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ENCOGEN FOUR PTNRS., L.P. v. NIAGARA MOHAWK POWER

February 6, 1996

ENCOGEN FOUR PARTNERS, L.P., Plaintiff, -against- NIAGARA MOHAWK POWER CORPORATION, Defendant. NORCON POWER PARTNERS, L.P., Plaintiff, against NIAGARA MOHAWK POWER CORPORATION, Defendant.


The opinion of the court was delivered by: SPRIZZO

 SPRIZZO, D.J.:

 Plaintiffs Encogen Four Partners, L.P. ("Encogen") and NorCon Power Partners, L.P. ("NorCon") bring the instant related actions against Niagara Mohawk Power Corporation ("Niagara Mohawk"), each claiming breach of contract for the sale of electricity. In each action, Niagara Mohawk counterclaims against plaintiffs, seeking a declaratory judgment that New York law provides a right to demand adequate assurances of future performance. Pursuant to Federal Rule of Civil Procedure 12(c), Encogen moves for judgment on the pleadings dismissing Niagara Mohawk's counterclaim. Pursuant to Federal Rule of Civil Procedure 56, NorCon moves for summary judgment. For the reasons that follow, Encogen's motion for judgment on the pleadings is granted, and NorCon's motion for summary judgment is granted in part and denied in part.

 BACKGROUND

 Congress enacted the Public Utility Regulatory Policies Act of 1978 ("PURPA"), 16 U.S.C.A. §§ 796 and 824a-3 et seq., to encourage the development of qualified cogeneration facilities by independent power producers. *fn1" 16 U.S.C.A. § 824a-3. Under PURPA, the Federal Energy Regulatory Commission ("FERC") is empowered to establish rules regulating state public utilities and cogeneration facilities. Pursuant to its statutory mandate, the FERC enacted regulations requiring an electric utility to purchase "any energy and capacity which is made available from a qualifying [cogeneration] facility . . . ." 18 C.F.R. § 292.303(a) (1993).

 These regulations also require that the price a cogeneration facility may charge the utility for its electricity be "just and reasonable to the electric consumer of the electric utility and in the public interest." 18 C.F.R. § 292.304. The FERC regulations also direct the utility regulatory authorities of each state to promulgate rules governing the pricing provisions of contracts between cogeneration facilities and utilities. 18 C.F.R. § 292.401. Pursuant to PURPA, the New York State legislature enacted New York Public Service Law ("PSL") § 66-c, which provides that the New York Public Service Commission ("PSC") shall require New York utilities to enter into long-term contracts for the purchase of electricity from alternative energy sources, including cogeneration facilities. PSL § 66-c. Furthermore, Section 66-c grants the PSC authority to oversee the contracting process and set the prices for long-term power contracts. Id.

 Encogen, a Delaware limited partnership, owns, leases and operates an electric cogeneration facility in the State of New York. First Amended Complaint ("First Am. Comp.") P 2. Niagara Mohawk is a private, investor-owned New York utility corporation. First Am. Comp. P 3; Encogen's Memo in Support ("Enc. Mem. Sppt.") at 2. Regulated by the PSC, Niagara Mohawk provides electric and gas power throughout a large portion of upstate New York. First. Am. Comp. P 3; Enc. Mem. Sppt. at 2. On or about February 18, 1988, Niagara Mohawk and American Brass Company, Encogen's predecessor in interest, entered into a power purchase agreement (the "Encogen Agreement") whereby American Brass Company *fn2" would own and operate an approximately 62 megawatt gas fired cogeneration facility (the "Encogen facility") in Buffalo, New York. *fn3" First Am. Comp. P 14. As statutorily required, Niagara Mohawk agreed to purchase all electricity generated by the Encogen facility. *fn4"

 The Encogen Agreement creates a pricing formula for the purchase of electricity generated by the Encogen facility during a twenty-five year term commencing May 1, 1992. Id. PP 20, 16. This formula specifies that Niagara Mohawk's purchase price under the Encogen Agreement shall be equal to or below Niagara Mohawk's "avoided cost." Answer and Counterclaim to First Am. Comp. ("Ans.") P 2. The avoided cost reflects the cost of either generating the electricity itself or purchasing it from another source. Id.

 The Encogen Agreement creates three pricing periods over the twenty-five year term. First Am. Comp. P 21. During the first period, which lasts until the balance in an "adjustment account" reaches zero, Niagara Mohawk is to pay Encogen rates that equal the avoided costs calculated at the date of the Encogen Agreement. Id. The second pricing period lasts fifteen years until March 6, 2007. Id. P 22. The third pricing period begins thereafter and ends on March 6, 2017. Id. P 23. During the second and third periods, Niagara Mohawk is to pay Encogen rates based on avoided costs calculated at the time of delivery. Ans. P 19.

 Because these fixed rates could deviate from Niagara Mohawk's avoided cost, the Encogen Agreement creates an adjustment account. First Am. Comp. P 21. The difference between payment at the contract rates and payment at Niagara Mohawk's avoided cost is accumulated in the adjustment account with interest at contractually specified rates. Id. During the second and third pricing periods, Encogen must repay the accumulated adjustment account balance by selling electricity at a discount from Niagara Mohawk's avoided cost to make cash payments from the proceeds. Id. P 22, 23. At the time of contracting, all parties recognized that, due to any number of variables, the balance in the adjustment account over the duration of the Encogen Agreement could fluctuate. Id. P 25; Ans. P 35. To secure this risk, the parties negotiated and agreed to a provision in the Encogen Agreement granting Niagara Mohawk a security interest in the Encogen Facility to secure Encogen's performance and any balance in the adjustment account remaining at the end of the third period. *fn5"

 At the time the parties entered into the Encogen Agreement, the PSC Power Division estimated that the adjustment account balance would be approximately $ 16.5 million after the third year of operation. Ans. P 6. The Power Division also predicted at the time of contracting that Encogen would repay this amount in full before the end of the sixth contractual year. Id. However, independent consultants hired by Niagara subsequent to contracting, using the same type of analysis employed by the PSC's Power Division, projected that Encogen will accumulate an adjustment account of nearly $ 330 million before repayment is scheduled to begin. Id. P 7.

 In December 1993 and January 1994, Encogen supplied Niagara with all the electricity produced at the facility, in accordance with the Encogen Agreement. First Am. Comp. P 33. Niagara Mohawk made payments towards the amount due. Id. However, these payments were substantially below those it is alleged to have owed under the Encogen Agreement. Id.

 By letter dated March 4, 1994, Encogen responded that it intended to continue to perform its obligations pursuant to the terms of the Encogen Agreement. Ans. P 55; First Am. Comp. P 45. Encogen filed the instant action for breach of contract seeking damages in an amount in excess of $ 1.075 million plus interest and punitive damages. Encogen also seeks a declaratory judgment that 1) Niagara has no grounds for reasonable insecurity as to Encogen's ability to perform its obligations under the Encogen Agreement, First Am. Comp. P 53, 2) Niagara has no right to demand adequate assurances of its future ...


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