Court rules mostly for Duke in battle with Westinghouse over Levy nuclear costs

A judge at the U.S, District Court for the Western District of North Carolina on Dec. 22 ruled for Duke Energy Florida in a legal battle with Westinghouse Electric Co. LLC (WEC) over termination earlier this decade of a contract to build the shelved Levy County nuclear plant in Florida.

Duke Energy Florida is currently a unit of Duke Energy (NYSE: DUK), though the dispute itself dates back to when this utility was part of Progress Energy.

Said the Dec. 22 court ruling: “[O]ne of the world’s largest designers and builders of nuclear energy plants, Westinghouse, and the nation’s largest energy supplier, Duke, have squared off over repayment of some $500 million in initial development costs of a cutting edge “Next Gen+” power plant, a plant that is likely to make both titans billions in the coming years. As will be seen, Westinghouse was unable to link those development expenses to allowable “Termination Costs” under this contract.

“In sum, Duke lawfully exited from a consortium of domestic power companies that backed Westinghouse in seeking approval of its AP1000 Standard Plant design. When Duke thereinafter terminated a separate agreement to build an AP1000 Standard Plant in Florida, Westinghouse attempted to recoup those development costs under the design-build contract at issue here by inclusion of Duke’s share of development costs in its termination invoice. For the reasons that follow, the court concludes that Westinghouse’s inclusion of those development costs in the invoice at issue here – no matter how equitable that inclusion may seem – was beyond the terms of the contract. Westinghouse is, however, entitled to recoup from Duke the full termination fee of $30 million plus approximately $4 million in accrued interest, and the court will deny Duke’s request for offset of some $51 million, which the court has determined to be a request for recoupment, based on a finding of waiver.”

Prior to trial and after a hearing, the judge dismissed Westinghouse’s counterclaim for breach of the implied covenant of good faith and fair dealing as well as Duke Energy Florida’s claim for breach of contract. Both dismissals were without prejudice. In the days immediately preceding trial, Duke moved to amend its complaint to reassert its dismissed claim for Breach of Contract as a claim for Breach of the Implied Covenant of Good Faith and Fair Dealing. Both the dismissed claim and the proposed claim were based on Duke’s 2009 payment of $51,778,440 for a Turbine Generator, which was to be built by another subsidiary of Westinghouse’s parent corporation, Toshiba. Such motion was denied by David S. Cayer, U.S. Magistrate Judge.

Duke is the successor to Progress Energy Florida, which contracted with Westinghouse in December 2008 to design and build a two-unit nuclear power facility in Levy County, Florida. This contract is known as the “EPC Agreement.”

In a separate contract in 2007, Progress and two other major domestic power companies (called the “NuStart companies”) combined with Westinghouse to financially support Westinghouse in its application before the U.S. Nuclear Regulatory Commission to obtain a reference combined license (COLA) for Westinghouse’s AP1000 Standard Plant design under the U.S. Department of Energy’s “Nuclear Power 2010” program. All three domestic power companies had plans to be the first wave of energy companies to operate the Westinghouse AP1000.

In a separate contract, the NuStart companies and Westinghouse entered into the “NuStart/Westinghouse Restructured Award Agreement” (called the “NuStart Agreement”). While this was a substantial undertaking, the NuStart members stood to benefit from their support not just from having in place a reference COLA, but in also receiving royalties from Westinghouse as non-NuStart power companies contracted with Westinghouse to build AP1000 units after the reference COLA was in place, the judge noted.

Soon after entering into the NuStart Agreement in 2007 and the EPC Agreement in 2008, Progress attempted to obtain a Limited Work Authorization (LWA) from the NRC to do site preparation work at the Levy Project site. In February 2009, however, the NRC denied the request for an LWA, stating that it would only issue the LWA when a COL had been issued. Duke presented evidence that this decision meant that it could not do site preparation work needed to support the Levy Project, shifting back the project schedule. As a result, Progress sent Westinghouse a “Partial Suspension Letter” in April 2009. Under Section 22 of the EPC Agreement, Progress had the right to partially suspend the work (as defined by the agreement). In that letter, Progress directed Westinghouse not to proceed with any work unless it was both necessary to support Duke’s licensing efforts and authorized by the Project Director and incorporated as a Change Order.

Later that spring, Progress further clarified its partial Suspension Letter by way of a second letter explaining that its intent in the Partial Suspension letter “was to ensure that the Consortium would not continue Work that would be billable to Progress without the specific approval of Progress independent of this Notice of Partial Suspension.”

Responsive to those letters, Westinghouse wrote in a June 2009 letter that in addition to a Change Order for incremental work activities (e.g., work not part of the contract scope of work but made necessary by the Partial Suspension) “Progress Energy’s written authorization is still required to fund the continuation of the original EPC Firm/Fixed and Target contract scope activities that are necessary to support the COLA….” Duke presented evidence that employees of Progress understood this to mean that the work necessary to support the COLA was site specific to the Levy plant. During the partial suspension, the parties negotiated 44 change orders totaling $86 million and there was no contention that these billings have gone unpaid.

The judge noted in the Dec. 22 order: “At trial, the court heard a great deal of evidence concerning back-and-forth negotiations beginning in 2010 where WEC sought to have the definition of Termination Costs broadened to include AP1000 Standard Plant Costs as well as evidence that Progress never agreed to such inclusion. The court has, however, determined that such evidence amounts to evidence of prior and contemporaneous negotiations and has excluded such as parol evidence inasmuch as the EPC Agreement, as amended, provides the court with precisely what the parties agreed were “Termination Costs,” a written provision which was clearly well counseled and intended by all parties to be included as part of a total integration of the agreement.”

Said Duke about this litigation in its Nov. 4 quarterly Form 10-Q report: “On March 28, 2014, Duke Energy Florida filed a lawsuit against Westinghouse in the U.S. District Court for the Western District of North Carolina. The lawsuit seeks recovery of $54 million in milestone payments in excess of work performed under the terminated Engineering, Procurement and Construction agreement (EPC) for Levy as well as a determination by the court of the amounts due to Westinghouse as a result of the termination of the EPC. Duke Energy Florida recognized an exit obligation as a result of the termination of the EPC contract.

“On March 31, 2014, Westinghouse filed a lawsuit against Duke Energy Florida in U.S. District Court for the Western District of Pennsylvania. The Pennsylvania lawsuit alleged damages under the EPC in excess of $510 million for engineering and design work, costs to end supplier contracts and an alleged termination fee.

“On June 9, 2014, the judge in the North Carolina case ruled that the litigation will proceed in the Western District of North Carolina. In November 2014, Westinghouse filed a Motion for Partial Judgment on the pleadings, which was denied on March 30, 2015. On July 11, 2016, Duke Energy Florida and Westinghouse filed separate Motions for Summary Judgment. On September 29, 2016, the court issued its ruling on the parties’ respective Motions for Summary Judgment. The court ruled in favor of Westinghouse on a $30 million termination fee claim. The court dismissed Duke Energy Florida’s $54 million refund claim, however the court stated that Duke Energy Florida could use the refund claim to offset any damages for termination costs. Westinghouse’s claim for termination costs is unaffected by this ruling and continues to trial. On October 11, 2016, in a pre-trial filing, Westinghouse reduced its claim for termination costs from $482 million to $424 million. The trial concluded on October 21, 2016, and the court will issue a ruling following the parties submitting post-trial briefs.”

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.