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Smoky Hills Wind Project II LLC v. City of Independence

United States Court of Appeals, Eighth Circuit

May 2, 2018

Smoky Hills Wind Project II, LLC Plaintiff- Appellant
v.
City of Independence, Missouri Defendant-Appellee Smoky Hills Wind Project II, LLC Plaintiff- Appellee
v.
City of Independence, Missouri Defendant-Appellant

          Submitted: December 14, 2017

          Appeals from United States District Court for the Western District of Missouri - Kansas City.

          Before SMITH, Chief Judge, KELLY and ERICKSON, Circuit Judges.

          ERICKSON, Circuit Judge.

         This case involves a "Renewable Energy Purchase Agreement" ("REPA") that resulted from arms-length bargaining between parties with longstanding experience and expertise in the generation and marketing of electrical energy. Smoky Hills Wind Project II, LLC ("Smoky II"), operates a wind farm generating wind energy which it supplies to various customers, known in the energy business as "off-takers." Smoky II is an indirect subsidiary of Enel Green Power North America, Inc., whose parent company is Enel Green Power, SpA., headquartered in Italy. The City of Independence, Missouri ("Independence"), owns and operates Independence Power & Light, a municipal electric system that distributes electricity to its customers. Independence generates electricity from its own generators but also purchases wholesale energy from various suppliers, including Smoky II. Smoky II brought suit for breach of contract when it did not receive payment from Independence on invoices related to curtailed energy. Curtailed energy is wind energy that is not actually produced because the producer is directed to reduce production either because: (1) an off-taker like Independence requests that its share of the production be reduced, or (2) because the regional regulator (in this case Southwest Power Pool) directs reduction based on regional market conditions. Independence counterclaimed.

         After a five-day bench trial, the district court[1], having jurisdiction pursuant to 28 U.S.C. § 1332, held Independence liable for certain charges that it found to be "timely-billed" and denied the counterclaims. Having jurisdiction under 28 U.S.C.§ 1291, we affirm the judgment of the district court, but for our own reasons as stated below.

         I. BACKGROUND

         As is apparent to people only vaguely aware of the energy business, the production and delivery of electricity is a highly regulated industry. The regulatory context governing the relationship between the parties is described in the stipulation of facts provided to the district court prior to trial. The United States electrical energy grid is made up of interconnected transmission systems and local distribution systems. Higher-voltage transmitting facilities deliver electricity to load centers over long distances, while lower-voltage facilities are used to deliver energy to the local consumers. The Federal Energy Regulatory Commission ("FERC") has exclusive jurisdiction under the Federal Power Act, 16 U.S.C. §§ 791-828, to regulate the rates, terms, and conditions of electrical transmission service in interstate commerce. FERC, in recent years, has encouraged the creation of non-profit entities called Regional Transmission Organizations ("RTOs") to manage the operation of these systems and the wholesale markets for the energy transmitted by these systems. The North American Electrical Reliability Corporation ("NERC") is a non-profit regulatory authority overseen by FERC. NERC establishes and enforces mandatory reliability standards for the electricity industry, including transmission grid operators. Southwest Power Pool, Inc. ("SPP"), is a FERC-approved RTO that manages transmission systems and the wholesale energy market in the central United States on behalf of a group of utilities and transmission companies in fourteen states, including Kansas and portions of Missouri. SPP and other RTOs commonly operate on a conservative contingency, or N-1, basis. SPP is a NERC regional electric reliability council member and is a NERC Reliability Coordinator. In these capacities SPP is responsible for maintaining reliability of the bulk electric power system in the region in which Independence and Smoky II are located.

         On August 14, 2008, the parties entered into a REPA setting forth the terms and conditions for the sale of energy from Smoky II to Independence. Independence is just one of five off-takers who buy portions of the wind energy produced and sold by Smoky II.[2] The parties agree that the REPA is a valid and enforceable contract, supported by adequate consideration.

         The Smoky II wind project was only possible with the involvement of tax equity investors. Tax investors are by nature very concerned about minimizing risk and were heavily involved in the negotiation of the REPA. Frank Costanza, the executive vice president of TradeWind Energy, the primary start-up developer of the Smoky II project before it was bought by Enel, testified that his focus "was to make sure that in that contract that the terms and conditions that we agreed on with our counterpart, the utility, would be found acceptable to the tax equity financiers." Costanza stressed that the investors made it plain that they were not interested in absorbing the risk of curtailment, stating "we need to get paid" and "we need to get paid for curtailments."

         The parties anticipated curtailment and included provisions in the REPA that govern the allocation of costs associated with curtailment. Under the REPA, curtailments fall into two categories: (1) Economic Curtailments, and (2) Emergency Curtailments.

         Specifically, section 7.3(B) provides: "SPP, Interconnection Provider, or Transmission Owner may curtail all or a portion of the delivery of Test Energy or Renewable Energy to Buyer from the Facility. If such curtailment is not an Emergency, then such curtailment shall be considered an Economic Curtailment." Section 7.3(C) provides that Independence is "obligated to pay for Renewable Energy or Test Energy not delivered due to an Economic Curtailment at the rate set forth in Section 8.2." Section 8.2 provides:

Payment during Economic or Emergency Curtailment. If Seller is unable to deliver energy to the Delivery Point due to an Emergency Curtailment or an Economic Curtailment, (A) the parties shall use reasonable efforts to determine the quantity of Renewable Energy that would have been produced by the Facility had its generation not been subject to Emergency Curtailment or an Economic Curtailment and (B) Buyer shall pay to Seller;
(1)all amounts that Seller would have received from Buyer under this REPA had production not been so curtailed, and
(2)the amount of any Tax Benefits to which Seller would have been entitled but does not receive, adjusted upwards for taxes based on the marginal federal and Kansas tax rates.
Seller shall install sufficient measuring equipment at the Facility to collect data necessary to reasonably determine the amount of Facility generation subject to the Emergency Curtailment or Economic Curtailment. Seller shall install sufficient meteorological towers around the Site or in conjunction with the Wind Turbines to provide the capability of measuring and recording representative wind data twenty four ...

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