California ex rel. Lockyer v. Dynegy, Inc.

375 F.3d 831

People of the State of CALIFORNIA, ex rel; Bill LOCKYER, Attorney General, Attorney General of the State of California, Plaintiffs-Appellants, v. DYNEGY, INC.; Dynegy Power Marketing, Inc.; NRG Energy, Inc.; Xcel Energy, Inc.; West Coast Power LLC; Cabrillo Power I LLC; Cabrillo Power II LLC; El Segundo Power LLC; Long Beach Generation LLC, Defendants-Appellees.

People of the State of California, ex rel Bill Lockyer, Attorney General of the State of California; Bill Lockyer, Attorney General, Attorney General of the State of California, Plaintiffs-Appellants, v. Reliant Energy, Inc.; Reliant Energy Services, Inc.; Reliant Energy Power Generation, Inc.; Reliant Resources, Inc.; Reliant Energy Coolwater, LLC; Reliant Energy Ellwood, LLC; Reliant Energy Etiwanda, LLC; Reliant Energy Mandalay, LLC; Reliant Energy Ormond Beach, LLC, Defendants-Appellees.

People of the State of California, ex rel Bill Lockyer, Attorney General of the State of California; Bill Lockyer, Attorney General, Attorney General of the State of California, Plaintiffs-Appellants, v. Mirant Corporation; Mirant California, L.L.C.; Mirant Potrero L.L.C.; Mirant Americas Energy Marketing, L.P.; Mirant California Investments, Inc.; Mirant Americas Inc.; Southern Energy Golden States Holdings, Inc., Defendants-Appellees.

People of the State of California, ex rel. Bill Lockyer, Attorney General, Attorney General of the State of California, Plaintiff-Appellant, v. Reliant Energy, Inc.; Reliant Energy Services, Inc.; Reliant Energy Power Generation, Inc.; Reliant Resources, Inc.; Reliant Energy Coolwater, LLC; Reliant Energy Ellwood, LLC; Reliant Energy Etiwanda, LLC; Reliant Energy Mandalay, LLC; Reliant Energy Ormond Beach, LLC; Mirant

Corporation; Mirant California, L.L.C.; Mirant Delta, L.L.C.; Mirant Potrero LLC; Mirant Americas Energy Marketing, L.P.; Mirant California Investments, Inc.; Mirant Americas, Inc.; Southern Energy Golden States Holdings, Inc.; Dynegy, Inc.; Dynegy Power Marketing, Inc.; Nrg Energy, Inc.; Xcel Energy, Inc.; West Coast Power, L.L.C.; Cabrillo Power I, L.L.C.; Cabrillo Power II LLC; El Segundo Power, L.L.C.; Long Beach Generation LLC, Defendants-Appellees.

No. 02-16619.

No. 03-15588.

No. 02-16625.

No. 02-16629.

United States Court of Appeals, Ninth Circuit.

Argued August 12, 2003.

Submitted as to all parties except NRG Energy, Inc. October 27, 2003.^*

Submitted as to NRG Energy, Inc. April 15, 2004.^**

Filed July 6, 2004.

COPYRIGHT MATERIAL OMITTED

Tamar Pachter, Deputy Attorney General, State of California, San Francisco, CA, argued the case for the appellant and was on the briefs. Attorney General Bill Lockyer, and Thomas Greene, Damon Connolly, Danette Valdez, Pamela Merchant, Paul Stein, and Laura Zuckerman, Office of the Attorney General, were also on the briefs.

Terry J. Houlihan, Bingham McCutchen LLP, San Francisco, CA, argued the case for the appellees and was on the joint briefs of the appellees, as attorney for appellees Reliant Energy, Inc.; Reliant Energy Services, Inc.; Reliant Energy Power Generation, Inc.; Reliant Resources, Inc.; Reliant Energy Coolwater, Inc.; Reliant Energy Ellwood, Inc.; Reliant Energy Etiwanda, Inc.; Reliant Energy Mandalay, Inc.; and Reliant Energy Ormond Beach, Inc. Nora Cregan and Thomas S. Hixson were also on the joint briefs as attorneys for the same parties.

John M. Grenfell, Douglas R. Tribble, and Michael J. Kass, Pillsbury Winthrop LLP, San Francisco, CA, were on the joint briefs of the appellees, as attorneys for appellees Dynegy, Inc.; Dynegy Power Marketing, Inc.; West Coast Power, LLC; Cabrillo Power I, LLC; Cabrillo Power II, LLC; El Segundo Power, LLC; and Long Beach Generation, LLC.

John A. Sturgeon and Bryan A. Merryman, White & Case LLP, Los Angeles, CA, were on the joint briefs of the appellees, as attorneys for appellees Mirant Corporation; Mirant California, LLC; Mirant Delta, LLC; Mirant Potrero, LLC; Mirant Americas Energy Marketing, LP; Mirant California Investments, Inc.; Mirant Americas, Inc.; and Southern Energy Gold States Holdings, Inc.

David T. Peterson and Theodore G. Spanos, Morgan, Lewis & Brockius LLP, Los Angeles, CA, were on the joint briefs of the appellees, as attorneys for appellee Xcel Energy, Inc.

Carlton A. Varner and Timothy B. Taylor, Sheppard, Mullin, Richter & Hampton LLP, Los Angeles, CA, were on the joint briefs of the appellees, as attorneys for appellee NRG Energy, Inc.

Attorney General Christine O. Gregoire, Seattle, WA, and Tina E. Kondo and W. Stuart Hirschfeld, Office of the Attorney General; and Attorney General Hardy Myers, Salem, OR, and Robert T. Roth and Colin A. Yost, Office of the Attorney General; were on the brief of amici curiae State of Washington and State of Oregon in support of plaintiff.

Appeal from the United States District Court for the Northern District of California; Vaughn R. Walker, District Judge, Presiding. D.C. Nos. CV-02-01854-VRW, CV-02-01791-VRW, CV-02-01914-VRW.

Before: CYNTHIA HOLCOMB HALL, DIARMUID F. O'SCANNLAIN, and EDWARD LEAVY, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

We must decide whether federal removal jurisdiction lies over California state court actions alleging that several power companies fraudulently failed to deliver reserve energy that might otherwise have helped to avert the state's energy crises of 2000 and 2001.

I

Far-reaching economic and regulatory changes in one of the largest electric energy markets in the world provide the backdrop to this litigation. We begin with some context necessary to understanding the legal claims before us.

A

California adopted an energy policy in the mid-1990s that broke new ground in important respects. Prior to the events at issue here, California consumers had long relied upon investor-owned utilities regulated by the California Public Utilities Commission ("CPUC") for the generation, transmission, and distribution of electricity. The traditional regulatory policy came under review in the mid-1990s, however, as ascendant free market philosophies and "changes in federal law intended to increase competition in the provision of electricity" prompted policymakers to rethink traditional assumptions underlying the market's structure. 1996 Cal. Adv. Legis. Serv. 854, *1 (Deering). Perhaps the culmination of this rethinking was California's decision in 1996 to initiate an aggressive market experiment to deregulate and to restructure its electricity markets. Noting the energy industry restructuring already underway, the California Legislature decided that reshaping the market for California energy could help provide competitive, lower cost and reliable electricity service, while preserving the state's commitment to developing diverse, environmentally sensitive electricity resources. Id. Assembly Bill 1890 ("AB 1890") established the legal structure for the deregulation and restructuring plan. Id.

That legislation formed two non-governmental entities to orchestrate the transmission and sale of electricity: the Independent System Operator ("ISO") and the Independent Power Exchange ("PX"), both of which are California non-profit, public benefit corporations. See 1996 Cal. Adv. Legis. Serv. 854. At the same time, the CPUC authorized the investorowned utilities to sell electricity generation plants to other entities, including to some of the parties in this litigation. Until it ceased operations in 2001, the PX was a crucial hub of the electricity generation market, overseeing an auction system for the sale and purchase of electricity on a nondiscriminatory basis to meet the electricity loads of exchange customers. As a public utility under the Federal Power Act ("FPA"), 16 U.S.C. § 791a et seq., the PX was subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC"), and it operated pursuant to FERC-approved tariffs and FERC-approved wholesale rate schedules.

Responsibility in turn for the efficient functioning of the high-voltage transmission grid fell to the ISO, which operates to this day. The ISO manages the flow of electricity across the grid and balances supply and demand in real time. Its operations are governed by a Tariff and Protocols on file with and approved by FERC. To maintain the grid, the ISO procures both "imbalance energy" (energy needed to balance the grid) and ancillary services ("operating reserves" or "reserve capacity") through various market auction processes. Such procurement ensures that generation (i.e., supply) and load (i.e., demand) remain in balance at all times. Producers that seek to sell imbalance energy or ancillary services to the ISO enter a standard agreement with the ISO. The ISO also designates and authorizes entities as "scheduling coordinators," which represent producers and purchasers and submit energy schedules to the ISO specifying predicted energy production and usage over the next day. The scheduling coordinators enter a standard agreement and are the only entities that can submit bids to sell imbalance energy and ancillary services to the ISO.

Imbalance energy and ancillary services are distinct products procured through different market programs. The imbalance energy market is the so-called "real time" market, in which bids to supply energy are made no later than 45 minutes prior to the operating hour. The ISO ranks the supply bids and purchases the required energy, paying all successful suppliers at the market-clearing price. Ancillary services, in contrast, represent generating capacity that can be converted to energy and delivered to the grid in response to uncertain events, such as major plant outages, upon receiving an ISO dispatch order. The ancillary services supplier warrants that it will comply with ISO dispatch orders if the bid is accepted. Accordingly, it must hold its capacity in reserve during the potential production period, and it receives payment for doing so, even if no dispatch order is made. Thus, if the ISO orders the producer to...