trying to understand whether excess capacity runs in a power grid to avoid brown outs and how long can the excess capacity exist within the grid before it is dissapated or used?
You are confusing yourself by being loose with the definition of "power grid".
The grid itself stores no power. All power dumped onto it by generators is immediately consumed. Most of that goes to power customers, and some fraction is lost in the transmission process.
However, there is usually more generating capacity than demand. In this case, generating capacity means extra power that could be generated, but isn't. This can come from, for example, running more water thru turbines at a dam, bringing more costly "peaking" plants on line that are normally idle, etc. These all come down to the modern equivalent of shoveling more coal into the boiler.
Also, is power generation produced to keep demand below total generation of power at any given time such that demand could be described as operating at a percentage of capacity in the power grid,
No. Again, the grid doesn't store power. However, power generation is adjusted to match demand in real time.
Or does power generation always equal demand exactly?
I am helping a client recover payments to a mucilage electric company for excess electricity he was billed but never used since it dissapated through the meter box due to a faulty lug clip damaged when the meter was installed.
The electricity was certainly "used" from the power companies standpoint. Someone somewhere had to shovel more provebial coal into the boiler to cover the extra power that was dissipated due to the faulty lug clip. Real expense was incurred in producing that power, whether it did anything useful for your client or not.
This case hinges around who owned the faulty equipment and who did the faulty work. Generally, up to the output of the power meter is the utilities responsibility. After that it's the customer's responsibility. However, specifics vary. You need to find out who owned, operated, and did the work on the faulty equipment, and authorized that work. If the power company did the work and owns the equipment, and if it's all in a cabinet they control, then you may have a case. If your client installed the equipment or did the repairs, it's likely on him.
Here is a analogy. You fill up your car at a gas station. There is a leak in the hose by the gas pump, so you are charged for more gas than got into your car. That's on the gas station. It cost the gas station money to provide the gas that leaked out, but in this case it is their expense to bear since their equipment is at fault and you did nothing wrong.
However, if there is a leak in your gas tank, it still cost the gas station the same amount to provide all the gas. But this time, the responsibility is yours. The gas station sold you the gas, and it was your fault, not theirs, that you didn't get to use all of it as you intended.
The problem here is deciding who exactly had responsibility for the "leak". Who owns the equipment, who worked on it, who approved it, etc, probably all have bearing. But, that's your end of things. Those are not electrical issues.
for electricity paid for by the customer that in essence was produced at zero marginal cost
No. Just no. It doesn't work that way.
It did cost the power company incrementally to produce that electricity, just like it cost the gas station for the leaked gas, regardless of whos fault it was that it got leaked.
because the billed power would have been present within the excess capacity generated
No. It doesn't work that way.
If this were the case, then why couldn't I and everyone else claim a fraction of their power bill was invalid because only free excess was being used? There is nothing special about your client's "leaked" power versus anyone else's successfully used power. It doesn't work this way. It could never be allowed to work this way, else the whole system of buying and selling electrical power would be invalid.