Opinion
No. 26181-6-III.
July 8, 2008.
Appeal from a judgment of the Superior Court for Spokane County, No. 05-2-01697-8, Kathleen M. O'Connor, J., entered May 11, 2007.
Affirmed by unpublished opinion per Schultheis, C.J., concurred in by Kulik and Korsmo, JJ.
The main issue on appeal is whether the arbitrator exceeded the scope of authority granted to him in the parties' contract to arbitrate their disputes. We conclude that he did not and affirm.
FACTS
On May 10, 1980, the cities of Tacoma and Seattle entered into five separate 40-year contracts to purchase wholesale electricity from several irrigation districts. Those districts are the East Columbia Irrigation District, Quincy Columbia Basin Irrigation District, and South Columbia Basin Irrigation District.
The districts formed a separate entity, the Grand Coulee Project Hydroelectric Authority (GCPHA), to administer the operation of the five hydroelectric projects that are governed by the contracts at issue here. See RCW 87.03.825-.840. For the purposes of this opinion, the GCPHA will not be distinguished from the districts.
According to the contract, the power costs are estimated for each coming contract year based on the previous year's costs and paid by the cities to the districts in equal monthly installments over the current year. At the end of the year, when the actual annual power costs are known, the districts issue adjustments to balance the difference between the estimated costs and the actual costs for the year.
For clarity and convenience, reference to only one of the identical contracts is made and is referred to in the singular.
The contract also provided for an incentive payment to the districts. The payment is based upon the difference between the districts' actual cost of producing power and the cities' actual cost of producing and acquiring output to meet their electrical systems' load. Specifically, the incentive payment is calculated by taking the number of net kilowatt hours made available to the cities multiplied by the greater of: (a) one-half of the amount by which the cities' annual resource unit cost exceeds the basic project energy unit cost, or (b) 1.65 mills. The contract includes as exhibit A an example for the calculation of the cities' average annual resource unit cost. The incentive payment is also made monthly based on the previous contract year's average annual resource unit cost and adjusted at the end of the year when the actual resource unit cost is known.
The basic project energy unit cost has a separate calculation: the sum of the cities' annual power costs for the current contract year, divided by the districts' average annual output in kilowatt-hours for the current and two preceding contract years.
A dispute arose when, for the first time in the parties' contract history, the cities' average annual resource unit cost exceeded the basic project energy unit cost on two of the projects in 2001. Prior to that time, the basic project energy unit cost exceeded the cities' average annual resource unit cost. The minimum incentive multiplier of 1.65 was therefore used, resulting in a nominal incentive payment. But in 2001, when the districts' cost of producing power was low relative to the cities' cost to meet their systems' load, the incentive payment increased significantly.
In November 2004, the districts issued adjustment statements for the years 2000 through 2003. The cities paid the adjustments per the statements but did so under protest for years 2002 and 2003. The basis for the cities' protest was that the districts' adjustment statements did not calculate a particular credit — for the cities' sale of power — against the cities' cost to meet their system loads. The cities refer to this approach as the average system cost (ASC) methodology. The districts took the position that the relevant contract provisions, section 5(c) and exhibit A, do not permit such a credit. The cities believed that their calculation was appropriate under the contract provision that allows interpretation of the computation method according to prudent utility practices.
The cities filed a declaratory action in 2005, seeking to invoke the contract provision that requires payment disputes to be submitted to a project consultant. The parties agree that the project consultant is akin to an arbitrator. Over the districts' objection, the court ordered that the matter be submitted to a project consultant.
According to the contract, "`Project Consultant' shall mean an individual or firm having a national reputation for expertise in the field of the matter or item referred to it appointed for the resolution of a difference regarding a matter or item referred to it. A different Project Consultant may be appointed for each item or matter referred." Clerk's Papers (CP) at 35.
After both parties submitted materials to the project consultant, a decision favorable to the districts issued. The project consultant found that while the cities' calculation method was consistent with prudent utility practices in the sale of retail power, it is not appropriate to apply it to the incentive payments under the parties' wholesale power contract where the incentive payments are to be made pursuant to express contract terms. The project consultant also found that because the incentive payments are governed by express pricing terms and conditions contained in section 5(c) and exhibit A of the contract, the methodology set forth in the contract is to be used for the remainder of the contract term. The project consultant denied the cities' motion for a modification and clarification of the decision.
The districts moved to confirm the decision and for entry of judgment on the awards. Arguing that the project consultant exceeded his authority, the cities asked the trial court to modify or correct the project consultant's decision and to vacate the decision. The trial court decided in the districts' favor and entered an order confirming the awards and directing entry of a judgment. The cities appeal the denial of their motions to amend and vacate.
ANALYSIS
"Washington courts accord substantial finality to arbitration decisions rendered under [former] chapter 7.04 RCW." In re Point Allen Serv. Area, 128 Wn. App. 290, 303, 115 P.3d 373 (2005). Therefore, the superior court here could only confirm, modify, or correct the arbitrator award on limited statutory bases. Barnett v. Hicks, 119 Wn.2d 151, 156, 829 P.2d 1087 (1992). Review on the merits is not permitted. Id. at 156-57. Our review of the arbitration award is confined to the same scope as the trial court's review. Id. at 157.
Former chapter 7.04 RCW was repealed by Laws of 2005, chapter 433, section 50, and recodified as chapter 7.04A RCW, the 2005 uniform arbitration act. The former chapter applies here because the arbitration was commenced before the new statutory scheme was effective on January 1, 2006. RCW 7.04A.900. The 2005 uniform arbitration act "does not affect an action or proceeding commenced or right accrued before January 1, 2006." RCW 7.04A.903.
The superior court could modify or correct the arbitration award only on grounds of "evident miscalculation of figures, or an evident mistake in the description of any person, thing or property," or "imperfect[ion] in a matter of form, not affecting the merits of the controversy." Former RCW 7.04.170(1), (3) (1943); former RCW 7.04.175 (1985).
The court could not vacate an arbitration decision unless the court was satisfied that the decision prejudiced the substantial rights of a party and the award or an arbitrator was influenced by corruption or partiality, the hearing was infused by arbitrator misconduct, or the arbitrator exceeded its powers. Former RCW 7.04.160(1)-(4) (1943). See also former RCW 7.04.160(5) (allowing vacation if there was no valid agreement to arbitrate or notice of arbitration).
The cities contend that the project consultant's decision should be vacated because he exceeded his powers by determining that the average annual resource unit cost calculation he approved would remain in effect for the remaining term of the contract and by basing his decision on something other than prudent utility practices, which (the cities claim) the parties agreed would be the sole basis for the project consultant's decision.
Prudent utility practices, according to the contract, means: "any of the practices, methods and acts engaged in or approved by a significant proportion of the electrical utility industry, or any practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time, could have been expected to accomplish the desired result at the lowest reasonable cost consistent with reliability, safety and expedition, and the requirements of governmental agencies having jurisdiction." CP at 35.
The terms of the contract to arbitrate dictate the scope of what is to be arbitrated. Barnett, 119 Wn.2d at 155. If the arbitrator exceeds the authority under the contract, the award is deemed void and a court has no jurisdiction to confirm it. Anderson v. Farmers Ins. Co., 83 Wn. App. 725, 730-31, 923 P.2d 713 (1996).
As noted, the project consultant found that the annual incentive payments must be calculated in accordance with section 5(c) and exhibit A of the contract, which specifically set forth the exclusive methodology to be used for calculating the annual incentive payments due under the contract throughout the entire duration of the contract. The project consultant agreed with the districts' calculations for the years 2002 and 2003.
Subsection (a) of section 13 of the contract, entitled "Project Consultant," provides:
The Purchasers and the Seller agree to submit to the Project Consultant in accordance with the provisions of this Section 13 all disputes relating to the Ownership and Operation of the [power project] and disputed payments made by the Purchasers; except that the following matters shall not be submitted to the Project Consultant: (1) such matters which are by law or this contract vested exclusively in the discretion of the Seller or the Purchasers; (2) the price and scheduling of dependable power and energy under Section 5(i) hereof; and (3) the timing and amount of payments of Debt Service. The Project Consultant shall resolve all matters referred to it in accordance with Prudent Utility Practices and consistent with the terms of this contract and the Seller's primary purpose, as an irrigation district, to supply water for irrigation purposes; provided, however, that the only matter theSeller may submit to the Project Consultant is a dispute as to the calculation of the Seattle-Tacoma Average Annual Resource Unit Cost, and then only to the extent such calculation is asserted to be inconsistent with Prudent Utility Practices.
Clerk's Papers (CP) at 54-55 (emphasis added).
Subsection (f) of section 5, entitled "Payment for Power Sold" also relevantly provides: "Any disputes by the Purchasers over the amount of payments under this Section 5 or their obligation to make them shall be resolved under the provisions of Section 13 hereto after such payments are made." CP at 46 (emphasis added). Section 5 includes the incentive payments.
The contract clearly allows for greater review by the project consultant than that described by the cities. The contract specifically allows for the resolution of disputed payments. Those disputes are to be resolved in accordance with both "Prudent Utility Practices and consistent with the terms of this contract" as well as consistent with the districts' primary purpose. CP at 54 (emphasis added).
Moreover, it was the cities, not the districts, that sought to submit the issue of prospectively calculating the average annual resource unit cost, not just the disputed payment, to the project consultant.
Under the contract, the parties must "give due consideration to the recommendations or objections of the other party as to any disputes which may be submitted to the Project Consultant." CP at 55. This provision is to assist the parties in resolving their differences short of resort to a project consultant as well as to frame the issues for the project consultant. The parties followed this provision, engaging in a series of meetings and correspondence.
The contract sets forth the procedure for when the parties cannot resolve their dispute:
If either party modifies or rejects a written recommendation or objection of the other party dealing with matters which may be referred to the Project Consultant, the party feeling aggrieved may demand in writing that the recommendation or objection be submitted to the Project Consultant. Within ten days of the receipt of such a written demand, the parties shall agree upon the Project Consultant to be appointed, and the Seller shall appoint that Project Consultant. In the event the parties cannot so agree upon the appointment of the Project Consultant, then the Project Consultant shall be appointed by the Presiding Judge of Spokane County. Insofar as the parties hereto may legally do so, they agree to abide by the decision of the Project Consultant.
CP at 55-56.
The contract goes on to provide for the submission of written materials to the project consultant.
In both the complaint for a declaratory judgment and the motion for summary judgment, the cities sought to compel submission of the entire dispute — not just the issue of prudent utility practices — to the project consultant for resolution. The cities also broadly framed the dispute prospectively in their complaint to include "the AARUC [average annual resource unit cost] computations for disputed years 2002 and 2003 and for ongoing AARUC computations for 2004 and subsequent years for all of the Contracts and hydroelectric developments." CP at 14. This position is reinforced by the cities' summary judgment motion.
In their summary judgment reply brief, the cities made clear their position that the project consultant — and only the project consultant — had the authority to decide the dispute between the parties and that the trial court could not impose any limitations on the project consultant's authority to decide the proper computation of the average annual resource unit cost.
When the trial court ruled that the dispute between the parties was subject to resolution by the project consultant, it identified the dispute as to whether the contract set forth an "exclusive and immutable formula" as the districts contended or whether the cities were correct that a "flexible process" was envisioned by the contract by which prudent utility practices must be considered. CP at 91.
Finally, in their position paper to the project consultant the cities sought broad and prospective relief: "The Cities request that the Project Consultant . . . [d]etermine that the ASC methodology used by the Cities is the correct method of calculating the AARUC for incentive calculations throughout the remainder of the Contract term." CP at 345.
The districts and the cities agreed in the contract that the project consultant must make a written determination as to whether any matter referred to it would or would not have been in accordance with Prudent Utility Practices and consistent with the terms of this contract and the Seller's primary purpose, as an irrigation district, to supply water for irrigation purposes. If the Project Consultant determines that the matter referred to it was not in accordance with Prudent Utility Practices, consistent with the terms of this contract and consistent with the Seller's primary purposes, as an irrigation district, to supply water for irrigation purposes, then and only then it shall recommend what would, under the same circumstances, have met such tests.
CP at 56.
In implementing the project consultant's findings,
[m]atters or items found by the Project Consultant to be in accordance with Prudent Utility Practices, consistent with the terms of this contract and consistent with the Seller's primary purpose, as an irrigation district, to supply water for irrigation purposes, shall become effective immediately. Matters found by the Project Consultant not to be in accordance with Prudent Utility Practices, to be inconsistent with the terms of this contract, or to be inconsistent with the Seller's primary purpose, as an irrigation district, to supply water for irrigation purposes shall be modified to conform to the recommendation of the Project Consultant or as the parties otherwise agree and shall become effective as and when modified.
CP at 56.
In the project consultant's findings, the cities' issues were framed and answered:
1. Determine that the Average System Cost (ASC) used by the Cities is consistent with Prudent Utility Practices.
I find that the Average System Cost (ASC) concept and the ASC-based costs computed by the Cities is not the appropriate mechanism for determining the Section 5(c) incentive payments pursuant to the subject Contracts. The Contracts contain specific pricing terms that are not subject to modification due to the fact that the Cities may employ the ASC concept in the retail rate-making process or in other
wholesale contracts. While the ASC pricing approach may be consistent with Prudent Utility Practices in other settings (such as in retail rate[-]making process), that fact has no bearing on the determination of incentive payments pursuant to the express terms of the subject wholesale power purchase Contracts.
2. Determine that the [ASC] methodology used by the Cities is the correct method of calculating the AARUC for incentive payments throughout the remainder of the Contract term.
I find that the determination of the incentive payments under the Contracts is governed by the express pricing terms and conditions contained in Section 5(c) and Exhibit A. The ASC methodology used by the Cities in computing their AARUC is not consistent with, and is contrary to, the methodology established in Section 5(c) and Exhibit A of the Contracts. For the remainder of the Contract term, the Cities shall determine their AARUC's in accordance with the methodologies established in Section 5(c) and Exhibit A.
CP at 132.
It is clear that the project consultant considered the appropriate criteria set forth in the contract pursuant to prudent utility practices and consistent with the terms of this contract. It is also clear that the cities sought to have the project consultant consider the issue prospectively.
The cities argue that the project consultant ignored the concept of prudent utility practices when determining the proper average annual resource unit cost calculation. To the contrary, the project consultant considered the prudent utility practice advanced by the cities and deemed that while the practice was appropriate in retail rate-making, it was inappropriate to apply the practice to the parties' contract, which did not involve retail rate-making.
We conclude that the trial court did not err in confirming the award.
Affirmed.
A majority of the panel has determined that this opinion will not be printed in the Washington Appellate Reports but it will be filed for public record pursuant to RCW 2.06.040.
KULIK, J., and KORSMO, J., concur.