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Pacific Gas and Electric Co. v. City and County of San Francisco


June 20, 2005


The opinion of the court was delivered by: Vaughn R Walker United States District Judge


Plaintiff Pacific Gas & Electric Company ("PG&E") moves the court for partial summary judgment on the first and second causes of action and the fifth and sixth causes of action in its first amended complaint ("FAC"). Pl Mot (Doc #133). Defendant City and County of San Francisco ("CCSF") moves for partial summary judgment on the first through fourth, sixth, and eighth through twelfth causes of action in the FAC. Def Mot (Doc #131). For the reasons that follow, the court GRANTS IN PART CCSF's motion for summary judgment; DECLINES to exercise supplemental jurisdiction over certain claims; and DENIES as moot PG&E's motion for summary judgment.



In 1939, CCSF granted PG&E franchises to sell gas and electricity within the city. See Doc #137, Exhs A & B. The franchises authorize PG&E to excavate the streets of CCSF to construct, install and maintain gas and electric facilities. PG&E paid an initial fee of $200,000 for each franchise and continues to pay an annual percentage of its gross receipts under the franchises. In general, PG&E performs two types of excavations: main line trenches and bell-holes. "A 'main line trench' is a long trench with a narrow width, typically between 18 inches and 2 feet." Dias Decl (Doc #134) at ¶ 5. Bell-holes are roughly equal in length and width and "are typically 4 feet by 6 feet." Id. Main line trenches are used to access gas mains that run along the length of the streets, whereas bell-holes are generally used to access gas service lines that run off the main line to buildings on the side of the street. Id.

These two types of excavations are performed on the two types of streets in CCSF: asphalt and concrete. Asphalt streets have three layers: a layer of sand at the bottom, a 6- to 8-inch layer of concrete base in the middle and a 2-inch asphalt concrete wearing surface on top. Id at ¶ 4. Concrete streets have only two layers: a layer of sand at the bottom and a slightly larger 7- to 8-inch concrete base on top.

In December 1998, CCSF amended the Public Works Code ("PWC") to impose a "street damage restoration fee." 1999 PWC (Doc #137, Exh H) at § 2.4.44. In a prior order, the court held that the street damage restoration fee impaired the franchises in violation of the Contract Clause of the United States and California Constitutions. See Pacific Gas and Electric Co v City and County of San Francisco, 220 F Supp 2d 1070 (ND Cal 2002) ("PG&E").

PG&E contends in its present motion for partial summary judgment that four "non-fee regulations" passed in 1999 also impair the franchises in violation of the Contract Clause. The four nonfee regulations are described as: (1) the 13-foot rule, (2) the 50-foot rule, (3) the concrete panel replacement rule and (4) the warranty requirement.

The 13-foot rule and the 50-foot rule describe repaving requirements for asphalt streets. The 13-foot rule describes the width (direction perpendicular to the direction of car traffic) of repaving required following an excavation. The 50-foot rule concerns the length (direction of car traffic) of repaving required for noncontiguous excavations.

Under the 13-foot rule, the excavator must repave the street to a "constant width equal to the widest part of the Excavation * * * provided, however, that the width of the resurfacing need not exceed thirteen (13) feet." 1999 PWC § 2.4.55(a) (Doc #137, Exh H). A diagram depicting the 13-foot rule can be found at § 2.4.55(a). Id; see also Dias Decl (Doc #134) (providing a diagram depicting the 13-foot rule).

Under the 50-foot rule, an excavator is required to repave the length of the excavation. An excavator is also required to repave the unexcavated area between two noncontiguous excavations if the distance between the two excavations is less than or equal to 50 feet. See Summary (Doc #136, Exh C, Depo Exh 26) at 2 (providing a diagram depicting the 50-foot rule); Diagram (Doc #134, Exh C) (same). The court notes that the 50-foot rule is not codified in the 1999 PWC but has been enforced since 1999. See Chono Depo (Doc #136, Exh C) at 249-250. It is an overformalization, though, to treat the 50-foot rule as distinct from the 13-foot rule; it is easier to see the 50-foot rule as a limitation on a 13-foot rule that applies to noncontiguous trenches. In other words, the 13-foot rule applies to all contiguous and noncontiguous excavations of asphalt streets, except that trenches separated by 50 feet or more are treated separately under the 13-foot rule. Accordingly, the court will analyze the rules together and refer to integrated scheme of the 13-foot rule and the 50-foot rule as "the 13-foot rule."

The concrete panel replacement rule describes "repaving" requirements for excavation in concrete streets. Regulatory Order (Doc #137, Exh I) at § 9.1(D). In essence, the rule requires that a full concrete panel be replaced anytime an excavation occurs within the panel. Concrete panels are generally 20 feet long by 16 feet wide. Diagram (Doc #134, Exh B). A diagram of the concrete panel replacement rule is provided as an exhibit to the Dias declaration. Id.

Finally, PG&E describes PWC § 2.4.70 as an "Extension of Warranty" provision. Pl Mot (Doc #133) at 5. Section 2.4.70 provides:

Each Owner and Permittee that excavates or causes to be made an Excavation in the Public Right-of-Way shall be responsible to maintain, repair, or reconstruct the site of the Excavation so as to maintain a condition acceptable to the Director until such time as the Public Right-of-Way is reconstructed, repaved, or resurfaced by the Department.

Id (Doc #137, Exh H). PG&E contends that this provision extends its obligations to repair. Because this is a disputed contention, the court will refer to this provision as the "warranty provision," rather than the "extension of warranty provision."


The activities at issue here can be classified into three categories: excavation, restoration and repair. First, excavation is defined as an "opening in the street." 1939 PWC (Doc #137, Exh C) § 353. Second, restoration is described as a requirement that the excavator restore the street excavated to "as good a condition as it was in before the opening or tearing up thereof." Id § 342. The sections immediately following § 342 outline the short time limits within which restoration must occur. See, e g, id § 346 (providing that repaving must occur immediately following backfill of the excavation). Finally, the excavator has a "duty to repair * * * [i]n case the pavement or surface of the street over said openings should become depressed or broken at any time after the work has been completed." Id § 349.

Excavation is thus a process by which the street is opened that occurs at the time of installation or maintenance of pipes or other appurtenances. Restoration is a process by which the street is restored to its pre-excavation condition and which occurs immediately upon completion of the installation or maintenance of the pipes. Repair is a process by which later appearing problems in the street are repaired and which occurs after the completion of excavation and restoration.

Evidence for the distinction between restoration and repair in the 1939 PWC includes the following. First, obligations associated with restoration and repair are described in different sections of the 1939 PWC; § 342 describes restoration requirements and § 349 describes repair requirements. See id §§ 342, 349. Second, § 342 is entitled "Restoration of Streets-Penalty," whereas § 349 is entitled "Defects Appearing After Completion-Duty to Repair-Expense." Id. Third, the text of § 349 distinguishes between repair work performed "after the work has been completed" from "the original work of restoring said pavement." Id § 349.

But there is considerable slippage in the distinction between restoration and repair. The 1939 PWC uses "restoration" and "repair" interchangeably when referring to a type of activity. For example, in § 349, the 1939 PWC describes the duty to repair in terms of a requirement "to repair and restore said pavement." Id. Likewise, the parties, their FRCP 30(b)(6) designees and the court itself have used the terms interchangeably. See PG&E Supp Memo (Doc #177) at 9-11.

In any event, the distinction between restoration and repair is analytically helpful, and, accordingly, the court treats restoration and repair separately in this order. That said, the court does not believe its result -- or even much of its analysis -- would change if the two were treated together.

In classifying the non-fee regulations, the 13-foot rule, the 50-foot rule and the concrete panel replacement rule relate primarily to restoration. These rules describe requirements for restoring a street immediately following an excavation. These rules also relate to excavation because they require an excavator to remove certain portions of the street before repaving. For example, to restore an asphalt street under the 13-foot rule, the excavator must remove the asphalt wearing surface for a width of 13 feet before repaving. Because these non-fee regulations relate primarily to restoration, the court refers to them collectively as the "restoration regulations."

The warranty rule relates to an excavator's continuing obligation to pay for damage to the street that appears after the completion of excavation and restoration. Accordingly, the warranty rule falls under the rubric of repair.


The first cause of action in PG&E's FAC is for violation of the Contract Clause of the United States Constitution and the second cause of action is for violation of the Contract Clause of the California Constitution (collectively, the "Contract Clause"). FAC (Doc #18). PG&E alleges in the FAC that the imposition of the street damage restoration fee and various non-fee regulations violate the Contract Clause. The court previously granted partial summary judgment in favor of PG&E, finding that the street damage restoration fee violates the Contract Clause. PG&E, 220 F Supp 2d at 1088. PG&E now moves the court for partial summary judgment on the basis that the non-fee regulations also violate the Contract Clause. Pl Mot (Doc #133). CCSF opposes PG&E's motion and also moves for partial summary judgment of non-violation on the non-fee regulation claims. Def Opp (Doc #144); Def Mot (Doc #131).

The court set out the basic standard for Contract Clause analysis in a previous order in this case:

[T]he analysis of a Contract Clause claim under the California Constitution is identical to the analysis under the United States Constitution. To prevail on a claim under the Contract Clause, a party must show (1) a substantial impairment of a contractual relationship and (2) that the impairment was not reasonable and necessary to fulfill an important public purpose.

The first inquiry is further divided into three parts: (1) whether a contractual relationship existed; (2) whether the contract was impaired; and (3) whether the impairment was substantial.

PG&E, 220 F Supp 2d at 1086 (internal citations and quotation marks omitted). "An impairment of a public contract is substantial if it deprives a private party of an important right, thwarts performance of an essential term, defeats the expectations of the parties, or alters a financial term." Southern California Gas Company v City of Santa Ana, 336 F3d 885, 890 (9th Cir 2003) (per curiam) ("Santa Ana"). Moreover, "when the State is a party to the contract, 'complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake.'" Energy Reserves Group, Inc v Kansas Power and Light Co, 459 US 400, 413 n14 (1983) (quoting United States Trust Co of New York v New Jersey, 431 US 1, 26 (1977)).

The court's prior order elides an alternative ground to upholding a legislative action against a Contract Clause challenge: the reserved-powers doctrine. That doctrine holds that a state need not "adhere to a contract that surrenders an essential attribute of its sovereignty." United States Trust, 431 US at 23. The omission from the court's 2002 order -- which concerned the financial promises exchanged under the franchise -- is unsurprising, for a still earlier order in this case established that the making and revision of financial promises do not implicate CCSF's reserved police powers. See 10/31/00 Order (Doc #60) at 12-13. But the regulations at issue here involve more than financial promises, and thus they may be the proper subject of a reserved-powers argument by CCSF.


The first question the court considers is whether the non-fee regulations are within the scope of CCSF's reserved powers. As described in United States Trust, 431 US at 23, the "inquiry concerns the ability of the State to enter into an agreement that limits its power to act in the future." Under the "reserved-powers doctrine," a state cannot contract away "an essential attribute of its sovereignty." Id. Accordingly, if the non-fee regulations are within the scope of CCSF's reserved powers, then any franchise term contradicting the right to promulgate the non-fee regulations would be invalid.

Supreme Court doctrine prior to United States Trust used bright line rules to determine whether a contract term was valid. These rules were based on the type of authority invoked to enact a law or regulation. For example, "the police power and the power of eminent domain could not be 'contracted away,' but the State could bind itself in the future exercise of the taxing and spending powers." Id at 23-24.

In United States Trust, the Court noted the weakness in such "formalistic distinctions" and applied a more particularized analysis. Id at 24. The Court found that "the scope of the State's reserved power depends on the nature of the contractual relationship with which the challenged law conflicts." Id at 21-22. The Court compared a contractual term and legislation related to "health or safety," which would create an impermissible conflict with the state's reserved powers, against a contractual term and legislation related merely to a state's "financial obligation," which would not create an impermissible conflict with the state's reserved powers. Id at 24-25.

In Santa Ana, the Ninth Circuit touched on the reserved-powers doctrine. 336 F3d at 893 (noting that a "state governmental entity cannot contract away its police powers"). Santa Ana argued that it retained the right to pass ordinances under its police powers, despite a franchise granted to the franchisee, Southern California Gas Company. In particular, Santa Ana argued that its reserved police powers allowed it to pass an ordinance imposing street cut fees in addition to fees described in a franchise negotiated between Santa Ana and the franchisee. Santa Ana pointed to a provision of the franchise that described the franchisee's duty to abide by regulations passed under Santa Ana's police powers.

The Ninth Circuit rejected Santa Ana's argument, finding that a public entity's reserved powers do not allow a public entity to "compromise [the] material terms" of a franchise, even if an explicit reservation of the police powers is described in the franchise. Id at 893. The Ninth Circuit concluded that the franchise imposed an obligation on the franchisee to pay Santa Ana a franchise fee at a specific rate in return for a right to excavate and to repair. Because the street cut fee ordinance merely imposed an additional cost, the conflict between the franchise term and the challenged street cut fee was financial. Accordingly, the Ninth Circuit concluded that the street cut fee was not within the scope of Santa Ana's reserved police powers.

United States Trust and Santa Ana both require the court to look behind the formal characterization of a law or regulation, such as whether the regulation was passed under the public entity's police powers. The court must, therefore, examine the type of conflict between the contractual term and the regulation in question. If the type of conflict is merely financial, then the reserved-powers doctrine is not implicated. See also Continental Illinois Nat'l Bank & Trust Co of Chicago v Washington, 696 F2d 692, 699 (9th Cir 1983) (holding that a change in the manner in which bonds were approved by voters "simply altered the manner in which WPPSS [a municipal corporation] can raise money," and was thus not "an act inherently within the sovereign's power" for purposes of the reserved-powers doctrine).

Whether the non-fee regulations are within the scope of CCSF's reserved powers seems at first a close question. On the one hand, the non-fee regulations provide benefits to residents of CCSF that are not merely financial. The restoration regulations concern the amount of repaving that must occur when a street is excavated. The primary claimed benefits are a "smoother ride," "a good surface and better paving jobs." Id at 254-58. Better paving jobs result in fewer defects in the street and increased street longevity. On the other hand, the restoration regulations have financial implications. The restoration regulations impose repaving obligations that require PG&E and other excavators to incur substantial additional restoration costs. The restoration regulations also provide essentially financial benefits to CCSF in that the regulations tend to increase the expected life of streets over prior excavation practices.

But taking a step back, the court concludes that CCSF's argument fails as a matter of law. The police power has always encompassed the power to protect the public health, safety and welfare; as acceptable limits of governmental authority have expanded, the police power has grown to encompass not only protection of society but also its betterment -- the "public welfare" has expanded to include actions by government for the positive good as well as protection against the adverse. The police power has for some time now encompassed both protection from the bad and promotion of the good. For the reserved-powers doctrine, however, there is a critical distinction between protection from the bad (e g, saving society and its members from adversities) and promotion of the good. Protection from the bad encompasses many things, but it is not infinitely elastic --threats to life, limb and property may be many, but to be considered a threat, they can and must be identified. What prompts exercise of the police power to protect is a specific threat. What prompts exercise of the police power to enhance, by contrast, is almost infinitely elastic, covering a virtually unlimited number of things that improve citizens' welfare. Hence, governments must make choices every day about which of these unlimited array of ways they may seek to promote the public good. Government seeking to protect its citizens against harm acts in a manner significantly more delimited than when government seeks positively to promote its citizens' welfare.

In promoting the public good, governments are constantly engaging private parties and they have essentially limitless choices for what will serve the public good -- roads, schools, recreation and so on. But when government acts to protect the public from harm, it is inherently reactive; the government cannot protect its citizens from harms that do not exist and cannot be identified. The reserved-powers doctrine is concerned with retaining for the government the power to respond to threats as they arise. See, e g, Linton ex rel Arnold v Commissioner of Health & Environment, 65 F3d 508, 517 (6th Cir 1995) ("The restrictions of the Contract Clause must be reconciled with the 'essential attributes of sovereign power,' which are necessarily reserved by the states to safeguard their citizens.") (quoting United States Trust, 431 US at 21) (emphasis added, internal quotation marks omitted)); Sanitation & Recycling Industry, Inc v City of New York, 107 F3d 985, 992 (2d Cir 1997) ("[T]he Contract Clause must be accommodated to the police power a state exercises to protect its citizens." (citing Energy Reserves, 459 US at 410) (emphasis added)).

The reserved-powers doctrine cannot, therefore, be coextensive with the police power to promote the public good, for there are no limits on what may promote the public good. To the extent that promotion of the public good is a reserved power, it is only reserved in toto -- the government cannot delegate or contract away its general authority to decide what will serve the public good, but governments are constantly opting for one particular proposal to do good over another and these choices inevitably mean not undertaking some other public good. But if promoting the public good, in all its forms and manifestations, were a reserved power, the government could contract away nothing to private parties.

This protection from the bad / promotion of the good dichotomy is consistent with the "formalistic distinctions" that existed prior to United States Trust: Prototypically the "police power [i e, the power to protect the public health and safety] and the power of eminent domain were among those that could not be 'contracted away.'" United States Trust, 431 US at 24. Those powers, of course, are most classically used to respond to harms or meet necessity. By contrast, "the state could bind itself in the future exercise of the taxing and spending powers." Id. And, indeed, the Spending Clause of the federal Constitution itself enshrines these as the prototypical powers used to promote the good: "The Congress shall have Power To lay and collect Taxes * * * and [to] provide for the common Defense and general Welfare * * *." US Const Art I, § 8, cl 1.

With this distinction in mind, it is clear that CCSF's assertion that the regulations at issue are within its reserved powers must fail. All of CCSF's evidence and all of its argument is directed toward demonstrating why the regulations make paving "better" or "best" or "smoother" or "less disrupti[ve]." CCSF Supp Br (Doc #174) at 3-5. Indeed, CCSF summarizes its argument by stating that "[a]ll * * challenged regulations have practical justifications and serve their presumptive purpose of promoting the safety and welfare of the public." (The court has not, however, seen any safety-related evidence with respect to the challenged regulations.) CCSF has not put before the court evidence that the challenged rules respond to threats to public health or safety.

PG&E drives this point home in a footnote in which it cites several regulations enacted in 1999 that it is not challenging -- regulations that are affirmative responses to threats of harm to CCSF's citizens:

Of course, some of the regulations enacted by CCSF in 1999 do relate to legitimate health and safety issues, but PG&E is not challenging those regulations. For example, Excavation Code section 2.4.53(a) requires excavators to "cover open Excavation with steel places," presumably to prevent anyone from falling into an open excavation; section 2.4.53(b) requires excavators to clean each excavation site each day to minimize generation of dust; and section 2.4.53(d) requires excavators to dispose of hazardous material properly.

PG&E Supp Br (Doc #177) at 3 n2.

To be sure, the promote the good / protect from the bad distinction is not clear-cut in every case, and, of course, there is a positive good in protecting citizens against harm. But the distinction is a useful way of finding the contours and limits of a government's reserved powers. Because of this, it is apparent that CCSF has failed to establish a genuine issue of material fact that the challenged regulations exist pursuant to its reserved powers to protect public health and safety.


The court now turns to the impairment analysis laid out above. The parties address (1) impairment of express terms of the franchises, (2) impairment of terms of the 1939 PWC incorporated into the franchises and (3) impairment of terms implied by the parties' course of conduct. Admittedly, the parties' briefing is generally not so neatly divided, but the court must impose some orderly categorical structure on the analysis that follows. That said, the court recognizes that evidence from one category may bear on another: For example, the parties' course of conduct may illuminate the meaning of express terms in the franchises, and the terms of the 1939 PWC can provide the context in which the franchises are to be read. With this in mind, the court presses onward.

The parties do not dispute that the franchises created valid contractual relationships. Accordingly, the court considers only whether the franchises were impaired and whether any such impairment was substantial. These questions necessarily entail a construction of the franchises; a determination about which terms (if any) of the 1939 PWC were incorporated into the franchises; and an evaluation of what terms (if any) are implied by the parties' course of conduct.


The court first considers whether the non-fee regulations impair express terms of the franchises under a Contract Clause analysis. General principles of contract interpretation apply to interpretation of the franchises. Cal Civil Code § 1635. "A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful." Cal Civil Code § 1636. The court must focus its attention on the written terms of the contract to ascertain the intention of the parties. See Cal Civil Code §§ 1638-39.

The gas franchise provides, in pertinent part: Section 2 . There is hereby granted to Pacific Gas and Electric Company, its successors and assigns, a franchise * * * to lay and use in the streets of said city and county all pipes and appurtenances necessary or proper therefor * * *.

Section 7. The grantee shall (a) construct, install and maintain all pipes and appurtenances in conformity with all the lawful ordinances, rules and regulations heretofore or hereafter adopted by the Board of Supervisors, or other legislative body of the city, in the exercise of the police powers of the city; (b) pay to the city on demand the cost of all repairs to public property made necessary by any of the operations of the grantee * * *.

Gas Franchise (Doc #137, Exh A).

The electricity franchise contains virtually identical language. The minimal changes between the two are that the electricity franchise uses "construct" instead of "lay" in § 2 and "poles, wires, conduits" instead of "pipes" in § 2 and § 7(a).

As described above, in a Contract Clause analysis, the court must consider: "(1) whether a contractual relationship existed; (2) whether the contract was impaired; and (3) whether the impairment was substantial." PG&E, 220 F Supp 2d at 1086 (citation omitted).


The court first determines whether the express terms of the franchises are impaired by the restoration regulations. The court will consider whether the express terms of the franchises are impaired by the warranty rule in the next subsection.

No franchise provision clearly identifies restoration; indeed, neither the word "restore" nor "restoration" is used in either franchise. This is in contrast to the franchise in Santa Ana, which contained the following language: "If 'any portion of any street' is damaged, the Gas Company 'shall, at its own cost and expense, immediately repair any such damage and restore such street, or portion of street, to as good a condition as existed before such defect or other cause of damage occurred * * * ." Santa Ana, 336 F3d at 888 (quoting Santa Ana, Cal, Ordinance No 1061 (Mar 21, 1938) at § 10).


PG&E first contends that the restoration regulations impair its right to excavate, which is provided in § 2 of the franchises. Pl Opp (Doc #147) at 2. PG&E argues that its right to excavate is impaired because the restoration regulations "require PG&E to repave areas far beyond PG&E's excavations" and "impose additional financial obligations upon PG&E every time it exercises its right to excavate." Id.

PG&E's argument is unpersuasive because PG&E has never had an unfettered right to excavate as it wishes. Section 336 of the 1939 PWC provides that the "Department of Public Works shall adopt such regulations for the location, size and depth of such excavations as it may deem necessary for the public welfare." 1939 PWC (Doc #137, Exh C) at § 336. CCSF contends that § 7(a) of the franchises provides that PG&E must comply with laws such as § 336 of the 1939 PWC:

The grantee shall (a) construct, install and maintain all pipes and appurtenances in conformity with all the lawful ordinances, rules and regulations heretofore or hereafter adopted by the Board of Supervisors, or other legislative body of the city, in the exercise of the police powers of the city.

Gas Franchise (Doc #137, Exh A) at § 7(a). CCSF contends that § 7(a) is the relevant term for the court's Contract Clause analysis of the restoration regulations. CCSF argues that the activities of constructing, installing and maintaining the pipes and appurtenances governed by § 7(a) necessarily include the activities of excavation and restoration. Def Mot (Doc #131) at 5.

Looking only at the language of § 7(a), it is a close question whether that section reserves so much to CCSF. On the one hand, § 7(a) refers to the construction, installation and maintenance of "pipes and appurtenances," not the street. Gas Franchise (Doc #137, Exh A) at § 7(a) (emphasis added). "Pipes and appurtenances" is defined in the gas franchise in the following manner:

The phrase "pipes and appurtenances" shall mean pipes, pipelines, mains, services, traps, vents, vaults, manholes, meters, gauges, regulators, valves, conduits, appliances, attachments, appurtenances and any other property located or to be located in, upon, along, across, under or over the streets of the city * * *.

Id at § 1(e). The Gas Franchise thus expressly distinguishes objects constituting "pipes and appurtenances" from "the streets of the city." Id. The electricity franchise similarly distinguished the terms "poles, wires, conduits and appurtenances" from "the streets of the city." Electricity Franchise (Doc #137, Exh B) at § 1(f). In short, the franchises could be read to reserve to CCSF no more than the power to regulate the "pipes and appurtenances" (or "poles, wires, conduits and appurtenances") themselves.

On the other hand, the reservation in § 7(a) is not strictly addressed to regulation of "pipes and appurtenances" but rather to the "construction, installation and maintenance" thereof. These terms are susceptible of a broad reading that covers essentially all of PG&E's activities involving its physical plant. To pick a relevant example, excavation is certainly part and parcel of the "construction, installation [or] maintenance" of PG&E's "pipes and appurtenances." This broad reading is at least plausible, if not outright superior to PG&E's narrow reading of § 7(a).

Furthermore, PG&E's reading of § 7(a) proves too much: If the section reserves only limited and enumerated regulatory powers to CCSF, then the franchises effectively give PG&E a free pass with respect to any regulations or laws of general applicability that are not within § 7(a)'s reservation, for § 7(a) is CCSF's only reservation of rights in the franchise (aside from § 9, which reserves eminent domain rights). Under PG&E's reading, the franchises would exempt PG&E not only from regulations regarding street excavation, but also local regulations of minimum wages, antidiscrimination and so on -- essentially all regulations, save those reserved in § 7(a) and those that are necessarily reserved pursuant to the reserved-powers doctrine.

The better reading -- that § 7(a) must be read very broadly to encompass many of PG&E's activities -- is more plausible, albeit not especially favorable to PG&E. This reading is tempered by the reality that public utilities can (or, historically, could) pass the cost of regulation on to users by seeking regulated increases in their rates. Just this sort of rate regulation is explicitly contemplated in § 6 of the franchises. Also in this regard, the court finds distinguishable Santa Ana's rejection of the police-powers reservation clause in the franchise at issue in that case. See 336 F3d at 193. The Santa Ana court rejected a reading of the reservation clause that would extend to all police power regulations, reasoning that it would render the entire franchise illusory. By contrast, the court reads the reservation clause here to apply to a substantial amount of (but not all of) PG&E's activity; this reading does not render the franchise illusory as a whole.

Accordingly, the court concludes the CCSF expressly reserved the power to regulate excavation by rules such as § 336 of the 1939 PWC. As such, to the extent PG&E has a right to excavation, it is not impaired by the restoration regulations.


This brings the court to PG&E's second contention, namely that the restoration regulations impair its right of repair under the franchises. Section 7(b) of the gas franchise is pertinent. This subsection provides that PG&E must "pay to the city on demand the cost of all repairs to public property made necessary by any of the operations of the grantee." Gas Franchise (Doc #137, Exh A) at § 7(b). Relying on Santa Ana, PG&E argues that the duty to pay the cost of repairs on demand creates a right to repair that is impaired by the restoration regulations. Pl Reply (Doc #152) at 2-3. This argument is as backwards as it sounds, for the franchises in this case are quite different from the franchise in Santa Ana. In Santa Ana, the franchisee had a right to repair because the franchise provided that the franchisee could either repair an excavated street itself or pay the cost of such repairs to Santa Ana. Santa Ana, 336 F3d at 892-93. Here, the express terms of the franchise on their face do not give PG&E an option to repair -- and thus create no right to repair. That said, PG&E's incorporated-terms and course-of-conduct arguments also speak to the putative right to repair; the court will defers consideration of those arguments to later sections of this order.


The court now considers whether the express terms of the franchises cover the warranty rule, which is a repair-related regulation. The only term of the franchises the parties claim is implicated by the warranty rule is § 7(b), but again the express terms of that section do not create a right to repair at all, much less one that is impaired by the warranty rule. Accordingly, the court finds that the express terms of the franchises do not demonstrate that the parties intended to confer rights or obligations concerning restoration or repair.


PG&E also contends that the non-fee regulations impair implied terms of the contract, specifically that the provisions in § 349 of the 1939 PWC concerning the duty to repair should be implied into the franchises. Pl Mot (Doc #133) at 7:4-9. In other words, PG&E contends that § 349 of the 1939 PWC is incorporated into the franchises.

The first question is which provisions of the 1939 PWC, if any, are incorporated into the franchises. The parties provide little discussion of the legal requirements associated with incorporating statutes and regulations into franchises. Indeed, the only legal support for this proposition is a single case cited in a footnote of PG&E's moving papers. See Pl Mot (Doc #133) at 7 n9 (citing Wood v Lovett, 313 US 362, 370 (1941)).

Statutes and regulations ("statutes" for convenience) may be expressly incorporated into contracts. See, e g, Eichler Homes, Inc v County of Marin, 208 Cal App 2d 653 (1962). But no express incorporation exists in this case because the franchises lack any terms expressly incorporating provisions of the 1939 PWC.

That said, statutes may nonetheless be implicitly incorporated. "Laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as fully as if they had been expressly referred to or incorporated in its terms. This principle embraces alike those laws which affect its construction and those which affect its enforcement or discharge." Norfolk and Western Railway Co v American Train Dispatchers' Ass'n, 499 US 117, 130 (1991) (internal quotation omitted). The laws as they exist at the time of the contract are incorporated into the contract, unless the parties expressly provide otherwise. General Motors Corp v Romein, 503 US 181, 189 (1992) (incorporation depends on the "laws in existence when" a contract is made).

But not all existing laws and regulations are incorporated into a contract; instead, only those laws "which affect its construction and those which affect its enforcement or discharge" become implied terms of the contract. Norfolk and Western Railway Co, 499 US at 130; General Motors Corp, 503 US at 189 ("For the most part, state laws are implied into private contracts regardless of the assent of the parties only when those laws affect the validity, construction, and enforcement of contracts."); see also 5 Corbin on Contracts § 24.26, 275 (1998) ("Interpretation is the discernment of the parties' intended meaning, while construction is the legal effect that the court gives to the meaning after having identified it.").

In particular, to be implied into a contract, statutes or regulations must relate to the construction or enforcement of specific terms of the contract, not merely the general subject area of the contract. General Motors is instructive on this point. 503 US 181. General Motors involved employment contracts that did not mention workers' compensation benefits. 503 US at 183-186. The petitioners argued that statutory terms related to workers' compensation benefits were implied terms of the contract, but the Supreme Court rejected this position. The Court found that the statutory terms were not implied terms of the contract because the statutes did not change the ability to enforce the "bargained-for terms of the employment contracts." Id at 186-91. The Court reasoned:

The employment contract, in petitioner's view, could incorporate workplace safety regulations, employment tax obligations, and laws prohibiting workplace discrimination, even if these laws are not intended to affect private contracts and are not subject to bargaining between the employer and employees. Moreover, petitioners' construction would severely limit the ability of state legislatures to amend their regulatory legislation.

Id at 190.

The court will first consider whether 1939 PWC provisions relating to restoration are incorporated into the franchises and then turn to whether 1939 PWC provisions relating to repair are incorporated. As suggested above, the question turns on whether the parties bargained for rights in those areas.


Although the general subject matter of the franchises could plausibly include restoration, there is no evidence before the court -- extrinsic or in the text of the franchises themselves -- that the parties bargained for any rights or obligations regarding restoration. Admittedly, this is somewhat puzzling, in that the parties certainly foresaw at the time of forming the franchise contracts that street restoration would be implicated in PG&E's activities. But parties are entitled to remain silent on such issues, and the court will not incorporate statutory terms into their contract simply to fill a perceived void. This is not to say, of course, that subsequent course-of-conduct evidence cannot supply such terms; intentional silence at the time of formation is entirely consistent with the expectation that terms would eventually be implied by the parties' conduct. Nor is contractual silence inconsistent with an implied "reasonableness" term -- i e, an understanding between the parties that amendments to the 1939 PWC would impose only reasonable additional obligations on PG&E.

Accordingly, the court holds that the 1939 PWC provisions related to restoration were not incorporated into the franchises. Hence, the parties' ability to enforce the bargained-for terms of the franchises is unaffected by changes described in the restoration regulations because there are no bargained-for terms relating to restoration.


Whether the 1939 PWC should be incorporated as it relates to repair presents a somewhat different question. The franchises provide that PG&E must "pay to the city on demand the cost of all repairs to public property made necessary by any of the operations of the grantee." Gas Franchise (Doc #137, Exh A) at § 7(b). Thus it appears from the text of the franchises that the parties did bargain on the subject of repair.

PG&E contends that § 7(b) requires the incorporation of § 349 of the 1939 PWC, which provides in pertinent part:

In case the pavement or surface of the street over said openings should become depressed or broken at any time after the work has been completed-natural wear of the surface or improper work of some other person, firm or corporation excepted-the person, firm or corporation for whom the street was opened shall, upon a written notice from the Department of Public Works, immediately proceed to repair and restore said pavement in a proper way and workmanlike manner to the satisfaction of said Department of Public Works * * * .

In case said pavement is not completely restored within ten (10) days after such notice has been given, and unless delayed by a strike or strikes, or conditions beyond their control, the said Department shall thereupon do the work at the expense of said delinquent person, firm or corporation.


Thus, § 349 of the 1939 PWC describes an excavator's duty to repair the surface of the street over an excavation that later becomes depressed or broken. Section 349 also provides the excavator a right either to repair the street itself or pay the Department of Public Works the costs of such a repair. Section 7(b) of the franchises likewise imposes a duty to repair but does not provide the excavator a choice between repairing the street or paying CCSF the cost of any such repairs.

Because § 7(b) explicitly does not provide a right to repair, the court finds it improper to imply the right to repair found in § 349; to do so would be contrary to the express terms of the contract. Indeed, the fact that the franchise term is more limited than the regulations suggests that PG&E contracted away any "right to repair" located in § 349.


The parties also claim that the subsequent course of conduct of CCSF and PG&E implied terms into the franchises. Generally, course-of-conduct evidence is used to interpret express terms of the contract. See Fidelity, 1993 WL 128073 at *7 (ND Cal 1993) ("'Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.'") (quoting Restatement (Second) of Contracts § 202(4)); 5 Corbin on Contracts § 24.16 (1998).

But the parties' course of conduct may also imply terms into a contract, even absent express language. See Univ of Hawaii Professional Assembly v Cayetano, 183 F3d 1096, 1102 (9th Cir 1999) (noting that under Hawaii law, "[a] course of dealing can create a contractual expectation"); PG&E, 220 F Supp 2d at 1087 ("[A]n implied term of a contract, based on course of dealing, could provide the basis for contractual impairment.").

PG&E argues that from 1939 to 1999, the parties "interpreted PG&E's restoration obligation to be limited to the size of its excavations, or the area immediately adjacent to it, and the parties acted accordingly." Pl Opp (Doc #147) at 3. PG&E claims that this course of conduct created a contractual expectation that implied a term into the contract. Id. PG&E also notes that for virtually the entire time since the franchises were granted, PG&E has replaced and repaired only the actual footprint of its excavations. See, e g, Dias Decl (Doc #134) ¶7.

For its part, CCSF points to regulations promulgated by the Department of Public Works in 1985 as relevant course-of-conduct evidence. One such regulation was the "three-foot rule," which required any "[u]ndamaged pavement of three (3) feet or less" in asphalt streets to be removed. Doc #137, Exh G at SF00190. Another regulation was the "four-foot rule," which required any portion of concrete "less than 4 feet from a construction joint" in concrete streets to be removed. Id at SF00254. A third such example was the "mill and fill" special condition that required paving in a continuous patch. Special Conditions (Doc #145, Exh C, Depo Exh 159) at PGE031461. CCSF contends that these changes -- coupled with PG&E's apparent acquiescence in them -- "created an implied contractual term, namely, that [CCSF] may adopt more stringent excavation, repaving and maintenance obligations under its police powers." Def Reply (Doc #155) at 7 n3.

Not all of the evidence referred to by the parties is relevant for a course-of-conduct analysis. CCSF and PG&E interact in more than one way. First, and foremost, CCSF acts as a regulator and PG&E acts as a regulated private party. Additionally, CCSF and PG&E created a contractual relationship when they agreed to the 1939 franchise. Actions CCSF takes as a regulator, rather than as a mere contracting party, are not relevant for analyzing the course of conduct under the franchises. For example, the court draws little significance from the fact that, prior to enacting the challenged portions of the 1999 PWC, CCSF established other regulations in 1985. Likewise, actions (or forbearance) by PG&E as a regulated entity say nothing about its conduct under the franchises. For example, what CCSF characterizes as PG&E's acquiescence in the 1985 regulations is more properly characterized as simple regulatory compliance.

Indeed, separating the two roles of CCSF demonstrates the essence of a Contract Clause claim. The Contract Clause prohibits a government entity from improperly mixing its roles or, in other words, the Contract Clause prevents a government entity from using its unilateral power in its role as a regulator to shirk its obligations as a mere contracting party. See Energy Reserves Group, 459 US at 413 n14 (reiterating that a public entity "cannot simply walk away from its financial obligations").

In canvassing the course-of-conduct evidence cited above, the court must determine what actions CCSF took as a regulator and what actions CCSF took as a mere contracting party. On CCSF's side, the evidence is largely of the form "CCSF regulated, and PG&E complied." But as explained above, this is not course-of-conduct evidence. On PG&E's side, the evidence is largely of the form "CCSF did not regulate in such a way for a long time." Such evidence fails to persuade both because it concentrates on CCSF's actions as a regulator and because it would require the court to imply an affirmative limitation on the franchises through the absence of regulatory action.

Compliance with the existing regulatory regime is not proper course-of-conduct evidence. In fact, the opposite is true: If, for example, CCSF had routinely waived PG&E's compliance with new regulations, this would be highly probative of whether the parties understood the franchises to limit CCSF's regulatory authority over PG&E. Likewise, if the parties routinely departed from the express terms of the franchises, the court would perhaps find an implied term.

The parties have put such evidence before the court on only one issue: For virtually the entire time since the franchises were granted, PG&E has replaced and repaired its excavations. See, e g, Dias Decl (Doc #134) ¶7. This is seemingly contrary to the franchises, which do not afford PG&E a right to restore and repair. This course of conduct is strong evidence that the parties understood PG&E to have a right to perform its own restoration and repair, rather than paying for such upon demand by CCSF, as § 7(b) of the franchises would suggest.

But such an implied term -- the right of PG&E to restore or repair, rather than pay the cost to CCSF -- is not impaired by the regulations at issue in this case. True enough, the regulations dictate the scope of what restoration must take place, but PG&E's implied right under the franchise does not concern the scope of restoration; it only extends to PG&E's right to perform that restoration itself. PG&E would have a strong case for impairment if CCSF enacted a regulation that required all restoration to be performed by city workers, with the excavator to pay the cost of the work. As it stands, though, PG&E's implied right to elect to perform the work itself or pay CCSF is not impaired.

Accordingly, the court concludes that no term implied by the parties' course of conduct is impaired.

In sum, the court holds that the franchises are not impaired by the non-fee regulations. CCSF's motion for partial summary judgment on this issue is therefore GRANTED as to the first and second claims of PG&E's complaint.


CCSF moves for partial summary judgment against PG&E on the third and fourth causes of action in the FAC. These causes of action contain allegations that CCSF violated PG&E's due process rights in promulgating the street damage restoration fee and the non-fee regulations. FAC (Doc #18). PG&E opposes this motion, claiming that the non-fee regulations bear no rational relationship to CCSF's claimed purpose because CCSF performed insufficient scientific and engineering analysis before promulgating the regulations. Pl Opp (Doc #147) at 10-11. PG&E further asserts that CCSF's enforcement of the new regulations has been "arbitrary and irrational," singling out PG&E among other excavators for unequal treatment. Id at 11.


PG&E's first contention is essentially that the fee and non-fee regulations are not rational means to legitimate ends. It is settled that "[o]rdinances survive a substantive due process challenge if they were designed to accomplish an objective within the government's police power, and if a rational relationship existed between the provisions and purpose of the ordinances." Boone v Redevelopment Agency, 841 F2d 886, 892 (9th Cir 1988) (quoting Scott v City of Sioux City, 736 F2d 1207, 1216 (8th Cir 1984)). PG&E does not explain how the purposes of the regulations -- to defray the costs of road repair and ensure sound and functional streets -- are not legitimate interests, nor could it.

PG&E's principal contention is that "CCSF's studies do not demonstrate and quantifiable damage resulting from street excavations" and "the 1999 Regulations are not reasonable or necessary" to achieve CCSF's purposes. Pl Opp (Doc #147) at 10-11. But, as CCSF correctly states, governmental "action passes the rational basis test if a sound reason [for it] may be hypothesized." Def Reply (Doc #155) at 11:12-13. CCSF could rationally conclude that street trenching should be compensated for and restored in a particular manner that is calculated to leave street surfaces in as good a condition as (or even a better condition than) they were found before excavation. That such a decision benefits some and burdens others is a legislative concern, not a judicial one -- at least as far as the Due Process Clause is concerned.


PG&E also contends that its substantive due process rights were violated by arbitrary and irrational enforcement of the 1999 regulations. In support, PG&E offers the declaration of Cameron Rowland, a construction engineer for PG&E, who "repeatedly saw that, while PG&E immediately modified its excavation practices so as to comply with the new regulations, San Francisco's own departments and contractors repeatedly violated those regulations, and San Francisco did nothing about it." Rowland Decl (Doc #135) ¶4. It is true that arbitrary or irrational state action gives rise to a substantive due process claim. See, e g, Patel v Penman, 103 F3d 868 (9th Cir 1996) (requiring proof "that a challenged government action was 'clearly arbitrary and unreasonable, having no substantial relation to the public health, safety, morals, or general welfare'" (quoting Euclid v Ambler Realty Co, 272 US 365, 395 (1926)).

At the threshold, the court questions whether PG&E has standing to assert a claim of arbitrary enforcement when it professes its uniform voluntary compliance in the face of non-enforcement by CCSF's inspectors. See Rowland Decl (Doc #135) ¶4 ("PG&E immediately modified its excavation practices so as to comply with the new regulations * * *."); Dias Decl (Doc #134) ¶6 (describing efforts "to ensure that the completed work complies with San Francisco excavation and repaving requirements"). The Article III standing requirement requires, among other things, that PG&E show that it "has suffered some actual or threatened injury." Valley Forge Christian College v Americans United for Separation of Church & State, 454 US 464, 472 (1982). The parties do not suggest that PG&E has actually been the victim of arbitrary enforcement; it may have complied with an unjust law, but that claim is different from the arbitrary enforcement claim it raises here. If there has been no enforcement action -- a fine or citation, for example --then there is no claim for injury from arbitrary enforcement. Similarly, from a prospective view, the court has not been directed to evidence establishing that, should PG&E not comply with CCSF's regulations, it would be likely to face arbitrary enforcement.

In other words, it is entirely possible that PG&E is being a good citizen and voluntarily complying with the law, even as CCSF lacks the resources vigorously to enforce its regulations against noncompliant excavators. It may be that if PG&E ceased voluntary compliance, it would find itself in the company of the many other excavators who, it contends, violate CCSF's regulations with impunity. The situation is not unlike the motorist who assiduously obeys the speed limit, only to have others whiz past him at breakneck speeds yet never receive a speeding ticket. It is strange to think that this motorist would have standing to bring a substantive due process challenge to the county sheriff's "arbitrary and unreasonable" enforcement of the law.

Weighed against this is the undeniable fact that PG&E is a principal (if not the principal) excavator of CCSF's streets. As such, noncompliance by PG&E would seem likely to attract enforcement by CCSF. Moreover, there is at least one reference to a citation -- albeit in hearsay and without supporting original documentation -- that was issued to PG&E. See Rowland Decl (Doc #135) Ex A at 1. Because of this, and for the benefit of appellate review, the court will also address the merits of CCSF's motion for summary judgment.

PG&E rests its opposition to CCSF's motion for summary judgment on this issue upon the Rowland declaration and Rowland's deposition. See Pl Opp (Doc #147) at 11. The essentially anecdotal account of the Rowland declaration -- some portion of which is plainly inadmissible hearsay -- fails to create a genuine issue of material fact. Although the declaration is an impressive compilation of photographs of noncompliant excavators, by its own terms it is only "a small sampling of projects that were monitored [by PG&E] since the new codes were put into place." Rowland Decl (Doc #135) Ex A at 1. The survey does not purport to be systematic or comprehensive, but as a logical matter, a comprehensive survey is required to meet the exceptionally high threshold of outright arbitrariness; arguably, PG&E would have to demonstrate that no other excavator was the subject of CCSF enforcement.

That said, the court notes that the survey claims both that none of the infractions depicted were corrected or the subject of CCSF enforcement and that "no other work * * * was tracked for the same purpose during" the period in which the compilation was made. Id. Accordingly, the court will indulge the assumption that the survey creates a genuine issue of fact whether non-PG&E excavators were subject to any enforcement. Even so, as touched on above, PG&E has not put in evidence that it was (or, should it not comply in the future, would be) subjected to any enforcement either. Proving arbitrariness entails demonstrating a gross disparity; by showing a lack of enforcement of other excavators, but not establishing its own situation, PG&E has given the court only half the equation. Accordingly, CCSF's motion for summary judgment on the third and fourth counts of the FAC is GRANTED.


CCSF moves for summary judgment on the breach of contract claims in causes of action eight through twelve. The parties agree that the viability of PG&E's breach of contract claims depends on the viability of its Contract Clause claims. As the court has granted summary judgment in CCSF's favor on the Contract Clause claims with respect to the non-fee regulations, the court also GRANTS summary judgment to CCSF on the breach of contract claims.


Finally, CCSF moves for partial summary judgment on the sixth cause of action in the FAC and PG&E moves for partial summary judgment on fifth and sixth causes of action in the FAC. These causes of action concern whether the street damage restoration fee violates article XIII of the California Constitution and Cal Gov Code § 66014 because the street damage restoration fee was an excessive and non-voter-approved tax. FAC (Doc #18).

The court notes that it has already held that the street damage restoration fee unconstitutionally impairs the franchises in violation of the Contract Clause. PG&E, 220 F Supp 2d at 1088-89.

The court's confidence in this holding is bolstered by the Ninth Circuit's intervening decision in Santa Ana. PG&E concedes that, assuming the court's Contract Clause decision with respect to the street damage restoration fee is upheld on appeal, it would not receive further relief by prevailing on the fifth and sixth causes of action. Pl Supp Memo (Doc #177) at 14-15. PG&E argues, nonetheless, that the court should adjudicate those claims (1) in the interest of avoiding piecemeal appellate review and (2) because the issues are fully briefed and there has been extensive discovery. The risk of piecemeal appellate review seems small because Santa Ana suggests that this court's prior ruling will suffice. And citing counsel's efforts in discovery and briefing succumbs to the sunk cost fallacy: What matters is the value of a decision going forward, not how much effort has been expended to this point.

Furthermore -- and dispositively -- the court's review of the briefing suggests that this is a complex area of state law and a novel application to these facts. While prior California cases have addressed challenges on the grounds PG&E advances, the cases are distinguishable enough that adjudicating the fifth and sixth claims would require the court to pass on novel and complex questions of state law, or at least questions of state law presented in a novel and complex factual context. Indeed, the parties' briefing on these questions cites not a single federal case, suggesting that experience in these matters rests in the state courts. Such a task is made all the more delicate when state constitutional provisions are involved, when a state actor is a defendant and when injunctive relief is sought -- circumstances that are all present here.

The novelty of the claims, the delicacy required in their adjudication and the distinct possibility that they are superfluous all lead the court to conclude that it should exercise its discretion to decline supplemental jurisdiction over the fifth and sixth counts of the FAC under 28 USC § 1367(c)(1). Moreover, this disposition responds to PG&E's concern, Pl Supp Memo (Doc #177) at 15 n5, about risking a statute of limitations bar by voluntarily dismissing these claims. See 28 USC § 1367(d) (providing for tolling of claims pending in federal court). Accordingly, the court DECLINES supplemental jurisdiction over the fifth and sixth counts of the FAC pursuant to 28 USC § 1367(c)(1).


The court's review of its prior orders suggests that, with this order, it may be that all of PG&E's claims have been adjudicated or otherwise disposed of. The parties shall not later than July 8, 2005, serve and file within a joint statement of the issues remaining to be decided in this case, if any, and suggest a date for a further case management conference. If issues remain, the parties shall propose a schedule on which to file any further dispositive motions. If no issues remain, the parties shall submit a proposed judgment, approved as to form.

In sum, the court GRANTS IN PART CCSF's motion for summary judgment (Doc #131); sua sponte DECLINES supplemental jurisdiction over claims five and six pursuant to 28 USC § 1367(c)(1); and DENIES as moot PG&E's motion for summary judgment (Doc #133).



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