Wind group sees Duke, Benton County case as a danger to wind energy contracts

The American Wind Energy Association (AWEA) told a federal appeals court that it isn’t taking sides in a power contract dispute between Benton County Wind Farm LLC and Duke Energy Indiana, but that it wants to emphasize the principle that changes in power market rules don’t justify the termination of a binding power contract.

The U.S. Seventh Circuit Court of Appeals is currently considering a July 6 ruling out of the U.S. District for the Southern District of Indiana in this contract dispute. AWEA on Oct. 29 submitted its brief as amicus curiae in support of neither party. “While we do not take a position with respect to the interpretation of the particular contract at hand, we are concerned that a broad reading of the lower court decision could cast a cloud over the sanctity of many wind energy contracts,” said the association.

AWEA represents over 1,000 members across all 50 states. AWEA’s members include wind turbine manufacturers, component suppliers, project developers, project owners and operators, financiers, renewable energy supporters, utilities, marketers, customers, and their advocates.

“As a rapidly growing industry, the wind industry relies strongly on the certainty of contracts, legal predictability, and a reliable revenue stream,” said the AWEA brief. “If the Court finds for the Appellee and does not narrowly interpret the District Court’s decision, there is a threat that the lower court decision could create uncertainty for existing and future power purchase agreements and undermine the legal predictability that is necessary for the wind industry’s continued growth.

“Wind energy projects typically secure financing to construct a project based on the projected revenue stream from contracts. Indeed, the vast majority of wind energy projects operating today were built pursuant to power purchase contracts, and many of those contracts contain provisions giving the wind energy facility a predictable revenue stream. Accordingly, general uncertainty about the sanctity of these types of contracts could put future financing and, in turn, development and construction of projects at-risk.

“Putting aside the contract at hand, a decision by this Court that endorses a broad reading of the District Court’s holding in this case could send a message that a buyer is able to exploit changes in market rules to reduce the amount of power it purchases from a wind farm, even if that is not what was bargained for thereunder. If buyers are able to do so, a wind farm’s output and revenue could suddenly be drastically reduced, even though the contract does not provide for that. As noted, the reality is that wind farms are typically financed and built with long-term commitments and the availability and success of these investments is dependent upon the stream of revenues to be produced through the full term of the agreement.

Benton County Wind wants summary judgment from appeals court

Benton County Wind Farm noted in an Oct. 22 brief that its operates a wind farm in northwestern Indiana. In 2006, Benton entered into a 20-year contract to sell all of the wind farm’s power to Duke Energy Indiana, a unit of Duke Energy (NYSE: DUK), at a fixed price. The issue in this case is whether Duke has complied with the contract.

The contract requires Duke either to accept delivery of the wind farm’s power and purchase it at a fixed price or, if it does not accept the power, to pay Benton liquidated damages, said the wind company. That arrangement was meant to provide benefits for both parties: Benton would obtain the predictable stream of revenues its investors and lenders depend on, and Duke would obtain a “hedge” against future stringent environmental regulations and higher fuel prices. When Duke agreed to this arrangement, it planned to resell the wind farm’s power into an auction market administered by the entity that operates the regional electric grid, the Midcontinent Independent System Operator (MISO). Upon resale of the power, Duke would receive the market-clearing price from MISO. That market price could be higher than the contract price, meaning Duke would make money, or lower than the contract price, meaning Duke would lose money. It could even be negative, meaning Duke would have to pay MISO to place the power on the grid.

Wrote Benton County Wind Farm: “These potential outcomes were well understood. The parties agreed that regardless of the market price, Duke would accept and pay for the wind farm’s power for the duration of the contract’s 20-year term. For the first several years of the contract, the wind farm generated power whenever the wind blew without interference by Duke. Duke purchased that power at the contract price and resold it in MISO’s auction market at the market-clearing price, regardless of how that price compared with the contract price. As with any fixed-price contract, Benton (the seller) did not benefit from higher market prices for its power, while Duke (the buyer) accepted the risk that the market price could be lower than the contract price.

“This case arose because Duke exploited a change in MISO’s market rules in 2013 to drastically reduce the amount of power it purchases from the wind farm. Under the new rules, Duke is able to submit ‘price offers’ telling MISO what price Duke is willing to accept for reselling the wind farm’s power. If Duke submits an offer that is higher than the market price, MISO automatically orders the wind farm to stop generating power. Duke has taken advantage of the new rules by consistently submitting price offers of [redacted figure]—which predictably prevents the wind farm from generating power when market prices are less than [redacted figure]—and refusing to pay Benton liquidated damages for its failure to accept the wind farm’s power. As a result, the wind farm’s output and revenue have been reduced by approximately 50%. Duke has thus destroyed Benton’s benefit of the bargain. Duke has kept all of the contract’s upside for itself, while shifting to Benton much of the downside marketprice risk that the parties intended Duke to bear.

“The district court badly misunderstood the parties’ contract. Failing to read the agreement as a whole, the court reached the startling conclusion that Duke’s obligation to accept the wind farm’s power or pay liquidated damages is never triggered if the wind farm does not generate power—even if Duke itself prevents the wind farm from doing so. The court also held, without foundation, that Duke’s risk-shifting price offers are ‘reasonable’ as a matter of law. On that faulty basis, the court granted summary judgment to Duke (and denied it to Benton).

“Benton has no interest in dictating what Duke does with the wind farm’s power after it purchases that power. Nor does Benton seek to micromanage Duke’s participation in MISO’s auction market. Benton simply wants Duke to comply with its contractual obligation to either purchase the wind farm’s power at the contract price or pay liquidated damages. That obligation is not contingent on Duke’s ability to dispose of the wind farm’s power at an advantageous market price. The decision below has fundamentally transformed the parties’ bargain by allowing Duke to shift to Benton the market-price risk that Duke agreed to bear when it signed the contract.

“This Court should reverse and direct entry of summary judgment in Benton’s favor because Duke’s conduct violates the unambiguous terms of the parties’ agreement. If the Court does not direct entry of summary judgment in Benton’s favor, it should at a minimum reverse and remand for further proceedings.”

Benton County Wind Farm is a limited liability company, with its members being Benton County Holding Co. LLC and Aircraft Services Corp. Aircraft Services is an indirect, wholly owned subsidiary of General Electric (NYSE: GE).

Duke official describes issues that led to this dispute

Duke Energy Indiana hasn’t filed its appeals court brief yet. But John D. Swez, employed by Duke Energy Carolinas LLC as Director, Generation Dispatch and Operations, touched on the topic in Oct. 29 testimony filed with the Indiana Utility Regulatory Commission in a case covering fuel and purchased power cost passthroughs.

Swez wrote: “Starting in 2012, during various times primarily in the spring, fall, and winter seasons, Benton County Wind Farm (‘BCWF’) received persistent negative day-ahead and real-time [locational marginal prices (LMPs)] at the generator node. During this time, BCWF was registered at MISO as an Intermittent Resource, which means it had no ability to be committed or decommitted by, or follow the setpoint instructions of, MISO during normal energy market operations. MISO did have the ability to curtail the output of the units, however, through manual curtailment. Due to the nature of the contractual arrangement between the Company and BCWF and the way MISO treated offers from Intermittent Resources, the offer made by the Company to MISO for this generator was equal to the day-ahead forecast of the anticipated energy from the facility. The Company set the unit minimum and maximum loading equal to the forecasted generation amount, and, in addition, used a commitment status of must-run, meaning that MISO cleared the generator at any LMP, positive or negative, in the day-ahead market. As a result, negative revenue (meaning that payments must be made to send the power into the MISO system) was sometimes received by this generator in the day-ahead markets.

“Because the unit was an intermittent unit, the unit had no ability to be dispatched up or down and, as a result, no offer was made in the real-time market. Thus, it was possible to receive negative revenue in the real-time market as well if generation from the unit was greater than the day-ahead award and real-time LMPs were negative.

“MISO’s creation of the Dispatchable Intermittent Resource (‘DIR’) construct was designed to allow MISO to better manage the output of intermittent resources, thereby allowing for better management of congestion in certain areas, such as where Benton County Wind Farm is located. On March 1, 2013, Benton County Wind Farm began operation as a DIR, as required by MISO. Although it appears that the DIR construct is giving MISO additional tools to manage congestion at Benton County Wind Farm, negative LMPs at times do continue to be observed.

“On June 17, 2013, the Company received an invoice for payment from Benton County Wind Farm for March, April, and May 2013 liquidated damages for production that was not generated. The Company disputed this invoice and, as a result, did not issue payment or include the invoice in any [fuel and power cost] proceeding. In accordance with provisions of the contract, the Company and Benton County Wind Farm had negotiations regarding this invoice and other issues pertaining to operation under the MISO DIR.

“On December 16, 2013, Benton County Wind Farm filed a lawsuit against Duke Energy Indiana in United States District Court for the Southern District of Indiana, alleging that Duke Energy Indiana breached its contract with the wind farm. A trial was scheduled for August 2015, however, in early July the court entered summary judgment on behalf of Duke Energy Indiana in the case, meaning that the Court found the PPA was not a take or pay contract and that the Company’s supply offer was found to be reasonable. Because the Court entered judgment in the Company’s favor on all remaining claims, no payment is owed to Benton County Wind Farm for power not actually generated and delivered. As a result, the Company is not required to nor has plans to pay the invoice (discussed above) from Benton County Wind Farm for March, April, and May 2013 liquidated damages for production that was not generated. On July 30, 2015, Benton County Wind Farm filed a notice of appeal. As required in the appeal process, both parties have been participating in a court-ordered settlement conference. No settlement has been reached at this point in time.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.