CITIES OF BURBANK, GLENDALE and PASADENA, CALIFORNIA v. Samuel W. Bodman, SECRETARY OF ENERGY

United States Court of Appeals for the Federal Circuit
05-1512
CITIES OF BURBANK, GLENDALE and PASADENA, CALIFORNIA,
Appellants,
v.
Samuel W. Bodman, SECRETARY OF ENERGY,
Appellee.
John P. Williams, Duncan & Allen, of Washington, DC, argued for appellants.
With him on the brief was Helene de Neuville Pangas. Of counsel on the brief were
Dennis A. Barlow, City Attorney and Terry B. Stevenson, Senior Assistant City Attorney,
for the City of Burbank, California; Scott H. Howard, City Attorney and Steven G. Lins,
Senior Assistant City Attorney, for the City of Glendale, California; and Michele Beal
Bagneris, City Attorney and Scott D. Rasmussen, Assistant City Attorney, for the City of
Pasadena, California.
Kenneth M. Dintzer, Senior Trial Attorney, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for appellee.
With him on the brief were Peter D. Keisler, Assistant Attorney General and David M.
Cohen, Director.
Appealed from: United States Department of Energy Board of Contract Appeals
Acting Chief Administrative Judge Beryl S. Gilmore

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United States Court of Appeals for the Federal Circuit
05-1512
CITIES OF BURBANK, GLENDALE and PASADENA, CALIFORNIA,
Appellants,
v.
Samuel W. Bodman, SECRETARY OF ENERGY,
Appellee.
___________________________
DECIDED: August 30, 2006
___________________________
Before NEWMAN, RADER, and GAJARSA, Circuit Judges.
RADER, Circuit Judge.
The Department of Energy Board of Contract Appeals (Board) denied claims by
the cities of Burbank, Glendale, and Pasadena, California (the Cities) asserting that the
Bonneville Power Administration (BPA) miscalculated the rate it charged them for power
under various contracts. Cities of Burbank, Glendale, & Pasadena, Cal., EBCA Nos. C-
030364-66, slip op. (Apr. 14, 2005) (Board Decision). Because the Board correctly
interpreted the disputed contractual provision, this court affirms.
I.
BPA, an executive agency within the United States Department of Energy, see
16 U.S.C. § 832a (2000), markets, sells, and exchanges government-generated power
within and beyond the Pacific Northwest. See 26 U.S.C. § 837(b) (2000) (defining
“Pacific Northwest”). To ensure a preference for power needs in the Pacific Northwest,
title 16 places restrictions on customers beyond that region. See, e.g., 16 U.S.C.

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§ 837b (entitled “Contract terms and conditions for use of electric energy outside the
Pacific Northwest”). The Cities contracted with BPA in 1988 to purchase power,
referred to in the Agreements as “surplus firm power,” for a period of twenty years.
Board Decision, slip op. at 2. Thus, while each of the Cities entered into its own
contract with BPA, those contracts (Nos. DE-MS79-87BP92411, -92412, and -92413)
(the Agreements) each contained an identical provision to ensure that the Cities paid
rates in excess of the charges for local BPA customers. Those provisions used the
rates paid by local customers, the “Priority Firm Power Rate[s],” as a guideline for
adjusting the Cities’ higher rates during the life of the Agreements.
During the first five years, the Agreements fixed the Cities’ rates for surplus firm
power. Board Decision, slip op. at 2. Those fixed rates began at $4.60/kW-month in
1988, and gradually increased to $5.81/kW-month in 1992. Beyond 1992, Section
9(a)(3) of the Agreements adjusted those rates:
Adjustment Resulting from Adoption of New Priority Firm Power Rate Schedule.
Adjustments under this paragraph begin January 1, 1993. . . . On the
effective date of any Bonneville Priority Firm Power (PF) rate
adjustment thereafter, the rate for surplus firm power (SLnew) shall be
adjusted as follows:
SLnew = SLn x PFnew/PFprev
where
SLnew = The effective surplus firm power demand and energy
charges hereunder as adjusted to reflect the change between PFnew
and PFprev.
SLn = For the initial adjustment under this paragraph 9(a)(3) the
SLn demand charge shall be $5.81/kW-mo. and the energy charge
shall be 25.88 mills/kWh. For all subsequent adjustments under this
paragraph the values for SLn shall be the then-current values for the
previous SLnew.
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PFnew = The newly adjusted average PF rate or successor
rate(s) in mills per kWh. Such average PF rate shall be calculated at a
load factor of 50 percent, and assuming a uniform demand in all
months. If there is more than one PF rate, the average shall be
determined by a weighting based on forecasted sales under such PF
rates.
PFprev = The average PF rate or successor rate(s) in mills per
kWh, in effect during the previous rate period. Such average PF rate
shall be calculated at a load factor of 50 percent, and assuming a
uniform demand in all months. If there is more than one PF rate, the
average shall be determined by a weighting based on forecasted sales
under such PF rates.
Joint Appendix at JA 20074-75. Thus, while the Agreements specify a surplus firm rate
for the Cities’ power that is higher than the Priority Firm Rate (the PF rate), Section
9(a)(3) adjusts the surplus firm rate based on any yearly adjustments to the PF rate. In
other words, when the PF rate increases 5%, the surplus firm rate will also increase 5%,
regardless of the difference between the two rates.
Upon adoption of the Agreements, BPA’s local customers paid one of two PF
rates: the Preference rate and the Exchange rate. Board Decision, slip op. at 3. At the
time of the first adjustment, BPA calculated Section 9(a)(3)’s PFnew by determining
average Preference and Exchange rates and then weighting those averages by the
forecast sales of power in each category. Id. at 3. As it turned out, at the time of the
first adjustment in 1993, the Preference and Exchange rates were identical. Previously,
the Exchange rate had been higher. As a result of the lowered Exchange rate in 1993,
and its role in calculating PFnew and PFprev, the Cities’ cost for power under the
Agreements decreased after the 1993 adjustment. Id. at 4. In 1995, when BPA next
adjusted the rates, the Preference and Exchange rates were again equal. Thus, the
Exchange rate again had no effect on the 1995 adjustment. Id.
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The dispute in this case arose when BPA altered the structure of its PF rates.
Before 1996, BPA’s local “Pacific Northwest” customers paid PF rates that included only
demand and energy charges under both the Preference and Exchange rates. Joint
Appendix at JA 20124 (“Schedule PF-95 Priority Firm Power Rate”). In 1996, BPA
broke those rates down in more detail by specifying a demand charge, twelve separate
energy charges, a load shaping charge, a load regulation charge, and separate
transmission charges. Joint Appendix at JA20137-42 (“SCHEDULE PF-96 PRIORITY
FIRM POWER”). Due to that breakdown, which the Board referred to as “unbundling,”
the new rate schedule still included the heading: “PRIORITY FIRM POWER,” followed
by demand and energy charges. However, the new rate schedule also included a
number of additional headings, e.g. “FULL LOAD SHAPING,” “LOAD REGULATION,”
“TRANSMISSION,” etc., each being followed by specified charges. In a letter, BPA
explained to the Citites that those various additional charges had previously been
bundled into the PF rates. Therefore, BPA would continue to include them in
modifications to the rates under Section 9(a)(3) of the Agreements.
The Cities objected. They did not agree to the use of these additional charges
when calculating PFnew under Section 9(a)(3) (“the unbundling issue”). The Cities also
objected, as they had not done in the past, to BPA’s use of the Exchange rate in the
Section 9(a)(3) calculation (“the Exchange rate issue”).
Initially, the City of Burbank (Burbank) alone brought breach of contract claims
against the government in the United States Court of Federal Claims. That court
dismissed Burbank’s claims on jurisdictional grounds, reasoning that Burbank’s claims
fell within the exclusive jurisdiction of the United States Court of Appeals for the Ninth
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Circuit. City of Burbank v. United States, 47 Fed. Cl. 261, 268 (2000). Burbank
appealed and this court reversed. City of Burbank v. United States, 273 F.3d 1370,
1382 (Fed. Cir. 2001). On remand, the Court of Federal Claims again dismissed
Burbank’s claims for the alternative reason that Burbank did not comply with the
Contract Disputes Act. See id. at 1382 (“On remand, the Court of Federal Claims may
reinstate its alternative holding dismissing Burbank’s claims without prejudice for failure
to comply with the requirement of the Contract Disputes Act.”).
Following the lead of the Court of Federal Claims’ second dismissal, Burbank,
joined by the Cities of Glendale and Pasadena, sought reimbursement from the BPA’s
contracting officer based on BPA’s alleged miscalculation under section 9(a)(3). After
the contracting officer rejected their claims, the Cities appealed to the Board.
The Board rejected the Cities’ arguments. As to the unbundling issue, the Board
determined that the PF rates had always included the additional charges. Thus,
separate itemization (to local customers) of the various charges was not a sufficient
reason to take them out of the Section 9(a)(3) calculation. Board Decision, slip op. at
11-12. The Board explained: “The formula was adopted to track increases or decreases
in PF rates, the rates PF customers pay for power. To limit the PF rates in 1996 to only
the demand and energy charges would defeat the purpose of the rate adjustment
formula.” Id., slip op. at 12.
On the Exchange rate issue, the Board reasoned that the Agreements explicitly
contemplate an average of multiple PF rates. Id., slip op. at 14. The Board rejected the
Cities’ arguments as at odds with the language of the contracts. Finally, the Board
reasoned that the Cities’ failure to challenge the use of the Exchange rate in the 1993
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and 1995 adjustments demonstrated the Cities’ acceptance of that rate as an
appropriate component of any Section 9(a)(3) adjustment.
II.
This court reviews the Board’s decision under the provisions of the Contract
Disputes Act of 1978, 41 U.S.C. §§ 601-613 (2000) (the CDA). Under the CDA, this
court reviews the Board's conclusions of law without deference. 41 U.S.C. § 609(b);
White v. Edsall Constr. Co., 296 F.3d 1081, 1084 (Fed. Cir. 2002). The Board,
however, “has considerable experience and expertise in interpreting Government
contracts, and its interpretation is given careful consideration and great respect.” Cmty.
Heating & Plumbing Co. v. Kelso, 987 F.2d 1575, 1579 (Fed. Cir. 1993). This court will
not set aside a Board's findings of fact unless “fraudulent, or arbitrary, or capricious, or
so grossly erroneous as to necessarily imply bad faith, or if such decision is not
supported by substantial evidence.” 41 U.S.C. § 609(b); HPI/GSA 3C, LLC v.
Perry, 364 F.3d 1327, 1333 (Fed. Cir. 2004).
The Unbundling Issue
“A principal objective in deciding what contractual language means is to discern
the parties’ intent at the time the contract was signed.” Winstar Corp. v. United States,
64 F.3d 1531, 1540 (Fed. Cir. 1995) (en banc) (quoting Arizona v. United States, 575
F.2d 855, 863 (Ct. Cl. 1978)), aff’d 518 U.S. 839 (1996). Thus, this court seeks the
correct interpretation of Section 9(a)(3) consistent with the parties’ intent at the time of
contract execution in 1988. At that time, the PF rates, whether the Preference rate or
the Exchange rate, represented the total rates paid by local customers for BPA power.
See Board Decision, slip op. at 4-5. Only later, beginning in 1996, did BPA separately
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identify additional charges to the local customers for services previously bundled with
the PF rates. Id. Thus, from the outset of the Agreements, Section 9(a)(3) adjusted the
Cities’ rates based on changes in the specific unbundled charges first separately
identified in 1996.
The BPA’s 1996 rate schedule recites the term “priority firm power,” with its
associated charges, and identifies additional new charges. BPA’s 1995 rate schedule
had not identified those additional charges separately. In one sense, the term “priority
firm power” changed in 1996 to exclude the newly identified additional charges that the
Citites are now seeking to exclude from the Section 9(a)(3) calculation. In another
sense, those additional charges had always influenced changes to the Cities’ rates; so
nothing changed with BPA’s approach. In the most important sense, the meaning of
“PF rate” in Section 9(a)(3) did not change eight years into the Agreements due to
BPA’s unilateral acts. In 1988, the parties understood Section 9(a)(3) to alter the rates
charged to the Cities based on the change in the charges to local customers for the
same services. The ratio of PFnew/PFprev set forth in Section 9(a)(3) loses its
intended meaning unless the PF rates in that ratio represent the same real charges to
BPA’s local customers from year to year. Thus, the Board correctly concluded that it
was proper for BPA, when calculating rates under Section 9(a)(3) to re-bundle the 1996
rates to arrive at a rate comparable to the PF rates paid by local customers in previous
years. Any other approach would result in an apples-to-oranges ratio completely
disconnected from the parties’ intent in the Agreements.
Furthermore, the Cities’ theory would give them a windfall in the year BPA first
changed its billing practices for local customers, and thereafter would under-calculate
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those adjustments. The PF rate for 1995, the year before the unbundling, included two
components in its Preference Rate: a Demand Charge of $4.307 per kW during peak
periods, and an Energy Charge of either 23.06 (Sept. – Mar.) or 16.94 (Apr. – Aug.)
mills per kWh. Meanwhile, in the PF rate for 1996, the Demand Charge dropped to
$0.87 per kW, while the Energy Charge stayed substantially the same, though broken
down into more than two periods. The record shows that the new charges attributed to
load shaping, load regulation, and transmission apparently offset the significant drop in
the Demand Charge. Thus, the real numbers confirm the logic of the BPA approach
followed by the Board.
Finally, the Cities argue that their cost does not include a transmission rate.
Therefore, the Cities protest the use of the transmission rate for local customers when
calculating increases under Section 9(a)(3). This reasoning conflates the billing
practices to the Cities with the adjustment factor of Section 9(a)(3). As the Board
explained, the Agreements locked increases or decreases in the Cities’ rates to the
same adjustments in local customer rates. Board Decision, slip op. at 12. Thus, while
Section 9(a)(3) tracks the actual changes in the cost of power to local customers, it
does not require a perfect correlation between the separate components of rates
charged to the local customers and the Cities.
The Exchange Rate Issue
The Cities do not dispute that BPA used a blended average of the Exchange rate
and the Preference rate when calculating the PF rates for the years before 1996. BPA’s
use of the Exchange rate in the Section 9(a)(3) calculation during those early years
either benefited the Cities, or made no difference. Furthermore, the Cities admit that
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the Exchange rate is a PF rate. Appellants’ Br. at 40. Nevertheless, the Cities argue
that the Agreements are ambiguous and so should be construed in light of extrinsic
evidence that they assert supports their position that they never intended to include an
Exchange rate in the PF rate calculation. Specifically, the Cities argue that “[i]t was
reasonable for the Citites, being from outside BPA’s Pacific Northwest region, not to
know about the PF Exchange rate unless BPA specifically discussed it with them.” Id.
Thus, the Cities claim that because they did not know about the Exchange rate, they did
not intend its inclusion in Section 9(a)(3).
At the outset, section 9(a)(3) of the Agreements is not ambiguous. Section
9(a)(3) includes definitions of PFnew and PFprev. Both of those definitions include the
following sentence: “If there is more than one PF rate, the average shall be determined
by a weighting based on forecasted sales under such PF rates.” Thus, Section 9(a)(3)
contemplates the existence of multiple PF rates and sets forth a procedure for their use
in the Section 9(a)(3) calculation.
Moreover, section 9(a)(3) by its own terms did not apply until 1993. Because that
section contemplated the possibility of multiple PF rates in the future, the Cities
ignorance of the number of PF rates in 1988 is irrelevant. In addition, the Board
rejected the Cities’ contentions as a matter of fact. The Board explained that the
testimony in support of the Cities’ theory “is unpersuasive.” Board Decision, slip op. at
14-15. In short, this court sees no error in the Board’s holding that BPA properly
averaged the Exchange rate with the Preference rate when conducting the Section
9(a)(3) calculation.
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Finally, the Cities argue that the Board was wrong to support its opinion with the
observation that the Cities somehow acquiesced to the use of the Exchange rate by not
challenging the use of that rate in earlier years when its use favored the Cities. Any
error by the Board in that regard was harmless. The language of the Agreements
supports fully the Board’s decision.
CONCLUSION
Because the Board properly interpreted Section 9(a)(3) of the Agreements, this
court affirms the denial of the Cities’ claims.
COSTS
Each party shall bear its own costs.
AFFIRMED
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