the method of calculating rate reductions under the Stipulation
is also without merit. The PSC does not have jurisdiction to
determine LILCO's obligations under the Stipulation. LILCO agreed
to submit disputes concerning the Stipulation to the exclusive
jurisdiction of this court. The court retained continuing
jurisdiction to enter orders to effectuate the Stipulation. See
Stipulation ¶ 32 ("In the event of any dispute or disagreement
with respect to the meaning, effect, or interpretation of the
Stipulation . . . the parties hereto agree that such dispute will
be adjudicated only in the District Court." (emphasis added));
LILCO II, 710 F. Supp. at 1487 ("The court retains equitable
jurisdiction to supervise the operation of this decree."
To the extent that LILCO's obligation is contractual in nature,
the Federal Constitution prevents the PSC from abridging the
Class's contractual rights. See U.S. Const. art. I, § 10, cl.
1. ("No State shall . . . pass any . . . Law impairing the
Obligation of Contracts[.]"); Trustees of Dartmouth College v.
Woodward, 17 U.S. (4 Wheat) 518, 608-13, 4 L.Ed. 629 (1819);
see also Part IV, infra.
IV INTERPRETATION OF THE STIPULATION
The central issue is whether the Stipulation provides that
LILCO must itself pay the $390 million in the form of rate
reductions, or, as LILCO claims, it may use tax savings accruing
to ratepayers in calculating the $390 million.
Because the Stipulation "constituted a contract, general
principles of contract law must govern its interpretation."
Goldman v. Commissioner of Internal Revenue, 39 F.3d 402, 405
(2d Cir. 1994); see Red Ball Interior Demolition Corp. v.
Palmadessa, 173 F.3d 481, 484 (2d Cir. 1999). The parties agreed
in the Stipulation that it "shall be . . . interpreted in
accordance with the laws of the State of New York[.]" Stipulation
¶ 31. It is to New York contract law that we turn for direction.
When the contractual terms are clear and unambiguous, New York
enforces the intent of the parties as gleaned from within the
four corners of the agreement. See Karafiol v. Karafiol,
259 A.D.2d 522, 686 N.Y.S.2d 461, 462 (2d Dept. 1999); Richard A.
Lord, 11 Williston on Contracts § 32:5, at 412-24 (4th ed.
1999) [hereinafter Williston on Contracts]. "[A] party cannot
create an ambiguity . . . merely by `urg[ing] different
interpretations in the litigation.'" Red Ball Interior
Demolition Corp. v. Palmadessa, 173 F.3d 481, 484 (2d Cir.
1999); Hunt Ltd. v. Lifschultz Fast Freight, Inc.,
889 F.2d 1274, 1277 (2d Cir. 1989) ("The court is not required to find the
language ambiguous where the interpretation urged by one party
would `strain the contract language beyond its reasonable and
ordinary meaning.'" (changes in original)); see also E. Allan
Farnsworth, 2 Farnsworth on Contracts § 7.8, at 257-62 (2d ed.
1998) (ambiguity in contract language). Rather, "[t]he words and
phrases used [are to] . . . be given their plain meaning." In re
Duncan Macrae, 249 A.D.2d 476, 671 N.Y.S.2d 530, 531 (2d Dept.
1998); see Restatement (Second) of Contracts § 202(3)(a)
(1979); Williston on Contracts, supra, § 32:3, at 408-10.
Where the terms have a plain meaning and the resulting
interpretation of the contract is clear, the court must give
effect to that interpretation as the assumed intention of the
parties. Cf. Hartford Accident & Indemnity Co. v. Wesolowski,
33 N.Y.2d 169, 172, 350 N.Y.S.2d 895, 305 N.E.2d 907 (1973) ("The
objective in any question of the interpretation of a written
contract . . . is to determine `what is the intention of the
parties as derived from the language employed.'" (internal
LILCO argues that "[t]he Stipulation requires $390 million of
rate reductions and the proper test is whether
ratepayers' bills were reduced by $390 million — not whether
LILCO made out-of-pocket payments of $390 million." Defs'
Res.Mem. at 28. The language of the Stipulation does not support
such a reading.
The Stipulation is written in terms of LILCO's aggregate
payment obligations, not in terms of the aggregate relief for the
• "LILCO shall pay to [the Class] . . . the sum of
Three Hundred Ninety Million Dollars ($390,000,000)
in the form of . . . rate reductions. . . ."
(Stipulation ¶ 2(a) (emphasis added)).
• "LILCO shall pay [the Class] a total of $390
million in the form of rate reductions over a
period of 10 years." (Stipulation ¶ 4(a) (emphasis
By the express terms of the Stipulation, the $390 million was
the amount LILCO agreed it would "pay." In fact, the Stipulation
uses "rate reduction" and "revenue reduction" interchangeably,
further suggesting that LILCO was to shoulder the $390 million
obligation from its revenues. See Stipulation ¶ 4(h) ("The
above revenue reductions are the total amount that LILCO shall
guarantee. . . ." (emphasis added)).
LILCO argues, in the alternative, that the term "rate
reductions" as used in the Stipulation carries a specialized
meaning and that this meaning should govern. In advancing this
argument, LILCO relies on "rate reductions" as understood and
calculated by the PSC.
The PSC includes not only the base rate reduction (e.g., the
reduction borne by the utility from its revenues), but also any
resulting reduction in gross taxes and surcharges as a result of
the base rate reduction, in calculating "rate reductions." This
practice results from New York state's prohibition on breaking
out in utility bills base rates charged by the utility from taxes
and surcharges levied by the government. It is designed, as
revealed by LILCO during oral argument, to "hide" from ratepayers
the fact that a substantial portion of their electric bills
consist of taxes and governmental surcharges.
As support for its contention that the PSC's specialized
understanding of "rate reductions" should govern, LILCO notes
that "[i]n proposing the $390 million settlement figure, the
staff of the PSC [had] included the Revenue Taxes in its
calculation of rate reductions." See Defs' Res. Mem. at 29.
The Stipulation itself, however, evidences no intent to use the
PSC's understanding of "rates." In the first place, the
Stipulation provides that LILCO "shall pay" the $390 million in
rate reductions. The express obligation that LILCO pay the $390
million indicates LILCO alone was to assume the cost of the rate
reductions. Since the state and local municipalities are bearing
the cost of the reduced taxes and surcharges, by definition LILCO
is not "paying" them. Applying the PSC's specialized
understanding of "rate reductions" would effectively undermine
LILCO's obligation to bear the cost of the reduced rates and
therefore is not the natural meaning of the phrase "rate
reductions" as used throughout the Stipulation.
That any tax advantage accruing to the Class from reduced taxes
and surcharges owed state and local governments was not intended
as part of the $390 million rate reduction is further evidenced
by the fact that no part of the record (outside of the PSC's
documents), nor any language in any of the settlement papers —
including the Stipulation — intimate such an understanding. See
Tom Doherty Assoc. v. Saban Entertainment Inc., 869 F. Supp. 1130,
1140 (S.D.N.Y. 1994) ("It is axiomatic that, in the absence
of evidence to the contrary, words in a contract carry their
The term "rate reductions" as used in the Stipulation must be
given its ordinary and common meaning, that is it must be
understood as referring to reductions in the rate charged by
LILCO. This conclusion
is particularly persuasive given that during the negotiations
LILCO was apparently aware of the specialized industry meaning,
had reason to know the Class's ignorance of this special meaning,
and did not affirmatively clarify the usage it now asserts is
controlling. See, e.g., Frigaliment Importing Co. v. B.N.S.
Int'l Sales Corp., 190 F. Supp. 116, 121 (S.D.N.Y. 1960)
(Friendly, J.) (contracting party asserting specialized meaning
of term over plain meaning has burden of proof); see also E.
Allan Farnsworth, Contracts 7.9, at 488-89 (1982). LILCO must
be deemed to have assented to the only understanding of the
phrase "rate reductions" shared by the parties. See Joseph M.
Perillo, 1 Corbin on Contracts § 4.10, at 617 (rev. ed. 1993)
("If the meaning that either [party] . . . gave to the words was
the only reasonable one under the existing circumstances, as the
other party had reason to know, the latter is bound by that
meaning and there is a contract accordingly." (emphasis added)).
LILCO also suggests that the PSC's approval of its rates
supports its contention that the tax advantages accruing to
ratepayers may be counted towards its $390 million obligation.
This argument misreads the reality of LILCO's contractual duty.
Mere approval of LILCO's utility rates by the PSC cannot
eliminate or reduce LILCO's independent affirmative obligation
under the Stipulation to pay $390 million out of its net
revenues to compensate Long Island ratepayers.
The PSC has no more power than LILCO to abrogate the agreement.
In the absence of "a legitimate and important public purpose,"
the Federal Constitution prohibits states from substantially
impairing contractual rights. Mascio v. Public Employees
Retirement System of Ohio, 160 F.3d 310, 313 (6th Cir. 1998);
see U.S. Const. art. I, § 10, cl. 1; Vesta Fire Ins. Corp. v.
Florida, 141 F.3d 1427, 1433 (11th Cir. 1998) ("Three factors
are considered when evaluating a claim that the Contract Clause
has been violated: (1) whether the law substantially impairs a
contractual relationship; (2) whether there is a significant and
legitimate public purpose for the law; and (3) whether the
adjustments of rights and responsibilities of the contracting
parties are based upon reasonable conditions and are of an
appropriate nature."); see also Allied Structural Steel Co. v.
Spannaus, 438 U.S. 234, 244, 98 S.Ct. 2716, 57 L.Ed.2d 727
(1978) ("Despite the customary deference courts give to state
laws directed to social and economic problems, `[l]egislation
adjusting the rights and responsibilities of contracting parties
must be upon reasonable conditions and of a character
appropriate to the public purpose justifying its adoption.'"
(emphasis added) (changes in original)); County of Suffolk v.
Long Island Lighting Co., 14 F. Supp.2d 260, 267-69 ("[LILCO]
cannot offer even a rational basis for the redistribution of
rights under the [Stipulation and] judgment."); see generally
Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat)
518, 607-13, 4 L.Ed. 629 (1819); John Edward Smith, John
Marshall: Definer of a Nation 434-35 (1996) ("Dartmouth
College is a pivotal case in American economic development. . .
. It is, in some sense, the case of every man who has property of
which he may be stripped. For the question is simply this: shall
our State legislatures be allowed to take that which is not
their own, to turn it from its original use, and apply it to
such ends or purposes as they, in their discretion, shall see
fit?" (emphasis in original) (quoting Daniel Webster)).
To the extent that LILCO's obligation to pay out-of-pocket the
$390 million is contractual in nature, the state — whether
directly through legislation or indirectly through the PSC —
cannot impair the Class's contractual rights. See, e.g.,
Educational Employees Credit Union v. Mutual Guaranty Corp.,
50 F.3d 1432, 1438-40 (8th Cir. 1995); cf. Allied Structural Steel
Co., 438 U.S. at 244, 98 S.Ct. 2716 (application of contract
modification to narrow
class of parties is factor in determining constitutionality of
V STATUTE OF LIMITATIONS
No statute of limitation problems are presented. The
Stipulation created an ongoing contractual relationship
contemplating, and providing for, potential delays in making the
various installment payments. See, e.g., Stipulation ¶ 4(f)
(deficiency in any year); id. ¶ 6(c) (possibility of postponing
installments for reasons of financial necessity).
The statute of limitations for a breach of LILCO's obligation
to pay the $390 million does not begin to run until May 31, 2000,
the date the last installment is due under the Stipulation. Cf.
City of New York v. Castro-Blanco, Piscioneri & Assoc., P.C.,
222 A.D.2d 226, 228, 634 N.Y.S.2d 489 (3d Dept. 1995).
VI LAW OF THE CASE
Even assuming LILCO is correct that the Stipulation as drafted
was designed to ensure that ratepayers' bills were reduced by
$390 million, and not to require LILCO to make out-of-pocket
payments of $390 million — an assumption impossible to support —,
that "was effectively modified by the court as a condition of
granting its approval of the settlement, and LILCO did not
challenge that modification on appeal." LILCO III, 106 F.3d at
As the court of appeals explained in a related dispute over the
interpretation of the Stipulation,
Although a consent decree is an agreement between
the parties, it is nonetheless an accord that is not
effective without approval of the district court. To
the extent that the court imposes a condition that a
party finds unacceptable, the party's recourse is
either to retreat from the agreement, and continue
the litigation or settlement negotiations, or to
challenge the judicial condition on appeal within the
time for appeal from the judgment incorporating the
condition. A party that follows neither course will
be barred from challenging the condition under the
Id. at 1117 (internal citations omitted) (emphasis added).
In assessing the fairness and reasonableness of the parties'
agreement and approving the Stipulation, the court interpreted it
to mean that LILCO was obliged to pay fully the $390 million from
its revenues. The court expressly stated, "[t]he cost of the
settlement to LILCO is approximately 400 million dollars [— $10
million of which represented attorneys' fees —] over eleven
years. . . ." LILCO I, 710 F. Supp. at 1442 (emphasis added).
Later in the same opinion the court stated, "[t]here is nothing
in the agreement which would permit elimination of the absolute
obligation of LILCO to pay a total of $390 million . . . to the
class." Id. at 1446 (emphasis added).
The court was entirely clear on the matter. LILCO must pay $390
million out of its revenues to the Class in the form of rate
"If LILCO objected to that interpretation, it should have moved
for a modification of the court's opinion; and if no such
modification were granted, it should have challenged the
condition on appeal." LILCO III, 106 F.3d at 1117. LILCO did
not contest this interpretation of the Stipulation either in the
district court or in the court of appeals. See, e.g., County of
Suffolk v. Long Island Lighting Co., 907 F.2d 1295 (2d Cir.
1990). In the absence of such a challenge, the court's
interpretation "became the law of the case." LILCO III, 106
F.3d at 1117.
No basis in law or equity justifies a modification of this
interpretation, even assuming the court possessed such authority.
See Stipulation ¶ 6(c) ("[T]he District Court shall not enter
any order which reduces or has the effect of reducing the total
$390 million dollar amount of rate
reductions agreed to." (emphasis added)). This conclusion is
warranted in light of the repeated assurances in court opinions
given to the ratepayers of Long Island — many of whom expressed
extreme skepticism of LILCO's bona fides at the public fairness
hearings held prior to the court's acceptance of the Stipulation
— that LILCO would not be permitted to circumvent its "absolute
obligation" to pay the $390 million. See, e.g., LILCO I, 710
F. Supp. at 1440 ("Other objectors felt that LILCO could not be
trusted to carry out the settlement.").
A substantial portion of the $21.5 million owing to the Class
should have been paid in earlier installments. See Part II,
supra. Interest shall be charged on the delinquent amount of
each installment as of the last day of the month on which it
should have been rebated to the ratepayers. The interest shall be
calculated as provided for in the Stipulation. See Stipulation
VIII ATTORNEYS' FEES
Attorneys' fees and expenses are awarded to plaintiffs'
counsel. See Stipulation ¶ 7 (fees for "administration of the
settlement"). Fee and expense requests associated with
prosecuting this declaratory judgment proceeding are to be
submitted with full justification of hourly rates, time expended,
These fees will be paid out of the remaining funds set aside
under the Stipulation for attorneys' fees. See Stipulation ¶ 7
(total fees shall not exceed $10 million).
Plaintiffs' motion for a declaration of class rights is
granted. Judgment is entered on behalf of the Class for the
outstanding balance of the $390 million due as of May 31, 2000,
plus interest, and attorneys' fees and expenses.
An order shall be submitted to the court in accordance with
this memorandum within ten days. If the parties are unable to
agree on the amounts due, including interest and fees, they shall
arrange for a prompt evidentiary hearing before the court.
Costs and disbursements are to be paid by the defendants. These
costs and disbursements are in addition to any fees, costs and
disbursements provided for by paragraph 7 of the Stipulation.
© 1992-2003 VersusLaw Inc.