Recently Energy Risk magazine featured an article regarding "Force Majeure Provisions for Power Contracts." Written by Bracewell & Giuliani attorneys, Stan Jensen and Jonathan Hoff, the article provides insights on the following:
- judicial interpretations of force majeure provisions in power contracts under both Texas and New York law;
- the current definition of force majeure in the EEI and ISDA master trading contracts;
- potential force majeure claims under various infrastructure damage scenarios; and
- the outlook of force majeure issues under the proposed transition to a nodal system in ERCOT.
In the predawn hours of September 13, 2008, Hurricane Ike made landfall between Galveston and Baytown, Texas with tropical storm-force winds extending 550 miles from its eye, including winds of 110 mph. Within hours, more than 90% of electrical customers in the Houston metropolitan area (more than 4,500,000 people) lost electrical power. Recovery from this unprecedented electrical failure proceeded slowly; CenterPoint Energy concluded its power restoration activities some 18 days after landfall.
In addition to other losses and damage, many wholesale power purchasers faced serious financial losses if they were not excused by force majeure from their obligation to buy power that they could not sell or use.
Both New York and Texas courts (two jurisdictions whose law is frequently chosen by the parties to wholesale power sales agreements) (1) use narrow construction of the force majeure clause, (2) are reluctant to expand the definition of force majeure beyond the express wording of the contract, and (3) consistently find that mere economic loss, even severe loss, is insufficient to excuse performance under a contract.
Force Majeure Definitions from the EEI and ISDA Master Agreements
The EEI and ISDA Power Annex contain the following force majeure provision:
"Force Majeure" means an event or circumstance which prevents one Party from performing its obligations under one or more Transactions, which event or circumstance was not anticipated as of the date the Transaction was agreed to, which is not within the reasonable control of, or the result of the negligence of, the Claiming Party, and which, by the exercise of due diligence, the Claiming Party is unable to overcome or avoid or cause to be avoided. Force Majeure shall not be based on (i) the loss of Buyer's markets; (ii) Buyer's inability economically to use or resell the Product purchased hereunder; (iii) the loss or failure of Seller's supply; or (iv) Seller's ability to sell the Product at a price greater than the Contract Price. Neither Party may raise a claim of Force Majeure based in whole or in part on curtailment by a Transmission Provider unless (i) such Party has contracted for firm transmission with a Transmission Provider for the Product to be delivered to or received at the Delivery Point and (ii) such curtailment is due to "force majeure" or "uncontrollable force" or a similar term as defined under the Transmission Provider's tariff; provided, however, that existence of the foregoing factors shall not be sufficient to conclusively or presumptively prove the existence of a Force Majeure absent a showing of other facts and circumstances which in the aggregate with such factors establish that a Force Majeure as defined in the first sentence hereof has occurred.
General Application of EEI/ISDA Force Majeure Clause
The quoted force majeure definition specifically excludes both loss of non-firm transmission and loss of Buyer's market and Buyer's inability to economically use or resell power from the scope of force majeure. Because of the above exclusions, the question of whether force majeure will excuse performance would appear to be determined primarily by the physical status of the delivery point and its connected infrastructure, which may vary greatly depending on the size and nature of the delivery point and related delivery options specified in the individual transactions.
If the delivery point and related physical infrastructure have become wholly or partially inoperable, a force majeure condition excuses performance with respect to the power contracted for delivery at such delivery point to the extent such power exceeds the physical delivery limitations. Conversely, if the delivery point and related infrastructure are fully operable, then notwithstanding the pricing for such power resulting in economic losses, force majeure would not excuse performance.
It should also be noted that contracts and markets that use small, specifically defined delivery points (including nodal markets) would be much more likely than larger delivery area markets and transactions to have situations where a force majeure event would wholly or partially disable a "delivery point" and related infrastructure and thereby provide claims for excusing performance.
When Hurricane Ike temporarily disabled much of the ERCOT electrical infrastructure, it appears that most of the wholesale EEI and ISDA energy delivery contracts provided for large delivery zones, such as "ERCOT Houston Zone". In most situations, with so large a delivery zone, the ability of a party to assert that a force majeure event disabled an entire delivery point and thereby excused performance was slight. ERCOT is scheduled to convert to a nodal system in mid to late 2009, and if contracts provide for delivery to a specific node without provision for alternative delivery (as is common in nodal markets), then the next hurricane or other unexpected wide-scale outage could result in much stronger and more wide spread force majeure claims.
This summary outlines the key elements of the article, "Force Majeure Provisions for Power Contracts." The full text of this article is set forth in Energy Risk's Environmental Risk supplement, Spring 2009.