Duke Energy Trading & Marketing v. Davis

Citation267 F.3d 1042
Decision Date20 September 2001
Docket NumberNo. 01-55770,01-55770
Parties(9th Cir. 2001) DUKE ENERGY TRADING AND MARKETING, L.L.C., PLAINTIFF APPELLANT, v. GRAY DAVIS, GOVERNOR OF THE STATE OF CALIFORNIA, DEFENDANT APPELLEE, AND CALIFORNIA POWER EXCHANGE CORPORATION, DEFENDANT. San Francisco, California Filed
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Counsel Geoffrey Bestor (argued), Barry R. Ostrager, Seth A. Ribner, Steven H. Bergman, Simpson Thacher & Bartlett, Universal City, California; Joel B. Kleinman, Larry F. Eisenstat, Geoffrey Bestor, Mark L. Perlis, Dickstein Shapiro Morin & Oshinsky Llp, for Appellant.

Danette E. Valdez (argued), Deputy Attorney General, Bill Lockyer, Attorney General, Richard M. Frank, Chief Assistance Attorney General, Morris Beatus, Senior Assistant Attorney General, Andrea Lynn Hoch, Supervising Deputy Attorney General, San Francisco, California, for Appellee.

Appeal from the United States District Court for the Central District of California Terry J. Hatter, Chief District Judge, Presiding Argued and Submitted August 16, 2001 D.C. No. CV-01-01252-TJH

Before: Harlington Wood, Jr., * Alex Kozinski, and Diarmuid F. O'Scannlain, Circuit Judges

OPINION

O'scannlain, Circuit Judge

We must decide whether a wholesale energy supplier is entitled to injunctive relief from orders issued by the Governor of California commandeering its contractual rights to deliver electricity to public utilities within the state.

I.
A.

The electricity contracts at issue in this appeal are the products of the restructuring of the California electricity market, which commenced with the 1996 passage of Assembly Bill 1890 ("AB 1890"). 1996 Cal. Legis. Serv. 854 (West). AB 1890 called for the creation of the California Power Exchange ("CalPX"), a nonprofit entity that would provide an initially-mandatory auction market for the trading of electricity. 1 Electricity Restructuring Act § 1(c). The CalPX was deemed a public utility under the Federal Power Act ("FPA"); hence, it was subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC") and operated pursuant to FERC-approved tariffs and FERC-approved wholesale rate schedules. 2 Pac. Gas & Elec. Co., 77 FERC ¶¶ 61,204, at 61,803-05 (Nov. 26, 1996).

The CalPX commenced operations in March 1998. Initially, it operated only a single-price auction for day-ahead and day-of electricity trading (the "CalPX Core market"). In the summer of 2000, it opened its CalPX Trading Services ("CTS") division to operate a block forward market by matching supply and demand bids for longer-term electricity contracts ("block forward market" contracts or "BFM" contracts). AB 1890 required the three main investor-owned utilities ("IOUs") in California Southern California Edison ("SCE"), Pacific Gas & Electric ("PG&E"), and San Diego Gas & Electric ("SDG&E") to conduct virtually all of their electricity trading in the CalPX markets for a transition period. See In re Cal. Power Exch., 245 F.3d at 1114-15.

Beginning in the summer of 2000, wholesale prices for electricity in the California market increased dramatically. See id. at 1115-16. Prices in the CalPX markets spiked particularly sharply. San Diego Gas & Elec. Co., 93 FERC ¶¶ 61,121, at 61,353 (Nov. 1, 2000). PG&E and SCE, which were still subject to a retail rate freeze provided by AB 1890, incurred billions of dollars of debt because they were unable to pass their wholesale power costs on to their customers. See id. In January 2001, SCE and PG&E defaulted on hundreds of millions of dollars of obligations to the CalPX for December and January purchases in the CalPX Core and CTS block forward markets, including an outstanding debt of approximately $37 million for energy purchased through CTS from Duke. On January 18, 2001, following the downgrading of PG&E and SCE's debt ratings to "junk" status, the CalPX suspended trading privileges for the two IOUs.

The default of PG&E and SCE had a severe impact on the CalPX, as they were two of the largest CalPX participants. At the end of January 2001, the CalPX suspended trading in both its Core and CTS block forward markets and commenced wrapping up its operations. It filed for protection under Chapter 11 of the Bankruptcy Code on March 9, 2001. PG&E filed for bankruptcy on April 6, 2001.

B.

The CTS block forward contracts at issue in this appeal are contracts between wholesale suppliers such as Duke, on the one hand, and SCE and PG&E, on the other, for the delivery of electricity through December 31, 2001. The CalPX CTS served as an intermediary between buyers and sellers, matching supply and purchase bids submitted by CTS participants. The CalPX also served as a clearinghouse for payments and scheduled physical delivery of the electricity purchased through its CTS division. Duke was the largest single supplier of electricity in the CTS block forward market, accounting for nearly 43% of all CTS trades.

The contracts created through CTS's matches incorporate the provisions of the FERC-approved CalPX CTS Second Revised Rate Schedule FERC No. 1 ("CTS Rate Schedule"). Section 5 of the CTS Rate Schedule provides certain creditworthiness requirements for all CTS participants. These include an acceptable credit rating, collateral requirements, and other minimum financial conditions.

In the event of a default, the CTS Rate Schedule provides that "[a] default in the CTS Market will be deemed to be a default in the Core Market and vice versa." Section 6.7.6 of the CTS Rate Schedule sets forth the default mitigation provisions to which participants are bound. It provides:

If the CTS participant fails to pay any sum or to perform any other obligation to CTS or to CalPX when due, then CTS may, in its sole discretion and without further notice to the defaulting CTS Participant or regard to formalities of any kind . . . do any or all of the following in any order: . . . (e) sell or liquidate, as agent or attorney-in-fact for the defaulting CTS Participant, any Matches or cancel any bilateral deliveries it may then hold in the CTS Market . . . .

On January 5, 2001, the CalPX filed proposed Amendment 22 to its FERC tariff to permit PG&E and SCE to continue trading in the CalPX markets despite their deteriorating financial conditions. The proposed amendment would have relaxed the creditworthiness requirements included in the CTS Rate Schedule for certain CalPX market participants. It also would have authorized the CalPX governing board to waive collateral requirements. FERC ultimately rejected the proposed amendment, ruling that it represented an "inappropriate unilateral shifting of unacceptable financial risks" to wholesale energy suppliers, who had "negotiated over, and agreed to do business with the . . . PX subject to, tariff provisions that included standard financial protections." Cal. Indep. Sys. Operator Corp. et al., 94 FERC ¶¶ 61,132, 2001 WL 275661, at *8 (Feb. 14, 2001), reh'g denied, 95 FERC ¶¶ 61,026, 2001 WL 350274 (Apr. 6, 2001).

In mid-January, after SCE and PG&E defaulted on their obligations in the CalPX Core and CTS Markets, the CalPX invoked its authority under the CTS Rate Schedule's default mitigation provisions and commenced efforts to sell SCE and PG&E's contractual right to delivery of electricity through 2001 pursuant to their CTS block forward contract positions. Given that the prevailing price for electricity on the spot market vastly exceeded the price for electricity provided by SCE and PG&E's CTS block forward contracts which had been negotiated the previous year the value of SCE and PG&E's block forward positions, as of February 5, 2001, exceeded $200 million. The proceeds derived from the CalPX's sale of SCE and PG&E's contractual rights to electricity well below prevailing market rates were to be used to pay the IOUs' outstanding obligations to wholesale suppliers such as Duke.

C.

On January 17, 2001, in response to electricity blackouts and the threatened insolvency of the State's IOUs, Governor Davis declared a state of emergency, finding that "the imminent threat of widespread and prolonged disruption of electrical power . . . constitutes a condition of extreme peril to the safety of persons and property within the state."

On January 19, after learning that the CalPX was about to liquidate its block forward contracts, SCE sought a temporary restraining order against the CalPX in California Superior Court. The court denied the TRO request, but held a hearing on January 24 to consider SCE's application for a preliminary injunction. Id. The State intervened in the proceeding and requested that a preliminary injunction be entered to provide Governor Davis time to decide whether to take action by invoking his emergency powers. Id. The court granted the State's request and entered a preliminary injunction against the CalPX to expire on February 2, 2001. On January 25, 2001, the State obtained a TRO, to expire on February 5, 2001, barring the CalPX's liquidation of PG&E's forward contracts, as well.

On February 2, as the preliminary injunction surrounding the SCE block forward contracts was about to expire, Governor Davis issued an Executive Order purporting to "commandeer" SCE's block forward contracts "to be held subject to the control and coordination of the State of California." The Executive Order was promulgated pursuant to section 8572 of the California Emergency Services Act, which provides that "[i]n the exercise of the emergency powers hereby vested in him during a . . . state of emergency, the Governor is authorized to commandeer or utilize any private property or personnel deemed by him necessary in carrying out the responsibilities hereby vested in him as Chief Executive of the state and the state shall pay the reasonable value thereof." Cal. Gov't Code § 8572. On February 5, Governor Davis issued a similar Executive Order commandeering PG&E's block forward...

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