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7th Circuit rules Duke Energy must pay for wind-generated power

December 6, 2016

The 7th Circuit Court of Appeals reversed a district court decision Tuesday requiring Duke Energy to pay for power generated by a local wind farm only if it passes to a lower grid, deciding instead that the energy company is contractually obligated to pay for any generated power regardless of transmission issues.

The case of Benton County Wind Farm LLC v. Duke Energy Indiana, Inc. 15-2632, began in 2005 when Benton County Wind Farm opted into Duke Energy’s offer to buy 100 megawatts of renewable energy at a price high enough to enable potential sellers to finance the construction of wind turbines. As part of the deal, Duke was required to pay Benton for all power deliver over the next 20 years while Benton was required to deliver to power lines owned by Northern Indiana Public Service Co. or other locations designated by the Midcontinent Independent System Operator.

Benton built a 100-megawatt facility that began operating in 2008. At that time, it was the only wind farm in its area and NIPSCO’s facilities could carry its entire output, while Duke purchased and paid for all the energy the windfarm could produce. However, as the years progressed more wind farms were being built and were increasing their capacities to 1,745 megawatts.

Until February 2013, MISO allowed wind farms to deliver to the grid regardless of what other producers, such as coal or nuclear energy producers, were doing, which forced other classes of producers to cut back. But in March 2013, the rules changed and wind farms that were constructed after 2005 were put on a par with other classes of producers, costing Benton its status as a must-run facility.

Duke responded by bidding exactly $0 all the time to keep Benton’s power on the grid. Any time that bid was rejected, MISO instructed Benton not to deliver any power, an order that equated to an order not to generate power and has led to the wind farm delivering power only 59 percent of the time.

In district court, Duke argued that when MISO told Benton to stop delivering power, it did not owe the wind farm anything, while the wind farm countered that Duke could put its power on the grid by making a negative bid, thereby displacing other producers’ power. When Duke opts not to do so, Benton argued that it owes liquidated damages under their contract. The district court sided with Duke and ruled that the energy company only has to pay for power delivered to the “Point of Metering” where it is measured and passes to the local grid.

In its appeal to the 7th Circuit, Benton relied on a portion of its contract with Duke that read, in part, “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 … then Buyer shall pay to Seller liquidated damages … .”

Based on that and other language in the contract, Judge Frank Easterbrook wrote for the unanimous panel that the idea that Benton could not be paid if energy never crosses the point of metering and never counts toward the output is unfaithful to the contract because only some, not all, reasons for Duke’s failure to take the energy excuses its obligation to pay Benton.

Easterbrook pointed specifically to the portion of the contract that required Duke to pay Benton “due to Buyer’s failure to accept Transmission Service,” language that mirrors the situation Duke and Benton found themselves in, he said. When MISO changes the ruled in March 2013, Benton was being told to stop production 41 percent of time because transmission was unavailable at the price Duke was willing to offer.

“It is only a matter of time until more capacity is built, whether by Duke or someone else,” Easterbrook wrote. “And (the contract) tells us that, until that happens, Duke must pay Benton.”

The parties also signed a second contract that required Duke to work “reasonably” with Benton. Easterbrook wrote that the second contract would only be relevant if it entitled Benton to a larger recovery, but that is not the case.

However, Judge Richard Posner wrote in a separate opinion that he concurred with the findings related to the first contract, but also wrote that he disagreed with the panel’s discussion of damages for the breach of the second contract.

“(Benton) had the incentive under both contracts to have fallback protection in the form of a liquidated damages clause,” Posner wrote.

The case was remanded with instruction to determine the relief to which Benton is entitled.
 

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