Rainbow Energy Mktg. Corp. v. DCT, LLC
| Decision Date | 17 June 2022 |
| Docket Number | 1:21-cv-313-RP |
| Parties | RAINBOW ENERGY MARKETING CORPORATION, Plaintiff/Counter-Defendant v. DCT, LLC, Defendant/Counter-Plaintiff |
| Court | U.S. District Court — Western District of Texas |
ORDER AND REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Before the Court are DC Transco LLC's Opposed Motion for Leave to File First Amended Counterclaim, filed November 12, 2021 (Dkt. 55); DC Transco LLC's Second Motion for Partial Judgment on the Pleadings, filed December 1, 2021 (Dkt. 60); DC Transco LLC's Motion to Compel Discovery Responses filed May 19, 2022 (Dkt. 74); and the associated response and reply briefs.[1] The District Court referred the motions to the undersigned Magistrate Judge for disposition and Report and Recommendation, pursuant to 28 U.S.C. § 636(b)(1), Federal Rule of Civil Procedure 72, and Rule 1 of Appendix C of the Local Rules of the United States District Court for the Western District of Texas (“Local Rules”).
This litigation arises from Winter Storm Uri, which devastated the state of Texas in February 2021 with days of freezing rain, snow, and below-freezing temperatures. Jess Donald, Winter Storm Uri 2021: The Economic Impact of the Storm, Texas Comptroller's Fiscal Notes (October 2021).[2] Nearly seventy percent of Texans lost power in catastrophic blackouts spanning most of the state during the storm, which contributed to at least 210 deaths and caused financial losses estimated at $80 billion to $130 billion. Id.
The Texas electrical power generation and distribution grid is operated by the Electric Reliability Council of Texas (“ERCOT”). First Amended Complaint, Dkt. 42 ¶ 7. Rainbow Energy Marketing Corporation (“Rainbow”), a North Dakota corporation with its principal place of business in Bismarck, North Dakota, is a marketer and trader of electric power and provides energy management services to utility companies. Id. ¶ 2. DC Transco, LLC (“DCT”), a New York limited liability company, is in the business of selling electricity into the Texas electric power grid operated by ERCOT. Id. ¶ 3.
Texas's electric grid, unlike other states' grids, is largely internal and avoids connections to interstate systems. Id. ¶ 7. But a limited number of tie lines do permit power to flow into Texas's grid. Id. ¶ 9. The ERCOT East DC Tie is one such line, connecting the Texas grid with the electricity grid operated by the Southwest Power Pool (“SPP”), which permits transmission of electricity from parts of 13 other states. Id. ¶ 10. DCT owns the right to transmit 50 MW of electricity per hour to ERCOT via the East DC Tie based on a transmission capacity agreement with SPP. Id. ¶ 13.
On June 25, 2014, Rainbow and DCT executed an Energy Management Agreement (the “EMA”)[3] in which Rainbow agreed to provide DCT with “energy management services, including selling electricity into the ERCOT market and purchasing power from other parts of the country to satisfy the ERCOT sales.” Defendant's Answer and Counterclaim, Dkt. 20-1 ¶ 64. DCT alleges that Rainbow's role under the EMA was to enter into “Commodity Transactions” and “Other Transactions, ” as those terms are defined in the EMA, to maximize profits for DC Transco. Dkt. 63 at 1. DCT further alleges that the EMA required DC Transco's advance approval of “all transactions . . . and limited Rainbow's power to act as DC Transco's agent or to create any obligation on behalf of DC Transco.” Id. In contrast, Rainbow alleges that since 2019, “DCT has afforded Rainbow total discretion over transactions undertaken on behalf of DCT with third parties with terms of 30 days or less for the purchase or sale of power and/or risk management or financial transactions.” Dkt. 42 ¶ 17.
Beginning February 10, 2021, as Winter Storm Uri was moving toward Texas, Rainbow, “anticipating a rise in electricity prices in ERCOT” due to the storm, entered into a series of transactions “on behalf of DCT” to lock in the sale price for electricity for the following week and weekend (the “Disputed Transactions”). Dkt. 42 ¶ 18-21. Rainbow contends that these transactions were not Commodity Transactions or Other Transactions under the EMA. Rainbow alleges that it informed DCT of the Disputed Transactions on Friday, February 12, 2021, and DCT raised no objections. Id. ¶ 27. Rainbow contends that the Disputed Transactions could have been “unwound” or “booked out” until 5 p.m. on February 12. Id. ¶ 23. Rainbow further alleges that the Disputed Transactions resulted in over $16 million in profit for DCT from February 12 to February 19, 2021. Id. ¶ 44. Id. ¶ 45.
DCT contends that Rainbow should not have locked in pricing for the weekend of February 1314 and the following week of February 15-19, 2021. DCT argues that Rainbow should have sold all 50 MW of electricity DCT had the right to flow across ERCOT East DC Tie in the Day Ahead or Real Time markets, which ultimately hit the ERCOT cap of $9000 per MW hour. Dkt. 20-1 ¶ 69. DCT characterizes the Disputed Transactions as “a series of risky, financially-settled futures contracts on the ICE Futures U.S. commodity exchange (‘ICE') for the following week, which created the risk of losing money for the forecasted period of the storm.” Id. ¶ 66. DCT alleges that Rainbow did not get DCT's prior approval to enter into the Disputed Transactions, although Rainbow was contractually obligated to do so under the EMA. Id. DCT further argues that the Disputed Transactions were unrelated to the activity of the DC Tie or buying or selling power, but that Rainbow attempted to assign these trades to DC Transco after they had become significant liabilities. Id. DCT contends that it ‘would not have approved any ICE trades for relatively low prices for electricity as the impending winter storm created an expectation that prices would increase rapidly.” Id. ¶ 67. DCT further alleges that by the end of the storm, Rainbow allocated approximately $21 million in losses to DC Transco, based on the Disputed Transactions, while keeping at least $35 million profit (from ICE trades not assigned to DCT) for itself. Id. ¶ 69.
Rainbow filed this action on April 9, 2021, seeking a declaratory judgment that (1) Rainbow is not obligated to pay any further sums to DCT in connection with the transmissions at issue; (2) the transactions undertaken by Rainbow on behalf of DCT were all approved; (3) Rainbow “has comported in all respects” with the EMA; and (4) DCT may not use post facto knowledge of prices in the Texas electricity market to demand profits from transactions that were not undertaken, but might have been undertaken had the parties foreseen future events. Dkt. 19-1 ¶ 1.
In response, DCT filed counterclaims against Rainbow for breach of contract and breach of the implied covenant of good faith and fair dealing. Dkt. 20-1. DCT also seeks a declaratory judgment that Rainbow breached the EMA and that it is not responsible for the Disputed Transactions.
On August 12, 2021, DCT filed its First Motion for Partial Judgment on the Pleadings. Dkt. 35. Rainbow then filed an Opposed Motion for Leave to File Amended Complaint, which the District Court granted on August 27, 2021. On October 12, 2021, the District Court dismissed as moot DCT's first motion for partial judgment on the pleadings.
In its Second Motion for Partial Judgment on the Pleadings, DCT seeks judgment on one of its breach of contract counterclaims. DCT also requests leave to file its First Amended Counterclaim, adding new breach of contract claims against Rainbow. In addition, DCT moves to compel Rainbow to respond to certain discovery requests. Rainbow opposes all three motions.
Federal Rule of Civil Procedure 15(a) permits a party to amend its pleading “once as a matter of course” within certain time periods after service, but afterward “only with the opposing party's written consent or the court's leave.” The court should freely give leave when justice so requires. FED. R. CIV. P. 15(A)(2).
Rule 15(a) “evinces a bias in favor of granting leave to amend.” Mayeaux v. La. Health Serv. & Indem. Co., 376 F.3d 420, 425 (5th Cir. 2004) (citation omitted). “Leave to amend is in no way automatic, but the district court must possess a ‘substantial reason' to deny a party's request for leave to amend.” Marucci Sports, L.L.C. v. Nat'l Collegiate Athletic Ass'n, 751 F.3d 368, 378 (5th Cir. 2014) (citation omitted). Leave to amend may be denied for “undue delay, bad faith or dilatory motive on the part of the movant, repeated failures to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party . . . and futility of the amendment.” N. Cypress Med. Ctr. Operating Co. v. Aetna Life Ins. Co., 898 F.3d 461, 477 (5th Cir. 2018) (quoting Marucci, 751 F.3d at 378). Absent a substantial reason, “the discretion of the district court is not broad enough to permit denial.” Mayeaux, 376 F.3d at 425 (citation omitted). But denying a motion to amend is not an abuse of discretion if amendment would be futile. An amendment is futile if it would fail to survive a Rule 12(b)(6) motion. N. Cypress Med. Ctr., 898 F.3d at 478.
DCT contends that it learned of additional breaches of the EMA by Rainbow after it filed its Original Answer and Counterclaim. DCT seeks leave to add two breach of contract counterclaims against Rainbow relating to its audit and record keeping obligations under the...
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