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Benton County Wind Farm LLC v. Duke Energy Indiana, Inc.

United States Court of Appeals, Seventh Circuit

December 6, 2016

Benton County Wind Farm LLC, Plaintiff-Appellant,
Duke Energy Indiana, Inc., Defendant-Appellee.

          Argued February 26, 2016

         Appeal 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.

          Before Posner, Flaum, and Easterbrook, Circuit Judges.


         In 2005 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).

         Electrical 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 case.

         Regional 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.

         When 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.

         For 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.

         This is 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.

         Until 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.

         On 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.

         In this 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.

         The 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.

         This is 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."

         We have 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 ยง4.6(a) of the contract, a ...

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