NORTHERN IND. PUBLIC SERV. v. Colo. Westmoreland, Inc.

• Decision Date: 04 August 1987
• Docket Number: Civ. No. H 85-0542.
• Citation: 667 F. Supp. 613
• Parties: NORTHERN INDIANA PUBLIC SERVICE COMPANY, Plaintiff, and Defendant on Counterclaim, v. COLORADO WESTMORELAND, INC., Defendant, and Plaintiff on Counterclaim.
• Court: U.S. District Court — Northern District of Indiana

667 F. Supp. 613

NORTHERN INDIANA PUBLIC SERVICE COMPANY, Plaintiff, and Defendant on Counterclaim, v. COLORADO WESTMORELAND, INC., Defendant, and Plaintiff on Counterclaim.

Civ. No. H 85-0542.

United States District Court, N.D. Indiana, Hammond Division.

August 4, 1987.

Joseph R. Lundy, Ronald S. Safer, Marc W. O'Brien, Schiff Hardin & Waite, Chicago, William H. Eichhorn, Peter L. Hatton, Joel R. Page, Jr., Eichhorn, Eichhorn & Link, Kenneth D. Reed, Abrahamson, Reed & Adley, Hammond, Ind., for plaintiff.

Matthew J. Broderick, John M. Coleman, Melvin A. Schwarz, Kate D. Balaban, Dechert Price & Rhoads, Philadelphia, Pa., Charles A. Myers, McHie, Myers & McHie, Hammond, Ind., for defendant.

OPINION

EASTERBROOK, Circuit Judge.^*

The Northern Indiana Public Service Company (NIPSCO) generates electric power in coal-fired stations. It serves much of northwest Indiana. Unfortunately, NIPSCO's forecasts of its needs for coal have not been accurate — in part because the demand for power in the region has declined rather than increased (about 40% of its sales are related to the steel industry). NIPSCO also did not anticipate the rapid movements in the price of coal, which varies with the price of oil. Coal is valued for its energy content, so as the price of obtaining BTUs from oil declined, the price of coal also declined. The price of high-sulfur Midwest coal, readily available in the spot market, declined most quickly. The transportation cost from mines in Illinois and Indiana also was low. NIPSCO, however, was committed to purchase large quantities of high-priced, low-sulfur western coal. The delivered price of this coal sometimes was more than twice the delivered price of midwestern spot coal.

Two contracts with Colorado Westmoreland, Inc. (CWI) signed in 1977 obliged NIPSCO to take a total of 1,050,000 tons of coal per year through 1993. Although CWI and NIPSCO renegotiated these contracts in 1980, reducing NIPSCO's minimum take (and increasing the price per ton), a large supply of CWI's coal accumulated in a stockpile at NIPSCO's Mitchell generating station. The Public Service Commission of Indiana (which I call the PSC, even though its name recently was changed to the Indiana Utility Regulatory Council) thought the accumulation wasteful and excluded $52 million from NIPSCO's rate base (the "used and useful" investment on which a regulated utility is allowed to earn a regulated rate of return).

NIPSCO also had a contract with Carbon County Coal Co. requiring it to take a substantial number of tons per year. Concluding that it did not need so much low-sulfur coal (at least not at Carbon County's delivered price), NIPSCO broke its contract. The result was a judgment for $181 million in favor of Carbon County Coal. See Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265 (7th Cir.1986).

Reeling from the $52 million exclusion — but before the $181 million judgment — NIPSCO decided to renegotiate its contracts with CWI. NIPSCO had been having trouble keeping its generating units at the Mitchell station in compliance with environmental regulations while using CWI's coal. Seizing on this, NIPSCO told CWI that it considered the contract defunct; at the same time, NIPSCO tested CWI's coal in Unit 15 at its Schahfer generating station, which was having environmental problems of its own burning coal from Medicine Bow Coal Co. CWI's coal worked at Unit 15. NIPSCO offered CWI a contract to supply all of the coal Unit 15 needed. Between 1979 (when Unit 15 was placed into service) and 1982 Unit 15 had required about 1 million tons per year. CWI wanted a fixed-take contract; NIPSCO, intent on averting another fiasco caused by excess stockpiles, insisted on a requirements contract.

In May 1982 NIPSCO and CWI started negotiating a new contract. They signed the document in April 1983. The important clauses of this new contract (the Contract) provide:

SECTION 4 — QUANTITY OF COAL

A. Buyer agrees to purchase from Coal Company and Coal Company agrees to sell to Buyer all of the coal required by Buyer during the term of this Agreement to supply Unit No. 15 at Buyer's R.M. Schahfer Generating Station in Wheatfield, Indiana (Hereinafter called "Schahfer Unit 15"). Buyer represents that its estimated annual requirement of coal for Schahfer Unit 15 is approximately one million tons, as set forth in Exhibit I hereto.

B. At least 90 days prior to the beginning of each contract year ... Buyer shall advise Coal Company in writing of the quantity of coal it estimates it will require at Schahfer Unit 15 during that contract year and for each month of that contract year. If the amount exceeds 1.25 million tons, Coal Company shall have the right to limit its sales to that amount. Coal Company shall supply Buyer with its full requirements up to 1,250,000 tons per year and agrees to use its best efforts to supply Buyer with contract year requirements in excess thereof....

E. Coal Company agrees that it will not execute contracts to sell coal from the Mine to others which when added to the amount of tons which Coal Company is at that time obliged to deliver to Buyer, call for a rate or amount of production which exceeds the capacity of the Mine. Coal Company will treat all of its purchasers fairly and will not give preference to other purchasers over Buyer in times of short supply or production delays.

F. On or before the 25th of each month, Buyer shall order from Coal Company, in writing, the quantity of coal it will require to be delivered hereunder during the next succeeding month, specifying quantities to be delivered in substantially equal deliveries during such month. The amounts so ordered in each contract year shall be in substantially equal monthly amounts, and shall in the aggregate approximate the tonnage specified pursuant to paragraph B above.

G. Nothing contained in this Agreement shall be construed to require the purchase of a quantity of coal greater than is needed for the operation of Buyer's Schahfer Unit 15; nor shall anything in this Agreement be construed to prevent Buyer from operating any and all of its generating stations, and utilizing other sources of power supply in the most efficient, economical, and prudent manner for the production and supply of electrical energy, nor shall anything in this Agreement be construed to cause Buyer to exceed its reasonable reserve stockpile requirement. Buyer shall treat Coal Company no less fairly than any of its other producers of coal.

....

SECTION 25 — LIMITATION OF WARRANTIES

Except as specifically provided above in this Agreement, neither the Coal Company nor Buyer makes any warranty, representation or condition of any kind, express or implied (including no warranty of merchantability or of fitness for a particular purpose).

....

                              EXHIBIT I
                          SCHAHFER UNIT 15
                  ESTIMATED ANNUAL REQUIREMENT (TONS)
                   1982                    1,062,000
                   1983                      887,000
                   1984                    1,059,000
                   1985                      981,000
                   1986                    1,029,000
                   1987                    1,042,000
                   1988                    1,102,000
                   1989                    1,179,000
                   1990                    1,052,000
                   1991                    1,117,000
                   1992                    1,000,000
                   1993                    1,000,000
                

After the parties signed this contract, NIPSCO promptly tendered the annual estimate called for by § 4.B, in an amount similar to the estimate shown in Exhibit I. NIPSCO later reduced its purchases for 1983 because Unit 15 suffered an unexpected outage. All told, NIPSCO took 737,655 tons in 1983. NIPSCO delivered an estimate for 1984 of 1,011,300 tons. It ended up taking only 713,295. It estimated 650,000 tons for 1985 and took 573,305; it estimated 263,600 tons for 1986 and took 314,871. (CWI shut its mine for the last half of 1986 because of a fire, but NIPSCO's personnel testified that by then CWI already had delivered all the coal NIPSCO needed for the year, because a steel strike diminished the demand for NIPSCO's electricity. The parties agree that 1986 was an aberration.) And by mid-1984 NIPSCO's internal estimates were showing requirements at Schahfer Unit 15 in the vicinity of 300,000 tons per year for 1986-87, though with a recovery to 600,000 tons and up for 1988 and later years.

NIPSCO and CWI are at odds about why Unit 15 is burning so much less coal than the contract estimated, about whether this change was predictable in 1983, and about whether NIPSCO is required to take from CWI the tons listed in Exhibit I whether or not Unit 15 burns them. CWI sent NIPSCO demand letters insisting on compensation for the shortfall. NIPSCO then filed this diversity suit, which the parties agree is governed by Indiana law. NIPSCO sought a declaratory judgment that it has abided by the Contract and that the Contract remains in force through its termination date in 1993. CWI filed a counterclaim for damages for breach, and added claims based on promissory estoppel.

A bench trial was held between July 6 and July 20, 1987. This opinion contains the findings of fact and conclusions of law required by Fed.R.Civ.P. 52. The parties have stipulated to a substantial agreed statement of facts; each side also has accepted many propositions in the other's proposed findings of fact. I adopt all of these agreed-on facts. To the extent the compression necessary to produce a readable opinion yields any inaccuracy, the agreement of the parties controls. But the parties do not agree at all on why Unit 15's burn has been cut, whether NIPSCO should have foreseen this (or did), and what the negotiators said to each other about the meaning of the terms in the Contract. I concentrate on resolving these contested matters. Part I addresses the nature of (and the reasons for) the change in the operation of Unit 15, Part II discusses the negotiation and meaning of the Contract, and Part III handles some residual...