Client Alert

Ninth Circuit Issues Third in a Series of Decisions Solidifying FERC's Exclusive Jurisdiction Over Wholesale Electricity Markets

10/14/2004

Coming on the heels of two recent opinions affirming FERC's exclusive jurisdiction over wholesale power markets, on September 10, 2004, the Ninth Circuit Court of Appeals issued its decision in Pub. Util. Dist. No. 1 of Snohomish County v. Dynegy Power Marketing, Inc., No. 03-55191, 2004 U.S. App. LEXIS 19045 (Sept. 10, 2004), affirming the dismissal of Snohomish's claims against various traders of wholesale electricity for violations of California's antitrust and unfair competition laws as preempted by federal law and barred by the filed rate doctrine.

In the wake of the California energy crisis of 2000-01, Snohomish, a utility providing electricity to consumers in Washington state, sued various generators and traders who sold electricity in the California wholesale market, for violations of the Cartwright Act (California's antitrust law) and California's Unfair Competition Law by allegedly manipulating the markets and restricting electricity supplies to create artificially high prices in the markets from which Snohomish provided power. The complaint asserted that these practices caused Snohomish to "pay prices for electricity in excess of rates that would have been achieved in the competitive market." Snohomish sought monetary relief including treble damages, and also sought injunctive relief.

The district court granted the defendants' motion to dismiss the case for lack of jurisdiction, finding Snohomish's claims were barred by field preemption, conflict preemption, and the filed rate doctrine. The district court held that the relief Snohomish sought would interfere with FERC's exclusive jurisdiction over the regulation of interstate wholesale electricity markets, and that Snohomish's claim for damages would require the district court to determine what rates would have been achieved in a competitive market.

On review, the Ninth Circuit framed "the fundamental question" as "whether, under the market-based system of setting wholesale electricity rates, FERC is doing enough regulation to justify federal preemption of state laws." The Court found that under the market-based system FERC had waived many of the requirements that applied to a cost-based system. Nonetheless, the Court reasoned that FERC continued to oversee wholesale electricity rates by reviewing and approving various documents filed by the defendants, the PX, and the ISO.

First, each seller was required to file a market-based umbrella tariff, approved by FERC only upon a showing that the seller lacked or had mitigated its market power. Second, FERC monitored each seller's quarterly report, which requires sellers to document certain transaction related information during the quarter. Third, FERC reviewed and approved detailed tariffs filed by the PX and ISO, which described the operation of each market. Finally, the Court noted that FERC had previously ordered wholesalers to disgorge profits resulting from practices similar to those alleged by Snohomish. FERC had found many of these practices were prohibited by protocols filed as part of PX and ISO tariffs.

The Court found that its holding was controlled by its two recent decisions in Pub. Util. Dist. No. 1 of Grays Harbor County Washington v. Idacorp, Inc., 379 F.3d 641 (9th Cir. 2004) and California v. Dynegy, Inc., 375 F.3d 831, 850-853 (9th Cir. 2004). As Snohomish had argued, the plaintiff in Grays Harbor asserted that federal preemption and the filed-rate doctrine did not apply to a market-based rate system. The plaintiff in Grays Harbor brought state-law contract claims against a company that sold wholesale electricity alleging that the prices were a result of market manipulation, and asked the court to determine a "fair price" absent the alleged market manipulation. The Ninth Circuit found that Grays Harbor's claims were barred by federal preemption and the filed-rate doctrine.[fn1] In Snohomish, a different panel of the same Court reasoned that Snohomish's request that the court determine the rates that "would have been achieved in a competitive market" was the same as Grays Harbor's request for a "fair price." Therefore, as in Grays Harbor, Snohomish's claims were barred by the filed rate doctrine, field preemption and conflict preemption.

The Court also rejected Snohomish's request for injunctive relief. In Dynegy, the State of California had sought injunctive relief for alleged violations of California's unfair competition law. The Court announced in Dynegy that "remedies for breach and non-performance of FERC-approved operating agreements in the interstate wholesale electricity market fall within the exclusive domain of FERC." Noting that the practices alleged in the Snohomish complaint would violate market protocols governing sales in the PX and ISO markets, the Court concluded FERC likewise maintains exclusive jurisdiction over such claims. Thus, Snohomish's request for injunctive relief was barred by federal preemption and its only recourse was to seek a remedy with FERC.

The Court's opinion in Snohomish is the third in a series of decisions which demonstrate that FERC's exclusive jurisdiction over wholesale power markets is undiminished in a market-based rate system. Despite repeated attempts by buyers to circumvent the filed rate doctrine and federal preemption, the Ninth Circuit, as with other circuits, has consistently found that the only option for remedies for unjust and unreasonable rates or for market manipulation is with FERC.



Footnotes

1:Defendants in Grays Harbor were represented by Gordon Erspamer and Roger Collanton from Morrison & Foerster's Walnut Creek office.

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