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Barton Windpower LLC v. Northern Indiana Public Service Co.

United States District Court, N.D. Illinois, Eastern Division

June 18, 2018

BARTON WINDPOWER, LLC and BUFFALO RIDGE I, LLC, Plaintiffs,
v.
NORTHERN INDIANA PUBLIC SERVICE COMPANY, Defendant.

          MEMORANDUM OPINION AND ORDER

          John Z. Lee Judge

         Plaintiffs Barton Windpower, LLC and Buffalo Ridge I, LLC are wind energy power plants respectively located in Iowa and South Dakota. Both are owned by Iberdrola Renewables, LLC, the second-largest operator of wind energy plants in the United States. Defendant Northern Indiana Public Service Company (“NIPSCO”) contracted to purchase electricity generated by Iberdrola's Barton and Buffalo Ridge plants for a period of years at a set rate. NIPSCO would then sell that power to the Midcontinent Independent System Operator (the nonprofit regulator of the energy grid that covers the Midwest) at the market price. In this way, the contracts squarely placed the risk of a low market price on NIPSCO, and in return NIPSCO stood to benefit in the event of high prices.

         Two contract provisions give NIPSCO the power to refuse to purchase electricity that Iberdrola's plants are capable of delivering. First, under the “Unexcused Failure to Take” provision, NIPSCO may decline to “take” the plants' power at any time, but if NIPSCO does so, it must pay Iberdrola what is known as the “Cost to Cover”-unless NIPSCO's failure to take the power is excused by a “Force Majeure Event.” Second, under the “Voluntary Curtailment by Buyer” provision, NIPSCO may order the plants to stop producing power, but if NIPSCO exercises that right, it again must pay Iberdrola the Cost to Cover.

         A few years after these contracts went into effect, a regulatory change took place. This change required market participants like NIPSCO to set a minimum price at which to sell their wind power. When the market price falls below this minimum price, the participant's power plant receives an automatically generated order from the energy grid's regulator requiring that it cease delivering power to the grid. Since this regulatory change went into effect, the market price has fallen below NIPSCO's offer price many times, causing the Iberdrola plants to be taken offline. Iberdrola has billed NIPSCO the Cost to Cover for those time periods, but NIPSCO has refused to pay.

         Iberdrola claims that NIPSCO's refusal to pay the Cost to Cover has breached the contracts by violating each of the provisions described above. In the alternative, Iberdrola also claims that, even if NIPSCO has not breached those provisions, it has violated the implied covenant of good faith and fair dealing by using a regulatory change to shift the risk of low market prices onto Iberdrola, the opposite of the allocation that the parties intended when entering into the contracts.

         Both sides have moved for summary judgment, Iberdrola on its express contract claim and NIPSCO on both of Iberdrola's claims. The Court previously issued a minute order denying both motions with an opinion to follow [144]. Since that time, the parties have filed supplemental briefing based on an intervening Seventh Circuit opinion in a similar case, Benton Cty. Wind Farm LLC v. Duke Energy Ind., Inc., 843 F.3d 298 (7th Cir. 2016). Upon further consideration of the original motions and in light of the Benton opinion, the Court now modifies its previous order by granting Iberdrola's motion for summary judgment and denying NIPSCO's.

         I. Background [1]

         A. The Parties

         Iberdrola Renewables, the parent company of Barton Windpower and Buffalo Ridge I, is itself a subsidiary of Iberdrola, S.A., a Spanish renewable energy company with the largest renewable asset base of any company in the world. See Pls.' SOF ¶ 1. Buffalo Ridge is a 50-megawatt wind energy power plant in Brookings Ridge, South Dakota. See Id. ¶ 2. Barton is a 160-megawatt wind energy power plant in Worth County, Iowa. Id. For the sake of simplicity, the Court will refer to Plaintiffs collectively as “Iberdrola.”

         NIPSCO is a public utility located in Merrillville, Indiana. Def.'s SOF ¶ 4. NIPSCO provides natural gas and electric power services to approximately one million customers across the service region encompassing Northern Indiana. See Pls.' SOF ¶ 3. Under NIPSCO's contracts with Iberdrola, NIPSCO is the sole energy buyer, or offtaker, for the energy produced at the Buffalo Ridge power plant. Id. ¶ 2. NIPSCO is one of two offtakers for the Barton power plant. Id.

         B. The Electricity Grid

         Power plants in the Midwest, including wind energy plants, feed the electricity they produce into a grid managed by Midcontinent Independent System Operator (“MISO”), a nonprofit organization regulated by the Federal Energy Regulatory Commission. Id. ¶ 7. MISO's grid spans fifteen Midwestern states and the Canadian province Manitoba. Id. MISO purchases electricity from producers and then sells that electricity to utilities that, in turn, sell it to consumers. Id. NIPSCO is a utility that purchases electricity from MISO to sell to consumers in Indiana, but NIPSCO also sells to MISO the electricity that Iberdrola produces in Iowa and South Dakota. Id. ¶¶ 8, 16; Def.'s SOF ¶¶ 4, 27.

         In managing the electricity grid, MISO must always be cognizant of the grid's physical limitations. The grid can become overwhelmed with electricity at times of high production and consumption. Pls.' SOF ¶ 19; Def.'s SOF ¶¶ 15-17. And because electricity cannot be stored, MISO must carefully balance supply with demand, both of which can be difficult to predict. Def.'s SOF ¶ 15. To maintain the reliability and efficiency of the grid, MISO has the authority to order a producer to curtail its output. Id. ¶ 28.

         C. The Energy Markets

         MISO uses the markets through which it purchases and sells power to help balance supply and demand and to protect the integrity of the grid. Pls.' SOF ¶ 19. One of these markets is called the “day-ahead” market, and the other is called the “real-time” market. Id. In the day-ahead market, market participants offer to deliver to MISO a specified amount of power at a set price on the following day. Id. ¶ 20. If MISO accepts the offer and the market participant delivers the power as scheduled, the participant will be paid the agreed price regardless of the market price at the time of delivery. Id. If MISO rejects the offer, the participant may still sell power to MISO in the real-time market. Id. ¶¶ 22-23. In the real-time market, the participant is paid the market price at the time of power delivery. Id. ¶ 23.

         The market price that MISO pays for energy is known as the Locational Marginal Price (“LMP”). Id.¶ 8. The LMP can change many times in a single day and vary between different areas of the grid. Id. ¶¶ 14, 17. MISO sets the LMP for a given location based on three factors. Id. ¶ 12. The first factor is the “marginal energy component.” Id. This component reflects the market participants' offers to MISO relative to consumer demand. Id. ¶ 13. It is constant throughout the grid. Id. The second factor, the “marginal congestion component, ” reflects the costs of transmission congestion. See Id. ¶¶ 12, 14. If more power is being produced in a particular area of the grid than the transmission lines can accommodate, this component will be negative in that area, thereby reducing the financial incentive to deliver power and encouraging plants to go offline. See Id. ¶ 14. This component can vary throughout the grid. Id. The third factor is the “marginal loss component.” Id. ¶ 12. It captures the cost of transmission losses due to the physical infrastructure at each delivery point. Id. ¶ 15. Compared to the other two components, the marginal loss component is a relatively insignificant driver of the overall LMP. See id.

         Sometimes the LMP in a particular area is negative. Id. ¶ 10. A negative LMP can occur when more electricity is being produced than consumers are demanding or when the amount of power being produced in a particular area is causing significant congestion on the grid. Id. When the LMP is negative, market participants like NIPSCO can stop generating power, or they can continue to generate power and sell it to MISO at the negative price (i.e., pay MISO to take the power). Id. A market participant may be willing to sell power to MISO at negative prices if there is an opportunity cost for not delivering power-for example, if taking a plant offline is expensive or tax incentives will be lost for doing so. Id.

         Additionally, a market participant who is supplying power to MISO when the LMP is negative will not always be required to pay MISO anything. For example, in the case of NIPSCO, if the LMP in the area where it sells power to MISO is equal to the LMP in Indiana (where NIPSCO buys power from MISO), then NIPSCO will break even. Id. ¶ 17. And if NIPSCO agrees in the day-ahead market to provide MISO with power at a particular price, MISO will pay the agreed price to the market participant regardless of the LMP at the time of delivery. Id. ¶ 20.

         D. The Parties' Contracts

         The parties entered into two power purchase agreements (“PPAs”) on November 7, 2007. See Def.'s SOF ¶ 5. One PPA was between NIPSCO and Barton; the other was between NIPSCO and Buffalo Ridge. Id. The parties agree that the two PPAs are identical in all respects that are material to this case. Id. ¶ 7; Pls.' Resp. Def.'s SOF ¶ 7. The Court will provide an overview of the relevant portions of the PPAs here and will provide additional detail as it becomes necessary to the Court's analysis.

         The basic agreement is found in Article 5 of the PPAs, entitled “Purchase and Sale.” In that Article, NIPSCO agrees to purchase, and Iberdrola agrees to sell, “Buyer's Metered Output at the Delivery Point on an as-generated, instantaneous basis” for a set price. PPA § 5.1.1. NIPSCO also agrees to be responsible for “congestion charges, ” as well as “all charges, costs and expenses associated with a negative price at the Delivery Point [i.e., the interconnection between a plant and MISO's grid].” Id. § 5.5.

         Additionally, Article 5 includes a section entitled “Payments Due to Seller for Buyer's Unexcused Failure to Take.” Id. § 5.3. That section requires NIPSCO to pay Iberdrola's “Cost to Cover” if NIPSCO “fails to take Buyer's Metered Output, ” unless the failure to take is excused by an Iberdrola default or by a “Force Majeure Event.” Id. In turn, “Force Majeure Event” is defined in Article 6. The definition includes the standard “acts of God” events, but it specifies in addition that “curtailment by Midwest[2] ISO, or its successor, at the Delivery Point for any reason that prevents either Party from performing under this Agreement will constitute a Force Majeure Event.” Id. § 6.1.2.

         The last major section of the PPAs that is relevant to this case is entitled “Voluntary Curtailment by Buyer.” This section gives NIPSCO the power to instruct Iberdrola to stop delivering electricity to the grid at any time. Id. § 5.4. If NIPSCO chooses to exercise this option, however, it must comply with certain notice requirements and pay Iberdrola's Cost to Cover for the period of curtailment. Id. §§ 5.4.1, 5.4.3. The definition of “Cost to Cover” for purposes of this section is substantially identical to the definition of “Cost to Cover” for purposes of the “Unexcused Failure to Take” section. Compare Id. § 5.3.2, with Id. § 5.4.3.

         E. Previous Regulatory System

         Because wind power plants produce electricity only when the wind is blowing, they were categorized as “Intermittent Resources” under the regulatory system in place in 2007 when the parties executed the PPAs. Pls.' SOF ¶ 53. The intermittent nature of wind power plants means that the plants do not necessarily produce power when consumers are demanding it, and sometimes the plants generate more power than is needed or can be accommodated by the grid. Id. ¶ 56. At the time the PPAs were executed, MISO sometimes needed to stop such overproduction by placing telephone calls to individual wind plants and ordering them to curtail their production for a period of time. Id. During these “manual curtailments” at the Iberdrola plants, NIPSCO did not pay Iberdrola the Cost to Cover, and Iberdrola never demanded such payments. Id. ¶ 57.

         F. Regulatory Change

         Partly to address the inefficiencies of manual curtailments, MISO created a new category of energy resource in 2010, the “Dispatchable Intermittent Resource” (“DIR”), and began using an automated system known as “Security Constrained Economic Dispatch” (“SCED”) to manage this resource category. Id. ¶¶ 60-62; Def.'s SOF ¶ 19. The new system requires market participants, like NIPSCO, to set a minimum LMP at which they are willing to sell electricity to MISO. Def.'s SOF ¶¶ 32-33. That price can be as high as $1000/MWh (megawatt-hour) or as low as negative $500/MWh. Pls.' SOF ¶ 22. When the LMP drops below the market participant's minimum price, SCED automatically sends a signal from MISO to the participant's wind plants ordering them to “dispatch down” (i.e., stop delivering power to the grid). Id. ¶ 63; Def.'s SOF ¶ 38.

         Most wind plants, including the Iberdrola plants, were required to convert to DIR by March 1, 2013. Pls.' SOF ¶ 62. Since then, the need for manual curtailments from MISO has been reduced, but it has not been eliminated. Def.'s SOF ¶¶ 43-45; Pls.' Resp. Def.'s SOF ¶¶ 43-45.

         G. ...


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