Blocktree Props., LLC v. Pub. Util. Dist. No. 2 of Grant Cnty. Wash.

447 F.Supp.3d 1030

BLOCKTREE PROPERTIES, LLC, a Washington limited liability company; Cytline, LLC, a Delaware limited liability company; 509 Mine, LLC, a Washington limited liability company; MIM Investors, LLC, a Washington limited liability company; Miners United, LLC, a Washington limited liability company; Mark Vargas, an individual; Wehash Technology, LLP, a Washington limited liability company, Plaintiffs,

v.PUBLIC UTILITY DISTRICT NO. 2 OF GRANT COUNTY WASHINGTON, a Washington municipal corporation; Terry Brewer, individually and in his official capacity; Bob Bernd, individually and in his official capacity; Dale Walker, individually and in his official capacity; Tom Flint, individually and in his official capacity; Larry Schaapman, individually and in his official capacity; Nelson Cox, individually and in his official capacity; Judy Wilson, individually and in her official capacity, and Does 1-10, managers and employees of Grant County PUD, individually and in their official capacities, Defendants.

NO: 2:18-CV-390-RMP

United States District Court, E.D. Washington.

Signed March 12, 2020

Jonathan D. Tebbs, Cairncross & Hempelmann PS, Seattle, WA, Eric L. Christensen, Beveridge & Diamond PC, Seattle, WA, for Plaintiffs.

Dale Noel Johnson, Malcolm Cavarly McLellan, Van Ness Feldman LLP, Seattle, WA, for Defendants.

ORDER GRANTING IN PART DEFENDANTS' RENEWED MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

ROSANNA MALOUF PETERSON, United States District Judge

BEFORE THE COURT are the parties' Cross Motions for Summary Judgment. The Court has considered the briefing, the relevant precedent, the record, and is fully informed.

BACKGROUND

This case involves the cryptocurrency industry and the rates that cryptocurrency companies pay for electricity. Cryptocurrency is a digital currency that exists solely on the internet; it is unregulated and unmanaged by third parties, such as banks or governments. ECF No. 81 at 7–8. Cryptocurrency is made possible by a technology called blockchain. Id. Blockchain is the technology through which cryptocurrency transactions are verified and tracked across networks of computers, working as a digital ledger. Id. Blockchain, functioning as a ledger, records every transaction in which each particular crypto coin has been used. For blockchain to track cryptocurrency transactions, the transactions must be verified by independent blockchain participators. ECF No. 81 at 7–8. These blockchain participants, also known as cryptocurrency miners, verify cryptocurrency transactions, essentially by solving complicated mathematical problems. ECF No. 81 at 8–9. The first miner to solve the problem, verifying the transaction on the blockchain (ledger), is rewarded, often in cryptocurrency. Id. Miners rely on advanced and specialized computer hardware to successfully mine cryptocurrency. Id.

Because cryptocurrency mining is technologically complex and requires advanced equipment, one of a miner's biggest expenses is electricity. ECF No. 81 at 9; ECF No. 106-3 at 4. Cryptocurrency miners work to reduce their power bills by locating their operations in areas with inexpensive and reliable access to large amounts of electricity. ECF No. 106-3 at 4.

Grant County, Washington, has some of the lowest electric rates in the country. Id. Electric rates in Grant County are set by Public Utility District No. 2 ("the District"). See id. The District is established under Title 54 of the Revised Code of Washington and operates as a municipal corporation at the direction of elected Commissioners, who are assisted by hired staff. ECF No. 37 at 9. Pursuant to District Resolution 8768, district staff prepare electric rate schedule proposals. ECF No. 106-3 at 6. Then, the Commission decides whether to adopt the proposed rate schedules. Id.

Prior to 2017, the district had fifteen distinct rate schedules, each schedule pertaining to a different "customer class," or group of costumers with similar, relevant characteristics. See id. at 5. Common examples of "customer classes" include "residential" and "industrial" classes. Id. at 29. Ultimately, members of a particular customer class "tend to exhibit common characteristics—whether in terms of electricity usage or otherwise—such that they can be effectively grouped together for [the District's] cost allocation purposes." Id. The customer class that a person falls into determines which rate schedule is applicable to her, thereby setting the rate that she will pay for electricity.

In the summer of 2017, the District claims that it experienced a large influx of requests for power service from cryptocurrency miners, who were attracted to the District's low electric rates. Id. at 6. The District purports that requests from cryptocurrency miners in 2017 totaled 1,500 MW of new load, which constituted more than twice the District's average load of 600 MW. ECF No. 37-6 at 7.

Plaintiffs dispute the "influx" of service requests from cryptocurrency miners, arguing that the District has inflated this number. See ECF No. 136 at 7. Plaintiffs claim that the District did not take appropriate measures to get a realistic estimate of cryptocurrency miners interested in Grant County. See id. Regardless of the actual number of cryptocurrency mining companies interested in Grant County, the District thought it necessary to put together a team of staff ("Staff") to analyze how the District could satisfy the new demand while simultaneously servicing existing customers. Id. at 7.

At the direction of the Commission, the Staff analyzed how to respond to the unprecedented number of new requests for service, primarily from cryptocurrency miners. Id. Eventually, the Staff recommended that a new rate schedule, "RS 17," and a corresponding new customer class, the "Evolving Industries" class, be created. To decide if an industry falls into the Evolving Industries class, and is thus subject to RS 17 rates, the Staff recommended a test focused on certain risk factors presented by the industry in question. ECF No. 37-6 at 91. These risks are:

Regulatory Risk – Risk of detrimental changes to regulation with the potential to render the industry inviable within a foreseeable time horizon.

Business Risk – Potential for cessation or significant reduction of service due to a concentration of business risk, in an evolving or unproven industry, in the value of the customer's primary output.

Concentration Risk – Potential for significant load concentration with Grant PUD's service territory resulting in a meaningful aggregate impact and corresponding future risk to Grant's revenue stream. Evaluation would begin to occur when industry concentration of existing and service request queue customer loads exceeds 5% of Grant PUD's total load.

Id.

The District argues that these risks are significant for the purposes of rate setting in part, because if an industry requiring a large percentage of the district's power fails, numerous costs related to infrastructure or contracts with other power companies will be passed on to the remaining customers in the District. As explained in one Staff memorandum: "When retail load increases, it increases Grant PUD's obligation under [its] Power Sales Contract to purchase additional energy permanently. That increased commitment to purchase power ... will remain if the [Evolving Industries] customers leave Grant's power system resulting in surplus power. To the extent that the sale of this surplus results in a loss, these costs will be borne by remaining Grant PUD's [sic] customers." ECF No. 37-6 at 94. Additionally, the District reasoned that the expansion of Evolving Industries, which by definition requires a relatively large percentage of the District's power, likely will necessitate the development of additional infrastructure. Id. at 94. Thus, if an Evolving Industry relocated to another district, or failed, the remaining customers would be forced to bear the costs of infrastructure upgrades necessitated by that Evolving Industry. Id.

In addition to the creation of the Evolving Industry class and RS 17, the Staff recommended a "two-queue" approach, under which "traditional" customers are placed in one queue to have their service requests addressed, and those belonging to the Evolving Industries class, like cryptocurrency miners, are placed in a separate queue. ECF No. 37-6 at 13. In the two-queue approach, traditional customers are served before any Evolving Industries customers. Id. at 13–14.

After RS 17 and the two-queue approach were drafted, but before they were adopted by the District, members of the cryptocurrency industry were notified. See ECF No. 106-3 at 11. During October of 2017, District Staff held an in-person meeting and took questions. Id. Additionally, all Commission meetings are open to the public and have a public comment period, including those during which the Commission discussed RS 17 and the two-queue approach. Id. at 12. During the comment period held at every public meeting, any person is permitted to comment on the issues raised during the meeting. Id. Prior to each meeting, the District posts an agenda, commission packets, and presentation materials on the District Website, so that members of the community can become informed about the upcoming meeting and prepare thoughtful comments. See id. at 12.

Between October 24, 2017, and August 28, 2018, the Commission held eleven open meetings during which it discussed RS 17 and the two-queue approach. Id. at 12–13. Various cryptocurrency mining companies made public comments at many of these meetings. Id. at 13–15. At the end of the process, on August 24, 2018, the Commission adopted RS 17 and the two-queue approach in Resolution 8891. Id. at 13. Because the cryptocurrency mining industry falls within the newly created Evolving Industries class, cryptocurrency mining companies are subject to RS 17 and placed in the Evolving Industries queue.

On December 19, 2018, Plaintiffs filed a complaint in ...