Mobil Oil Corporation v. Tennessee Valley Authority, Civ. A. No. 71-230.

• Decision Date: 18 November 1974
• Docket Number: Civ. A. No. 71-230.
• Citation: 387 F. Supp. 498
• Parties: MOBIL OIL CORPORATION, a corporation, Plaintiff, v. TENNESSEE VALLEY AUTHORITY, Defendant.
• Court: U.S. District Court — Northern District of Alabama

387 F. Supp. 498

MOBIL OIL CORPORATION, a corporation, Plaintiff, v.TENNESSEE VALLEY AUTHORITY, Defendant.

Civ. A. No. 71-230.

United States District Court, N. D. Alabama, Northwestern Division.

November 18, 1974.

COPYRIGHT MATERIAL OMITTED

Drayton T. Scott & Drayton Nabers, Jr., Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, Ala., Curtis B. Kellar, Gen. Counsel and Philip B. Raue, Associate Gen. Counsel, New York City, for Mobil Oil Corp.

Robert H. Marquis, Gen. Counsel, Herbert S. Sanger, Jr., Deputy Gen. Counsel, Justin M. Schwamm, Asst. Gen. Counsel, Knoxville, Tenn., for Tennessee Valley Authority.

MEMORANDUM OPINION

LYNNE, District Judge.

The primary question involved in this case is whether Mobil Oil Corporation("Mobil") is obligated to pay the minimum bill portion of rates for electric service provided to it under contract by Tennessee Valley Authority ("TVA") at Mobil's chemical plant near Mount Pleasant, Tennessee.

Mobil filed this suit on March 19, 1971, seeking to invalidate both an electric rate increase implemented by TVA in October of 1970 and the minimum bill provision of its power contract with TVA.TVA filed a counterclaim for amounts then due and unpaid on the basis of the rates specified in the contract.On November 30, 1971, TVA moved for summary judgment.Mobil thereafter amended its complaint, deleting its allegations concerning TVA's rate increase but retaining its basic contention that the minimum bill provision was invalid for the period through February 28, 1974, the expiration date of the contract.On May 18, 1972, Mobil filed a motion for partial summary judgment, which approximately two weeks later was heard concurrently with TVA's motion for summary judgment.On June 5, 1972, the Court overruled TVA's motion and took Mobil's motion under advisement.On April 3, 1973, TVA filed a second motion for summary judgment on Mobil's amended complaint and on its counter claim, supported by the affidavits of James E. Watson and R. A. Kampmeier, which is now before the Court.

The pleadings, answers to interrogatories, and admissions on file,¹ together with affidavits, show that there is no genuine issue as to any material fact and that TVA is entitled to a judgment as a matter of law.The question before the Court is a legal one — the effect of the minimum bill portion of the rates which, under the contract between the parties, Mobil agreed to pay throughout the contract term.The rates and the contract are before the Court, and are clear and unambiguous.The construction and effect of the contract and the rate provisions included therein are a matter of law to be determined by the Court, and the matter is an appropriate one for determination by summary judgment.Freeman v. Continental Gin Co., 381 F.2d 459(5th Cir.1967);Mississippi Power Co. v. Roubicek, 462 F.2d 412(5th Cir.1972);Volunteer Elec. Coop. v. Tennessee Valley Authority, 139 F.Supp. 22(E.D.Tenn.1954), aff'd on opinion of the district court, 231 F.2d 446(6th Cir.1956);Pipkin v. FMC Corp., 427 F.2d 353(5th Cir.1970);Gore v. American Motorists Ins. Co., 441 F.2d 10(5th Cir.), cert. denied, 404 U.S. 913, 92 S.Ct. 233, 30 L. Ed. 187(1971).

The material facts are, in summary, as follows:

Prior to 1964 the Virginia-Carolina Chemical Corporation("V-C") operated facilities at the site of Mobil's present operations and received electric service for such facilities from the City of Mount Pleasant, a distributor of TVA power.A plant expansion by V-C increased its need for electric service to a size which it is TVA's practice to supply directly rather than through a distributor.SeeVolunteer Elec. Coop. v. Tennessee Valley Authority, supra.On June 27, 1963, V-C and TVA entered into a power contract for service to the expanded plant by TVA beginning on March 1, 1964.The contract was in TVA's standard form for industrial customers such as V-C, and provided for a 10-year term and payment of TVA's standard prevailing rates for industrial customers during such term.V-C was merged into Mobil in November 1963, and Mobil succeeded to V-C's rights and obligations under the contract.Thereafter, the contract was amended from time to time at Mobil's request to increase by some 35 percent the amount of power which TVA was obligated to make available under it.The most recent such amendment, effective as of November 30, 1969, fixed the amount of power at 47,100 kW through the remainder of the contract term.Of this amount, 13,100 kW is firm power to be available all of the time, and 34,000 kW is interruptible power to be available at least 98 percent of the time.This is Mobil's "contract demand."²

The contract is what is known in the electric power industry as an "availability contract."Section 3 of the contract provides that:

. . . TVA shall make available to Company hereunder a supply of power, sometimes hereinafter referred to as "normal" power and energy, in the respective amounts specified. . . .³

Section 7 of the contract provides that "Company shall pay TVA monthly for power and energy available under this agreement" during the contract term on the basis of the specified rates.

Section 1 of the Terms and Conditions attached to and made a part of the contract provides that:

Maintenance by TVA at the point of delivery of voltage within the . . . limits and the frequency contracted for will constitute availability of power for purposes of the contract.

TVA has maintained such voltage and frequency, and could at all times have met Mobil's full contract demand.

TVA's standard industrial rates provided in the power contract consist, insofar as pertinent to this case, of a demand charge, an energy charge, a minimum bill charge, and a late payment charge, characterized as a penalty.Rates with these components are in common use throughout the electric industry.

The "demand charge" is an amount charged per kilowatt (kW) based on a "billing demand" which rather commonly (and in the contract in this case) is the customer's highest actual demand on the system's capacity during the month.The level of the demand charge per kW is commonly designed to recover most of the power supplier's fixed costs, which are essentially the costs related to the investment in capacity.

The "energy charge" is an amount charged per kilowatt hour (kWh) for the customer's actual use of electric energy during the month.It is commonly designed to collect somewhat more than the power supplier's variable costs, which are essentially the costs of producing power through actual plant operation.

The minimum bill charge is:

. . . the lowest amount to which the customer's bill may fall.Unless specifically provided in the rate schedule, this minimum must be paid in each billing period of the customer's contract, whether or not any service is actually taken.⁴

Under TVA's standard industrial rates included in the contract, the minimum bill is in lieu of both the demand and energy charges, and is equal to the firm power demand charge per kW applied to the contract demand.

The "late payment charge" is a fixed percentage of the bill for each specified period that it remains unpaid after it is due.This charge purportedly is designed to ensure that those customers who do not pay their bills on time are responsible for the costs of carrying and collecting their delinquent accounts.

Although TVA is obligated under the contract to make available Mobil's contract demand of 47,100 kW for Mobil's use during the contract term, Mobil is not obligated to use any particular amount of power during any month.Thus, for any particular month Mobil is obligated to pay either the minimum bill or the sum of the applicable demand and energy charges, whichever is higher.

Mobil has used electricity at varying levels throughout the term of the contract.Prior to January 1, 1971, such use was generally at a sufficiently high level so that Mobil was obligated for and paid the sum of the applicable demand and energy charges for most months, but Mobil paid minimum bills on at least eight occasions during this period.⁵In January 1971, Mobil shut down a substantial portion of its Mount Pleasant facilities, having previously notified TVA that it intended to do so and that this would result in its actual use of a comparatively small amount of electricity during the remainder of the contract term.Mobil has continued to use electricity for its other facilities at Mount Pleasant, its largest actual usage for any month being 42,800 kW and 1,206,000 kWh in January 1971.For each month beginning with January 1971, the sum of the demand and energy charges has been less than the minimum bill and the minimum bill therefore became applicable.⁶Mobil has made no payments for any month subsequent to December 1970.It contends here that the minimum bill portion of the standard industrial rates provided for in the contract constitutes a separate disguised liquidated damages clause for breach of contract; that it is invalid as such because it did not represent a reasonable estimate of damages TVA would suffer if Mobil reduced its actual power use, and because TVA did not sustain actual damages following Mobil's reduction comparable to the amount of the monthly minimum bill; and that the clause should be treated as a penalty and TVA required to prove its actual damages.

Mobil also denies liability for the late payment charge, contending, inter alia, that it is an unenforceable penalty, an unconstitutional deterrent to good faith litigation, and arbitrary in light of its stated purpose.It has also failed, for reasons not explained, to make payments under a second contract between the parties(Ex. B to TVA's counterclaim) under which TVA is providing alternate backup power facilities to supply Mobil's plant for which Mobil is obligated to pay a "facilities rental charge" of $75 per month.It is undisputed that TVA has performed its obligations under that contract.

This...