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

March 26, 2012


Superior Court of City and County of San Francisco, No. CGC-07-470086, Charlotte W. Woolard and Curtis E. A. Karnow, Judges.

The opinion of the court was delivered by: Bruiniers, J.


(San Francisco City & County Super. Ct. No. CGC-07-470086)

For over 80 years, the City and County of San Francisco (City) has generated electric power at its Hetch Hetchy hydroelectric project in the Sierra Nevada. The City's power transmission lines, however, reach only to the City of Newark. Pursuant to contract, Pacific Gas and Electric Company (PG&E) transmits City-generated electricity the remaining distance to San Francisco and distributes it locally. The contract distinguishes electricity to be used for municipal purposes (Municipal Load) and electricity to be used for commercial purposes, for which PG&E generally has the right to bill the end user. The Ferry Building, a property owned and originally largely occupied by the Port of San Francisco, was mutually agreed to be Municipal Load. This dispute arose after the Ferry Building was renovated in 2003. PG&E contended that the use of the building had materially changed and that the account no longer qualified as Municipal Load. PG&E filed this action seeking declaratory relief and breach of contract damages.

On cross-motions for summary adjudication, the trial court agreed that the postrenovation account was no longer Municipal Load and granted declaratory relief in favor of PG&E. In a separate bench trial, however, the court rejected PG&E's damage claim for breach of contract, finding that PG&E had sued under the wrong contract, and that it had failed to present a claim to the City under the correct agreement as required by the Government Code. In the published portion of this opinion, we affirm the ruling that the postrenovation account no longer qualified as Municipal Load. In the unpublished section of our opinion, we reverse the ruling on the breach of contract claim, vacate the judgment and remand to the trial court for reconsideration of PG&E's claim for damages.

I. Factual and Legal Background

In the 1920's, the City began generating electricity at the Hetch Hetchy hydroelectric project in the Sierra Nevada. The City uses its own transmission lines to bring power from Hetch Hetchy to the City of Newark. However, the residents of San Francisco never approved funding for transmission lines between Newark and San Francisco or distribution lines within San Francisco, so the City contracts to use PG&E's lines for that purpose. The City's use of Hetch Hetchy power is governed by the 1913 federal Raker Act. (See Pub.L. No. 63-41 (Dec. 19, 1913) 38 Stat. 242; hereafter, Raker Act.) The City's transmission of electricity over PG&E's lines is governed by several contracts between the City and PG&E. For these purposes, "the City" includes the Port of San Francisco (Port), which manages City property on the San Francisco harbor, including the Ferry Building.

The Raker Act

Congress granted the City rights of way in the Stanislaus National Forest and Yosemite National Park to build, operate and maintain the Hetch Hetchy hydroelectric project. (See Raker Act, § 1.) The parties agree that the Raker Act "defines and limits the uses that the City may make of the electricity that it generates at Hetch Hetchy."

Section 9(l) of the Raker Act requires the City to sell excess electricity from the Hetch Hetchy project to the Modesto and Turlock Irrigation Districts and municipalities within those districts for certain purposes at cost. Electricity is defined as "excess" if it is more than what the City needs to pump its own water supply and "for the actual municipal public purposes of [the City] (which purposes shall not include sale to private persons or corporations)." (Ibid.) Once the City has provided excess electricity to satisfy designated needs of the irrigation districts and associated municipalities, "it may dispose of any [additional] excess electrical energy for commercial purposes."*fn2 (Ibid.) Section 6 of the Raker Act prohibits the City "from ever selling or letting to any corporation or individual, except a municipality or a municipal water district or irrigation district, the right to sell or sublet the . . . electric energy sold or given to it or him by the [City]."

The 1987 Interconnection Agreement

The City contracted with PG&E to transmit and distribute the City's power from Newark to San Francisco and other locations in several "Interconnection Agreements."*fn3 In the parties' 1945 Interconnection Agreement, PG&E agreed to transmit power that the City required " 'for its own municipal purposes,' " which were defined by illustration through such examples as " 'a street railway system' " and " 'lighting City streets.' " The agreement specified that the term did " 'not include resale except as mutually agreed by the parties.' "

In 1987, the parties entered into a new Interconnection Agreement (the IA).*fn4 Pursuant to the IA, PG&E is required to sell and provide the City with power and other services, including transmission and distribution services, the City needs to meet its Municipal Load and "Firm Resale Load." (IA, § 2.1.) PG&E's obligations are expressly limited "to the extent such services support City's Municipal Load and Firm Resale Load." (IA, § 2.7.3) Municipal Load is defined as "[p]ower required for City's municipal public purposes pursuant to the Raker Act, as may be designated by the City, both inside and outside of City. For purposes of this Agreement, such load shall not include load served by the City as resale load." (IA, § 1.43.) Firm Resale Load is defined as "City's contractual commitment to meet Firm Obligations to Districts and to provide Firm Power to Airport Tenants and Riverbank." (IA, § 1.26.) "Firm Obligations to Districts" refers to the City's obligations to provide power to the Modesto and Turlock Irrigation Districts; "Airport Tenants" are the "tenants at the San Francisco International Airport whose electric service is purchased at retail from City, and their respective loads"; and "Riverbank" is "Riverbank Army Ammunition Plant, a resale customer of City located in Riverbank, California, that is owned by the United States Department of Defense and operated by Norris Industries or its successor."*fn5 (IA, §§ 1.16, 1.2, 1.57.) The IA also contains an arbitration clause. (IA, § 9.29.2.)

PG&E filed the IA with the Federal Energy Regulatory Commission (FERC), which has jurisdiction over agreements related to the transmission of electricity. (See 16 U.S.C. § 824 et seq.)

The 1997 Master Settlement Agreement

In a 1997 Master Settlement Agreement (MSA), the City and PG&E agreed to settle a number of then outstanding disputes, including the designation of certain accounts as Municipal Load.*fn6 The parties agreed that the Ferry Building*fn7 and certain other accounts should be designated Municipal Load, and PG&E agreed to transfer those accounts to service by HHWP, i.e., the City. PG&E waived any claim that accounts then served as Municipal Load were not Municipal Load, and the City waived any claim that accounts then served as non-Municipal Load were Municipal Load. (MSA, §§ 2.a.v.a, 2.a.v.b.)

The MSA left open issues as to any new or changed accounts that might arise thereafter. Section 2.a.v.d of the MSA provided, "Nothing in this [MSA] shall affect the rights of PG&E or City under the [IA] as to any new account arising after January 1, 1997; provided, however, that for purposes of this subsection, 'new account' shall include any material change in use or activity at any existing account, but only to the extent of such material change in use or activity." The MSA contained an integration clause, but no arbitration clause.

Aside from the Ferry Building, the accounts that were designated Municipal Load in the MSA included accounts through which the City billed certain commercial entities for electric service (KSFO Radio, Caito Fisheries, Inc., F. Alioto Fish Co., Franks Fisherman's Supply, Coast Marine Industries, Stevedoring Services of America, Beth Aharon Day School & Jewish Education Center, and Mission Rock Resort).*fn8 Not included among the accounts designated Municipal Load in the MSA was Pier 39, "a San Francisco Bay attraction featuring retail shops and restaurants." Pier 39 is served by PG&E as a retail account. The Port leases Pier 39 to a private entity, for a 60-year term, which has the right under the contract to sublease or use the property for commercial and retail purposes.*fn9

The Ferry Building in 1997

When the MSA was signed in 1997, the Ferry Building had approximately 300,000 square feet of interior space. Approximately 88,000 square feet was common space, including stairs, hallways and restrooms. The Port Commission used approximately 82,000 square feet: 42,000 square feet for administrative offices and a hearing room on the second and third floors, and 40,000 square feet for a garage and shop on the ground floor. The Port leased another 100,000 square feet to commercial office tenants, and about 30,000 square feet to tenants that sold food or other retail goods and services, including 29,500 square feet to the World Trade Club.*fn10 The tenants included Amtrak Real Estate, Aspen Group, Inc., California State Department of Mental Health, Chronicle Publishing Co., Federal Express, Hanse Shipping Agency, I.D.T Telecommunications, Jenken Freight Services, Limbach & Limbach, Midsummer Mozart Festival, Omar's Cafe, the Rockport Group, among many others. At that time, the Ferry Building was not generally open to the public, and the second and third floors were accessible only to tenants or those doing business with the Port. Transit passengers traveled from ferries to the Embarcadero by walking through a tunnel in the building. In sum, 29.33 percent of the interior space was common area, 27.33 percent was occupied by the Port, 10 percent by retail tenants (9.83 percent by the World Trade Club), and 33.33 percent by commercial tenants. The total electric usage in the building was about 320,000 kilowatt hours per month.

Renovation of the Ferry Building

In 1997, the Port Commission announced a plan to renovate the Embarcadero area, including the Ferry Building. In 1998, William Wilson and Associates and its successor, Ferry Building Investors, LLC (Ferry Building Investors), were engaged to renovate and lease the Ferry Building as a mixed-use commercial and office complex. In April 2001, the Port and Ferry Building Investors entered into a 66-year ground lease (Ground Lease) for the Ferry Building. In December 2001, Ferry Building Investors entered into a Master Tenant Sublease with Ferry Building Associates, LLC (Ferry Building Associates) which in turn further subleased space in the building to commercial office and retail tenants. Equity Office, LLC (Equity Office) manages the Ferry Building for Ferry Building Investors and Ferry Building Associates.

Existing Ferry Building tenants (including the Port) vacated the premises during renovation. When renovation was complete in April 2003, the Ferry Building had 275,000 square feet of interior space, of which 248,000 was rentable. Approximately 180,000 square feet on the second and third floors was rented as commercial office space. Of this, approximately 3,561 square feet was rented to the Port for use as a hearing room and ancillary purposes. The Port did not move its administrative offices back into the building. Approximately 65,000 square feet on the ground floor plus 8,000 square feet of outdoor space on the ground level was rented to retail outlets, another 9,000 square feet of outdoor space was rented for a weekday farmers' market and 35,000 square feet for a Saturday farmers' market. Approximately 100,000 square feet of space on the ground floor of the building, including the retail outlets and common area, became accessible to the public. The tenants in 2003 included Peet's Coffee, The Slanted Door, Cowgirl Creamery, Scharffenberger Chocolate, Acme Bread Company, Golden Gate Meat Company, Book Passage Inc., Coblentz, Patch, Duffy & Bass LLP, Embarcadero Financial, and Platinum Advisors LLC. In sum, 13 percent of the interior space was common area, 1 percent was occupied by the Port, 24 percent by retail tenants, and 62 percent by other commercial tenants.

The City characterizes the Ferry Building renovation as a "public and private partnership." The Ground Lease requires Ferry Building Investors to pay the Port an "annual minimum rent" of $1.4 million, and a "Participation Rent" based on the "Total Income" for each calendar year. If Ferry Building Investors subsequently transfers the lease, the Port has rights to share in the proceeds from the transfer. At the end of the lease, the Port will obtain title to any improvements that Ferry Building Investors made to the Ferry Building. Finally, the Ground Lease expressly provides that the City will provide electricity to the building.

Electrical Service to the Ferry Building During and After the Renovation

During the Ferry Building's renovation from April 2001 and October 2002, the City sold power to the general contractor. In March 2002, the City and PG&E entered into a "Distribution Service and Extension Agreement" (DSEA) that provided for the installation of new electric facilities to serve the renovated Ferry Building, and PG&E energized the new service in May 2002.

Following renovation, total electric usage at the Ferry Building has been about 620,000 kilowatt hours per month. The City bills Equity Office for 100 percent of this electricity at a rate comparable to the rate PG&E would charge if PG&E were serving the Ferry Building. Equity Office bills Ferry Building Associates which in turn bills subtenants, either on the basis of actual electric usage and cost (most ground floor retailers) or a pro rata share of overall usage. The Port pays Equity Office its pro rata share of the building's electric usage. The City pays PG&E the Municipal Load IA rate for the transmission of this electricity.


Arbitration of Fifth and Mission Garage Designation as Municipal Load

In 2002, the City and PG&E arbitrated a dispute concerning whether electricity that the City supplied to retail businesses leasing space at the City-owned Fifth and Mission Garage constituted Municipal Load under the IA. Those retail businesses were Starbucks Coffee, Mel's Diner, Asia Chinese Restaurant, Museum West and a Verizon Wireless cellular antenna. The terms and conditions of the 1997 MSA were not at issue in the arbitration. On October 11, 2002, the arbitrator issued a decision in favor of PG&E. The City complied with the arbitration decision without the necessity of any action by PG&E to confirm the award in the superior court.

Prior Action and Appeal Regarding Ferry Building Designation

In a May 2003 notice of dispute, PG&E objected to the City's plan to sell electricity to the new tenants of the renovated Ferry Building, arguing the sales would violate both the IA and the MSA. PG&E also argued the City's sale of electricity to the new Ferry Building tenants conflicted with federal and state tariffs.

PG&E and the City were unable to resolve the Ferry Building dispute between themselves, and PG&E invoked the IA's arbitration provision. In its May 2004 arbitration notice, PG&E estimated damages at $500,000 to $750,000. The City claimed the dispute was not arbitrable and, on May 20, 2004, filed a complaint for declaratory and injunctive relief barring arbitration of the dispute. (City and County of San Francisco v. Pacific Gas and Electric Co. (Super. Ct. S.F. City and County, 2004, No. CGC-04-431615).) The City argued that the terms of the MSA governed and, although the MSA incorporated the IA's definition of Municipal Load, it did not incorporate the IA's arbitration provision and did not have an arbitration clause of its own. "The substance of PG&E's allegations in the Notice of Arbitration is that under the definition of 'municipal load,' the City can no longer provide electric services to the Ferry Building on the grounds that the use of the Ferry Building has materially changed since the parties entered into the [MSA] in 1997. . . . Among other things, PG&E claims that by continuing to provide electric services to the Ferry Building, the City is violating the [MSA]." The trial court agreed with the City and held the parties' dispute was not subject to arbitration. In February 2007, Division One of this court affirmed. (City and County of San Francisco v. Pacific Gas and Electric Co. (Feb. 27, 2007, A108473) [nonpub. opn.]; hereafter, prior appellate opinion.)*fn11

The Instant Action

PG&E filed a government claim against the City and, after it was denied, filed a complaint for declaratory relief and breach of contract. In its first cause of action, PG&E sought a "judicial declaration that the new service requested by the City as part of the Ferry Building remodeling project constitutes a 'new account' under the [MSA], that there has been a material change in use and activity at the Ferry Building, and that the Ferry Building no longer qualifies as municipal load under the [MSA] or [IA] such that PG&E is not required to transport Hetch Hetchy power to the Ferry Building." In its second cause of action, PG&E alleged that the City breached its obligations under the MSA "in that it has continued to serve Hetch Hetchy power to the Ferry Building under ...

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