B-164660, SEP. 26, 1968

B-164660, SEP. 26, 1968

TO MR. SECRETARY:

LETTER DATED JUNE 21, 1968, FROM THE DEPUTY ASSISTANT SECRETARY FOR ADMINISTRATION, CONCERNS THE MAKING OF A FINAL SETTLEMENT OF ACCOUNTS BY THE SOUTHWESTERN POWER ADMINISTRATION (SPA) WITH THE N.W. ELECTRIC POWER COOPERATIVE, INC. (N.W.), ARISING OUT OF A POWER SALES CONTRACT WHICH WAS IN EFFECT BETWEEN 1949 AND JULY 31, 1962. THE DEPUTY ASSISTANT SECRETARY STATES THAT ONE OF THE ELEMENTS OF THE FINAL ACCOUNTING AND SETTLEMENT INVOLVES A DISPUTE OVER WHETHER, BY VIRTUE OF CERTAIN EVENTS WHICH OCCURRED IN DECEMBER 1961, N.W. IS OBLIGATED UNDER THE CONTRACT TO PURCHASE AND PAY FOR 5,000 KILOWATTS OF PEAKING CAPACITY AND ASSOCIATED ENERGY FOR THE PERIOD JANUARY 1 THROUGH JULY 31, 1962. IN VIEW OF THE DISPUTE THE MATTER IS PRESENTED FOR OUR CONSIDERATION AS A DOUBTFUL CLAIM PURSUANT TO THE PROVISIONS OF 4 GAO 53.1.

A STATEMENT OF THE RELEVANT FACTS AND A DISCUSSION OF THE DISPUTED QUESTIONS, AS CONTAINED IN THE ASSISTANT SECRETARY'S LETTER, ARE SET FORTH BELOW.

IN 1949 SPA ENTERED INTO TWO COMPANION CONTRACTS WITH N.W. UNDER ONE, CALLED THE LEASE CONTRACT, CONTRACT NO. ISPA-295, N.W. AGREED TO CONSTRUCT A STEAM GENERATING PLANT AND CERTAIN TRANSMISSION FACILITIES, AND THE GOVERNMENT (SPA) AGREED TO LEASE THE PLANT AND FACILITIES AND TO PAY N.W. ON THE BASIS OF ITS COSTS OF CONSTRUCTION AND OPERATION. UNDER THE SECOND CONTRACT, REFERRED TO AS THE POWER CONTRACT, CONTRACT NO. ISPA-296, SPA AGREED TO SELL AND DELIVER TO N.W. ITS REQUIREMENTS FOR ELECTRIC POWER AND ENERGY. ARTICLE I OF THE POWER CONTRACT AND ARTICLE VII OF THE LEASE CONTRACT PROVIDED THAT IN THE EVENT SPA WAS UNABLE TO SUPPLY THE TOTAL FIRM POWER REQUIREMENTS OF N.W., THE COOPERATIVE (N.W.) WOULD HAVE THE RIGHT TO PURCHASE POWER AND ENERGY FROM ADDITIONAL SOURCES.

DURING THE FOLLOWING TEN-YEAR PERIOD BOTH CONTRACTS WERE AMENDED A NUMBER OF TIMES IN WAYS NOT HERE MATERIAL. ON DECEMBER 17, 1959, THE PARTIES AMENDED CONTRACT NO. ISPA-296 BY AMENDMENT NO. 10. THE SECOND RECITAL CLAUSE OF AMENDMENT 10 PROVIDES AS FOLLOWS: "WHEREAS, THE COOPERATIVE NEEDS ADDITIONAL CAPACITY, AND THE PARTIES HERETO DESIRE TO AMEND THE SAID AGREEMENT TO PROVIDE FOR THE SALE BY THE GOVERNMENT TO THE COOPERATIVE OF FIRM POWER CAPACITY AND ASSOCIATED ENERGY, AND, IN ADDITION, FOR THE SALE BY THE GOVERNMENT TO THE COOPERATIVE OF PEAKING POWER CAPACITY AND ASSOCIATED PEAKING POWER ENERGY WHICH WILL BE UTILIZED BY THE COOPERATIVE IN CONNECTION WITH POWER AND ENERGY PURCHASED FROM OTHER SOURCES OF POWER SUPPLY; "

THE AMENDMENT EXTENSIVELY REVISED ARTICLE I OF THE POWER CONTRACT. SECTION 1 OF THE REVISED ARTICLE PROVIDES FOR THE SALE OF FIRM POWER CAPACITY AND ASSOCIATED ENERGY TO N.W. IN INCREASING AMOUNTS UP TO 45,000 KILOWATTS PLUS THE ADDITIONAL FIRM POWER CAPACITY, IF ANY, PURCHASED BY N.W. UNDER SECTION 10 OF ARTICLE I. SECTION 2 PROVIDES FOR THE SALE OF PEAKING POWER CAPACITY WHEN N.W.'S ACTUAL MAXIMUM DEMAND, AS DEFINED IN SECTION 5, EXCEEDS 45,000 KILOWATTS, TOGETHER WITH ASSOCIATED PEAKING ENERGY OF 1,800 KILOWATT-HOURS OF ENERGY PER YEAR PER KILOWATT OF PEAKING CONTRACT DEMAND. SUCH PEAKING POWER CAPACITY IS TO BE SOLD IN INCREMENTS OF 5,000 KILOWATTS UP TO 25,000 PLUS THE ADDITIONAL PEAKING POWER CAPACITY, IF ANY, PURCHASED BY N.W. UNDER SECTION 10.

SECTION 5 DEFINES ACTUAL MAXIMUM DEMAND IN SUBSECTION (A) FOR THE PERIOD "WHEN THE COOPERATIVE'S TOTAL POWER SUPPLY REQUIREMENTS ARE BEING FULFILLED THROUGH THE PURCHASE OF FIRM POWER CAPACITY FROM THE GOVERNMENT; " AND IN SUBSECTION (B), FOR THE PERIOD "WHEN THE COOPERATIVE'S POWER SUPPLY REQUIREMENTS ARE BEING FULFILLED THROUGH THE PURCHASE OF FIRM POWER CAPACITY FROM THE GOVERNMENT AND THE PURCHASE AND/OR EXCHANGE OF POWER AND ENERGY FROM OTHER SOURCES OF POWER SUPPLY, OR THROUGH THE PURCHASE OF FIRM AND PEAKING POWER CAPACITY FROM THE GOVERNMENT AND THE PURCHASE AND/OR EXCHANGE OF POWER AND ENERGY FROM OTHER SOURCES OF POWER PLY.'

SECTION 10, ENTITLED "SALE OF ADDITIONAL CAPACITY BY GOVERNMENT," PROVIDES IN SUBSECTION (A) AS FOLLOWS: "/A) IF AT ANY TIME THE COOPERATIVE REQUIRES FIRM OR PEAKING POWER CAPACITY FOR SERVICE TO ITS CUSTOMERS IN ADDITION TO THE AMOUNT OF SUCH CAPACITY PURCHASED UNDER SECTIONS 1 AND 2 OF THIS ARTICLE I, THE GOVERNMENT SHALL SELL AND DELIVER TO THE COOPERATIVE, AND THE COOPERATIVE SHALL PURCHASE AND RECEIVE, SUCH REQUIRED ADDITIONAL CAPACITY IF, IN THE SOLE JUDGMENT OF THE GOVERNMENT, SUCH CAPACITY IS AVAILABLE FOR UTILIZATION UNDER THIS AGREEMENT, UNDER THE SAME TERMS AND CONDITIONS PROVIDED IN THIS ARTICLE I; PROVIDED, THAT DURING THE PERIOD BETWEEN SEPTEMBER 30 AND JUNE 1 OF EACH CONTRACT YEAR, THE COOPERATIVE MAY, AT ITS OPTION, PURCHASE FROM SOURCES OF POWER SUPPLY OTHER THAN THE GOVERNMENT SUCH AMOUNTS OF CAPACITY AS MAY BE NEEDED BY THE COOPERATIVE, IN ADDITION TO THE CAPACITY PURCHASED UNDER SECTIONS 1 AND 2 OF THIS ARTICLE I, TO FULFILL ITS TOTAL LOAD REQUIREMENTS DURING SUCH PERIOD.'

ON DECEMBER 21, 1959, THE PARTIES APPROVED A LETTER AGREEMENT RELATING TO SCHEDULING OF AND ACCOUNTING FOR ENERGY BETWEEN N.W., SPA, AND THE KANSAS CITY POWER AND LIGHT COMPANY, WHICH ALSO WAS A CUSTOMER OF SPA. THE LETTER REFERS TO A WHOLESALE POWER AGREEMENT BETWEEN KANSAS CITY POWER AND LIGHT COMPANY (COMPANY) AND N.W. OF DECEMBER 21, 1959. DURING THE PERIOD FROM DECEMBER 17, 1959 TO DECEMBER 17, 1961, N.W. DID NOT PURCHASE ANY POWER FROM THE COMPANY; THAT IS, IT RECEIVED ITS TOTAL POWER REQUIREMENTS FROM SPA. ON FRIDAY, DECEMBER 15, 1961, N.W. ADVISED SPA THAT STARTING THE FOLLOWING SUNDAY, DECEMBER 17, IT WOULD SCHEDULE ONE MEGAWATT OF POWER FROM THE COMPANY DURING PEAK LOAD HOURS EVERY DAY UNTIL FURTHER NOTICE. N.W. EXPLAINED THAT BY DOING THIS IT COULD AVOID INCREASING ITS CONTRACT DEMAND ON SPA AT THIS TIME.

ON DECEMBER 20, 1961, METER READINGS AT THE POINT OF INTERCONNECTION AT MISSOURI CITY SUBSTATION DISCLOSED THAT N.W. HAD RECEIVED INTO ITS SYSTEM 46,400 KILOWATTS OF POWER. OF THIS AMOUNT, 1,280 KILOWATTS WAS DELIVERED INTO THE N.W. SYSTEM FOR DELIVERY FOR THE ACCOUNT OF THE GOVERNMENT TO TRENTON, MISSOURI INTERCONNECTION, UNDER CONTRACTUAL ARRANGEMENT NOT HERE RELEVANT, LEAVING A BALANCE OF 45,120 KILOWATTS. ON THIS DAY, N.W. PURCHASED 1,000 KILOWATTS OF POWER FROM THE COMPANY WHICH WAS DELIVERED AT THE MISSOURI CITY POINT OF INTERCONNECTION.

THE OPERATIONS AND ENGINEERING DIVISION OF SPA QUESTIONED WHETHER THE PURCHASE OF PEAKING POWER BY N.W. FROM THE COMPANY RELIEVED N.W. OF ITS OBLIGATION TO PURCHASE PEAKING CAPACITY AND ENERGY FROM SPA UNDER CONTRACT ISPA-296. HOWEVER, THE DIVISION OF RATES AND CUSTOMER SERVICE OF SPA SAID THAT THE TRANSACTION WAS PERMISSIBLE UNDER THE CONTRACT. ACCORDINGLY, THE OPERATIONS AND ENGINEERING DIVISION ACCEPTED THE SCHEDULES. DURING THE ENSUING SEVEN-MONTH PERIOD FROM JANUARY 1, 1962, UNTIL THE CONTRACT WAS SUSPENDED EFFECTIVE JULY 30, THE BILLS WHICH SPA SENT N.W. DID NOT REFLECT A CHARGE FOR PEAKING CAPACITY. ON MARCH 2, 1962, THE PARTIES ENTERED INTO AMENDMENT NO. 19 TO THE POWER CONTRACT.

IN 1963 AN AD HOC COMMITTEE APPOINTED BY THE ADMINISTRATOR OF SPA REVIEWED THE ACCOUNTS AND CONCLUDED THAT N.W. SHOULD HAVE PAID THE GOVERNMENT FOR PEAKING CAPACITY DURING THIS DISPUTED SEVEN-MONTH PERIOD. ON AUGUST 8, 1963, A LETTER WAS SENT TO N.W. ADVISING OF THIS CONCLUSION WITH ACCOMPANYING REVISED BILLS FOR THE PERIOD.

THE FOREGOING MATTERS RAISED THE FOLLOWING QUESTIONS WITH RESPECT TO WHICH OUR ADVICE IS REQUESTED.

1. IS N.W. LIABLE TO THE GOVERNMENT UNDER CONTRACT ISPA-296, AS AMENDED, FOR THE PAYMENT OF 5,000 KILOWATTS OF PEAKING CAPACITY AND ASSOCIATED ENERGY DURING THE PERIOD JANUARY 1 THROUGH JULY 31, 1962?

IN CONNECTION WITH QUESTION ONE, THE ASSISTANT SECRETARY STATES THAT: "THE ARGUMENT ON BEHALF OF THE GOVERNMENT UNDER THE CONTRACT IS THAT SINCE THE COOPERATIVE IN DECEMBER 1961 WAS NOT PURCHASING POWER AND ENERGY UNDER BOTH SECTIONS 1 AND 2 OF ARTICLE I, THE CONDITIONS SET FORTH IN THE PROVISO CLAUSE OF THE ABOVE QUOTED SECTION 10 (A) HAD NOT BEEN FULFILLED; THAT UNDER THESE CIRCUMSTANCES THE COOPERATIVE'S ACTUAL MAXIMUM DEMAND WAS 45,120 KILOWATTS UNDER SUBSECTION (A) OF SECTION 5; AND, THEREFORE, THAT BEGINNING ON JANUARY 1, 1962 THE COOPERATIVE WAS OBLIGATED TO PURCHASE 5,000 KILOWATTS OF PEAKING CAPACITY AND ASSOCIATED ENERGY IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2 (A). TO HOLD OTHERWISE, IT IS ARGUED, WOULD MEAN THAT THE COOPERATIVE COULD INDEFINITELY POSTPONE ANY OBLIGATION TO PURCHASE PEAKING CAPACITY UNDER SECTION 2. THIS COULD NOT HAVE BEEN THE INTENT OF THE PARTIES BECAUSE IT WOULD RESULT IN THE IMPOSITION OF AN OBLIGATION ON THE GOVERNMENT TO HOLD AVAILABLE PEAKING CAPACITY FOR N.W. (AND THEREFORE BE PRECLUDED FROM SELLING THIS CAPACITY TO OTHER CUSTOMERS) WITHOUT ANY COMPANION OBLIGATION ON THE COOPERATIVE TO PAY FOR THIS CAPACITY AS ITS LOADS GREW. "ON THE OTHER HAND, THE COOPERATIVE REFUSES TO ACKNOWLEDGE ANY OBLIGATION TO PURCHASE THE 5,000 KILOWATTS OF PEAKING POWER. IT MAINTAINS THAT IT HAD THE RIGHT UNDER THE PROVISO CLAUSE OF SECTION 10 (A) TO PURCHASE IN DECEMBER THE THOUSAND KILOWATTS OF POWER FROM KANSAS CITY POWER AND LIGHT COMPANY IN ADDITION TO FIRM POWER PURCHASED FROM SPA; THAT UNDER THESE CIRCUMSTANCES, ITS -ACTUAL MAXIMUM DEMAND- SHOULD HAVE BEEN COMPUTED UNDER SUBSECTION (B) OF SECTION 5 OF ARTICLE I, WITH THE RESULT THAT ITS ACTUAL MAXIMUM DEMAND FOR DECEMBER 1961 WOULD BE 44,120 KILOWATTS (46,400 KILOWATTS MINUS 1,280 KILOWATTS TO TRENTON MINUS 1,000 KILOWATTS PURCHASED FROM THE COMPANY); AND THEREFORE, BECAUSE ITS ACTUAL MAXIMUM DEMAND HAD NOT REACHED 45,000 KILOWATTS, IT WAS NOT OBLIGATED TO PURCHASE PEAKING CAPACITY UNDER SECTION 2.'

2. DID THE UNITED STATES BY THE LETTER OF DECEMBER 21, 1959 OR BY ITS ACTION ON AND SUBSEQUENT TO DECEMBER 15, 1961, CONCUR IN THE COOPERATIVE'S INTERPRETATION OF THE CONTRACT THEREBY FORECLOSING IT FROM ASSERTING A CLAIM AT THIS TIME?

THE DISCUSSION IN THE ASSISTANT SECRETARY'S LETTER, AS RELATES TO QUESTION TWO, IS AS FOLLOWS: "THE COOPERATIVE CONTENDS THAT THE LETTER OF DECEMBER 21, 1959 CONSTITUTES AN INTERPRETATION OF THE CONTRACT WHICH SUPPORTS ITS POSITION. THE GOVERNMENT CONTENDS, HOWEVER, THAT THE LETTER IS NOTHING MORE THAN AN ACCOUNTING AGREEMENT DESIGNED TO ACCOUNT FOR POWER AND ENERGY SCHEDULED FOR DELIVERY BY SPA TO KCP-AND L AND TO N.W. ELECTRIC COOPERATIVE. THIS ACCOUNTING AGREEMENT WAS NECESSARY BECAUSE THE AMOUNT OF POWER DELIVERED COULD BE DETERMINED ONLY AFTER THE FACT, BECAUSE POWER WOULD FLOW TO N.W. IN SUCH AMOUNTS AS WERE NECESSARY TO MEET ITS REQUIREMENTS, WHILE THE DELIVERY OF POWER TO KCP-AND-L WAS BY SCHEDULE. THE SUBJECT LETTER ESTABLISHED THE ARRANGEMENTS FOR DETERMINING THE AMOUNT OF POWER WHICH WAS TRANSFERRED BETWEEN SPA AND KCP-AND-L TO MEET THE SCHEDULES AND DELIVERIES. "THE QUESTION OF THE PROPER INTERPRETATION OF THE CONTRACT WAS RAISED INTERNALLY IN SPA IN DECEMBER 1961 AS SOON AS IT LEARNED THAT N.W. HAD SCHEDULED THE 1,000 KILOWATTS OF PEAKING POWER FROM THE COMPANY. NONETHELESS, THE BILLS THAT WERE SUBMITTED TO N.W. DURING THE ENSUING SEVEN MONTHS DID NOT REFLECT THE CONTENTION NOW BEING MADE BY SPA. MOREOVER, ON MARCH 2, 1962, THE PARTIES EXECUTED AMENDMENT 19 TO THE CONTRACT (ISPA-296), THE PURPOSE OF WHICH WAS TO CLARIFY ACCOUNTING FOR POWER AND ENERGY AMONG THE THREE PARTIES RETROACTIVE TO DECEMBER 1, 1961. THE GOVERNMENT CONTENDS THAT THIS AMENDMENT IS MERELY AN ACCOUNTING MATTER AND DOES NOT GO TO THE MERITS OF THE DISPUTE OVER THE TERMS OF THE CONTRACT. IT IS ASSERTED ON BEHALF OF N.W., HOWEVER, THAT PARAGRAPH (2) (II) OF THIS AMENDMENT FURTHER CONFIRMS N.W.'S INTERPRETATION THAT UNDER THE SECTION 10 (A) PROVISO OF THE CONTRACT IT WAS ENTITLED TO PURCHASE PEAKING POWER FROM THE COMPANY DURING THE EIGHT-MONTH PERIOD FROM OCTOBER THROUGH MAY WITHOUT INCURRING LIABILITY TO PURCHASE PEAKING CAPACITY FROM SPA DURING THESE MONTHS. "THE QUESTION PRESENTED, THEREFORE, IS WHETHER THE 1959 LETTER, THE SEVEN MONTHS OF BILLING PRACTICE, AND THE EXECUTION OF AMENDMENT 19 SEVERALLY OR COLLECTIVELY PRECLUDE THE GOVERNMENT AS A MATTER OF LAW OR EQUITY FROM NOW ASSERTING A CLAIM THAT N.W. IS LIABLE TO THE UNITED STATES FOR PEAKING POWER AND ENERGY DURING THIS PERIOD.'

3. IF THE ANSWER TO THE FIRST QUESTION IS "YES" AND THE ANSWER TO THE SECOND QUESTION IS "NO" , WHAT IS THE AMOUNT OF THE CLAIM WHICH THE UNITED STATES SHOULD REASONABLY ASSERT AT THIS TIME AS AN OFFSET AGAINST ANY SUMS DUE AND OWING THE COOPERATIVE FROM THE UNITED STATES?

QUESTION THREE IS DISCUSSED AS FOLLOWS BY THE ASSISTANT SECRETARY: "THE ADMINISTRATOR'S LETTER OF AUGUST 8, 1963, STATES A CLAIM OF $67,256.75 BASED UPON ADDITIONAL CAPACITY AND ENERGY CHARGES OF $98,782.40, WITH AN OFFSETTING ADJUSTMENT FOR TRANSMISSION SERVICE FOR THIS CAPACITY AND ENERGY OF $31,525.65. THIS COMPUTATION CAN ALSO BE ANALYSED INTO A PEAKING CAPACITY COMPONENT AND AN ENERGY COMPONENT AS FOLLOWS: "PEAKING CAPACITY COMPONENT "PEAKING CAPACITY - 5,000 KW AT $1.60 PER MONTH PER KILOWATT $56,000"LESS TRANSMISSION CHARGE AT $ .80 PER KW PER MONTH 28,000

------- "TOTAL

$28,000

"ENERGY COMPONENT "ADDITIONAL FIRM AND PEAKING ENERGY

$42,782.40 "LESS - TRANSMISSION CHARGE 3,525.65 ---------- "TOTAL

$39,256.75 "FURTHER ANALYSIS OF THE ENERGY COMPONENT DISCLOSES CERTAIN OFFSETTING CONSIDERATIONS WHICH MIGHT AFFECT AN EQUITABLE DETERMINATION OF THE AMOUNT OF THE GOVERNMENT'S CLAIM, IF ANY. IT SHOULD BE RECOGNIZED THAT THE CHARGE IS FOR ENERGY THAT WAS NEVER DELIVERED BY SPA. THE ENERGY WAS IN FACT SOLD AND SUPPLIED TO THE COOPERATIVE BY KANSAS CITY POWER AND LIGHT COMPANY; THE CHARGE IS BASED ON THE CONTRACT INTERPRETATION THAT N.W. HAD NO RIGHT TO PURCHASE THE ENERGY FROM THE COMPANY AND SHOULD HAVE PURCHASED IT FROM SPA. DURING THE DISPUTED PERIOD SPA WAS SELLING ENERGY AT DUMP RATES AT 1.5 MILLS PER KILOWATT HOUR. IT IS NOT POSSIBLE TO DETERMINE WHETHER AMOUNTS OF ENERGY WERE WASTED THAT OTHERWISE WOULD HAVE BEEN SOLD TO N.W. ASSUMING THAT NONE WAS WASTED AND THAT ENERGY NOT SOLD TO THE COOPERATIVE WAS SOLD ELSEWHERE AT 1.5 MILLS, THE GOVERNMENT'S LOSS BY VIRTUE OF N.W.'S FAILURE TO PURCHASE PEAKING ENERGY FROM SPA UNDER THE CONTRACT WOULD BE .5 MILLS PER KILOWATT HOUR, OR ONE-QUARTER OF THE ENERGY CHARGE. THIS WOULD THEREFORE AMOUNT TO APPROXIMATELY $9,800. "SPA ACKNOWLEDGES THE ADJUSTED BILLING BY N.W. IN THE AMOUNT OF APPROXIMATELY $80,000 FOR OTHER SERVICES UNDER THE LEASE CONTRACT AND THE POWER CONTRACT. THE MATTER FOR RESOLUTION UNDER THE THIRD QUESTION, THEREFORE, IS WHETHER SPA SHOULD DEDUCT THE AMOUNT OF $67,256.75, $37,800, $28,000, SOME OTHER AMOUNT, OR NOTHING BEFORE TENDERING FINAL PAYMENT TO THE COOPERATIVE ON THESE ITEMS.'

CONCERNING QUESTION ONE, READING SECTION 1 (A) (B) AND (D), SECTION 2, AND SECTION 10 OF THE CONTRACT TOGETHER COMPELS THE CONCLUSION THAT N.W. IS REQUIRED TO PURCHASE -- IF NECESSARY TO MEET ITS NEEDS -- ALL THE POWER THE GOVERNMENT (SPA) IS OBLIGATED TO FURNISH UNDER SECTIONS 1 AND 2, AND ANY ADDITIONAL POWER IT (N.W.) NEEDS THAT SPA MAY BE IN A POSITION TO FURNISH, BUT THAT DURING THE PERIOD BETWEEN SEPTEMBER 30 TO JUNE 1 OF THE CONTRACT YEAR IF N.W. NEEDS POWER IN EXCESS OF THE AMOUNTS THE GOVERNMENT IS REQUIRED TO FURNISH UNDER SECTIONS 1 AND 2, N.W. MAY, AT ITS OPTION, PURCHASE SUCH ADDITIONAL AMOUNTS FROM SOURCES OUTSIDE THE GOVERNMENT (SPA).

IN OTHER WORDS IT IS OUR VIEW THAT UNDER SECTIONS 1 AND 2 AND 10 OF ARTICLE I OF THE POWER CONTRACT, AS AMENDED BY AMENDMENT NO. 10, N.W. WAS OBLIGATED TO PURCHASE ITS TOTAL POWER REQUIREMENTS FROM THE GOVERNMENT (SPA) AND COULD NOT (LEGALLY) PURCHASE POWER FROM ANY OTHER SOURCE, EXCEPT AS PROVIDED IN SECTION 10. AS INDICATED IN THE ASSISTANT SECRETARY'S LETTER, TO HOLD OTHERWISE WOULD MEAN THAT N.W. COULD INDEFINITELY POSTPONE ANY OBLIGATION TO PURCHASE PEAKING CAPACITY UNDER SECTION 2 AND THIS WOULD RESULT IN THE IMPOSITION OF AN OBLIGATION ON THE GOVERNMENT (SPA) TO HOLD AVAILABLE PEAKING CAPACITY FOR N.W. (AND THEREBY BE PRECLUDED FROM SELLING THIS CAPACITY TO OTHER CUSTOMERS) WITHOUT ANY COMPANION OBLIGATION ON N.W. TO PAY FOR THIS CAPACITY AS ITS LOADS GREW. WE AGREE THAT THIS HARDLY COULD HAVE BEEN THE INTENTION OF THE PARTIES TO THE CONTRACT.

UNDER SECTION 10 OF ARTICLE I OF THE POWER CONTRACT, AS AMENDED BY AMENDMENT 10, N.W. WAS REQUIRED TO PURCHASE FROM SPA ANY ADDITIONAL FIRM OR PEAKING POWER CAPACITY IT NEEDED FOR ITS CUSTOMERS IN ADDITION TO THE AMOUNT OF SUCH CAPACITY IT WAS REQUIRED TO PURCHASE UNDER SECTIONS 1 AND 2 OF ARTICLE I, IF SPA HAD SUCH ADDITIONAL CAPACITY TO SELL,EXCEPT THAT DURING THE PERIOD BETWEEN SEPTEMBER 30 AND JUNE 1 OF EACH CONTRACT YEAR N.W., AT ITS OPTION, COULD PURCHASE FROM OTHER THAN SPA ANY POWER IT REQUIRED IN ADDITION TO THE AMOUNTS OF POWER IT WAS OBLIGATED TO PURCHASE (IF NEEDED) UNDER SECTIONS 1 AND 2. THUS, DURING THE PERIOD BETWEEN SEPTEMBER 30 AND JUNE 1 OF THE CONTRACT YEAR N.W. HAD NO RIGHT UNDER SECTION 10 TO PURCHASE POWER FROM ANY SOURCE OTHER THAN SPA, EXCEPT AMOUNTS OF POWER IT NEEDED OVER AND ABOVE THE AMOUNTS IT WAS REQUIRED TO PURCHASE (IF IT HAD A NEED THEREFOR) UNDER SECTIONS 1 AND 2. SINCE THE TOTAL POWER REQUIREMENTS OF N.W. IN DECEMBER 1961 DID NOT EXCEED THE AMOUNTS SET FORTH IN SECTIONS 1 AND 2 OF ARTICLE I (WHICH SPA WAS REQUIRED TO FURNISH N.W.), N.W. HAD NO RIGHT UNDER SECTION 10 TO PURCHASE POWER FROM ANY SOURCE OUTSIDE SPA, UNLESS, OF COURSE, SPA WAS NOT IN A POSITION TO MEET N.W.'S NEEDS.

ACCORDINGLY, SUBJECT TO WHAT IS SET FORTH BELOW, IT IS OUR VIEW THAT N.W. IS LIABLE TO THE GOVERNMENT UNDER POWER CONTRACT ISPA-296, AS AMENDED, FOR THE PAYMENT OF 5,000 KILOWATTS OF PEAKING CAPACITY AND ASSOCIATED ENERGY DURING THE PERIOD JANUARY 1 THROUGH JULY 31, 1962.

AS TO QUESTION TWO, WE AGREE WITH THE POSITION OF SPA INSOFAR AS THE LETTER OF DECEMBER 21, 1959 AND AMENDMENT NO. 19 DATED MARCH 2, 1962, ARE CONCERNED. THAT IS TO SAY WE AGREE THAT BOTH THE LETTER AND AMENDMENT NO. 19 PERTAIN TO ACCOUNTING AND/OR BILLING FOR POWER AND ENERGY RATHER THAN TO THE QUESTION OF THE AMOUNT OF POWER AND ENERGY SPA WAS OBLIGATED TO SELL TO N.W., AND N.W. WAS OBLIGATED TO PURCHASE FROM SPA UNDER THE CONTRACT. CONCERNING THE FAILURE OF SPA TO REFLECT IN ITS MONTHLY BILLING TO N.W. A CHARGE FOR PEAKING CAPACITY DURING THE PERIOD JANUARY 1 TO JULY 30, 1962, THIS FAILURE MAY HAVE CAUSED N.W. TO HAVE INCURRED COSTS IN PURCHASING PEAKING CAPACITY FROM THE COMPANY THAT N.W. MIGHT NOT OTHERWISE HAVE INCURRED, ASSUMING IT IS NOW REQUIRED TO PAY THE INSTANT CLAIM. OTHER WORDS N.W. MAY HAVE CONTINUED TO PURCHASE PEAKING CAPACITY AND ASSOCIATED ENERGY FROM KANSAS CITY POWER AND LIGHT COMPANY DURING THE PERIOD IN QUESTION AND IT MIGHT NOT HAVE DONE SO HAD SPA'S BILL FOR JANUARY 1962 REFLECTED A CHARGE FOR PEAKING CAPACITY. AT LEAST A CHARGE FOR PEAKING CAPACITY IN THE BILL RENDERED BY SPA FOR JANUARY 1962 WOULD HAVE PUT N.W. ON NOTICE THAT SPA CONSIDERED N.W. OBLIGATED UNDER THE CONTRACT TO PURCHASE PEAKING CAPACITY (UP TO 5,000 KILOWATTS) FROM SPA, AND N.W. WOULD HAVE HAD AN OPPORTUNITY TO DISCONTINUE PURCHASING PEAKING CAPACITY FROM THE COMPANY, ASSUMING, OF COURSE, THAT IT CONTINUED TO PURCHASE SUCH POWER FROM THE COMPANY DURING THIS PERIOD. HENCE, ON THE BASIS OF THE PRESENT RECORD BEFORE US, IT IS OUR VIEW THAT THE FAILURE OF SPA TO INCLUDE IN ITS MONTHLY BILLS TO N.W. FOR THE PERIOD IN QUESTION A CHARGE FOR PEAKING CAPACITY MAY -- IN LIGHT OF ALL THE OTHER FACTS AND CIRCUMSTANCES -- BE CONSIDERED AS PRECLUDING SPA FROM RECOVERING FROM N.W. FOR PEAKING CAPACITY ANY AMOUNTS N.W. MAY HAVE PAID THE COMPANY FOR PEAKING CAPACITY (UP TO 5,000 KILOWATTS) DURING THE PERIOD IN QUESTION,EXCLUDING AMOUNTS OF PEAKING CAPACITY N.W. PURCHASED FROM THE COMPANY PRIOR TO N.W.'S RECEIPT OF ITS BILL FROM SPA FOR JANUARY 1962.

AS TO QUESTION NUMBER THREE, WE UNDERSTAND THERE WAS A READY MARKET FOR SPA ENERGY DURING THE PERIOD IN QUESTION. HENCE, IT WOULD BE REASONABLE TO ASSUME, IN CONNECTION WITH THE COMPUTATION OF THE ENERGY COMPONENT CHARGE, THAT THE ADDITIONAL PEAKING ENERGY NOT SOLD TO N.W. WAS PROBABLY SOLD ELSEWHERE AS -- AT LEAST -- DUMP ENERGY. ACCORDINGLY, BASED ON THE INFORMATION SET FORTH IN THE ASSISTANT SECRETARY'S LETTER WE BELIEVE SPA COULD REASONABLY ASSERT A CLAIM OF $37,800. THE CLAIM OF $37,800 WOULD INCLUDE THE TOTAL CHARGES FOR PEAKING CAPACITY OF $28,000 PLUS ONE QUARTER OF THE ENERGY CHARGE OF $39,256.75, OR APPROXIMATELY $9,800. THE AMOUNT OF $9,800 IS BASED ON THE ASSUMPTION THAT DURING THE PERIOD IN QUESTION SPA SOLD THE ENERGY ELSEWHERE AT DUMP RATES OF 1.5 MILLS PER KILOWATT HOUR AND THAT THE GOVERNMENT'S LOSS RESULTING FROM N.W. NOT PURCHASING PEAKING ENERGY FROM SPA AT THE CONTRACT RATE WOULD BE .5 MILL PER KILOWATT HOUR, OR ONE QUARTER OF THE CONTRACT ENERGY CHARGE. OF COURSE, THE CLAIM OF $37,800 WOULD BE SUBJECT TO ANY REDUCTION REQUIRED BY OUR ANSWER TO QUESTION TWO.