La Paloma Generating Co.
v.
Mojave Pipeline Co.

This case is not covered by Casetext's citator
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIAMar 3, 2016
No. 1:15-cv-01280-MCE-JLT (E.D. Cal. Mar. 3, 2016)

No. 1:15-cv-01280-MCE-JLT

03-03-2016

LA PALOMA GENERATING CO., LLC, Plaintiff, v. MOJAVE PIPELINE CO., LLC, et al., Defendant.


MEMORANDUM AND ORDER

Plaintiff La Paloma Generating Company, LLC ("Plaintiff") operates a natural-gas-fired power plant (the "Plant") in Kern County. It filed this lawsuit against Defendants Mojave Pipeline Company ("Mojave"), El Paso Natural Gas Company, LLC ("El Paso"), and Kern River Gas Transmission Co. ("Kern"), the owners of the pipeline through which gas is delivered to the Plant ("Pipeline"). By way of this action, Plaintiff seeks to recover damages for: (1) shutdowns and repairs necessitated by the delivery of allegedly contaminated gas; and (2) a shutdown in the Plant's operations resulting from a sudden drop in pressure in the Pipeline. The operative First Amended Complaint ("FAC") asserts two claims for breach of contract, one against El Paso and Mojave and one against Kern, as well as an alternatively pleaded negligence claim against all Defendants. ///

Currently pending before the Court are Defendants' two Motions to Dismiss, one brought jointly by Mojave and El Paso (ECF No. 31) and one brought individually by Kern (ECF No. 32). Both Motions raise the same general arguments. Defendants first contend that they were only contractually obligated to deliver merchantable gas to Plaintiff's manager, EDF Trading North America, LLC ("EDF"), not to Plaintiff, and thus Plaintiff's breach of contract claims fail as a matter of law. In addition, Defendants argue that they owed no duty of care to Plaintiff to ensure that the gas sold to EDF was uncontaminated. For the following reasons, Defendants Mojave and El Paso's Motion is GRANTED without leave to amend and Defendant Kern's Motion is GRANTED without leave to amend in part and DENIED in part.

BACKGROUND

The following set of background facts is taken entirely from Plaintiff's FAC.

The Plant consists of four independently operated sets of turbines and related equipment fueled by natural gas transported through the Pipeline. On December 13, 2012, Plaintiff entered into an Energy Management Agreement ("EMA") with EDF. ECF No. 28 at Exh. A. The EMA obligated EDF to act as Plaintiff's energy manager. More specifically, pursuant to the EMA, EDF purchases gas from various third parties and contracts with Defendants to have it shipped through the Pipeline to the Plant pursuant to separate Transportation Services Agreements ("TSAs") with Defendants Kern, Mojave, and El Paso. Under the relevant TSAs, EDF nominates a volume of gas for delivery to itself at the Plant. EDF then sells that gas to Plaintiff in a separate transaction. Plaintiff and EDF also utilize the "California Pool," a service operated by Defendant Kern in which a buyer can purchase gas available to be delivered to multiple delivery points on the Kern pipeline system. Plaintiff and Defendant Kern are directly contractually bound through this Pooling Letter Agreement. ECF No. 28-8. Under the Pooling Letter Agreement, EDF purchases or otherwise designates volumes of gas in the California Pool to be delivered to the Plant. EDF's nominations under the Pooling Letter Agreement frequently accounted for more than 20% of the gas delivered by Kern. See ECF No. 28 at Exh. K.

According to Plaintiff, the TSAs between EDF and Defendants provide a framework for actual sales contracts for gas. It follows, Plaintiff contends, that EDF's nominations under the TSAs are separate, distinct, and enforceable contracts. Importantly, Plaintiff emphasizes, EDF's nominations identified Plaintiff as the party that would receive the gas. EDF would then either make an equivalent volume of gas it owned available to the Pipeline at a specified receipt point, or identify a volume of gas already in the California Pool managed by Defendant Kern that could be made available as well. If it turned out that Plant operations required more gas than previously thought, Plaintiff was permitted by certain Operational Balancing Agreements with Defendants to draw more gas from the Pipeline than EDF had nominated for delivery.

Under this arrangement, Plaintiff was then of course required to arrange to have those additional quantities of gas purchased to be delivered back into the Pipeline to balance the account. The Operational Balancing Agreements and Plaintiff's Pooling Letter Agreement with Defendant Kern are the only agreements that create direct contractual relationships between Plaintiff and any Defendant.

Aside from the technical delivery aspects of these nominations, Plaintiff alleges that each nomination was an agreement between EDF and Defendants that incorporated the General Terms and Conditions of the relevant Defendant's FERC tariff. Each of these FERC tariffs required Defendants to provide "merchantable" natural gas—that is, gas free from contaminating substances such as crude oil and dust.

A tariff is the means by which the Federal Energy Regulatory Commission regulates the interstate shipment of natural gas.

Beginning in May 2014, turbines at the Plant began to experience issues traceable to contaminated gas drawn from the Pipeline. According to the FAC, the gas delivered by Defendants was the only possible cause of these problems, which required Plaintiff to drain hundreds of gallons of oil from the Plant's fuel gas scrubbers and which resulted in approximately $3 million in damages. ///

In addition to the above fuel contamination, Plaintiff alleges that Defendants failed to deliver gas at the proper pressure for several hours on June 8, 2014. This drop in pressure allegedly caused the Plant to completely shut down, resulting in additional damages of approximately $675,000.

As a result, Plaintiff initiated this action to recover for its economic injuries. In its original complaint, Plaintiff sought to recover from the current Defendants as well as EDF. The FAC, however, drops all claims against EDF and proceeds only against Mojave, El Paso, and Kern. As it stands, Plaintiff seeks to recover from each of the remaining Defendants alternatively under either its breach of contract or negligence theories. With one exception as to the Kern Pooling Agreement, all of these arguments lack merit.

For this reason alone, Plaintiff's argument that dismissal of its claims against Defendants would leave it without a remedy is specious. Although Plaintiff may not be able to recover directly from Defendants for the damages it has sustained as a result of these events, it almost certainly may assert a cause of action against EDF, even if it does not do so in this Court. --------

STANDARD

On a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) "requires only 'a short and plain statement of the claim showing that the pleader is entitled to relief' in order to 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not require detailed factual allegations. However, "a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (internal citations and quotations omitted). A court is not required to accept as true a "legal conclusion couched as a factual allegation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555 (citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1216 (3d ed. 2004) (stating that the pleading must contain something more than "a statement of facts that merely creates a suspicion [of] a legally cognizable right of action")).

Furthermore, "Rule 8(a)(2) . . . requires a showing, rather than a blanket assertion, of entitlement to relief." Twombly, 550 U.S. at 555 n.3 (internal citations and quotations omitted). Thus, "[w]ithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirements of providing not only 'fair notice' of the nature of the claim, but also 'grounds' on which the claim rests." Id. (citing Wright & Miller, supra, at 94, 95). A pleading must contain "only enough facts to state a claim to relief that is plausible on its face." Id. at 570. If the "plaintiffs . . . have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed." Id. However, "[a] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that a recovery is very remote and unlikely.'" Id. at 556 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).

A court granting a motion to dismiss a complaint must then decide whether to grant leave to amend. Leave to amend should be "freely given" where there is no "undue delay, bad faith or dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of the amendment . . . ." Foman v. Davis, 371 U.S. 178, 182 (1962); Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (listing the Foman factors as those to be considered when deciding whether to grant leave to amend). Not all of these factors merit equal weight. Rather, "the consideration of prejudice to the opposing party . . . carries the greatest weight." Id. (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 185 (9th Cir. 1987)). Dismissal without leave to amend is proper only if it is clear that "the complaint could not be saved by any amendment." Intri-Plex Techs. v. Crest Group, Inc., 499 F.3d 1048, 1056 (9th Cir. 2007) (citing In re Daou Sys., Inc., 411 F.3d 1006, 1013 (9th Cir. 2005); Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989) ("Leave need not be granted where the amendment of the complaint . . . constitutes an exercise in futility . . . .")).

ANALYSIS

A. Plaintiff's Breach of Contract Claims

As Plaintiff concedes, the only contracts with Defendants to which Plaintiff was actually a party are the Operational Balancing Agreements and the Pooling Letter Agreement with Kern. While Plaintiff does assert that its direct relationship with Kern through that Pooling Letter Agreement is sufficient to maintain a contract claim, the bulk of its breach of contract arguments turn on indirect relationships: (1) that Defendants are contractually liable to Plaintiff because EDF acted as Plaintiff's agent in nominating gas for delivery to the Plant; and (2) that Plaintiff is a third-party beneficiary of the nominations made by EDF. The Court addresses each of these arguments in turn.

1. Plaintiff's Agency Theory

Plaintiff's first theory is that pursuant to the TSAs, EDF contracted with Defendants as Plaintiff's agent for the delivery of natural gas to the Plant. ECF No. 68, 75-76. These agreements were purportedly made through the daily "nominations" process, and incorporated Defendants' FERC Tariffs.

Plaintiff's own contractual relationship with EDF is then governed by the EMA. Both Plaintiff and Defendants agree that New York law governs the EMA's interpretation. Ordinarily, then, the question of whether EDF acted as Plaintiff's agent would be a factual one. E.g., Melito v. American Eagle Outfitters, Inc., No. 14-cv-2440, 2015 WL 7736547 at *6 (S.D.N.Y. Nov. 30, 2015). On the other hand, when parties enter into a contract, courts look to the language of the agreement to ascertain the nature of the relationship. EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 19-20 (N.Y. 2005). Section 2.5 of the EMA provides that EDF may only act as either: (a) Plaintiff's scheduling agent, and (b) as Plaintiff's limited agent, "subject to a written acceptance of appointment and all necessary Third Party approvals, under the Related Agreements" to which Plaintiff is a party. ECF No. 28 at Exh. A.

Defendants argue that none of the above is sufficient to have established an agency relationship between EDF and Plaintiff. There is no reference in the EMA to the TSAs between EDF and Defendants and no agreement where EDF was appointed as Plaintiff's agent with respect to transactions governed by the TSAs. Rather, Plaintiff simply purchases gas from EDF. When gas is delivered to the Plant by Defendants, it is owned by EDF and sold by EDF to Plaintiff. A buyer-seller relationship such as the one between EDF and La Paloma rarely gives rise to a principal-agent relationship. See Crimson Semiconductor, Inc. v. Electronum, No. 84 Civ. 2124 (RLC), 1990 WL 186867 at *3 (S.D.N.Y. November 19, 1990) (explaining the difference between a buyer-seller relationship and an agency relationship). Plaintiff argues, however, that its relationship with EDF under the EMA was not a typical buyer-seller relationship, and that the question of whether EDF was acting as Plaintiff's agent is a question of fact that should not be decided at the pleading stage.

In some instances, Plaintiff may be correct. However, section 2.5 of the EMA makes clear that Plaintiff appointed EDF as its agent in only a limited capacity. This limited agency appointment does not cover Plaintiff's claims here, and, in fact, section 2.5 expressly disclaims any broader interpretation of the agency relationship. Although the EMA does obligate EDF to use commercially reasonable efforts to optimize the economic value of the EMA to Plaintiff, it does not appear that Plaintiff exercises any control over EDF beyond telling it how much gas the Plant's operation requires on any given day. For example, the EMA does not give Plaintiff any right to control who EDF initially purchases gas from, nor does the EMA give Plaintiff the right to accept or reject any purchase or transportation agreement made by EDF. Accordingly, the EMA is structured so that EDF acts as an independent contractor that acquires and purchases gas for Plaintiff. Plaintiff's agency theory of contractual liability therefore fails as a matter of law.

2. Plaintiff's Third-Party Beneficiary Theory

Plaintiff next alleges that it has contract claims against Defendants because it is a third-party beneficiary of the TSAs between EDF and Defendants. Specifically, Plaintiff alleges that the nominations for gas deliveries made by EDF under the TSAs constituted separate contracts and that Plaintiff is the intended beneficiary of those contracts. ECF No. 28 at ¶ 26; see also ECF No. 42 at 18:22-19:2. The parties agree that Colorado law governs the TSAs between EDF and El Paso/Mojave, and Utah law governs the TSA between EDF and Kern. Both Colorado and Utah law look to the written contract as well as the circumstances surrounding it to determine whether a party is a third-party beneficiary. E.g., Salt Lake City Corp. v. ERM-West, Inc., No. 2:11-CV-1174, 2013 WL 4782286 at *3-4 (D. Utah Sept. 5, 2013); E.B. Roberts Const. Co. v. Concrete Contractors, Inc., 704 P.2d 859, 865 (Colo. 1985).

The critical question here is whether the daily nominations constitute separate contracts from the TSAs attached to the FAC. If they do, then Plaintiff's contract claims will survive dismissal under a third-party beneficiary theory because Plaintiff alleges that Defendants were aware that the daily nominations for deliveries to the Plant were made specifically for Plaintiff's benefit. ECF No. 28 at ¶ 29. Indeed, the nominations themselves would have clearly indicated to Defendants that the contemplated natural gas would be transported to Plaintiff.

The Court nonetheless concludes that the daily nominations are not separate contracts. As Defendants observe, the nominations do not contain contractual terms. To the contrary, the nominations Plaintiff attached to the FAC are simply spreadsheets that list the delivery location and quantity for Plaintiff's gas deliveries. ECF No. 28 at Exhs. K and L. Furthermore, pursuant to the TSAs, EDF can nominate gas deliveries at dozens of locations along the Pipeline, including but not limited to deliveries to the Plant. Finally, it appears that the nominations process is simply part of the course of performance under the TSAs rather than a separate contractual arrangement. See e.g., id. at Exh. D at ¶ 5 ("Shipper agrees to tender gas for transportation service and Transporter agrees to accept receipt quantities . . . ."). The Operational Balancing Agreements between the parties do not affect this analysis because they contain no terms regarding the nomination, delivery, or quality of the gas. Nor does Plaintiff make any allegation by which the Operational Balancing Agreements could transform the daily nominations made by EDF into separate, enforceable contracts.

Because the nominations made by EDF on Plaintiff's behalf do not constitute contracts separate from the TSAs, Plaintiff's third-party beneficiary theory of contractual liability also fails as a matter of law.

3. The Kern Pooling Agreement

Finally, Plaintiff contends that it has a direct contractual relationship sufficient to support a breach of contract claim against Defendant Kern through the Pooling Letter Agreement, which states that by using Kern's pooling service, Plaintiff agreed "to be bound by the terms and conditions of Kern River's Tariff . . . that may reasonably be interpreted to have application to pooling transactions." ECF No. 28 at Ex. H. Accordingly, if the gas quality provisions of Kern's FERC Tariff may be reasonably interpreted to apply to pooling transactions, then Plaintiff may state a breach of contract claim for deliveries of contaminated gas by Kern.

Kern argues that the gas quality provisions of its FERC Tariff are not applicable to pooling transactions because the Pooling Letter Agreement does not provide for the transportation of natural gas. Instead, Kern contends that "the Pooling Agreement is nothing more than a mechanism that allows La Paloma to aggregate natural gas supplies from Shippers . . . before final delivery to the La Paloma Interconnect."

Kern's argument is unpersuasive, at least at this stage in the proceedings. Here, the FAC specifically alleges that the Pooling Letter Agreement incorporates the gas quality provisions of Kern's FERC Tariff. ECF No. 28 at ¶ 33. It further alleges that Kern was scheduled to deliver gas to the Plant on June 8, 2014, and the nominations spreadsheet attached to the spreadsheet shows that at least some of those deliveries were nominated from the California Pool. ECF No. 28-11. The Pooling Letter Agreement is short, and is reasonably susceptible to both Plaintiff's and Kern's dueling interpretations. Accordingly, dismissal of Plaintiff's Second Cause of Action for breach of contract against Defendant Kern is inappropriate on this Rule 12(b) motion. See, e.g., Aguayo v. U.S. Bank, 653 F. 3d 912, 917 (9th Cir. 2011) ("A complaint must not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim that would entitle the plaintiff to relief."). Kern's Motion to Dismiss is therefore DENIED with respect to that claim. Both Motions to Dismiss the contract claims are GRANTED without leave to amend in all other respects.

B. Third Cause of Action for Negligence

Plaintiff's Third Cause of Action seeks to hold Defendants liable in negligence for the contaminated gas and June 8 failure. The FAC specifically alleges that Defendants owed Plaintiff a duty of care to operate and maintain the Pipeline to ensure that the quality of gas shipped through the pipeline was of commercially reasonable quality. ECF No. 28 at ¶ 82-83.

Defendants contend that they owe no common law duty of care to downstream users of gas delivered through their pipelines. Relying on a recent decision from the District of Oregon (PacifiCorp v. Northwest Pipeline GP, 879 F. Supp. 2d 1171 (D. Or. 2012)), Defendants argue that the only "duty" they have is the contract-based obligation in their FERC tariffs to provide merchantable gas to their direct customers.

The facts of PacifiCorp are similar to the facts of the instant case. In PacifiCorp, the plaintiff operated a natural gas power plant that sold electricity to retail customers. Plaintiff PacifiCorp contracted with Defendant GTN to transport gas from Canada and deliver it to the power plant. The transportation agreement between PacifiCorp and GTN incorporated the terms and conditions of GTNs FERC tariff. Id. at 1177. Defendant Northwest would also ship gas through GTN's pipeline but did not have any contract in place with PacifiCorp. Eventually, gas contaminated by oil caused problems with the power plants turbines, and PacifiCorp brought claims for breach of contract and negligence against both Northwest and GTN.

In deciding cross motions for summary judgment, the Court dismissed all of PacifiCorp's claims against Northwest. The Court also dismissed PacifiCorp's negligence claim against GTN. In dismissing both sets of negligence claims, the Court reasoned that the gas quality language in the FERC tariffs set forth a standard of conduct that created a limited duty of care and obviated the need to analyze whether injury resulting from a particular course of conduct was reasonably foreseeable. The Court held that Northwest's FERC tariff explicitly limited its duty concerning gas quality to "gas delivered to a 'Shipper' at a 'Delivery Point.'" Id. at 1185. Furthermore, the Court noted that allowing a negligence claim based on the Northwest FERC tariff would have violated FERC authority holding that upstream gas transporters are only responsible for ensuring gas quality at their tariff delivery points to their direct customers. Id. Accordingly, the Court rejected the plaintiff's attempt to "manufacture a negligence claim against Northwest by expanding the scope of FERC tariffs to create a generalized duty of care to all foreseeable downstream users, in contradiction to the tariff's express terms." Id.

Plaintiff and Defendants here are in a similar position to PacifiCorp and Northwest. Like PacifiCorp, Plaintiff seeks to create a duty of care out of the gas quality standards in Defendants' FERC tariffs. But as the PacifiCorp court recognized, allowing Plaintiff to do so would contradict both the plain language of the tariffs that limit Defendants' duty to Shippers and FERC authority holding that upstream gas transporters are only responsible for ensuring gas quality at their tariff delivery points to direct customers. See ANR Pipeline Co., 116 FERC ¶ 61002, ¶ 61014 ("The Commission accordingly finds that in setting a Safe Harbor CHDP, ANR must choose a level that assures that it can make deliveries to downstream customers and that gas will be accepted for delivery at the interconnects with those customers . . . . However, the Commission agrees with ANR and the producers that LDCs and other downstream systems are responsible for the operating conditions on their systems." (emphasis added)). Here, the direct customer is EDF, not Plaintiff.

Plaintiff's arguments to the contrary are not persuasive. Specifically, Plaintiff argues that its relationship with Defendants is more similar to the relationship between PacifiCorp and GTN than it is to the relationship between PacifiCorp and Northwest. But in PacifiCorp, the plaintiff's relationship with GTN was direct—the Plaintiff specifically contracted with GTN for the delivery of gas. Here, in contrast, Plaintiff has no customer relationship with any Defendant in this action other than with respect to the Kern Pooling Letter Agreement. As stated above, Plaintiff is free to maintain its claim for breach of contract against Defendant Kern based on the Pooling Agreement. But, Plaintiff cannot manufacture a negligence claim based on Defendants' FERC tariffs. Accordingly, Plaintiff's Third Cause of Action for Negligence is DISMISSED without leave to amend.

CONCLUSION

For the reasons stated above, IT IS HEREBY ORDERED that:

1. Defendants El Paso and Mojave's Motion to Dismiss (ECF No. 31) is GRANTED in its entirety. Plaintiff's First and Third Causes of Action are DISMISSED without leave to amend.
2. Defendant Kern's Motion to Dismiss (ECF No. 32) is GRANTED without leave to amend with respect to Plaintiff's Third Cause of Action, and GRANTED without leave to amend IN PART and DENIED IN PART with respect to Plaintiff's Second Cause of Action.


IT IS SO ORDERED. Dated: March 3, 2016

/s/_________


MORRISON C. ENGLAND, JR. CHIEF JUDGE


UNITED STATES DISTRICT COURT