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MODESTO IRRIGATION DIST. v. PACIFIC GAS & ELEC.

August 20, 1999

MODESTO IRRIGATION DISTRICT, PLAINTIFF,
v.
PACIFIC GAS & ELECTRIC COMPANY, AND DYNERGY POWER SERVICES, INC., AS SUCCESSOR TO DESTEC POWER SERVICES, INC., DEFENDANTS.



The opinion of the court was delivered by: Patel, Chief Judge.

  MEMORANDUM AND ORDER

On August 3, 1998, plaintiff Modesto Irrigation District, Inc. ("MID") filed this action alleging that defendants Pacific Gas & Electric Company ("PG & E") and Dynergy Power Services, Inc. ("DESTEC") refused to deliver wholesale electric power to NM in violation of federal and state antitrust laws and state tort laws. In particular, MID alleged (1) violations of section I of the Sherman Act, 15 U.S.C. § 1, and the Cartwright Act, Cal.Bus. & Prof.Code §§ 16720 et seq., California's antitrust statute by both PG & E and DESTEC; (2) tortious interference with contract and with prospective business relationship against PG & E alone; and, (3) breach of contract against DESTEC. The court dismissed MID's federal and state antitrust claims on February 2, 1999, on defendants' motion, but granted MID leave to amend its complaint. See Modesto Irrigation Dist. v. Pacific Gas & Elec., Case No. 98-3009 MHP, slip op. at 12-13 (N.D.Cal., Feb. 2, 1999) ("February order").

MID subsequently filed a first amended complaint ("FAC") on March 4, 1999, adding to the factual allegations in its original complaint and raising two additional causes of action: (1) violations of section 2 of the Sherman Act, 15 U.S.C. § 2, against PG & E and DESTEC, and (2) conspiracy to violate section 2 against PG & E and DESTEC. Again before the court is defendants' motion to dismiss MID's federal and state antitrust claims. Having considered the parties' arguments and submissions, the court enters the following memorandum and order.

BACKGROUND

Plaintiff MID is an irrigation district, a public agency created under the authority of the California Water Code, which owns and operates facilities for the generation, transmission and distribution of electric power. FAC, at ¶ 4. MID provides retail electric service in Stanislaus, Tuolumne, San Joaquin and Contra Costa counties, and wholesale electric service throughout the western United States. Id. Defendant PG & E is an investor-owned public utility engaged in the generation, transmission and distribution of electricity in northern and central California.*fn1 FAC, at ¶¶ 7, 10. PG & E sells and delivers electric power to both retail and wholesale consumers and separately sells transmission services to resellers of electric power. Id. at ¶¶ 9-10. As the predominant wholesaler and retailer of electric power in northern and central California, PG & E dominates and controls facilities for the transmission of electricity within its California service territory. Id. at ¶ 10. According to MID, PG & E and MID are in "actual and potential competition" to supply residential and industrial consumers with electric power. Id. at ¶ 12. Finally, DESTEC, a subsidiary of Dynergy Corporation of Houston, Texas, is a wholesaler of electric power, which is also referred to as a "power marketer." Id. at ¶¶ 6, 15.

The events at issue in this action concern the purchase and use of a "substation" ("Praxair substation") originally owned by Praxair, Inc. ("Praxair"), a large industrial consumer of electricity located in Pittsburg, California, and a retail customer of PG & E. FAC at ¶ 17. A "substation" is a facility which receives electric power at high voltage and transforms the power into lower, usable voltages. Id. at ¶ 16. MID alleges that PG & E, as the sole supplier of retail electric power in the geographic market of Pittsburg, possessed monopoly power and could control prices or exclude competition from the Pittsburg retail electric power market. Id. at ¶ 19. MID further alleges that significant barriers allow PG & E to limit the access of competitors such as MID to the retail electric power market in the vicinity of Pittsburg. Id. at ¶ 20. Among these barriers include PG & E's ownership or control of all the transmission lines and services supplying wholesale and retail electric power to Pittsburg and the impracticability of duplicating PG & E's local transmission services because of cost and regulatory barriers. Id. at ¶¶ 21-22. Finally, as a result of the exclusion of MID from the retail electric power market in the vicinity of Pittsburg, MID alleges that Praxair and other residential and commercial consumers of retail electric power have been deprived of the benefits of low-cost electric power. Id. at ¶ 28.

Prior to the events at issue in this action, DESTEC entered into a Control Area and Transmission Service Agreement ("CATSA") with PG & E which allowed DESTEC to utilize PG & E's electric transmission lines to deliver electric power to wholesale customers of DESTEC. FAC, at ¶ 15. DESTEC intended to use PG & E's transmission facilities to sell and deliver low-cost electric power purchased in the Pacific Northwest to California electricity consumers. Among other limitations, the CATSA prohibits DESTEC from using PG & E's transmission facilities to directly deliver electric power to end-user, or retail, customers of PG & E. Id. In accordance with the requirements of the Federal Power Act ("FPA"), 16 U.S.C. § 824d(c), and regulations promulgated thereunder, 18 C.F.R. § 35.1, the CATSA was submitted to the Federal Energy Regulatory Commission ("FERC") and became effective on April 14, 1995. Def. Request for Judicial Notice ("RJN"), Exh. 1 [Pacific Gas & Elec. Co., 71 F.E.R.C. ¶ 61,045 (April 14, 1995)]. As a result of the CATSA, DESTEC and PG & E were direct competitors in the sale of wholesale electric power, but were not competitors with respect to the retail sale of electric power. FAC, at ¶ 15.

Because DESTEC was prohibited from selling electric power at retail under the CATSA, it determined that it could service the needs of retail power consumers and sell its low-cost electric power only if two critical elements could be satisfied. First, DESTEC would have to persuade a utility company permitted under state and federal law to sell electricity to retail consumers to purchase a substation. FAC, at ¶ 16. DESTEC could then supply its low-cost electric power on a wholesale basis to the utility company, which could then resell the electric power to retail electricity consumers via the substation. Id. at ¶¶ 16-17. Second, DESTEC would have to obtain PG & E's approval to allow DESTEC to deliver wholesale electric power to the substation under the terms of the CATSA. See id. at ¶ 23.

To put its plan into motion, DESTEC approached MID with a proposal that MID buy the Praxair substation and supply retail electric power consumers, such as Praxair and other residential and commercial consumers in the Pittsburg area, with low-cost DESTEC-supplied electric power via the Praxair substation. FAC, at ¶ 17. On March 21, 1996, DESTEC entered into a written Power Sales Agreement with MID, in which MID agreed to purchase the Praxair substation and DESTEC agreed to deliver power to MID at the substation. Id. At the same time, MID and the City of Pittsburg ("Pittsburg") entered into a "Permission Agreement" under which Pittsburg agreed to allow MID to provide retail electric power to its residents and "to offer City residents an alternative for obtaining electricity at more competitive rates."*fn2 Id. MID and Praxair also entered into a "Equipment Sales Agreement" for the purchase of the Praxair substation that was expressly conditioned upon PG & E's approval of the substation as a valid "output point" for DESTEC under the CATSA. Id. at ¶ 18.

By letter dated January 30, 1996, DESTEC sought PG & E's approval to provide the necessary transmission services needed to allow DESTEC to deliver wholesale electric power to the Praxair substation under the terms of the CATSA. FAC, at ¶¶ 23-24. MID also sought to enter into an "interconnection agreement" with PG & E setting forth the conditions under which PG & E would provide transmission services to MID at the Praxair substation. Id. at 24. On February 26, 1996, PG & E denied DESTEC's request that PG & E deliver power to the Praxair substation. Id. at ¶ 24. In its opposition, MID also asserts that PG & E refused to grant MID's request to enter into an interconnection agreement as well. P's Opp. at 4. MID alleges that PG & E agreed to an identical request for the provision of transmission service by DESTEC in order to sell electric power wholesale to the Port of Oakland for later resale to Port tenants at retail. FAC, at ¶ 24.

Thereafter, DESTEC and PG & E commenced proceedings in several forums to resolve their dispute. DESTEC initiated an arbitration proceeding under the terms of the CATSA to compel PG & E to provide transmission service to the Praxair substation. FAC, at ¶ 25. PG & E filed suit in federal district court seeking to enjoin the arbitration, but no order issued. Id. PG & E also filed a petition with FERC to disallow the Praxair scheme, which was opposed by MID and DESTEC. See RJN, Exh. 3 [Petition for Declaratory Order filed September 28, 1996]; RJN, Exhs. 4-6. Prior to any resolution of these proceedings, DESTEC and PG & E entered into a settlement of their dispute, which included an amendment of the CATSA which, in effect, prohibits DESTEC from supplying energy transmitted through PG & E to "substations."*fn3 FAC, at ¶ 26. MID alleges that in particular PG & E and DESTEC jointly agreed that DESTEC would not supply wholesale electric power to MID via the Praxair substation using PG & E's transmission services. Id. To induce DESTEC to agree to the CATSA amendment, PG & E agreed to "functionally assign" to DESTEC certain wholesale power contracts permitting DESTEC to market its low-cost electric power at much higher rates negotiated and contracted for by PG & E. Id.

On November 1, 1996, PG & E subsequently submitted the proposed amendment to the CATSA for approval and filing by FERC. FAC, at ¶ 27; RJN, Exh. 9 [PG & E's Application for Approval of Second Amendment to CATSA]. However, on December 12, 1996, PG & E and DESTEC jointly requested that FERC suspend consideration of the proposed amendment. Id.; RJN, Exh. 10 [Joint Req. of PG & E and DESTEC]. Although FERC has taken no action on either the application for approval or the subsequent request to suspend consideration, MID asserts that PG & E and DESTEC have abided by their agreement not to provide MID with electric power to the Praxair substation at wholesale prices. Id. As a result, MID alleges that as a result of the CATSA amendment PG & E has thwarted both the Power Sales Agreement between MID and DESTEC and the Equipment Sales Agreement between MID and Praxair. Id. Similarly, although the Power Sales Agreement required that both MID and DESTEC "use their respective good faith best efforts to timely negotiate and obtain the agreements and the regulatory approvals" necessary to implement the agreement, MID alleges that DESTEC abrogated the Power Sales Agreement. Id. at ¶ 28. These actions, taken together, frustrated its plans to sell electric power to Praxair and to numerous commercial and residential electricity consumers in Pittsburg. Id. at ¶¶ 27-28.

MID first alleges that DESTEC and PG & E engaged in a "contract, combination and/or conspiracy" to unreasonably restrain competition in the wholesale and retail sale of electric power in PG & E's service area in northern and central California in violation of section I of the Sherman Act. FAC, at ¶ 29. According to MID, DESTEC and PG & E have entered into an agreement under which DESTEC will not sell electric power at wholesale for delivery to substations and will abandon its arbitration proceeding against PG & E in exchange for the assignment by PG & E of certain wholesale power contracts. Id. at ¶¶ 29-30. MID also alleges two claims based on section 2 of the Sherman Act: actual or attempted monopolization and conspiracy to monopolize. In Count Two, MID alleges that PG & E has attempted to monopolize and/or has monopolized the market for the retail distribution of electric power to Praxair and Pittsburg's electricity consumers. Id. at ¶ 36. Specifically, MID alleges that PG & E has refused to permit its transmission lines to be used by MID or DESTEC to supply wholesale electric power to the Praxair substation by improperly invoking various provisions of the CATSA agreement. Id. at ¶ 38. In doing so, MID asserts that PG & E has unlawfully exercised its monopoly power over its transmission lines. FAC at ¶ 40. In Count Three, MID also asserts that PG & E and DESTEC engaged in a conspiracy to monopolize the retail electric power market in the Pittsburg area. Id. at ¶ 48.

LEGAL STANDARD

A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Fidelity Financial Corp. v. Federal Home Loan Bank of San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064, 107 S.Ct. 949, 93 L.Ed.2d 998 (1987). All material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). Although the court is generally confined to consideration of the allegations in the pleadings, when the complaint is accompanied by attached documents, such documents are deemed part of the complaint and may be considered in evaluating the merits of a Rule 12(b)(6) motion. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987), cert. denied sub. nom., Wyoming Community Dev. Auth. v. Durning, 484 U.S. 944, 108 S.Ct. 330, 98 L.Ed.2d 358 (1987).

In the Ninth Circuit, "antitrust pleadings need not contain great factual specificity." Portland Retail Druggists Ass'n v. Kaiser Found. Health Plan, 662 F.2d 641, 648 (9th Cir. 1981), cert. denied, 469 U.S. 1229, 105 S.Ct. 1230, 84 L.Ed.2d 368 (1985). "There is no special rule requiring more factual specificity in antitrust pleadings." Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 924 (9th Cir. 1980) (citing Franchise Realty Interstate Corp. v. San Francisco Local Joint Executive Bd. of Culinary Workers, 542 F.2d 1076, 1082 (9th Cir. 1976), cert. denied, 430 U.S. 940, 97 S.Ct. 1571, 51 L.Ed.2d 787 (1977)). However, as noted by many courts, the court need not accept legal conclusions asserted in the complaint even if pled as "facts" or conclusory allegations without more. JM Computer Srvcs. Inc. v. Schlumberger Technologies, Inc., 1996 WL 241607, *2 (N.D.Cal. May 3, 1996) (citing Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)).

DISCUSSION

I. Analytical Framework for the Sherman ...


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