Public Utility District No. 1 of Snohomish County v. Dynegy Power Marketing, Inc.
Docket: No. 03-55191
Court: Court of Appeals for the Ninth Circuit; September 10, 2004; Federal Appellate Court
Litigation stems from the California Energy Crisis of 2000-01, during which power shortages and soaring electricity prices led to blackouts across the west coast. Public Utility District No. 1 of Snohomish County, Washington, has filed a lawsuit against several wholesale electricity generators and traders, alleging violations of California's antitrust and consumer protection laws due to market manipulation that resulted in artificially inflated prices for electricity purchased by Snohomish. The utility seeks treble damages and injunctive relief.
The district court ruled that Snohomish's claims were preempted by federal law, which gives the Federal Energy Regulatory Commission (FERC) authority over wholesale electricity rates. Snohomish argues that FERC’s reliance on market forces for rate-setting represents a failure of its regulatory responsibilities. However, the court affirms the district court's ruling, referencing that FERC has exclusive jurisdiction over interstate wholesale electricity sales and continues its regulatory activities.
Prior to 1996, FERC set electricity rates based on costs, with utilities required to file detailed rate schedules that included cost breakdowns and expected returns, subject to FERC approval. In 1996, California transitioned to a market-based rate system through Assembly Bill 1890, aiming to lower electricity prices by allowing competitive forces to determine rates. This legislation established the California Power Exchange and the California Independent System Operator, both of which operate under FERC’s oversight.
The PX facilitated a market for electricity trading in 'day-ahead' and 'day-of' markets, where prices were determined by evaluating bids from sellers and buyers. Sellers could submit multiple price-quantity bids, and buyers did the same, leading to the establishment of aggregate supply and demand curves. The market clearing price was set at the intersection of these curves, with all transactions occurring at this price, regardless of individual willingness to pay or sell at different rates. The ISO managed the transmission network, addressing supply-demand imbalances and ensuring grid reliability through a 'real-time' or 'spot' market, particularly during peak demand situations. In 2000 and 2001, wholesale electricity prices surged, leading to record costs for consumer utilities.
In the ongoing litigation, Snohomish accuses defendants—generators and traders in the California wholesale market—of violating the Cartwright Act and Unfair Competition Law by withholding supply and manipulating prices during emergencies. Specific deceptive practices, including transactions dubbed 'Death Star' and 'Get Shorty,' are alleged. The Federal Energy Regulatory Commission (FERC) has investigated these claims, detailing the manipulation techniques in a formal order and assessing their compliance with filed tariffs. Snohomish asserts that these actions resulted in excessive electricity costs and seeks remedies including injunctions against unlawful practices, disgorgement of profits, restitution, compensatory and treble damages, along with costs, interest, and attorney’s fees.
The district court dismissed Snohomish's complaint, citing a lack of jurisdiction based on the filed rate doctrine and field and conflict preemption. The court determined that addressing Snohomish's claims would interfere with the Federal Energy Regulatory Commission's (FERC) exclusive authority over interstate wholesale energy rate regulation. Snohomish's appeal argued that the preemption doctrines should not apply to market-based rates, as market dynamics, rather than FERC, dictate pricing. The core issue is whether FERC's regulatory actions provide sufficient oversight to warrant federal preemption of state laws concerning market-based wholesale electricity rates. The court referenced two prior decisions—**Dynegy** and **Grays Harbor**—to assess FERC's regulatory adequacy. Under the current market-based system, FERC has relaxed previous requirements, allowing prices to be set by market operations rather than mandatory filings, while still overseeing wholesale rates through seller filings, quarterly reports, and approval of market operation protocols. Sellers must demonstrate a lack of market power to obtain FERC approval for market-based sales, which is intended to ensure rates remain just and reasonable.
Participants in the PX and ISO markets were required to sign agreements acknowledging that the applicable tariffs would govern all transactions. Following the energy crisis, FERC mandated that wholesalers return profits from practices alleged by Snohomish, which were found to violate the protocols in the PX and ISO tariffs. The court previously rejected Snohomish's argument regarding the inapplicability of preemption doctrines to market-based rates, referencing Grays Harbor, where similar issues arose. In Grays Harbor, state-law contract claims for rescission and reformation were dismissed because awarding relief would necessitate determining a "fair price," infringing upon FERC’s exclusive jurisdiction to set wholesale rates. Although Snohomish’s claims involve state antitrust and unfair competition laws rather than contract law, they similarly request the court to ascertain rates indicative of a competitive market, which the court ruled as barred by preemption principles in Grays Harbor.
Snohomish also sought injunctive relief, which has been similarly deemed preempted by the filed rate doctrine. The court cited a precedent (California v. Dynegy) affirming that remedies for breaches of FERC-approved agreements fall within FERC's exclusive jurisdiction. As FERC-approved tariffs governed the relevant markets and violations were found, Snohomish's claims for relief must be addressed through FERC. Consequently, the district court’s dismissal of Snohomish’s claims for lack of jurisdiction was affirmed.
