The Ninth U.S. Circuit Court of Appeals last week affirmed a lower court's ruling to allow a lawsuit by E. & J. Gallo Winery of Modesto, CA, to continue against EnCana Corp. and "multiple unnamed co-conspirators" over colluding to increase the price of natural gas sold to the wine maker in 2001.
Gallo filed a lawsuit against EnCana in 2003 seeking $30 million, which it claims is the difference between what it said it should have paid for gas and what it did pay to EnCana and now-defunct subsidiary WD Energy Services (see NGI, Aug. 14, 2006; March 13, 2006; June 2, 2003; April 21, 2003) in E.&J. Gallo Winery v. EnCana Corp., et. al., No. 05-17352. EnCana has called the allegations absurd.
EnCana had asked the San Francisco-based court to issue a summary judgment in the case on the grounds that the federal Filed Rate Doctrine and federal preemption barred Gallo's claims as a matter of law. The U.S. District Court for the Eastern District of California had earlier denied EnCana's motion.
According to court documents, Gallo purchases gas to use in its wineries and glass plant. Between June 1, 2000 and Dec. 31, 2001, Gallo purchased gas at the PG&E Citygate from EnCana. During this period, Gallo said the purchase and sale contract did not specify how the parties would calculate the price of gas, and Gallo alleges that it was affected by price manipulation and illegal trading during the period that it purchased the gas from EnCana.
Specifically, Gallo claims that EnCana and its competitors "engaged in a number of illegal practices" to manipulate the price indices published by Natural Gas Intelligence and Platts' Gas Daily. Because Gallo paid EnCana for gas at rates pegged to the indices, Gallo claims it was injured by the illegal practices that artificially inflated the indices. The Federal Energy Regulatory Commission and California authorities later determined there was widespread manipulation of the gas markets between 2000 and 2001 in California.
After Gallo filed its original six-count complaint against EnCana, the producer sought to have it dismissed. EnCana then moved for summary judgment in July 2005, contending that Gallo's damage claims were barred because they required the court to determine a hypothetical fair rate in the wholesale natural gas market, which is barred by the Filed Rate Doctrine and federal preemption principles.
Writing the circuit court opinion, Judge Sandra S. Ikuta said that whether or not the Filed Rate Doctrine bars damage claims based on the price indices "is not a simple one. We must conclude that to the extent the indices are comprised of rates that are not FERC-authorized rates, the Filed Rate Doctrine does not bar Gallo's claim that such rates are unfair and led to unfair retail rates paid by Gallo. However, Gallo cannot challenge FERC-authorized rates that are incorporated into the indices...Our conclusion may raise complexities in resolving claims such as Gallo's; however, this is dictated by our precedents."
To prevail in its summary judgment motion, Ikuta wrote that "EnCana would have had to establish that all transactions in the indices were transactions under FERC jurisdiction." EnCana did not meet this burden, the court said.
"Rather, the record reflects that the indices may also include reports of transactions that were not subject to FERC jurisdiction," she wrote. On remand, the opinion noted that the district court "may consider Gallo's claims to the extent they are based on rates that are not FERC-authorized rates."
Although she concurred with the court's opinion, Circuit Court Judge Betty B. Fletcher "sounded a note of concern and caution. The filed-rate doctrine was developed in the context of filed tariffs that were subject to the usual regulatory process -- a time and procedure for public comment and complaint and room for disallowance or adjustment by the regulators...However, I find no evidence that FERC has set a standard for the determination of what is a just and reasonable rate nor have the courts done so. I fear we talk a better game than we play.
"Without minimum standards for FERC oversight, the Filed Rate Doctrine threatens to come unmoored from its rationale of respecting the actions of a federal agency to which Congress has delegated authority. Instead, I fear respect is being given to agency passivity, allowing anticompetitive and otherwise illegal actions to escape review."
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