Supreme Court of Virginia Affirms SCC Decision on Pumped Storage and Preservation of Existing Contracts

The Supreme Court of Virginia recently affirmed a Final Order issued by the State Corporation Commission that began as a dispute over what qualifies as renewable energy but ended in a split opinion debating the effects of statutory changes on existing contracts. At the end of the day, the Court allowed Constellation NewEnergy to continue serving its Virginia customers, all of whom are businesses, pursuant to the law as it existed at the time Constellation entered into its contracts with Virginia customers.


We won’t repeat all the details of the case because we blogged about it after the Commission entered its Final Order in favor of Constellation. The important stuff is that Constellation entered into retail electricity supply contracts with Virginia businesses in late 2019 and began serving those customers in February 2020. The contracts provide that Constellation anticipated serving its customers with “renewable energy” under Va. Code § 56-576 generated by a pumped storage hydroelectricity facility. Under the law, Constellation enters into wholesale contracts to buy enough pumped storage hydroelectricity every month to equal the amount of electricity they serve to their retail customers.


When they entered into the contracts in 2019, § 56-576 defined “renewable energy” as including “energy derived from . . . falling water.” The General Assembly changed the definition effective July 1, 2020, to specifically exclude pumped storage hydroelectricity. Virginia Electric and Power Company (“VEPCO”), the appellant, argued that pumped storage hydroelectricity was not renewable energy under the prior statute.


So, there were two issues. First, did pumped storage hydro meet the old definition of “renewable energy” in § 56-576 which applied to the contracts through July 1, 2020? And second, does the amended definition, which became effective on July 1, 2020, apply to Constellation’s contracts, or does the old definition apply?


On the first issue, the Court found that a pumped storage hydro facility generates electricity when water “falls” from a higher point to a lower point. It didn’t matter that the water is pumped upstream and then released (as opposed to “run-of-river” hydro where electricity is produced only when Mother Nature allows water to run downstream).  This was still “energy derived from . . . falling water” under the plain, clear, and unambiguous language of the former § 56-576.


In this part of the decision, the justices all agreed with Justice Chafin, who wrote that “[t]here are numerous substitutions or qualifying words the General Assembly could have utilized to achieve VEPCO’s narrower interpretation, but it did not do so.” The only way to exclude pumped storage hydro from the definition of “renewable energy” was to add words to the statute, which the Court refused to do.


To further support its decision, the Court looked to another Code section dealing with renewable energy that adopted the definition of § 56-576 but added language to exclude pumped storage. That added language excluding pumped storage would not have been necessary if § 56-576 already excluded it. Finally, “as the clearest indication that energy from pumped storage was not already excluded” from § 56-576, the General Assembly would have had no reason to change the definition in 2020.


So, under the old law, Constellation’s contracts passed muster. That decision, however, only saved Constellation and its customers through July 1, 2020, when the law changed. What law governs the contracts after that date?


And this is where the case got really interesting and reaches beyond the wonky world of energy law. In a 4-3 decision, the Court agreed with Constellation and the Commission, holding that the revised definition did not apply to Constellation’s contracts.


The debate centered primarily around the difference between retroactive and prospective application of new statutes. VEPCO had argued that the new definition, beginning July 1, 2020, should apply prospectively to the contracts from that day forward. The majority disagreed, finding that VEPCO had “misconstrue[d] the concepts of retroactive and prospective application of statutes.”


Prospective application concerns the rights and claims that arise after the legislation, whereas retroactive application “reaches back to affect the rights and duties accrued prior the legislation.” While calling it prospective, VEPCO actually wanted the Court to apply the statute retroactively; VEPCO wanted the Court to reach back and change the terms of Constellation’s contracts that affect Constellation’s performance.


Virginia law disfavors retroactive application and, absent an express manifestation of legislative intent, will apply the statute prospectively. In other words, in passing legislation, the General Assembly needs to be clear that it intends for the new law to interfere with rights accrued pursuant to a contract executed prior to a statutory amendment, because the Court will not infer such an intent. Here, when it revised the definition of “renewable energy” to exclude pumped storage, the General Assembly did not express an intent to apply the statute retroactively or to interfere with existing contracts. As a result, the revised definition did not apply to Constellation’s contracts.


Another important factor was that the contract incorporated the definition of § 56-576 and specifically mentioned pumped storage as being a compliant “renewable energy” resource. The Court held that the statute became a “material part of the contract of the parties by mutual agreement,” and the General Assembly had not expressed any intent to disrupt this established contractual relationship.


The dissent had a decidedly different take on the prospective versus retroactive argument. Justice Kelsey, with whom Chief Justice Lemons and Justice McCullough agreed, found the answer “uncomplicated.” To them, the new definition governed Constellation’s sales after July 1, 2020 – prospectively. The new definition affected future sales, which are not vested rights, and Constellation had no vested right in the assumption that the legislature would never change the legal definition of renewable energy during the multi-year duration of its executory, retail contracts.


Finally, one issue that was hotly debated in the case was whether the contracts were subject to a valid exercise of police power. Constellation and the Commission argued that a police power analysis is only applicable if there is an expressed intent in the statute or, in the very least, in the inherent structure or language at issue, to affect existing contracts. In other words, it’s a progression – you only get to police power if the statute intended to affect vested rights. The Court agreed with Constellation and the Commission that it need not reach VEPCO’s argument that the amended definition was a valid exercise of the Commonwealth’s police power.


Thus, this decision is the first case in which the Supreme Court of Virginia has directly held that it will only apply a police power analysis if the General Assembly intended for the new law to affect vested rights.


The dissent went ahead and applied the police power analysis. First, the three justices wrote that Constellation’s contractual obligations were not impaired because Constellation could sell other sources of renewable energy identified in § 56-576. Second, even if the contracts required Constellation to provide pumped storage, the prospective application of the new definition would not have risen to the level of a “substantial” contract impairment. There are other sources of energy under § 56-576, and Constellation operates in an industry that has been heavily regulated in the past.  And third, even if the impairment was substantial, there was a reasonable justification for doing so: regulating the supply of electricity.


What’s the takeaway? On the first issue, the Court applied well-settled rules of statutory interpretation to rule in Constellation’s favor. The second issue resulted in a spirited debate about the effect of statutory amendments on existing contracts. The “prospective-versus-retroactive” distinction has been around for years, but this marks the first time the Court has analyzed it this deeply. The case also stands for the proposition that the Court will not apply a police power analysis unless the General Assembly intended for the new law to affect vested rights.


On October 6, 2021, the Court denied VEPCO’s petition for rehearing. The Court’s July 15, 2021 Opinion, linked above, can also be found at 861 S.E.2d 47.


GreeneHurlocker represented Constellation NewEnergy throughout this proceeding. For more information on this case and other issues impacting the retail energy and renewable energy industries, please contact Brian Greene or any of GreeneHurlocker’s energy attorneys.


Brian Greene
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