Blocktree Props., LLC v. Pub. Util. Dist. No. 2 of Grant Cnty. Wash., Mun. Corp.

• Decision Date: 29 March 2019
• Docket Number: NO: 2:18-CV-390-RMP,: 2:18-CV-390-RMP
• Citation: 380 F.Supp.3d 1102
• Parties: BLOCKTREE PROPERTIES, LLC, a Washington limited liability company; Corsair Investments, WA, LLC, a Washington limited liability company; Cytline, LLC, a Delaware limited liability company; 509 Mine, LLC, a Washington limited liability company; MIM Investors, LLC, a Washington limited liability company; Miners United, LLC, a Washington limited liability company; Telco 214 Wholesale Software, Inc., a Washington corporation; Mark Vargas, an individual; Wehash Technology, LLP, a Washington limited liability company, Plaintiff, v. PUBLIC UTILITY DISTRICT NO. 2 OF GRANT COUNTY WASHINGTON, a Washington municipal corporation; Terry Brewer, individually and in his official capacity; Bob Bernd, individually and in his official capacity; Dale Walker, individually and in his official capacity; Tom Flint, individually and in his official capacity; Larry Schaapman, individually and in his official capacity; Does 1-10, managers and employees of Grant PUD, individually and in their official capacities, Defendants.
• Court: U.S. District Court — District of Washington

380 F.Supp.3d 1102

BLOCKTREE PROPERTIES, LLC, a Washington limited liability company; Corsair Investments, WA, LLC, a Washington limited liability company; Cytline, LLC, a Delaware limited liability company; 509 Mine, LLC, a Washington limited liability company; MIM Investors, LLC, a Washington limited liability company; Miners United, LLC, a Washington limited liability company; Telco 214 Wholesale Software, Inc., a Washington corporation; Mark Vargas, an individual; Wehash Technology, LLP, a Washington limited liability company, Plaintiff,

v.PUBLIC UTILITY DISTRICT NO. 2 OF GRANT COUNTY WASHINGTON, a Washington municipal corporation; Terry Brewer, individually and in his official capacity; Bob Bernd, individually and in his official capacity; Dale Walker, individually and in his official capacity; Tom Flint, individually and in his official capacity; Larry Schaapman, individually and in his official capacity; Does 1-10, managers and employees of Grant PUD, individually and in their official capacities, Defendants.

NO: 2:18-CV-390-RMP

United States District Court, E.D. Washington.

Signed March 29, 2019

Jonathan D. Tebbs, Eric L. Christensen, Cairncross & Hempelmann PS, Seattle, WA, for Plaintiff.

Dale Noel Johnson, Malcolm Cavarly McLellan, Van Ness Feldman LLP, Seattle, WA, for Defendants.

ORDER DENYING PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION

ROSANNA MALOUF PETERSON, United States District Judge

BEFORE THE COURT is Plaintiffs' Motion for Preliminary Injunction, ECF No. 25. Plaintiffs, a group of technology firms primarily engaged in the business of cryptocurrency mining, asked this Court to enjoin Grant County PUD No. 2 from implementing its "Evolving Industries" electricity rate class, which substantially increases the cost of electricity supplied to "evolving industries," including Blocktree and other Grant County cryptocurrency miners. The Court finds that Blocktree has failed to show that they will suffer irreparable harm unless a preliminary injunction is imposed. Further, Blocktree is not likely to succeed in showing that Rate Schedule 17 is discriminatory or arbitrary, that their classification as an evolving industry was made without due process, or that the District's actions violated Blocktree's right to carry on a business under the Washington State Constitution's Privileges and Immunities Clause. Therefore, the Court denies Blocktree's request for a preliminary injunction.

BACKGROUND

Cryptocurrency Mining and Blockchain Technology

Plaintiffs Blocktree Properties, LLC; Corsair Investments WA, LLC, Cytline, LLC; 509 Mine, LLC, MIM Investors, LLC; Miners United, LLC; Telco 214 Wholesale Software, Inc.; Mark Vargas; and WeHash Technology, LLP (collectively, "Blocktree") are a group of technology firms that provide verification and security services for blockchain-based cryptocurrencies. ECF No. 25 at 11. Cryptocurrencies are digitally-based currency that exist solely on the internet and are unregulated and unmanaged by third parties, such as banks or governments. ECF No. 1 at 7–8. The blockchain is the data structure through which cryptocurrency transactions are identified, tracked, and shared across networks of computers, working as a digital ledger. Id. Supporters of cryptocurrencies claim that the blockchain allows for more secure and transparent monetary transactions than traditional payment methods. Id.

For the blockchain to track cryptocurrency transactions, the transactions must be verified by independent blockchain participators. ECF No. 1 at 7–8. Blockchain verifiers, also known as cryptocurrency miners, are given the chance to verify cryptocurrency transactions by solving complicated mathematical problems. Id. The first miner to solve the problem, and then verify the transaction on the blockchain, is rewarded with a small amount of cryptocurrency. Id. Miners rely on advanced and specialized computer hardware to successfully mine cryptocurrency before others can secure the cryptocurrency reward for themselves. Id.

Because cryptocurrency mining is technologically complex and requires advanced equipment, one of a miner's biggest expenses is electricity. ECF No. 1 at 9. Cryptocurrency miners work to reduce their power bills by locating their operations in areas with inexpensive and reliable access to high amounts of electricity. ECF No. 37-6 at 99.

Grant County PUD No. 2's Relationship with Cryptocurrency Miners

Defendants are Grant County Public Utility District Number 2, its Commissioners, and staff (collectively, "the District"). ECF No. 1 at 6–7. The Public Utility District is established under Title 54 of the Revised Code of Washington and operates as a municipal corporation at the direction of elected Commissioners, who are assisted by hired staff. ECF No. 37 at 9. The District boasts one of the least expensive power rates in the country due to its close proximity to reliable energy sources, such as the Grand Coulee Dam. ECF No. 32-1 at 656. Blocktree, drawn to the District by the affordable and reliable electricity, set up operation centers in the District over the previous five years. ECF No. 25 at 11.

The District charges its customers for power based on the customers' operations and power consumption. ECF No. 37 at 9. Customers of similar industries and operations are grouped into rate classes and are charged for power under the rates imposed on each class. Id. Currently, Blocktree is charged under Rate Schedule 7 ("RS-7"), which is the rate for large general service customers who use between 200 kW¹ and 5,000 kW of power a month. ECF No. 37-6 at 4–5.

The District contends that it received unprecedented interest from cryptocurrency miners in the summer of 2017. ECF No. 37-6 at 7. Since 2017, the District states that it has received interest from over 125 cryptocurrency mining companies, which the District equates to 1,500 MW of power, more than double the District's average load of 600 MWa. Id. The District became worried that the large number of cryptocurrency miners would overload the District's power systems and inhibit the District's ability to supply power to all of its customers. Id. at 8. Additionally, the District was worried about the risks imposed by the uncertainties in the cryptocurrency mining industry and whether the miners' failure to profit from the activity would result in a failure to pay high power bills, leaving the rest of the District's customers responsible for the unpaid electricity. Id. at 10.

To address the issues generated by the growing interest from cryptocurrency miners, the District developed two different strategies. The first was known as a two-queue approach. ECF No. 37-6 at 13. Under the two-queue approach, "traditional" customers are placed in one queue for electricity, and those belonging to an "evolving industry," such as cryptocurrency miners, are placed in another queue. Id. The District would service the traditional customers before servicing those in the evolving industry queue. Id. The second strategy developed by the District was the evolving industry rate class, whose electricity bills would be calculated under the newly-developed Rate Schedule 17 ("RS-17"). Id. at 16.

Rate Schedule 17

The District's hired staff began the creation of RS-17 in late 2017 as an approach to handle the sudden interest from cryptocurrency mining companies. ECF No. 37-6 at 11. On April 24, 2018, the staff, in a public presentation, recommended that the Commissioners establish a new rate schedule for industries like cryptocurrency mining that face certain viability risks while simultaneously consuming a relatively large portion of the District's power load. Id. at 64. On May 8, 2018, the Commissioners approved the creation of an evolving industry class by passing Resolution No. 8885. Id. at 75.

Following Resolution No. 8885, the District's staff drafted a memorandum describing the problems presented by the rapidly-growing cryptocurrency mining industry and how the new rate class, authorized by the Resolution, could potentially solve those issues. ECF No. 37-6 at 90. The staff recommended that customers would be placed into the "evolving industry" category, and therefore subjected to the secondary queue and RS-17, if the industry in question showed certain risks. The District classified the risks into three categories, as quoted from the memorandum:

Regulatory Risk – Risk of detrimental changes to regulation with the potential to render the industry inviable within a foreseeable time horizon.

Business Risk – Potential for cessation or significant reduction of service due to a concentration of business risk, in an evolving or unproven industry, in the value of the customer's primary output.

Concentration Risk – Potential for significant load concentration within Grant PUD's service territory resulting in a meaningful aggregate impact and corresponding future risk to Grant's revenue stream. Evaluation would begin to occur when industry concentration of existing and service request queue customer loads exceeds 5% of Grant PUD's total load.

Id. at 91.

The staff recommended that an industry be categorized as an evolving industry if the industry showed a concentration risk and one of the other two risks, and that the District evaluate an industry's placement in the evolving industry category on an annual basis. ECF No. 37-6 at 91. For regulatory risk, the District would consider pending state and federal legislation, regulatory rulings from state and federal agencies, and feedback from investment banks. Id. For business risk, the District would consider trends in the price volatility of the industry's primary product, the financial strength of market participants, and the viability and competitiveness of the industry based on the threat of new entrants, threat of substitutes, bargaining power of customers, bargaining power of suppliers, and industry rivalry. Id. For concentration risk, the District would consider whether all customers within the industry use 5% or more of the...