Public Service Commission v. Panda-Brandywine, L.P.

WILNER, Judge. This case arises from the maelstrom accompanying the restructuring of the electric industry in Maryland. Although it is an appeal by the Maryland Public Service Commission (PSC) from a judgment of the Circuit Court for Montgomery County reversing one of its administrative decisions, the prin ¹⁸⁸ cipal parties in interest are Potomac Electric Power Company (PEPCO), Panda-Brandywine, L.P. (Panda), and Southern Energy, Inc. (SEI).

The issue presented to the PSC was whether certain provisions in an Asset Purchase and Sale Agreement (APSA) between PEPCO and SEI caused that agreement to contravene an anti-assignment clause in an earlier power purchase agreement (PPA) that PEPCO had with Panda. The PSC entered an order declaring that the APSA did not violate the anti-assignment provision of the PPA and that Panda’s consent to the APSA was therefore not required. The Circuit Court, in an action by Panda for judicial review of the PSC order, disagreed with the PSC’s conclusion that there was no violation of the anti-assignment provision. It found that the disputed provisions in the APSA did constitute an assignment of rights and obligations under the PPA and that, absent Panda’s consent, it was impermissible.

The Court of Special Appeals, upon the PSC’s and PEPCO’s appeal, agreed that those provisions — Schedule 2.4 of the APSA — constituted an assignment or delegation in contravention of the PPA. It concluded, however, that the PSC has the authority, on public policy grounds, to “validate transactions that violate anti-assignment provisions that would entitle the complaining party to assert a cause of action under Maryland contract law,” and it directed that the case be remanded to the PSC for a determination whether, on purely public policy grounds, the APSA should be validated notwithstanding the anti-assignment violation. We granted cross-petitions for certiorari to review the judgment of the Court of Special Appeals. We agree with the intermediate appellate court, and the Circuit Court, that Schedule 2.4 of the APSA violates the anti-assignment provisions of the PPA.

We shall vacate, however, that part of the judgment directing a remand to the PSC. The issue of whether the PSC has any authority to validate the APSA on public policy grounds was not raised in the administrative ¹⁸⁹ proceeding and should not have been injected into the case by the Court of Special Appeals. BACKGROUND PEPCO is an electric utility serving the metropolitan Washington, D.C. area. Panda is a “qualified facility” (QF) under the Public Utility Regulatory Policies Act of 1978 (PURPA) ( 16 U.S.C. § 2601 et seq.).

It has that status because it is a “qualifying cogeneration facility” that produces electricity and steam or other useful energy for industrial, commercial, cooling, or heating processes and because it conforms with regulations promulgated by the Federal Energy Regulatory Commission (FERC). See 16 U.S.C. § 796 (18)(B). As part of its effort to provide for increased conservation of electric energy and increased efficiency in the use of facilities and resources by electric utilities, Congress directed in § 210 of PURPA (16 U.S.C. § 824a-3) that FERC adopt regulations to encourage cogeneration production and specified that those regulations require electric utilities to purchase electric energy from qualified facilities. Dutifully, FERC adopted such regulations.

See 18 CFR § 292.303 , requiring electric utilities to purchase any energy and capacity made available from a QF either directly or indirectly to the utility. 1 The regulations require the utility to make any interconnections with a QF that are necessary to accomplish the purchase. Id. § 292.303(c)(1). In August, 1991, PEPCO and Panda entered into a PPA calling for (1) the construction by Panda of a new 230-megawatt cogenerating power plant in Prince George’s County, (2) connection of the facility to PEPCO’s high voltage transmission system by transmission facilities to be built by Panda but later transferred without cost to PEPCO, and (3) ¹⁹⁰ upon commencement of the commercial operation of the plant, for PEPCO to purchase the power generated by that plant for a period of 25 years. The plant was built at a cost of $215 million, financed mostly through loans.

The PPA is 113 pages in length, single-spaced, and is both detailed and complex. In it, PEPCO was given substantial authority to review, influence, and, in some instances, determine important aspects of both the construction and operation of the Panda facility. Among other things, PEPCO had the right: (1) to review the design of the facility and monitor its construction, start-up, testing, and operation (§ 7.1(e)); (2) to review and approve certain performance standards for the generators (§ 7.1(g)); and (3) to review and approve Panda’s selection of the operator of the facility and the terms and conditions of any operation and maintenance agreement entered'into by Panda with respect to the facility (§ 8.1(e)). In addition, PEPCO had the right to appoint one of the two members of an operating committee charged with developing policies and procedures regarding operations, maintenance, outage and capability reporting, accounting, and record keeping, except that PEPCO reserved sole discretion over procedures pertaining to the interconnection of the facility to the PEPCO system and the operation of the facility in a parallel mode with the PEPCO system (§§ 8.10 and 7.1(h)).

It had an option to purchase Panda’s interest in the facility at fair market value in the event Panda desired to sell and had not received a bona fide offer, and it had a right of first refusal to purchase an interest in Panda itself (§§ 18.1 and 18.3). The plant was to have a Dependable Capacity of 230 megawatts, which was divided, for operational purposes, into two categories — a Limited Dispatch Portion of 90 megawatts and a Dispatchable Portion of 140 megawatts. Under the initial agreement, PEPCO was obliged to purchase the entire Dependable Capacity of the facility (§ 5.1), but it had substantial control over when during the day or week the Dispatchable Portion was to be delivered and some control over when the Limited Dispatch Portion was to be delivered (§ 8.3). ¹⁹¹ Section 19.1 of the PPA provided, with certain exceptions not relevant here, that “[n]either this Agreement, nor any of the rights or obligations hereunder, may be assigned, transferred, or delegated by either Party, without the express prior written consent of the other Party, which consent shall not be unreasonably withheld.... ” We are informed, without contradiction by the PSC or PEPCO, that Panda’s loan documents require Panda to obtain the consent of its lenders to any assignment, transfer, or delegation under § 19.1. Panda’s facility commenced commercial operation in November, 1996, but, during the first four years, the Dispatchable Portion remained idle for extended periods, and various claims and disputes arose between the parties.

On October 24, 1997, Panda and PEPCO resolved those disputes through a letter agreement, one feature of which was an agreement by PEPCO to release to Panda on a periodic basis, through 2002, the right to sell energy from the facility to others, i. e., not to insist on Panda supplying all of the Dependable Capacity to PEPCO. The letter agreement stated, in that regard, that PEPCO would base those releases on its projections of facility operations to serve PEPCO loads — that is, on its estimate of its own needs. The initial PPA was submitted to and approved by the PSC. See 83 Md. P.S.C. 191, 1992 WL 527167 (1992).

The parties concluded that the letter agreement did not require PSC approval and apparently did not submit it for such approval. In 1999, the General Assembly passed the Electric Consumer Choice and Competition Act of 1999 (Md.Code, §§ 7-501 through 7-517 of the Public Utility Companies Article), calling for the restructuring of the electric industry in an effort to promote competition in the generation and delivery of electricity, and, in that Act, it directed the PSC to oversee that restructuring. In furtherance of that role, the PSC directed the electric utilities in the State to submit plans for the restructuring of their operations. See Delmarva Power v. PSC, 370 Md. 1 , 803 A.2d 460 (2002).

PEPCO’s proposed restructuring involved a complete divestiture of its electric ¹⁹² generating assets and its various PPAs, to be accomplished by an auction. That proposal was submitted to the PSC as part of an overall settlement agreement, and, by order entered December 22, 1999, it was approved. See In the Matter of Potomac Electric Power Company, Md. PSC Case No. 8796, Order No. 75850, 198 P.U.R. 4th 1, 1999 WL 1334719 (1999). The order noted that the auction sale would include PPAs unless PEPCO determined either that the value received would be significantly less if those agreements were included or that “it is not legally free to auction purchased power contracts.” The sale to the winning bidder was to be accomplished by an Asset Purchase and Sale Agreement (APSA) that included a number of PPAs to which PEPCO was a party and specifically the PPA with Panda.

Recognizing that some of the contracts intended to be assigned under the APSA may contain anti-assignment clauses, requiring the consent of a third party, PEPCO inserted provisions dealing with that eventuality. Section 2.4(b) of the APSA stated that, if PEPCO was unable to obtain a consent from a Power Seller to an assignment of a PPA, the PPA was to be governed by Schedule 2.4, attached to the APSA. Schedule 2.4 was applicable to all PPAs not assigned to the buyer on the closing date. It stated, in § H.B., that PEPCO agreed to sell to the buyer “all capacity, energy, ancillary services and other benefits” under the unassigned PPA and that the buyer would pay to PEPCO all amounts due from PEPCO to the Power Seller.

Section D of Schedule 2.4, which is the provision most at issue in this case, is captioned “Administration” and provides, in relevant part, that: (1) As of the Closing Date, PEPCO would irrevocably and unconditionally appoint the buyer as its exclusive representative and agent “for all purposes to the fullest extent permitted under the Unassigned PPAs except with respect to the Retained Rights.” 2 ¹⁹³ (2) Except as to the Retained Rights, the buyer was authorized to take all actions that PEPCO could lawfully take under the PPA without further approval from PEPCO, including: (i) dealing directly with Panda and others with respect to all matters arising under the PPA; (ii) acting on PEPCO’s behalf in the prosecution or defense of all rights or liabilities under the PPA; (iii) monitoring Panda’s performance under the PPA; (iv) reviewing and auditing all bills and related documentation rendered by Panda; and (v) with certain limitations, entering into amendments of the PPA. (3) The buyer could delegate to its affiliates or third parties any of its responsibilities under Section D. Upon PSC approval of the auction proposal, negotiations of some sort commenced between PEPCO and Panda, but they were not fruitful, and each party now blames the other for the failure. The auction date was set for May 31, 2000. In April, 2000, PEPCO filed an action in the United States District Court for the District of Maryland in which, among other claims, it sought a declaratory judgment that Panda was not properly a QF because it did not comply with FERC regulations.

The court dismissed the complaint, largely on PEPCO’s failure to exhaust administrative remedies, and no appeal was taken. See Potomac Elec. Power Co. v. Panda Brandywine, L.P., 99 F.Supp.2d 681 (D.Md.2000). 3 Panda, in turn, one day before final bids were due on the auction, filed a motion with the PSC to postpone the auction, ¹⁹⁴ at least with respect to its PPA, and to direct PEPCO to enter into good faith negotiations regarding the conditions under which Panda would consent to the inclusion of its PPA in the auction. That submission presumably was pursuant to § 17.2(a) of the PPA, which provided that, if the parties were unable to resolve any dispute arising under the agreement, they would submit the dispute to the PSC for expedited resolution before pursuing any other available rights or remedies.

PEPCO responded, in part, with a motion for a Declaratory Order that the proposed auction agreement would not constitute an assignment of the PPA and, for that reason, did not require Panda’s consent. While the matter was pending before the PSC, the auction proceeded, and, on June 7, 2000, SEI was declared the winning bidder. On September 27, 2000, the PSC entered an order (Order No. 76472) declaring, among other things, that the provisions in the APSA did not constitute an assignment or transfer within the meaning of § 19.1 of the Panda PPA, that PEPCO was not assigning “significant obligations and rights under the PPA,” that Panda would not be harmed by the transaction, and that the APSA did not “fundamentally alter[ ]” the privity of contract between Panda and PEPCO. It thus concluded that Panda’s consent to the proposed APSA was not required.

In conformity with those findings, the PSC denied all relief sought by Panda. To some extent, the PSC’s conclusions rested on a decision of FERC in New England Power Company, et al., 82 F.E.R.C. ¶ 61,179, 1998 WL 89673 , reh’g denied, 83 F.E.R.C. ¶ 61,275, 1998 WL 385144 (1998). Panda sought judicial review in the Circuit Court for Montgomery County. That court found that the APSA was not merely a resale or “back to back” agreement, as averred by PEPCO and found by the PSC, but, with the provisions in § D of Schedule 2.4, effected an assignment of Panda’s PPA.

It reversed the PSC order and remanded for further proceedings, although it did not specify the kind of proceedings it anticipated or what further issues PSC would need to resolve. ¹⁹⁵ While the judicial review action was pending, PEPCO sought approval of the APSA from FERC, which, under § 203 of the Federal Power Act (16 U.S.C. § 824b(a)) must approve such a transaction if it finds that the disposition will be consistent with the public interest. In making that determination, FERC considers three things: effect on competition, effect on rates, and effect on regulation. Panda intervened in the proceeding and asked that FERC either reject Schedule 2.4 as unjust and unreasonable or suspend it and set the issue for hearing. Panda argued that the proposed transfer would alter its bargained-for risks in that, as SEI is a direct competitor, it could restrict the releases of energy under the 1997 letter agreement, thereby depriving Panda of significant economic benefits.

FERC approved the transaction. With respect to Panda’s opposition, it agreed with PEPCO’s position that PEPCO would remain the purchaser and would not be transferring its rights and obligations. FERC concluded that “[sjince PEPCO will remain the purchaser under the proposed transactions for the unassigned PPAs, Panda’s concerns are misplaced.” FERC did not address, in any specific way, the effect of the various designations and delegations under § 19.1 of the PPA. See Potomac Electric Power Company, et al., 93 F.E.R.C. ¶ 61,240, 2000 WL 1828412 (2000).

Aggrieved by the decision of the Circuit Court, PEPCO appealed to the Court of Special Appeals. That court viewed the issue as one of contract interpretation, which was an issue of law. The intermediate appellate court concluded that, through the APSA, PEPCO effectively and improperly delegated its duties under the PPA to SEI. It added that the APSA amounted to an assignment because it extinguished PEPCO’s right to performance from Panda — a right that was transferred to SEI.

The court viewed the FERC decisions relied on by the PSC as public policy decisions and agreed that both FERC and PSC have the authority, on public policy grounds, to validate transactions such as the APSA notwithstanding that they violate anti-assignment provisions. Its ultimate holding was that, although the PSC could approve the ¹⁹⁶ APSA on grounds of public policy, it could not approve the transaction. on the ground that it did not violate the anti-assignment clause of § 19.1 of the PPA. We granted cross-petitions for certiorari to consider whether the Court of Special Appeals erred (1) in concluding that Schedule 2.4 of APSA effected an assignment of rights and obligations under the PPA in violation of § 19.1 of the PPA, and (2) in concluding that the PSC had authority to validate APSA on public policy grounds even though it constituted a violation of the PPA. DISCUSSION Contract Interpretation Both parties agree that the assignment issue is one of contract interpretation.

The PSC and PEPCO present the question as whether the APSA constitutes an assignment or delegation of the PPA that requires Panda’s consent and urge that, “[t]o answer that question, the Court need only apply the traditional principles of contract construction and interpretation to the PPA and the APSA.” Principally, the PSC and PEPCO focus on ¶ II.B. of Schedule 2.4, which calls for PEPCO to sell and SEI to purchase all of the power that PEPCO purchases from Panda, and thus regard the entire APSA as a “back to back” resell agreement and nothing more. They treat the APSA arrangement as equivalent to an automobile dealer reselling a car that it has purchased from a manufacturer to a consumer. Panda retorts that one cannot look just at ¶ II.B. but must consider the APSA as a whole. It focuses on ¶ II.D. — the Administration provision — as the source of the improper assignment and delegation.

In response, the PSC and PEPCO point out that the irrevocable and unconditional appointment of SEI as PEPCO’s agent for all purposes is “to the fullest extent permitted under the Unassigned PPAs” and that any delegation by PEPCO is thus limited by, and therefore cannot exceed, what is permitted by the PPA. The PSC and PEPCO further maintain that SEI is merely PEPCO’s agent, that ¹⁹⁷ PEPCO remains fully liable to Panda for SEI’s performance, and that, as a result, there was no assignment of either rights or obligations. Panda views the first of these arguments as “nonsensical” and the second as “gimmickry.” In addressing these various positions, we need to start, and end, with the relevant language in the two contracts— § 19.1 of the PPA and § 2.4 and Schedule 2.4 of the APSA. Section 19.1 states clearly that “[n]either this Agreement, nor any of the rights or obligations hereunder, may be assigned, transferred, or delegated by either Party, without the express prior written consent of the other Party, which consent shall not be unreasonably withheld.” Neither the PSC nor PEPCO has ever contested the validity of that provision; nor have they claimed that the provision is in any way ambiguous or against public policy, or that PEPCO has ever received consent from Panda to the APSA.

By prohibiting both non-consensual assignment and delegation, the PPA recognizes a nuance, or distinction, that is occasionally overlooked. In a bilateral contract, each party ordinarily has both rights and duties — the right to expect performance from the other party to the contract and the duty to perform what the party has agreed to perform. Although both are often the subject of transfer, the law does distinguish between them, using the term “assignment” to refer to the transfer of contractual rights and the term “delegation” to refer to the transfer of contractual duties. The basic rules are well-stated in the Restatement (Second) of Contracts §§ 317-323 (1981).

Restatement § 317 defines the assignment of a right as “a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance.” Section 317(2) permits a contractual right to be assigned unless (a) “the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or ¹⁹⁸ materially impair his chance of obtaining return performance, or materially reduce its value to him,” (b) the assignment is forbidden by statute or is inoperative on grounds of public policy, or (c) “assignment is validly precluded by contract.” (Emphasis added). Section 318 speaks to the delegation of performance. Section 318(1) allows an obligor to delegate the performance of a contractual duty “unless the delegation is contrary to public policy or the terms of his promise.” (Emphasis added). Section 318(2) provides that, unless otherwise agreed, a promise requires performance by a particular person “only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised.” Finally, § 318(3) states that, “unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.” Although using somewhat different language, we have adopted those principles.

In Macke Co. v. Pizza of Gaithers burg, 259 Md. 479, 482 , 270 A.2d 645, 646-47 (1970), we held that “[i]n the absence of a contrary provision ... rights and duties under an executory bilateral contract may be assigned and delegated, subject to the exception that duties under a contract to provide personal services may never be delegated, nor rights be assigned under a contract where delectus personae was an ingredient of the bargain.” 4 These general statements, both in §§ 317 and 318 and in Macke regarding the extent to which rights may be assigned and duties of performance may be delegated are, as noted, subject to any valid contractual provision prohibiting ¹⁹⁹ assignment or delegation. Section 19.1 of the PPA very clearly prohibits both the assignment of rights and the delegation of duties of