Free Response to Motion - 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 RESPONSE TO CALIFORNIA'S MOTION TO COORDINATE PRETRIAL PROCEEDINGS We respectfully submit this response to California's motion to coordinate pretrial proceedings. California requests that this case be coordinated with two other cases pending before the Court, Pacific Gas and Elec. Co. et al. v. United States, No. 07-157, and San Diego Gas & Elec. Co. v. United States, No. 07-167, which have already been consolidated under 07157. See California's November 7, 2007 motion at 1 ("Cal. Mot. ___"). We do not oppose California's general suggestion that these cases should be coordinated, and we encourage the Court to do so. In particular, coordination following dispositive motions may be helpful to the parties and to the Court. We object to the specifics of California's proposal, however, because the proposal is unnecessarily prejudicial to us and unwarranted until, if ever, some true problem arises between the parties.

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STATEMENT OF THE CASE I. Background

As noted in prior filings, these cases arise from the California power crisis of 2000 through 2001. Explanations of the facts surrounding these cases 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), petition for cert. filed, 76 U.S.L.W. 3058 (U.S. Aug. 6, 2007) (No. 07-155); 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 utilities ("IOUs") to divest themselves of substantial amounts of their power generation facilities. CPUC, 456 F.3d at 1035-36. Those utilities are Pacific Gas and Electric Co. ("PG&E"), Southern California Edison Co. ("SCE"), and San Diego Gas and Electric Co. ("SDG&E"). 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," "PX," or "CalPX"). 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 1036-37. That tariff also provided the mechanism by which payments were made for the power transacted, with the CPX generating settlement statements and invoices that billed

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participants for the amounts they owed. Cal. Compl. ¶ 18, 26. AB 1890 also established the California Independent System Operator Corporation ("ISO" or "CAISO"). Although the IOUs continued to own their electricity transmission facilities, the legislation required the IOUs to give operational control of 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. Also like the CPX, the ISO tariff provided the mechanism for the ISO to generate statements and invoices that billed the IOUs for the power and services purchased. CPUC, 456 F.3d at 1037; Cal. Compl. ¶ 26. From time to time the ISO single auction market failed to provide enough power to meet its needs. When that happened the ISO engaged in out-of-market transactions directly with sellers. CPUC, 456 F.3d at 1050; Cal. Compl. ¶ 22. II. The Power Crisis A. Initiation Of FERC's Investigation And CERS's Commencement Of Power Purchases

In the summer of 2000, California began to experience a power crisis. Prices in the CPX and ISO markets spiked sharply. CPX, 245 F.3d at 1115-16. Accordingly, in August, 2000, SDG&E 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) on August 23, 3

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2000. BPA, 422 F.3d at 912; San Diego Gas & Electric Co., 92 F.E.R.C. ¶ 61,172, at 61,603 (2000). While FERC proceedings were continuing, the CPX market collapsed, ceasing operations on January 30, 2001. CPUC, 456 F.3d at 1041. On January 17, 2001, 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 1040. On January 18, 2001, the Department's Energy Resources Scheduling Division ("CERS") began buying power bilaterally from various sources, including the Bonneville Power Administration ("BPA") and the Western Area Power Administration ("WAPA"), two power marketing agencies of the Department of Energy. Id. at 1041; Cal. Compl. ¶ 45. B. FERC's Prospective Price Mitigation Plan, Retroactive Refund Ruling, And The Appellate Court's Reversal Of The Retroactive Refund's Applicability To The Government 1. FERC's Prospective Price Mitigation Plan

Pursuant to section 206(a) of the FPA (16 U.S.C. § 824e(a)), whenever FERC determines that a public utility's rate for a sale, or contract affecting that rate, is unjust or unreasonable, it shall determine a new just and reasonable rate or contract to be thereafter observed by that public utility for its future sales.1 However, FERC's retroactive powers are more limited. Pursuant to section 206(b) of the FPA (16 U.S.C. § 824e(b)), FERC may only order a public utility to refund any amounts already paid to the utility upon previous sales that exceed the rate or contract that FERC has ordered to be thereafter observed. Thus, in contrast to its power under section 206 to prospectively modify a public utility's rates or contracts, FERC is not also empowered to

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Significantly, a public utility is an investor-owned utility, not a government-owned 4

utility.

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retroactively modify those rates or contracts; it may only order public utilities to issue refunds.2 In purported accordance with these provisions, on June 19, 2001, FERC implemented a price cap upon future ISO spot market sales, effective June 20, 2001, through September 30, 2002. CPUC, 456 F.3d at 1041-43; San Diego Gas & Electric Co., 95 F.E.R.C. ¶ 61,418, at 62,545-48 (2001). Respecting prior sales into the markets, on July 25, 2001, FERC set a Mitigated Market Clearing Price ("MMCP") and ordered sellers to refund the difference between the prices paid for sales occurring between October 2, 2000, and June 19, 2001, and what the prices would have been had the June 19 MMCP been in effect, with some modifications. CPUC, 456 F.3d at 1042, 1054; San Diego Gas & Electric Co., 96 F.E.R.C. ¶ 61,120, at 61,502, 61,516 (2001). This time frame is commonly referred to as the "Refund Period." FERC ordered the ISO and the CPX to commence calculating the refund amounts due under MMCP 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; PG&E Compl. ¶ 56, SDG&E Compl. ¶ 50. That process has continued since then, with no final billing statements presented for payment. FERC's order included the unprecedented requirement that government-owned sellers, and not just investor-owned public utilities, pay refunds. 2. Appellate Reversal Of The Refund Order's Applicability To Government-Owned Sellers

Various governmental entities that sold electricity into the CPX and ISO markets, including 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 governmental

The refunds are limited to amounts paid after an"effective refund date," which is established by FERC pursuant to requirements contained in section 206(b). 5

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entities to issue refunds. BPA, 422 F.3d at 914. The Court ruled that Congress had limited FERC's refund authority to investor-owned utilities. The court of appeals remanded the matter to FERC for actions consistent with its decision. Id. at 926. PG&E's petition for a writ of certiorari in BPA v. FERC remains pending. As explained in more detail in the pleadings in Pacific Gas and Electric Co. v. United States, 07-157C, -167C, the IOUs now seek these same refunds in their own suit against the United States. C. Exclusions From FERC's Refund Order And Appellate Response

FERC's July 25, 2001 refund order excluded certain items from the scope of its MMCP methodology that had been sought by claimants. First, FERC excluded all sales that had taken place outside of the CPX and ISO markets, including CERS's bilateral power purchases, from the scope of its order. CPUC, 456 F.3d at 1042. Second, FERC excluded Exchange Sellers from the refund proceedings. CPUC, 456 F.3d at 1057-58. In an exchange, the ISO would enter into a transaction with a first seller, the "Exchange Seller," which would agree to provide the ISO with an agreed-upon amount of power, in exchange for which it would receive power back from the ISO at a later time, plus some additional amount. Later, the ISO would purchase power on the spot market from a second seller, the "Spot Seller," and use that power to pay back the Exchange Seller. FERC's July 25 refund order applied to mitigate the price paid by the ISO to the Spot Seller, but FERC declined to take action upon the transaction with the Exchange Seller to mitigate the value of the exchange with that entity. Id. As part of a comprehensive review of FERC's actions, in CPUC, the United States Court of Appeals for the Ninth Circuit affirmed FERC respecting its exclusion of the CERS bilateral purchases from the scope of its order, but reversed FERC respecting the Exchange Sellers.

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CPUC, 456 F.3d at 1057, 1061. Respecting the CERS purchases, the court of appeals found that these sales were through bilateral transactions that took place outside the CPX and ISO markets. Id. at 1061. Indeed, the market in which these transactions occurred did not even exist at the time SDG&E filed its initial complaint with FERC. Id. at 1062. Instead of occurring through the centralized, single price CPX and ISO auctions, the CERS sales were two-party, mutually negotiated, ostensibly arms-length transactions. Id. Accordingly, the CERS transactions were not within the scope of the refund proceedings. Regarding Exchange Sellers, the court rejected FERC's suggestion that it was impossible to place a monetary value upon the exchanges to assess whether they were unreasonable, holding that FERC had not performed an adequate analysis to support that conclusion. CPUC, 456 F.3d at 1059. No mandate has been issued yet in CPUC, and accordingly FERC has yet to commence any remand proceedings respecting the Exchange Sellers. There is no current schedule for FERC to do so either. III. Current Claims In This Court

California seeks the following relief in this Court: First, in apparent recognition that FERC's July 25 refund order did not include exchange transactions, and that FERC has not reconsidered that matter yet upon remand of CPUC, California seeks a declaratory judgment that, "at such time as FERC corrects the rates charged by sellers for energy exchanges, [California] will be entitled to recover from the United States the difference between the rates the Agencies initially charged and the lawful rates as ultimately determined by FERC . . . ." Cal. Compl. ¶¶ 68-69. Second, like the plaintiffs in Pacific Gas & Electric Co., California suggests that the refusal of the agencies to "honor their repayment obligations will result in a shortfall of funds needed to settle the accounts of the ISO and PX participants," without being clear which

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"repayment obligations" to which it is referring. It proceeds to claim that "[u]nder the terms of the ISO and PX Tariffs, other market participants, including CERS, may therefore be required to pay for any resulting market shortfall." California therefore seeks "a declaratory judgment that the United States will be contractually liable to CERS for any amount assessed against CERS's accounts due to the Agencies' refusal to honor their repayment obligations." Cal. Compl. ¶¶ 7073. Third, California seeks a declaratory judgment that the United States is contractually required to permit the agencies' accounts at the ISO and PX to be adjusted to reflect FERC's alleged correction of the ISO and PX market prices for sales and exchanges at such time FERC makes those corrections. Cal. Compl. ¶¶ 74-76. Fourth, and unlike the IOUs, California claims that BPA (but not WAPA) has breached its implied covenant of good faith and fair dealing on some unspecified set of contracts because it "knew or was on notice of conduct in the Western energy markets inconsistent with legitimate energy transactions . . . ; BPA took no action to stop such conduct; and BPA was also a beneficiary of the extraordinary prices . . ." California proceeds also to allege that "BPA engaged in conduct inconsistent with legitimate energy transactions during the Summer of 2000, that further investigation and discovery are likely to disclose that BPA continued to engage in such conduct . . . ." California seeks a judgment "for the difference between the amount paid and the amount which should have been paid," again on some unspecified set of contracts. Cal. Compl. ¶¶ 77-80 Fifth and sixth, and again unlike the IOUs, California claims that the agencies engaged in duress and undue influence upon CERS respecting its bilateral transactions with them by demanding "exorbitant prices for energy and onerous terms in exchanges." Alternatively,

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California asserts that the transactions were premised upon a critical energy shortage that the parties did not learn until later was artificially created. Accordingly, it seeks a declaration that the transactions are void or rescinded, entitling California to damages. Cal. Compl. ¶¶ 81-88. The IOUs advance seven separate claims. PG&E Compl. ¶¶ 72-92. Three of these claims, premised upon future actions by FERC, are largely identical to California's first three claims. The IOUs' remaining four claims, however, differ from California's claims. First, the IOUs claim that the agencies are currently in breach of contract based upon FERC's actions. See id. at ¶¶ 72-76. Second, the IOUs assert that the agencies have anticipatorily breached an alleged contract. See id. at ¶¶ 77-79. Third, the IOUs seek declaratory relief associated with the agencies' alleged denial of liability for the refund period. See id. at ¶¶ 80-81. Finally, the IOUs seek declaratory relief related to so-called "Summer Period" transactions, which were at issue in CPUC. California asserts none of these claims. Finally, the California Electricity Oversight Board joins with the IOUs, though it does not claim to be in privity of contract with BPA and WAPA regarding their power sales into the ISO and CPX, does not claim that BPA and WAPA owe it anything, and does not seek an order that they will owe it anything in the future. ARGUMENT We do not oppose California's general suggestion that these cases should be coordinated. We recognize that the existence of some common issues potentially presents an interest for all parties to coordinate where appropriate. We have noted this interest in our discussions with counsel for California, and expressed our willingness to cooperate to the extent possible. Indeed, not only have we made this point clear in our discussions with California, but we have put it into practice. For example, we contacted California after the plaintiffs in the other cases proposed argument dates for our motion to stay and for more definite statement, noting that it made sense

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to include our similar motion in this case in a coordinated hearing. We have also made a point to include California in other scheduling discussions that also involved the other plaintiffs. We are unaware of any complaints from California so far that we have failed in this regard and intend to continue to attempt to identify such issues of common interest as they arise. We oppose California's specific request concerning briefing because it would prejudice our ability to defend these cases and is unnecessary at this time. California asks this Court to enter a "coordinated schedule for the filing and briefing of all motions made during the pretrial phase of these proceedings that raise common issues (with motions concerning common claims or issues to precede motions based on separate claims or issues) and joint hearings on such motions." Cal. Mot. 9. Such an order would unnecessarily prejudice our ability to defend this case fully and fairly. California's complaint contains six claims, the final three of which are not contained in any form in the IOUs' complaints. See Cal. Compl. ¶¶ 77-88. The IOUs' complaints likewise contain four unique counts. See PG&E Compl. ¶¶ 72-92. California's unique claims are based upon theories of breach of the duty of good faith and fair dealing, mutual mistake, lack of consent, duress, and undue influence. See Cal. Compl. ¶¶ 77-88. The IOUs' complaints, in contrast, rest entirely upon alleged contractual rights arising from the actions of FERC. See PG&E Comp. ¶¶ 72-92. We have yet to file a response to any of the complaints in these cases, but we certainly may advance arguments specific to California's case, and also to the IOUs' cases. Some of these arguments may be jurisdictional in nature. California's request that the Court require the parties to brief common issues before briefing separate issues would prevent us from raising unique issues, jurisdictional and non-jurisdictional, at the beginning of the case, when it is most efficient to do so. There is simply no reason to restrict us from doing so. The Court should accordingly

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deny this portion of California's request. To the extent formal coordination between the parties would be helpful following our response to the parties' complaints, we do not oppose California's request. In particular, we agree with California that coordinated discovery may be appropriate, given the issues and parties common to these cases. We do not oppose an order requiring the parties to coordinate their efforts in discovery. Respectfully submitted, JEFFREY S. BUCHOLTZ Acting 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 December 3, 2007

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

Attorneys for Defendant

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CERTIFICATE OF FILING I hereby certify that on this 3rd day of December, 2007, a copy of the foregoing "DEFENDANT'S RESPONSE TO CALIFORNIA'S MOTION TO COORDINATE PRETRIAL PROCEEDINGS" 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