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Pacific Gas and Electric Co. v. United States

United States Court of Appeals, Federal Circuit

October 3, 2016

UNITED STATES, Defendant-Appellee

         Appeal from the United States Court of Federal Claims in Nos. 1:07-cv-00157-SGB, 1:07-cv-00167-SGB, 1:07-cv-00184-SGB, Judge Susan G. Braden.

          Carter Glasgow Phillips, Sidley Austin LLP, Washington, DC, argued for plaintiffs-appellants. Also repre- sented by Tobias Samuel Loss-Eaton, Quin M. Sorenson; Marie L. Fiala, San Francisco, CA; Stan Berman, Seattle, WA.

          Jane Irene Ryan, Steptoe & Johnson, LLP, Washington, DC for plaintiff-appellant Southern California Edison Company. Also represented by Heather Horne.

          Mark Fogelman, Friedman & Springwater, LLP, San Francisco, CA, for plaintiff-appellant San Diego Gas & Electric Company. Also represented by Ruth Stoner Muzzin.

          Gary Alexander, Office of the Attorney General, California Department of Justice, San Francisco, CA, for plaintiffs-appellants People of the State of California Ex Rel. Edmund G. Brown, Jr., Attorney General of the State of California, California Department of Water Resources.

          James R. Sweet, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Benjamin C. Mizer, Robert E. Kirschman, Jr., Martin F. Hockey, Jr.; Mark William Pennak, Appellate Staff, Civil Division, United States Department of Justice, Washington, DC.

          Candace J. Morey, California Public Utilities Commission, San Francisco, CA, for amicus curiae Public Utilities Commission of the State of California. Also represented by Arocles Aguilar.

          James Bradford Ramsay, National Association of Regulatory Utility Commissioners, Washington, DC, for amicus curiae National Association of Regulatory Utility Commissioners.

          Before Newman, Dyk, and Wallach, Circuit Judges.


          Dyk Circuit Judge

         Pacific Gas and Electric Company, Southern California Edison Company, San Diego Gas & Electric Company, and the state of California (collectively, "appellants"), brought suit against the United States claiming that two federal government agencies selling electricity (the Western Area Power Administration and the Bonneville Power Administration) (collectively, "the government") overcharged appellants for electricity.

         The United States Court of Federal Claims (the "Claims Court") dismissed their breach of contract action for lack of standing. Appellants appeal. We conclude that appellants lack privity of contract or any other relationship with the government that would confer standing. Because appellants lack standing, we affirm. This does not, however, suggest that appellants were without a remedy for the alleged overcharges against the parties with whom they are in contractual privity-two California electricity exchanges-or that the exchanges lacked a breach of contract remedy for overcharges against the government agencies that sold them electric power.



         Under the Tucker Act, the Claims Court has jurisdiction over contract cases in which the government is a party. See 28 U.S.C. § 1491(a)(1); Gonzales & Gonzales Bonds & Ins. Agency v. Dept. of Homeland Sec., 490 F.3d 940, 943 (Fed. Cir. 2007). Normally, a contract between the plaintiff and the United States is required to establish standing to sue the government on a contract claim. S. Cal. Fed. Sav. & Loan Ass'n v. United States, 422 F.3d 1319, 1328 (Fed. Cir. 2005) ("A plaintiff must be in privity with the United States to have standing to sue the sovereign on a contract claim.").

         This case involves the purchase and sale of electricity in the California market. Appellants contend that they were overcharged for electricity during the period from October 2, 2000, to June 20, 2001 ("the 2000-2001 period"), and seek to recover the overcharges from the United States based on sales by two federal government agen-cies-the Western Area Power Administration ("WAPA") and the Bonneville Power Administration ("BPA"). Two exchanges were involved in these transactions-the California Power Exchange ("Cal-PX") and the California Independent System Operator ("Cal-ISO"). These exchanges were responsible for acquiring and distributing electricity between producers and consumers in California and setting prices for the electricity. The basic question is whether purchase and sale contracts existed between the exchanges, on the one hand, and the appellants and defendant government agencies, on the other, or whether the contracts were between the appellants and the government agencies-the consumers and producers of electric power. If the contracts were between the exchanges and market participants individually, appellants' remedy is against the exchanges. If the contracts were between the consumers and producers of electricity, appellants' remedy is against the government producers.

         Appellants contend that a contract existed between two groups-one group consisting of all consumers of electricity (including appellants) and the other group consisting of all producers of electricity (including the government agencies) in California. Under appellants' theory, appellants and all other power consumers are in privity of contract with all producers in the California markets, including the government sellers. The government, on the other hand, contends that the contracts were only between the middleman entities that facilitated and operated the California electricity markets-Cal-PX and Cal-ISO-and the consumers and producers individually. Under the government's theory, appellants are in privity of contract with Cal-PX and Cal-ISO, and the government is also in privity of contract with Cal-PX and Cal-ISO, but appellants are not in privity with the government.


         On the face of it, the only contracts here were between the exchanges-Cal-PX and Cal-ISO-and individual market participants (the consumers and producers). Both of these exchanges entered into individual contracts with each of the consumers and producers of electricity. The basis for appellants' alternative theory requires some understanding of the background.

         In the late 1990s, California restructured and deregulated its energy market. In 1996, California established two non-profit organizations to acquire and distribute electricity and to otherwise organize and supervise all of the wholesale energy transactions in the state. One nonprofit, Cal-PX, was designed to facilitate and conduct all wholesale electric power transactions for the state of California. Cal-PX's responsibilities included, inter alia, collecting supply and demand bids from sellers and buyers of wholesale electricity respectively, processing those bids to develop aggregate supply and demand curves from the total pool of bids received, setting a market clearing price based on the intersection point of the aggregate supply and demand curves, preparing financial settlements by issuing statements to all market participants, establishing a calendar for payment, and settling payment individually with each market participant by debiting or crediting its Cal-PX account. Cal-PX was also responsible for determining the proper distribution of funds in the event of an overpayment, collecting the overpaid funds from the overpaid participants, and remitting those funds to the market participants who overpaid.

         The other exchange, Cal-ISO, was established to assume operational control over all of California's electric transmission facilities and ensure supply and demand on a real-time basis. Cal-ISO was responsible for, inter alia, operating the transmission grid, ensuring the necessary supply of energy, maintaining nondiscriminatory access to the grid, purchasing and providing ancillary services, and maintaining a real-time spot market for electricity to balance out any last-minute disparities between supply and demand in the Cal-PX market. In this regard, Cal-ISO operated as a back-up to the primary Cal-PX market for wholesale energy.

         Cal-PX and Cal-ISO filed tariffs with the Federal Energy Regulatory Commission ("FERC"), the independent federal agency with regulatory authority over the interstate sale of all wholesale electricity and transmission service. The tariffs ("Cal-PX Tariff" and "Cal-ISO Tariff, " respectively) established the terms and conditions of service and rates for the California markets. The Cal-PX Tariff and the Cal-ISO Tariff both contained clauses known in the industry as Memphis clauses, which preserved the ability of consumers and producers in the California markets to exercise their rights under the Federal Power Act ("FPA") to petition FERC for a change in the terms or rates of the tariffs.

         All consumers and producers of wholesale energy in the California markets entered into individual agreements with Cal-PX and Cal-ISO, known as participation agreements. Every Cal-PX participation agreement incorporated the Cal-PX Tariff, and every Cal-ISO participation agreement incorporated the Cal-ISO Tariff. None of the consumers and producers of wholesale energy purported to contract directly with one another; rather, all participants in the California markets executed separate participation agreements with Cal-PX and Cal-ISO only. Indeed, individual contracts between consumers and producers were not feasible since electricity is fungible, and purchases and sales of electricity could not be traced to particular consumers and producers in the California markets.

         Appellants entered into participation agreements with Cal-PX and Cal-ISO shortly after California deregulated the market to purchase electricity. WAPA and BPA, the defendant federal power-producing administrations, also executed participation agreements with Cal-PX and Cal-ISO. No agreements were executed between appellants and the federal agencies. In 1999, the government agencies began selling energy into the California markets through Cal-PX and Cal-ISO, along with many other sellers. Appellants were among the many consumers of that energy.

         To transact energy in California, potential consumers and producers submitted bids to Cal-PX to buy or sell wholesale electric power. Based on all of the bids received, Cal-PX compiled supply and demand curves to calculate a "market price" that it then applied uniformly to all transactions within a given market. Consumers paid Cal-PX, which organized and disbursed the funds to sellers in proportion to the amount of energy each supplied. Consumers never paid producers directly. Cal-ISO operated in a similar fashion. In this way, Cal-PX and Cal-ISO served as exchanges or centralized clearinghouses, acquiring electric power from producers and distributing it to consumers and otherwise facilitating wholesale energy transactions for market participants pursuant to the conditions and constraints imposed by the governing tariffs.

         As a result of the method of pricing in the California energy market, appellants contend that they and each of the many other consumers were overcharged for purchases during the 2000-2001 period, allegedly as a result of improper pricing mechanisms. Cal-PX set prices on an hourly basis to satisfy short-term demand for "spot markets." While Cal-PX also set prices over a larger period for long-term or "forward contract" markets, most purchases and sales were in the spot markets. Pac. Gas & Elec. Co. v. United States, 122 Fed.Cl. 315, 322-23 (2015). Appellants and other consumers became subject to unstable spot market purchases. "Sellers quickly learned that the California spot markets could be manipulated by withholding power . . . to create scarcity and then demanding extremely high prices when scarcity was probable." Pub. Utilities Comm'n of Cal. v. FERC, 462 F.3d 1027, 1039 (9th Cir. 2006). By May 2000, the price of wholesale power in the California markets doubled. Blackouts rolled across the state as it descended into an energy crisis.

         By August 2000, appellants and all other consumers were charged prices three to four times greater than the market rates of less than a year earlier. Appellants believed the rates established by the exchanges were unjust and unreasonable. Appellants sought relief by filing a complaint with FERC, which, with respect to nongovernment entities, has the authority to set an effective date, determine whether rates charged after that date are unjust and unreasonable, and order refunds for rates charged after that date if it determines that they are unjust and unreasonable. Here, FERC set an effective date of October 2, 2000, determined that rates charged after that date were unjust and unreasonable, and ordered that refunds be paid by all sellers in the California market.

         A series of appeals to the Ninth Circuit ensued. As is relevant here, the Ninth Circuit held that FERC lacked jurisdiction to order the government to pay refunds, Bonneville Power Admin. v. FERC, 422 F.3d 908, 926 (9th Cir. 2005), a determination that is not now contested. This was so because government agencies are not subject to FERC jurisdiction, as § 201(f) of the Federal Power Act makes clear: "No provision of this subchapter shall apply to . . . the United States . . . or any agency, authority, or instrumentality [thereof]." 16 U.S.C. § 824(f); see also Bonneville, 422 F.3d at 920. Although FERC lacked the authority to order the government to pay refunds, the Ninth Circuit upheld FERC's ability to find the rates charged by all sellers, including the government agencies, to be unjust and unreasonable. See City of Redding v. FERC, 693 F.3d 828, 841 (9th Cir. 2012) (explaining that to the extent that FERC revised or reset the market rate for the 2000-2001 period, this was within FERC's authority, as it "necessarily involved reevaluating the price previously charged by all market participants because the market clearing price was the same for all of them").

         Since FERC lacked jurisdiction to order refunds by the government, [1] appellants brought this breach of contract action in the Claims Court, alleging that the government producers had breached agreements between the consumers and producers by overcharging appellants and all other consumers and by failing to pay a refund for unjust and unreasonable prices charged during the 2000- 2001 period.

         After a trial, Judge Smith found in favor of appellants. See Pac. Gas & Elec. Co. v. United States, 105 Fed.Cl. 420, 440 (2012). Judge Smith held that "the facts at trial showed that the Agencies contracted with and owe contract obligations to [appellants]." Id. at 432. In his view, Cal-PX and Cal-ISO "were pass-through entities or clearinghouses" only, and he therefore concluded that "the payment obligations were between the buyer [consumer] and seller [producer]." Id. at 432-33. Judge Smith further held that the government had breached its contract with appellants by failing to pay refunds. See id. at 439- 40.

         Before the damages-phase proceedings began, Judge Smith retired from the bench. His successor, Judge Braden, vacated Judge Smith's opinions and dismissed the case for, inter alia, lack of standing. Pacific Gas, 122 Fed.Cl. at 329-335, 343. Judge Braden held that while appellants were in privity of contract with the exchanges, they lacked privity with the government. See id. at 331. Judge Braden further held that appellants failed to demonstrate the existence of an agency relationship between the government and the exchanges, see id. at 334-35, and failed to demonstrate that appellants were third-party beneficiaries of the government's contracts with the exchanges, see id. at 332-34.[2] This appeal followed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).



         Appellants first contend that Judge Braden violated the law of the case doctrine by vacating Judge Smith's rulings.

         According to appellants, the law of the case doctrine "counsels particular caution when one judge is asked-or, as here, decides sua sponte-to reconsider her predecessor's decisions." Br. of Appellants at 32-33. Appellants assert that this case should be remanded because Judge Braden's decision to reconsider Judge Smith's decisions constituted an abuse of discretion.

         But the dispositive issue addressed on reconsideration here-standing-is a pure issue of law, which we review de novo. See S. Cal. Fed. Sav. & Loan Ass'n, 422 F.3d 1319, 1328 (Fed. Cir. 2005).[3] And the question of standing here depends on contract interpretation, which also is a question of law that we review de novo. See, e.g., S. Nuclear Operating Co. v. United States, 637 F.3d 1297, 1301 (Fed. Cir. 2011). Indeed, appellants agree that "Judge Braden's specific errors in interpreting the contracts and the Ninth Circuit's decisions were purely legal, and are therefore subject to plenary review." Br. of Appellants at 62 n.11. Judge Smith's contract interpretation was also legal in character. Judge Smith made no rele- vant findings of fact with respect to interpretation of the contract provisions at issue.[4] See, e.g., Thatcher v. Kohl's Dept. Stores, Inc., 397 F.3d 1370, 1373 (Fed. Cir. 2005). Accordingly, even if appellants could demonstrate that Judge Braden erred in reconsidering Judge Smith's interlocutory decisions, they have suffered no prejudice, since our review of both decisions of the Claims Court is de novo. We thus proceed to consider the issue of stand- ing. S. Cal. Fed. Sav. & Loan Ass'n, 422 F.3d at 1328.


         As noted above, typically "[t]o have standing to sue the sovereign on a contract claim, a plaintiff must be in privity of contract with the United States, " Anderson v. United States, 344 F.3d 1343, 1351 (Fed. Cir. 2003), and "[s]tanding is a threshold jurisdictional issue that implicates Article III of the Constitution." S. Cal. Fed. Sav. & Loan Ass'n, 422 F.3d at 1328. "Not only is privity a fundamental requirement of contract law, but it takes on even greater significance in cases such as this, because the 'government consents to be sued only by those with whom it has privity of contract.'" Id. (quoting Erickson Air Crane Co. of Wash. v. United States, 731 F.2d 810, 813 (Fed. Cir. 1984)). "The effect of finding privity of contract between a party and the United States is to find a waiver of sovereign immunity." Cienega Gardens v. United States, 194 F.3d 1231, 1239 (Fed. Cir. 1998). We do not lightly presume that the government's actions give rise to contractual obligations when the government is not a named party to the contract in dispute. See United States v. Algoma Lumber Co., 305 U.S. 415, 421 (1939).

         Limited exceptions to the privity requirement have been recognized when a "party standing outside of privity by contractual obligation stands in the shoes of a party within privity, " such as when a party can demonstrate that it was an intended third-party beneficiary under the contract, see, e.g., First Hartford Corp. Pension Plan & Tr. v. United States, 194 F.3d 1279, 1289 (Fed. Cir. 1999), or when a party can demonstrate that a prime contractor acted as purchasing agent on behalf of the government in contracting with a subcontractor. See Nat'l Leased Hous. Ass'n v. United States, 105 F.3d 1423, 1435-36 (Fed. Cir. 1997); United States v. Johnson Controls, Inc., 713 F.2d 1541, 1551 (Fed. Cir. 1983).


         We first address the issue of contractual privity, addressing later in this opinion appellants' alternative theories of agency and third-party beneficiary. The government argues that the only contracts for the purchase and sale of electricity here were between each market participant and the exchanges. We agree. There is no question that each of the many buyers and sellers entered into contracts with the exchanges. Each individual participant in the California markets executed a contract with one or both exchanges incorporating the relevant tariff. Each contract described the parties as being the individual participant and the exchange only. For example, BPA's contract with Cal-PX explicitly provided that "THIS AGREEMENT . . . is entered into, by and between: (1) BONNEVILLE POWER ADMINISTRATION . . . and (2) THE CALIFORNIA POWER EXCHANGE CORPORATION." J.A. 424. No parties other than the individual participant and the relevant exchange were listed on any contract.

         While the Uniform Commercial Code ("UCC") does not apply directly to government contracts, see, e.g., GAF Corp. v. United States, 932 F.2d 947, 951 (Fed. Cir. 1991), the UCC "provides useful guidance in applying general contract principles, " Hughes Commc'ns Galaxy, Inc. v. United States, 271 F.3d 1060, 1066 (Fed. Cir. 2001); see also Diversified Energy, Inc. v. Tenn. Valley Auth., 339 F.3d 437, 446 n.9 (6th Cir. 2003); Tech. Assistance Int'l, Inc. v. United States, 150 F.3d 1369, 1372 (Fed. Cir. 1998). The parties appear to agree that the provision of electricity involves the sale of a good which would invoke the UCC. See, e.g., Br. of Appellants at 41 ("Here . . . the Agencies sold the power itself-which is personal property under [41 U.S.C.] § 7102(a)(4) . . . ."). Indeed, we would lack jurisdiction under the Contract Disputes Act if the contracts were interpreted as involving the provision of services rather than goods. See 41 U.S.C. § 7102(a). Under the Supreme Court's decision in United States v. Eurodif, S.A., the fact that electricity is fungible suggests that the exchanges bought from and sold electricity to market participants, rather than merely facilitating a transfer between producers and consumers. See 555 U.S. 305, 319-20 (2009) (explaining that a transaction involving a fungible product is more likely to be viewed as the sale of a good as opposed to the sale of a service).[5]

         On the face of the agreements, the exchanges were performing a typical middleman function with respect to transactions in goods as described in commentary on the UCC. See Lary Lawrence, 2 Lawrence's Anderson on the Uniform Commercial Code, §§ 2-103:18, 103:44 (3d ed. 2012). Under typical middleman contracts, "courts will treat as a buyer [and seller] a middleman who contracts for the sale of goods to be delivered to a third person." Lawrence, at § 2-103:18; see also id. at ยงยง 2-103:19, 103:44-45. Though the title to the electricity passes directly from producers to consumers, the UCC makes quite clear that this is not inconsistent with a middleman contract for purchase and sale. "A middleman making a contract . . . is a 'seller' for the purpose of ...

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