San Diego Gas & Elec. Co. v. Canadian Hunter Marketing Ltd., 96-56374

• Decision Date: 31 December 1997
• Docket Number: No. 96-56374,96-56374
• Citation: 132 F.3d 1303
• Parties: 97 Cal. Daily Op. Serv. 18, 97 Daily Journal D.A.R. 29 SAN DIEGO GAS & ELECTRIC COMPANY, Plaintiff-counter-defendant-Appellant, v. CANADIAN HUNTER MARKETING LTD.; Noranda, Inc., and Related Counterclaims, Defendants-counter-claimants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1303

132 F.3d 1303

97 Cal. Daily Op. Serv. 18, 97 Daily Journal

D.A.R. 29

SAN DIEGO GAS & ELECTRIC COMPANYPlaintiff-counter-defendant-Appellant, v.CANADIAN HUNTER MARKETING LTD.; Noranda, Inc., and Related Counterclaims, Defendants-counter-claimants-Appellees.

No. 96-56374.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 7, 1997.

Decided Dec. 31, 1997.

James L. Hunt, McCutchen, Doyle, Brown & Enersen, San Francisco, California, for plaintiff-counter-defendant-appellant.

Charles Ferguson, LeBoeuf, Lamb, Leiby & Macrae, San Francisco, California, for defendants-counter-claimants-appellees.

Appeal from the United States District Court for the Southern District of California; Rudi M. Brewster, District Judge, Presiding.D.C. No. CV-93-01885-RMB.

Before: PREGERSON, D.W. NELSON and HAWKINS, Circuit Judges.

D.W. NELSON, Circuit Judge:

Plaintiff San Diego Gas and Electric Company("San Diego Gas"), a California public utility, appeals the district court's grant of summary adjudication to defendantsCanadian Hunter Marketing Ltd.("Canadian Hunter") and Noranda, Inc., Canadian Hunter's parent company.The district court found that, under Section 12(1) of the Alberta Sale of Goods Act ("SGA"), R.S.A, Ch. S-2(1980)(Can.), changes in California regulatory procedures had invalidated a contract between the parties for the sale of natural gas.San Diego Gas argues on appeal that summary judgment for Canadian Hunter was inappropriate both because genuine issues of material fact remain to be resolved and because the district court erred in its legal analysis of the substantive issues.We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

In the late 1970s, the Federal Energy Regulatory Commission began to deregulate the United States natural gas industry, permitting utility companies like San Diego Gas to look beyond their traditional sources of natural gas to alternative, more economical sources.At the same time, depressed natural gas prices in Canada encouraged Canadian suppliers to seek access to American markets, where they could obtain higher prices for their products.It was under these circumstances that San Diego Gas and Canadian Hunter negotiated an agreement by which Canadian Hunter could provide and San Diego Gas could purchase a guaranteed long-term supply of natural gas.On March 12, 1991, the parties executed a Natural Gas Purchase Agreement ("the Agreement"), which, the parties agreed, would be governed by the law of Alberta, Canada.

At the outset of contract negotiations, San Diego Gas made clear that it was willing to purchase gas from Canadian Hunter only if the gas could be obtained at prices competitive with those offered by San Diego Gas' traditional suppliers in the American Southwest.Accordingly, the parties negotiated a pricing arrangement under which the price of gas purchased from Canadian Hunter would be fixed at a level slightly lower than the weighted average cost of gas (WACOG) obtained by San Diego Gas from its Southwestern suppliers.The Agreement also provided that Canadian Hunter would bear the additional costs of transporting the gas from Canada.

Under the regulatory scheme in effect when the Agreement was executed, San Diego Gas was entitled to recover from its ratepayers the costs that it had incurred in purchasing gas, provided that those costs were reasonable.The reasonableness of San Diego Gas' purchases was evaluated each year by the California Public Utilities Commission("the Commission").Fuel purchases deemed by the Commission to have been "imprudent" were "subject to disallowance," which meant that San Diego Gas could not pass on the cost of those purchases to ratepayers.

In order to account for the possibility that one or more of San Diego Gas' Southwest gas purchases might be disallowed by the Commission, San Diego Gas requested that Commission approval be incorporated into the pricing arrangement in its contract with Canadian Hunter.Accordingly, the Agreement was drafted to define the WACOG as follows:

WACOG = the Monthly volume weighted average purchased cost of gas (in $U.S./MMBtu) as approved by the [Commission], currently in the reasonableness phase of an Energy Cost Adjustment Clause proceeding, for firm, term, and spot gas acquired for [San Diego Gas'] account (i) through purchases made under tariff from SoCal for delivery to [San Diego Gas'] System; (ii) at the interconnection of the El Paso system and the SoCal system; and (iii) at the interconnection of the Transwestern system and the SoCal system, both being near the California/Arizona border.

(emphasis added).Thus, expenditures disallowed by the Commission because they were unreasonably high would be excluded from the weighted average, bringing down the average and, under the formula, bringing down the price that San Diego Gas owed to Canadian Hunter.Ultimately, then, the price for gas purchased by San Diego Gas from Canadian Hunter was not finalized until the Commission had approved retrospectively the Southwest gas purchases comprising the WACOG.

At the time the Agreement was signed in 1991, the Commission reviewed the reasonableness of San Diego Gas' expenditures in an "Energy Cost Adjustment Clause"("ECAC") proceeding.Under this procedure, San Diego Gas filed a report with the Commission each year describing the gas procurement expenses that it sought to pass on to ratepayers.San Diego Gas also submitted confidentially the data underlying its report, providing specific information about individual gas purchase transactions.

San Diego Gas' annual report and the underlying data were reviewed and audited by the Commission's Division of Ratepayer Advocates("Advocates' Division").The Advocates' Division"had the right to challenge the reasonableness or prudence of any or all of [San Diego Gas'] individual gas purchase transactions," and ultimately submitted a report to an administrative law judge recommending either allowance or disallowance of those transactions.The judge then issued a proposed decision, subject to adoption or modification by the Commission itself.

San Diego Gas and Canadian Hunter both acknowledge that, with one exception, the Advocates' Division consistently recommended that San Diego Gas' gas procurement expenses be deemed reasonable during the period from May 1988 through March 1991, when the Agreement was finalized.On one occasion in late 1990, however, the Advocates' Division advised the CPUC to disallow a specific gas contract into which San Diego Gas had entered, determining that San Diego Gas had paid an unreasonable price for a gas purchase from the Elk Hills Naval Petroleum Reserve.In response, San Diego Gas argued that the Commission, in prior decisions, had established the practice of assessing the reasonableness of its expenditures by examining "the construction of the gas portfolio,"(emphasis added), not by reviewing each of the contracts in the portfolio.Accordingly, San Diego Gas maintained that no individual contract could be approved or disapproved in isolation.

Although the Commission ultimately decided not to disallow the Elk Hills purchase, it explicitly disagreed with San Diego Gas' interpretation of its past decisions:

[T]he Commission may review individual contracts and is not limited only to reviewing aggregate supply portfolios.Individual contract review is necessary to establish the supply balance and cost considerations contained in the portfolio.The terms, including price, of each contract that combine to form the portfolio must be evaluated to establish the reasonableness of the core portfolio.

The Commission then proceeded to evaluate the reasonableness of the Elk Hills purchase, concluding that, while San Diego Gas may have paid more than comparable market prices for the gas it purchased from Elk Hills, other exigent circumstances made it reasonable for San Diego Gas to do so.

In October 1992, San Diego Gas submitted an application requesting that the Commission alter its reasonableness review procedures.Specifically, San Diego Gas sought to have its gas procurement expenses reviewed through a "Performance Based Ratemaking"(PBR) mechanism.The Commission approved San Diego Gas' application in June 1993, and San Diego Gas began operating under a PBR mechanism on August 1, 1993, three months before deliveries commenced under its Agreement with Canadian Hunter.

Under PBR, as under ECAC, the Advocates' Division reviews San Diego Gas' annual report and underlying data, comparing San Diego Gas' actual purchases to market-based purchase indices.The significant difference between the two procedures, as far as the current dispute is concerned, is that the PBR mechanism "eliminates reasonableness review of SDG & E's gas procurement costs," giving San Diego Gas the ability "to procure gas under any contract terms that its management deems appropriate" so long as the resulting total cost of gas compares favorably to the relevant benchmarks.The Commission made this change in order to enhance productive efficiency, noting that under the former system, regulators could "miss the success of an overall procurement strategy by focusing on particular contracts and a narrow timeframe."

This change in review procedures is at the center of this dispute on appeal.Pursuant to the Agreement, Canadian Hunter began delivering gas to San Diego Gas in November 1993.By that time, however, prices in the Canadian gas market had increased.Canadian Hunter, recognizing that it was selling gas to San Diego Gas at prices substantially below those available elsewhere, sought to avoid its contract with San Diego Gas.Because the Agreement's price terms remained favorable to San Diego Gas, however, San Diego Gas filed a complaint in December 1993 requesting that the Agreement be declared valid and enforceable.Canadian Hunter responded with a number of counterclaims, one of...