Federal Court Rejects Electric Reliability Standards as Basis for Tort Liability

In a first-of-its-kind decision, a U.S. District Court in California dismissed with prejudice a class action by millions of retail electricity consumers who lost electricity in a September 2011 blackout in Southern California. At issue were the Reliability Standards developed by the North American Electric Reliability Corporation (NERC) and approved by the Federal Energy Regulatory Commission (FERC). The plaintiffs’ novel legal theory was that a violation of the Reliability Standards could be a basis for a state law “negligence per se” claim against a utility in whose system the outage originated. Ballard Spahr attorneys Daniel M. Benjamin and Howard H. Shafferman, together with co-counsel, advised and represented the defendants.

Congress mandated the creation of the Reliability Standards in its 2005 amendments to the Federal Power Act following the Northeast Blackout of 2003. The Reliability Standards are designed to increase the reliability of the bulk power transmission system, consequently decreasing the number of blackouts and their length. However, neither the 2005 legislation nor the Reliability Standards create any direct cause of action by retail electricity end-users. Instead, enforcement is left to FERC and NERC.

In September 2011, a widespread power outage originated in Arizona and spread through portions of Southern California, Arizona, and Mexico, leading to the lawsuit at issue, Waldon v.Arizona Public Service Company. The plaintiffs brought suit on behalf of Southern California residents who alleged that the Arizona utility in whose system a transmission line tripped at the outset of the outage, together with its parent company, were liable under state law. Significantly, the potential class members were not customers of the defendants.

Historically, most courts have held that non-customers cannot bring ordinary negligence claims against a utility with regard to a service interruption. The plaintiffs in Waldon, however, argued that the Reliability Standards changed the law and allowed them to sue for negligence per se under Arizona law. Under the negligence per se doctrine, depending on the jurisdiction, a plaintiff can seek to use a violation of a state or federal law (or a regulation) to establish liability.

The plaintiffs’ position, if accepted, could have resulted in cascading liability for utilities to tens of millions of non-customers. The September 2011 blackout involved the Western Interconnection, which extends from Canada to Mexico. Within the United States, it includes all or part of 13 states, encompassing a population of 78 million. If a utility in Montana, for example, is at risk of liability to every person in California in the event of a bulk power system outage, the financial implications would be catastrophic. Citing such concerns, the Edison Electric Institute filed an amicus brief at the trial court level to support the defendants’ position.

Fortunately for utilities, the district court agreed with the defendants that California law had to control because the class members and alleged injury were in California. Applying long-standing California law, the court held that California courts would not hold utilities liable for service interruptions to non-customers; the federal Reliability Standards pled by plaintiffs did not alter this conclusion.

However, the court left unanswered the question of whether a negligence per se claim could be based on the Reliability Standards under the laws of other states. The potential application of the Reliability Standards as a ground for state law claims by consumers affected by an electrical blackout will remain a concern for the industry unless and until further clarification is provided by the courts, regulators, or legislators.

Ballard Spahr’s Energy and Project Finance Group regularly counsels and advises utilities with regard to issues involving regulatory compliance. Members of the firm’s Litigation Department have extensive experience defending clients against novel and unique claims, including in high-stakes class actions.

For more information, please contact Daniel M. Benjamin in the Litigation Department at 619.487.0787 or benjamind@ballardspahr.com, or Energy and Project Finance Group Practice Leader Howard H. Shafferman at 202.661.2205 or hhs@ballardspahr.com.