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MODESTO IRRIGATION DISTRICT v. PACIFIC GAS AND ELECTRIC

March 18, 2004.

MODESTO IRRIGATION DISTRICT, Plaintiff,
v.
PACIFIC GAS AND ELECTRIC COMPANY, Defendant



The opinion of the court was delivered by: MARILYN PATEL, Chief Judge, District

MEMORANDUM AND ORDER Motion for Summary Judgment

On August 3, 1998, plaintiff Modesto Irrigation District ("MID") filed a complaint in this court against defendant Pacific Gas and Electric Company ("PG&E").*fn1 In pertinent part, MID's complaint alleges that PG&E violated the Sherman Act, 15 U.S.C. § 1, 2, and related provisions of state law when it attempted to prevent MID from offering electric services in Pittsburg, California. On February 2, 1999, this court dismissed MID's clams under Federal Rule of Civil Procedure 12(b)(6), granting MID leave to amend. See Modesto Irrigation Dist. v. Pacific Gas & Elec. Co., No. C 98-3009 MHP, slip op. at 12-13 (N.D. Cal. 1999). MID filed its first amended complaint on March 4, 1999, and this court again dismissed the action under Federal Rule of Civil Procedure 12(b)(6). See Modesto Irrigation Dist. v. Pacific Gas & Elec. Co., 61 F. Supp.2d 1058 (N.D. Cal. 1999) (denying leave to amend). In an unpublished disposition, the Ninth Circuit reversed. Modesto Irrigation Dist. v. Pacific Gas & Elec. Co., 54 Fed. Appx. 24882 (9th Cir. 2002).

Two weeks after the Ninth Circuit entered its decision, MID filed a second amended complaint in this court. The parties subsequently agreed that resolution of PG&E's eleventh affirmative defense (viz., that MID failed to comply with particular provisions of California law, thus eliminating the prospect of cognizable antitrust injury) might dispose of the action in its entirety; the parties also agreed that a summary judgment motion regarding PG&E's eleventh affirmative defense could be adequately briefed on stipulated Page 2 facts and considered without additional discovery. Now before the court is PG&E's motion for summary adjudication of its eleventh affirmative defense. The court has considered the parties arguments fully, and for the reasons set forth below, the court rules as follows.

 BACKGROUND*fn2

  Pacific Gas & Electric Company, a California corporation, is authorized by the California Public Utilities Commission (PUC) to provide electric services to certain parts of California.*fn3 See Second Am. Compl., ¶¶ 3-12 (noting, inter alia, that PG&E is the predominate wholesaler and retailer of electric power in Northern and Central California, controlling most of the related facilities). An investor-owned utility ("IOU"), PG&E owns and operates facilities for the generation, transmission, and distribution of electric power throughout much of Northern and Central California, including, notably, the City of Pittsburg. See Request for Judicial Notice, Exh. 8 at p. 3. As an IOU, PG&E is required to obtain a Certificate of Public Utilities Convenience and Necessity ("CPUCN") from PUC before it may develop or extend electricity-related facilities in specific service territories. See Cal. Pub. Util. Code § 1001; see generally Greyhound Lines. Inc. v. Pub. Utilities Comm'n, 68 Cal.2d 406, 412 & n.3 (1968) (noting that this certification process prevents waste of resources and protects lOUs against improper competition). During the period at issue in this litigation, PG&E held a CPUCN that permitted it to distribute electricity to all residents of Pittburg, California. See Stip. of Facts, ¶ 8. All residential and commercial residents of Pittsburg wishing to receive electric services did, in fact, receive electric services from PG&E. See id. at ¶ 7. Praxair, Inc., a manufacturer of industrial gases and a large consumer of electric power, is located in Pittsburg; like all other Pittsburg residents, Praxair receives its electric services from PG&E. Id. at ¶ 5.

  Modesto Irrigation District is a state-recognized irrigation district organized pursuant to California Irrigation District Law. See Cal. Water Code §§ 20500, et seq. Among its utility-related ventures, MID owns and operates facilities for the generation, transmission, and distribution of electric power in a portion of Stanislaus County, California. As its name suggests, MID is a "district" under California law, see Cal. Gov't Code § 56036 (defining "district" as an "agency of the state . . . for the local performance of governmental or proprietary functions within limited boundaries . . . "); as such, MID is an entity of limited powers, and it has specifically circumscribed geographic and "sphere of influence"*fn4 boundaries. See Stip. Page 3 of Facts, ¶¶ 9 & 12.*fn5 No part of Contra Costa County, California — in which Pittsburg sits — falls within MID's existing service area or "sphere of influence." Id. at ¶ 15.

 I. The Contracts and MID's Plan

  In 1994, PG&E entered a Control Area and Transmission Service Agreement with Dynergy Power Services, Inc., a power marketer and a wholesaler of electricity. See Stip. of Facts, ¶ 16; Mayer Decl., Exh. B. Approved by the Federal Energy Regulatory Commission ("FERC"),*fn6 the agreement permitted Dynergy to use PG&E's transmission lines for wholesale electricity customers, but it did not authorize Dynergy to serve any of PG&E's retail (or "end-user") customers. Id.*fn7 In early 1996 — at a time roughly contemporaneous with a legislative effort to revamp California's retail electricity industry-MID and Dynergy developed a complicated business plan to provide electric distribution service to one or more retail customers in Pittsburg. Id. at ¶ 1. The plan involved a series of contracts between MID, the City of Pittsburg, Dynergy, and others;*fn8 and it depended on MID's acquisition of a Praxair substation, through which MID hoped to distribute power (at a retail rate) to Praxair itself. See id. at ¶¶ 17-19; see also Second Am. Compl, ¶¶ 15-18 (noting that a "substation" is a facility that receives high-voltage electric power, converting that power into lower, usable voltages for distribution to consumers); Mayer Decl., ¶ 9 (identifying the "Linde" substation as the one targeted — and as one of multiple Praxair sites); id. at Exhs. C & D (Permission Agreement and Equipment Sales Agreement).*fn9

  With these complex contractual arrangements in place, Dynergy and MID asked PG&E to enter an "interconnection agreement" which would require PG&E to commence delivery of power to the Praxair substation. See Second Am. Compl., ¶ 24; see also First Am. Compl. (alleging that PG&E had agreed to a similar agreement — with Dynergy — regarding provision of service and resale opportunities in the Port of Oakland). PG&E refused. Id.

 II. FERC Petitions and the Statutory Framework

  A round of petitions to FERC followed. PG&E filed the first petition with FERC, alleging, inter alia, that MID's plan with Dynergy constituted a "sham wholesale" transaction designed to allow MID to select (and to serve) only those retail customers that would be particularly profitable to MID. See, e.g., Page 4 Req. for Judicial Notice, Exhs. 3 & 6.*fn10 Both Dynergy and MID opposed PG&E's petition, and MID later filed its own application with FERC, asking that PG&E be compelled to interconnect the Praxair substation. See id. at Exhs. 4 & 5. PUC later intervened on PG&E's behalf, concurring with PG&E that MID's business plan contravened the terms of applicable California law, particularly the Cortese-Knox Local Government Reorganization Act. See id. at Exh. 6.*fn11

  The Cortese-Knox Local Government Reorganization Act, see Cal. Gov't Code §§ 56000, et seq. ("the Act"),*fn12 is a detailed statutory scheme governing, inter alia, control of urban sprawl. See, e.g., City of Shasta Lake v. County of Shasta, 75 Cal.App.4th 1, 6 (Cal.App. 1999). To facilitate local resource management, the Act contemplates the creation of local agency formation commissions ("LAFCOs")*fn13 in each county of California, see Cal. Gov't Code § 56325, and it empowers LAFCOs to make decisions on a variety of urban planning issues. See, e.g., id. at §§ 56001 (noting that LAFCOs are "single multipurpose governmental agencies" charged with controlling "the process of municipality expansion"), 56375, 56021. Decisions regarding the scope and potential extension of utility services (e.g., electric services), for example, fall within a county LAFCO's purview. See Cal. Gov't Code §§ 56133, 56375; see also Tillie Lewis Foods. Inc. v. City of Pittsburg, 52 Cal.App.3d 983, 995 (Cal.App. 1975).

  Many of the Act's provisions delineate LAFCO and utility-provider rights and obligations. Id. Section 56133 of the Act, for example, discusses where and when a city or district may expand the electric services it provides:
A city or district may provide new or extended services by contract or agreement outside its jurisdictional boundaries only if it first requests and receives written approval from the [LAFCO] in the affected county.
Cal. Gov't Code § 56133(a). Subsections (b) and (c) of section 56133 posit the limited contexts in which a LAFCO may authorize a city or district to provide new or extended services outside its jurisdictional boundaries: Subsection (b) allows such authorization only where the desired extension would fall "within [a district's] sphere of influence in anticipation of a later change of organization"; subsection (c) permits such authorization where the relevant extension is intended "to respond to an existing or impending threat to the public health or safety of the residents of the affected territory. . . ." Id. at § 56133(b)-(c) (adding, for subsection (c), that the entity applying for the contract must provide "documentation of a threat to the health Page 5 and safety of the public or the affected residents" and ensure that the committee has notified "any alternate service provider . . . that has filed a map and a statement of its service capabilities with the commission"). Subsection (e) of section 56133 denotes a handful of contexts in which the mandates of section 56133 do not control ex ante.

  When MID attempted to distribute electricity to Contra Costa County (that is, to Pittsburg), it did not request or receive approval from Contra Costa County's LAFCO. See Stip. of Facts, ¶¶ 22-23. Instead, MID believed that section 56133 did not apply to its electricity-distribution activities at all, so LAFCO preapproval was neither required nor sought. Id. at ¶ 24. The ...


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