Torch Energy Marketing v. Pacific Gas & Elec.

• Decision Date: 13 August 2003
• Docket Number: No. CIV.A.H-01-3402.,CIV.A.H-01-3402.
• Citation: 280 F.Supp.2d 632
• Parties: TORCH ENERGY MARKETING, INC., Plaintiff, v. PACIFIC GAS & ELECTRIC COMPANY, Defendant and Third-Party Plaintiff, v. Torch Energy Advisors, Inc., Third-Party Defendant.
• Court: U.S. District Court — Southern District of Texas

280 F.Supp.2d 632

TORCH ENERGY MARKETING, INC., Plaintiff, v. PACIFIC GAS & ELECTRIC COMPANY, Defendant and Third-Party Plaintiff, v. Torch Energy Advisors, Inc., Third-Party Defendant.

No. CIV.A.H-01-3402.

United States District Court, S.D. Texas, Houston Division.

August 13, 2003.

Anne M Rodgers, Fulbright & Jaworski, Gerard G Pecht, Fulbright and Jaworski, Houston, for Torch Energy Marketing Inc, plaintiff.

Mitchell E Ayer, Thompson & Knight LLP, Rhett G Campbell, Thompson & Knight LLP, Houston, for Pacific Gas & Electric Company, defendant.

MEMORANDUM AND ORDER

ROSENTHAL, District Judge.

This declaratory judgment action arose from a California Production Balancing Agreement ("CPBA") between plaintiff, Torch Energy Marketing, Inc. ("TEMI"), and defendant, Pacific Gas and Electric ("PG & E"). Under the CPBA, TEMI distributed natural gas through a pipeline PG & E owned. The contract required delivery of a specified amount of gas. Failure to deliver less than the specified amount in a given month created an imbalance. If TEMI did not act to correct the imbalance within a set period, and the accrued imbalance exceeded a set amount, PG & E would "cashout" the imbalance and TEMI would owe PG & E the cashout sum.

For a number of months, TEMI's deliveries of gas to PG & E's pipeline under the contract were insufficient and created imbalances, which TEMI failed to correct. TEMI repeatedly incurred charges under the CPBA automatic cashout provisions. PG & E, however, failed to invoice TEMI for these charges during the first three years of the contract. TEMI did not pay any of the cashout charges it incurred. PG & E eventually discovered its failure to invoice TEMI for the cashout amounts and sought payment from TEMI, although PG & E did not seek interest on the past due amounts. TEMI refused to pay.

TEMI sought a declaratory judgment that the CPBA cashout imbalance payment provisions are unenforceable because PG & E did not timely invoice TEMI for the cashout amounts. PG & E counterclaimed against TEMI for the amount PG & E claims it is owed, the accrued cashout amounts without interest. (Docket Entry No. 6). PG & E also filed a third-party claim against Torch Energy Advisors, Inc. ("TEAI") (Docket Entry No. 8), seeking to enforce the General Guarantee Agreement ("the Guarantee") between TEAI and PG & E, under which TEAI agreed to guarantee TEMI's obligations under the CPBA.

PG & E moved for partial summary judgment against TEAI, (Docket Entry No. 17), contending that, as a matter of law, TEAI is liable to PG & E under the Guarantee despite PG & E's failure to invoice TEMI. PG & E asked this court to find that the Guarantee requires TEAI to pay PG & E for the gas it supplied to keep the pipeline balanced under the CPBA with TEMI. PG & E also seeks the attorney fees it incurred in enforcing the Guarantee.

TEMI and TEAI moved for summary judgment against PG & E, (Docket Entry No. 18), arguing that the cashout provisions of the CPBA are unenforceable punitive liquidated damages under California law; that PG & E's failure timely to invoice TEMI breached the CPBA and made the cashout imbalance provisions, or, alternatively, the entire contract, unenforceable; that PG & E caused TEMI's imbalances by increasing the pressure in its pipeline and making gas deliveries more difficult; and that all the defenses available to TEMI under the CPBA are also available to TEAI under the Guarantee.

In response, PG & E filed a cross-motion for summary judgment against TEMI, asserting that undisputed facts showed its entitlement to the accrued cashout amounts under the CPBA, not including interest. (Docket Entry No. 20). PG & E agreed that the consequence of its failure to issue timely invoices for the cashout amounts is its inability to recover interest for the period TEMI had the use of the money. In an amended complaint, TEMI and TEAI added California state law claims for breach of the covenant of good faith and fair dealing; laches; and estoppel, which TEMI and TEAI argued excused payment of the cashout amounts. (Docket Entry No. 31). TEMI and TEAI also argued that PG & E's failure to send invoices created a course of performance that modified the terms of the original contract.

In its Memorandum and Opinion of March 31, 2003, (Docket Entry No. 66), this court held that TEAI was entitled to assert the defenses to payment available to TEMI; that PG & E had not waived its right to recover cashout amounts by failing timely to invoice those amounts; that PG & E's failure timely to invoice the cashout amounts was not a material breach of the CPBA that excused TEMI's performance; that PG & E did not breach the covenant of good faith and fair dealing; that PG & E's course of dealing had not modified the contract so as to allow TEMI volumetrically to balance over time; that PG & E's recovery was not barred by the doctrine of laches; and that fact issues remained precluding summary judgment on TEMI's equitable estoppel defense to payment of the cashout amounts.

PG & E has moved for reconsideration of this court's denial of summary judgment of TEMI's equitable estoppel claim. PG & E contends that under California law, the defense of equitable estoppel is unavailable in this case. TEMI has moved for reconsideration of this court's rulings that PG & E did not modify the CPBA through its course of dealing and that the failure timely to invoice cashouts was not a material breach of the CPBA.

Based on the motions and responses; the record; and the applicable law, this court GRANTS PG & E's motion for reconsideration and DENIES TEMI's motion for reconsideration. The reasons are explained below.

I. PG & E's Motion for Reconsideration

PG & E contends that under California law, the affirmative defense of equitable estoppel is not available in disputes involving utility rates approved by the California Public Utility Commission ("CPUC"). TEMI responds that it is not challenging PG & E's filed rates, but rather PG & E's failure timely to invoice cashouts.

California law applies to this case. This court's Erie role is to apply existing California law. United Parcel Serv., Inc. v. Weben Indus., Inc., 794 F.2d 1005, 1008 (5th Cir.1986). The California Supreme Court has not addressed whether the defense of equitable estoppel is available in cases in which a utility fails to invoice charges. "When making an Erie-guess in the absence of explicit guidance from the state courts, [this court] must attempt to predict state law, not to create or modify it." Assoc. Inter. Ins. Co. v. Blythe, 286 F.3d 780, 783 (5th Cir.2002) (citation omitted). The court "must do that which [it] thinks the [California] Supreme Court would deem best." Morin v. Moore, 309 F.3d 316, 324 (5th Cir.2002) (citation omitted). This court's Erie duty leads it to consider California appellate court case law to predict what the California Supreme Court would likely rule if confronted with the issue. Id.

California Public Utility Code § 532 provides:

Except as in this article otherwise provided, no public utility shall charge, or receive a different compensation for any product or commodity furnished or to be furnished, or for any service rendered or to be rendered, than the rates, tolls, rentals, and charges applicable thereto as specified in its schedules on file and in effect at the time, ... nor shall any such public utility refund or remit, directly or indirectly, in any manner or by any device, any portion of the rates, tolls, rentals, and charges so specified, nor extend to any corporation or person any form of contract or agreement or any rule or regulation or any facility or privilege except such as are regularly and uniformly extended to all corporations and persons.

Under section 532, "[a] public utility `cannot by contract, conduct, estoppel, waiver, directly or indirectly increase or decrease the rate as published in the tariff ....'" Empire West v. S. California Gas Co. 12 Cal.3d 805, 117 Cal.Rptr. 423, 528 P.2d 31, 33 (Cal.1974) (quoting Transmix Corp. v. S. Pac. Co., 187 Cal.App.2d 257, 264, 9 Cal.Rptr. 714 (Cal.Ct.App. 1960)). Scheduled rates must be inflexibly enforced to maintain equality for all customers and to prevent collusion, which otherwise might be easily and effectively disguised. Id. "[A]s a general rule, utility customers cannot recover damages which are tantamount to a preferential rate reduction even though the utility may have intentionally misquoted the applicable rate." Id.

California Public Utility Code § 2106 provides:

Any public utility which does, causes to be done, or permits any act, matter, or thing prohibited or declared unlawful, or which omits to do any act, matter, or thing required to be done, either by the Constitution, any law of this State, or any order or decision of the commission, shall be liable to the persons or corporations affected thereby for all loss, damages, or injury caused thereby or resulting therefrom.

An award of damages under section 2106 is barred by California Public Utility Code § 1759 if it would "have the effect of undermining a general supervisory or regulatory policy of the [CPUC], i.e. when it would `hinder' or `frustrate' or `interfere with' or `obstruct' that policy." San Diego Gas & Elec. Co. v. Superior Court of Orange County, 13 Cal.4th 893, 55 Cal. Rptr.2d 724, 920 P.2d 669, 683 (1996) (citations omitted).¹

California law does not permit discounts or rebates of approved rates. South Tahoe Gas Co. v. Hofmann Land Improvement Co., 25 Cal.App.3d 750, 760-61, 102 Cal.Rptr. 286 (Cal.Ct.App.1972). "The collection of undercharges ... has been held to be one of the most effective means of preserving the minimum rate structure and of eliminating collusion between carriers and shippers" and "to maintain the integrity of the order of [the] Public Utilities Commission." Id. (citing People v. Ryerson, 241 Cal.App.2d 115, 120, 50 Cal.Rptr. 246 (Cal.Ct.App.1966); West v. Holstrom, 261 Cal.App.2d 89, 97...