The Federal Energy Regulatory Commission (“FERC”) has dismissed a complaint filed by the California Attorney General (“AG”) and associated state agencies and utilities seeking billions of dollars in damages from short-term bilateral power sales agreements between various power marketers and the Scheduling Division of the California Department of Water Resources (“CERS”) in the wake of California’s dysfunctional energy markets in 2000 and 2001.1 Among the allegations in the complaint, the AG claimed the sellers profited from an inflated “pricing umbrella” created by the manipulative acts of certain market participants, and that the sellers otherwise violated the Federal Power Act (“FPA”) and their filed tariffs.
In response to the complaint, the sellers argued that the AG failed to establish individualized wrongdoing that impacted wholesale power prices in their contracts, a showing that was a necessary predicate to overcome the presumption that their power sales were reasonable under the Supreme Court’s Mobile-Sierra doctrine. They also argued that the AG’s pricing umbrella theory was legally invalid, and that he failed to explain why the respondent sellers—rather than other wrong-doers with whom the AG had settled—should pay for the wrongful acts seemingly committed by the settling sellers. One seller, Allegheny Energy Supply Company, LLC (“Allegheny”), further argued that the complaint was time-barred in any event under the federal “catchall” statute of limitations, which limits the time for bringing claims seeking penalties to five years. The AG filed his complaint in July 2009.
FERC agreed with the respondent sellers, ruling that the complaint “seeks an unavailable remedy, advances inadequate legal theories and, to the extent it raises an appropriate legal theory . . . the claims are not sufficiently supported.” FERC rejected “the California AG’s unsupported theory of vicarious liability . . . under the premise of a ‘pricing umbrella,’” and found that the AG’s generalized allegations of wrongdoing against “virtually all sellers” was insufficient to support the complaint as to individual sellers. FERC further found that the shortterm bilateral contracts with CERS were subject to the Mobile-Sierra presumption, which the AG failed to overcome, and the AG’s claims were time-barred in any event under the federal statute of limitations. In rejecting the complaint, FERC also denied several related procedural motions filed by the AG and its associated litigants.2
Significantly, a central element of the AG’s theory was that Section 309 of the FPA provides equitable relief from sellers who are unjustly enriched by wrong-doing that affects wholesale power prices, regardless of whether the beneficiaries themselves are guilty of any wrong-doing. FERC disagreed, holding that Section 309 requires evidence of individualized misconduct and gives FERC “remedial authority to require that entities violating the FPA pay restitution for profits gained as a result of a statutory or tariff violation.” Thus, the AG could only attain the relief he sought under that provision by pleading a specific violation by a specific seller. FERC further ruled that Section 309 is merely a remedial provision that does not supplant substantive elements of the statute. Thus, the AG could not use Section 309 to circumvent the limitations of Section 206, which only gives FERC authority to order refunds of unjust and unreasonable rates on a prospective basis.
FERC also held that the AG’s generalized allegations about market dysfunctions during the California energy crisis of 2000-2001 were insufficient to overcome the Mobile-Sierra presumption of reasonableness, which FERC found to be applicable to the sellers’ bilateral contracts with CERS. FERC pointed out that the CERS agreements were entered into under the framework of the Western Systems Power Pool (“WSPP”) agreement, which contains a Mobile-Sierra clause, and the short-term bilateral contracts with CERS were the type of contract to which the Mobile-Sierra presumption generally applies. Under the Mobile-Sierra standard, FERC may only modify rates of freely negotiated contracts if it finds that a challenger (whether a party to the contract, or a thirdparty, such as a State consumer advocate) has shown that the rates substantially harm the public interest. FERC held that a challenger must show specific facts about the misconduct of specific sellers and how the misconduct affected contract pricing.
Finally, in what appears to be an issue of first impression for the agency, FERC agreed with Allegheny that the complaint was timebarred by the federal “catchall” statute that requires actions seeking penalties or forfeitures to be brought within five years. FERC reasoned that the relief the AG sought—“refunds” calculated as the difference between the prices in individual contracts and a single, market-wide clearing price—was really a penalty because it was not tied to the disgorgement of allegedly ill-gotten profits from individual sellers. FERC ruled that the five-year federal statute of limitations applies to requests for relief that amount to damages, which made the AG’s complaint time-barred.
FERC’s ruling came a few weeks after it affirmed an initial decision in another proceeding dismissing the AG’s claims that sellers violated the FPA by failing to comply with the quarterly reporting requirements for market-based wholesale power sales, and that such violations resulted in unjust and unreasonable rates during the California energy crisis.3 FERC agreed with the judge that the AG failed to show that any reporting irregularities masked an accumulation of market power by the sellers that allowed them to charge unjust and unreasonable rates.