Pacific Gas and Elec. Co. v. Lynch

Decision Date25 July 2002
Docket NumberNo. C-01-3023 VRW.,C-01-3023 VRW.
CourtU.S. District Court — Northern District of California
PartiesPACIFIC GAS AND ELECTRIC CO, Plaintiff, v. Loretta M LYNCH, Henry M Duque, Richard A Bilas, Carl W Wood and Geoffrey F Brown, in their official capacities as Commissioners of the California Public Utilities Commission, Defendants. The Utility Reform Network, Intervenor.

Adam M. Cole, M. Laurence Popofsky, Marie L. Fiala, Thomas E. Reiber, Heller Ehrman White & McAuliffe, LLP, San Francisco, CA, Christopher J. Warner, Robert Bordon, Christopher J. Warner, Roger J. Peters, Law Department Pacific Gas and Electric, San Francisco, CA, for Pacific Gas and Electric Company, a California corporation, plaintiff.

Elizabeth M. McQuillan, Gary M. Cohen, California Public Utilities Commission, San Francisco, CA, Harvey Y. Morris, Public Utilities Commission of CA, San Francisco, CA, for defendants.

Daniel L. Siegel, Sacramento, CA, Laura Julie Zuckerman, State of California, Department of Justice, Attorney General's Office, San Francisco, CA, Morris Beatus, Sacramento, CA, Paul Stein, CA State Attorney General's Office, San Francisco, CA, for Bill Lockyer, Attorney General, Gray Davis, People of State of Cal., amicus.

D. Cameron Baker, Theresa L. Mueller, San Francisco, CA, Jacqueline Minor, Deputy City Attorneys, San Francisco, CA, for City and County of San Francisco, amicus.

Fredric D. Woocher, Michael J. Strumwasser, Strumwasser & Woocher, LLP, Santa Monica, CA, Randolph L. Wu, Robert E. Finkelstein, The Utility Reform Network, San Francisco, CA, for Utility Reform Network, intervenor.


WALKER, District Judge.

By its complaint, Pacific Gas and Electric Company (PG & E) attacks the regulatory restructuring scheme California developed and later implemented for its electrical public utilities. PG & E names as defendants Loretta M Lynch, Henry M Duque, Carl W Wood, Geoffrey F Brown and Michael R Peevey1, in their official capacities as Commissioners of the California Public Utilities Commission (CPUC). PG & E has moved for summary judgment on its first and second claims for relief (Doc # 111) while defendants have filed cross-motions for summary judgment or, in the alternative, for partial summary judgment on PG & E's preemption claims. Doc # 104. Applicant in intervention The Utility Reform Network (TURN) also moves for summary judgment against PG & E. Doc # 119.


PG & E filed its original complaint against defendants on November 8, 2000, in this court, bringing the same claims as in its present complaint, with the addition of an equal protection claim. See Compl in PG & E v. Lynch, et al, No C-00-4128 (SBA) (NDCal), in PRJN I (Doc # 49, Exh # 3). That action was subsequently transferred to Judge Lew in the Central District of California, who was presiding over a similar lawsuit filed by Southern California Edison (SCE). After PG & E amended its complaint, defendants moved to dismiss. See Def Mot in PG & E v. Lynch, et al, No C-01-1083-RSWL (SHx) (CDCal), in PRJN I (Doc # 50, Exh # 11). On May 2, 2001, Judge Lew granted defendants' motion to dismiss without prejudice on ripeness grounds, because "many of the decisions to which PG & E refers in its [first amended complaint] as violating federal law are non-final interim orders that will become final upon a grant or denial of rehearing." 5/2/01 Order at 38, attached in PRJN I (Doc # 49, Exh # 2). Judge Lew noted that PG & E could refile its complaint once the "CPUC interim orders it challenges become final decisions." Id at 39.

On August 8, 2001, PG & E filed the instant action before Judge Hamilton in this court, asserting that two of the orders central to its complaint had become final under state law. See Compl in PG & E v. Lynch, et al, No C-01-3023-PJH (Doc # 1). On September 24, 2001, defendants moved to dismiss PG & E's complaint. Doc # 24. Also on September 24, TURN moved to intervene and to dismiss PG & E's complaint. Docs ## 18 and 20. On December 18, 2001, the undersigned determined that C-01-3023-PJH was related to a bankruptcy appeal brought by PG & E and pending before the undersigned, C-01-2490-VRW, and C-01-3023-PJH was reassigned to the undersigned.

The court heard oral argument on defendants' and TURN's motions to dismiss on February 7, 2002. See Doc # 85. At the March 7, 2002, case management conference, the court determined that the court's consideration of the issues raised would benefit from a further development of the record and set a hearing date on any summary judgment motions for May 24, 2002. See Doc # 90.


The instant action is one of many filed in response to California's attempt to restructure its regulatory scheme for the generation and sale of electricity. As codified in Assembly Bill 1890 (AB 1890), California's restructuring reflected the CPUC's determination that:

the interests of the ratepayers and the state as a whole will be best served by moving from the regulatory framework *** in which retail electricity service is provided principally by electrical corporations subject to an obligation to provide ultimate consumers in exclusive service territories with reliable electric service at regulated rates, to a framework under which competition would be allowed in the supply of electric power and customers would be allowed to have the right to choose their supplier of electric power.

CalPubUtilCode § 330.

California's restructuring scheme involved the creation of two new non-governmental corporations to orchestrate the transmission and sale of electricity, organized under California law but regulated by the Federal Energy Regulatory Commission (FERC): the Independent System Operator (ISO) and the California Power Exchange (PX).

Before it ceased operation, the PX operated a continuous state-wide auction, matching bids for the sale and purchase of wholesale electricity. Bidders of supply into the PX included independent generators of electricity, and other entities that had purchased electricity from such generators for resale. The PX matched these supply bids with requirements for the delivery of electricity, as expressed by demand bids from buyers. Starting in July 1999, a division of the PX, CalPX Trading, operated a block forward market (BFM), an exchange that matched bids to buy specified amounts of power for various time periods with offers to sell power for the same periods in advance of the contracted delivery date. BFMs provided a degree of predictability in the future cost of power.

The ISO, which continues to operate, assumed control over the transmission systems of all three of California's investor-owned utilities (IOUs): PG & E, SCE and San Diego Gas & Electric Co. (SDG & E). The ISO operates the electrical grid for the state and purchases power as necessary to ensure non-discriminatory access and system reliability. Although PG & E continues to own its transmission system, the ISO has operational control. At all times relevant to PG & E's complaint, if PG & E's customer demand was not met by scheduled supplies into the PX or other sources, the ISO was required to procure additional electricity to serve PG & E's requirements and maintain the stability of the grid. See Compl (Doc # 1) at ¶ 20.

Prior to August 3, 2000, the CPUC required PG & E to procure electricity solely through the PX, unless, as discussed above, PG & E's customer demand could not be met by the scheduled power supply available on the PX. After August 3, 2000, the CPUC authorized PG & E, and the other California IOUs, to purchase a limited amount of wholesale electricity through bilateral contracts outside the PX and ISO markets, subject to certain restrictions. See Kubitz Decl (Doc # 115) at ¶¶ 4-9. As a consequence of this regulatory change, PG & E has divided its preemption claim into two parts: one concerning the period before August 3 and one concerning the period after.

In order for AB 1890 to be implemented and for the PX and ISO to begin operation, the FERC, which has jurisdiction to regulate the sale of electricity in interstate commerce, was required to approve certain filings by the ISO, the PX and the IOUs. Beginning in late 1996, as part of the shift to a competitive electricity market, the FERC granted a series of requests by owners of generation plants, including the IOUs and recent purchasers of plants previously owned by the IOUs, for authorization to sell electricity on the PX and other wholesale markets at market-based rates. PG & E during restructuring would be both a purchaser and a seller of electric wholesale power.

Prior to 1996, by contrast, the CPUC regulated nearly every aspect of PG & E's vertically integrated electricity business. PG & E owned and operated assets used in generation, transmission and distribution of electricity to retail customers. The CPUC established and regulated the retail rates that PG & E could charge its customers, setting these rates at a level sufficient to allow PG & E to recover the costs of generation, transmission, distribution and other ancillary functions, as well as allowing PG & E a reasonable rate of return on its investment in the capital required to perform these functions. In restructuring its electricity markets, California sought to separate the utilities' vertically-integrated generation, transmission and distribution functions with the goal of providing consumer access to competitively priced generation. On the retail side, this envisioned eventually replacing the regulation of retail rates based on cost and a reasonable rate of return with competitively determined market rates, subject to certain limitations in order to protect certain constituencies.

In enacting AB 1890, the California legislature did not effect an immediate transition to this new regime. Rather, California imposed a rate freeze on retail rates during a transition period. This transition period was set to end the earlier of March 31, 2002, or the date that the...

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