LCRA disputes wind power contract

Plaintiff Lower Colorado River Authority (“LCRA”) submits this Motion to Compel Arbitration seeking an order compelling Defendant Papalote Creek II, LLC f/k/a Papalote Creek Wind Farm II, LLC (“Papalote”) to binding arbitration. This is to certify that on August 28, 2015, the undersigned counsel for LCRA contacted Leslie Thorne and Ben Meschel, counsel of record for Papalote, by phone and in writing to determine whether Papalote opposes this Motion. Despite such efforts counsel was not able to obtain Papalote’s position on whether or not the motion is opposed, and thus the motion is being submitted as opposed. 

Relief Requested

LCRA seeks to compel Papalote to arbitration pursuant to the terms of a contract entered into by the two parties. The Power Purchase Agreement (“PPA”) provides for the purchase by LCRA of energy and related products produced by a wind generation facility owned by Papalote.

In the event LCRA purchases less than the full amount of energy produced by the facility, then LCRA may owe damages determined in accordance with formulas set forth in the PPA. A separate provision in the PPA limits LCRA’s aggregate liability to $60 million. The parties dispute whether this provision imposes a cap on all damages that LCRA would be required to

Factual Background

On December 18, 2009, LCRA and Papalote entered into the PPA which provides for the purchase by LCRA, and the sale by Papalote, of energy and related products produced at the Papalote Creek II Wind Project (the “Project”) located in San Patricio County, Texas. (Doc. 1, Notice of Removal, PPA attached thereto as Exhibit A-2, at p. 14). The PPA commenced on December 18, 2009 and extends through September 28, 2028. (Id., ¶ 2.1; Affidavit of Richard Williams (“Williams Aff.”), attached hereto as Exhibit “A,” at ¶ 4).

Section 3.1 of the PPA provides that “[i]n accordance with and subject to the provisions of [the PPA] … Buyer shall purchase and receive … all of the Project’s capacity, Net Electricity, Ancillary Services and environmental Credits … generated by the Project.” (PPA, ¶ 3.1). The PPA provides a fixed price for all energy purchases. (Id., ¶ 3.3). In the event that LCRA purchases less than the Project’s full output of energy, then Section 4.3 of the PPA sets forth a formula for calculating liquidated damages to be paid by LCRA. (Id., ¶ 4.3). The PPA contains a separate provision, in Section 9.3, that caps LCRA’s financial liability under the PPA: Buyer’s damages for failure to perform its material obligations under this Agreement shall likewise be limited in the aggregate to sixty million dollars ($60,000,000).” (Id., ¶ 9.3).

To date LCRA has made all purchases of energy in accordance with the PPA. (Williams Aff., ¶ 5). LCRA has paid over $184 million to Papalote for such purchases since the commencement of the PPA, despite the fact that the price of energy thereunder is substantiallyabove current market rates. (Id.). While LCRA has thus far purchased the full amount of energy produced by the Project, LCRA contends that in the event it reduces or ceases further purchases then Section 9.3 caps LCRA’s obligation to pay damages under the PPA, including liquidated damages, at $60 million. (Id., ¶ 6). Papalote disagrees with LCRA’s interpretation and contends that, regardless of the limitation of liability provision, LCRA remains liable to purchase and pay for the total amount of all energy generated by the Project over the full term of the PPA. (Id.). LCRA has a statutory obligation to its wholesale customers to charge only the reasonable and necessary costs of providing energy. (Id., ¶ 3). The liquidated damages provisions and the liability cap in the parties’ fixed-price contract help mitigate the risk of fluctuating energy prices and enable LCRA to manage its cost exposure and its rates to customers. LCRA contends that the plain language of Section 9.3 limits the liability of both parties to $60 million. (Id., ¶ 6). For instance, the liability cap would have applied had Papalote failed to build the Project and it would apply to damages owed by a party on an early termination of the PPA. In LCRA’s view it also applies to any damages LCRA would owe pursuant to Section 4.3. (Id.). Such damages compensate Papalote for the difference between the fixed price in the PPA and the lower price at which Papalote sells the energy not taken by LCRA, thus making Papalote whole until the Section 9.3 cap on damages is reached.

Papalote disagrees with LCRA’s interpretation of the PPA. (Id., ¶ 6). While Papalote has taken the position in discussions with LCRA that it disagrees that Section 9.3 limits LCRA’s damages to $60 million, the pleading filed by Papalote herein offers no specifics on its substantive position. Thus, the parties need an arbitrator to determine the extent of LCRA’s potential liability for damages arising under the PPA before LCRA purchases less than all of the available energy. 

On April 24, 2015, LCRA’s Chief Financial Officer Richard Williams contacted Mark Frigo, Vice President and Head of Marketing in North America for Papalote’s parent company E.ON Climate & Renewables North America, LLC (“E.ON”), to initiate a discussion with Papalote about LCRA’s interpretations of the liability cap and possible decreases in energy purchases as a result of that interpretation. (Id., ¶ 7). Thereafter, on April 30, May 7, May 8 and May 18, Mr. Williams, Mr. Frigo and other executives of the parties held telephone conferences to discuss their different opinions of the PPA and possible compromises. (Id.). 

The parties continued their efforts on May 26, 2015, when senior executives of Papalote traveled to LCRA’s office in Austin to meet with senior officers of LCRA. (Id.). Papalote’s representatives at that meeting included Mr. Frigo, E.ON’s Chairman and Papalote’s Director and Senior Vice President Patrick Woodson, and Papalote’s Chief Financial Officer Tom Festle. (Id.). LCRA’s representatives at the meeting included Mr. Williams, LCRA’s General Manager Phil Wilson, and LCRA’s Chief Commercial Officer Ken Price. (Id.). Unable to reach a resolution, representatives of LCRA and Papalote conducted further telephone conferences on May 29, June 5, June 9, June 10, June 17 and June 18. (Id.). The parties’ discussions included their competing interpretations of the liability cap in Section 9.3 and strategies and proposals for resolving the dispute. (Id.). Despite such efforts the parties have been unable to reach an agreement on the application of Section 9.3 and the scope and extent of LCRA’s financial responsibility under the PPA. (Id., ¶ 9).

As a result, LCRA has no choice but to submit this dispute to binding arbitration under Section 13.2 of the PPA in order to obtain certainty with respect to the interpretation of the PPA provisions. To that end Section 13.2 of the PPA states: 

either party may submit any disputes arising under this Agreement, which cannot be resolved by the Parties to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “AAA”) effective at the time of the dispute (the “AAA Rules”) and the terms of this Section 13.2.

(PPA, ¶ 13.2). Either party may initiate arbitration by delivering to the other a written notice  requesting arbitration if they are unable to resolve the dispute within ten days after a meeting—in person or by telephone—among both parties’ senior officers or executives. (Id., ¶¶ 13.1, 13.2).

On June 19, 2015, LCRA made written demand on Papalote for arbitration. (Williams Aff., ¶ 10). This demand was made well over ten days after the May 26 in-person meeting between the parties’ senior executives. (Id.). Despite the conditions precedent having been satisfied, Papalote refuses to acknowledge that the arbitration procedure has been properly invoked under the PPA and refuses to follow the arbitration procedure outlined in Section 13. (Id.). Instead Papalote takes the position that arbitration is premature and improper because no breach of the PPA has occurred, and thus there presently is no dispute to be arbitrated. (Doc. 5, Defendant Papalote Creek II, LLC’s Answer and Affirmative Defenses (“Answer”), ¶ 4.2).