Madrid v. Perot Systems Corp.

Decision Date26 May 2005
Docket NumberNo. C046683.,C046683.
Citation30 Cal.Rptr.3d 210,130 Cal.App.4th 440
CourtCalifornia Court of Appeals Court of Appeals
PartiesArt MADRID, Plaintiff and Appellant, v. PEROT SYSTEMS CORPORATION et al., Defendants and Respondents.

Stephen A. Kroft, McDermott Will & Emery, Los Angeles, CA, for Defendant and Respondent, Perot Systems Corporation.

C. Brandon Wisoff, Farella, Braun & Martel, San Francisco, CA, for Defendant and Respondent, California Independent System Operator.

Allen J. Ruby, Ruby & Schofield, San Jose, CA, for Defendant and Respondent, Terry Winter.

Colin L. Pearce, Duane Morris, San Francisco, CA, Joseph J. Aronica, Duane Morris, Washington, DC, for Defendant and Respondent, Paul Gribik.

SIMS, J.

Plaintiff Art Madrid seeks to pursue a class action lawsuit on behalf of California electricity customers, against parties involved in restructuring California's electricity market, who allegedly engaged in unlawful business practices in violation of the unfair competition law (UCL) (Bus. & Prof.Code, § 17200 et seq.1). Plaintiff appeals from a judgment of dismissal following the sustaining of demurrers to his complaint against defendants Perot Systems Corporation (Perot), California Independent System Operator (ISO), Terry Winter (president and corporate executive Officer of ISO), and Paul Gribik, a Perot associate. Plaintiff argues he alleged viable UCL claims. We disagree. As we shall explain, damages are not recoverable under the UCL, and plaintiff has alleged no viable theory upon which he could obtain restitution or injunctive relief. We shall therefore affirm the judgment.2

FACTUAL AND PROCEDURAL BACKGROUND

In June 2002, plaintiff filed in San Diego County a class action lawsuit against Perot, ISO, and Winter. Gribik was brought in as a Doe defendant in June 2003. The complaint alleged UCL violations. It also alleged other counts, which we need not address because plaintiff expressly abandons them on appeal.

The complaint's "INTRODUCTION" alleged: "This action is brought under California's criminal antitrust and unfair competition laws. It seeks recovery of damages, and other monetary, equitable and injunctive relief arising from [Perot's] aiding and abetting in the manipulation, distortion, and corruption of California's electricity market including derivatives. Defendants' unfair and unlawful business practices include conspiring to establish phoney strategies designed to `game' the California markets. Those strategies were designed by PEROT and sold3 to various market participants for the purpose of cheating Californians out of billions of dollars. It is estimated that defendants' anti-competitive conduct and illegal, unfair and deceptive business practices exploited the general public and caused damage well in excess of $10 billion."

The complaint alleged as follows:

1. Plaintiff was the Mayor of La Mesa but was suing not in his official capacity but on his own behalf and the behalf of a class consisting of all persons in California who have purchased electricity from San Diego Gas & Electric (SDG & E), Southern California Edison (SCE) or Pacific Gas & Electric (PG & E) for purposes other than resale or distribution since 1999.

2. ISO is a California mutual benefit corporation that operates the "real-time" and "ancillary services" power markets and manages the electricity transmission grid covering most of California. Winter is ISO's president and corporate executive officer.

3. Perot, a Delaware corporation doing business in California, developed and implemented the business systems used to operate ISO and the California Power Exchange (PX).

4. In 1996, California enacted Assembly Bill 1890 (AB 1890), codified as Public Utilities Code section 330 et seq. (Stats. 1996, ch. 854, § 10), to restructure the California electricity market. AB 1890 required California's investor-owned utilities (SDG & E, SCE and PG & E) to sell much of their electric generation capacity in order to create competition in the generation and sale of wholesale electricity. California's deregulation plan envisioned that, by removing a critical portion of wholesale generating capacity from the utilities' control, competitive market forces would attract new sources of power and lower the price of electricity. Instead, a limited group of "inside players," including defendants, used the opportunity to manipulate the California market to extract unconscionable profits. Defendants helped energy companies (Duke, Reliant, Dynegy, Mirant, and Williams/AES) to devise deceptive schemes and engage in fraudulent and unlawful business conduct that thwarted the vision of a competitive energy market.

5. AB 1890 also established ISO and the PX. PX was to operate a market for the purchase and sale of electricity for delivery during the same or next day. ISO was to manage the transmission network, procure electricity during actual operation ("real-time") in order to manage imbalances between demand and supply as they occur, and to maintain the reliability of the transmission grid. ISO's board of directors was comprised of energy company representatives and other stakeholders in the electricity marketplace. The electricity purchases administered by ISO and PX were for subsequent resale, primarily to customers of the investor-owned utilities.

6. Substantial portions of the electricity requirements for any given day were scheduled through the PX in conjunction with ISO. ISO also was able to procure real-time energy as needed. These markets operate in one-hour increments (and even in 10-minute increments), requiring bidding, sales, and purchases for each one-hour or 10-minute increment. Ancillary services are separate markets operated by ISO for the delivery of electricity on demand. Generators bid into ancillary service markets and, when their bids are accepted, agree to provide electricity if ISO determines, through the operation of the grid, that the electricity is needed.

7. Perot was hired to set up the computer systems that controlled California's deregulated energy market. Perot also provided business consulting and applications development services used by ISO and PX to administer the power markets and transmission grid. Perot designed and implemented systems that allowed and facilitated energy market manipulation by market participants. Perot identified holes and gaps in ISO's operating systems that could allow generators and traders to "game" the market and increase their profits through deceptive and fraudulent means. Perot aided and abetted the market participants in manipulating the market through bogus, fraudulent gaming strategies. Perot provided generators and traders with a detailed blueprint of how to exploit the market's holes and gaps.

8. Perot created and gave to market participants a document proclaiming, "PEROT systems discovered a hole in the ISO's protocols for buying, selling, and pricing imbalance energy." The document instructed participants to "find leverage points you can use" and said gaps in the protocols "provide opportunities for increased profits." The document warned there may be a limit to the "window of opportunity" to exploit the system before ISO recognized the gaps and revised its protocols to close them. The document said that, if market participants followed Perot's strategies, even a small participant could control prices in California and destabilize the electricity market.

9. The "game plan" Perot shared with its "co-conspirators" included specific collusive and fraudulent trading strategies, which were used by market participants to manipulate the market. The strategies took on code names within the industry, e.g., Megawatt Laundering, the Black Widow, Load Shifting, Get Shorty, Ricochet, Forney's Perpetual Loop, and Cong Catcher. For example, Death Star was designed to create artificial congestion (a traffic jam when scheduled electricity traveling over the transmission line exceeds the line's capacity). To resolve the congestion, a party planning to use a congested line may receive from ISO a substantial payment (a decremental energy payment) not to use the line. Traders and generators would schedule energy over a transmission line they knew would be congested at a given point, even though they had no intention of actually using that line, in order to receive a payment not to use the line. Another scheme was Inc-ing, in which traders entered into bogus transactions in the "day-ahead" markets that had the effect of artificially inflating demand for electricity while simultaneously artificially diminishing the supply of power. The purchaser in the dummy transaction would thereafter draw only a fraction of the power it had purchased, allowing the seller to sell the excess power. In another scheme, Load Shift, traders overstated electrical load in one geographic zone, while understating it in another zone. By doing so, prices for power in the artificially congested zone would rise. The trader would then cancel or not use some or all of the power ordered in the high congestion zone. The trader would then receive a payment from ISO for not using the power.

10. Each of these schemes involved the use of dummy trading, collusion between market participants, false representations, and deceptive business practices. As a result of Perot's conduct, market participants did engage in market manipulation on a massive scale, realizing extraordinary profits at the expense of plaintiff and Californians.

11. ISO and its employees acquiesced in and facilitated Perot's wrongful conduct by combining with other market participants to manipulate and destabilize the market through dummy trades and manipulation of the...

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