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February 26, 1996


The opinion of the court was delivered by: SKRETNY




 Before this Court are the parties' cross-motions for summary judgment pursuant to Federal Rule of Civil Procedure 56. Plaintiff commenced this action against defendant on May 9, 1994, seeking damages for an alleged breach of contract and breach of the duty of good faith and fair dealing. This Court has jurisdiction pursuant to 28 U.S.C. § 1332 as the matter in controversy exceeds $ 50,000 exclusive of interest and costs, and plaintiff and defendant are citizens of different states. Defendant filed a motion for summary judgment dismissing the complaint on April 3, 1995, and plaintiff filed a cross-motion for summary judgment on May 3, 1995. On May 31, 1995, this Court granted plaintiff's motion, filed with consent of defendant, that the summary judgment motions be resolved on submission without oral argument. *fn1"

 For the reasons set forth below, this Court will deny both parties' motions for summary judgment.


 In 1978, Congress enacted the Public Utility Regulatory Policies Act ("PURPA") to encourage cogeneration and small power production by requiring electric utilities to purchase electric energy from qualifying cogeneration facilities and qualifying small power production facilities. 16 U.S.C. §§ 796, 824a-3. Under PURPA, states must implement rules regulating the purchase by utilities of power from such facilities. Id. § 824a-3. The New York Public Service Law accordingly provides that the New York Public Service Commission ("PSC") shall require electric utilities to enter into long-term contracts for the purchase of electricity from alternative energy sources. N.Y. Public Service Law § 66-c (McKinney 1989 & Supp. 1996). The Public Service Law further authorizes the PSC to supervise the contract formation process between electric utilities and qualifying facilities. Id.

 Plaintiff O'Shanter Resources, Inc. ("O'Shanter") and defendant Niagara Mohawk Power Corporation ("Niagara Mohawk" or "Niagara") entered into a "Power Purchase Agreement" ("the Agreement") in October 1988 pursuant to PURPA and § 66-c of the New York State Public Service Law. Under the Agreement O'Shanter would build and operate a cogeneration facility from which Niagara Mohawk would purchase the electricity generated. (D. Exh. 2.) Niagara Mohawk is an electric and gas utility with its office and principal place of business in Syracuse, New York. O'Shanter is a corporation incorporated under the laws of the State of Texas, having its principal place of business in Toronto, Ontario, Canada. (D. Exh. 2.)

 The Agreement provides that O'Shanter would own and operate its electric generating plant in Chautauqua County, New York, without specifying any more precise location. (D. Exh. 2; P. Exh. F, p.2; P. Exh. K, p.135.) The parties agreed in the twentieth paragraph of the Agreement that Niagara Mohawk would submit the Agreement to the PSC for its review and possible modification or abrogation as required under the New York Public Service Law. (D. Exh. 2; P. Exh. K, p.63.) In addition to submission of the Agreement to the PSC, O'Shanter submitted an Environmental Information Requirements Form ("EIRF") to the PSC on July 31, 1989. The EIRF identified the location of the proposed site as Honeyset Road southwest of Plank Road in the Town of Chautauqua ("Honeyset/Plank Road site") and provided various environmental impacts of that proposed location. (D. Exh. 7.)

 The PSC notified Niagara Mohawk in a letter dated September 27, 1989, "that the Commission [PSC] has accepted O'Shanter's environmental filing and has approved the contract. . . . " The letter explained, however, that "contract approval is contingent on O'Shanter's obtaining all environmental permits required by the NYS-DEC [New York State Department of Environmental Conservation ("DEC")] and filing them with the Commission, along with a description of all final environmental impacts . . . and a description of the environmental control measures finally utilized." The letter also required O'Shanter to comply with a maximum sound level of 40 dbA at any existing residence. (D. Exh. 3.)

 After the PSC approved the contract, O'Shanter considered locating the project at sites other than the Honeyset/Plank Road site for a variety of reasons. (D. Exh. 4, pp. 100-23; Krehm Aff. P 10.) O'Shanter ultimately decided to construct the facility adjacent to the Lakeview Shock and ASATC Correctional Facilities in the Town of Portland in Chautauqua County ("Lakeview site"). (Krehm Aff. P 10; Schrayshuen Aff. P 21.) According to O'Shanter, the Lakeview site was preferable to the Honeyset/Plank Road site because, among other reasons, the sound level at the Lakeview site would not impact the surrounding area. (Krehm Aff. P 10; D. Exh. 5, p.19.)

 By letter dated June 24, 1992, O'Shanter's President, Adam Krehm, notified Niagara Mohawk that "the project is to be located at the Lakeview Shock Incarceration Facility, Brocton, New York." (P. Exh. N.) Niagara Mohawk Senior Analyst William Stier responded on behalf of Niagara Mohawk on July 13, 1992, noting that "the September 27, 1989 New York State Public Service Commission correspondence approving your contract references acceptance of O'Shanter's environmental filing." Stier asked Krehm to "advise if your change in site location affects your filing and your time table for amending same, if required." (D. Exh. 25.) Eugene Preston, President of Amergy Corporation, O'Shanter's consulting engineer, advised Stier in a letter dated September 14, 1992, that "the current site location has been transmitted to the NYS DEC. Permitting was begun for this site in July 1992 and will be completed after startup, in accordance with standard DEC procedure." (P. Exh. O.)

 On December 10, 1992, O'Shanter provided the PSC with the environmental permits required by the DEC, and a description of final environmental impacts and final environmental control measures for the Lakeview site. O'Shanter also provided a pre-operation noise analysis. (P. Exh. P.) Dan Driscoll from PSC discussed the noise analysis with Adam Krehm on December 17, 1992, and with Eugene Preston on December 18, 1992.

 Niagara Mohawk in the meantime monitored and reviewed the progress of O'Shanter's construction at the Lakeview site. Representatives of Niagara Mohawk visited the site on September 29, 1992, for a start of construction meeting, at which time the initial stages of construction were underway. (Krehm Aff. P 16; P. Exh. L, pp. 70-76.) On January 18, 1993, Niagara Mohawk provided O'Shanter with an approved interconnection report that Niagara Mohawk had prepared for the Lakeview site. (P. Exh. Q.) As construction continued, Niagara Mohawk made further visits to the Lakeview site, including visits on August 12, September 2, and October 6, 1993, to inspect the progress of construction. (Krehm Aff. P 16; P. Exh. R.)

 On September 20, 1993, William Stier informed Adam Krehm that Niagara Mohawk was "seriously interested" in pursuing either a buy-out or a several year postponement of the Agreement. (D. Exh. 12.) In 1992 and 1993, Niagara Mohawk had contacted various other developers about the possibility of either delaying the start of construction or cancelling projects. (P. Exh. L, p.99; D. R.Facts, p.8.) Niagara Mohawk makes no secret of the fact that it considers the above-market price terms the PSC imposes on contracts like the Agreement with O'Shanter to be economically unreasonable. (D. R.Facts, p.8; P. Exhs. H-J.) As explained in the September 20, 1993 letter to O'Shanter, Niagara Mohawk's buy-out policy was "to pay up to one and one half (1.5) times of actual project expenditures." (D. Exh. 12.)

 Krehm responded on September 27, 1993. He explained that O'Shanter had made significant progress in construction and intended to complete the project and deliver electricity under the terms of the Agreement. O'Shanter was "nonetheless . . . willing to discuss . . . the proposals of buyout or postponement" though it considered Niagara Mohawk's buyout policy "not sufficient in light of the advanced state of development and construction of the project." (D. Exh. 13.) Krehm further requested in a letter dated November 16, 1993, that Niagara Mohawk "issue a letter confirming that it shall not terminate this contract pursuant to this paragraph twentieth." (P. Exh. S.) The Agreement's twentieth paragraph provides that "NIAGARA agrees to issue a letter to SELLER, after COMMISSION review and action satisfactory to NIAGARA, stating that NIAGARA shall not terminate this AGREEMENT pursuant to Paragraph TWENTIETH." (D. Exh. 2.)

 Niagara Mohawk did not issue such a letter but did meet with O'Shanter on January 6, 1994 to discuss its buyout and postponement proposals. (D. Exh. 4, pp. 159-60.) O'Shanter claims that by this time it had spent approximately $ 2 million on the project. (D. Exh. 4, p.161.) According to Krehm, Niagara Mohawk's implicit refusal to honor paragraph 20, coupled with it policy of trying to stop these projects, had cast a cloud over the deal. (D. Exh. 4, p.166.) The parties executed a confidentiality agreement with the intent to further pursue the buyout and postponement matters discussed at the January 6, 1994 meeting. (D. Exh. 20; P. Exh. J.) On February 14, 1994, Krehm sent buyout and postponement proposals on behalf of O'Shanter to Niagara Mohawk for its consideration. (D. Exh. 20.)

 In the meantime, on December 28, 1993, the PSC issued an order in a proceeding entitled Consolidated Edison Company of New York, Inc. and Indeck Energy Services of Yonkers, Inc., Case No. 89-E-1158 ("Indeck Yonkers order"). (D. Exh. 22.) Herbert Schrayshuen, Niagara Mohawk's Director of Unregulated Generation, describes the Indeck Yonkers order as follows:

In its Order, the PSC granted the request of the utility (Consolidated Edison) for clarification of the PSC's original approval of a similar Power Purchase Agreement by holding that approval is "site specific." Thus, where the Power Purchase Agreement in Indeck Yonkers references the "City of Yonkers," the developer's decision to move the site less than one mile away within the same city was held to violate the site certainty policy. The consequences of such a violation would be that the developer must negotiate a new Power Purchase Agreement at rates then in effect under PSC policy.

 (Schrayshuen Aff. P 15.)

 On February 23, 1994, Schrayshuen discussed the Indeck Yonkers order with Krehm on the telephone and informed Krehm that Niagara Mohawk might apply to the PSC for clarification of the site specific policy as it applied to the Agreement. Since O'Shanter had moved the project from the Honeyset/Plank Road site to the Lakeview site after the PSC had rendered its approval, there was now an issue, according to Schrayshuen, as to the validity of the entire Agreement. Schrayshuen advised Krehm to seek counsel in this regard. (D. Exh. 4, p.170; Schrayshuen Aff. P 16; P. Exh. K, p.107.) At no prior time had ...

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