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JET SOURCE CHARTER, INC.,v. DOHERTY Part II

JET SOURCE CHARTER, INC.,v. DOHERTY Part II
03:18:2007



WHOLESALE ELECTRICITY ANTI-TRUST CASES I & II



Filed 2/26/07



CERTIFIED FOR PUBLICATION



COURT OF APPEAL, FOURTH APPELLATE DISTRICT



DIVISION ONE



STATE OF CALIFORNIA



WHOLESALE ELECTRICITY ANTI-TRUST CASES I & II



JUDICIAL COUNCIL COORDINATION PROCEEDING



NOS. 4204 and 4205



D047697



San Diego Super. Ct. Nos. GIC758487, GIC758565, GIC760743



San Francisco Super. Ct. Nos. 318189, 318343



Los Angeles Super. Ct. No. BC249705



APPEAL from a judgment of the Superior Court of San Diego County, Joan M. Lewis, Judge. Affirmed.



Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, Leonard B. Simon, Pamela M. Parker and Frank J. Janecek Jr. for Plaintiffs and Appellants Ruth Hendricks, People of the City and County of San Francisco, City of Oakland and County of Santa Clara.



Best, Best & Krieger, C. Michael Cowett, Robert J. Hanna, Mary E. Coburn, James P. Gilpin and William C. Pate for Plaintiffs and Appellants Borrego Water District, Fallbrook Public Utility District, Helix Water District, Padre Dam Municipal Water District, Ramona Municipal Water District, Sweetwater Authority, Valley Center Municipal Water District, Vista Irrigation District, Yuma Municipal Water District, Metropolitan Transit Development Board, San Diego Trolley, Inc. and San Diego Transit Corporation.



Levine, Steinberg, Miller & Huver, Harvey R. Levine, Richard A. Huver; Patricia A. Meyer & Associates, Patricia A. Meyer, Marisa Janine-Page, and Matthew T. Poelstra for Plaintiffs and Appellants Cruz Bustamante, Ruth Hendricks and Barbara Matthews.



Kiesel, Boucher & Larson and Raymond P. Boucher for Plaintiffs and Appellants Cruz Bustamante and Barbara Matthews.



Krause, Kalfayan, Benink & Slavens, James C. Krause, Ralph B. Kalfayan, David B. Zlotnick; Keegan, Macaluso & Baker, Patrick N. Keegan; and Hoyt E. Hart II for Plaintiff and Appellant Pamela Gordon.



Lieff, Cabraser, Heimann & Bernstein, William Bernstein, Joseph R. Saveri and Barry Himmelstein for Plaintiffs and Appellants Bill Lockyer, Oscars Photo Lab, Pier 23 Restaurant and Mary L. Davis.



Office of City Attorney, Dennis J. Herrera and Theresa L. Mueller for Plaintiff and Appellant City and County of San Francisco.



Office of Oakland City Attorney, John A. Russo, Barbara Parker and Izetta C.R. Jackson for Plaintiff and Appellant City of Oakland.



Office of Santa Clara County Counsel, Ann Miller Ravel and Cheryl A. Stevens for Plaintiff and Appellant County of Santa Clara.



Pillsbury, Winthrop, Shaw & Pittman, Douglas R. Tribble, Connie J. Wolfe, John M. Grenfell and Michael J. Kass for Defendants and Respondents Cabrillo Power I, LLC, Cabrillo Power II, LLC, Louis J. Dorey, Dynegy, Inc., Dynegy Marketing & Trading, Dynegy Power Marketing, Inc., El Segundo Power, LLC, Long Beach Generation, LLC, Matt K. Schatzman and Charles Watson.



Latham & Watkins, Daniel Murray Wall, Michael J. Weaver and Kimberly A. Hicks for Defendants and Respondents Sempra Energy, Inc., Sempra Generation and Sempra Energy Trading Corporation.



Coughlan, Semmer & Lipman, R. J. Coughlan, Jr.; Williams & Connolly, Stephen D. Raber, for Defendant and Respondent AES Corporation.



Kirkland & Ellis, Tony L. Richardson, Jeffrey S. Davidson, and James B. Ransom for Defendant and Respondent Morgan Stanley Capital Group, Inc.



Plaintiffs and appellants Borrego Water District, et al. (Borrego), a group of public entities and retail purchasers of electricity, filed this action for damages and other relief against defendants and respondents AES Corporation, et al. (AES), a number of companies and their subsidiaries who are generators, sellers, or traders of electricity at wholesale (defendants). In their master complaint filed in 2002 in these coordinated actions, plaintiffs allege violations of California's antitrust laws (Bus. & Prof. Code,[1] 16720, hereafter the Cartwright Act), as well as violations of California's unfair competition law ( 17200 et seq., hereafter the UCL).[2] These allegations all arise out of market conditions and events during the California energy crisis of 2000 and onward, relating to claims for damages and injunctive relief for anticompetitive activity and/or unfair competition in the wholesale electricity market.



In response to the filing of this action, and after a delay of several years due to removal to federal court and remand to state court, all defendants brought and renewed a joint demurrer to the master complaint, on the grounds of lack of jurisdiction. Defendants argued the subject matter of the master complaint was preempted by federal law that had occupied the field of wholesale electricity market control and regulation, because plaintiffs' theories of recovery would inevitably require the superior court to determine reasonable rates for wholesale power sales. Defendants further argued that a regulatory doctrine, the filed rate doctrine, barred the filing of this action for damages. (See Public Utility Dist. No. 1 of SnohomishCounty v. Dynegy Power Marketing, Inc. (9th Cir. 2004) 384 F.3d 756 (Snohomish); Public Utility Dist. No.1 of Grays HarborCountyWashington v. Idacorp Inc. (9th Cir. 2004) 379 F.3d 641, 647 (Grays Harbor).) The trial court agreed and sustained the demurrer without leave to amend.



Plaintiffs appeal, contending the ruling was erroneous because California case law,Younger v. Jensen (1980) 26 Cal.3d 397 (Younger) and Spielholz v. Superior Court (2001) 86 Cal.App.4th 1366 (Spielholz), should support a finding that state law can provide an independent ground for regulation of the anticompetitive or unfair conduct of defendants, through an award of antitrust damages, such that there should be no finding of federal preemption. Plaintiffs found further support for their theory of general applicability of state antitrust laws in the context of electricity market disputes in the United States Supreme Court case of Otter Tail Power Co. v. United States (1973) 410 U.S. 366 (Otter Tail Power).



Our analysis of the master complaint and pertinent case law convinces us that the trial court correctly applied the doctrines of field and conflict preemption in sustaining the demurrer without leave to amend. We find additional support for that conclusion in the filed rate doctrine, relied on by the trial court as an alternate ground for its ruling on demurrer. (California ex rel. Lockyer v. Dynegy, Inc. (9th Cir. 2004) 375 F.3d 831, 852-853 (Dynegy).) We affirm the judgment of dismissal.



FACTUAL AND PROCEDURAL BACKGROUND



A



Master Complaint; Coordinated Proceedings



Since 2001, these coordinated proceedings have included a total of six actions originating both in San Diego and in other counties. Plaintiffs, the People of the State of California (suing through city attorneys) and 21 retail purchasers of electricity, filed their master complaint in 2002. These plaintiffs did not purchase power directly from defendants, who are wholesalers, but rather from several investor-owned utilities, including San Diego Gas & Electric and Southern California Edison. Although several of the plaintiffs originally sought class certification, those matters were apparently stayed pending the demurrer proceedings and are not before us on this appeal.[3]



A number of major named defendant groups have settled this case and are not participants in this appeal (Reliant Energy, Duke Energy, Williams Energy Marketing & Trading, and Mirant Americas Energy etc.).[4] The remaining defendants, and their subsidiaries for whose activities they are sued, are four groups of generators, sellers, or traders of electricity at wholesale (Dynegy, Inc.; Morgan Stanley Capital Group, Inc.; AES Corporation; and Sempra Energy, Inc.).[5]



Plaintiffs assert a number of alleged violations of the Cartwright Act (first cause of action) and the unfair and/or unlawful prongs of the UCL statute (second and third causes of action), occurring around 2000, during a period of intense governmental and commercial activity to deregulate the electricity markets pursuant to 1996 state




legislation, Public Utilities Code section 330 et seq. (Dynegy, supra, 375 F.3d 831, 835 ["Noting the energy industry restructuring already underway, the California Legislature decided that reshaping the market for California energy could help provide competitive, lower cost and reliable electricity service, while preserving the state's commitment to developing diverse, environmentally sensitive electricity resources. [Citation.] Assembly Bill 1890 (AB 1890) established the legal structure for the deregulation and restructuring plan"].)



In the introductory allegations of the master complaint, plaintiffs allege that they are entitled to recover damages and other equitable and injunctive relief, based on injuries incurred during this period and "arising from defendants' manipulation, distortion, and corruption of California's deregulated wholesale electricity market. Defendants' unfair and unlawful business practices and illegal restraints of trade included combining to withhold supply from electricity markets and colluding to fix electricity prices. This conduct forced electricity users to pay electricity prices based not on competitive market forces, but prices which were grossly inflated due to defendants' conduct. [] This action seeks to remedy that conduct, which caused widespread electricity shortages and astronomical prices. Defendants' manipulation of what was supposed to be a competitive market for wholesale electricity harmed all Californians and destabilized the California economy, which depends on a reliable supply of competitively priced energy. The total harm caused by defendants' conduct is, at this point, unknown. . . ."



Plaintiffs' master complaint cites to several examples of the defendants' alleged exploitation of the changes since 1996 in the energy market's new regulatory and economic structure. These include practices of "conspiring to withhold the supply of energy into the PX and ISO [power exchange and "Independent System Operator," nonprofit public benefit corporations established by the Legislature] markets and to manipulate the price at which wholesale energy was sold." Plaintiffs allege this constituted "gaming the market" to create false shortages and prevent the sale of electricity at competitive rates.[6]



The master complaint describes how the ISO was charged with balancing the supply of energy offered for sale into the market with demand at certain points in time, and was required to purchase energy on the spot market to meet any shortfalls. This spot market was susceptible to manipulation regarding the price of wholesale energy, which was set by the "market clearing price," or the highest price offered for sale of energy necessary to meet the load. This scheme was supposed to promote competition to attract new sources of power and lower the price of electricity, but according to plaintiffs, it was subject to abuse.



Additionally, defendants' communications and information sharing were alleged to be made for the purpose of and having the effect of manipulating supply and fixing prices. Defendants "manipulated supply such that the ISO was forced to issue shortage warnings during the Summer of 2000 even though the State had sufficient generating capacity. Defendants accomplished this by withholding supply from the PX and ISO markets, thus creating artificial shortages of electricity which, in turn, raised the market clearing prices on the wholesale energy markets. Much of this withholding was executed by simply shutting down or restricting the output of operational electricity generators. . . . [] This sort of activity provided the pretext -- electricity shortages -- for defendants' collusive and outrageous sales prices offered into the wholesale energy markets operated by the PX and ISO. From their respective trading floors, defendants coordinated the prices for electricity they offered for sale, otherwise known as 'bid rigging.' "



Plaintiffs therefore alleged that defendants' conduct departed from a competitive model, and they could "wield 'market power,' i.e., the ability to control the market price." This conduct "materially raised electricity prices in the PX and ISO markets, which in turn, resulted in higher retail prices to consumers." The relief sought included actual and treble damages, restitution, civil penalties, and injunctive relief.



B



Demurrer/Opposition



In June 2005, after remand from federal court, defendants renewed their joint demurrer, asserting a lack of jurisdiction in the superior court, based on federal preemption, as well as failure to state the causes of action. Defendants asserted plaintiffs' claims, based on conduct occurring in the wholesale energy market, cannot be adjudicated in state court because that is a field which is regulated by the federal government through the Federal Power Act (FPA) and placed within the exclusive authority of the Federal Energy Regulatory Commission (FERC). Defendants relied on federal case law holding that state law claims arising from wholesale transactions in the interstate electricity market are preempted under the FPA and that the filed rate doctrine applies to rates regulated under the FPA.(Snohomish, supra, 384 F.3d 756; Grays Harbor, supra, 379 F.3d 641, 647.)



Defendant argued the cases cited by plaintiffs as precluding a finding of preemption, such as Younger, supra, 26 Cal.3d 397 and Spielholz, supra, 86 Cal.App.4th 1366, were distinguishable and more limited than plaintiffs believed. Opposition and reply papers were filed, supported by extensive judicially noticeable material from FERC records.[7]



At oral argument in the trial court, defendants responded to plaintiffs' theories with the observation that there were ongoing refund requests before FERC by one of the defendants' subsidiaries, SDG&E, and defendants contended FERC was the proper forum. Plaintiffs continued to argue that in light of the various changes in the FERC regulatory process, from filed rates to a market-based type of regulation, Congress could not have intended to preempt the field when it enacted the FPA. Plaintiffs relied on Younger, supra, 26 Cal.3d 397 to contend concurrent state antitrust regulation in the




wholesale market was appropriate, also citing to a related case in which a federal district court judge had observed that it was possible to establish a violation of the Cartwright Act without reference to the FPA's "just and reasonable" rates standard. (Hendricks v. Dynegy Power Marketing, Inc. (S.D.Cal 2001) 160 F.Supp.2d, 1155, 1163 (Hendricks).) In plaintiffs' view, it was possible to establish damages for anticompetitive conduct by the defendants that was not measured by rate regulation standards. Plaintiffs contended that antitrust damages should be measured by what price the market would have set if anticompetitive forces were not operating, as distinguished from the FERC standard of a just and reasonable rate, which was tied to how much money the defendants were entitled to be making. The matter was taken under submission.



C



Ruling



After oral argument, the trial court issued its order, setting forth its reasoning as follows. First, the court granted the respective requests for judicial notice of rulings and orders issued by FERC. The demurrer was sustained on the basis that all claims were preempted and Younger, supra, 26 Cal.3d 397 was distinguishable. The court primarily relied on the authority of a Ninth Circuit Court of Appeals decision, Snohomish, supra, 384 F.3d 756, to conclude that plaintiffs' claims and prayer for relief would impermissibly require a "fair price" determination, already found to be barred by preemption principles in Grays Harbor, supra, 379 F.3d 641. The court concluded the field preemption and conflict preemption principles barred each of plaintiffs' claims.



Further, the trial court rejected plaintiffs' argument that Otter Tail Power, supra, 410 U.S. 366 would bar a finding of preemption, "because that case concerned federal antitrust laws and not state antitrust laws as Plaintiffs allege in their Master Complaint." The court further noted that in light of its finding that preemption bars plaintiffs' claims, it was not required to reach the issue of the applicability of the filed rate doctrine; nevertheless, those principles would bar these claims (relying on, e.g., Snohomish, supra, 384 F.3d 756; Grays Harbor, supra, 379 F.3d 641; Dynegy, supra, 375 F.3d 831). These rulings were dispositive and the master complaint was dismissed.



Plaintiffs, through liaison counsel, timely filed their notice of appeal.



DISCUSSION



The main thrust of the complaint is that the defendants' conduct, their alleged "manipulation, distortion and corruption" of the wholesale electricity market in California, "forced electricity users to pay electricity prices based not on competitive market forces, but prices which were grossly inflated due to defendants' conduct," thereby giving rise to an entitlement to antitrust damages and unfair competition remedies in favor of plaintiffs. To avoid the effect of federal preemption in this heavily regulated area, plaintiffs seek to distinguish between the regulatory authority granted to FERC to order compliance with its policies, such as by ordering refunds to electricity consumers, and the types of damages and other relief recoverable under the Cartwright Act and/or the UCL.



We first set forth rules regarding federal preemption in this factual and legal context. We then address the filed rate doctrine.



I



QUESTIONS OF LAW PRESENTED



To address these issues as resolved on demurrer, we apply basic standards of review. "We review the trial court's sustaining of a demurrer without leave to amend de novo, exercising our independent judgment as to whether a cause of action has been stated as a matter of law. [Citations.] We 'give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.]' [Citation.] A judgment based on a dismissal must be affirmed if any of the grounds for demurrer raised by the defendant is well-taken and disposes of the complaint. [Citation]." (Gallivan v. AT&T Corp. (2004) 124 Cal.App.4th 1377, 1381.)



"When the issues regarding federal preemption involve undisputed facts, it is a question of law whether a federal statute or regulation preempts a state law claim and, on appeal, we independently review a trial court's determination on that issue of preemption. [Citations.]" (Smith v. Wells Fargo Bank, N.A. (2005) 135 Cal.App.4th 1463, 1476 (Smith).)



A preliminary question of law we must address is whether plaintiffs are entitled to claim the benefit of "the general rule disfavoring implied preemption." (Southern California Edison Co. v. Public Utilities Com'n (2004) 121 Cal.App.4th 1303, 1311-1312 (Southern CaliforniaEdison).) This is sometimes termed a "presumption against preemption. 'We apply a presumption against federal preemption unless the state attempts to regulate an area in which there is a history of significant federal regulation.' [Citation.]" (Grays Harbor,supra, 379 F.3d 641, 648, fn. 7.) Plaintiffs rely on Smith, supra, 135 Cal.App.4th 1463 to argue that the Cartwright Act may provide alternative schemes of regulation of wholesale electricity markets, to the extent that such claims are not inconsistent with federal preemption in this area. They hinge this claim upon their perception that antitrust damages arising from the defendants' anticompetitive conduct are different in nature from any penalties or refunds that FERC might order resulting from the same type of conduct. They argue the party claiming federal preemption (defendants) have the burden to show specific state law claims are preempted. (Id. at p. 1475.)



In response, defendants cite to Southern CaliforniaEdison,supra, 121 Cal.App.4th 1303, to say that the "presumption against preemption" is "characteristically applied where the field is one that the states have traditionally occupied and regulated. [Citation.] The presumption 'is not triggered when the state regulates in an area where there has been a history of significant federal presence. [Citation.]' Inasmuch as the field of interconnection [wholesale electricity distribution] agreements has a history of significant federal presence, the presumption against preemption is not applicable here." (Id. at pp. 1311-1312.) We agree with those observations and those of the court in Grays Harbor,supra, 379 F.3d 641, 648, footnote 7, that "[t]his presumption is almost certainly not applicable here because the federal government has long regulated wholesale electricity rates."



We therefore seek to examine, free from any such presumption against preemption, the respective merits of the arguments by both plaintiffs and defendants regarding the application of preemption principles here.



II



PREEMPTION PRINCIPLES



As set forth in Smith,supra, 135 Cal.App.4th 1463, 1476, our task is to examine "the precise language of the federal law or regulation to determine whether a particular state law claim is preempted. [Citations.] 'As to each state law claim, the central inquiry is whether the legal duty that is the predicate of the [claim] constitutes a requirement or prohibition of the sort that federal law expressly preempts. [Citations.]' [Citation.]" (Ibid.)



To carry out this analysis of the scope of preemption in the energy/electricity context, we first outline the leading case authority dealing with similar claims arising out of the California energy crisis in the wholesale electricity market, as issued by the Ninth Circuit Court of Appeals. We then compare the nature of the antitrust/UCL damages requested, to the remedial powers allocated by the FPA (16 U.S.C. 791a) to FERC (formerly the FPC [see hist. & stat. notes, 16 U.S.C.A. (2000), foll.  792, p. 78]). We note that although preemption principles are closely intertwined with the "filed rate doctrine," which is central to FERC's operations, we may nevertheless discuss them separately. (California ex rel. Lockyer v. F.E.R.C. (9th Cir. 2004) 383 F.3d 1006, 1011 (Lockyer).) The reason is that the historic filed rate doctrine is undergoing fast-paced evolution in the context of energy deregulation, such as the aftermath of the 1996 California legislation with which we are dealing. (Pub. Util. Code,  330 et seq.; Dynegy, supra, 375 F.3d 831, 852-853.) We will address this evolution to the extent necessary in part III, post.



Finally, with this background set forth, we will analyze plaintiffs' arguments that certain alternative federal and state authority shows that antitrust relief in the state courts is not inconsistent with the grant of federal authority to regulate the wholesale electricity market. (E.g., Younger, supra, 26 Cal.3d 397; Otter Tail Power, supra, 410 U.S. 366.)



A



Recent Ninth Circuit Authority



In Grays Harbor,supra, 379 F.3d 641, 644, the Ninth Circuit Court of Appeals built upon earlier authority (Dynegy, supra, 375 F.3d 831), to address "contract-related claims against energy wholesalers by a public utility which contends it was forced to pay exorbitant prices for electricity." (Grays Harbor, supra, at p. 644.) The court upheld a district court dismissal of such contract claims on preemption grounds. It first set forth basic preemption principles:



"As an initial matter, it is clear that the Federal Power Act (the 'FPA') grants FERC ' "exclusive authority to regulate the transmission and sale at wholesale of electric energy in interstate commerce." ' [Citations.] Through the FPA, ' "Congress meant to draw a bright line easily ascertained, between state and federal jurisdiction. . . . This was done in the Power Act by making [FERC] jurisdiction plenary and extending it to all wholesale sales in interstate commerce except those which Congress has made explicitly subject to regulation by the States." ' [Citations.] This power includes the exclusive authority to determine the reasonableness of wholesale rates. [Citations.]" (Grays Harbor,supra, 379 F.3d 641, 646-647.)



In Dynegy, supra, 375 F.3d 831, 839, the court explained the operation of the ISO tariffs filed with FERC, and said that "the ISO tariff binds the companies to important obligations and duties that are relevant and necessary to the state law claim." (Ibid.) For example, "the ISO must file schedules showing its rates and charges, and the practices and regulations affecting such charges. [Citation.] The filing enables FERC to determine whether the ISO rules and regulations pertaining to those charges are reasonable, as required by the FPA. [Citation.] Once filed with a federal agency, such tariffs are the 'equivalent of a federal regulation.' [Citations.]  . . .  Besides specifying the generators' responsibilities, the tariff also details penalties and remedies for non-compliance." (Ibid.)



Even though the unsuccessful plaintiff in Grays Harbor was claiming contract damages (nominally state law causes of action), the court of appeals read its complaint as seeming, impermissibly, "to require the district court, at some point, to determine the fair price of the electricity that was delivered under the contract. This determination is clearly within FERC's jurisdiction for determining the reasonableness of wholesale rates. [Citations.] At the very least, the requested relief intrudes on an 'identifiable portion' of a field that the federal government has occupied and addresses a matter that is 'in any way regulated by the federal government.' [Citation.]" (Grays Harbor,supra, 379 F.3d at p. 648.)



TO BE CONTINUED AS PART II.



Publication courtesy of San Diego free legal advice.



Analysis and review provided by Santee Property line Lawyers.







[1] All statutory references are to this code unless otherwise stated.



[2] Sections 17200 through 17209 are commonly referred to as the unfair competition law or UCL. (Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 558, fn. 2.)



[3] Certain of the plaintiffs, public officials whom we denote the Bustamante group, do not join in the antitrust claims but make additional UCL claims based on Penal Code violations. (Pen. Code,  395, 396.) The same basic theories pertain to all the causes of action and we need not discuss these additional distinctions separately.



[4] Apparently, those settlements with those other defendants also included other related claims, and are not informative with regard to the issues on this appeal.



[5] In addition to suing these four major employers in the business of wholesale electric trading and marketing, plaintiffs named three individual defendants, who were management employees of the Dynegy group. No separate allegations are made about the individual defendants and we refer to all defendants collectively.



[6] The ISO continues to manage the wholesale electricity market, but the PX is no longer in operation. Plaintiffs' allegations relate to the period during which the PX was still participating in the market.



[7] Plaintiffs appropriately request judicial notice on appeal of various FERC proceedings and decisions in the record, outlining the scope of its jurisdiction as granted by the FPA (16 U.S.C. 791a et seq.). These orders and decisions deal with rate schedules and proposed market-based rates and tariffs, and are submitted by plaintiff to provide examples of FERC's duties to review whether rates and rate-related practices are just and reasonable, and to provide remedies for violations. (16 U.S.C.  824d, 824e.) We need not discuss several of plaintiffs' arguments made below, which are not pursued on appeal, such as the purported distinction between the roles of sellers and other participants in the market, such that "at a minimum the case should proceed against traders and generators."





Description Punitive damage award of $26 million was excessive where compensatory damages totaled $6.5 million, damages were largely in the way of restitution to single plaintiff for funds defendants improperly took from it, and harm defendants caused was solely economic and did not involve a "vulnerable victim." In such cases, punitive damage awards in excess of compensatory damages violate due process.
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