U.S. Court of Federal Claims Finds BPA and WAPA to be in Breach of Contract

U.S. Court of Federal Claims Finds BPA and WAPA to be in Breach of Contract

On May 2, 2012, United States Federal Court of Claims issued a ruling in Case Nos. 07-157C and 07-167, holding that the Bonneville Power Administration ("BPA") and the Western Area Power Administration ("WAPA") are in breach of a present contractual duty to pay refunds that they owe to the California parties. Plaintiffs California Parties, including Pacific Gas and Electric, Southern California Edison Company, San Diego Gas & Electric and the People of California, had filed suit to recover funds from BPA and WAPA for certain overcharges of electricity prices during the California Energy Crisis of 2000-2001.

During the crisis, electricity in the California market was sold in two centralized auction electricity markets, the California Independent System Operation Corporation ("ISO") and the California Power Exchange ("PX"). In order to participate in either market, participants were required to sign contracts that bound them to the terms of the tariffs that governed the operations of the markets. In August of 2000, San Diego Gas & Electric filed a Complaint with the Federal Energy Regulatory Commission (the "Commission" or "FERC") against all sellers of electricity in both the ISO and PX markets, arguing that the markets were not competitive and requesting that the Commission take action to ensure that the market rates satisfy the just and reasonable standard. Subsequently, the Commission opened an investigation into the California rates and established a refund period of October 2000 through June 20, 2001 ("Refund Period"). The Commission found that the markets were flawed and that these flaws caused unjust and unreasonable rates. The Commission then corrected the prices charged in the PX and ISO Markets during the Refund Period, including an interest component to compensate market participants who had originally overpaid for their power purchases. The Commission further found that its power to enforce sellers' payment of refunds under the Federal Power Act extended to government agencies such as BPA and WAPA.

The Ninth Circuit subsequently affirmed FERC's ability to correct the prices charged in the markets during the Refund Period. The PX and the ISO then recalculated prices for these transactions based on FERC's adjusted methodology and published settlement statements. However, the Ninth Circuit held that FERC did not have the statutory authority over the governmental agencies necessary to enforce the obligation to pay a refund and instead suggested that the "equivalent refund relief" could be obtained by bringing contract claims against the federal agencies based on the contracts that parties executed to participate in the markets, which had bound them to tariffs that governed the markets.

In the May 2nd ruling, the Federal Court of Claims found that both BPA and WAPA, in order to access the markets, were required to sign contracts that incorporated the ISO and PX tariffs. In executing these agreements, BPA and WAPA contractually accepted the market tariffs as modified on occasion by the Commission. As such, the Commission's rate methodology change for the Refund Period affected the terms of the sales made by the government agencies as a matter of contract. Further, the court rejected the governmental agencies' argument that the California Parties lacked privity, finding that the ISO and the PX both essentially acted as clearinghouses for transactions between parties, all of whom executed the agreements to access the markets which dictated the terms of access, and therefore privity exists between the California Parties and the government agencies. The court also noted that the federal agencies sought to take advantage of the dysfunction of the market during the energy crisis, citing to several unflattering internal agency communications, including one BPA Operations Memo from June 22, 2000, where the agency explained that, "[s]elling at such times is an ancient but still true marketing strategy derived from the Neanderthal hunting philosophy translated from cave paintings: 'wait until they fall in the tar pit and then whomp 'em."

Having found BPA and WAPA to currently be in breach of contract, the next phase of this proceeding will be a determination of damages. The California Parties have made claims against BPA totaling $40.9 million plus interest and against WAPA totaling $29.5 million plus interest. No additional dates have yet been set in the docket.

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