The Massachusetts Supreme Judicial Court yesterday upheld the Massachusetts Municipal Wholesale Electric Co.'s contracts to sell Seabrook power to Massachusetts utilities, ending a legal battle that lasted almost two-and-a-half years, MMWEC said.

The contracts in question backed $517 million of the $876 million of municipal bonds the agency sold to pay for its 11.59% share of the Seabrook nuclear power plant.

Yesterday the Massachusetts high court confirmed that the contracts are valid and said the agency had acted correctly when it invokved a "step-up" provision in the contracts to redistribute to Massachusetts participants shares of the project originally held by Vermont utilities.

David Sjosten, the agency's general manager, said the court victory meant MMWEC was "born again."

The decision will allow the Massachusetts agency to refund its high-coupon outstanding debt, saving member utilities about $400 million in financing costs over the life of the bonds, Mr. Sjosten said.

The lawsuit challenging the contracts' validity had tarnished MMWEC's ratings and barred the agency from refinancing its debt.

Moody's Investors Service's Baa rating on the agency's debt has been suspended since 1988. Standard & Poor's Corp. has had its BBB MMWEC rating on Credit Watch with negative implications since the same year.

Since the rating agencies acted in response to the lawsuit, "we hope now with this decision they'll look more favorably on MMWEC's credit," said David Tuohey, a spokesman for MMWEC.

Rating agency officials said yesterday they were still studying the court ruling.

Joan Dougherty, an assistant vice president at Moody's, said it was beginning a reevaluation of its rating.

And Philip Edwards, a senior vice president at Standard & Poor's, said, "we're obviously assessing the situation."

The lawsuit that was settled yesterday had its roots in a September 1988 ruling by the Vermont Supreme Court that said six Vermont utilities had lacked the authority to enter into contracts to buy power through MMWEC from the troubled Seabrook nuclear plant.

The court said the Vermont utilities' Seabrook contracts with the agency were void "ab initio," or from the beginning.

To municipal bond market participants, the decision was disturbingly similar to a 1983 ruling involving Washington Public Power Supply System contracts, which led to the default of $2.25 billion of bonds, although the MMWEC situation differed in that the contracts voided backed only a small portion of the outstanding bonds.

The six Vermont utilities had shares in Project 6, which constituted more than half of MMWEC's involvement in Seabrook, and when their contracts were voided, the agency redistributed their shares among the Massachusetts Project 6 participants, citing the "step-up" provision in the contract.

But the Massachusetts utilities balked. Faced with paying still more for debt service on a nuclear plant that had been under construction for years and had yet to produce any power, 10 Massachusetts utilities challenged the validity of their contracts.

They said that if the Vermont contracts were void from the beginning, MMWEC might have violated a contract provision requiring 100% participation. And they questioned whether the Vermont participants' exit constituted a default, the condition they said was a prerequisite if MMWEC was to use the step-up provision.

The court yesterday rejected both those arguments.

"Later determination by a court that one of the participants never had the authority to enter into an agreement was not meant to be an event that would cancel the entire project," the court said in its decision in reference to the utilities' argument about the 100% participation clause.

And in discussing the step-up provisions, the high court agreed with MMWEC that the provisions were intended to come into effect if some power sales agreements were declared void "ab initio."

At the end of its decision, the court acknowledged the financial hardships incurred by the Massachusetts Project 6 participants, but said upholding the contracts will "work to the benefit of public entities seeking financing in the future as they may be assured that their arrangements will be enforced as they intended."

Joseph Spadia, manager of the Hingham, Mass., Municipal Lighting Plant, one of the 10 utilities that brought the lawsuit against MMWEC, said yesterday's decision "answers the questions we had and couldn't find answers to other than by filing the court case."

"We certainly are not planning an appeal," Mr. Spadia said, but added he could not speak for the other nine utilities.

Asked about an appeal, Bruce Patten, manager of the Peabody, Mass., Municipal Light Plant, said, "that remains to be seen."

But he said that Peabody and the Hudson Light and Power Department, two of the largest Project 6 participants, intend to proceed with their lawsuit challenging the cancellation of the "sell-back provision," which gave Project 6 participants the right to sell some of their Seabrook power back to the project's lead owner, Public Service Co. of New Hampshire.

The sell-back lawsuit was stayed pending the resolution of the lawsuit decided yesterday.

Mr. Tuohey said MMWEC was working to settle the sell-back issue out of court. In any case, he said, it would not interfere with the refunding, which had been held up because of the court case on the contracts and its effect on MMWEC's ratings.

The agency already has state approval to refinance $691 million of its outstanding debt and has asked the Massachusetts Department of Public Utilities to approve an additional $260.2 million.

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