugach Elec. Assn, Inc.,
99 P.3d 553, 557 (Alaska 2004) (internal footnotes omitted) (MEA
2004).
2 Id.
3 Id. at 559-60.
4 Id. at 558-59.
5 Id. at 560.
6 Id. at 561.
7 Id. at 558.
8 Id.
9 Id. (citations omitted).
10 Id. at 561 n.29 (quoting Plumber v. Univ. of Alaska
Anchorage, 936 P.2d 163, 166 (Alaska 1997)).
11 restatement (second) of judgments 26(1)(c) (1982).
12 Id.
13 Id. at 83(3).
14 Id. at 83 cmt. g.
15 Id.
16 AS 42.05.141(a)(2). The statute provides:
(a) The Regulatory Commission of Alaska
may do all things necessary or proper to
carry out the purposes and exercise the
powers expressly granted or reasonably
implied in this chapter, including:
(1) regulate every public utility
engaged or proposing to engage in a utility
business inside the state, except to the
extent exempted by AS 42.05.711;
(2) investigate, upon complaint or upon
its own motion, the rates, classifications,
rules, regulations, practices, services, and
facilities of a public utility and hold
hearings on them;
(3) make or require just, fair, and
reasonable rates, classifications,
regulations, practices, services, and
facilities for a public utility;
(4) prescribe the system of accounts
and regulate the service and safety of
operations of a public utility;
(5) require a public utility to file
reports and other information and data.
17 AS 42.05.431(a) clarifies the power of the Commission
to set rates:
When the commission, after an investigation
and hearing, finds that a rate demanded,
observed, charged, or collected by a public
utility for a service subject to the
jurisdiction of the commission, or that a
classification, rule, regulation, practice,
or contract affecting the rate, is unjust,
unreasonable, unduly discriminatory or
preferential, the commission shall determine
a just and reasonable rate, classification,
rule, regulation, practice, or contract to be
observed or allowed and shall establish it by
order.
18 58 P.3d 491 (Alaska 2002).
19 Id. at 493-95.
20 Id. at 494.
21 MEA 2004, 99 P.3d at 561 n.30 (quoting Universal
Motors, Inc. v. Neary, 984 P.2d 515, 518 n.11 (Alaska 1999)).
22 State, Child Support Enforcement Div. v. Bromley, 987
P.2d 183, 192 (Alaska 1999) (internal citations and quotations
omitted).
23 Chugach argued in its summary judgment motion that MEA
could have appealed the Commissions 2003 decision but did not.
An administrative appeal would have been the correct method to
seek superior court review of the Commissions decision. AS
42.05.551. The record does not reveal why MEA chose not to file
an appeal, and MEA has not claimed equitable tolling in its
briefing before us.
24 Because we conclude that collateral estoppel applies to
this case, it is not necessary to reach the question whether the
superior court properly resolved the issue of primary agency
jurisdiction.
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