TXU Portfolio Management Company, L.P. N/K/A Luninant Energy Company, L.L.C. v. FPL Energy, LLC FPL Energy Pecos Wind I, LP FPL Energy Pecos Wind IIL

ACCEPTED
05-08-01584-CV
FIFTH COURT OF APPEALS
DALLAS, TEXAS
10/23/2015 3:45:32 PM
LISA MATZ
CLERK

James C. Ho
FILED IN+1 214.698.3264
Direct:
5th COURTFax:
OF+1APPEALS
214.571.2917
October 23, 2015 JHo@gibsondunn.com
DALLAS, TEXAS
10/23/2015 3:45:32 PM
VIA ELECTRONIC FILING LISA MATZ
Clerk

Lisa Matz
Clerk of the Court
Fifth Court of Appeals
600 Commerce Street, Suite 200
Dallas, Texas 75202

Re: Case No. 05-08-01584-CV; TXU Portfolio Management Company, L.P. v. FPL
Energy, LLC, et al.

Dear Ms. Matz:

Appellant TXU Portfolio Management Company, L.P. (“TXUPM”) files this post-
submission brief to respond to the new “impossibility” theory of cover damages explored at
oral argument by Justice Evans. Under this theory, as we understand it, breach could have
occurred at the moment that it became mathematically impossible for FPL to avoid breach—
that is, at the moment when FPL owed TXUPM more energy under its annual minimum
quantity obligation than it could possibly produce, even if it produced at maximum capacity
for the rest of the year.

TXUPM will address three points in turn:

1) First, even if an “impossibility” theory of cover damages is adopted by this Court,
it does not make sense to apply that theory under the facts of this case.

2) Second, even if an “impossibility” theory is adopted in this case, that undermines
FPL’s theory that cover damages should apply and supports TXUPM’s theory that
market damages should apply.

3) Third, this theory of cover damages has never been advanced by FPL, and thus it
is waived.

For these reasons, this Court should decline to adopt a theory of breach by
impossibility, hold that market damages are the appropriate measure of damages in this case,
and remand to the district court for a determination of TXUPM’s market damages.

***
Lisa Matz
October 23, 2015
Page 2

Even if an “impossibility” theory of cover damages is adopted by this Court, that theory
should not be applied under the facts of this case.

During oral argument, Justice Evans explored a theory of cover damages that has not
been raised by either party. Under this theory, FPL’s breach could possibly have been
determined at some point before the end of the contract year at issue, when it became
mathematically impossible for FPL to avoid breach because FPL owed TXUPM more energy
under its annual quantity obligation than it could produce, even if it produced at maximum
capacity for the rest of the contract year. We have found nothing in Texas law to either
support or reject this theory of breach. And outside Texas, there are authorities on both
sides. 1 However, the Court need not decide whether this theory is available here because, for
the reasons set forth below, the facts in this case do not support application of such a theory
even if such a theory were available in Texas.

The contract requires FPL to provide a minimum annual quantity of both electricity
and RECs. It is FPL’s failure to meet that annual quantity obligation for either electricity or
RECs that constitutes the relevant breach in this case—as both this Court and the Supreme
Court have already held, and as we explained in response to questions from Justice Whitehill.
See, e.g., TXU Portfolio Mgmt. Co. v. FPL Energy, LLC, 328 S.W.3d 580, 584 (Tex. App.—
Dallas 2010) (“At trial, the Wind Farms did not dispute their failure to provide the minimum
annual quantities of renewable energy as alleged by TXUPM.”); FPL Energy, LLC v. TXU
Portfolio Mgmt. Co., 426 S.W.3d 59, 62 (Tex. 2014) (“FPL failed to produce the agreed

1
For example, courts are divided over whether breach occurs due to impossibility, where the
putative breaching party has not taken a voluntary, affirmative act of refusal to perform. Contrast
United Corp. v. Reed, Wible and Brown, Inc., 626 F. Supp. 1255, 1257-58 (D.V.I. 1986)
(requiring “a voluntary affirmative act” because “[n]onfeasance, such as United was faced with,
cannot support a finding of repudiation under the Restatement’s definition”), with Larose v.
Porter, 177 A. 297, 299 (N.H. 1935) (allowing repudiation when a party’s “financial
involvements were such as to show his inability to later perform” and refusing to distinguish
“between unexcused inability and wilful intention not to perform”).
Courts are likewise divided over whether breach occurs due to impossibility, where the promisee
is not aware of the impossibility. Contrast Sequa Corp. v. Gelman, 1996 WL 79876, at *3
(S.D.N.Y. 1996) (refusing “to allow [a] defendant to track back in time and claim the rights
resulting from an alleged repudiation” from a time before the plaintiff “became aware” of the
alleged breach), with Mar-Kay Plastics, Inc. v. Alco Standard Corp., 825 S.W.2d 381, 383-84
(Mo. App. 1992) (ruling that the buyer repudiated through conduct even though the seller “was
not even aware of the [conduct that constituted repudiation] until [five months later]”).
Lisa Matz
October 23, 2015
Page 3

upon electricity and RECs.”); id. at 68 (holding that TXUPM could pursue remedies other
than liquidated damages for “electricity deficiencies”).

Having established the existence of an annual obligation to deliver a minimum
quantity of both electricity and RECs, an “impossibility” theory of breach should not be
adopted in this case for several reasons.

• FPL and TXUPM both consistently treated the annual delivery obligation as an
obligation for which satisfaction or breach would be determined at the end of the period
for delivery—namely, after the end of the contract year at issue. That behavior reflects
the framework of the contract. Section 4.02 of the contract provides for an annual
minimum megawatt hour requirement, not merely an annual RECs requirement. Further,
section 4.05 states “the calculations under this Article IV are made based upon the actual
amount of Net Energy and actual amount of RECs . . . .” Net Energy is defined as “the
amount of electric energy in MWh produced by the Renewable Resource Facility and
delivered to the Connecting Entity . . . .”

Because the parties intended to evaluate performance based on the “actual amount” of
energy produced, after the end of the contract year, FPL never indicated that it had
reached a point at which it would be impossible to perform because the amount of
electricity exceeded the maximum amount it could produce in the remaining days left in
the contract year—despite the fact that it had the information to do so. And TXUPM
never attempted to determine whether FPL had reached a point at which it would be
impossible to perform. Treating the moment of impossibility as itself a breach or
repudiation would disregard the parties’ course of dealing and course of performance, as
well as their implicit understanding that breach would be determined at the end of the
year. TEX. BUS. & COM. CODE § 1.303.

• FPL has never advanced this theory in connection with this dispute. It has never
identified the moment when the remainder on its annual quantity requirement exceeded
the maximum amount of wind energy it could produce in any of the contract years at
issue. As a result, there is no evidence in the record to suggest that the moment of
impossibility was reasonably calculable; FPL would not necessarily have advised
TXUPM if it was constructing additional capacity or if some of its theoretical capacity
was inoperable. Moreover, FPL has never presented evidence of cover purchases that
TXUPM allegedly made after and in response to impossibility of performance. To the
contrary, FPL’s entire point is that TXUPM engaged in real-time balancing activity
“daily, and throughout the contract term”—regardless of, and both before and after, the
moment at which any such impossibility might have occurred. FPL Supp. Br. 17.
Lisa Matz
October 23, 2015
Page 4

• In fact, FPL argued against this theory in the district court. The record shows FPL
argued at the charge conference that it could not be in breach during the year, but only
after it failed to pay TXUPM for the Annual Deficiencies. 24RR:21-24. Moreover,
TXUPM tried to put forth a damages model based upon FPL’s monthly forecasts during
the year and FPL opposed calculating damages based on short-term forecasts as “not
really in compliance with the damages under the contract of an annual quantity.”
9RR:22-23. FPL’s damages expert argued that TXUPM could not base its damages on
prices paid during a year because FPL would not be in breach during the year. 5RR:254-
55.

• And, under the facts of this case, it would be impossible to determine the extent of the
breach even if its inevitability was known. For example, assume that on December 1 the
amount remaining on the annual quantity obligation is 100,005 kWhs and FPL could only
produce 99,995 kWhs for the rest of the year at maximum capacity. Although the
inevitability of the breach is then known, the quantity of the deficiency is not. The
breach could be as low as 10 kWhs, if FPL produced at maximum capacity for the rest of
the year. It could be as high as 100,005 kWhs, if FPL produced no more wind energy for
the rest of the year. And it could fall anywhere in between. The point is that the quantity
would be unknowable until the contract year was over and as the framework of the
contract makes clear it does not make sense to require any action by TXUPM until the
full quantity of the deficiency is known.

Thus, the Court need not decide whether an “impossibility” theory of breach should
be established under Texas law because it would be inappropriate to the facts at issue here.

Even if an “impossibility” theory of breach is adopted, it undermines FPL’s theory of
cover damages and supports TXUPM’s theory of market damages.

A case is governed by the market price damages statute, not the cover damages
statute, unless the buyer purchased substitute goods after a breach by the seller. So
determining whether or not a case is subject to cover damages involves two steps: (1) first,
identify the relevant moment of “breach,” and (2) second, determine whether the buyer made
a substitute purchase “after” that breach. See TEX. BUS. & COM. CODE § 2.712.

If this Court adopts the “impossibility” theory of breach, it would actually support
TXUPM’s theory of market damages and completely undermine FPL’s theory of cover
damages. Adoption of the impossibility theory requires acceptance that breach under the
contract occurs on an annual, not daily, basis. This squarely contradicts FPL’s cover theory
that TXUPM made cover purchases “daily, and throughout the contract term,” FPL Supp. Br.
17, and thus bolsters TXUPM’s well-supported position that the default rule of market
damages should be applied.
Lisa Matz
October 23, 2015
Page 5

According to FPL, breach occurs, not annually, but on a daily basis throughout the
contract year, every time FPL misses a daily forecast. See, e.g., FPL Supp. Br. 4 (“Each day
the Wind Farms provided TXUPM with projected generation for the following day.”). And,
FPL argues, TXUPM makes substitute purchases on a daily basis throughout the contract
year, as part of its daily real-time balancing efforts. FPL theorizes that these purchases—
made on a daily basis throughout the contract year—constituted cover purchases. See, e.g.,
FPL Supp. Br. 17 (“Because delivery was ongoing—hourly, daily, and throughout the
contract term—the parties built real-time cover into the contracts.”).

Adoption of the “impossibility” theory of breach undermines FPL’s theory for two
reasons. First, it negates FPL’s daily breach theory because a breach occurs only at the
moment it is deemed impossible for FPL to deliver the annual minimum quantity rather than
on a daily basis as daily forecasts are missed. Second, it negates FPL’s cover theory because
FPL’s entire point is that TXUPM engaged in the same real-time balancing activity “daily,
and throughout the contract term”—regardless of, and both before and after, the moment at
which any such impossibility might have occurred. See generally TXUPM Supp. 10-18.

In any case, because FPL has never advanced an “impossibility” theory of breach and
cover damages, it is waived.

FPL has never argued, let alone presented evidence to prove, this “impossibility”
theory of breach and cover damages. See Powell v. Knipp, 2015 WL 4653231, at *10 (Tex.
App.—Dallas 2015, no pet. h.) (Evans, J.) (ruling that issues not raised in an opening brief
“are ordinarily waived and may not be considered by an appellate court”).

***

This case should be remanded. The relevant breach in this case is the annual quantity
obligation, not daily forecasting, as FPL contends. And FPL has never presented an annual
impossibility theory of breach—let alone an annual impossibility theory of cover. To the
contrary, FPL’s theory of the case rejects an annual impossibility theory of cover.

Accordingly, the Court should remand for further proceedings on market price
damages, now that this Court’s reversal of the district court’s ruling on transmission capacity
has been upheld by the Texas Supreme Court. 2

2
Remand is also appropriate regardless of how the Court ultimately resolves FPL’s argument
under section 1.305. Under the “majority view,” TXUPM is simply required to prove market
price damages under section 2.713, and nothing more. Tongish v. Thomas, 840 P.2d 471, 475
(Kan. 1992). See also id. at 476 (describing FPL’s proposed rule as “sharply criticized” and
(Cont'd on next page)
Lisa Matz
October 23, 2015
Page 6

Sincerely,

/s/ James C. Ho
James C. Ho

(Cont'd from previous page)
“unfortunate” “minority rule”). At trial, TXUPM amply proved its market price damages.
20RR:221. But TXUPM can—and if the Court directs, will—separately show that it was badly
hurt by FPL’s massive breach, and that there is accordingly no conflict between sections 1.305
and 2.713 of the UCC in this case in any event.
In 2000, FPL guaranteed TXUPM a low, long-term contract price. Electricity prices then
skyrocketed in the years 2002 to 2005. So as a result, FPL’s breach either forced TXUPM to buy
energy at market prices far above contract price—or deprived TXUPM of the opportunity to re-
sell FPL’s energy at those same high market prices. See generally 47CR:11511; TXUPM Supp.
Reply 11. To respond to the hypothetical posed by Justice Whitehill: If a seller fails to provide
widgets, but the buyer happens to have enough widgets “in its back pocket,” the seller still
harmed the buyer if the buyer could have made a healthy profit by re-selling the undelivered
widgets—as TXUPM indisputably could have done here.
Lisa Matz
October 23, 2015
Page 7

CERTIFICATE OF SERVICE

I hereby certify that, on this 23rd day of October, 2015, I caused a copy of the
foregoing document to be served electronically upon counsel for Appellees/Cross-Appellants
FPL Energy, LLC; FPL Energy Pecos Wind I, LP; FPL Energy Pecos Wind II, LP; and
Indian Mesa Wind Farm, LP.

Nina Cortell Jeffrey Tillotson
State Bar No. 04844500 State Bar No. 20039200
nina.cortell@haynesboone.com jmt@lynnllp.com
Anne M. Johnson John Volney
State Bar No. 00794271 State Bar No. 24003118
anne.johnson@haynesboone.com jvolney@lynnllp.com
Ben L. Mesches LYNN TILLOTSON PINKER & COX,
State Bar No. 24032737 LLP
ben.mesches@haynesboone.com 2100 Ross Avenue, Suite 2700
Ryan Paulsen Dallas, TX 75201
State Bar No. 24060397 Telephone: (214) 981-3838
ryan.paulsen@haynesboone.com Facsimile: (214) 981-3839
HAYNES AND BOONE, LLP
2323 Victory Avenue, Suite 700
Dallas, Texas 75219
Telephone: (214) 651-5000
Facsimile: (214) 651-5940

/s/ James C. Ho
James C. Ho