Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-01216/USCOURTS-caed-2_05-cv-01216-4/pdf.json

Nature of Suit Code: 410
Nature of Suit: Antitrust
Cause of Action: 28:1331 Fed. Question: Anti-trust

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1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

PEOPLE OF THE STATE OF

CALIFORNIA EX REL. BILL

LOCKYER, ATTORNEY GENERAL OF

THE STATE OF CALIFORNIA,

Plaintiff,

v.

POWEREX CORP., a Canadian

Corporation, dba POWEREX ENERGY

CORPORATION; PUBLIC SERVICE

COMPANY OF NEW MEXICO; and DOES

1-100,

Defendants.

CIV-S-05-01216 DFL DAD 

MEMORANDUM OF OPINION

AND ORDER

The Attorney General of California (“Attorney General”)

filed this action in state court against Powerex Corporation

(“Powerex”) and the Public Service Company of New Mexico (“PNM”)

to recover damages for violations of the state antitrust statute. 

Defendants removed the case to this court on the basis of federal

question jurisdiction. The Attorney General now moves to remand. 

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 Plaintiff alleges that CRC is a co-conspirator in this 1

scheme. However, CRC is not a defendant in this action.

 Plaintiff asserts that defendants engaged in thousands of 2

these ricochet transactions. Specifically, plaintiff alleges

that defendants exported and imported in the same hour: (1) at

2

Both defendants move to dismiss the complaint under Fed.R.Civ.P.

12(b)(6). 

For the reasons discussed below, the motion to remand is

DENIED and the motions to dismiss are GRANTED. 

I.

This case is one of many related to the California energy

crisis of 2000-2001. The complaint alleges that defendants

violated the Cartwright Act, Cal. Bus. & Prof. Code §§ 16720 et

seq. -– the California analogue of the Sherman Act -- by

misrepresenting in-state electricity as higher-priced “out-ofmarket” (“OOM”) energy. The Attorney General alleges that

defendants engaged in a scheme, known as “ricochet” or “megawatt

laundering,” which involved the following series of transactions:

(1) Powerex purchased power in California at regular market

rates; (2) Powerex exported the power to PNM and the Colorado

River Commission (“CRC”); and (3) Powerex imported the power 1

back into California and sold it as OOM energy. (Compl. ¶ 32.) 

Because a price cap on in-state power did not apply to OOM power,

the price of OOM power was generally much higher than that of instate power. (Id. ¶ 31.) Thus, the scheme allegedly enabled

defendants to sell power generated in California at a

higher price thereby defrauding consumers. (Id. ¶ 33.) 2

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least 158,622 MWh during at least 901 hours between May 2000 and

October 2000; (2) at least 184,169 MWh during at least 1,107

hours between October 2000 and January 2001; and (3) at least

463,734 MWh during at least 2,016 hours between January 2001 and

June 2001. 

3

By means of this alleged “megawatt laundering” scheme, the

Attorney General alleges that defendants combined to restrain

trade in violation of the Cartwright Act by: (1) entering into a

series of anti-competitive agreements designed to establish a

market structure in restraint of trade; (2) engaging in a series

of ricochet trades with the intent and effect of increasing the

price of electricity in California; (3) engaging in a series of

ricochet trades in order to fix, control, and establish the price

of electricity in California; (4) misrepresenting the type of

electricity being sold in order to collect payments for in-state

electricity at OOM prices; and (5) pooling, combining, and

uniting their interests in the sale and transportation of

electricity to affect its price. (Id. ¶¶ 36-37.) The Attorney

General seeks actual and treble damages. (Id. ¶¶ A-D.)

This is not the first time that the Attorney General has

made these claims. The Attorney General intervened in a Federal

Energy Regulatory Commission (“FERC”) proceeding that involved an

investigation of Powerex, as well as other energy companies, for

megawatt laundering and for antitrust violations during the 2000

and 2001 energy crises. FERC held hearings and issued numerous

orders relating to its investigation. See e.g., Fact Finding

Investigation of Potential Manipulation of Electric and Natural

Gas Prices, Order Directing Staff Investigation, 98 FERC ¶

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4

61,165, 2002 WL 32001559 (Feb. 13, 2002); San Diego Gas & Elec.

Co. v. Sellers of Energy and Ancillary Serv., 101 FERC ¶ 61,186,

2002 WL 31973795 (Nov. 20, 2002); San Diego Gas & Elec. Co. v.

Sellers of Energy and Ancillary Serv., 96 FERC ¶ 61,120, 2001 WL

1704964 (Jul. 25, 2001); Am. Elec. Power Serv. Corp et al., 103

FERC ¶ 61,345, 2003 WL 21480252, *20 (Jun. 25, 2003);

Investigation of Anamalous Bidding Behavior and Practices in

Western Markets, 103 FERC ¶ 61,347, 2003 WL 21480250, *5 (Jun.

25, 2003); Enron Power Mktg., Inc., et al., 103 FERC ¶ 61,346,

2003 WL 21480248 (Jun. 25, 2003). Among other things, the

investigation resulted in a settlement agreement between FERC and

Powerex, under which Powerex agreed to pay $1,300,000 to the

United States Treasury. See Powerex Corp., 106 FERC ¶ 63,019,

2004 WL 346501, at *65158 (Feb. 24, 2004). FERC and Powerex also

released a Joint Explanatory Statement in which FERC stated, in

part, that “Powerex’s transactions are within the Commission’s

exclusive jurisdiction over wholesale electricity rates.” (See

Powerex RJN Ex. 5 at 3.) The Attorney General of California

objected to the settlement agreement, but FERC approved it over

this objection. See Powerex Corp., 106 FERC ¶ 61,304, 2004 WL

615694, at *62195 (Mar. 26, 2004). 

II. Motion to Remand

The jurisdictional issues in this case are complex; however,

the court has the benefit of several decisions of the Ninth

Circuit that address many of the same issues presented here. See

Pub. Util. Dist. No. 1 of Grays Harbor County Wash. v. Idacorp,

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Inc., 379 F.3d 641 (9th Cir. 2004) (“Grays Harbor”); Pub. Util.

Dist. No. 1 of Snohomish County v. Dynegy Power Mktg. Co., 384

F.3d 756 (9th Cir. 2004), cert. denied, 125 S.Ct. 2957 (2005)

(“Snohomish”); California ex rel. Lockyer v. Dynegy, Inc., 375

F.3d 831 (9th Cir. 2004), cert. denied, 125 S.Ct. 1836 (2005)

(“Dynegy”). Despite minor differences in pleading and claim, the

Ninth Circuit has repeatedly found that the kind of claim brought

here by the Attorney General raises a question of federal law

within the exclusive jurisdiction of FERC such that the claim is

within the subject matter jurisdiction of the federal court.

The complaint here rests solely on the state antitrust

statute, and, therefore, would not be removable unless the

“artful pleading doctrine” applies. The artful pleading doctrine

keeps a plaintiff from “defeat[ing] removal by omitting to plead

necessary federal questions in a complaint.” Franchise Tax Bd.

of Cal. v. Constr. Laborers Vacation Trust for S. Cal., 463 U.S.

1, 22, 103 S.Ct. 2841 (1983). The doctrine “allows courts to

delve beyond the face of the state court complaint and find

federal question jurisdiction by recharacteriz[ing] a plaintiff’s

state-law claim as a federal claim.” Lippitt v. Raymond James

Fin. Servs., Inc., 340 F.3d 1033, 1041 (9th Cir. 2003) (internal

quotations and citations omitted). Under the artful pleading

doctrine, federal question jurisdiction will be found as to state

law claims that are: (1) “completely preempted” by federal law;

(2) necessarily federal in character; or (3) dependant on the

resolution of a substantial, disputed federal question. Lippitt,

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 Powerex and PNM also assert that the court has subject 3

matter jurisdiction because the Cartwright Act claim is

necessarily federal in character and the Federal Power Act

completely preempts state law. (Powerex Opp’n at 7,8.) Because

the court finds that jurisdiction lies on the basis of a

substantial federal questions, it is not necessary to address the

other two suggested bases for jurisdiction.

6

340 F.3d at 1041-42; see also Grable & Sons Metal Prods., Inc.,

v. Darue Eng’g & Mfg., __ U.S. __, 125 S.Ct. 2363, 2368 (2005)

(“[T]he question is, does a state-law claim necessarily raise a

stated federal issue, actually disputed and substantial, which a

federal forum may entertain without disturbing any

congressionally approved balance of federal and state judicial

responsibilities.”).

Powerex and PNM assert that the court has subject matter

jurisdiction under the artful pleading doctrine because

plaintiff’s right to relief depends on the resolution of a

substantial, disputed federal question. (Powerex Opp’n at 3.) 3

To make out a Cartwright Act claim, plaintiff must show: (1) the

formation and operation of a conspiracy; (2) that the

conspirators acted illegally; and (3) that the conspirators

caused an injury. G.H.I.I. v. MTS Inc., 147 Cal.App.3d 256, 265

(1983). The court has subject matter jurisdiction if the

resolution of “some substantial disputed question of federal law

is a necessary element” of plaintiff’s Cartwright Act claim. 

Grable & Sons, 125 S.Ct. at 2366-67. 

Defendants assert that federal jurisdiction is proper

because the Attorney General cannot prove the injury component of

a Cartwright Act claim without determining a hypothetical

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 For example, the complaint states: “Defendants . . . 4

manipulated the market . . . in order to restrain trade and fix

and maintain the price for electricity in California at

artificially high levels” (Compl. ¶ 1); “This manipulation of the

supply of electricity caused the price to rise, and Powerex was

able to sell it back into the California market at these higher

prices” (Id. ¶ 2); “During the Relevant Period, Defendants and

CRC undertook several steps . . . to achieve supercompetitive

profits from the market for electricity in California. 

Defendants did, in fact, make supercompetitive profits from their

market manipulation” (Id. ¶ 29); “As a direct result of this

manipulation, California customers were overcharged over a

billion dollars during the Relevant Period” (Id. ¶ 34); and “The

conspiracy caused disruptions in the ISO grid, power shortages,

and higher prices during the Relevant Period. In consequence of

these acts, these higher prices for electricity were ultimately

passed on to California consumers” (Id. ¶ 38).

7

reasonable rate for wholesale electricity. (Powerex Opp’n at 3;

PNM Opp’n at 3-4.) Defendants argue that if there was an illegal

conspiracy, damages can only be determined by calculating what

the rate would have been in the absence of such a conspiracy. 

And, the argument continues, this is a calculation that only FERC

can make and that presents a substantial, disputed federal

question under the Federal Power Act (“FPA”). (Id. (citing 16

U.S.C. § 824e; Grays Harbor, 379 F.3d at 647, 653).)

During oral argument, the Attorney General conceded that any

claim which required determining a reasonable rate for wholesale

electricity would be precluded by Grays Harbor and Snohomish. 

Because the complaint is fairly read to require this kind of

determination, the court finds that the complaint as drafted 4

presents a substantial, disputed federal question and that the

removal was appropriate.

However, having made the concession, the Attorney General

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then offered to narrow the complaint by proceeding only on the

theory that defendants misrepresented in-state power as OOM

power. According to the Attorney General, this theory of

recovery does not require hypothesizing a reasonable rate for

wholesale electricity because damages could be calculated by

using the historical fixed prices for OOM and in-market energy

during the relevant time periods. However, the Attorney

General’s proposed narrowing simply shifts the substantial issue

of federal law from determining the rate to classifying the

power. Under the Attorney General’s proposed narrowed complaint,

the fundamental issue becomes whether defendants sold in-state

power at OOM rates. Although the Ninth Circuit has not directly

addressed the question of whether the classification of the power

is equivalent to the determination of a reasonable rate, logic

suggests that the inquiries are just different sides of the same

rate determination coin: A reasonable rate determination

necessarily requires classification of the power. Thus,

classification of the power sold by defendants here, whether as

in-state or OOM – which will be the critical factual issue in the

case – would seem to fall under the same case law applying to the

determination of a reasonable rate.

Moreover, even if power classification were somehow

different than rate determination, FERC has broad and exclusive

control over every aspect of the sale and transmission of

wholesale energy. See, e.g., Grays Harbor, 379 F.3d at 646

(quoting New England Power Co. v. New Hamphsire, 455 U.S. 331,

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340 (1982) (finding that Congress assigned to FERC the “exclusive

authority to regulate the transmission and sale at wholesale of

electric energy in interstate commerce”)); FPC v. S. Cal. Edison

Co., 376 U.S. 205, 215-16, 84 S.Ct. 644 (1964) (holding that by

enacting the FPA, Congress intended to “draw a bright line easily

ascertained, between state and federal jurisdiction . . . making

[FERC] jurisdiction plenary and extending it to all wholesale

sales in interstate commerce except those which Congress has made

explicitly subject to regulation by the States”). And FERC’s

authority over interstate sales of power is not limited to rate

setting: “our cases specifying the nature and scope of exclusive

FERC jurisdiction make clear that the interstate ‘transmission’

or ‘sale’ of wholesale energy pursuant to a federal tariff – not

merely the ‘rates’ – falls within FERC’s exclusive jurisdiction.”

Dynegy, 375 F.3d at 851. Thus, classification of the power is

within FERC’s exclusive jurisdiction and, therefore, presents a

substantial, disputed issue of federal law.

In sum, under the Attorney General’s narrowed theory, the

fundamental question in this case is whether defendants sold instate energy at OOM rates. This issue involves a substantial

federal question because under the case law and the FPA, FERC has

the exclusive authority to decide whether power is or is not instate or OOM and whether a given quantity of wholesale

electricity can be legally sold at OOM rates. See generally

Dynegy, 375 F.3d at 851; Snohomish, 384 F.3d at 762; Grays

Harbor, 379 F.3d at 647-48 (discussing the plenary authority of

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 Defendants also rest removal on the Foreign Sovereign 5

Immunities Act. There is no need to address that theory.

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FERC over wholesale electricity sales); 16 U.S.C. § 824e(a)

(providing FERC with the authority to set “any rate, charge, or

classification” of any “transmission or sale” of electricity). 

As a result, the court has subject matter jurisdiction over the

Cartwright Act claim even if the Attorney General’s theory does

not require the determination of a hypothetical reasonable rate. 

For all of the reasons, the motion to remand is DENIED.5

III. Motions to Dismiss

Powerex and PNM assert that plaintiff’s claim is barred by 

field preemption and should be dismissed. Under field

preemption, “[i]f Congress evidences an intent to occupy a given

field, any state law falling within that field is preempted.” 

Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 248, 104 S.Ct. 615

(1984). “Preemption of state law ‘is compelled whether Congress’

command is explicitly stated in the statute’s language or

implicitly contained in its structure and purpose.’” Transmission

Agency of Cal. v. Sierra Pac. Power Co., 295 F.3d 918, 928 (9th

Cir. 2002) (quoting Jones v. Rath Packing Co., 430 U.S. 519, 525,

97 S.Ct. 1305 (1977)). 

The Attorney General argues that the Cartwright Act claim is

not preempted because: (1) the FPA does not preempt antitrust

laws; and (2) the complaint does not challenge the reasonableness

of any FERC-approved rates. For many of the same reasons

discussed above in relation to removal, plaintiff’s arguments are

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 The Attorney General argues in the alternative that the 6

Cartwright Act claim is not preempted because the claim does not

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unpersuasive. 

A. Preemption of State Antitrust Laws

To support its argument that the FPA does not preempt state

antitrust laws, the Attorney General contends that: (1) Congress

did not express a clear intent to regulate all transactions in

the wholesale energy market; and (2) the FPA does not preempt

claims under the Sherman Act and therefore does not preempt

claims under the State’s antitrust statute. 

Plaintiff’s first argument is squarely defeated by several

prior cases, including Dynegy, Grays Harbor, Snohomish, FPC v. S.

Cal. Edison, and New England Power. As discussed above, these

cases declare unequivocally that Congress intended to give FERC

exclusive jurisdiction over the sale of wholesale electricity. 

Therefore, this argument fails.

Plaintiff’s second argument is equally unpersuasive. The

Supreme Court’s holding that the FPA does not supersede the

Sherman Act, see Otter Tail Power Co. v. United States, 410 U.S.

366, 374-75 (1973), does not help the Attorney General in this

case because he has brought suit under the Cartwright Act. 

Although the Cartwright Act is based on the Sherman Act, it is

not federal law, therefore the analysis involving the Sherman Act

does not apply, and the Ninth Circuit has already found that

similar Cartwright Act claims are barred by field preemption. 

See Snohomish, 384 F.3d at 761-62. Because federal law 6

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challenge the reasonableness of a rate. This is the same issue

addressed already with respect to removal and is no more

persuasive in this context. To succeed on the Cartwright Act

claim, the Attorney General must prove that the energy sold as

OOM power was actually in-state power. But this characterization

rests exclusively with FERC. 

12

exclusively occupies the field of wholesale energy sales,

plaintiff’s Cartwright Act claim must be dismissed under the

doctrine of field preemption.

III.

For the reasons stated above, the court DENIES plaintiff’s

motion to remand and GRANTS defendants’ motions to dismiss. The

Clerk shall enter judgment in accordance with this order.

IT IS SO ORDERED.

Dated: April 13, 2006. 

/s/ David F. Levi 

DAVID F. LEVI

United States District Judge 

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