Free Response to Motion [Dispositive] - District Court of Federal Claims - federal

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 1 of 113

802

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 2 of 113

803

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 3 of 113

804

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 4 of 113

805

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 5 of 113

806

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 6 of 113

807

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 7 of 113

808

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 8 of 113

809

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 9 of 113

810

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 10 of 113

811

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 11 of 113

812

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 12 of 113

813

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 13 of 113

814

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 14 of 113

815

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 15 of 113

816

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 16 of 113

817

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 17 of 113

818

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 18 of 113

819

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 19 of 113

820

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 20 of 113

April 15, 1999, order with FERC. See, Mid-Continent Area Power Pool, 89 F.E.R.C. 6,135 (1999). It argued that, as a public power district of the State of Nebraska, it was not subject to FERC's jurisdiction regarding rates and charges. NPPD requested that FERC clarify that its April 15, 1999, order applied only to entities over which FERC had jurisdiction. On November 1, 1999, FERC issued its "Order on Requests for Clarification and Denying Requests for Rehearing". MidContinent Area Power Pool, 89 F.E.R.C. ~61,135 (1999). FERC held that it did not have direct jurisdiction over NPPD and that its April 15, 1999, order applied only to public utility members ofMAPP which are within FERC's jurisdiction. However, FERC stated specifically "we need not and do not address whether nonpublic utility members ofMAPP are nevertheless bound to take or refrain from taking any actions, including providing refunds, under the terms of any agreement". Id. at 61,387. FERC did not relieve NPPD of its obligation to pay the refunds under the Restated Agreement. It left the issue of whether NPPD must comply with the provisions of the Restated Agreement for resolution in this contract action.
SUMMARY OF ARGUMENT

This action does not seek to enforce any FERC order against NPPD, It seeks to enforce NPPD's contractual obligations under the Restated Agreement. When it accepted the Restated Agreement, NPPD agreed to be bound by all its terms and to
11

821

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 21 of 113

make its contractual rights and obligations subject to FERC regulation, even though NPPD itself is not subject to direct FERC jurisdiction. When FERC held that Schedule F rates were unlawful, and ordered refunds, NPPD was required to comply because FERC has jurisdiction over the contract. NPPD's arguments fail for a variety of reasons. First, NPPD should not be allowed to reap the benefits ofMAPP membership and avoid contractual obligations which have an adverse financial impact. Second, NPPD's arguments violate the very purpose ofMAPP by advocating for itself rights and benefits superior to those of other members. Finally, NPPD cannot avoid its contractual obligations by arguing that under Nebraska law only its board of directors can establish its rates. By becoming a member ofMAPP, NPPD agreed to be subject to all the Restated Agreement's provisions. Complying with a contract it entered into, with its board of directors' approval, does not constitute an unlawful delegation of the board's raternaking authority to FERC. As the district court held correctly, NPPD is bound by its contractual obligations. For these reasons, the judgment should be affirmed.
ARGUMENT A. Standard of Review

The district court's decision to grant summary judgment is reviewed de novo on appeal. Shelter Ins. Companies v. Hildreth, 255 F.3rd 921,924 (8th Cir. 2001).
12

822

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 22 of 113

823

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 23 of 113

824

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 24 of 113

825

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 25 of 113

826

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 26 of 113

827

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 27 of 113

828

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 28 of 113

829

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 29 of 113

830

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 30 of 113

831

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 31 of 113

832

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 32 of 113

833

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 33 of 113

834

Case 1:07-cv-00184-LAS

Document 47-17

Filed 05/20/2008

Page 34 of 113

835

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1 of 79 113 Filed 05/20/2008 Page 35 of

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

PACIFIC GAS AND ELECTRIC COMPANY, SOUTHERN CALIFORNIA EDISON COMPANY, AND CALIFORNIA ELECTRICITY OVERSIGHT BOARD, Plaintiffs, v. THE UNITED STATES, Defendant. SAN DIEGO GAS & ELECTRIC COMPANY, a California corporation, Plaintiff, v. THE UNITED STATES, Defendant.

No. 1:07-cv-00157-LAS No. 1:07-cv-00167-LAS Consolidated HON. LOREN A. SMITH

PLAINTIFFS PACIFIC GAS AND ELECTRIC COMPANY, SOUTHERN CALIFORNIA EDISON COMPANY, AND SAN DIEGO GAS & ELECTRIC COMPANY'S OPPOSITION TO DEFENDANT'S MOTION TO DISMISS

836

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2 of 79 113 Filed 05/20/2008 Page 36 of

TABLE OF CONTENTS Page STATEMENT OF THE ISSUES.....................................................................................................1 STATEMENT OF THE CASE........................................................................................................2 I. II. INTRODUCTION ...................................................................................................2 FACTS .....................................................................................................................3 A. B. C. D. E. The California Wholesale Markets During the 20002001 Energy Crisis ......................................................................................3 FERC's Authority Over the ISO and PX Markets ......................................5 The Agencies Agreed to Abide by the Tariffs. ............................................6 The ISO and PX Auction Market Mechanisms ...........................................7 Market Participants Have the Right, Under the Tariffs, to Bring Actions Directly Against Other Market Participants...................................................................................................9 May 2000 to June 2001: The Energy Crisis..............................................10 Plaintiffs Seek Relief From FERC.............................................................11 1. 2. H. I. The FERC Remedy Proceeding .....................................................11 The Discovery of Market Manipulation ........................................12

F. G.

FERC Remediates the Unlawful Market Prices.........................................12 Appeals From FERC's Orders ..................................................................13 1. 2. 3. Relief for the Summer Period and Excluded Transactions--CPUC v. FERC .....................................................13 FERC's Authority to Order the Agencies to Pay Refunds--The Bonneville Decision...............................................14 FERC's October 19, 2007 and November 19, 2007 Orders ...................................................................................15

J.

The Agencies Repudiate Their Contractual Obligations and Plaintiffs Pursue Their Contract Claims. ............................................15

-i-

837

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 3 of 79 113 Filed 05/20/2008 Page 37 of

1. 2. 3.

Repudiation by the Agencies .........................................................15 Claims Presentments and Denials and This Action.............................................................................................16 The California Action ....................................................................16

ARGUMENT ................................................................................................................................17 I. II. III. OVERVIEW OF PLAINTIFFS' CONTRACT CLAIM .......................................17 THE U.S.'S ARGUMENTS MAY NOT BE RESOLVED ON THIS MOTION......................................................................................................20 CALIFORNIA LAW GOVERNS THE AGENCIES' CONTRACTUAL OBLIGATIONS UNDER THE ISO AND PX TARIFFS..........................................................................................................23 PLAINTIFFS HAVE PLEADED THEIR STANDING TO SUE SUFFICIENTLY TO ESTABLISH THIS COURT'S JURISDICTION.....................................................................................................26 A. B. The U.S. and Plaintiffs Are Parties to the Same MultiParty Contracts...........................................................................................26 The ISO and PX Tariffs Both Create Contractual Obligations That Are Enforceable by the Market Participants.................................................................................................30 1. The ISO and PX Tariffs Are Indistinguishable for Purposes of the Privity and Standing Analysis..........................................................................................31 Both Tariffs Expressly Allow Plaintiffs to Sue to Enforce the Agencies' Refund Obligations. ..................................32 The Tariffs Establish That the ISO and PX Are Not Parties to the Purchase and Sale Transactions, but That Buyers and Sellers Are..............................35

IV.

2. 3.

C.

Electricity Need Not Be "Traced" to a Particular Seller for Plaintiffs to Be Able to Recover Refunds from Sellers.........................................................................................................36 The Edison and Lynch Proceedings Do Not Support a Different Interpretation of the Tariffs, and No "Estoppel" Can Be Applied Here. .............................................................38

D.

- ii -

838

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 4 of 79 113 Filed 05/20/2008 Page 38 of

1. 2. 3. 4. E. F.

Southern California Edison Co., 80 FERC ¶ 61,262 (1997). .............................................................................39 Southern California Edison Company v. Lynch, 307 F.3d 794 (9th Cir. 2002). ........................................................42 There Is No Basis for Invoking Judicial Estoppel Against SCE...................................................................................44 Estoppel Is Not an Appropriate Means of Resolving These Issues. .................................................................45

The Restatement (Third) of Agency Permits This Action.........................................................................................................46 At a Minimum, Plaintiffs Have Standing as Third-Party Beneficiaries of the Agencies' Agreements to Abide by the ISO and PX Tariffs. .............................................................................46 1. For Plaintiffs to Prevail on This Motion, They Need Only Plead That the Multi-Party Contracts Manifest an Intent to Benefit Them. ..............................................47 The Tariffs Clearly Manifest an Intent to Benefit Market Participants Such as Plaintiffs. ..........................................47

2. V.

THE COURT HAS JURISDICTION OVER PLAINTIFFS' DECLARATORY RELIEF CLAIMS AND MAY GRANT THE REQUESTED RELIEF. ................................................................................49 A. B. This Court May Grant Declaratory Judgments..........................................49 The Claims Pleaded Here Warrant the Court's Exercise of Jurisdiction to Award Declaratory Relief..............................................50 1. A Declaratory Judgment May Properly Determine the Parties' Contract Obligations Upon the Occurrence of a Future Event. .......................................50 Plaintiffs' Declaratory Relief Claims Raise a "Live Controversy.".......................................................................52

2. VI.

THE SIXTH AND SEVENTH CLAIMS WERE PRESENTED TO THE CONTRACTING OFFICER. .................................................................55 A. Plaintiffs May Pursue Their Claims So Long as They Arise from the Same Operative Facts and Seek Essentially the Same Relief as Their CDA Claims....................................55 - iii -

839

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 5 of 79 113 Filed 05/20/2008 Page 39 of

B.

The CDA Claims and the Complaint Are Based on the Same "Operative Facts" and Seek "Essentially the Same Relief." .......................................................................................................57

VII.

PLAINTIFFS PROPERLY PLEADED BREACH OF CONTRACT AND ANTICIPATORY REPUDIATION CLAIMS IN THE ALTERNATIVE......................................................................59

CONCLUSION..............................................................................................................................60

- iv -

840

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 6 of 79 113 Filed 05/20/2008 Page 40 of

INDEX TO APPENDIX Pages Index of Key ISO and PX Tariff Provisions................................................................................. 1-31 Order on Demurrers, Electric Refund Cases, JCCP 4512 (L.A. Sup. Ct., Dec. 4, 2007) ........................................................................................... 32-33 Minute Order, Electric Refund Cases, JCCP 4512 (L.A. Sup. Ct., Jan. 3, 2008) ............................................................................................ 34-37 U.S. Notice of Intervention, Alliant Energy v. Nebraska Pub. Power. Dist., Case No. 62-C5-00-004626 (Minn. Dist. Ct., County of Ramsey, Aug. 18, 2000)......... 38-42 Brief of Appellee S. Cal. Edison Co., S. Cal. Edison Co. v. Lynch, Case Nos. 01-56879, et al. (9th Cir. Feb. 5, 2002) .......................................................... 43-92 Plaintiffs' Memorandum in Opposition to Defendants' Demurrers (Vol. II, Detailed Argument), Electric Refund Cases, JCCP 4512 (L.A. Sup. Ct., Oct. 9, 2007).......................................................................................... 93-216 Southern Cal. Edison Co., 80 FERC ¶ 61,262 (1997) ............................................................. 217-222 Pacific Gas & Elec. Co., 81 FERC ¶ 61,122 (1997) (Excerpt) .............................................. 223-232 Portland General Elec. Co., et al., 83 FERC ¶ 61,315 (1998) ................................................ 233-237 Automated Power Exchange, Inc., 84 FERC ¶ 61,020 (1998) ................................................ 238-256 Automated Power Exchange, Inc., 85 FERC ¶ 61,232 (1998) ................................................ 257-265 Cal. Power Exch. Corp., 92 FERC ¶ 61,096 (2000)................................................................ 266-270 San Diego Gas & Elec. Co., 92 FERC ¶ 61,172 (2000) .......................................................... 271-283 San Diego Gas & Elec. Co., 93 FERC ¶ 61,121 (2000) ......................................................... 284-355 San Diego Gas & Elec. Co., 95 FERC ¶ 61,418 (2001) ......................................................... 356-407 San Diego Gas & Elec. Co., 96 FERC ¶ 61,120 (2001) ......................................................... 408-450 San Diego Gas & Elec. Co., 109 FERC ¶ 61,218 (2004) ........................................................ 451-499 San Diego Gas & Elec. Co., 121 FERC ¶ 61,067 (2007) ....................................................... 500-533 San Diego Gas & Elec. Co., 121 FERC ¶ 61,188 (2007) ....................................................... 534-539 California ex rel. Lockyer, 122 FERC ¶ 61,260 (2008) .......................................................... 540-563 -v-

841

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 7 of 79 113 Filed 05/20/2008 Page 41 of

Fact-Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices, FERC Docket No. PA02-2-000 (Mar. 26, 2003) (Excerpt)............................. 564-595 MAPP Restated Agreement, FERC Docket No. ER96-1447-000 (Mar. 29, 1996) (Excerpt) ............................................................................................ 596-639 Letter from Clark Evans Downs on behalf of APX to David Boergers, Secretary of FERC (Aug. 14, 1998) ................................................................................................. 640-674 Power Exchange Settlement and Billing Procedures (PSABP), filed May 7, 2002, by the California PX in FERC Docket No. EL00-95.................... 675-708 WAPA Motion to Intervene, FERC Docket Nos. EL01-1-000, et al. (Oct. 23, 2000)............ 709-714 BPA Motion to Intervene, FERC Docket Nos. EL00-95-000, et al. (Nov. 22, 2000)............. 715-722 Bonneville Power Administration Request for Rehearing and Clarification, FERC Docket Nos. EL00-95, et al. (Jul. 19, 2001) ..................................................... 723-741 Plaintiffs' Amended Claim for Damages (WAPA) (Dec. 20, 2005) ...................................... 742-753 Motion by and Answer of the Bonneville Power Administration (BPA) and the Western Area Power Administration (Western) to the California Parties' Motion Related to Procedures Following Remand in Bonneville Power Administration, et al. v. FERC, FERC Docket Nos. EL00-95-000, et al. (Apr. 17, 2007) .................. 754-774 Thirty-Eighth Status Report of the California Independent System Operator Corporation on Settlement Re-Run Activity, San Diego Gas & Elec. Co., FERC Docket Nos. ER03-746-000, et al. (Sept. 6, 2007) ........................................... 775-795 16 U.S.C. § 824 (2000) ........................................................................................................... 796-798 16 U.S.C. § 824e (2000) .......................................................................................................... 799-801

- vi -

842

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 8 of 79 113 Filed 05/20/2008 Page 42 of

TABLE OF AUTHORITIES Page

CASES Acceptance Ins. Co. v. United States, 503 F.3d 1328 (Fed. Cir. 2007) ..................................................................................... 21 Adarbe v. United States, 58 Fed. Cl. 707 (2003) ................................................................................................... 21 Alliant Energy, Inc. v. Nebraska Pub. Power Dist., 347 F.3d 1046 (8th Cir. 2003), aff'g No. 00-2139 ADM/FLN, 2001 WL 1640132 (D. Minn. Oct. 18, 2001) ............................................................................... 3, 14, 18, 19 Alliant Energy, Inc. v. Nebraska. Pub. Power Dist., No. 00-2139 ADM/FLN, 2001 WL 1640132 (D. Minn. 2001), aff'd, 347 F.3d 1046 (8th Cir. 2003).................................................................. 18, 19, 30 Alliant Techsystems, Inc. v. United States, 178 F.3d 1260 (Fed. Cir. 1999) ............................................................................... 49, 50 Ammex, Inc. v. United States, 384 F.3d 1368 (Fed. Cir. 2004) ..................................................................................... 39 ATK Thiokol, Inc. v. United States, 76 Fed. Cl. 654 (2007) ................................................................................................... 55 Bell v. Hood, 327 U.S. 678 (1946)....................................................................................................... 21 Bilzerian v. United States, 41 Fed. Cl. 134 (1998) ................................................................................................... 44 Bonneville Power Admin. v. FERC, 422 F.3d 908 (9th Cir. 2005), cert denied, 128 S.Ct. 804 (Dec. 10, 2007) ................................... 2, 3, 14, 17, 18, 19, 35 Boyle v. United Tech. Corp., 487 U.S. 500 (1988)................................................................................................. 24, 25

- vii -

843

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 9 of 79 113 Filed 05/20/2008 Page 43 of

Brunswick Leasing Corp. v. Wisconsin Cent. Ltd., 136 F.3d 521 (7th Cir. 1998) ......................................................................................... 46 Cal. Dental Ass'n v. Am. Dental Ass'n, 23 Cal. 3d 346 (1979) .................................................................................................... 28 California ex rel. Lockyer v. FERC, 383 F.3d 1006 (9th Cir. 2004), cert. denied, 127 S.Ct. 2972 (June 18, 2007) ................................................................ 14 Casady v. Modern Metal Spinning and Mfg. Co., 188 Cal. App. 2d 728 (1961) ......................................................................................... 28 Cedars-Sinai Med. Cent. v. Watkins, 11 F.3d 1573 (Fed. Cir. 1993) ....................................................................................... 22 Cerberonics, Inc. v. United States, 13 Cl. Ct. 415 (1987) ..................................................................................................... 56 Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420 (7th Cir. 1993) ......................................................................................... 45 Cleveland Orchestra Comm. v. Cleveland Fed'n of Musicians, 303 F.2d 229 (6th Cir. 1962) ......................................................................................... 28 Client Network Servs., Inc. v. United States, 64 Fed. Cl. 784 (2005) ................................................................................................... 22 Coast Fed. Bank, FSB v. United States, 48 Fed. Cl. 402 (2000), aff'd, 323 F.3d 1035 (Fed. Cir. 2002)............................................................................ 24 Coenen v. R. W. Pressprich & Co., 453 F.2d 1209 (2d Cir. 1972) ........................................................................................ 27 Comair Rotron, Inc. v. Nippon Densan Corp., 49 F.3d 1535 (Fed. Cir. 1995) ....................................................................................... 44 Commonwealth Edison Co. v. United States, 56 Fed. Cl. 652 (2003) ................................................................................................... 44 Cooke v. United States, 91 U.S. 389 (1875)......................................................................................................... 23
- viii -

844

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1044 79 113 Filed 05/20/2008 Page of of

Corrugated Paper Prods., Inc. v. Longview Fibre Co., 868 F.2d 908 (7th Cir. 1989) ......................................................................................... 47 County of Cook v. Midcon Corp., 773 F.2d 892 (7th Cir. 1985) ......................................................................................... 41 CW Gov't Travel, Inc. v. United States, 63 Fed. Cl. 369 (2004) ............................................................................................. 50, 51 Data Gen. Corp. v. Johnson, 78 F.3d 1556 (Fed. Cir. 1996) ....................................................................................... 44 Democratic Party v. Reed, 343 F.3d 1198 (9th Cir. 2003) ....................................................................................... 45 Employers Ins. of Wausau v. United States, 23 Cl. Ct. 579 (1991) ..................................................................................................... 23 Engineered Demolition, Inc. v. United States, 70 Fed. Cl. 580 (2006) ................................................................................................... 55 First Fed. Sav. & Loan Ass'n of Twin Falls v. East End Mut. Elec. Co., 735 P.2d 1073 (Idaho App. 1987).................................................................................. 28 Flexfab, L.L.C. v. United States, 62 Fed. Cl. 139 (2004), aff'd, 424 F.3d 1254 (Sept. 27, 2005)............................................................................ 46 Garrett v. Gen. Elec. Co., 987 F.2d 747 (1993)....................................................................................................... 50 Gear v. Webster, 258 Cal. App. 2d 57 (1968) ..................................................................................... 28, 29 Glass v. United States, 258 F.3d 1349 (Fed. Cir. 2001), amended by, 273 F.3d 1072 (Fed. Cir. 2001) .......................................................... 47, 48 Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308 (2005)................................................................................................. 25, 26 Grubart, Inc. v. Great Lake Dredge and Dock Co., 513 U.S. 527 (1995)....................................................................................................... 21
- ix -

845

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1145 79 113 Filed 05/20/2008 Page of of

Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186 (1974)....................................................................................................... 21 Himebaugh v. Smith, 476 F. Supp. 502 (C.D. Cal. 1978) ................................................................................ 32 Holland v. United States, 75 Fed. Cl. 492 (2007) ................................................................................................... 24 Johnson Controls World Servs., Inc. v. United States, 43 Fed. Cl. 589 (1999) ............................................................................................. 56, 57 Kawa v. United States, 77 Fed. Cl. 294 (2007) ................................................................................. 21, 22, 46, 47 Kennedy v. City of Seattle, 617 P.2d 713 (Wash. 1980) ........................................................................................... 45 L-3 Commc'ns Integrated Sys., L.P. v. United States, 79 Fed. Cl. 453 (2007) ................................................................................................... 22 Lampi Corp. v. American Home Prods., 228 F.3d 1365 (Fed. Cir. 2000) ..................................................................................... 45 Long Island Sav. Bank, FSB v. United States, 503 F.3d 1234 (Fed. Cir. 2007) ..................................................................................... 24 Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992)....................................................................................................... 21 Maltese v. Dubinsky, 108 N.E.2d 604 (N.Y. 1952).......................................................................................... 28 Manuel Bros., Inc. v. U.S., 55 Fed. Cl. 8 (2002), aff'd, 95 Fed. Appx. 344 (Apr. 9, 2004) ........................................................................ 56 Marrero Land & Imp. Ass'n, Ltd. v. United States, 26 Cl. Ct. 193 (1992) ..................................................................................................... 59 McNutt v. Gen. Motors Acceptance Corp. of Indiana, 298 U.S. 178 (1936)................................................................................................. 21, 22
-x-

846

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1246 79 113 Filed 05/20/2008 Page of of

Montana v. United States, 124 F.3d 1269 (Fed. Cir. 1997) ..................................................................................... 47 Mother's Restaurant, Inc. v. Mama's Pizza, Inc., 723 F.2d 1566 (Fed. Cir. 1983) ............................................................................... 39, 44 Moyer v. United States, 190 F.3d 1314 (Fed. Cir. 1999) ..................................................................................... 22 Muh v. Newberger, Loeb & Co., Inc., 540 F.2d 970 (9th Cir. 1976) ............................................................................. 27, 28, 29 Nelson Constr. Co. v. United States, 79 Fed. Cl. 81 (2007) ......................................................................................... 22, 23, 47 New Hampshire v. Maine, 532 U.S. 742 (2001)................................................................................................. 44, 45 New Orleans Pub. Serv. Inc. v. Council of the City of New Orleans, 491 U.S. 350 (1989)....................................................................................................... 39 New York v. FERC, 535 U.S. 1 (2002)............................................................................................................. 5 Nippon Steel Corp, et al. v. United States, 219 F.3d 1348 (Fed. Cir. 2000) ..................................................................................... 21 Prentis v. Atlantic Coast Line Co., 211 U.S. 210 (1908)....................................................................................................... 39 Pub. Utils. Comm'n of Cal. v. FERC, 462 F.3d 1027 (9th Cir. 2006) ................................................................. 4, 12, 14, 19, 53 Reliance Ins. Co. v. United States, 931 F.2d 863 (Fed. Cir. 1991) ....................................................................................... 56 Renda Marine, Inc. v. United States, 71 Fed. Cl. 378 (2006) ................................................................................................... 56 Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746 (Fed. Cir. 1988) ................................................................................. 22, 23

- xi -

847

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1347 79 113 Filed 05/20/2008 Page of of

Richmond, Fredericksburg & Potomac R.R. Co. v. United States, 75 F.3d 648 (Fed. Cir. 1996) ................................................................................... 24, 25 SanDisk Corp. v. Memorex Prods., Inc., 415 F.3d 1278 (Fed. Cir. 2005) ..................................................................................... 45 Scott Timber Co. v. U.S., 333 F.3d 1358 (Fed. Cir. 2003), aff'd, 224 Fed. Appx. 972 (May 10, 2007) ........................................................ 55, 56, 58 Shea v. McCarthy, 953 F.2d 29 (2d Cir. 1992) ............................................................................................ 28 Simmons v. United States, 71 Fed. Cl. 188 (2006) ................................................................................................... 21 S. Cal. Edison Co. v. Lynch, 307 F.3d 794 (9th Cir. 2002), order modified, 353 F.3d 648 (9th Cir. 2003) ......................................................... 42, 43 S. Cal. Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005), cert. denied, 126 S.Ct. 2967 (June 26, 2006) ................................................................ 30 Spruill v. Merit Sys. Prot. Bd., 978 F.2d 679 (Fed. Cir. 1992) ................................................................................. 21, 49 Stoica v. Int'l Alliance of Theatrical Stage Employees and Moving Picture Mach. Operators of the U.S. and Can., 78 Cal. App. 2d 533 (1947) ........................................................................................... 28 Sullivan v. United States, 54 Fed. Cl. 214 (2002) ....................................................................................... 20, 23, 47 Swanson Group, Inc. v. United States, 76 Fed. Cl. 44 (2007) ............................................................................................... 55, 56 The Second Taxing Dist. of the City of Norwalk v. FERC, 683 F.2d 477 (D.C. Cir. 1982)....................................................................................... 39 Tiger Natural Gas, Inc. v. United States, 61 Fed. Cl. 287 (2004) ............................................................................................. 51, 52
- xii -

848

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1448 79 113 Filed 05/20/2008 Page of of

Total Med. Mgmt. v. United States, 104 F.3d 1314 (Fed. Cir. 1997) ..................................................................................... 21 Trauma Serv. Group v. United States, 104 F.3d 1321 (Fed. Cir. 1997) ..................................................................................... 21 United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979)....................................................................................................... 25 United States v. Seckinger, 397 U.S. 203 (1970)....................................................................................................... 24 United States v. Utah Constr. and Mining Co., 384 U.S. 394 (1966)....................................................................................................... 39 United States v. Winstar Corp., 518 U.S. 839 (1996)................................................................................................. 23, 24 Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed. Cir. 2005) ..................................................................................... 24 ADMINISTRATIVE CASES Automated Power Exch., Inc., 84 FERC ¶ 61,020 (1998) ........................................................................................ 37, 38 Automated Power Exch., Inc., 85 FERC ¶ 61,232 (1998) ........................................................................................ 37, 38 Cal. Power Exch. Corp., 92 FERC ¶ 61,096 (2000) .................................................................................. 10, 34, 42 California ex rel. Lockyer, 122 FERC ¶ 61,260 (2008) ............................................................................................ 14 Pac. Gas & Elec. Co., 81 FERC ¶ 61,122 (1997) .................................................................................. 10, 34, 42 Portland Gen. Elec. Co., 83 FERC ¶ 61,315 (1998) .............................................................................................. 41 San Diego Gas & Elec. Co., 92 FERC ¶ 61,172 (2000) .............................................................................................. 11
- xiii -

849

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1549 79 113 Filed 05/20/2008 Page of of

San Diego Gas & Elec. Co., 93 FERC ¶ 61,121 (2000) .............................................................................................. 11 San Diego Gas & Elec. Co., 95 FERC ¶ 61,418 (2001) .............................................................................................. 10 San Diego Gas & Elec. Co., 96 FERC ¶ 61,120 (2001) .................................................................................. 11, 12, 13 San Diego Gas & Elec. Co., 109 FERC ¶ 61,218 (2004) ...................................................................................9-10, 35 San Diego Gas & Elec. Co., 121 FERC ¶ 61,067 (2007) .................................................................... 15, 20, 34, 35, 54 San Diego Gas & Elec. Co., 121 FERC ¶ 61,188 (2007) ...................................................................................... 15, 20 S. Cal. Edison Co., 80 FERC ¶ 61,262 (1997) ............................................................................ 35, 39, 40, 41 FEDERAL STATUTES, LAWS, AND RULES 16 U.S.C. §§ 791a, et seq. ................................................................................................... 2 16 U.S.C. § 824 (2000).................................................................................................... 4, 5 16 U.S.C. § 824d (2008)...................................................................................................... 5 16 U.S.C. § 824e (2000) .................................................................................................. 5, 6 16 U.S.C. § 824e (2008) .................................................................................................. 5, 6 16 U.S.C. § 832a(f) (2008) ................................................................................................ 24 28 U.S.C. § 1491(a)(2) (2008)........................................................................................... 49 42 U.S.C. § 7256(a) (2008) ............................................................................................... 24 Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (2005)........................................................................ 5 Fed. R. Evid. 201(b) ............................................................................................................ 4
- xiv -

850

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1650 79 113 Filed 05/20/2008 Page of of

Rules of the United States Court of Federal Claims 8(e)(2) ............................................. 59 OTHER AUTHORITIES 6 Am. Jur. 2d, Associations and Clubs, § 21 (1999)........................................................ 28 73 Am. Jur. 2d, Stock and Commodity Exchanges, § 7 (2001) ......................................... 28 9 Corbin, Contracts § 44.6 (2007)..................................................................................... 48 18 C.J.S. Corporations § 154 (2007) ................................................................................ 28 2 Jack B. Weinstein & Margaret A. Berger, Weinstein's Federal Evidence §201.12 (2d ed. 2008) ...................................................................................................... 4 RESTATEMENT (SECOND) OF JUDGMENTS, § 28 (1982) .............................................. 44, 45 RESTATEMENT (THIRD) OF AGENCY § 6.05 (2006) ........................................................... 46

- xv -

851

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1751 79 113 Filed 05/20/2008 Page of of

Plaintiffs Pacific Gas and Electric Company ("PG&E"), Southern California Edison ("SCE"), and San Diego Gas & Electric Co. ("SDG&E") (together, "Plaintiffs") submit this joint opposition to the U.S.'s motion to dismiss. STATEMENT OF THE ISSUES 1. Whether Plaintiffs have sufficiently pled that the Tariffs for the California

Independent System Operator ("ISO") and the California Power Exchange ("PX") markets create contractual obligations between Plaintiffs and the Bonneville Power Authority ("BPA") and Western Area Power Authority ("WAPA") (together, the "Agencies") as buyers and sellers in those markets and that Plaintiffs have standing to enforce such contracts against the U.S. 2. Whether Plaintiffs have sufficiently pled, in the alternative, that Plaintiffs are

third-party beneficiaries of the Agencies' contractual obligations to abide by the ISO and PX Tariffs provisions. 3. Whether the Court has jurisdiction to grant the declaratory relief sought in

Plaintiffs' Fourth through Seventh Claims, which seek interpretations of the parties' disputed rights and obligations under the ISO and PX Tariffs. 4. Whether Plaintiffs' Sixth and Seventh claims were encompassed by or arise from

the same operative facts as their Contract Disputes Act Claims ("CDA Claims") and seek essentially the same relief. 5. Whether Plaintiffs have properly pled their First Claim for present breach of

contract as an alternative to their Second Claim for anticipatory breach of contract.

-1-

852

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1852 79 113 Filed 05/20/2008 Page of of

STATEMENT OF THE CASE I. INTRODUCTION In 2000 and 2001, when wholesale electricity prices in California reached stratospheric levels, the California ISO and PX wholesale markets offered an irresistible opportunity for sellers of electric power, including the Agencies. During the Energy Crisis, BPA and WAPA charged more than $500 million for electricity they sold at prices that were grossly inflated by market manipulation and dysfunction. As a condition of gaining entry to these highly-regulated markets, the Agencies had signed written contracts agreeing to sell power at only prices approved, and subject to after-the-fact revision, by the Federal Energy Regulatory Commission ("FERC"), and not to retain prices in excess of the FERC-determined rates. In the most massive proceeding in its history, FERC investigated conditions that prevailed in the ISO and PX markets during the Energy Crisis, found that the prices charged had been unjust, unreasonable, and unlawful, and corrected the prices for the period October 2, 2000 to June 20, 2001 (the "Refund Period") to just and reasonable levels, as mandated by the Federal Power Act ("FPA"), 16 U.S.C. §§ 791a, et seq. The Agencies should have honored their contractual promises to accept the corrected prices and refund their overcharges, but they did not. Instead, they--along with other so-called "governmental entities"--vigorously denied any obligation to pay refunds for the transactions in which they had been sellers, and insisted on their right to retain their windfall profits, while, at the same time, seeking refunds for all of the transactions in which they had purchased power. In an appeal from the FERC proceeding, they argued, and the Ninth Circuit agreed, that FERC could not compel the Agencies to pay refunds because the FPA places governmental entities outside the perimeter of FERC's refund authority. Bonneville Power Admin. v. FERC, 422 F.3d 908, 920 (9th Cir. 2005) ("Bonneville"), cert denied, 128 S.Ct. 804 (Dec. 10, 2007). However, -2-

853

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 1953 79 113 Filed 05/20/2008 Page of of

the Ninth Circuit did not stop there. It went out of its way to note that the Plaintiffs could, as an alternative remedy, bring claims in court directly against the Agencies to enforce the contractual obligations created by the Tariffs. Id. at 925-26. This is the breach of contract lawsuit expressly recommended by the Ninth Circuit in Bonneville. A nearly identical claim was endorsed by the Eighth Circuit in Alliant Energy, Inc. v. Nebraska Pub. Power Dist., 347 F.3d 1046, 1050-51 (8th Cir. 2003), aff'g No. 00-2139 ADM/FLN, 2001 WL 1640132 (D. Minn. Oct. 18, 2001) ("Alliant Energy"), a case in which the U.S. participated as a plaintiff on behalf of WAPA and recovered refunds on a breach of contract theory from a recalcitrant governmental entity situated just like BPA and WAPA are here. The U.S. does not contest these facts. Rather, it continues to try to evade its contract obligations by making various hypertechnical--and misconceived--arguments premised on lack of standing, estoppel, the absence of an Article III case or controversy, and alleged defects in Plaintiffs' CDA Claims. The U.S.'s arguments ignore the meticulous jurisdictional allegations of the Complaint, which must be credited at this stage of the case, and the extensive record that, were it to be considered, establishes Plaintiffs' standing. Not to mention the fact that the U.S. itself, when it wished to recover refunds for overcharges by a governmental seller in Alliant Energy, saw no obstacle to asserting its own standing to sue under a strikingly similar contract. The U.S.'s remaining arguments are equally without merit. Plaintiffs respectfully submit that their case must be allowed to proceed. II. FACTS A. The California Wholesale Markets During the 2000-2001 Energy Crisis

For Plaintiffs, public utilities that serve the vast majority of California's residential and commercial ratepayers, the ISO and PX wholesale power markets were virtually the only game in town during the 2000-2001 Energy Crisis. Plaintiffs were required to purchase through the -3-

854

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2054 79 113 Filed 05/20/2008 Page of of

ISO and PX nearly all of the wholesale electric power needed to supply their retail customers' needs. California Parties' Complaint ("PG&E Compl.") ¶ 17; SDG&E Complaint ("SDG&E Compl.") ¶ 11.1 Because the ISO and PX are "public utilities" as defined by the FPA, they are subject to FERC's exclusive regulatory jurisdiction. See 16 U.S.C. § 824(b), (d), (e) (2000), Plaintiffs' Appendix ("App."), submitted herewith, at 796. All sales and purchases of power in the ISO and PX markets were governed by FERC-regulated tariffs. The ISO and PX Tariffs specify detailed "rules of the road" for these markets, including when and in what form bids to buy and sell power would be submitted, and the formulas used to establish prices for all purchase-sale transactions.2 The Tariffs also prescribe the financial settlements resulting from market transactions and allocate risks as between the markets and the market participants. PG&E Compl. ¶¶ 18, 28-35; SDG&E Compl. ¶¶ 12, 22-29; see also infra pp. 7-9. All ISO and PX market participants were required to comply with the ISO and PX Tariffs, and transactions in the ISO and PX markets could only take place on the terms and conditions stated in the respective Tariffs. PG&E Compl. ¶¶ 28, 36-37; SDG&E Compl. ¶¶ 22, 30-31.3 To effectuate

A detailed description of the California markets and the Energy Crisis is found in Pub. Utils. Comm'n of Cal. v. FERC, 462 F.3d 1027, 1035-1045 (9th Cir. 2006) ("CPUC"). The PX operated daily auctions in which buyers purchased power for the following day and hourly auctions that allowed buyers to make any necessary adjustments to their day-ahead purchases. PG&E Compl. ¶¶ 19-20; SDG&E Compl. ¶¶ 13-14. The ISO's role was to safely and reliably operate California's transmission grid, which included maintaining a stable power supply and adequate reserves. To meet these obligations, the ISO operated, and still operates, its own auction markets to acquire the electric power needed to perform these vital functions. PG&E Compl. ¶¶ 21-23; SDG&E Compl. ¶¶ 15-17. Plaintiffs hereby request judicial notice of the PX and ISO Tariffs, located at A1-A1149 of the U.S.'s Appendix ("U.S. App."); the exhibits at A1150-A1170, A1180-A1181, A1206A1208, A1221-A1224, A1226-A1238, A1288-A1303 of the U.S. App.; and the exhibits at pages 32-801 of Plaintiffs' Appendix. The Court may judicially notice these exhibits because they are "capable of accurate and ready determination by resort to sources whose accuracy cannot be questioned." Fed. R. Evid. 201(b). See 2 Jack B. Weinstein & Margaret A. Berger, Weinstein's
(Footnote continued)
3 2

1

-4-

855

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2155 79 113 Filed 05/20/2008 Page of of

these obligations, buyers and sellers wishing to participate in these markets had to sign agreements contractually binding themselves to comply with the Tariffs.4 B. FERC's Authority Over the ISO and PX Markets

Subchapter II of the FPA gives FERC exclusive jurisdiction over the sale of electricity at wholesale and the transmission of energy in interstate commerce. 16 U.S.C. § 824(b) (2000); see generally New York v. FERC, 535 U.S. 1 (2002). FERC's primary statutory responsibility under the FPA is to ensure that rates charged in the transactions it regulates are just and reasonable.5 FERC thus has exclusive authority to regulate the rates, terms, and conditions of sales made under the ISO and PX Tariffs and to correct such rates, terms, and conditions if FERC determines that they are not just and reasonable or are otherwise unlawful.6 In order to carry out this statutory mandate, FERC indisputably has regulatory power to alter or amend the Tariffs, Federal Evidence §201.12 (2d ed. 2008) (listing categories of judicially noticeable materials, such as court orders and pleadings, administrative orders, and governmental records). For ease of reference, Plaintiffs' Appendix also includes an "Index of Key ISO and PX Tariff Provisions," App. at 1-31, which provides excerpts of key Tariff provisions in numeric order with pinpoint cites to the U.S.'s and Plaintiffs' Appendices. ISO Tariff § 2.2.3.1; PX Tariff § 2.6.2(f). ISO market participants, called "Scheduling Coordinators," were required to sign a Scheduling Coordinator Agreement ("SC Agreement"), in which they explicitly agreed to abide by the terms and conditions of the ISO Tariff. Similarly, participants in the PX market, called "PX Participants," were required to sign a PX Participation Agreement ("PX Agreement"), in which they explicitly agreed to abide by the terms and conditions of the PX Tariff. The ISO and PX Tariffs were incorporated by reference into the SC and PX Agreements, respectively. See ISO Tariff Appendix B, SC Agreement §§ 2, 8; PX Tariff Appendix A, PX Participation Agreement §§ II, 8; see also PG&E Compl. ¶¶ 25-27; SDG&E Compl. ¶¶ 19-21. 16 U.S.C. §§ 824d, 824e (2008). The FPA was amended by the Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (2005) ("EPAct 2005"). The FPA provisions discussed herein were in force during the Energy Crisis and at the time of the relevant FERC proceedings, prior to the passage of EPAct 2005. The Tariffs expressly reference FERC's regulatory authority. See, e.g., ISO Tariff § 18.1; PX Tariff § 18.1. See also PG&E Compl. ¶¶ 38-40; SDG&E Compl. ¶¶ 32-34.
6 5 4

-5-

856

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2256 79 113 Filed 05/20/2008 Page of of

including the pricing provisions.7 Importantly, the ISO and PX Tariffs give market participants the right to petition FERC to review and modify rates charged in these markets. In the event that FERC determines that any rates charged under the Tariffs are unjust, unreasonable, or otherwise unlawful, and corrects the rates, the Tariffs provide for recalculation of charges and resettlement of buyers' and sellers' accounts. ISO Tariff § 19; PX Tariff § 13; see also 16 U.S.C. § 824e (2008), 16 U.S.C. § 824e(a) (2000), App. at 799. C. The Agencies Agreed to Abide by the Tariffs.

In order to gain access to the ISO and PX markets, the Agencies signed written contracts that expressly incorporated the entire Tariffs as contract terms. PG&E Compl. ¶¶ 25-27, 41; SDG&E Compl. ¶¶ 19-21; 35. See also U.S. App. at A1150, A1155 (BPA contracts), U.S. App. at A1221, A1226, A1235 (WAPA contracts). By those contracts, the Agencies agreed that the "obligations and liabilities" of the Tariffs were binding on them, and that, if they sold power in the ISO and PX markets, the prices they charged for their transactions would be set pursuant to the ISO and PX Tariff terms. PG&E Compl. ¶¶ 36, 40-41; SDG&E Compl. ¶¶ 30, 34-35. As a consequence, selling in these two markets exposed the Agencies to the very substantial possibility that FERC would step in and correct the extraordinarily high prices they were receiving under the Tariffs' pricing formulas and order the ISO and PX to recalculate and resettle their accounts. Those events would, in turn, trigger the contractual obligation of all sellers,

The ISO Tariff provides, for example, that in signing SC Agreements, market participants agree "to comply with all ISO rules, protocols, and instructions, as those rules, protocols and instructions may be amended from time to time." ISO Tariff Appendix A, Master Definitions Supplement ("SC Agreement") (emphasis added). Similarly, the PX Agreement defines the PX Tariff as "the PX FERC Electric Service Tariff as amended from time to time...." PX Tariff Appendix A, PX Participation Agreement, § 1(B) (emphasis added).

7

-6-

857

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2357 79 113 Filed 05/20/2008 Page of of

including the Agencies, to refund the overcharges to their buyers. PG&E Compl. ¶¶ 36, 38-41; SDG&E Compl. ¶¶ 30, 32-35. The contracts the Agencies entered into are unambiguous on these points. The ISO SC Agreement provides that the Agencies "will abide by, and will perform all of the obligations under the ISO Tariff . . . in respect of all matters set forth therein including, without limitation, all matters relating to the scheduling of Energy and Ancillary Services on the ISO Controlled Grid, . . . [and] billing and payments . . . ." See, e.g., BPA ISO SC Agreement, U.S. App. at A1150, § 2(B). It further provides that "[t]he ISO Tariff is incorporated herein and made a part hereof." Id. § 8. The PX Agreement similarly provides that the Agencies agree, inter alia, that they "will abide by, and will perform all of the obligations under the PX Tariff in respect of all matters set forth therein including, without limitation, all matters relating to the trading of Energy by it through the PX Market, ongoing obligations in respect of bidding, Settlement, . . . billing and payments . . . ." See, e.g., BPA PX Agreement, U.S. App. at A1155, § II(B). The PX Agreement further provides that "[t]he PX Tariff is incorporated herein and made a part hereof." Id. § 8. D. The ISO and PX Auction Market Mechanisms

The ISO and PX did not buy electricity on their own behalves. The Tariffs explicitly state that the ISO and PX operated their respective markets not as principals, but on behalf of market participants, who were the counterparties to the sales transactions conducted in those markets.8 See infra pp. 35-36. Power sales in these markets were conducted as so-called "single
8

ISO Tariff § 2.2.1 provides that, in contracting for wholesale power, "the ISO will not act as principal but as agent for and on behalf of the relevant Scheduling Coordinators." The PX Tariff contains a similar provision stating that the PX will not be deemed a counterparty to any trades in the market. See PX Tariff § 3.1. See also PG&E Compl. ¶¶ 30, 34; SDG&E Compl. ¶¶ 24, 28. -7-

858

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2458 79 113 Filed 05/20/2008 Page of of

price auctions." All sellers who sold electricity in a particular auction period received the same price (the market clearing price) for their power, even if they had originally offered to sell at a lower price. PG&E Compl. ¶¶ 20, 22, 66; SDG&E Compl. ¶¶ 14, 16, 58. As a consequence, when market dysfunction or manipulation inflated the market clearing price to unjust and unreasonable levels, all sellers--including the Agencies--received, and all buyers were forced to pay, the unjust and unreasonable prices. PG&E Compl. ¶¶ 39-40; SDG&E Compl. ¶¶ 33-34. Most market participants both bought and sold electric power in the ISO and PX markets. The ISO and PX were responsible for tracking how much power each market participant bought and sold and the price associated with each transaction in those markets. See ISO Tariff §§ 11.1, 11.2; PX Tariff §§ 3.1, 6.2; see also PG&E Compl. ¶ 29; SDG&E Compl. ¶ 23. This function is called "settlement." For each "Settlement Period," the ISO and PX calculated each Scheduling Coordinator's and PX Participant's respective purchases and sales, netted out the credits and debits attributable to each buyer and seller, and prepared and distributed settlement statements and invoices reflecting the amounts payable and receivable by market participants in connection with their trades. ISO Tariff § 11.9; PX Settlement and Billing Procedures, App. at 675 ("PX PSABP"), § 5.4. Although the markets established market clearing prices for each auction period, the ISO and PX Tariffs create no expectation that amounts due to each seller are "final" once a sale is made. Even after an auction is completed and settled, the Tariffs provide mechanisms to correct any overpayments made to sellers and to refund the overpaid amounts to affected purchasers, including--as mentioned above--giving market participants the right to petition FERC to correct

-8-

859

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2559 79 113 Filed 05/20/2008 Page of of

the prices. When FERC determines that sellers made improper overcharges, as happened here, the Tariffs provide for correction of the accounts of the buyers and sellers involved.9 The market participants, rather than the ISO or PX, bore the risks and rewards of trading in these markets. The Tariffs contain provisions to protect the ISO and PX from the consequences of any shortfall that might result if a market participant defaults on a payment, causing a shortage of total funds collected for distribution to the other market participants.10 If the funds collected are insufficient, the ISO and PX pass through liability for shortfalls to the non-defaulting market participants that bought or sold power in the markets during a period for which there was a shortfall.11 E. Market Participants Have the Right, Under the Tariffs, to Bring Actions Directly Against Other Market Participants.

The Tariffs leave no doubt that the market participants themselves may sue other participants to enforce contract obligations arising from market transactions. The ISO Tariff expressly gives market participants the right to bring suit against one another to enforce rights and obligations created by the Tariffs resulting from sales transactions.12 According to FERC, the Tariff "authorizes but does not require [the ISO] to seek payment from recalcitrant Scheduling Coordinators on behalf of sellers of energy. Nor is [the ISO] responsible for making payments to a seller if a Scheduling Coordinator defaults." San Diego Gas & Elec. Co., 109
9

ISO Tariff §§ 11.6.3.3, 11.18.1, 11.18.2; PX PSABP §§ 5.3.1, 5.3.4, 5.3.5. See PG&E Compl. ¶ 40; SDG&E Compl. ¶ 34. ISO Tariff §§ 2.2.3.2, 11.8.2.2; PX PSABP §§ 2.1.2, 5.7.1, 5.7.2; see also PG&E Compl. ¶¶ 31-33; SDG&E Compl. ¶¶ 25-27. See, e.g., ISO Tariff §§ 11.2.9, 11.16.1; PX Tariff, Schedule 2, §§ 5.2.4, 5.3; PX PSABP § 5.7.3; see also PG&E Compl. ¶¶ 31-33; SDG&E Compl. ¶¶ 25-27.
12 11 10

See ISO Tariff §§ 11.19, 11.20.1, 11.20.2; PG&E Compl. ¶ 34; SDG&E Compl. ¶ 28.

-9-

860

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2660 79 113 Filed 05/20/2008 Page of of

FERC ¶ 61,218 at P 72 (2004), App. at 451 ("November 23, 2004 Order"); see also Pac. Gas & Elec. Co., 81 FERC ¶ 61,122 at 61,508-09 (1997), App. at 223 ("October 30, 1997 Order") ("[I]t should be the responsibility of Scheduling Coordinators to recover amounts that they are owed."); PG&E Compl. ¶¶ 30-35; SDG&E Compl. ¶¶ 24-29. The PX Tariff also creates direct rights of action among market participants.13 See infra pp. 32-35. F. May 2000 to June 2001: The Energy Crisis

Beginning in May 2000, the prices demanded by sellers in the ISO and PX markets shot up to unprecedented levels and stayed there for the next year. At times, prices during the Energy Crisis were over 100 times the prices that prevailed in prior periods. As a result of the singleprice auction mechanism in the ISO and PX markets, these extremely high prices generated windfall profits for all sellers, including the Agencies. The power crisis had severe negative effects on the stability and financial integrity of the Plaintiffs, and ultimately imposed billions of dollars in additional costs on business and residential customers throughout California. Plaintiffs, because they were required to buy power in these markets, had no means of escaping the full brunt of these sky-high prices. PG&E Compl. ¶¶ 43-44, 48; SDG&E Compl. ¶¶ 37-38, 42. The Energy Crisis ended on June 19, 2001, when FERC imposed price caps and other remedial measures on wholesale power sellers across the Western region. San Diego Gas & Elec. Co., 95 FERC ¶ 61,418 at 62,558 (2001), App. at 356; PG&E Compl. ¶¶ 47-49; SDG&E

If a PX Participant defaults on its obligations, the PX Tariff allows the PX to "chargeback" or allocate the unsatisfied amount to all non-defaulting participants in the PX markets. PX Tariff, Schedule 2, § 5.3. Upon effecting a chargeback, the PX Tariff requires the PX to "identify the defaulting Participant"--who otherwise would have remained anonymous-- "to all other affected PX Participants by the most expeditious means available," so that "nondefaulting Participants are able to seek recovery from the defaulting party." Cal. Power Exch. Corp., 92 FERC ¶ 61,096 at 61,379 (2000), App. at 266 ("July 28, 2000 Order") (emphasis added).

13

- 10 -

861

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2761 79 113 Filed 05/20/2008 Page of of

Compl. ¶¶ 41-43. The bulk of the crippling costs of the crisis has been, or will be, passed through to, and paid by, Plaintiffs' residential and commercial ratepayers. Amounts recovered in this proceeding will ultimately benefit the California ratepayers who were subjected to the overcharges. PG&E Compl. ¶ 50; SDG&E Compl. ¶ 44. G. Plaintiffs Seek Relief From FERC. 1. The FERC Remedy Proceeding

On August 2, 2000, SDG&E filed a complaint with FERC under the FPA against all sellers of electricity into the ISO and PX markets. See PG&E Compl. ¶ 51; SDG&E Compl. ¶ 45. PG&E and SCE intervened in that case on August 14, 2000, seeking extensive relief. On August 23, 2000, FERC opened a broad investigation into whether sellers' rates were just and reasonable, which it consolidated with the above proceedings. San Diego Gas & Elec. Co., 92 FERC ¶ 61,172 at 61,603, 61,609 (2000), App. at 271. (Collectively, these dockets are referred to as the "Remedy Proceeding.") FERC established October 2, 2000 as the "refund effective date," after which prices set by the Tariffs became conditional and subject to retrospective adjustment. Id.; San Diego Gas & Elec. Co., 93 FERC ¶ 61,121 at 61,370 (2000), App. at 284. The Agencies were respondents to the initial SDG&E Complaint, and also formally intervened as parties and gained full participatory rights in the Remedy Proceeding. WAPA Motion to Intervene, FERC Docket Nos. EL01-1-000, et al., (Oct. 23, 2000), App. at 709; BPA Motion to Intervene, FERC Docket. Nos. EL00-95-000, et al., (Nov. 22, 2000), App. at 715. The Agencies, who had both bought and sold power during the Energy Crisis, sought refunds for overcharges on their purchases, while consistently refusing to pay refunds to their purchasers-- who had suffered exactly the same injury. See, e.g., San Diego Gas & Elec. Co., 96 FERC ¶ 61,120 at 61,513 n.56 (2001), App. at 408 ("July 25, 2001 Order").

- 11 -

862

Case 1:07-cv-00157-LAS Document 34 Case 1:07-cv-00184-LAS Document 47-17

Filed 04/07/2008 Page 2862 79 113 Filed 05/20/2008 Page of of

2.

The Discovery of Market Manipulation

In early 2002, documents surfaced indicating deliberate manipulation of the ISO and PX markets by Enron and numerous other sellers, designed to increase prices throughout the Energy Crisis. Following an investigation, FERC identified numerous potential market power abuses and tariff violations, many implemented with the willing cooperation of sellers, including BPA. See Fact-Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices, FERC Docket No. PA02-2-000 (Mar. 26, 2003), App. at 564. See also CPUC, 462 F.3d at 103940 (explaining that evidence showed that many sellers artificially manipulated the markets, destabilizing the electric grid and increasing prices); PG&E Compl. ¶¶ 63-65. H. FERC Remediates the Unlawful Market Prices.

Throughout the Refund Period, FERC issued numerous orders in an attempt to remedy the effects of the dysfunctional ISO and PX markets, culminating in the critical July 25, 2001 Order, which reset prices for sales made in the ISO and PX markets during the Refund Period. July 25, 2001 Order, 96 FERC at 61,512, 61,516; PG&E Compl. ¶ 52; SDG&E Compl. ¶ 46. FERC adopted a methodology to recalculate retrospectively, on a market-wide basis, the maximum competiti