LCRA, wind company told by judge to pursue arbitration

A federal judge in Texas on April 22 refused to grant a petition from Papalote Creek II LLC f/k/a Papalote Creek Wind Farm II LLC for an order to stay arbitration with the Lower Colorado River Authority pending appeal.

The dispute between Papalote and LCRA is over the damages clause in a 2009 deal for LCRA to purchase power from a Papalote wind farm. LCRA filed suit in August 2015 against Papalote at the U.S. District Court for the Western District of Texas seeking an order that this dispute be put into arbitration. The judge issued an order on Feb. 24 granting the LCRA request. Papalote subsequently filed notice that it was taking the Feb. 24 decision to the U.S. Fifth Circuit Court of Appeals and asked for a stay of the Feb. 24 order in the meantime. The judge on April 22 rejected the stay request.

One issue raised by Papalote in the stay request is whether the issue at hand is ripe for arbitration. The judge responded that the parties are free to raise the ripeness issue before the arbitrator. “Ripeness may be determined at the threshold in that forum, just as it would be determined at the threshold in this forum,” wrote Judge Sam Sparks. “Thus, a stay of the arbitration pending appeal would merely result in delaying the resolution of the ripeness question.”

On another point, the judge said that Papalote has not shown it is likely to succeed on the merits of its claim. 

In December 2009, LCRA and Papalote entered into a Power Purchase Agreement (PPA) that provides for the purchase by LCRA, and the sale by Papalote, of energy and related products produced at the Papalote Creek II Wind Project located in San Patricio County, Texas.

The PPA provides that LCRA shall purchase and receive all of the project’s capacity, net electricity, ancillary services and environmental credits. In the event that LCRA purchases less than the project’s full output of energy, then Section 4.3 of the PPA sets forth a formula for calculating liquidated damages to be paid by LCRA.

A separate provision in the PPA, found in Section 9.3 and titled “Limitation on Damages for Certain Types of Failures,” provides “Buyer’s damages for failure to perform its material obligations under this Agreement shall likewise be limited in the aggregate to sixty million dollars ($60,000,000).”

In an August 2015 filing at the district court, LCRA said that to date it has made all purchases of energy in accordance with the PPA. “While LCRA has thus far purchased the full amount of energy produced by the Project, LCRA contends that in the event it reduces or ceases further purchases of energy then Section 9.3 caps LCRA’s obligation to pay damages under the PPA, including liquidated damages, at $60 million.”

LCRA added: “Papalote disagrees with LCRA’s contention that Section 9.3 caps LCRA’s obligation to pay liquidated damages arising under the PPA at $60 million. Papalote contends that, regardless of the limitation of liability provision, LCRA remains liable to purchase and pay for the total amount of all energy generated by the Project over the full term of the contract. In order to determine its performance obligations, LCRA needs to determine the extent of its potential liability for damages arising under the PPA in the event that it reduces or ceases further purchases of energy.”

LCRA said that early last year, the parties spoke several times to resolve this issue. “The parties continued their efforts on May 26, 2015, when senior executives of Papalote and its parent company, E.ON Climate & Renewables North America, LLC, traveled to LCRA’s office in Austin to meet with senior officers of LCRA. Unable to reach a resolution, representatives of LCRA and Papalote conducted further telephone conferences on May 29, June 5, June 9, June 10, June 17 and June 18.

“Despite the foregoing efforts, the parties have been unable to reach an agreement on the interpretation and application of the limitation of liability provision in Section 9.3 of the PPA, and the scope and extent of LCRA’s financial responsibility under the contract. As a result, LCRA has no choice but to submit this dispute to binding arbitration under Section 13.2 of the PPA in order to obtain certainty with respect to the interpretation of the contract provisions and LCRA’s obligations thereunder.”

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.