Client Alert

Ninth Circuit Finds Electricity Supplier Immune from Liability for Alleged Refusal to Wheel

2/11/2004

A recent decision of the Ninth Circuit United States Court of Appeals assessed the scope of an electricity supplier's state action immunity from liability under federal antitrust law. Snake River Valley Elec. Ass'n v. PacifiCorp, No. 02-36057 (9th Cir. Feb. 9, 2004) ("Snake River II"). In an earlier decision involving the same lawsuit, the Ninth Circuit had held that there was no state action immunity under the Idaho Electrical Supplier Stabilization Act ("ESSA") for an electric supplier alleged to have violated antitrust laws in refusing to wheel[fn1] wholesale electric power. Snake River Valley Elec. Ass'n v. PacifiCorp, 238 F.3d 1189 (9th Cir. 2001) ("Snake River I"). The ESSA is a comprehensive statute regulating electricity supply in Idaho, and is designed to promote harmony among electric suppliers in Idaho, to prohibit the "pirating" of consumers of another electric supplier, and to discourage duplication of electric facilities in Idaho. Idaho Code § 61-332. The Idaho legislature responded to Snake River I by amending the ESSA. This time, the Ninth Circuit found that the supplier was immune from liability.

Background and Snake River I

Snake River II involved a lawsuit filed by the Snake River Valley Electric Association ("SRVEA") against PacifiCorp, which alleged antitrust violations due to PacifiCorp's refusal to sell wholesale electrical power to SRVEA, and to wheel wholesale electrical power obtained from another supplier to SRVEA via PacifiCorp's transmission lines. SRVEA is an Idaho non-profit corporation organized to deliver retail electricity to its members (mostly irrigation farmers). PacifiCorp is an electric power company that provides retail electricity to, inter alia, SRVEA's potential customers. PacifiCorp also sells wholesale electricity nationwide through the wholesale power supply market.

The lawsuit stems from SRVEA's December 1995 request to PacifiCorp to wheel wholesale electricity to SRVEA's members. PacifiCorp claimed that the request contained insufficient information, and responded by inviting further discussion, and by referring SRVEA to tariff schedules filed with FERC which, according to PacifiCorp, was standard operating practice when it received an application to wheel. SRVEA did not respond, but instead filed suit in federal district court in July 1996. In April 1997, the district court granted the State of Idaho's motion to intervene. In January 1998 Idaho moved for partial summary judgment on state action immunity grounds, contending that it actively supervised the policies underlying the ESSA. The district court granted the motion, holding that PacifiCorp, even if it acted anti-competitively, had state action immunity from federal antitrust law.

SRVEA appealed and the Ninth Circuit reversed. Snake River I, 238 F.3d at 1189. The Ninth Circuit held that, though the ESSA had clearly articulated a policy restraining competition, the statute did not provide for active state supervision because PacifiCorp was allowed to act in any manner it chose with respect to wheeling and wholesale power sales. The Ninth Circuit expressly noted that "Idaho's situation . . . could be addressed by legislative action providing for supervision." Id. at 1195.

The Idaho legislature quickly responded to the Ninth Circuit's invitation, and enacted amendments to the ESSA, effective December 8, 2000. First, the legislature added a provision allowing an electrical supplier to refuse to wheel if the requested wheeling "results in retail wheeling and/or a sham wholesale transaction." Idaho Code § 61-332D(1). If an electrical supplier refuses to wheel, the supplier is obligated to petition the Idaho PUC for a review of whether that supplier's actions are consistent with the ESSA. Id. § 61-332D(2). Second, the ESSA was amended to expressly prohibit an electrical supplier, such as SRVEA, from serving consumers or former consumers of another electrical supplier, such as PacifiCorp, unless the proposed supplier first petitions the Idaho PUC and the PUC issues an order allowing the service. Id. § 61-334B. Under the old ESSA, an entrant electrical supplier could service the territory or customer of a current supplier with the current supplier's written consent.

Upon remand, PacifiCorp and Idaho again moved for summary judgment on the grounds that the amended ESSA gave state action immunity and that PacifiCorp was immune from the effective date of the amendment to the ESSA, December 8, 2000, forward. PacifiCorp also sought summary judgment on the refusal to wheel claim on the ground that SRVEA never made a valid request for wheeling. Finally, PacifiCorp argued summary judgment was appropriate on the refusal to sell wholesale power claim because PacifiCorp did not have monopoly power over that market. The district court granted partial summary judgment to PacifiCorp, holding that PacifiCorp enjoyed state action immunity from SRVEA's claims from December 8, 2000 onward. The district court also held that summary judgment was appropriate on the refusal to sell wholesale power claim. However, the district court found disputed issues of material fact with respect to the refusal to wheel claim prior to December 8, 2000. This claim proceeded to trial, and the jury held for PacifiCorp, finding that PacifiCorp did not deny a request by SRVEA that it be provided access to PacifiCorp's power lines. SRVEA appealed, and the Ninth Circuit affirmed across the board.

The Ninth Circuit's Rationale

The Ninth Circuit first addressed the question of state action immunity under the amended ESSA. As stated by the Court, state action immunity applies where the challenged restraint (1) reflects a clearly articulated state policy that permits the anti-competitive conduct and (2) the permitted anti-competitive activities are actively supervised by the state. As for the "clearly articulated state policy" prong, the Court held that because the prior version of the ESSA satisfied this prong, it followed a fortiori the amended ESSA also satisfied this requirement. Unlike in Snake River I, however, this time the Court held that the amended ESSA also satisfied the "active supervision" requirement.

The Court noted that to satisfy the second element, the private entity must demonstrate both that the state has the power to exercise control over the private anticompetitive conduct, and that the state in fact exercises its power. The Court held that the literal language of the amended ESSA makes clear that the state has the power to control whether a refusal to wheel should be approved or reversed. The Court further found that the State in fact exercised its power under the ESSA. Although PacifiCorp did not file its section 61-332D(2) petition under the ESSA until April 1, 2001 – five months after the amendments took effect – the Court found that the delay was not unreasonable, and that once the petition was filed, the Idaho PUC exercised control by virtue of its proceedings, in which the parties presented briefing and argument.

The Court found an additional ground for finding state action immunity in this case. Unlike the prior version of the ESSA, the amended ESSA explicitly prohibits a new supplier from "pirating" the customers of a public utility unless the PUC itself permitted the transfer of such customers. Idaho Code §§ 61-332B, 61-334B. That is, under the amended ESSA, a current electrical supplier had no discretion to permit a new supplier to service its existing customers. Therefore, the Court reasoned, PacifiCorp could not be said to have acted in an anti-competitive fashion in declining to transfer customers because it did not have the power to make such a transfer. For this, independent reason, the second prong of the state action immunity analysis was satisfied because "the state exercises ultimate control over transfer of customers."

SRVEA argued in the alternative that if the Court found state action immunity under the amended ESSA, then the state had violated the Contracts Clause of the United States Constitution. U.S. Constit. Art. I, § 10, cl.1. To prevail on this claim, the SRVEA had to show that the amended ESSA substantially impaired SRVEA's contractual relationship, and that significant and legitimate public purposes do not justify the impairment. The Court did not address the question of substantial impairment, because it found there was "no doubt that that amended ESSA reflects significant and legitimate public purposes" – the prohibiting of unrestrained competition for retail electric customers and the avoiding of wasteful duplication of electrical suppliers. SRVEA's constitutional argument was therefore rejected.

The Court next addressed whether the grant of summary judgment was appropriate for PacifiCorp on SRVEA's refusal to sell wholesale power claim. The Court agreed with the district court that summary judgment on this claim was appropriate, because there was no evidence that PacifiCorp had monopoly power over wholesale energy transactions. To the contrary, the Court found that this market "is now highly competitive." Because possession of monopoly power in the relevant market is a necessary element for an antitrust violation under Section 2 of the Sherman Act, the Court found that SRVEA's claim was precluded.

Finally, the Court affirmed the jury verdict finding that PacifiCorp had not refused a request from SRVEA to wheel. The Court rejected a number of evidentiary objections asserted by SRVEA, and in particular, the Court affirmed the trial court's decision to permit PacifiCorp to introduce evidence of FERC's regulatory requirement for a "good faith wheeling request." The trial court found that the evidence was relevant to establish PacifiCorp's asserted routine response to all wheeling requests, and the Ninth Circuit saw no reason to disturb that ruling.

If you have any questions about Snake River II, or its potential implications for your company, please feel free to contact a member of Morrison & Foerster's Energy Group.



Footnotes

1: Wheeling refers to a common industry practice whereby Utility A delivers electricity to utility A's customers through utility B's transmission facilities.

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