Pacific Gas & Elec. Co. v. United States
| Decision Date | 02 May 2012 |
| Docket Number | Case No. 07-167,Case No. 07-157C |
| Parties | PACIFIC GAS AND ELECTRIC COMPANY, SOUTHERN CALIFORNIA EDISON COMPANY, AND CALIFORNIA ELECTRICITY OVERSIGHT BOARD, Plaintiff, v. THE UNITED STATES, Defendant. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
FOR PUBLICATION
Breach of Contract, Trial, California Power Crisis
Marie L. Fiala, Sidley Austin L.L.P, San Francisco, CA, for Plaintiff, Pacific Gas & Electric Company. Jane I. Ryan, Steptoe & Johnson L.L.P., Washington, D.C., for Plaintiff, Southern California Edison Company. Mark Fogelman, Friedman Dumas & Springwater L.L.P., San Francisco, CA, for Plaintiff, San Diego Gas & Electric Company. Gary Alexander, Deputy Attorney General, for Plaintiff The People, Office of the Attorney General, San Francisco, CA.
Timothy P. McIlmail, Senior Litigation Counsel, with whom were Tony West, Assistant Attorney General, Jeanne E. Davidson, Director, Mark A. Melnick, Assistant Director, Commercial Litigation Branch, Civil Division, Department of Justice, Washington, D.C., for Defendant.
OPINON AND ORDER
Plaintiffs bring this breach of contract case to recover refunds from overcharges of electricity prices during the Energy Crisis of 2000-2001 in the state of California. In this liability phase, the Court held a four week trial in San Francisco, CA. After consideration of all the evidence, briefs and arguments, the Court finds that the United States breached its contract with the Plaintiffs.
During the summer of 2000 through 2001, California experienced a power crisis which dramatically affected the price of electricity. During that time, the electricity used in the California market was sold in two new centralized auction electricity markets, one run by the California Independent System Operation Corporation ("ISO") and one run by a centralized market called the California Power Exchange (PX). In both of these markets, participants signed contracts binding themselves to the terms of tariffs that governed the operations of the markets. Plaintiffs now bring these suits based upon these contracts and tariffs and seek refunds of the overcharges on electric power the Agencies sold between May 1, 2000 and June 20, 2001 in wholesale markets operated by the PX and ISO. Specifically, in their complaint, Plaintiffs allege two breach of contract claims. First, Plaintiffs allege breach by anticipatory repudiation. Second, Plaintiffs allege a present breach, as well as declaratory relief claims.
The Court held trial in San Francisco, CA. The record in this case, including all the briefing, the trial testimony, and the exhibits is extensive. Much of the evidence at trial was to provide the Court with an explanation of the market structure and the economics that gave rise to Plaintiffs' claims. However, Plaintiffs assert that most of the evidence is not necessary to decide the issues before the Court.
Despite the daunting complexity of the tariffs, at least to one not schooled in utility economics, of the transaction at issue, and of the variety of litigation related to the power crisis, Defendant also asserts that these cases are quite simple. Defendant argues that the agencies have no obligation to pay the Plaintiffs anything. Instead, Defendant argues that the contracts signed by the agencies were with the ISO and the PX, not with the Plaintiffs. Further, Defendant argues that by Plaintiffs' own admission, no obligations have arisen under the contracts.
Even though both parties claim that these cases are quite simple, however, in order to fully understand this case, the Court must delve into the novel utility markets created by the State of California, as well as the economy of the time. The Court will, therefore, begin its opinion with the parties in this litigation, the history of the electricity market, and then the tariffs. The Court will thereafter move into the FERC and Ninth Circuit litigation and, thereafter, the issues before the Court.
Plaintiffs Pacific Gas and Electric ("PG&E"), Southern California Edison Company ("SCE") and San Diego Gas & Electric ("SDG&E") are investor owned utilities (IOUs) engaged in the purchase, transmission, distribution, and sale of electric energy within California. TheIOUs provide electric power to the vast majority of California's businesses and residences, and together serve about 70 percent of all electric customers in the State.
PG&E is one of the nation's largest IOUs, providing electricity to approximately 15 million people in northern and central California. SCE serves approximately 15 million people in 15 Southern California counties. SDG&E services approximately 14 million people in both San Diego County and southern Orange County.
Plaintiffs the People are represented by the California Attorney General's Office on behalf of the ratepayers of the State and the California Energy Resources Scheduling Division ("CERS"). CERS is a state governmental entity created in January 2001 to serve as the power buyer of last resort for the State's electricity customers. CERS is a division within California's Department of Water Resources ("DWR").
The United States is defending Plaintiffs' claims on behalf of Bonneville Power Administration ("BPA") and Western Area Power Administration ("WAPA"), which are federal agencies responsible for marketing hydroelectric power generated by certain federal and non-federal facilities. BPA markets more than 20,000 megawatts of power per year generated by a nuclear power plant and 31 federal hydro projects that constitute the federal Columbia River power system in the Pacific Northwest. WAPA markets and transmits about 10,000 megawatts of power per year from some 55 hydro power plants to a 15-state region in the central and western United States, selling about 40 percent of all the hydroelectric power generated in that region.
Prior to 1998, the IOUs were vertically integrated. Specifically, the IOUs owned and operated their own generation, transmission, and distribution systems. The power rates which the IOUs could charge were regulated by the California Public Utilities Commission ("CPUC"). For the wholesale power bought and sold by the IOUs on the Western transmission grid, FERC regulated such activities. See CPUC v. FERC 462 F.3d 1027 (9th Cir. 2006).
During this time, the IOUs generated through their own facilities the power needed to serve their customers. To meet their demand, if necessary, the IOUs would purchase electricity from other suppliers. In order to effectuate the sale, the IOUs and out-of-state suppliers would enter into bilateral contracts. The IOUs had such agreements with BPA and WAPA, and some IOUs continue to do so today. The bilateral contracts negotiated price and volume, the specific source from which the power would be delivered to the transmission grid, and defined the transmission path through which the power would be distributed. In order to determine how much was owed, the parties used a settlement process basing the amount owed on metering data showing how much power was actually generated, transmitted, and received.
In 1996, California enacted Assembly bill 1890 ("AB 1890"), which restructured California's electric power markets. This bill created two new wholesale electricity markets: the PX and the ISO. Both the PX and ISO are non-profit, public benefit corporations organized under California law and they are FERC-jurisdictional public utilities which commenced operations in 1998.
Under AB 1890, the IOUs were required to "unbundle" their functions by separating their generation, transmission, and distribution functions. The IOUs had to divest substantial amounts of their power generation facilities and to transfer control of their transmission systems to the ISO. In addition, the IOUs were not permitted to use their remaining generating capacity to serve their customers, but instead were required to sell all of the power they generated, and buy substantially all of the power they needed through the PX and ISO. This buy-sell requirement applied only to the three IOUs in this case.
The PX was deemed a public utility pursuant to the Federal Power Act (FPA) and, as such, its operations and transactions were governed by a tariff approved by FERC. The PX was a nonprofit corporation that provided a centralized clearinghouse, similar to a stock exchange, which facilitated electricity transactions between sellers and buyers. The trading parties were called "market participants" and, therefore, the IOUs, CERS, and the Agencies all were considered Market Participants who bought and sold power in the PX.
Pursuant to its FERC-regulated Tariff, the PX operated daily auctions in which buyers purchased power for the following day, as well as hourly auctions that allowed buyers to make any necessary adjustments to purchases. As with any trading exchange, sellers submitted offers ("bids") to sell power in each auction and buyers submitted demand bids for the amount of electricity they wanted to buy. For each auction, the PX ranked the sellers offers to buy from low to high with a resulting supply curve. Price was mapped vertically and quantity horizontally, and the chart would depict the supply curve slopped upward because as the price increased, sellers were willing to sell more. On the other hand, the buyers' offers formed the "demand curve" which sloped downward because as the price increased, purchasers were willing to purchase less. Like all supply and demand curves, the point where the lines intersected represented the quantity sold in that auction and the "market clearing price" ("MCP") for that power.
The PX and ISO Tariffs provided the formula for the price; thus, the price of the last accepted seller's bid (the highest price) set the MCP for all of the power sold in that...
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