© 2012 The Texas Lawbook.
By Janet Elliott
Staff Writer for The Texas Lawbook
AUSTIN – As Texas became the nation’s top generator of wind power over the past decade, a glaring problem emerged: there wasn’t sufficient transmission capacity to bring the electricity from West Texas to urban areas.
This chronic congestion, which prevented some wind farms from meeting contractual obligations, is at the heart of a dispute heard Monday by the Texas Supreme Court.
TXU Portfolio Management Co. (now known as Luminant Energy Co.) wants the court to allow it to proceed with a lawsuit seeking $29 million from three West Texas wind farms that failed to deliver contracted-for amounts of energy and renewable energy credits from 2002 to 2005. Credits are used by electric providers as an alternative way to meet state requirements that certain levels of power be generated from renewable sources.
Although transmission capacity now is growing – thanks to a surcharge on electric customers’ bills – the wind industry says an adverse ruling in the dispute could threaten the market for renewable energy credits.
TXU sued FPL Energy and two other wind-energy producers for contract breach. The wind farms counterclaimed that TXU did not provide sufficient transmission lines to carry the power.
The trial court found that the damages provision was unenforceable and that TXU should take nothing because it did not provide transmission capacity and covered its losses by buying energy from other sources. The Dallas Court of Appeals in 2010 reversed the trial judgment, holding that the damages provision was enforceable and that TXU’s contract with the wind-energy producers did not require it to provide transmission capacity.
“The court of appeals’ decision sends a disturbing message to the renewable energy industry: when contractual disputes arise in Texas, a court’s failure to appreciate how the industry operates may result in multi-million dollar damage awards that exceed any reasonable measure of actual damages incurred,” a coalition of wind energy interests said in a friend-of-the-court brief filed by Austin lawyer Pamela Stanton Baron.
TXU argues that its dispute with the wind farms is a simple contractual dispute and that the wind industry is overstating any potential impact on the market for renewable energy credits.
A key issue is whether the damages set out in the contract apply to the sale of renewable energy credits and energy sales, or just to the credits.
Nina Cortell, a Dallas lawyer who argued for FPL, said the Legislature created a separate market for trading of the renewable energy credits. She said the court of appeals erred in treating the credits and electricity as a single, combined product in the contract, leading to a “damages windfall” for TXU.
Although TXU could have faced penalties if it fell short of renewable energy or credits, Cortell said that didn’t happen.
“At the end of the day, TXU is asking the court to rewrite the contract,” said Cortell, a partner at Haynes and Boone in Dallas.
James Ho, who represents TXU, said FPL and TXU agreed in the contract to buy and sell identical quantities of both energy and credits at a single, unified price. When the wind farms did not perform as FPL promised, TXU suffered a loss of energy and credits worth tens of millions of dollars over the fixed contract price it was promised.
“FPL is profoundly misreading a complicated contract,” said Ho, a Dallas partner at Gibson, Dunn & Crutcher in Dallas.
Texas, which deregulated its electric industry in 1999, was the first state to develop a renewable energy trading program. Since then, 29 states and the District of Columbia have adopted similar mandatory renewable portfolio standards. In 2006, Texas surpassed California as the top producer of wind energy.
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