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Firstenergy Solutions Corp. v. Allegheny Ludlum LLC

United States District Court, W.D. Pennsylvania

April 13, 2017

FIRSTENERGY SOLUTIONS CORP.
v.
ALLEGHENY LUDLUM LLC

          MEMORANDUM

          KEARNEY, J.

         Businesses properly rely on federal courts consistently interpreting their contractual obligations. Lawyers are trained to promptly address and resolve disputes on contract terms to allow their client businesses move on to their highest goal of achieving value for their owners and constituencies. A purchaser who disputes a bill should promptly seek judicial resolution. If it believes it has a valid defense to payment, the purchaser should not voluntarily pay the bill, sit silently for over a year and then, as the contract expires, simply deduct the amount viewed as overpaid a year earlier. Under the parties' chosen Ohio law, the doctrine of voluntary payment bars the purchaser from paying the bill in full under some form of informal protest and then later simply deducting from the final bill without judicial direction. In the accompanying Order, we apply these time-tested principles of Ohio law and grant the seller's motion for summary judgment requiring the purchaser to pay the last bill in full.

         I. Background [1]

         Allegheny Ludlum LLC is Pittsburgh steel and metal manufacturer relying on electricity to operate its four plants in Western Pennsylvania and one plant in Ohio.[2] FirstEnergy Solutions Corporation provides electricity to businesses and residences. Allegheny Ludlum and FirstEnergy negotiated a deal for Allegheny Ludlum to purchase electric from FirstEnergy.

         A. The Agreement

         On November 19, 2010, Allegheny Ludlum and FirstEnergy signed a "Customer Supply Agreement" requiring FirstEnergy to provide electricity for Allegheny Ludlum's five plants.[3] The parties agreed the Agreement expired in December 2015.[4] The parties agreed upon venue in Pennsylvania and Ohio law would govern disputes.[5]

         The parties agreed Allegheny Ludlum would purchase electricity from FirstEnergy under two slightly different methods, one for its four Pennsylvania plants and one for its Ohio plant.[6] For the Ohio plant, the parties agreed to "Fixed Price Pricing Attachment" which established a fixed price per kWh Allegheny Ludlum would pay for electricity used.[7] For the Pennsylvania plants, Allegheny Ludlum would purchase electricity in "blocks" and if Allegheny Ludlum exceeded the "block" amount, it could purchase additional electricity under an agreed upon pricing index.[8] This information is included in Exhibit B to the Agreement, including how to calculate the "block" electricity and one factor is the "LMP Adder."[9] The "LMP Adder" contemplates charges from the independent regional transmission organization ("RTO") which "manages the high-voltage electricity grid to ensure reliability for more than 61 million people."[10] The RTO is not a party to the Agreement and is independent from FirstEnergy and Allegheny Ludlum.[11]Under the Agreement, FirstEnergy would bill Allegheny Ludlum for the energy supplied on a monthly basis.[12]

         B. The January 2014 events leading to the RTO surcharges.

         On January 6-8, 2014, Western Pennsylvania and Ohio experienced a "prolonged, deep cold" with record low temperatures.[13] The deep freeze caused a rise in demand for heating and caused the RTO's energy reserves to fall below its requirements.[14] Also due to the increased demand, the RTO's energy grid had "significant, unplanned" outages from equipment failures in its power plants.[15] The RTO ordered additional power plants to be brought online.

         Weather agencies forecasted very cold temperatures and winter storms for January 17-29.[16] The RTO ordered additional power plants be brought online to avoid outages and needed to purchase additional expensive gas units to do so.[17] On January 23, 2014, the RTO filed a waiver with the Federal Energy Regulatory Commission to "allow for make-whole (uplift) payments for the difference between the capped price and the marginal costs for generating energy that exceeded the $l, 000/MWh cap" of the operating agreements.[18]

         The cold and storms did not present as severe as expected.[19] The consumer demand for energy was also not as high as expected and "energy market prices never exceeded the old $1, 000 generation resource offer cap in the second half of January."[20] The RTO's measures to activate and run the additional power plants during these two time periods cost an estimated $600 million dollars.[21] The RTO passed the January 2014 ancillary charges onto its member utilities, including FirstEnergy, under their agreements.

         On March 19, 2014, FirstEnergy informed Allegheny Ludlum during the month of January 2014 the RTO "incurred extremely high ancillary costs" to add the additional power plants and invoiced these high ancillary costs, referred to as an "RTO surcharge, " to FirstEnergy.[22] FirstEnergy explained this RTO surcharge is a "Pass-Through Event" under the Agreement and FirstEnergy would adjust Allegheny Ludlum's "electric generation costs" for January would be adjusted to include this "Pass-Through Event" charge.[23] FirstEnergy anticipated the charge would be "approximately 1-3 percent" of Allegheny Ludlum's annual electric generation expenditure and the charge will be in a bill "rendered after April 15, 2014."[24]The letter then states in bold this is "a notification of the Pass-Through Event and that the additional costs and charges will be reflected in future electric bills."[25]

         FirstEnergy included the first RTO surcharge of $25, 999.86 charge in the June 4, 2014 bill for Allegheny Ludlum's Ohio plant.[26] On July 1, 2014, Allegheny Ludlum told FirstEnergy its withholding $25, 999.86 from the bill and demanding a corrected invoice.[27] FirstEnergy, through counsel, asserted its charge is proper and it would collect unpaid charges.[28]

         On July 17, 2014, FirstEnergy included the RTO surcharge for the four Pennsylvania plants: (1) $37, 570.41 for Latrobe; (2) $401, 772.64 for Brackenridge/Vandergrift; $23, 115.48 for Washington; and, (4) $16, 174.22 for Houston.[29] FirstEnergy billed Allegheny Ludlum $504, 632.61 in total for the additional ancillary costs imposed by the RTO.[30] Allegheny Ludlum refused to pay these additional charges in its June and July bills because it did not believe FirstEnergy could pass through the RTO surcharge under the Agreement.

         On November 11, 2014, FirstEnergy sent Allegheny Ludlum five invoices for the RTO Expense Surcharge Invoice with the past due amounts totaling $503, 632.61.[31] The invoices also warned if Allegheny Ludlum does not pay within thirty days its "service with FirstEnergy Solutions will be cancelled."[32] On November 19, 2014, Allegheny Ludlum decided to pay the charges "to protect the remaining value of the [Agreement] until it expires in December 2015.[33]

         On December 3, 2014, Allegheny Ludlum sent five separate wires totaling $504, 632.61 to FirstEnergy.[34] Allegheny Ludlum's counsel simultaneously sent a letter by email and overnight delivery to FirstEnergy and FirstEnergy's outside counsel stating it submitted the payment under protest and paid only "to avoid [FirstEnergy]'s cancellation of the Agreement."[35]

         Over a year later, FirstEnergy issued Allegheny Ludlum its final invoices under the Agreement expiring in December 2015.[36] FirstEnergy billed for energy provided in Fall 2015 entirely unrelated to the RTO surcharges Allegheny Ludlum paid fourteen months earlier.[37] FirstEnergy invoiced $142, 222.08 for the Ohio plant and $2, 777, 799.84 for the four Pennsylvania plants.[38]

         Allegheny Ludlum unilaterally short-paid $504, 632.61 on the last invoice under the Agreement.[39] It simply decided to not pay the money it believed it did not owe, as a matter of law, on December 3, 2014. FirstEnergy sent written demands for the $504, 632.61 and Allegheny Ludlum refused to pay.[40] On May 27, 2016, FirstEnergy sued Allegheny Ludlum for the unpaid balance of the December 2015 invoices. The parties cross moved for summary judgment.[41]

         II. Analysis

         FirstEnergy moves for summary judgment arguing Allegheny Ludlum breached the Agreement by short-paying the final invoice and waived its defense by voluntarily paying the RTO surcharges on December 3, 2014. Allegheny Ludlum moves for summary judgment arguing FirstEnergy should not have imposed the RTO surcharges under the Agreement. We find in favor of FirstEnergy's breach of contract claim because Allegheny Ludlum voluntarily paid the disputed RTO surcharge and breached the Agreement by withholding $504, 632.61 from the last invoice due to FirstEnergy.[42] Allegheny Ludlum's declaratory judgment claim is denied.

         1.Allegheny Ludlum impermissibly short-paid FirstEnergy's final invoice by $504, 632.61.

         Allegheny Ludlum breached the Agreement with FirstEnergy by withholding $504, 632.61 from FirstEnergy's December 2015 invoice. Allegheny Ludlum does not dispute the $504, 632.61 is for energy services provided by FirstEnergy in Fall 2015. The December 2015 invoice is unrelated to the RTO surcharges Allegheny Ludlum voluntarily paid in December 2014 even though it believed it had no legal right to pay. While Allegheny Ludlum's dispute of the RTO surcharges may have been valid in 2014, we do not reach its merits because under strict Ohio law, Allegheny Ludlum waived the dispute by voluntarily paying the charges.[43]Allegheny Ludlum must remit the unpaid $504, 632.61 balance and interest from the December 2015 invoice to FirstEnergy.

         A. Allegheny Ludlum's voluntary payment of the RTO surcharges.

         Allegheny Ludlum believed, as a matter of law, FirstEnergy could not pass through the RTO surcharge onto it under the Agreement but it paid the RTO surcharges under protest. Allegheny Ludlum's legal counsel wrote to FirstEnergy and its outside counsel regarding the payments under protest. Allegheny Ludlum did not invoke legal process to assert its right to restitution of the RTO surcharge. Allegheny Ludlum waited one year and two months until the Agreement expired making its relationship with FirstEnergy no longer commercially useful and short-paid FirstEnergy the amount of the RTO surcharge it voluntarily paid. Even at this juncture, Allegheny Ludlum did not sue FirstEnergy for declaratory judgment or restitution over the RTO surcharge. Instead, Allegheny Ludlum waited for FirstEnergy to hale it into court.

         Ohio law, selected by the parties, strictly applies the voluntary payment doctrine.[44]Under Ohio's voluntary payment doctrine, "a person who voluntarily pays another to full knowledge of the facts will not be entitled to restitution."[45] In Sailing, plaintiff rented a car from Budget for one day.[46] The plaintiff drove 64 miles, re-filled the car with gas, and returned it to Budget.[47] Budget charged him a refueling charge even though plaintiff returned the car with a full tank because under Budget's policy if a renter drives a car less than 75 miles, the renter must refill the tank and submit a receipt.[48] Plaintiff paid the refueling charge specifically "in anticipation of filing suit" then filed a class action lawsuit against Budget claiming the refueling charge breached his contract with Budget.[49]

         The Court of Appeals found plaintiff voluntarily paid the refueling charge to Budget.[50]The court looked to the Ohio Supreme Court holding "[i]n the absence of fraud, duress, compulsion or mistake of fact, money, voluntarily paid by one person to another on a claim of right to such payment, cannot be recovered merely because the person who made the payment mistook the law as to his liability to pay."[51] The Court of Appeals found plaintiff knowingly paid the charge believing it breached the contract to have standing to file his class action against Budget.[52] The court also held plaintiffs argument the voluntary payment doctrine does not apply to breach of a written contract is incorrect because "[a] payment made by reason of a wrong construction of the terms of the contract is not made under a mistake of fact, but under a mistake of law, and if voluntary cannot be recovered back."[53]

         Allegheny Ludlum must pay FirstEnergy because the voluntary payment doctrine bars Allegheny Ludlum's right to keep the $504, 632.61 it improperly withheld. When Allegheny Ludlum paid the RTO surcharge it believed FirstEnergy did not have the right to pass the surcharge through under the Agreement as in Sailing, where the plaintiff believed Budget's surcharge breached their contract when he paid it.[54] Allegheny Ludlum's payment under protest is different from Sailing where there appears no evidence plaintiff paid Budget "under protest." Although we find it difficult to imagine how an average consumer would pay Budget under protest (short of bringing a checkbook), Allegheny Ludlum disputed the charge to FirstEnergy and consulted its in-house counsel whether the Agreement permitted the charge. After FirstEnergy refused to remove the RTO surcharge, Allegheny Ludlum evaluated the worth of the Agreement and decided to pay it.

         Allegheny Ludlum's RTO payments were not made under duress and compulsion because Allegheny Ludlum weighed its options and decided not to terminate the Agreement with FirstEnergy or file suit against FirstEnergy. Under Ohio contract law, economic duress requires Allegheny Ludlum demonstrate "(1) that it involuntarily accepted the terms of another; (2) that under the circumstances it had no other reasonable alternative; and, (3) that the circumstances were a product of coercive actions on the party of the opposite party."[55] Allegheny Ludlum did not suffer duress because it admits to consulting its attorneys and measuring the economic benefit of the Agreement versus terminating over refusal to pay the RTO surcharge and return to likely more expensive utility service. There is no evidence FirstEnergy engaged in coercive actions; it believed Allegheny Ludlum owed the RTO surcharge under the Agreement and enforced its contractual right to demand payment or cancel the contract.[56]

         Allegheny Ludlum's payment under protest is not an exception to the voluntary payment doctrine. Ohio recognizes fraud, duress, compulsion, or mistake of fact as valid exceptions to the voluntary payment doctrine.[57] The Third Edition of Ohio Jurisprudence explains "[a] protest does not render a payment involuntary....[t]he function of a protest is only to evidence the party's intention at the time the payment is made, and when, independently of the protest, the circumstances of payment would not justify a recovery of the payment, the fact that it was made under protest will not render such payment involuntary."[58] Allegheny Ludlum's protest failed to render its RTO surcharge payment involuntary. It only served to notify First Energy of its intent, particularly when Allegheny Ludlum never used legal process to assert its protest.

         We are aware the cases supporting the Ohio jurisprudence are from the late Ninetieth and early Twentieth Century and Allegheny Ludlum argues this lessens their precedential value. We disagree. Both parties are unable to locate a more recent case overruling or criticizing these cases and other courts, including the Court of Appeals and Ohio appellate courts, look to this precedent in voluntary payment doctrine cases.[59] Taking Ohio's jurisprudence together, if the Ohio Supreme Court faced these facts consistent with precedent, it would find Allegheny Ludlum's payment under protest does not change its payment from voluntary to involuntary under the doctrine and bars restitution.

         B. Allegheny Ludlum's conduct after voluntary payment of ...


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