Tuesday, December 8, 2009
Bloomberg.com reports on what appears to have been a very interesting contracts dispute between Sempra Energy, owner largest U.S. natural gas distributor and the the California Department of Water Resources, which alleged that Sempra had breached an $6.6 billion agreement that it entered into with the state in 2001 because Sempra failed to build a power plant on time.
Sempra initiated the suit in 2002 to prevent the state from canceling the 2001 agreement after the state learned that Sempra was planning to purchase electricity on the open market and resell it to the state rather than use a new power plant as provided in the contract. Although the new power plant was supposed to be up and running in 2002, it was not completed and operational until 2003. The jury agreed with Sempra that the company was permitted to provide the state with energy from an alternative source when forcing compliance with the agreement would have been commercially unreasonable.
According to one of Sempra's attorneys, the jury found that California was not harmed by the delay and got the full benefit of its bargain. One attorney for California saw things differently, telling the jury: “Sempra has made hundreds of millions of dollars of profits from this contract and never provided the state with one dime’s worth of power from [the new plant]." Apparently, compliance with the contract became a less attractive option for Sempra when energy prices dropped and it became cheaper to buy electricity than to boost capacity in California. Sempra argued that the contract provided the option for Sempra to behave precisely as it did if cheaper sources of electricity were available.