United States District Court, S.D. Indiana, Indianapolis Division
ORDER ON THE PARTIES' MOTIONS FOR SUMMARY JUDGMENT
SARAH EVANS BARKER, District Judge.
This matter comes before us on the parties' Motions for Summary Judgment. [Dkt. Nos. 53, 59.] The motions are fully briefed. Having considered the arguments and the uncontroverted evidence, we DENY Benton County Wind Farm LLC's Motion for Summary Judgment and GRANT Duke Energy Indiana, Inc.'s Motion for Summary Judgment, for the following reasons:
The term "wind power" describes the process by which wind's kinetic energy is converted into electricity by the use of wind turbines. A wind turbine works the opposite way that a fan works. Instead of using electricity to make wind, like a fan, wind turbines use wind to make electricity. The wind turns blades which spin a shaft that connects to a generator to generate electricity. The electricity cannot be stored, however. The electricity passes through a grid and is transmitted through electrical wires to the consumer.
Although large-scale wind generation is relatively new, in the past decade it has become one of the fastest growing sources of electricity generation in the United States. Prior to 2008, wind power in Indiana was extremely rare, limited to individual, small-scale turbines. Over the past seven years, Indiana has increased its electrical output to 1, 745 MW generated by 1, 031 turbines on six wind farms. According to Wind on the Wires (a wind advocacy organization), within the next decade Indiana is expected to triple its wind energy generation to more than 5, 000 MW.
Benton County Wind Farm was the first wind farm in Indiana, beginning operations in 2008, and consists of 87 turbines. These wind turbines (or their blinking red warning lights) are observable for miles, especially while driving on I-65 from Indianapolis to Chicago. Just one of these 87 turbines provides power sufficient to supply 600 homes per year. The towers for these turbines often exceed 200 feet in height, are costly to install (approximately $1-2 million per turbine), and are extremely large and heavy (weighing approximately 300, 000 pounds per turbine).
This new and developing source of energy has given rise to new business entities and relationships as techniques for the commercial exploitation of this resource have evolved and progressed. The litigation before us here reflects all these factors, requiring the Court to review the contract entered into by the parties and to resolve the dispute that has arisen under it.
Background and Facts
The parties agree as to nearly all of the relevant facts. Most importantly, the parties stipulate that the contracts at issue are "clear and unambiguous." [Dkt. No. 55-1 at 1 (Duke); Dkt. No. 63 at 17 (BCWF).] The parties' dispute has arisen over their respective contractual obligations in light of subsequent changes in circumstances relating to the sale and purchase of wind energy. The specific provocation for the filing of this lawsuit was Duke's submission of bids to the intervening grid authority the amounts of which fell below the threshold at which Benton County Wind Farm LLC ("BCWF") was able to run its wind farm at 100% capacity. BCWF asserts that Duke's actions constitute a breach of the parties' contract, which Duke denies.
A. The Introduction of Wind Energy in Indiana.
In 2005, when Indiana's General Assembly enacted legislation to mandate utility procurement of renewable energy, Duke issued a solicitation for 100 megawatts ("MW") of renewable power generation requiring the successful bidder to develop, permit, construct, and operate a renewable power plant. In exchange, Duke offered to pay a fixed price per MW generated. BCWF became the successful bidder in response to this solicitation.
B. The Renewable Wind Energy Power Purchase Agreement ("PPA").
On September 1, 2006, Duke and BCWF entered into a Renewable Wind Energy Power Purchase Agreement ("PPA") whereby Duke agreed to purchase energy generated by BCWF's wind farm located in Benton County, Indiana (the "Wind Farm"). Several specific provisions of the complex arrangement embodied in the PPA are relevant to the parties' current dispute:
4.1 Sale and Purchase of Energy and Credits
During the term of this Agreement, Seller shall deliver and sell to Buyer and Buyer shall accept and purchase from Seller (a) Electrical Output of the Plant; and (b) any Credits associated with, and to the extent available from, such Electrical Output purchased by Buyer. After the Commercial Operation Date, the Capacity Rights shall belong to Buyer, provided that Seller makes no representation or warranty whatsoever regarding the quantity of capacity associated with the Plant or any rights associated therewith.
Buyer will pay Seller for the Electrical Output and Credits at a price per MWh of Electrical Output delivered to Buyer at the Point of Metering in accordance with Exhibit A attached hereto.
4.5 Measurement of Electricity
All Electrical Output will be measured at the Point of Metering and will meet the specifications established by the Interconnection Agreement, as the same may be amended from time to time. For purposes of monthly billing in accordance with Article 10 NTPSCO and/or the RTO will ensure that the Meters are read at the end of each Month
4.6 Buyer's Failure to Accept Delivery of Electrical Output.
(a) In the event that Buyer fails to accept delivery of all of the Electrical Output at the Point of Metering, whether due to Buyer's failure to obtain Transmission Service (if applicable) or for any reason other than Seller's failure to perform, an Emergency Condition, a Force Majeure Event that prevents such acceptance pursuant to Article 14 or the proper exercise by Buyer of its suspension rights pursuant to Section 15.2(a) then Buyer shall pay to Seller as liquidated damages an amount equal to the positive difference, if any, between (i) (x) the amount that svuuld have been payable by Buyer to Seller hereunder if such Electrical Output had been accepted by Buyer plus (y) additional transmission charges, if any, reasonably incurred by Seller in delivering the Electrical Output to such third party purchaser and (ii) the net amount, if any, that Seller, using Commercially Reasonable Efforts, actually realizes through remarketing of such Electrical Output to Persons other than Buyer, provided that in the event Seller is unable to remarket such Electrical Output, then the net amount described in clause (ii) shall be $0 ami the dan)ages owed by Buyer shall also include lac then-current amount of the PTC (On a per MWh basis) on an After-Tax Basis for each MWh of Such Electrical Output that Seller was unable to remarket. The damages provided in this Section 4.6 shall be the sole and exclusive remedy of Seller for any failure of Buyer to accept delivery of Electrical Output that it is required to accept hereunder.
(b) Seller shall include in a monthly invoice delivered to Buyer pursuant to Section 10.1 the amounts owed by Buyer pursuant to Section 4.6(a) and a description, in reasonable detail, of the calculation of damages resulting from Buyer's failure to accept delivery of Electrical Output.
[Dkt. No. 1-1 at Art. 4.] The parties defined the term "Electrical Output" as follows:
EkctricaJ Output' Means the entire electric energy output of the Plant delivered Lo the Point of Metering, as measured pursuant to Article 8.
[ Id. at Art. 1 (Definitions).] The Point of Metering is also a defined term in the PPA.
Point of Metering: Means trie interconnection point with NlPSCO and/or RTC\ which is pore fully described in the Interconnection Agreement,
[ Id. ] With respect to the scheduling, delivery, and transmission of the energy generated by BCWF, the parties agreed:
6.2 Schcduliwa/Market Participant
The Parties will reasonably cooperate with each other with respect to the bidding and scheduling with NlPSCO und/ur the RTO of the Electrical Output to be sold and delivered by Seller and accepted and purchased by Buyer, Buyer will be responsible for all such bidding and scheduling, The Parties agree that Buyer shall be the RTO Market Participant for the Plant (bs defined by the RTO Requirements), except in connection with the delivery of test energy pursuant to Section 9.2 or After the occurrence of an Event of Default with respect to Buyer.
6.3 Environmental Quality Certification Requirements
Seller agrees to use Commercially Reasonable Efforts lo conform its administration of this Agreement to fall within the parameters contained within the requirements of any Credits or similar benefits for renewable energy adopted by the State of Indiana in effect on the Effective Date* to enable qualification of the Electrical Output as renewable energy, as defined in tlwse requirements.
Notwithstanding anything to the contrary set forth herein, nothing in Section 6.2 or this Section 6.3. shall require Seller to take any action effecting, or which would otherwise result in, ar.y reduction in the Electrical Output or cause Seller to incur additional costs as a result of such provisions.
[ Id. at Art. 6.]
The parties included provisions in their PPA addressing a termination of the agreement by either party. Section 15.4 states: "[T]he Parties acknowledge and agree that if this Agreement is terminated due to an Event of Default by either Party, the actual or direct damages incurred by the non-defaulting Party shall include:...." [ Id. § 15.4]. Damages in the case of termination by the Seller due to an Event of Default by the Buyer are to be calculated in the following manner:
(a) in the case of a termination by Seller due to an Event of Default by Buyer, the net present value of the difference, if positive, between (x) the amount that Buyer would have been required to pay up Seller pursuant to this Agreement for delivery of all Electrical Output that would have been delivered by Seller hereunder during the remainder of the Term (absent termination of this Agreement and based on an assumption as to the amount of Electrical Output calculated using commercially reasonable projections based on historical performance of the Plant if such termination occurs two (2) years or more after the Commercial Operation Date; if such termination occurs earlier than two (2) years after the Commercial Operation Date then the Parties shall jointly retain an independent wind resource consultant to estimate the Electrical Output that would have been delivered by Seller hereunder during the remainder of the Term, taking into account all relevant data, and such estimate shall be binding on the Parties) and (y) the net amount, if any, payable to Seller by a third party pursuant to any replacement power purchase agreement thai Seller using Cornmencially Reasonable Efforts enters into for the replacement of such Electrical Output, provided thai to the extent Seller is unable to remarket all of such Electrical Output, then the net amount described in clause (y) shall he SO and the damages owed by Buyer shall also include the then-current amount of the PI U (on a per MWh basis) on an After-Tax Basis for each MWh of such energy that Seller was unable to remarket,
[ Id. ] The PPA requires Duke and BCWF to conform to MISO requirements. [PPA § 5.4(d) ("Subject to the right to Contest their applicability, both Parties will comply with all applicable RTO Requirements in all material respects.") ("RTO" is defined as "the Midwest Independent Transmission System Operator, Inc." (MISO).]
Endorsing the opinion of BCWF's expert, Dr. Roy J. Shanker, Ph.D., Duke notes that the PPA "has no provision for calculation of deemed generation" and the "PPA does not contain any language on how to calculate the megawatt hours of energy that could have been delivered." [Dkt. No. 55-1 at 10.]
C. Transmission Services.
The PPA includes a description of "Transmission Services" that may or may not be required for Duke to accept the energy generated by BCWF:
Buyer represents that it intends to deliver and sell all of the Electrical Output to the RTO at the Point of Metering and does not intend to utilize any Transmission Services. If Buyer nevertheless utilizes Transmission Services for the Electrical Output during the Term or is required (due to a change in the applicable transmission rules) to us; Transmission Services in order to accept deliveries of the Electrical Output at the Poim of
Metering, then Buyer shall be responsible for arranging for all Transmission Services required to effectuate Buyer's acceptance of delivery and purchase of Electrical Output, including, without limitation, obtaining Tiansmission Service, in an amount of capacity equal to the Designated Name-plate Capacity Rating, and shall be responsible for the payment of any charges' related to such Transmission Services hereunder, including, without limitation, charges for transmission or wheeling services, ancillary services, imbalance, control area services, congestion charges, location marginal pricing, transaction charges and line losses. The Parties acknowledge that the purchase price of Electrical Output does not include charges for such Transmission Services, all of which shall be paid by Buyer,
[PPA at Art. 6.] "Transmission Services" is a defined by the PPA as follows:
Transmission Saryltegr Means all transmission or wheeling services, scheduling services, imbalance services, OASTS, congestion and congestion management services, tagging services, dispatch services, ancillary services, control area services, and other transmission services necessary for Buyer to accept Electrical Output at the Point of Metering and transmit, and deliver Electrical Output from the Point of Metering, using the highest priority transmission service available.
[ Id. at Art. 1.] MISO has never required Duke to obtain Transmission Services to accept power that is delivered to the Point of Metering. Duke claims that it is not required under the PPA to utilize Transmission Services to accept power that is delivered to the Point of Metering. [Dkt. No. 55-1 at 15 (citing Shanker Dep. at 144:21-145:14).]
D. The Joint Energy Sharing and Operating Agreement ("JESOA").
On December 19, 2007, BCWF, Duke, and Vectren Power Supply, Inc. entered into the Joint Energy Sharing and Operating Agreement ("JESOA"), which sets forth an agreed method for dividing the electrical output of the Wind Farm. BCWF contracted with Vectren for the sale of 30 MW of power from the wind farm in addition to the 100.5 MW already subject to the PPA. [Dkt. No. 1-2 (JESOA (Recitals B-C)).]
The JESOA defines "Electrical Output" as "the electric energy output of the Facility delivered to the Delivery Point." [ Id. at 3.] "Delivery Point" as defined in the agreement is "the interconnection point of the Facility to the RTO-controlled transmission grid." [ Id. at 2.] "Total Facility Output" as used in the JESOA means "the total electrical energy produced by the Facility Capacity from time to time, net of energy used by the Facility, as measured at the Delivery Point." [ Id. at 5.] Section 2.4 of the JESOA provides, in part:
Notwithstanding anything in this Agreement to the contrary, Seller shall have the right to curtail the Total Facility Output as required under the Interconnection Agreement or as instructed by the RTO or NIPSCO and to comply with all RTO and NIPSCO operating procedures in effect from time to time, and Duke and Vectren agree to cooperate with Seller in connection therewith and to comply (to the extent compliance is required by either of them) with all RTO and NIPSCO curtailment orders and operating procedures and with all RTO Requirements in effect from time to time. Except to the extent expressly provided in the respective PPAs, neither Duke nor Vectren shall have the right to curtail or reduce the Total Facility Output.
[ Id. § 2.4 at 7 (emphasis added).] Duke and Vectren also agreed:
2.5 Transmission from Delivery Point, Duke and Vectren shall each be responsible for all transmission of their respective Shares of the Total Facility Output from the Delivery Point, including the procurement and management of financial transmission rights associated with their respective Nodes and aj] other transmission or congestion rights under applicable RTO Requirements.
[ Id. § 2.5.] The JESOA did not "modify the rights and obligations of the Parties under [their respective PPAs] except to the extent expressly provided [t]herein [and] in the event of a conflict between the terms of either PPA and [the JESOA], the terms of [the JESOA] shall control." [ Id. § 8.5.]
E. The Benton County Wind Farm and MISO.
The Wind Farm began operations on or about April 19, 2008. At the time the Wind Farm began operating, it was the only wind farm in Indiana generating electricity. The Wind Farm is interconnected to the transmission system owned by Northern Indiana Public Service Company ("NIPSCO") and controlled by MISO. MISO is the entity responsible for administering the regional electrical grid covering Duke's service area. According to BCWF's Vice President, James Eisen, MISO "manage[s] or operate[s] the transmission grid in this region." [Eisen Dep. 49:3-6.] MISO is the "traffic cop to make sure that those deliveries [of power that's being generated] don't cause problems in the system." [ Id. at 49:17-22.]
1. Locational Marginal Price (LMP).
The Locational Marginal Price ("LMP") constitutes a significant component of the parties' overall dispute. The LMP is the prevailing market price for energy generated at a specific time in a specific place. The LMP is the amount that Duke receives from MISO (when the LMP is positive) or pays MISO (when the LMP is negative) to inject BCWFgenerated power into the MISO grid. The amount that Duke pays BCWF is dictated by the PPA; the LMPs do not affect the price Duke pays BCWF for electricity. Although BCWF is not directly affected by the LMP, Duke's cost (and that of its customers) is substantially impacted by the LMPs.
The LMP can be positive, negative, or neutral. When the LMP is positive, Duke benefits because MISO pays Duke for power that passes into the grid and Duke can subsidize its payment to BCWF with the monies it receives from MISO. When the LMP is negative, Duke pays MISO (in addition to BCWF) for the power that enters the grid. When the LMP is $0/MWh, Duke pays only BCWF to inject power into the grid and no money is exchanged between Duke and MISO.
Duke's cost for power fluctuates significantly based on the LMP. When LMPs are negative, the cost of power to Duke is higher because Duke pays both MISO and BCWF for energy. If, however, BCWF is prevented from generating electricity when the LMPs are negative, then Duke does not purchase any electricity and as a result does not pay the negative LMPs. If Duke purchases energy only when the LMP is positive or neutral, then Duke's cost is that which it agreed to pay BCWF pursuant to the PPA, or less.
2. IR Rules.
At the time the parties entered into the PPA and BCWF became operational, on April 19, 2008, MISO treated wind generation facilities as Intermittent Resources ("IR"), meaning that MISO accepted all available produced energy at the prevailing market price (LMP) and MISO managed congestion issues manually.
As IRs, generators of wind energy were not required to inform MISO in advance of expected electric generation, but were permitted to generate and deliver electric power whenever possible (i.e., when the wind blew) in return for payment of the prevailing LMP at its location. Duke describes the Wind Farm at this time as a "must run" facility - i.e., MISO took all of the power from the Wind Farm regardless of price. [Dkt. No. 82-1 at 6.] As an IR, BCWF was not subject to curtailment by MISO based on the cost of its power relative to the costs of other generators' power. During the IR period, Duke submitted an offer price in the day-ahead market that equaled the PPA price at the time the offer was submitted. Initially, LMPs paid to Duke for BCWF's output were relatively high (reflecting the relative abundance of transmission capacity available to BCWF as the first wind farm in the area), allowing Duke to profit from the power it purchased from BCWF and resold into MISO markets.
After BCWF had commenced operation, more wind farms were added by other producers to the transmission grid in Benton County and surrounding areas without any transmission upgrades or expansion in transmission capability. In the immediate geographic proximity of BCWF, the 106 MW Hoosier Wind Project was placed into service in November 2009, and the 600 MW Fowler Ridge Wind Farm, which was placed into service in three phases, began in early 2009 and was completed in December 2009. As a result, by the end of 2010, more than 800 MW of wind resources were in operation in or near Benton County. Consequently, MISO began to experience increasing congestion in the transmission system in the Benton County area due to wind generation. MISO's grid did not have sufficient capacity to accommodate all the electric power that was being generated. The increase in the number of wind farms also brought about a drop in LMPs based on the additional supply, requiring MISO to discourage potential excess generation.
MISO can and did discourage generation in a congested area by requiring generation facilities to accept lower LMPs for use of the grid. When MISO set a negative LMP, the market participant (i.e., Duke) was required to pay MISO for MISO to purchase that unit of power and inject the power into the MISO grid at the congested location. [Dkt. 1 at ¶ 16; Dkt. 19 at ¶ 16.] Duke paid MISO more than $4.4 million in negative LMPs in connection with IR-classified power it purchased from BCWF prior to March 1, ...