Westmoreland-LG&E Partners v. Virginia Elec. and Power Co., WESTMORELAND-LG

• Decision Date: 06 June 1997
• Docket Number: WESTMORELAND-LG,No. 961410,961410
• Court: Virginia Supreme Court
• Parties: & E PARTNERS v. VIRGINIA ELECTRIC AND POWER COMPANY. Record

Page 289

486 S.E.2d 289

254 Va. 1

WESTMORELAND-LG & E PARTNERS v. VIRGINIA ELECTRIC AND POWER COMPANY.

Record No. 961410.

Supreme Court of Virginia.

June 6, 1997.

Andrew P. Miller, Washington, DC (James vanR. Springer, Larry F. Eisenstat, Washington, DC; Samuel W. Hixon, III, Stephen E. Baril, Richmond; John R. McCall, Louisville, KY; B. Jeanine Hull, Fairfax; Michael R. Engleman, Louisville, KY; Theodore E. Worcester, Colorado Springs, CO; Michael Lepchitz, Abingdon; Dickstein, Shapiro, Morin & Oshinsky, Washington, DC; Williams, Mullen, Christian & Dobbins, Richmond, on briefs), for appellant.

G.H. Gromel, Jr., (Michael R. Shebelskie; George W. Marget, III; Hunton & Williams, on brief), Richmond, for appellee.

Virginia Independent Power Producers, Inc. (Anthony Gambardella; Frank K. Friedman, Roanoke, on brief), amicus curiae, in support of appellant.

Present: All the Justices.

CARRICO, Chief Justice.

In an amended motion for judgment, Westmoreland-LG & E Partners (Westmoreland) sought to recover from Virginia Electric and Power Company (Virginia Power) damages resulting from Virginia Power's alleged breach of a "Power Purchase and Operating Agreement" (the Contract). Westmoreland appeals from the award of summary judgment in Virginia Power's favor and the dismissal of Westmoreland's action with prejudice.

Westmoreland makes three complaints on appeal. First, Westmoreland says the trial court erred in holding that evidence of trade custom and usage would not be permitted to explain the meaning of certain contractual terms. Second, Westmoreland contends the Contract is ambiguous and that the trial court erred in ruling that parol evidence would not be allowed to show the parties' intent and understanding with respect to certain of the Contract's payment provisions. Third, relative to an alternative basis for recovery, Westmoreland maintains the trial court erred in failing to recognize that certain contractual language might entitle Westmoreland to at least a partial recovery for Virginia Power's alleged breach of the Contract.

The facts are not in dispute. Westmoreland, a Virginia general partnership composed of Westmoreland Roanoke Valley, L.P. and LG & E Roanoke Valley, L.P., is an independent power producer. Virginia Power is a public utility providing electrical service to its customers.

In the late 1970s, Virginia Power began purchasing electricity from independent power producers. In 1988, Virginia Power issued a request for proposals from a number of independent power producers, including Westmoreland, for the supply of electricity to Virginia Power. A model contract prepared by Virginia Power accompanied the request for proposals.

Westmoreland responded with a proposal, which Virginia Power accepted, and the two parties entered into the Contract on January 24, 1989. ¹ On or about the same date, Virginia Power entered into agreements with approximately twenty other independent power producers as a result of its request for proposals.

In order to fulfill its obligations under the Contract, Westmoreland constructed a $300 million power plant, known as "ROVA I" (the Facility), near Roanoke Rapids, North Carolina. ² The plant commenced commercial operations in May 1994 with the capacity to produce approximately 150 megawatts of electricity. Westmoreland is obligated under the Contract to supply this capacity to Virginia Power upon demand for a term of twenty-five years.

In the Contract, Westmoreland agrees to sell and Virginia Power agrees to purchase "the Net Electrical Output of the Facility." Also, Westmoreland agrees to sell and Virginia Power agrees to purchase "Dependable Capacity from the Facility." "Net Electrical Output" is defined in the Contract as "[a]ll of the Facility's generating output made available for sale." "Dependable Capacity" is defined as "[t]he amount of capacity set by [Westmoreland based upon prescribed tests] and delivered from the Facility" to Virginia Power.

Under the Contract, Westmoreland must "control and operate the Facility consistent with [Virginia] Power's Dispatch of the Facility." "Dispatch" is defined in the Contract as "[t]he right of [Virginia] Power ... to schedule and control ... the generating level of the Facility in order to commence, increase, decrease, or cease the delivery of Net Electrical Output" to Virginia Power. When Virginia Power dispatches the Facility by providing notice to Westmoreland of the estimated needs for the following week, Westmoreland must comply with the notice.

Virginia Power is obligated by the Contract to make two types of payments to Westmoreland, one for net electrical output, termed "Energy Payments," and the other for dependable capacity, termed "Capacity Payments," based upon the different types of costs incurred by Westmoreland. Energy Payments are designed to compensate Westmoreland for the actual amount of electricity it generates and delivers to Virginia Power and to reimburse Westmoreland for its variable costs incurred to produce the electricity.

Energy Payments are not in dispute here, but Capacity Payments are. Capacity Payments are designed to compensate Westmoreland for the costs it incurred in constructing the Facility and for the fixed costs it incurs in operating and maintaining the Facility.

Under § 10.15(a) of the Contract, Virginia Power is required to make Capacity Payments in a fixed amount for a 25-year term, "so long as the plant is available as required by the Contract." Although paid monthly, the Capacity Payment is calculated at the rate of approximately $200,000 per day.

The present controversy arose when Virginia Power withheld Capacity Payments for each day it deemed to be a "Forced Outage Day" within the meaning of the Contract. In its amended motion for judgment, Westmoreland sought recovery for the total amount withheld by Virginia Power.

Section 1.18 of the Contract defines a "Forced Outage" as "[a]n interruption ... of the Facility's delivery of the Net Electrical Output [that] is not ... the result of a Scheduled Outage." ³ Section 1.20 defines a "Forced Outage Day" as [e]ach continuous twenty-four (24) hour period beginning with the start of a Forced Outage (regardless of the number of actual outages that may occur during such twenty-four (24) hour period(s))

(a) designated by [Westmoreland] as a Forced Outage Day,

(b) a Forced Outage Day which is determined pursuant to Section 10.15(d).

Section 10.15(d) forms the entire basis of Virginia Power's defense in this case. It is a unique section, found only in the contract involved here and not in the agreements Virginia Power executed with other independent power producers at or about the same time. ⁴ Section 10.15(d) provides as follows:

For each instance where [Westmoreland] fails, after the second oral notification (such notification shall not be less than fifteen (15) minutes from the first notification) from [Virginia] Power, to maintain the operating level specified by [Virginia] Power pursuant to Section 7.6, to within ± five (5%) percent of the Dispatched level then for each percent or portion of a percent deviation from the above allowed ± five (5%) percent, then at [Virginia] Power's option, the payment for that Day's Dependable Capacity shall be reduced two (2%) percent. If such deviation reduces that Day's payment for Dependable Capacity to zero (0) then that Day shall be a Forced Outage Day. Example: If the Facility is Dispatched at 100MW but is only able to deliver 87MW then the payment for Dependable Capacity for that Day would be reduced by 16%.

Because, under § 10.15(d), the 2% reduced payment scale applies to each percent of deviation from the dispatched level, or portion thereof, the reduction in the capacity payment reaches 100% and a Forced Outage Day occurs on any day when power generation falls below 46% of the dispatched level, giving credit for the ± 5% allowance. This is the result derived from the formula, 100 - 5 = 95 - 45 = 50 X 2 = 100.

Sections 10.15(g) and 10.18 also relate to Forced Outage Days. Section 10.15(g) provides in pertinent part as follows:

[Westmoreland] shall be allowed thirty (30) Forced Outage Days per full Capacity Test Period (May 1 through April 30).... Payments for Dependable Capacity will be reduced five hundred thousand ($500,000) dollars as liquidated damages for each Forced Outage Day that occurred or was designated by [Westmoreland] during that period in excess of the above allowances.

And § 10.18 provides in pertinent part as follows:

The parties agree that [Virginia] Power will be substantially damaged in amounts that will be difficult or impossible to determine if the Facility:

....

(d) Exceeds the allowed number of Forced Outage Days in Section 10.15(g).

Therefore, to the limited extent set forth in the Agreement, the Parties have agreed on sums which the Parties agree are reasonable as liquidated damages for such occurrences. It is further understood and agreed that the payment of the liquidated damages is in lieu of actual damages for such occurrences.

The relationship between § 10.15(d) and the terms "Forced Outage Days" and "Force Majeure Days" is also relevant to this dispute. Under § 14.1, a delay in performance occurring on a given day is excused if Westmoreland designates such day a "Force Majeure Day." A Force Majeure Day may be designated when a delay in performance is "due solely to circumstances beyond the reasonable control of the Party experiencing such delay, [for example,] acts of God; ... war; riots; ... or accidents."

A Force Majeure Day does not count against the thirty Forced Outage Days allowed before the $500,000 per day liquidated damage provision of § 10.15(g) may be invoked. However, under § 10.15(b) of the Contract, if a forced outage is designated as an event of Force Majeure, "then [Virginia] Power's obligation to pay the payments for Dependable Capacity specified in Section 10.15(a) above shall cease, prorated daily,...