BlueEarth Biofuels LLC has sued its business partners Hawaiian and Maui Electric companies in a Texas court, alleging that they cut it out of a plan to build a $61 million biodiesel refinery on Maui, The Maui News reported today.

Also a defendant is Aloha Petroleum Inc., which BlueEarth says has been tapped to replace it on the 120-million-gallon-a-year renewable energy project.

The defendants had little to say about the suit, filed last month in the U.S. District Court for the Northern District of Texas in Dallas. BlueEarth alleges that the defendants violated nondisclosure agreements, and it is seeking protection of its intellectual property, specific performance to allow it to complete its contract and damages equal to its potential revenue, plus costs and an "exemplary amount" to deter the defendants from violating agreements in the future.

Lynne Unemori, vice president for corporate relations at Hawaiian Electric Co., said the electric utilities are hopeful of resolving the dispute and moving ahead with the project.

Kau'i Awai-Dickson of Maui Electric Co. said MECO associates itself with the position of its parent company, and that "MECO still has plans to use renewable, sustainable biodiesel in its units."

Aloha Petroleum Chief Executive Officer Richard Parry said: "We do not think there is much to the lawsuit and expect it to be resolved in due course, but our attorneys have advised us not to discuss the matter further. Aloha Petroleum is continuing to work with other local companies to meet Hawai'i's current and future energy needs."

Landis Maez, co-managing partner of BlueEarth, said Monday that he had no comment.

The lawsuit was filed Oct. 6. On Oct. 20, Gov. Linda Lingle announced a comprehensive agreement — including commitments from HECO companies - to move the state away from its dependence on fossil fuels for electricity. BlueEarth's project, which had been announced to a mixture of praise and dismay in February 2007, was not mentioned at Lingle's press conference.

That absence was spotted by Henry Curtis, executive director of Life of the Land, who had been critical of using Malaysian palm oil as the feedstock for diesel to be refined on Maui.

Ted Peck, the energy specialist at the Department of Business, Economic Development & Tourism, said Monday that a Booz Allen consultant study found that the governor's goal of 40 percent renewables for electricity can be attained "without biofuels."

However, biodiesel was going to be the first really large input of renewable energy in the state. When announced, the refinery was to be in operation in 2009, and an even larger new generating station on O'ahu was to use imported biodiesel.

The plan was for BlueEarth, a 50.1 percent owner of the refinery, to import renewable feedstock, refine it on Maui and sell most of it to MECO.

The initial refinery was to have a capacity of 40 million gallons, quickly expandable to 120 mg by 2011. MECO, which already uses small amounts of biodiesel, requires about 70 mg of oil a year, and HECO had visions of using Maui-refined diesel at generating plants on O'ahu and the Big Island.

According to the narrative in the complaint filed by Dallas attorney Mitchell Milby, BlueEarth began talking with HECO and MECO in March 2006. The agreement announced about a year later called for HECO to be a 49.9 percent owner of the refinery. BlueEarth would not only build but operate the plant, with most of the financing to come from $59 million in state-backed special purpose bonds.

Maez said the revenue stream from long-term sales contracts with MECO would have been attractive to certain kinds of investors, and as recently as September he said that despite the trouble in financial markets, BlueEarth would have no difficulty funding the project.

"BlueEarth has performed or is ready, willing and able to perform its obligations," says the complaint.

In the course of negotiations, the suit says, last January Aloha was brought into the talks because BlueEarth needed terminal facilities at Kahului Harbor to receive and process the plant oils to be used as feedstock.

Nondisclosure agreements were signed then, too, and allegedly HECO and MECO promised not to solicit business from each other's clients or to beat BlueEarth out of any commissions.

In May, the suit says, Aloha expressed interest to BlueEarth in taking a small minority interest in the refinery.

"Shortly after BlueEarth shared its confidential information regarding the details of the project with Aloha, (Karl) Stahlkopf informed BlueEarth that based upon numerous private meetings between HECO and Aloha in June of 2008, HECO was unilaterally terminating investment talks with the project's potential equity investor in order to provide Aloha with a key investment role."

Stahlkopf is a senior vice president and chief technology officer at HECO. He as an individual is named as a defendant. He could not be reached for comment.

Later, the suit says, Stahlkopf told BlueEarth that HECO expected it to sell its entire interest to Aloha or risk losing its entire investment. This is said to be $1.2 million in addition to time and expertise.

According to the suit, Stahlkopf told BlueEarth that when the nondisclosure agreements expire Jan. 29, "HECO and MECO intend to contract with Aloha to complete the project."

The suit says Aloha also is in violation of confidentiality agreements because it solicited business from unnamed BlueEarth clients.

Curtis, who has been following the Public Utilities Commission filings in this matter, says: "It appears that the deal between BlueEarth and MECO fell apart for several reasons: how to finance the plant, where the fuel would come from and how to make the process transparent.

"BlueEarth claimed that the biofuel pricing would be transparent and not tied to the price of oil. But for the past several months biodiesel has cost more than diesel, which costs more than petroleum. . . .

"On top of that, allegedly sustainable palm oil is just coming onto the market, and that costs more than everything else. In addition, it is generally agreed that local biofuel production is years off. Finally, there are rumors about the amount of money that BlueEarth was paying its owners."

Curtis, who takes the position that palm oil grown in Southeast Asia is not sustainable because forests are being cleared for plantations, also noted that HECO is having problems with its biodiesel generating plant on O'ahu.

It was going to get the refined biodiesel from Imperium Renewables, which may not be ready to deliver.

BlueEarth and HECO say their feedstock will be sustainable, and they got the Natural Resources Development Council to devise a standard to determine which plant-source feedstocks are sustainable.

In the original plan, the source of the plant oil was eventually to be Hawai'i, using an unspecified crop. HECO was going to donate its half of the profits to a foundation for research and encourage local production of fuel crops.

(The leading candidate crop is jatropha, a tree that produces oily beans, and the island of production would not necessarily be Maui.)

Last month, when Lingle introduced her Hawaii Clean Energy Initiative, she said HECO was committing to integrating up to 1,100 megawatts of already identified additional renewable energy on the Hawaiian Electric companies' grids, with 700 megawatts to be implemented within five years.

That would be more than five times MECO's annual output, which now gets about 10 percent of its kilowatt-hours from wind and somewhat less from Hawaiian Commercial & Sugar Co.'s bagasse-fired plant.

Biodiesel would move MECO to mostly renewables, although importing the palm oil would do nothing for the other leg of the state's long-term goal of enhancing energy security by producing locally.

And biodiesel would be firm power, unlike wind and solar.

The initiative also prohibits HECO from building any new coal plants in Hawai'i. The Kahe plant on O'ahu — six times as big as MECO — uses coal.

BlueEarth is asking for a jury trial.

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