PSI Energy, Inc. v. Exxon Coal USA, Inc., IP 92-645-C.

• Decision Date: 27 August 1993
• Docket Number: No. IP 92-645-C.,IP 92-645-C.
• Citation: 831 F. Supp. 1430
• Parties: PSI ENERGY, INC., Plaintiff, v. EXXON COAL USA, INC., and Exxon Corporation through its division Exxon Coal and Mineral Company, Defendant.
• Court: U.S. District Court — Southern District of Indiana

831 F. Supp. 1430

PSI ENERGY, INC., Plaintiff, v. EXXON COAL USA, INC., and Exxon Corporation through its division Exxon Coal and Mineral Company, Defendant.

No. IP 92-645-C.

United States District Court, S.D. Indiana, Indianapolis Division.

August 27, 1993.

Robert F. Zoccola, Michael A. Bergin, Thomas L. Davis, and Alan S. Brown, Locke Reynolds Boyd & Weissell, Indianapolis, IN, and Donald P. Bogard, PSI Energy, Inc., Plainfield, IN, for plaintiff.

Richard Wilson, Fulbright & Jaworski, David J. Beck, Beck Redden & Secrest, Houston, TX, Robert A. Burgoyne, Fulbright

& Jaworski, Washington, DC, and William P. Wooden, John D. Nell, and Julie Michaelis, Wooden McLaughlin & Sterner, Indianapolis, IN, for Exxon Coal USA and Exxon Corp.

James K. Wilson and James J. McGowan, Jr., Exxon Coal and Minerals Co., Houston, TX, for Exxon Coal and Minerals Corp.

ENTRY

BARKER, District Judge.

PSI Energy, Inc. ("PSI") and Exxon are signatories to a twenty-five year contract (the "Contract") which requires Exxon to supply coal to PSI through the year 2001, subject to the parties agreeing at five-year intervals to a new base price (the "Base") and escalation provisions ("Exhibit A") which together determine the actual price of the coal (the "Price"). The last renegotiation period ended on December 31, 1992. Long before that deadline, however, the parties realized that they were unable to agree on the meaning of Article VII to the Contract (the "reopener provision"), which governs renegotiation of the coal's price. Especially troublesome to the parties was Section 7.03, which states in pertinent part:

Each party covenants with the other to participate in such negotiations in a good faith effort to reach agreement. If the parties are unable to reach agreement, BUYER will accept SELLER's last offer or present SELLER with a firm, written offer which it has received from another supplier, which it is willing to accept, for the supply of coal called for under the remaining term of this Agreement (herein referred to as a "competitive offer").... If ... the parties have not reached agreement upon a new base and SELLER declines to meet a competitive offer submitted by BUYER pursuant to the above provisions, this Agreement shall terminate at the end of the contract period in which notice of price renegotiation was given....

Plaintiff's Exhibit 1. Because the parties were unable to reach agreement, PSI presented Exxon with what it believed was a competitive offer from the Black Beauty Coal Company ("Black Beauty"). The terms of the Black Beauty offer differed in many respects from the terms of the Contract. From Exxon's perspective, the most significant difference was Black Beauty's willingness to supply more than one PSI station from several of its mines, which Exxon contended prevented it from calculating a single base that it could meet. Exxon had always supplied just one PSI station — the Gibson Station in East Mount Carmel, Indiana — from its Monterey No. 2 Mine and had built that facility at a cost of several hundred million dollars with the understanding that its coal would be dedicated to PSI. Exxon believed that, with the exception of the base, a "competitive offer" presented under Section 7.03 had to have substantially the same terms as the Contract and that PSI was required to specify a new Base determined on a delivered basis to the Gibson Station.

In contrast, PSI read Section 7.03 as requiring Exxon to match all the terms and conditions of the competitive offer, or, at a minimum, match those terms that PSI deemed significant. The result of the parties' inability to agree was a lawsuit in which PSI asked this Court to enter a declaratory judgment that: (1) the written offer which PSI received from Black Beauty is a "competitive offer" within the meaning of the Contract; (2) Exxon did not meet the competitive offer, and therefore, the Contract shall terminate on December 31, 1992, or at PSI's election, at the end of the temporary continuance of deliveries as provided for in Section 7.04 of the Agreement; and (3) Exxon be prohibited from taking any action, at law, in equity, or otherwise, from enjoining or preventing or seeking to enjoin or prevent PSI from accepting and executing a new agreement for the supply of coal under the Contract. A bench trial was conducted on December 1st, 2nd, 3rd, 4th, 7th and 8th, 1992.

This Court delivered its decision on December 28, 1992, granting PSI's request for declaratory relief and holding that the Contract was not ambiguous, that the Black Beauty offer was a "competitive offer", and that Exxon had failed to meet that offer. The Court began its analysis by noting that the primary purpose of Article VII is to manage market risk by allowing the parties to reconcile deviations in the Contract's price with the prevailing market price. It then rejected Exxon's interpretation of the reopener provision which required that any competitive offer mirror the terms of the Contract with the exception of the Base. It was this Court's view that restricting competition to only a single dimension — the base — would so limit the field of firms that would be able to tender an offer that it would undermine the competitive offer process. The Court explained:

The evidence presented establishes that any given coal supplier occupies a unique market position. The competitive advantage it possesses depends on such factors as the quality of the coal it can produce, the distance that the coal must travel to the buyer, the nature of its mining operations, and other idiosyncratic variables. Not every competitive advantage, though, derives from efficiencies in the cost of production because other considerations besides cost enter into the decision calculus for the buyer. For example, the supplier's flexibility in scheduling and delivering the coal is also an important competitive dimension. See Masselink Depo. III, at 249. The point seems too obvious to warrant much discussion, but whether a coal buyer enters into a contract with a particular supplier depends on the totality of circumstances surrounding the contract and the overall value that it renders to the buyer. Thus, it is not impossible for a coal supplier which is situated at a farther distance from the buyer than a competitor, with an inferior quality coal, to prevail in his negotiations with the buyer by offering non-cost related concessions that offset whatever disadvantages he may face. Exxon's reading of the Agreement would foreclose any competition on non-base terms. Such a reading not only is inconsistent with the overriding purpose of Article VII, it also directly contradicts its express language. Article VII was included in the Agreement primarily to manage market risks. Exxon's interpretation, if adopted, would shift far too much risk onto PSI by creating a barrier to competition that few coal suppliers (i.e. third party competitors) could overcome. The Court can find no language in the Agreement that would warrant impeding market competition in this way.

Exxon's interpretation also betrays the parties' original intent as manifested in the words they chose to incorporate in the Agreement; "competitive", as that term is used in "competitive offer", means nothing less than fully competitive. Exxon's own reasoning supports this finding:

as a practical matter neither Exxon nor any other seller could meet literally all the terms and conditions of the Black Beauty offer. That offer contains many idiosyncratic features tailored to the unique circumstances of Black Beauty's proposed operations. Explicit reference is made to production at and sales from each of Black Beauty's three mines, by name; different coal quality standards for each mine; different "starting prices" are quoted for each mine; and delivered prices are calculated by adding to those "starting prices" the actual transportation costs incurred on each shipment from those mines.

Defendants' Trial Brief, at 32-33 (emphasis added).

The adage, "what is good for the goose is good for the gander," applies here. Exxon is just as uniquely situated in the market as Black Beauty. Why should the Court require Black Beauty to do what Exxon correctly implies is impossible: mirror all the terms of another coal suppliers' agreement and compete just on one term, the base? Simply put, the contract does not indicate that the parties intended that the third-party competitor would have to develop its offer shackled by the limitations that Exxon now seeks to impose. Under the Agreement, PSI had the right to obtain a competitive offer from another supplier which contained terms and conditions which were different from the terms and conditions of the Agreement.

Entry, at 17-19. Although the Court recognized the long-term nature of the Contract and the extent of Exxon's capital commitments to supply the Gibson Station, it could not ignore the fact that no sensible buyer would enter into an economic relationship which would leave its resources bottled-up for a quarter-century in a venture requiring it to pay above-market prices with only a modest hope that another firm would happen to occupy a market position that would make feasible the tender of a competitive offer.

The Court also rejected PSI's contention that Exxon was required to match all the terms of a competitive offer, as this would fail to protect Exxon's interest in maintaining predictability in the Contract's terms. The Contract was a twenty-five year contract and not five separate five-year contracts. The Court wrote:

Pursuant to Section 7.05, Exxon need not modify anything but the Base to "meet" the competitive offer. PSI's interpretation of Section 7.03 that Exxon must match the competitive offer term for term and in kind is incorrect, as this would be contrary to the express meaning of Section 7.05. That Section states that "the purpose and intent of Sections 7.01 to 7.04, inclusive, are only to provide for renegotiation of Base and

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