February 26, 2016
from the United States District Court for the Southern
District of Indiana, Indianapolis Division. No.
l:13-cv-01984-SEB-TAB - Sarah Evans Barker, Judge.
Posner, Flaum, and Easterbrook, Circuit Judges.
EASTERBROOK, CIRCUIT JUDGE.
Duke Energy Indiana offered 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 would acquire renewable-energy credits that buyers
or generators of wind energy can trade or sell to other
utilities that lack wind generation. Benton County Wind Farm
(Benton) accepted Duke's offer and built a 100-megawatt
facility that became operational in 2008. The contract
between Duke and Benton requires Duke to pay Benton for all
power delivered during the next 20 years. Duke does not have
its own transmission lines in Benton County, and the contract
requires Benton to deliver to lines owned by Northern Indiana
Public Service Company (NIPSCO) or some other place
designated by the regional transmission organization, the
Midcontinent Independent System Operator (MISO).
grids throughout North America are connected, and it is
essential to ensure that none of the transmission lines
becomes overloaded or fails to convey power to customers that
are counting on it. The ten regional transmission
organizations in North America develop technical standards
for how smaller networks connect with each other. They also
employ tools to monitor networks in order to prevent
overloads or imbalances, which can cause blackouts. Our
opinion in MISO Transmission Owners v. FERC, 819
F.3d 329 (7th Cir. 2016), describes some of this regulatory
and coordination function, and it includes a map showing
MISO's territory, which spans the middle of the continent
from Manitoba through Louisiana-all or part of 15 states plus
one province. It shares Indiana with PJM Interconnection, a
regional transmission organization whose territory includes
Chicago, New York City, and all or part of 13 states plus the
District of Columbia. Only MISO's decisions affect this
transmission organizations have concluded that the price
system is the best tool to balance loads on the networks.
Potential buyers of energy bid for power to be delivered over
the network (this is done principally through utilities such
as Duke and NIPSCO, which aggregate end-users' demands);
potential sellers such as Duke (on behalf of Ben- ton) also
submit bids for sale, and the regional transmission
organization accepts the bid that clears the market.
Benton's wind farm started producing, the bidding was
conducted once a day. Now it is conducted every five
minutes-necessarily by computers. MISO uses a variant of a
Vickrey auction to decide which bids are accepted at what
price. Here's a simple illustration. Buyer 1 bids $60 per
megawatt-hour (MWh) for 200 megawatts of power; Buyer 2 bids
$40 for another 200; Buyer 3 bids $30 for a further 200. If
the transmission grid in the area can carry 300 megawatts,
then Buyer 1 gets 200 megawatts and Buyer 2 gets 100; Buyer 3
gets nothing. The bid price is set at $40 per MWh, which is
what the marginal buyer is willing to pay; in a Vickrey
auction, all buyers and sellers receive the same price.
(Treasury securities are sold using a similar system.)
Meanwhile Seller 1 offers 100 megawatts at $20 per MWh,
Seller 2 offers 100 megawatts at $30, Seller 3 100 megawatts
at $40, and Seller 4 100 megawatts at $50. The
market-clearing price and quantity are $40 for 300 megawatts.
MISO accepts the bids from Sellers 1, 2, and 3, and all three
receive $40 per megawatt-hour.
some kinds of suppliers, such as wind farms, the marginal
cost of generating any unit of output is small, even though
the capital cost of building wind turbines is high. Rather
than accept no sales, Seller 4 may cut its price to $10 per
MWh. Then the prevailing offer would be $30 (enough to
attract a total of 300 megawatts, the most the local grid can
carry), and all three buyers would pay $30. Sellers 1, 2, and
3 may not take this lying down. They may cut their own bids.
If all sellers bid only enough to cover their marginal costs,
the price in such a market could fall to, say, $1 per MWh,
and even at that price one of the four potential sellers
would be unable to make a sale.
roughly what has happened in central Indiana. When Benton
started operating it was the only wind farm in the area, and
NIPSCO's facilities could carry its entire output. Duke
purchased and paid for everything Benton could produce, and
MISO cleared the transfers to the regional grid. But central
Indiana has excellent conditions for generating power from
wind, and by 2015, when the district court issued its
opinion, aggregate capacity of local wind farms was not 100
megawatts but 1, 745 megawatts. More wind farms are being
built. The capacity of the local transmission grid has been
exceeded. It is no longer possible for all of the local wind
farms to generate power at the same time, because the grid
cannot accept their full output. And because local generation
capacity substantially exceeds local transmission capacity,
the market-clearing price in MISO's auction has
fallen-indeed, the price sometimes is negative, and then
would-be producers must pay MISO to take the power off their
hands, and buyers get free electricity. Prices near or below
zero induce some producers to stop supplying electricity and
thus reduce output to what the grid can carry.
the end of February 2013 MISO allowed wind farms to deliver
to the grid no matter what other producers (coal, nuclear,
solar, hydro, and so on) were doing, which meant that other
classes of producers had to cut back. Sometimes the market
price in this must-carry-wind-power system fell below zero,
which meant that wind generation alone had overtaxed the
local grid. When that happened Duke paid a negative price,
displacing other wind farms to ensure that Benton ran at
capacity. So if the auction price was minus $10/MWh, Duke
would pay MISO that amount and pay Benton for the power; it
would receive nothing for this power (save the potential
value of renewable-energy credits) and charge the loss to its
customers. Duke could recover some of the loss in its role as
a buyer of power from MISO's grid, because even if the
power on NIPSCO's grid goes north (Duke's operations
are in southern Indiana), a lower price on NIPSCO's
network will depress prices on other grids, which will buy
from NIPSCO and tell other sources to curtail their own
output. But Duke believes that it loses more in its role as
seller of Benton's power than it gains in its role as
buyer from MISO.
March 1, 2013, the rules changed to put wind farms
constructed after 2005 on a par with other classes of
producers. Benton lost its status as a must-run facility.
Duke responded to the new system by deciding to bid exactly
$0, all the time, to put Benton's power on the grid. When
this bid is accepted, Duke gets the market-clearing price
(usually positive but sometimes zero) and pays Benton the
contract price (roughly $52 per MWh). But when the
market-clearing price in MISO's auction falls below $0,
and Duke's bid therefore is rejected, MISO instructs
Benton not to deliver any power. Once Benton generates power
it must deliver it (otherwise it would fry its own
equipment), so an order not to deliver power equates to an
order not to generate power, and Benton must stop its
turbines from rotating. Under MISO's new system, with
Duke's standing bid of $0/MWh, Benton has gone from
delivering power 100% of the time the wind allowed to
delivering (and being paid) only 59% of the time that the
weather can drive its turbines at their capacity.
litigation Duke takes the position that, when MISO tells
Benton to stop delivering power, it does not owe Benton
anything. Benton takes the position that Duke could
put Benton's power on the grid by making a lower bid
(MISO accepts bids as low as negative $500 per MWh), thereby
displacing other producers' power, and that when Duke
elects not to do this it owes liquidated damages under the
contract. Sometimes for load-balancing or other technical
reasons MISO tells Benton to stop delivering power even when
the market price exceeds zero and Duke's bid nominally
has been accepted. Benton acknowledges that in this situation
Duke need not pay damages.
district court sided with Duke, ruling that it need pay only
for power delivered to the "Point of Metering"
where it is measured and passes to the local grid; when MISO
issues a stop order that quantity is zero. 2015 U.S. Dist.
Lexis 181563 (S.D. Ind. Oct. 9, 2015). The parties have a
second contract that requires Duke to cooperate, reasonably,
in marketing Benton's power; the district judge found
that bidding $0 is "reasonable" cooperation because
it usually leads Duke to suffer an out-of-pocket loss, since
the market price will be less than what Duke must pay Benton.
Indeed, on this understanding Duke might be entitled to bid
$52 in MISO's auction and ensure that it makes a profit
on reselling every megawatt-hour that it buys from Benton.
a contract dispute, so we must set out the contractual
clauses that matter. We have tried to be parsimonious;
interested readers can find more details in the district
court's opinion. There are two contracts-the first
requiring Duke to buy Benton's power, the second
requiring Duke to cooperate with Benton. The parties call the
first the Renewable Wind Energy Purchase Power Agreement or
PPA; they call the second the Joint Energy Sharing and
Operating Agreement or JESOA. We discuss the second contract
briefly at the end of this opinion. For now, we refer to the
first contract as "the contract."
already mentioned one clause. The contract requires Duke to
purchase Benton's output, which it defines as "the
entire electrical output of the Plant delivered to
the Point of Metering" (emphasis added). A separate
clause defines that point as where Benton connects with the
local grid (either NIPSCO's or another designated by
MISO). Benton relies principally on §4.6(a) of the
contract, a ...