Powerex Corp. v. Superior Court

Filed 9/4/07 Powerex Corp. v. Superior Court CA3

NOTTOBEPUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

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Powerex Corp., a Canadian marketer of wholesale energy products and services, petitions for a writ of mandate to compel the superior court to sustain its demurrer to the complaint filed by the California Department of Water Resources (DWR), in which DWR seeks a declaration that its energy contracts with Powerex are void ab initio under principles of state contract law. In its view, the Federal Power Act (the FPA) (16 U.S.C. 791a et seq.) completely preempts DWRs claims, which are within the exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC).

Powerex contends that instead of relegating it to its remedy by appeal from the judgment after trial, we should grant Powerexs petition for writ of mandate because it presents an important issue of subject matter jurisdiction and will prevent a needless and expensive trial. For the reasons that follow, we shall deny the petition.

BACKGROUND

The present dispute arises from the California energy crisis of 2000-2001. The background regarding this crisis was discussed cogently in California ex rel. Lockyer v. Dynegy, Inc. (9th Cir. 2004) 375 F.3d 831 at pages 835-836 (hereafter Dynegy) and need not be reiterated here. It suffices to say that between May 2000 and the Fall of 2001, the price of wholesale power rose to unprecedented levels, the volume of available energy was insufficient to meet demand, and Californians were subjected to rolling blackouts. According to DWR, the insufficient energy supply and exorbitant prices were caused by market manipulation by energy marketers, including Powerex.

In February 2005, DWR filed a complaint for declaratory relief, rescission, restitution, and consequential damages, alleging that due to Powerexs manipulation of the California electricity markets, DWRs contracts with Powerex were unenforceable under theories of duress, undue influence, and violation of public policy.

Asserting federal jurisdiction under the FPA, Powerex removed the action to the United States District Court for the Eastern District of California. Powerex then moved to dismiss DWRs action on the ground that the issues raised were within the exclusive jurisdiction of FERC and barred by federal preemption. The district court initially agreed and dismissed the action, but later granted DWRs motion to vacate the dismissal and to amend its complaint.

DWRs amended complaint contains the following allegations: DWR is authorized to purchase electricity to protect the health, safety, and economic interests of the citizens and businesses of California. DWR was compelled to enter into numerous contracts with Powerex due to the state of emergency created by the energy crisis. Powerex took an oppressive and unfair advantage of the distress created by the crisis, and even participated in the market manipulation and gaming activity that tightened the supply of electricity and helped to create the crisis. At the time Powerex entered the contracts with DWR, Powerex claimed the crisis was due to market fundamentals and Californias failure to build necessary power plants. Powerex denied it had artificially created shortages and manipulated markets, and DWR was unaware that this was not true. As a result of the market manipulation, DWR had no alternative but to enter into numerous transactions with Powerex to procure sufficient electricity to supply demand in California. DWRs apparent consent to the terms of each transaction was not real, mutual, or free in that it was obtained through duress and undue influence. Furthermore, allowing contracts formed under such circumstances to stand violates public policy.

DWRs amended complaint does not seek monetary damages, only a declaration that its contracts with Powerex are void under state law principles of contract formation. It contends that if the contracts are declared void, then any monetary relief will be determined by FERC.

DWR moved to remand the action to state court on the ground that it involved only issues of state law. Powerex opposed the motion, but the district court remanded the action to state court, finding that the face of DWRs amended complaint does not contain a federal question because all claims over which the district court had original jurisdiction had been dismissed. DWR did not allege violations of FERC-filed tariff obligations and did not seek to enforce any federal law, duty, or liability; it simply alleged state law claims. The district court declined to exercise supplemental jurisdiction and remanded the matter to the superior court.

Following remand, Powerex demurred to DWRs complaint. Powerex claimed that the action is barred by federal preemption and by the filed rate doctrine that precludes claims which attempt to challenge terms that a federal agency has reviewed and filed. (Dynegy, supra, 375 F.3d at p. 853.) In the alternative, Powerex asked the superior court to stay the action to let the parties refer the matter to FERC for it to exercise its concurrent jurisdiction.

DWR opposed the demurrer on the ground that the complaint alleges only contract formation issues which are not barred by the federal preemption or the filed rate doctrine. Contending that a referral of the matter to FERC was unwarranted, DWR also opposed Powerexs request for stay.

The superior court overruled Powerexs demurrer, finding that DWRs specific and limited requests for declaratory relief regarding contract formation do not fall within, conflict with, or invade the exclusive jurisdiction of [FERC]. The court denied Powerexs request for a stay without prejudice, observing that either party could renew the motion if an action is filed before FERC.

Powerex then filed the present extraordinary writ petition.

DISCUSSION

I

Powerex acknowledges the general rule that an order overruling a demurrer is not directly appealable but must be reviewed on an appeal from the final judgment (Code Civ. Proc., 904.1, 906), which is presumed to be an adequate remedy at law, thus barring immediate review by extraordinary writ (Code Civ. Proc., 1086, 1103). However, Powerex relies on an exception to this rule when the demurrer raises an important question of subject-matter jurisdiction; in that event, courts have held it proper to review the order overruling the demurrer by means of extraordinary writ. [Citations.] (San Diego Gas & Electric Co. v. Superior Court (1996) 13 Cal.4th 893, 913.) Powerex also argues that mandate may lie to review a ruling on the pleadings when it will prevent needless and expensive trial and reversal. (Taylor v. Superior Court (1979) 24 Cal.3d 890, 894.)

DWR responds that these exceptions do not apply because the superior court unquestionably has jurisdiction over the issues raised in the DWRs complaint, which all involve state contract law principles. However, whether the superior court has subject matter jurisdiction depends upon a resolution of Powerexs claim that the action is preempted by the FPA, over which FERC has exclusive jurisdiction. Thus, this case involves an important question of subject matter jurisdiction, and writ relief will prevent a needless trial and reversal if Powerex is correct. Accordingly, review by extraordinary writ is appropriate.

II

Powerex contends FERC has exclusive jurisdiction over DWRs lawsuit, which is barred by field preemption, conflict preemption, and the filed rate doctrine. The parties agree that there is no conflict in the evidence and that the question of jurisdiction is purely one of law, which we review de novo. (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 449; Smith v. Wells Fargo Bank, N.A. (2005) 135 Cal.App.4th 1463, 1476; Robbins v. Foothill Nissan (1994) 22 Cal.App.4th 1769, 1774.) Furthermore, we review de novo an order overruling a demurrer, and accept as true all properly pleaded facts in the complaint, regardless of plaintiffs ability to later prove them. (Caliber Bodyworks, Inc. v. Superior Court (2005) 134 Cal.App.4th 365, 373.)

A

Powerexs challenge to the superior courts ruling, and DWRs response, are based on the following principles:

State law can be preempted in either of two general ways referred to as field preemption and conflict preemption. (Dynegy, supra, 375 F.3d at p. 849.) If Congress evidences an intent to occupy a given field, any state law falling within that field is pre-empted. [Citations.] If Congress has not entirely displaced state regulation over the matter in question, state law is still pre-empted to the extent it actually conflicts with federal law, that is, when it is impossible to comply with both state and federal law [citation], or where the state law stands as an obstacle to the accomplishment of the full purposes and objectives of Congress [citations]. (Silkwood v. Kerr-McGee Corp. (1984) 464 U.S. 238, 248 [78 L.Ed.2d 443, 452].)

Congress has legislated that the FPA applies to transmission of electric energy in interstate commerce and to the sale of electric energy at wholesale in interstate commerce. (16 U.S.C.  824(b).) The FPA grants FERC exclusive authority to regulate the transmission and sale at wholesale of electric energy in interstate commerce. (New England Power Co. v. New Hampshire(1982) 455 U.S. 331, 340 [71 L.Ed.2d 188, 196].) FERC has plenary jurisdiction over wholesale sales in interstate commerce, and its power includes the exclusive authority to determine the reasonableness of wholesale rates. (Public Util., Grays Harbor, WA v. IDACORP (9th Cir. 2004) 379 F.3d 641, 646-648 (hereafter Grays Harbor).)

[P]reemption principles are closely intertwined with the filed rate doctrine, which is central to FERCs operations. (Wholesale Electricity Antitrust Cases I & II (2007) 147 Cal.App.4th 1293, 1305 (hereafter Wholesale Electricity).) Under the filed rate doctrine, the terms of the filed tariff are considered to be the law and to therefore conclusively and exclusively enumerate the rights and liabilities of the contracting parties. [Citations.] As a result, the filed rate doctrine bars all claims--state and federal--that attempt to challenge [the terms of a tariff] that a federal agency has reviewed and filed. [Citations.] . . . [] [T]he filed rate doctrines purpose is to ensure that the filed rates are the exclusive source of the terms and conditions by which the [regulated entity] provides . . . the services covered by the tariff. [Citation.] (Dynegy, supra, 375 F.3d at p. 853.) [T]he filed rate doctrine is not limited to rates per se; any allocation of power that directly affects rates is protected by the filed rate doctrine. (Nantahala Power & Light v. Thornburg (1986)476 U.S. 953, 966-967 [90 L.Ed.2d 943, 954-955].)

Applying these principles, numerous courts have held that claims seeking monetary damages under various theories arising from the interstate sale of electricity, or the regulation of the energy market, are barred by federal preemption and the filed rate doctrine. (See, e.g., Wholesale Electricity, supra, 147 Cal.App.4th at pp. 1308-1311, 1316-1317 [state law antitrust claim for damages]; Public Utility Dist. No. 1 of Snohomish County v. Dynegy Power Marketing, Inc. (9th Cir. 2004) 384 F.3d 756, 759-761 (hereafter Snohomish) [state law antitrust claim seeking restitution and compensatory and treble damages]; Grays Harbor, supra, 379 F.3d at pp. 645, 649-652 [contract claims for rescission, restitution, and unjust enrichment]; Dynegy, supra, 375 F.3d at pp. 852-853 [state law unfair competition claim]; (Transmission Agency, North. Cal. v. Sierra Pacific (9th Cir. 2002) 295 F.3d 918, 929-933 (hereafter TANC) [tort and property claims for inverse condemnation, nuisance, trespass, and conversion; claims for breach of contract, intentional interference with a contractual relationship, and intentional interference with a prospective economic advantage; and a fraud claim].)

In TANC, for example,breach of contract, tort, and property claims were barred by the filed rate doctrine because the damage calculations would require the court to assume how FERC would allocate access to interstate transmission capacity, thereby usurping FERCs delegated jurisdiction. (TANC, supra, 295 F.3d at p. 931.) TANC established that state-law claims which depend on assumptions contrary to rates or allocations approved by FERC are barred by the filed rate doctrine even if this may leave claims unredressed. (Id. at pp. 929-932.) TANC also stands for the proposition that remedies for breach and non-performance of FERC approved operating agreements in the interstate wholesale electricity market fall within the exclusive domain of FERC. (Dynegy, supra, 375 F.3d at p. 852.)

In Dynegy,the California Attorney General sought damages under state law governing unfair competition, contending that the defendants fraudulently sold energy on the spot market from reserve capacity they had contracted to hold in reserve. (Dynegy, supra, 375 F.3d at p. 836.) The Attorney General argued that restitution and disgorgement of the defendant companies ill-begot gains did not conflict with the filed tariff, which prohibited double-selling of reserve capacity. (Id. at p. 853, fn. 24.) Dynegy disagreed, noting that the tariff itself specifies the penalties to which companies are subject for violating their reserve capacity commitments. (Id. at p. 853, fn. 24.) To the extent that California is seeking to enforce the penalty provisions of the tariff, or to have them expanded, this conflicts with the filed rate doctrine and the exclusive authority conferred to FERC to enforce its tariff. (Id. at p. 853, fn. omitted.) Its claims were preempted because they encroach[ed] upon the substantive provisions of the tariff, an area reserved exclusively to FERC . . . . (Id. at p. 852.)

Similarly, Snohomish held that a utility districts state antitrust and consumer protection claims against wholesale energy sellers, who manipulated the market and restricted electricity supplies in order to cause artificially high prices in the market, were barred by the filed rate doctrine, field preemption, and conflict preemption. (Snohomish, supra, 384 F.3d at pp. 758, 761.) The plaintiff asked the district court to enjoin the defendants from engaging in unlawful and unfair business acts and order them to disgorge all monies wrongfully obtained, to pay restitution, and to pay compensatory and treble damages. (Id. at pp. 759-760.) These claims were barred because they required the district court to determine the rates that would have been achieved in a competitive market, in effect asking the court to determine the fair price. (Id. at p. 761.)

In Grays Harbor, the plaintiff sought rescission or reformation of a power contract based on mutual mistake, unilateral mistake, duress, and unconscionability. (Grays Harbor, supra, 379 F.3d at p. 645.) The circuit court held these claims were barred by field preemption because Congress here has granted exclusive authority over rate regulation to the Commission. In so doing, Congress withheld the authority to grant retroactive rate increases or to permit collection of a rate other than the one on file. It would surely be inconsistent with this congressional purpose to permit a state court to do through a breach-of-contract action what the Commission itself may not do. (Id. at p. 649.)

Grays Harbor also held the claims were barred by conflict preemption because by asking the court to set a fair price, [plaintiff] is invoking a state rule (specifically, contract law) that would interfere with the method by which the federal statute was designed to reach it[s] goals (specifically, FERC regulation of wholesale electricity rates). To permit [plaintiff] to receive in its court action what is essentially a refund would create a conflict with FERCs authority over wholesale rates. And such a result would make state law stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress under the FPA. (Grays Harbor, supra, 379 F.3d at p. 650, fn. omitted.) In addition, plaintiffs claims were barred because the relief sought would require the court to set damages by assuming a hypothetical rate, the fair value, in violation of the filed rate doctrine. [Citation.](Id. at p. 651.)

But Grays Harbor identified the following limited exception to federal preemption: A complaint that merely seeks declaratory relief as to contract formation issues would not necessarily intrude upon the rate-setting jurisdiction of FERC. [(]Cf. Pan Am. P[. Corp. v. Superior Court (1961)] 366 U.S. [656,] 662 [6 L.Ed.2d 584, 589] ([Q]uestions of exclusive federal jurisdiction and ouster of jurisdiction of state courts . . . depend on the particular claims a suitor makes in a state court--on how he casts his action.).[)] For instance, the district court could determine that, because of wide-spread market manipulation and dysfunction, the contract was formed under circumstances of unilateral or mutual mistake. . . . [E]ven FERC has acknowledged that such questions may be resolved by a court. (Grays Harbor, supra, 379 F.3d at p. 652, fn. omitted, citing Villages of Edgerton & Montpelier (Dec. 11, 1989) 49 FERC 61306, 62161 [1989 WL 263107] [With respect to the issue of whether Ohio Power made a legally enforceable commitment to supply the Villages full requirements service, we believe that generally the courts would be the appropriate forum for deciding whether two parties entered into a contract].)

To fall within this limited exception, the complaint must be narrowly drafted to seek declaratory relief only as to issues of contract formation. More specifically, itmust not require the district court to make a determination as to what the fair rate would have been. Should [the plaintiff] eventually prevail and receive a determination that no valid contract exists, [the plaintiff] may not turn to the district court for monetary relief. [The plaintiffs] only avenue for relief at that point, if any exists, would be with FERC. (Grays Harbor, supra, 379 F.3d at pp. 652-653, fn. omitted.)

Similarly, Gulf States Utilities Co. v. Alabama Power Co. (5th Cir. 1987) 824 F.2d 1465 (hereafter Gulf States) held that contracts to purchase electricity might be set aside if the plaintiff could show it had been fraudulently induced to enter the contract. Assuming arguendo that such relief is available under state law, the FPA would not necessarily forbid the district court to set aside contracts obtained unconscionably or by fraud. The FERC does not warrant that filed contracts . . . are free from fraud. By setting aside the contracts, the district court would not interfere with the FERCs rate-making powers. We stress, however, that the district court may not set aside the contracts on the theory that [the] rates are too high. [Citation.](Gulf States, supra, 824 F.2d at p. 1472, fns. omitted.)

It follows that claims challenging wholesale energy contracts and transactions are barred if they (1) are based on violations of filed tariffs, (2) depend on assumptions contrary to rates or allocations approved by FERC, or (3) seek to modify the terms of, or seek damages for, the breach of FERC-regulated energy contracts. However, a complaint is not barred if it seeks only declaratory relief as to issues of contract formation and does not require the trial court to make a determination whether the rates charged were fair or to otherwise interfere with FERCs rate-making powers.

With these principles in mind, we now turn to Powerexs challenge to the superior courts ruling.

B

Relying on Dynegy, Snohomish and TANC, Powerex argues the trial court erred in overruling its demurrer. This is so, it says, because the allegations of DWRs complaint affect the transmission and wholesale sale of electric energy in interstate commerce, which is within FERCs exclusive jurisdiction.

DWR disagrees because, in its view, the complaint does not allege violations of the FPA or rules, regulations, and orders under the FPA, nor does []DWR allege that wholesale electricity rates charged by Powerex were unjust or unreasonable. According to DWR, it merely seeks a determination of whether the market manipulation created an artificial energy shortage which compelled []DWR to enter into energy transactions it would not have transacted but for the energy shortage, and whether the transactions with Powerex are void because they were the result of duress and undue influence and are contrary to public policy. That is, it alleges the electricity contracts were not validly formed but does not (1) challenge the terms of the contracts or rates charged, (2) seek to enforce any liability or duty created by the FPA, or (3) seek to enjoin any violation of any FPA rule, regulation or order. Thus, DWR contends, its complaint is governed by the decisions in Grays Harbor and Gulf States, which provide that FERC has concurrent rather than exclusive jurisdiction over contract formation claims. We agree with DWR.

According to the complaints allegations: DWR was compelled to enter into numerous contracts with Powerex as a result of the emergency created by the energy crisis, and Powerex not only took an oppressive and unfair advantage of the distress created by the crisis, it participated in the market manipulation and gaming activity that helped to create the crisis. Powerex denied that it had artificially created shortages and manipulated markets, claiming the crisis was due to market fundamentals and Californias failure to build necessary power plants. DWR was unaware this was not true and, as a result of the market manipulation, DWR had no alternative but to enter into numerous transactions with POWEREX to procure sufficient electricity to supply demand in California. And DWRs apparent consent to the terms in each of the transactions with POWEREX was not real, mutual, or free in that it was obtained through duress and undue influence. The complaint does not seek monetary damages, only a declaration that DWRs contracts with Powerex are void under state law principles of contract formation and that, if the contracts are declared void, then any relief will be determined by FERC.

Accordingly, DWRs contract claims: are not based on violations of filed tariffs; do not depend on assumptions contrary to rates or allocations approved by FERC; do not seek to modify the terms of the contract; and do not seek damages for breach of FERC-regulated energy contracts. And DWRs complaint does not require the trial court to make a determination as to whether the rates charged were fair or to otherwise interfere with FERCs rate-making powers. It seeks only declaratory relief as to issues of contract formation on the ground that even if the rates charges were valid and approved, the conduct of Powerex nevertheless compelled DWR to enter the contracts as a result of duress and undue influence in violation of public policy. The issue alleged in the complaint is not within FERCs exclusive jurisdiction and may be resolved by the court. (Grays Harbor, supra, 379 F.3d at p. 652.)

Contrary to Powerexs claim otherwise, nothing in Grays Harbor limits its holding to issues of contract formation that are entirely removed from energy market, such as the authority of an agent to execute the contract. Indeed, Grays Harbor expressly stated that the district court could determine that, because of wide-spread market manipulation and dysfunction, the contract was formed under circumstances of unilateral or mutual mistake. (Grays Harbor, supra, 379 F.3d at p. 652.)

Powerex argues that FERC previously has rejected contract claims based on duress. However, the case upon which Powerex relies is of no assistance because it did not hold that (1) FERC has exclusive as opposed to concurrent jurisdiction over contract formation claims, or (2) regardless of the specific factual scenario underlying the contract formation, a plaintiff can never void an energy contract on the basis of duress. Rather, in the cited case, which determined whether the dysfunctional spot market during the energy crisis was of a magnitude warranting modification of specific contracts entered into in the bilateral markets in California, Nevada, and Washington, FERC found that based on the evidence presented the Nevada Companies were not forced to enter into any of the contracts, as the evidence in the record [did] not show any pressure, uncertainty, hesitancy, or a lack of understanding about what was being purchased and were routine and unremarkable broker trades. (Nevada Power Co. and Sierra Pacific Power Co. v. Enron Power Marketing, Inc. (Dec. 19, 2002) 101 FERC 63031, 65302 [2002 WL 31889939].)

In contrast, the case before us is at the pleading stage, and it is unknown what evidence DWR will submit in support of its claims of duress.

Powerex does not discuss the substantive law applicable to voiding contracts based on duress or undue influence. And Powerex has not demonstrated that DWRs action necessarily is preempted because it is impossible for DWR to prove duress or undue influence based on something other than the invalidity of the rates charged. Stated another way, Powerex does not establish that if DWR is not challenging FERC-approved rates, tariffs, rules, or regulations, then as a matter of law, DWR simply cannot establish, under any circumstances, that the contracts should be voided under state law governing contract formation. As the appellant, it is Powerexs burden to present argument and authority establishing reversible error. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) It has not done so.

Once DWRs theory is more fully developed, Powerex might be able to refute it on state law substantive grounds, or show the action is preempted because it cannot succeed without requiring the court to make a determination as to what the fair rate would have been. (Grays Harbor, supra, 379 F.3d at pp. 652-653.) But for now, DWRs complaint withstands Powerexs demurrer.^[1]

DISPOSITION

The petition for a writ of mandate is denied. Having served its purpose, the alternative writ of mandate is discharged. Powerex

shall reimburse DWR for its costs in this writ proceeding. (Cal. Rules of Court, rule 8.490(m)(2).)

SCOTLAND, P.J.

We concur:

RAYE , J.

ROBIE , J.

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^[1] The present case is distinguishable from People ex rel Brown v. Powerex Corp. (2007) 153 Cal.App.4th 93 (hereafter Brown), in which the Attorney General sued Powerex, seeking restitution, damages, penalties, and injunctive relief on the ground that the prices charged for power violated the unfair competition law (Bus. & Prof. Code, 17200 et seq.) and the California Commodity Law (Corp. Code, 29500 et seq.). (Brown, supra, 153 Cal.App.4th at p. 96.) Brown observed: The gist of the complaint is that had Powerex acted fairly the amount charged for wholesale energy would have been less, which means that the complaint indirectly sought a determination of the reasonableness of rates charged by Powerex. (Id. at p. 101.) Under the circumstances, the trial court did not abuse its discretion in sustaining Powerexs demurrer to the complaint without leave to amend. (Id. at p. 112.)
In dictum, Brown agreed, as follows, with the concurring and dissenting opinion in Grays Harbor, which questioned the plaintiffs ability to amend its complaint to cure the federal preemption problem: Although the [Grays Harbor] court cautioned that an amended complaint must not require the district court to make a determination as to what the fair rate would have been [citation], the court did not explain how this would be possible, inasmuch as the claimed mistake was that Grays Harbor did not know the market price it paid resulted from a dysfunctional, manipulated market. [Citation.] [] Because the claimed mistake hinged on an unfair price, leave to amend should have been denied, as Judge Callahan explained in her separate opinion. (Grays Harbor, supra, 379 F.3d at pp. 653-654 [conc. & dis. opn. of Callahan, J.].) (Brown, supra,153 Cal.App.4th at pp. 106-107.)
In this case, unlike in Grays Harbor and Brown, (1) the complaints allegations do not depend on the reasonableness of the rates, (2) DWR is not seeking restitution or other damages, and (3) DWR is not asking the trial court to determine a remedy; it will submit that issue to FERC. Moreover, unlike in Brown, we are reviewing whether the trial court abused its discretion in denying Powerexs demurrer to the complaint, which puts the burden of establishing error squarely on Powerex. As explained above, Powerex has not met its burden.