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05-25-1979 HUCMSpecial Meeting May 25, 1979 Commissioners Quade and Tracy were present; Commissioner Filk was absent, also present were Mgr. Alexander, Ruth Hakel and Counsel Peterson. The meeting was called to order at 10:00 a.m, by President Quade. Mgr. Alexander presented a letter from Robins, Davis and Lyons concerning the failure of the Rolls Royce Olympus generator on January 10, 1979. Letter follows: May 23, 1979 Mr. Richard A. Peterson Attorney at Law 116 Main Street South. Hutchinson, MN 55350 Dear Mr. Peterson: We have reviewed the various documents which. were obtained from Hutchinson Utilities Commission at the time of our visit with you and have also conferred with Rufus Alexander and John Nixon in connection with the circumstances surrounding the failure of the Curtiss - Wright gas generator. Based upon our analysis of the materials which we reviewed, our discussions with Mr. Nixon and Mr. Alexander and legal research which we have undertaken, we are in a position to provide you with our recommendations with respect to further action that the Commission may desire to take against Curtiss- Wright. The technical information which we have reviewed indicates that the January 10 failure of the Rolls Royce Olympus gas generator initiated at the inlet guide vanes of the unit. Apparently, a section of the skin of one of the guide vanes broke loose and passed through the first two rotor stages of the low pressure compressor section. When the broken section from the inlet guide vane reached the third rotor stage of the low pressure compressor, it apparently was unable to continue to pass through- the compressor and caused a virtual "wipeout" of all of the rotor blades in the third stage. This traumatic occurrence resulted in additional substantial damage in the first and second rotor and stator stages of the low pressure compressor. At the time of the loss, the Olympus gas generator had only accumulated approximately 765 hours of operating time since its original installation. The machine was still under warranty pursuant to the existing contractual agreements between the Commission and Curtiss - Wright. Although more than 12 months had passed since the initial installation of the unit, it had been out of service for some considerable time during 1978 because of warranty work that had to be done in order to replace a defective component in the power turbine. As a result the Curtiss - Wright warranty was extended for an additional period of time. Based upon the information which we have reviewed, this is the type of loss which, in the abstract, is covered under the manufacturer's warranty. However, under the circumstances existing with respect to this incident, Curtiss - Wright has taken the position that it has no warranty responsibility. In order to evaluate the propriety of Curtiss - Wright's position, it is neces- sary to first give consideration to the probable reason for the loss having occurred in the first instance. The design of the inlet guide vanes coupled with the type material of which they are constructed apparently creates a condition of high susceptibility to fatigue cracking. This is a condition which has been known to Rolls Royce and presumably Curtiss Wright for some considerable time. We do not have enough technical data, at this time, to ascertain with certainty why the inlet guide vanes have a high susceptibility to fatigue cracking but do know that the cracking seems to consistently initiate at the leading edge of the guide vane at the junction of the weld attachment to, what I shall refer to as, the "button11 that fastens the guide vane to the air intake section of the gas generator. It is interesting to note that of the 26 inlet guide vanes in the Hutchinson gas generator, 14 of them had failed at this precise location. Photographs of the failed blades demonstrate what appears to be an almost identical mode of failure as to each inlet guide vane which begins in the HAZ between the guide vane and attachment button. The technical data which we have reviewed indicates rather conclusively that the fatigue cracking problem to which the inlet guide vanes are susceptible is significantly accelerated when the generator is being operated in an anti -icing mode. Although we do not know precisely why anti -icing increases the likelihood of inlet guide vane cracking, we can reasonably assume that it must be related to increased thermal stresses and vibrational resonance which are created during operation with anti - icing. It is our understanding that the high temperature air from the discharge section of the high pressure compressor which is used for anti -icing passes through the hollow interior section of the inlet guide vanes. This creates a rather extreme temperature differential between the inside and outside surfaces of the inlet guide vane skin. Such a condition, of course, develops thermal stresses in excess of those which normally exist when the gas generator is being operated without anti - icing. With respect to anti -icing operation of the gas generator it may be of significance that the anti - ice valve on this particular unit contained a larger diameter orifice plate than that recommended by Rolls Royce. According to John Nixon, Curtiss- !Trigh.t failed to follow a recommendation of Rolls Royce with. respect to modification of the anti -ice valve. Apparently, Rolls Royce required that the orifice plate be changed so as to reduce the diameter of the opening through which the anti -icing gases would pass. Nixon suggests that this modification was intended to reduce pressure and vibrational loads on the inlet guide vanes and thereby reduce the stresses which were contributing to the fatigue failure. It is quite possible that Curtiss- Wright's failure to incorporate this Rolls Royce modification as it relates to the anti -icing valve orifice was an instrumental factor in the rapid and catastrophic failure of the gas generator. This definitely is one aspect of the occurrence which needs further technical exploration. A review of the failure analysis investigations prepared by Curtiss - Wright and Rolls Royce reveals that each of them was aware of the susceptibility of the inlet guide vanes to fatigue cracking prior to the sale and instal- lation of the Hutchinson unit. Curtiss - Wright makes the categorical statement that "...cracking of the entry guide vanes can occur within the estimated repair of overhaul life of the gas generator" and Rolls Royce notes that "vane failures have occurred previously....1° Additionally, in a paper delivered at the gas turbine conference in San Diego, in March of this year, the Rolls Royce engineer in charge of the Olympus C gas generator development went on record with respect to the knowledge of Rolls Royce that the inlet guide vanes on the Olympus C were known to suffer from minor cracking particularly if anti -icing air was used excessively. In that same paper, the Rolls Royce representative commented upon the design and development of a new inlet guide vane of "significantly improved mechanical construction" which virtually eliminates the problem of fatigue cracking. Although we have mentioned, earlier that this type of loss would generally be covered under a manufacturer's warranty, Curtiss - Wright has taken the position that its warranty has been negated because of the acts of Hutchinson Utilities. At a meeting which was held with Hutchinson Utilities' representatives on March 7, 1979, at the Curtiss - Wright offices, Curtiss - Wright pointed out that Hutchinson did not perform the required inspection of the inlet guide vanes at 250 and 500 hour intervals and therefore the Curtiss - Wright warranty was negated. Curtiss - Wright stated that Hutchinson was solely "culpable" for the damage. This position was apparently premised upon the failure analysis report B -778 -1 prepared by the Materials and Processing Engineering Department of Curtiss - Wright dated February 23, 1979. That report indicated that except for inlet guide vane X63, all of the other vanes which exhibited fatigue cracking and material loss showed heavy internal sooting and dirt which demonstrated that the vanes had been cracked or material had been lost for a considerable period of time. The conclusion arrived at by Curtiss - Wright is that inspections by Hutchinson Utilities would have revealed a serious problem with loss of material from inlet guide vanes and resulted in corrective measures being taken. In a letter of April 6, 1979, Curtiss - Wright actually goes on record as stating that: If the required inspections of the entry guide vanes had been performed, a catastrophic failure would have been avoided. This failure is therefore not covered by the contractual warranty." It is apparently because of the position set forth in the communications mentioned above that Curtiss- Wright has refused to accept the purchase order issued by Hutchinson Utilities for repair of the Rolls Royce Olympus C gas generator. The purchase order, as issued, contained nonwaiver language which was intended to preserve the rights and remedies of Hutchinson Utilities under warranty or otherwise to hold Curtiss - Wright responsible for the damage sustained. The purchase order was issued. with an express proviso that its submission shall not constitute acceptance or acquiescence by Hutchinson Utilities of the Curtiss - Wright position that the January 10 failure is not covered by warranty. In its letter of May 1, 1979, Curtiss - Wright states that the nonwaiver language is totally unacceptable. It is the position of Curtiss - Wright that it has demonstrated 01beyond reasonable doubt" that the engine failure was due to conduct on the part of Hutchinson which "effectively negated" warranty coverage. Curtiss- Wright states that it will not accept the purchase order which permits the possibility that payment for the repair work will be withheld because Hutchinson Utilities will not accept or acquiesce "to the sound conclusion that failure of referenced engine was caused by factors that negated any warranty coverage." Before discussing the soundness of the position which has been taken by Curtiss - Wright with respect to its responsibility for this loss, we believe that some comment should be made concerning the attitude of Curtiss - Wright with reference to the purchase order as expressed in its May 1 letter. In the first instance, it should be noted that the language of the purchase order does not require Curtiss - Wright to admit its responsibility for this loss under its warranty. The language merely reserves the right of Hutchinson Utilities to claim that the damage is covered under warranty or is, on some other basis, the responsibility of Curtiss - Wright. Contrary to the assumption of Curtiss - Wright the purchase order language does not permit Hutchinson Utilities to withhold payment for the repair work. It merely provides that in the event payment is made, such payment will not constitute an acceptance or acquiescence by Hutchinson of the conclusion reached by Curtiss - Wright that it does not have warranty responsibility. I do not know if Curtiss- Wright's misinterpretation of the language in the purchase order is intentional or simply the result of an innocent mistake, but believe that the matter requires further communication with Curtiss - Wright in order to see if its position can be modified. With respect to the position of Curtiss - Wright that Hutchinson Utilities failure to make required inspections of the inlet guide vanes negated any warranty of the manufacturer, an evaluation of the soundness of this position must begin with an analysis of the service information bulletin and maintenance manual references that prescribe the inspection procedure. These documents point out that defects can occur in inlet guide vanes which may result in the need to change damaged blades within the overhaul life of the gas generator. Particular attention is called to fatigue cracking which is accelerated by the use of anti -icing air. Accordingly, the service information bulletin and maintenance manual require an inspection every 250 hours when the machine is running with anti -icing air. When anti -icing is not being used, an inspection of the inlet guide vanes is required every 500 hours. We have been advised by representatives of Hutchinson Utilities that although it was provided with the service information bulletin and maintenance procedure information, these were merely two page documents incorporated within several thousands of pages of information and technical materials supplied by Curtiss Wright. Although Curtiss - Wright had a field service representative train Hutchinson operating personnel after installation of the unit, we are advised that no special mention was ever made of the requirement for 250 hour or 500 hour visual inspection of the inlet guide vanes. Notwithstanding the fact that Curtiss Wright now takes the position that such an inspection procedure was absolutely essential in order to avoid the type of catastrophic failure which occurred, the documents which set forth the inspection procedure contain no specific warning or other prominent language emphasizing the importance of performing the inspection. Furthermore, we are advised that Curtiss - Wright performed no inspection of the inlet guide vanes after the unit was returned to service with almost 190 hours of operation. This would seem to be in violation of Section 2.1.11.2 of the Curtiss - Wright maintenance manual which states: "At any time that it is necessary to enter the inlet plenum area for a routine maintenance requirement, an inspection must be performed regarding the general condition of the gas generator inlet area.11 While it is true that Hutchinson Utilities did not perform the visual inspection of the inlet guide vanes as required by the service information bulletin or maintenance manual, we do not believe that this conduct necessarily negates the manufacturer's warranty. There are several aspects of the inspection requirement which, in our opinion, reduces its significance insofar as it may be relied upon as a defense by Curtiss - Wright to any claims made by Hutchinson Utilities. In the first instance, the 250 hour inspection requirement is tantamount to an admission by Curtiss - Wright that its equipment is defective and potentially nonoperational. Assuming 24 hour operation of the unit under anti -icing conditions, strict adherence to the inspection requirements would necessitate bringing the unit down and out of operation every 10 days. Even when anti -icing is not in use the unit could only be operated for a maximum of 20 consecutive days. Secondly, based upon actual experience, it is quite likely that extensive inlet guide vane damage would be detected during each inspection. This would require the replacement of one or more inlet guide vanes every 10 days of operation under anti -icing conditions. It is our understanding that the inlet guide vanes cost approximately $1,000.00 each and simply based upon the experience of this particular gas generator during 765 hours of service, Hutchinson Utilities would have been required to replace 14 inlet guide vanes. On this basis, the Curtiss - Wright gas generator would involve maintenance costs of in excess of $15,000.00 for every 30 days of operation. It is our considered judgment that this is an unreasonable burden to place upon the purchaser of a gas generator who should reasonably anticipate uninterrupted normal operation without excessive maintenance costs. Thirdly, and perhaps most significantly, it must be noted that the inspection procedures required by Curtiss - Wright are not preventative. The detection of cracked or failed inlet guide vanes merely enables the customer to replace the defective blade. It does nothing by way of avoiding future failure. Under the circumstances involved in this particular loss it is impossible to speculate as to whether inlet guide vane #3 would have shown any evidence of cracking even if a timely inspection had been made. Interestingly, the other 13 vanes which failed did not cause catastrophic damage and apparently did not propagate to further failure. From this fact one could conclude that the gas generator operates more safely with broken inlet guide vanes than with vanes which are intact but susceptible to failure. Based upon the factors set forth above it is our opinion that the position taken by Curtiss - Wright with respect to its warranty responsibility is unsound. Notwithstanding the fact that Hutchinson Utilities did not follow the recommended inspection procedures relative to the inlet guide vanes we do not believe that that factor standing alone negates Curtiss- Wright's responsibility for the damage sustained as a result of the January 10 occurrence. We believe that a claim can be successfully made against Curtiss - Wright on the basis of warranty or alternatively on the basis of negligence or strict liability. We have also discussed with you the possibility that the entire turbo - generator unit sold by Curtiss - Wright may have been so unreasonably defective as to entitle Hutchinson Utilities to rescind its contract with Curtiss- Wright and demand return of the purchase price. It is our understanding that this entire unit has never been able to perform as originally intended since the time of its installation. There have been previous problems with the power turbine involving an improperly specified end plate which required replacement and took the unit out of service for a period of several months. In addition, we are informed that recent boroscopic findings have revealed serious cracking of weld repairs in the power turbine casing. Also, we have been advised that the gas generator which was sold to Hutchinson Utilities on the representation that it was a Rolls Royce Olympus "C" was in fact a retrofitted and modified Olympus-"B." When all of these circumstances are added to the unreasonably defective design of the inlet guide vanes of the gas generator we believe that a very strong argument can be made that there has been a total failure of consideration on the part of Curtiss - Wright with respect to its contract to sell a turbo - generator unit to Hutchinson Utilities. Rescission is an equitable remedy which may be available to one party to a contract depending upon the particular circumstances which exist. There are several factors present in this transaction which might give rise to the remedy of rescission. As pointed out above, it appears that a strong argument can be made demonstrating a total failure of consideration on the part of Curtiss - Wright. Secondly, it may be demonstrated that Curtiss - Wright has reputiated the contract or an essential part of it by refusing to recognize its warranty responsibility or to warrant the repair work which is being done with respect to the gas generator. Finally, we believe that there is strong It must be noted with respect to the availability of the remedy of rescission that the law will not permit it to be utilized if the party who seeks it has an adequate remedy for damages at law. In other words, if Hutchinson Utilities can be made whole by having Curtiss - Wright assume responsibility for repair of the damaged gas generator and power turbine casing then it is unlikely that you would be permitted to rescind the contract. However, the Courts do permit a party to claim rescission as an alternative remedy to a claim for monetary damages and it would be our recommendation that Hutchinson Utilities give serious consideration to pursuing rescission as an alternative form of relief. In the event that you are in agreement with the opinions which we have set forth in this letter, we suggest that Curtiss - Wright be placed on notice with respect to the position of Hutchinson Utilities. We are enclosing herewith a draft form of a letter which would serve this purpose. We claim no particular pride of authorship and to the extent that you wish to modify or amend the language contained in our proposed letter, please feel free to do so. We are sensitive to the immediate problems which are of concern to Hutchinson Utilities. We realize that there is a strong desire to maintain a good relationship with Curtiss - Wright in order to facilitate repair of the damaged gas generator and resume operation of the peaking station unit. At the same time, of course, Hutchinson Utilities does not desire to be deprived of its legal rights and permit Curtiss - Wright to avoid responsibility for damage which it should properly assume. Obviously, these are business judgments which must be made by the Commission. We have provided you with our best judgment relative to the validity of the Curtiss - Wright position and potential claims which can be made by Hutchinson Utilities. After you have had an opportunity to review this letter, we shall appreciate your advice as to any future activity you might desire on our part. evidence that there has been a breach of an essential part of the sales contract by reason of of the equipment to perform its intended the inability purpose. On the basis of any of the above factors we believe that Hutchinson Utilities can legaly rescind its contract with Curtiss- Wright. It must be noted with respect to the availability of the remedy of rescission that the law will not permit it to be utilized if the party who seeks it has an adequate remedy for damages at law. In other words, if Hutchinson Utilities can be made whole by having Curtiss - Wright assume responsibility for repair of the damaged gas generator and power turbine casing then it is unlikely that you would be permitted to rescind the contract. However, the Courts do permit a party to claim rescission as an alternative remedy to a claim for monetary damages and it would be our recommendation that Hutchinson Utilities give serious consideration to pursuing rescission as an alternative form of relief. In the event that you are in agreement with the opinions which we have set forth in this letter, we suggest that Curtiss - Wright be placed on notice with respect to the position of Hutchinson Utilities. We are enclosing herewith a draft form of a letter which would serve this purpose. We claim no particular pride of authorship and to the extent that you wish to modify or amend the language contained in our proposed letter, please feel free to do so. We are sensitive to the immediate problems which are of concern to Hutchinson Utilities. We realize that there is a strong desire to maintain a good relationship with Curtiss - Wright in order to facilitate repair of the damaged gas generator and resume operation of the peaking station unit. At the same time, of course, Hutchinson Utilities does not desire to be deprived of its legal rights and permit Curtiss - Wright to avoid responsibility for damage which it should properly assume. Obviously, these are business judgments which must be made by the Commission. We have provided you with our best judgment relative to the validity of the Curtiss - Wright position and potential claims which can be made by Hutchinson Utilities. After you have had an opportunity to review this letter, we shall appreciate your advice as to any future activity you might desire on our part. In accordance with the understanding reached at our meeting with. the Commission, we believe we have now finished the first phase of our retention. If you desire us to proceed further with respect to this matter, we shall be pleased to represent your interests upon receiving your advice. Yours very truly, ROBINS, DAVIS & LYONS Lawrence Zelle LZ /mrd Enclosure CC: Mr. Rufus Alexander Mgr. Alexander also presented a letter composed by, Rohins, Davis and Lyons to Curtiss -- Wright concerning warranty and possible recission of the purchase of the Curtiss - Wright plant. A motion was made by Commissioner Tracy, seconded by President Quade and carried that the letter proposed to be presented to Curtiss - Wright be submitted as corrected. Letter follows: May 25, 1979 Curtiss-Wright Corporation One Passaic Street Wood - Ridge, New Jersey 07075 Subject: Our Purchase Order No. 5312 Reference: Gas Generator 201736/C20/C22 Gentlemen: We are writing to you in connection with the repair of damage to the above referenced gas generator and particularly in response to the comments made in your letter of May 1, 1979. Your May 1 letter states that Curtiss - Wright is unwilling to accept our purchase order for repair of the damage sustained by the Rolls Royce Olympus "C" gas generator which occurred on January 10, 1979, unless certain terms and conditions are imposed upon our purchase order x`5312 as issued. You have requested that we confirm to you our agreement to the conditions you wish to impose. We understand that among the conditions you wish us to agree to are the following: 1. With respect to the repaired gas generator, Curtiss - Wright will not provide any warranty whatso- ever; 2. That Curtiss - Wright will not accept Hutch- inson Utilities desire to preserve any claims which it might have against Curtiss - Wright either on the basis of breach of warranty or otherwise; 3. That Hutchinson Utilities must abandon its position that Curtiss - Wright is responsible for repair of damage to the gas generator and accept the "sound conclusion" that the Curtiss - Wright warranty has been negated. We, of course, cannot agree to issuance of our purchase order with the restrictions that you have requested be imposed upon it. We are concerned that there may be some misunder- standing on the part of Curtiss - Wright with respect to the nonwaiver language contained in our purchase order. We are not demanding that Curtiss - Wright admit its warranty responsibility in undertaking repair of the generator. We recognize that a difference of opinion exists between us and Curtiss - Wright as to responsibility for this loss. The language set forth in our purchase order is merely intended to permit each of us to preserve any rights or remedies which we might have. We simply want to assure ourselves of the fact that issuance of the purchase order and payment thereunder will not result in an abandonment or waiver of our claims against Curtiss - Wright. We cannot see that this requirement will prejudice Curtiss - Wright in any way whatsoever and quite frankly fail to understand why you should find it objectionable. We are equally concerned by your refusal to provide any warranty on the gas generator after repairs have been completed. As you know, there have been only approximately 765 operating hours on this machine. Irrespective of whether the damage that occurred as a result of the failure on January 10, 1979, is or is not covered by your warranty, there is substantial time still remaining with respect to that warranty. We do .not believe it is reasonable for Curtiss - Wright to deprive Hutchinson Utilities of the remaining warranty which still would be in existence after repairs have been completed. In fact, we believe that Hutchinson Utilities should be entitled to a credit against the existing warranty time for the period required to make repairs. The January failure of the gas generator, when coupled with other experiences that we have had with your equipment has caused us to have serious question with respect to the integrity of the entire generating train which you sold to us. As you know, there was a severe problem in the past with respect to the power turbine and recent inspection of stator housing of that machine has revealed severe cracking in the area of rework of rail cracks which we believe will require replacement of said stator housing. Additionally, it has been brought to our attention that the Olympus unit which was sold to us as a Rolls Royce Olympus "C" was, in fact, a retro - fitted and modified Olympus "B ". We do not know if this factor contributed to the loss that was sustained in January but we are of the opinion that we did not receive from Curtiss - Wright the type of equipment which it represented it was providing to us under our contractual agreement. When the various problems that we have had with the Curtiss - Wright equipment are viewed in the context of your present attitude with respect to your refusal to honor your warranty as it relates to the gas generator, it is our opinion that there has been a total and complete failure of our contractual agreement which entitles Hutchinson Utilities to rescind that contract. We do not believe that we received from you a generating train which was capable of performing its intended function in accordance with the specifi- cations upon which our contract was based. Furthermore, you have demonstrated an unwillingness to live up to the terms and conditions of the contract with respect to service and warranty work. In view of these factors, we ask that you consider a return of all of the Curtiss - Wright equipment which you sold to us under contract of Decemberll, 1975, and that you reimburse us the purchase price of the equipment plus interest to date. There are obviously some serious misunderstandings existing between us. We are hopeful that they can be resolved in an amicable fashion but wish to inform you that we are prepared to resort to litigation if that becomes necessary. Before undertaking the expense and delay which could be involved by seeking a legal remedy we wish to invite you to discuss with us the alternative possibilities of rescission of our contract or repair of the damaged generator without requiring us to abandon all of our legal rights. 1 We shall be pleased to meet with you at your convenience if you would like to explore this matter further. We shall await your prompt response and then act accordingly. Yours truly, HUTCHINSON UTILITIES COMMISSION Rufus Alexander General Manager The regular meeting for June will be held on June 8 at 9:00 a.m. There being no further business, the meeting was adjourned at 10:30 a.m. Clinton Tracy, Secretary ATTES H. P. Quade, President