People ex rel. Brown v. Powerex Corp.

• Decision Date: 11 June 2007
• Docket Number: No. C051868.,C051868.
• Citation: 62 Cal.Rptr.3d 638,153 Cal.App.4th 93
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE ex rel. Edmund G. BROWN, Jr., as Attorney General, etc., Plaintiff and Appellant, v. POWEREX CORPORATION, Defendant and Respondent.

62 Cal.Rptr.3d 638

153 Cal.App.4th 93

The PEOPLE ex rel. Edmund G. BROWN, Jr., as Attorney General, etc., Plaintiff and Appellant, v. POWEREX CORPORATION, Defendant and Respondent.

No. C051868.

Court of Appeal, Third District.

June 11, 2007.

As Modified July 11, 2007.

Bill Lockyer, Attorney General, Thomas J. Greene, Chief Assistant Attorney General, Mark Breckler, Danette E. Valdez, Annadel A. Almendras, Myung J. Park, and Song Hill Deputy Attorneys General, for Plaintiff and Appellant.

Gurnee and Daniels, Steven H. Gurnee, John A. Mason; Bracewell & Giuliani, J. Clifford Gunter, III and Andrew M. Edison, Pro Hac Vice, for Defendant and Respondent.

MORRISON, J.

After the collapse of Enron Corporation, the Attorney General concluded wholesale energy companies, including Powerex Corporation, had engaged in schemes damaging California energy consumers. He sued Powerex, alleging violations of the Unfair Competition Law (Bus. & Prof.Code, § 17200 et seq., "UCL") and the California Commodity Law of 1990 (Corp.Code, § 29500 et seq., "CCL") seeking damages, penalties and injunctive relief.

The trial court sustained Powerex's demurrer without leave to amend on the ground the claims were barred by the Federal Power Act (16 U.S.C.A. § 791a et seq., "FPA") which grants the Federal Energy Regulatory Commission ("FERC") exclusive jurisdiction over the wholesale energy market.

Several Ninth Circuit decisions arising out of the energy crisis have concluded that claims similar to the Attorney General's are barred by the FPA, specifically by implied preemption (field and conflict preemption), and by the filed rate doctrine. Field preemption exists when a federal scheme is comprehensive, leaving no room for state regulation; conflict preemption exists when state regulation would conflict with federal regulation; the filed rate doctrine bars claims which assume rates different from a federal tariff. (See Public Utility v. Dynegy Power Marketing (9th Cir.2004) 384 F.3d 756 (Snohomish); Public Util., Grays Harbor, WA v. IDACORP (9th Cir.2004) 379 F.3d 641 (Grays Harbor); California ex rel. Lockyer v. Dynegy, Inc. (9th Cir.2004) 375 F.3d 831 (Dynegy).)

We conclude the filed rate doctrine bars all of the Attorney General's monetary and injunctive claims. Further, no injunction is warranted because there is no threat that the misconduct will continue. Because the Attorney General does not explain how his complaint might be amended, we shall affirm.

STANDARD OF REVIEW

Because this case arises on demurrer, for purposes of this appeal we must accept as true the allegations in the complaint. We accept the well-pleaded facts alleged in the complaint and matters judicially noticeable, but not rhetoric or conclusions of law. We consider de novo whether the complaint states a viable claim for relief. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081, 6 Cal.Rptr.3d 457, 79 P.3d 569; Faulkner v. Cal, Toll Bridge Authority (1953) 40 Cal.2d 317, 329, 253 P.2d 659.)

BACKGROUND

A. The Complaint

"The California Independent System Operator (`ISO') is a not-for-profit corporation established through California's deregulation legislation. The ISO is responsible for operating the high-voltage transmission grid serving most of California. The area encompassing this transmission grid is known as the ISO control area."

Powerex sells wholesale energy within the ISO control area. It engaged in fraudulent trading (or "gaming") schemes which used false and misleading information.

We quote from a decision summarizing background facts which are also alleged in the complaint:

"Before 1996, FERC reviewed electricity rates that were cost-based. The primary factor in setting the rate was the cost of producing and transmitting the electricity. Power suppliers proposed rates by adding up their costs and accounting for an expected rate of return. FERC reviewed and approved tariffs that contained detailed breakdowns of costs and specified rates of return....

"In 1996, California changed this cost-based system of setting wholesale electricity rates to a market-based system, where the rate was determined in a structured market. The California legislature passed Assembly Bill 1890, Cal. Pub. Util.Code § 330 et seq., in an effort to reduce the price of electricity by replacing cost-based rate regulation with rates that were determined by competitive forces. [Citations.] The legislation created two non-governmental entities to operate markets and otherwise manage the sale of electricity: the California Power Exchange (`PX') and the [ISO]. These entities were subject to FERC's regulation. [Citation.]

"The PX operated a market for the purchase and sale of electricity in the `day-ahead' and `day-of markets. The price in these markets was set by evaluating bids submitted by market participants. A seller could submit a series of bids that consisted of price-quantity pairs representing offers to sell (e.g. 5 units at $50 each, but 10 units if the price is $100 each). Similarly, a buyer could submit a series of bids that consisted of price-quantity pairs representing offers to buy. The PX would then establish aggregate supply and demand curves and set the `market clearing price' at the intersection of the two curves. Then every exchange would take place at the market clearing price, even though some buyers had been willing to pay more and some sellers had been willing to sell for less.

"The ISO managed the transmission network, managing imbalances between supply and demand and maintaining the reliability of the transmission grid. As part of these responsibilities, it operated a `real-time' or `spot' market used to balance supply and demand at precise points in time. For example, if customer demand for a particular hour was not met, then the ISO was required to procure power on the spot market to maintain the stability of the grid. In the markets the PX and ISO managed, rates for wholesale electricity rose dramatically during 2000 and 2001. This caused consumer utilities to pay record high prices to traders and generators." (Snohomish, supra, 384 F.3d at pp. 758-759; see also Dynegy, supra, 375 F.3d at pp. 835-836; United States v. Reliant Energy (N.D.Cal.2006) 420 F.Supp.2d 1043, 1045-1046.)

In May 2000 the price of wholesale power rose sharply, buyers "incurred massive losses[,]" and the two largest investor-owned utilities, Southern California Edison and Pacific Gas & Electric, defaulted on payments to the PX and ISO; by March 2001 the PX had declared bankruptcy. Meanwhile, Governor Gray Davis had declared an emergency and "authorized the State, through the California Department of Water Resources" to purchase electricity, which it did to the tune of $10 billion. These costs were passed on to California consumers.

Beginning in 1999 Powerex had employed fraudulent schemes to justify "`congestive relief payments for taking actions that did not relieve any congestion, to receive payment for excess generation through the submission of false schedules, and to circumvent the ISO's price cap by falsely representing the source of the energy." These schemes came to light in connection with the collapse of Enron and are "widely known as the `Enron trading strategies' but were in fact employed by several market participants, including" Powerex.

These schemes acquired colorful names, such as Death Star, Get Shorty, Fat Boy and Ricochet. The details of each scheme are not important, but we will describe two for illustration.

In Ricochet, Powerex exploited an ISO rule which allowed payments above the price cap for power generated outside the state in times of shortage. Powerex would export power outside the ISO area, then import it back to California, representing it as out-of-market power and exempt from the price cap even though "no energy ever left or re-entered the State."

In Death Star, Powerex submitted false energy schedules: "In one schedule, energy is imported into the ISO control area through a transmission interface. This energy is scheduled to flow in a direction opposite to congestion and is then exported over another transmission interface. The counterflow created by this schedule is supposed to relieve congestion, and the market participant receives a congestion relief payment. However, in a second schedule, the same energy is then circled back to the ISO control area along transmission lines outside of the ISO system .... As [a] result ... no congestion is relieved because no energy is put onto or taken off of the ISO grid."

The Attorney General alleged these and similar schemes were unlawful and unfair business practices proscribed by the UCL and alleged that they represented unlawful artifices and false statements in violation of the CCL. In particular the Attorney General alleged Powerex violated both laws by:

"(a) willfully and fraudulently offering to sell ancillary services to the ISO without having any physical resources backing up the sale, and collecting payment for ancillary services it did not provide and had no intention of providing;

"(b) willfully and fraudulently misrepresenting 'out-of-market' sales of power to ISO as `imports,' and collecting payment for `out-of-market' sales at prices above the price cap, when in fact the power never left or re-entered California;

"(c) willfully and fraudulently overstating the amount of load it expected to serve, and thereby collecting payment for the `excess' generation at the market clearing price;

"(d) willfully and fraudulently scheduling non-firm energy in the opposite direction of congestion to a point outside the ISO control area without having any intention of delivering the power, collecting payment for purportedly relieving congestion, and then cutting the schedule before putting any energy on the grid;

"(e) willfully and fraudulently scheduling power in the opposite direction of congestion without having any intention of delivering the power, and collecting payment...