PGE v. Duncan, Weinberg, Miller & Pembroke, PC

• Decision Date: 04 August 1999
• Citation: 986 P.2d 35,162 Or. App. 265
• Parties: PORTLAND GENERAL ELECTRIC COMPANY, an Oregon corporation, Respondent—Cross-Appellant, v. DUNCAN, WEINBERG, MILLER & PEMBROKE, P.C., S. Bradley Van Cleve and Melinda J. Horgan, Appellants—Cross-Respondents.
• Court: Oregon Court of Appeals

986 P.2d 35

162 Or. App. 265

PORTLAND GENERAL ELECTRIC COMPANY, an Oregon corporation, Respondent—Cross-Appellant, v. DUNCAN, WEINBERG, MILLER & PEMBROKE, P.C., S. Bradley Van Cleve and Melinda J. Horgan, Appellants—Cross-Respondents.

(9708-06492; CA A100072)

Court of Appeals of Oregon.

Argued and Submitted December 15, 1998.

Decided August 4, 1999.

James N. Westwood, Portland, argued the cause for appellants—cross-respondents. With him on the briefs was Miller, Nash, Wiener, Hager & Carlsen LLP.

Barbee B. Lyon, Portland, argued the cause for respondent—cross-appellant. With him on the briefs was Tonkon Torp LLP.

Before WARREN, Presiding Judge, and EDMONDS and ARMSTRONG, Judges.

WARREN, Senior Judge.¹

Defendants Melinda Horgan and Bradley Van Cleve,² two attorneys who were formerly employees of plaintiff Portland General Electric (PGE), appeal from an injunction that prohibits them from representing Industrial Customers of Northwest Utilities (ICNU), a non-profit association of large industrial consumers of utility services, in various proceedings before the Oregon Public Utilities Commission (PUC) to which PGE is a party. PGE asserts that Horgan and Van Cleve have both matter-specific and information-specific conflicts arising from their former representation of PGE and that those conflicts make their representation of ICNU a violation of their obligations under DR 5-105(C). In addition, PGE cross-appeals from the trial court's refusal to extend the injunction to include defendant Duncan, Weinberg, Miller & Pembroke, P.C., the Washington, D.C. law firm in whose Portland office Horgan and Van Cleve are employed. The court instead required Duncan Weinberg to strengthen the "Chinese wall"³ between its Portland and Washington offices on matters on which Horgan and Van Cleve were disqualified. On de novo review we modify the injunction on appeal and affirm on cross-appeal.

Horgan worked for PGE for approximately two years, ending in January 1996 when she left to open the Portland office of Duncan Weinberg; she had previously been an associate in that firm's Washington office. During her tenure at PGE, her work primarily involved regulatory matters, including playing a leading role in representing PGE before the PUC in two proceedings, UE 88,⁴ a general rate case⁵ in which the major issue was the extent to which PGE could include the costs involved in decommissioning the Trojan Nuclear Plant in its rate base,⁶ and UE 93, in which the major issue was including the new Coyote Springs natural gas generating plant in PGE's rate base. As an attorney on those cases, Horgan learned a great deal about the nature of PGE's business, its physical plant, and its rate structure and strategy.

Van Cleve worked for PGE for about ten years, beginning while he was still in law school. In his last two years his primary focus was on long-term contracts for the purchase and sale of power. As part of that work he became familiar with the nature of PGE's wholesale energy trading operations. He left PGE to become the second attorney in Duncan Weinberg's Portland office about six months after Horgan established it.

The conflicts that PGE alleges that Horgan and Van Cleve have in representing ICNU arise from the relationship between their work for PGE and current and contemplated changes in the nature and structure of the electrical utility industry, including how it is regulated. Until recently, each investor-owned utility⁷ has had a monopoly on the sale and distribution of electricity within its assigned geographical area. Each utility's rates have been regulated in an effort to ensure an adequate but not exorbitant return on the utility's investment in generating plants, transmission lines, distribution facilities, and all of the other things that are necessary for it to perform its functions.

The underlying change that appears to be coming is to allow different energy producers and sellers to compete to sell power to customers without regard to where the customer is located. In order to make that possible, a utility will have to "unbundle" its rates, charging separately for each of its services rather than having a single rate that is designed to cover all of its costs in procuring the electricity and delivering it to the customer. After unbundling, a customer would purchase and pay for each unbundled service separately—for instance, paying the existing utility for maintaining the distribution system and paying a different company for the electricity that the utility distributes to the specific customer over that system.⁸ In a competitive market, the rates for electricity itself would be unregulated, while those for distribution and transmission might remain regulated; according to PGE, there is little desire to require different companies to string competing power lines down the same streets.

While Horgan and Van Cleve worked for PGE, it established an "Unbundling Task Force" in which PGE and industry representatives discussed some of the issues involved in allowing industrial customers to choose their energy suppliers. ICNU was one of the participants in the task force; both Horgan and Van Cleve attended one or more meetings on PGE's behalf and had other involvements—the extent of which is disputed—in the issues that the task force considered.

The essential issue that PGE raises in this case is whether Horgan and Van Cleve can represent ICNU in dealing with the change to a competitive retail energy market. At the heart of that issue is the problem of "stranded" or "transition" costs. This is one of the most contentious issues in general and, according to PGE, is something that the Unbundling Task Force considered at length and that otherwise relates directly to Horgan's and Van Cleve's work for PGE. Stranded costs are contentious because they are an inevitable consequence of the change and present a straightforward issue of the extent to which the utilities or their customers will gain or lose from it. As PGE points out, stranded costs represent a zero-sum game: either PGE or its customers will have to pay for them; there is no "win-win" solution.

Stranded costs arise from the differences between the monopoly and competitive environments.⁹ When a regulated public utility reasonably and prudently builds a generating facility, it is entitled to add that facility to its rate base. The utility's future rates will then include an amount that is intended to amortize the cost of the facility over the facility's anticipated useful life. For example, appropriate amortization for a $300 million facility might require allowing the utility to receive 5 cents per kilowatt hour for the facility's output over a 30 year useful life. The fact that the utility is a monopoly ensures that it will actually receive that amount; the purpose of public regulation is to ensure both that the utility receives a reasonable return and that it does not use its monopoly power to extort more than is reasonable. Stranded costs would arise in this example if, at the end of 20 years, when it has amortized $200 million of the facility's cost but still has $100 million to go, the utility ceases to have a monopoly on electricity. It will then have to sell the facility's power for whatever the market will bring. If the market rate is 5 cents or more, the utility will be able to continue the amortization as it originally anticipated. If, however, the market rate is less than 5 cents, the utility will be unable to complete the amortization; the difference between the amount of the investment that the utility will be able to recover and the amount that it would have been able to recover as a regulated monopoly is "stranded," with nowhere to go. That amount can also be seen as a cost of the transition from regulation to competition.¹⁰

Because the regulated environment both insulated utilities from market conditions and prevented them from taking advantage of their monopoly position to charge rates that would have allowed them to amortize their facilities more rapidly, there is a general understanding that they will be entitled to recover their legitimate stranded costs in some way. The extent of stranded costs and the precise method for recovering them are matters of considerable contention between utilities and their various customers and will be a major issue before the PUC. Among other things, utility customers assert that the regulated price for some facilities is less than the market price, giving the utility a benefit if it is able to charge the higher market price. PGE's customers argue that that possibility is especially significant in the Pacific Northwest, where electric prices have traditionally been much lower than those in the rest of the nation. During the meetings of the Unbundling Task Force, an ICNU economist argued that PGE's net stranded costs are zero or even less. PGE, on the other hand, insists that they are close to $1 billion. By far the largest single stranded cost, according to PGE, is the Trojan plant.

In June 1996, shortly after Van Cleve left to join Horgan in Duncan Weinberg's Portland office, PGE circulated a tariff, known as Schedule 77, to ICNU and others to provide some of the details of a proposed limited test of open access to power among its industrial customers. In Schedule 77, PGE set out the rates that it believed it should receive for its services for distributing electricity that those customers would purchase elsewhere; those rates included amounts to cover PGE's asserted stranded costs. According to PGE, a revised version of Schedule 77 became part of the Customer Choice Plan that we discuss below.

PGE argues that both Horgan and Van Cleve were deeply involved in issues involving stranded costs, Horgan through her work on the rate case involving Trojan and Van Cleve because of his knowledge of many of its wholesale power contracts, which are also potential stranded costs. That is the foundation of PGE's belief...