Free Motion to Stay - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ________________________________________________ ) THE PEOPLE OF THE STATE OF CALIFORNIA ) EX REL. EDMUND G. BROWN JR., ATTORNEY ) GENERAL OF THE STATE OF CALIFORNIA, and the ) CALIFORNIA DEPARTMENT OF WATER ) RESOURCES BY AND THROUGH ITS ) CALIFORNIA ENERGY RESOURCES SCHEDULING ) DIVISION, ) ) Plaintiffs, ) ) v. ) No. 07-184C ) (Senior Judge Smith) ) THE UNITED STATES, ) ) Defendant. ) ________________________________________________) DEFENDANT'S MOTION TO STAY PROCEEDINGS; ALTERNATIVELY, DEFENDANT'S MOTION FOR ENLARGEMENT OF TIME Pursuant to Rule 7(b) of the Rules of the United States Court of Federal Claims ("RCFC"), defendant respectfully requests that the Court stay proceedings in this case until related, potentially duplicative proceedings stemming from litigation in the United States Court of Appeals for the Ninth Circuit are final. Alternatively, in the event our request for a stay is denied, we request an enlargement of time of 60 days, from the date of the denial, within which we may respond to the plaintiffs' complaint. Plaintiffs, the People of the State of California, and the California Department of Water Resources Through Its California Energy Resources Scheduling Division (together "California"), through counsel, inform us that they oppose our request to stay proceedings, but have no objection to our alternative motion for an enlargement of time. In support of this motion, we rely upon the following memorandum.

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DEFENDANT'S MEMORANDUM BACKGROUND This case arises from the California power crises of 2000 through 2001. Explanations of the facts surrounding the case can be found in Public Utilities Commission (CPUC) v. FERC, 456 F.3d 1025, 1035-44 (9th Cir. 2006); Bonneville Power Administration (BPA) v. FERC, 422 F.3d 908, 911-14 (9th Cir. 2005); and In re: California Power Exchange Corp. (CPX), 245 F.3d 1110, 1114-19 (9th Cir. 2001). To summarize, in 1996 California enacted Assembly Bill 1890 ("AB 1890"). Cal. Pub. Util. Code §§ 330-398.5. That act required California's three major, investor-owned, vertically integrated electric utilities ("IOUs") to divest themselves of substantial amounts of their power generation facilities. CPUC, 456 F.3d at 1035-36. Those utilities are now plaintiffs in cases pending before this Court, with Pacific Gas and Electric Co. ("PG&E") and Southern California Edison Co. ("SCE") appearing as plaintiffs in number 07157C, and San Diego Gas and Electric Co. ("SDG&E") appearing as plaintiff in number 07167C. Instead of generating their own electricity, under AB 1890 the IOUs initially were required to purchase all of their power from a new, centralized market called the California Power Exchange ("CPX"). The CPX ran a price auction in which purchasers and suppliers submitted bids that generated a single market clearing price necessary to meet the entire market's demands for electricity for a particular period of time. All bidders paid or received that single market clearing price for the time period. Because the CPX was deemed a public utility pursuant to the Federal Power Act ("FPA"), its operations and transactions were governed by a tariff approved by the Federal Energy Regulatory Commission ("FERC"). CPUC, 456 F.3d at

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1036-37. AB 1890 also established the California Independent System Operator Corporation ("ISO"). Although the IOUs continued to own their electricity transmission facilities, the legislation required the IOUs to give operational control over these facilities to the ISO. The ISO operated the electricity transmission grid, directing necessary power to the loads of the IOUs. CPUC, 456 F.3d at 1037. To run the grid, the ISO was authorized to acquire the necessary power to balance it, known as "imbalance energy," as well as operating reserves, known as "ancillary services." Id. The ISO ran its own auction market to obtain these services in which it received bids from suppliers and then, like the CPX, set a single price necessary to meet the market's demands for a particular time period. Like the CPX, the ISO was regulated by FERC and therefore operated under a FERC approved tariff. In the summer of 2000, California began to experience a power crisis. Prices on the CPX spiked sharply. CPX, 245 F.3d at 1115-16. Accordingly, one of the IOUs filed a complaint with FERC claiming the CPX and ISO markets were producing unjust and unreasonable prices and sought a price cap. FERC denied the request, but initiated an investigation of those allegations under section 206 of the FPA (16 U.S.C. § 824e). BPA, 422 F.3d at 912; San Diego Gas & Electric Co., 92 F.E.R.C. ¶ 61,172, at 61,603 (2000). FERC's investigation led to several actions, including its December 15, 2000 elimination of the requirement that the IOUs purchase all of their power requirements through the CPX, and culminating in an order dated June 19, 2001, that prospectively imposed a price mitigation plan upon ISO spot market sales, effective June 20, 2001. San Diego Gas & Electric Co., 95 F.E.R.C. ¶ 61,418, at 62,545-48 (2001).

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In a decision dated July 25, 2001, FERC ordered refunds pursuant to section 206(b) of the FPA by all sellers of electricity in the CPX and ISO for sales occurring between October 2, 2000, and June 19, 2001. The amount of the refunds was generally based upon the June 19 price mitigation plan, with some modifications. San Diego Gas & Electric Co., 96 F.E.R.C. ¶ 61,120, at 61,502, 61,516 (2001). This order included the unprecedented requirement that government owned sellers, and not just investor owned utilities (which are confusingly referred to as "public utilities") pay refunds. FERC ordered the ISO and the CPX to commence calculating the refund amounts due from each seller in the exchanges and to rerun their settlement/billing process in accordance with the order. San Diego Gas & Electric Co., 96 F.E.R.C. at 61,516-17, 61,520; Cal. Compl. ¶¶ 51-52. That process has continued since then, with no final billing statements presented for payment. Various governmental entities that sold electricity into the CPX and ISO markets, including the Bonneville Power Administration ("BPA"), challenged FERC's inclusion of governmental entities within the scope of its July 25, 2001 refund order. In a decision dated September 6, 2005, the United States Court of Appeals for the Ninth Circuit ruled that FERC lacked the authority to order refunds by governmental entities. BPA, 422 F.3d at 911-14. FERC's refund authority was limited to public utilities, which again means investor owned utilities, not government owned entities. Observing that FERC's refund authority stems from subchapter II of the FPA, the court, among other things, held that section 201(f) of the FPA provides a sweeping exemption from the terms of subchapter II to "the United States or any state, including any political subdivision." BPA, 422 F.3d at 915. Accordingly, this exemption applies to "`governmental entities.'" Id. The court of appeals remanded the matter to FERC for

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actions consistent with its decision. Id. at 926. After petitions for rehearing were denied in BPA v. FERC on March 7, 2007, both the IOUs and California filed a motion with the Ninth Circuit Court of Appeals on March 13, 2007, to stay the issuance of its mandate while one or more of them petitioned for a writ of certiorari from the United States Supreme Court. The motion explained that the movants intended to challenge the court of appeals' holding that FERC lacks authority to order public entities to issue refunds. Motion of the California Parties to Stay Issuance of the Mandate, BPA v. FERC, Nos. 02-70262, et al. (9th Cir. March 13, 2007). Although that motion to stay the mandate was denied on March 28, 2007, a subsequent filing by both the IOUs and California before FERC reiterated their intent to file such a petition with the Supreme Court. California Parties Motion For Procedures Following Remand at 2 n. 3, San Diego Gas & Electric Co., Nos. EL00-95-000, EL00-98-000 (FERC April 7, 2007). While FERC proceedings were continuing, the CPX market collapsed and the Governor of California declared a state of emergency, ordering the California Department of Water Resources to purchase energy on behalf of consumers. CPUC, 456 F.3d at 1042. The Department's Energy Resources Scheduling Division ("CERS") began buying power on January 18, 2001, from, among others, BPA and the Western Area Power Administration ("WAPA") (another governmental entity that sold power into the CPX and ISO). Id.; Cal. Compl. ¶ 45. California now also alleges that CERS acted as the "fiscally responsible stand-in" for the ISO in the ISO's "energy exchange transactions" with the agencies. Cal. Compl. ¶ 25. Energy exchanges began when a seller, such as BPA, provided power to the ISO, which in turn purchased power on the spot market and returned that power to the seller on, for example, 2-for-

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1 megawatt terms. CPUC, 456 F.3d at 1059. In CPUC, the Court of Appeals for the Ninth Circuit agreed with FERC that CERS's bilateral transactions were beyond the scope of the refund proceedings brought before FERC by the IOUs. CPUC, 456 F.3d at 1064. However, the court held that FERC acted arbitrarily in excluding energy exchanges from the refund proceedings, and remanded for FERC to consider whether such transactions should be the subject of a remedy. Id. at 1061. The mandate in CPUC has been stayed to facilitate settlement discussions, and FERC has made no further rulings to date on exchange transactions. California has now brought suit in this Court, seeking a declaration that BPA and WAPA will become contractually liable to California for "overcharges associated with energy exchanges" and for "market shortfalls" if, upon remand of CPUC, FERC "corrects the rates charged by sellers for energy exchanges." Cal. Compl. ¶¶ 68-76. California also claims that the agencies breached an "implied covenant of good faith and fair dealing" with the State, and that the State engaged in transactions with the agencies only as a result of duress, undue influence, or mutual mistake. Cal. Compl. ¶¶ 77-88. ARGUMENT I. This Case Should Be Stayed Until BPA v. FERC Is Final

The Court should stay this case until BPA v. FERC becomes final. The power to stay proceedings "is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants," and is within the discretion of the Court. Landis v. North American Co., 299 U.S. 248, 255 (1936). This Court has noted that if there is duplicative litigation in federal courts, the case that

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has made the most progress should continue. N.Y. Power Auth. v. United States, 42 Fed. Cl. 795, 799-800 (1999). The IOUs and California have announced that they intend to seek further review of BPA v. FERC in the United States Supreme Court. Motion of the California Parties to Stay Issuance of the Mandate, BPA v. FERC, Nos. 02-70262, et al. (9th Cir. March 13, 2007); California Parties Motion For Procedures Following Remand at 2 n. 3, San Diego Gas & Electric Co., Nos. EL00-95-000, EL00-98-000 (FERC April 7, 2007). Specifically, they intend to challenge the Ninth Circuit's exclusion of BPA and WAPA from FERC's jurisdiction to order refunds. If BPA v. FERC is reversed, then presumably California will not need a declaration that BPA and WAPA are contractually obligated to pay refunds in the event FERC issues an order that "corrects the rates charged by sellers for energy exchanges." Instead, California would be able to recover refunds directly pursuant to FERC's order. FERC-ordered refunds would also moot California's second and third claims, which depend upon supposed imbalances in the agencies' ISO and PX accounts resulting from the agencies' hypothetical refusal to pay refunds. See Compl. ¶¶ 70-76. California's remaining claims also could be affected by the continuing BPA v. FERC proceedings. California's fourth claim, for an alleged breach of a covenant of good faith and fair dealing, broadly seeks "the difference between the amount paid and the amount which should have been paid in the absence of Defendant's breach of the covenant." Compl. ¶ 80. California does not identify the transactions associated with this alleged breach, but to the extent those transactions include energy exchanges or other transactions occurring on the ISO or PX markets, those transactions could be subject to refunds following any reversal of BPA v. FERC.

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Likewise, California's fifth and sixth claims, which include "transactions with Agencies between January 17, 2001, and June 20, 2001," may include transactions potentially subject to refunds, given that the refund period runs from October 2, 2000, to June 19, 2001. BPA, 422 F.3d at 913. Neither the Government, nor this Court, should be put to the considerable work of addressing these complex, multi-count claims while California or other entities continue to pursue the alleged FERC remedy through proceedings in the Supreme Court. If a petition for a writ of certiorari is granted in BPA v. FERC, its final outcome could significantly alter or affect the nature of this proceeding, including what issues, if any, need to be litigated here. Clearly, interests of judicial economy and efficiency, as well as the limited resources of the parties, dictate awaiting its outcome under these circumstances. N.Y. Power Auth., 42 Fed. Cl. at 804 (noting that the conservation of judicial resources and promotion of judicial economy favor a stay); cf. Far West Fed. Bank S.B. v. Dir. Office of Thrift Supervision, 930 F.2d 883, 891 (Fed. Cir. 1991) ("In today's climate of burgeoning litigation and strained resources, duplication of litigation serves no congressional purpose; it squanders judicial, governmental, and private resources"). If a petition for a writ of certiorari is denied, only a relatively limited delay in these proceedings will have occurred. Given that the BPA v. FERC proceedings could directly affect the nature, necessity, and validity of the claims being advanced here, this case should be stayed until BPA v. FERC becomes final.1 See Penn. R.R. Co. v. United States, 363 U.S. 202 (1960) (holding that the Court should stay a claim to await the outcome of proceedings in another forum that would determine rights and obligations having significant legal consequences for the matter

In making this request we are not intending to waive or abandon any potential defenses that may apply, whether they be upon the merits or jurisdictional. 8

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in this Court), cited with approval in Loveladies Harbor, Inc. v. United States, 27 F.3d 1545, 1554-55 (Fed. Cir. 1994) (recognizing the appropriateness of a stay in this Court to await the outcome of regulatory review in another forum which could "determine the necessity for prosecuting" the claim here). We propose that, upon exhaustion of proceedings in the Supreme Court in BPA v. FERC, the parties be required to file individual status reports within 30 days addressing the outcome of those proceedings, proposing further proceedings in this case, and proposing an appropriate schedule to be adopted by the Court. The stay should remain in effect pending the Court's establishment of a post-stay schedule. IV. Alternative Motion For Enlargement

In the event the Court denies our motion for a stay, we respectfully request an enlargement of time of 60 days, from the date of that denial, within which the Government may respond to the complaint in this case. As previously noted, California's counsel has informed us that it does not oppose this alternative request for an enlargement. As both the complaint and the Background description above indicate, this is a very complex case involving a sophisticated regulatory regime. The complaint presents numerous claims, about multiple sets of transactions, engaged in by two different agencies, in two separate markets, governed by two different tariffs. Each tariff is hundreds of pages in length. Moreover, the underlying facts involve the very tangled and voluminous events of the California energy crises of 2000-2001. Additionally, we are also addressing the related suits filed by the California utilities that also arise from those events, PG&E v. United States, Fed. Cl. No. 07-157C (J. Smith), and SDG&E v. United States, Fed. Cl. No. 07-167C (J. Smith). The process of

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developing the Government's responses to these suits has required us to perform in-depth research about a wide range of factual and legal matters and to coordinate with multiple agency counsel. Although progress has been made, in the event the Court denies our request for a stay, we seek an enlargement of time, from the date of that denial, within which we can complete our research and consultations, draft an appropriate response to the complaint, obtain its review by the various interested entities, and file it with the Court. Respectfully submitted, PETER D. KEISLER Assistant Attorney General s/ Jeanne E. Davidson JEANNE E. DAVIDSON Director OF COUNSEL: Sean B. McNamara Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Peter Burger Attorney Bonneville Power Administration John D. Bremer Attorney Western Area Power Administration May 14, 2007 Attorneys for Defendant s/ Mark A. Melnick MARK A. MELNICK Assistant Director Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit, 8th Floor 1100 L St., NW Washington, D.C. 20530 Tele: (202) 616-0475 Fax: (202) 305-7644

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CERTIFICATE OF FILING I hereby certify that on this 14th day of May, 2007, a copy of the foregoing "DEFENDANT'S MOTION TO STAY PROCEEDINGS; ALTERNATIVELY, DEFENDANT'S MOTION FOR ENLARGEMENT OF TIME" was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. The parties may access this filing through the Court's system.

s/ Mark A. Melnick