A 2008 case and its follow-up in 2011 addressed several issues arising from common provisions in power purchase agreements. These issues involve spinning reserve requirements, dispatch rights, and the applicable heat rate formula. The underlying dispute emphasizes the need to clearly address the parties’ bargain in the power purchase agreement (PPA), preferably with the input of the parties’ legal counsel.
The case involved an electric cooperative and its electric supplier who reached an impasse in their relationship. In fact, the dispute continued at least into 2011 when the court affirmed the confirmation of an arbitration award.
Background
The dispute arose from the parties’ interpretation of their PPA related to a particular power plant. Under the PPA, Seller would provide energy, capacity, and other deliverables to Buyer. Something went wrong in the relationship, and litigation ensued.
Spinning Reserves Obligation
The first dispute involved the obligation to provide spinning reserves under the PPA. Using a dictionary and general rules of contract interpretation, the court concluded that a PPA provision obligated Seller to provide a certain amount of spinning reserves at no additional cost to Buyer.
The PPA provision stated, “Seller agrees, at no additional cost to Buyer, to provide spinning reserves for the PPA Capacity as required to meet applicable requirements for such reserves.”
Seller interpreted the provision to require it to supply spinning reserves only if Buyer was ever required to satisfy a spinning reserve requirement, and only then if Buyer incurs additional cost. Seller believed the provision created an obligation to reimburse Buyer for any costs associated with the procurement of spinning reserves from others, but not the obligation to provide spinning reserves. Seller also argued that Buyer was required to allocate the duty to provide spinning reserves among its several power suppliers.
The lower court agreed with Seller that, in essence, the provision merely required it to reimburse Buyer for cost associated with an independent obligation on Buyer to acquire spinning reserves, and only after Buyer allocated the reserves requirement among its sources of power.
In contrast, Buyer argued that the provision required Seller to provide spinning reserves at no additional charge, and there was no requirement to allocate Buyer’s spinning reserves requirement among its power suppliers.
The appellate court agreed with Buyer. The provision obligated Seller to provide spinning reserves at no additional cost. But the amount of spinning reserves to be provided was limited “as required to meet applicable requirements for such reserves.” In other words, Seller must provide spinning reserves only to the extent Buyer was obligated to acquire spinning reserves. And this obligation need not be spread among Buyer’s other suppliers; it was an obligation assumed solely by Seller.
Rights to Commit and Dispatch
Buyer and Seller also disputed who had authority to request and dispatch energy from the project. Buyer contended that it had authority to dispatch the project, while Seller argued that Buyer’s dispatch agent had the sole authority.
The PPA provided that “Buyer’s dispatcher . . . shall have the sole discretion to commit[,] schedule and dispatch the PPA Capacity.” In a separate dispatch agreement between Buyer and its dispatch agent, Buyer granted its dispatch agent authority to dispatch the project.
Reviewing the provision of the PPA and the dispatch agent’s authority under the separate dispatch agreement, the court concluded that the dispatch agent had the sole and exclusive authority to dispatch the project. Accordingly, if the dispatch agent did not dispatch the project, then no energy and replacement energy are required under the PPA.
Applicable Heat Rate
In another dispute of contract interpretation, the parties differed in their interpretations of the applicable heat rate formula. The PPA contained two rates based on whether the project was operated on single-cycle or combined-cycle mode. Buyer argued, however, that the rate applicable to single-cycle mode should apply only when the failure to operate in combined cycle was unexcused.
Upon review of the applicable provision, the trial court concluded, and the appellate court agreed, that the provision contained no limitation on when Seller would apply the rates applicable to single-cycle mode. In other words, it did not matter why the project was operating in single-cycle mode; if the project was operating in such mode, the single-cycle rate should apply.
Conclusion
The case illustrates, to some extent, what can go wrong in the “real life” of a PPA. It calls for parties to draft their PPAs with potential problems and disputes in mind. After addressing the parties’ obvious desires and needs, drafters should then consider what might go wrong and prepare for it. Of course, not all eventualities can be predicted and addressed. So it is even more important, as a first priority, to consider whether the contracting party is one with whom you want to do (long-term) business.