STREETER, J. —
This case involves a long-running dispute between Panoche Energy Center, LLC (Panoche), a producer of electricity, and Pacific Gas and Electric Company (PG&E), a utility that purchases electricity from Panoche, over which of them should bear the costs of complying with a legislatively mandated program to reduce greenhouse gas (GHG) emissions pursuant to the California Global Warming Solutions Act of 2006 (Health & Saf. Code, § 38500 et seq.; Assem. Bill No. 32 (2005-2006 Reg. Sess.) (Assembly Bill 32).
The arbitration panel denied Panoche's motion, and after a five-day hearing rendered a decision declaring that Panoche had indeed assumed the cost of implementing Assembly Bill 32 under the PPA and fully understood this to be the case at the time of signing. In response to a counterclaim for declaratory relief filed by Panoche, the arbitrators also concluded that the parties "provide[ed] for recovery of GHG costs" by Panoche through a "payment mechanism" in section 4.3 of the PPA.
Panoche filed a petition to vacate the arbitration award under Code of Civil Procedure
PG&E now appeals. We shall reverse the court's order vacating the arbitration award and direct that the award be confirmed.
PG&E, an investor-owned utility (IOU) regulated by the CPUC, provides gas and electrical service to some 15 million end users in northern and central California. In 2004, with the CPUC's approval, PG&E published a long-term request for offers (LTRFO) for the construction and operation of new electrical generating facilities to help meet anticipated future demands for electricity in northern California. Panoche, a Delaware-based privately owned energy production company, submitted a proposal to build a 400-megawatt, natural gas-fired electrical production facility in Firebaugh, near Fresno.
While the PPA was being negotiated, proposed legislation aimed at addressing climate change through the regulation of GHG emissions came before the California Legislature. As introduced in December 2004, Assembly Bill 32 dealt primarily with carbon emissions recordkeeping, reporting and protocols. It did not require electricity generators such as Panoche to bear any costs associated with reducing GHG emissions. But Assembly Bill 32 went through several amendments before it was finally passed at the end of August 2006, and as the bill progressed through the legislative process, it focused increasingly on reduction of GHG emissions.
The Legislature was not alone in moving on this issue. In June 2005, Governor Schwarzenegger issued an executive order directing the California Environmental Protection Agency (CEPA) to coordinate the efforts of various state agencies to reduce California GHG emissions by certain target amounts between 2010 and 2050. (Governor's Exec. Order No. S-3-05 (June 1, 2005) at <https://www.gov.ca.gov/news.php?id=1861> [as of July 1, 2016].) Specifically, the Governor called for reduction of GHG emissions to 1990 levels by 2020 and to 80 percent below 1990 levels by 2050. (Ibid.)
On August 15, 2005, an amendment to Assembly Bill 32 was introduced, including The California Climate Act of 2006, which would have required the CEPA "to institute a cap on greenhouse gas emissions" from, among other sectors, the electrical power industry. (Legis. Counsel's Digest, Assem. Bill 32, as amended Aug. 15, 2005, & introducing proposed Health & Saf. Code, § 42877, subd. (a)(2) & (3) at <http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=200520060AB32> [as of July 1, 2016].) The intent of the proposed amendments was to require the CEPA to "institute a schedule of emissions reductions for specified entities, develop an enforcement mechanism for reducing greenhouse gas emissions to the target level, and establish a program to track and report greenhouse gas emissions and to monitor and enforce compliance with the greenhouse gas emissions cap" by January 1,
By April 18, 2006, approximately three weeks after the PPA was signed, the Legislative Counsel's Digest for the version of Assembly Bill 32 then under consideration summarized the proposed legislation as follows: "The bill would require the state board to adopt regulations, on or before January 1, 2008, to reduce statewide greenhouse gas emissions to 1990 emission levels by 2020...." (Legis. Counsel's Digest, Assem. Bill 32, as amended Apr. 18, 2006.) That iteration of the bill also included a requirement that the CARB adopt regulations to, among other things, "[d]istribute the costs and benefits of the program, including emission allowances, in a manner that is equitable, maximizes the total benefit to the economy, does not disproportionately burden low- and moderate-income households, provides compliance flexibility where appropriate, and ensures that entities that have voluntarily reduced their emissions receive appropriate consideration for emissions reductions made prior to the implementation of this program." (Legis. Counsel's Digest, Assem. Bill 32, as amended Apr. 18, 2006, proposed amends. to Health & Saf. Code § 42877, subd. (c)(1).) Again, though the quoted language was not ultimately included in Assembly Bill 32 as passed, it presumably constituted a red flag to participants in energy production indicating that costs would be entailed in implementing Assembly Bill 32 if it did ultimately pass.
By June 2006, although the term "cap-and-trade" had not yet come into common use, Assembly Bill 32 had further evolved and began to include the concept of "allowances" — defined as "authorization[s] to emit, during a specified year, up to one ton of carbon dioxide equivalence" — and "[f]lexible compliance mechanisms'" that would allow GHG emitters to "bank[], borrow[], and [use other] market mechanisms that provide compliance flexibility to entities that are required to ensure that their greenhouse gas emissions do not exceed their emissions allowances."
According to PG&E, during the PPA negotiations the negotiators on both sides were aware of developments in the GHG legislation as it progressed through the Legislature, and they all understood it could have significant financial and other impacts on future energy production in California. PG&E claims that under a "change in law" provision in the draft PPA, a clause it insisted upon in all of its power purchase agreements at the time, both parties fully understood Panoche would be responsible for any costs associated with the pending GHG legislation, and indeed the PPA negotiators specifically discussed the fact that this clause covered potential GHG compliance costs, even though the legislation had not yet progressed to the point where those costs could be quantified.
Panoche, on the other hand, claims to have been blindsided by Assembly Bill 32. Panoche argues it was not foreseeable to energy producers until at least June 2006 that Assembly Bill 32 costs could become a major concern. The "change in law" provision, it argues, was just a "generic" clause that made no specific reference to Assembly Bill 32 or GHG costs and therefore did not apply to such costs; allocation of such costs was "never part of the parties' deal." Because such costs were not quantifiable when it signed the PPA, Panoche asserts it "would never have signed" if it had understood it would be on the hook for unknown and unquantifiable future costs.
PG&E supports its position by pointing out that on December 16, 2004, eight days after Assembly Bill 32 was introduced in the Assembly and 15 months before the PPA was signed, the CPUC issued a long-term plan decision in which it insisted, for the first time, that PG&E and certain other utilities then in the process of negotiating power purchase agreements take into account the cost of GHG emissions in evaluating bids under the LTRFO. "To further the state's clear goal of promoting environmentally responsible energy generation, [the CPUC] also adopt[s] a policy that reflects and attempts to mitigate the impact of GHG emissions in influencing global climate patterns. As described in this decision, the IOUs are to employ a `GHG adder' when evaluating fossil and renewable generation bids. This method, which will be refined in future proceedings, will serve to internalize
In response to the CPUC's long-term plan decision, PG&E updated its LTRFO to require bidders on new electrical generating facility projects to accept liability for changes in the law, and it specifically assessed applicants' bids in part on their willingness to assume financial responsibility for what PG&E deemed to be foreseeable changes in the law. In March 2005, PG&E reissued the LTRFO, requiring that all counterparties getting contract positions would have to take on the risk of future changes in the law,
Aside from the evidence of the negotiations surrounding the amended LTRFO, PG&E argues that at least as of the time of the August 2005 amendments to Assembly Bill 32, more than seven months before the PPA was signed, those following the progress of Assembly Bill 32 were aware that (1) GHG emissions would have to be reduced over time, (2) there would be a regulatory "cap" on such emissions, and (3) some "enforcement mechanism" would be used to ensure compliance. To a sophisticated participant in energy production such as Panoche, PG&E argues, all of this clearly signaled that the passage of Assembly Bill 32 would entail a significant new cost burden of GHG emissions reduction compliance.
PG&E claims its view of what sophisticated parties would have known is more than a matter of revisionist history. It points out the CPUC has taken that view as well, opining in a 2012 settlement approval decision that "contracts negotiated and executed when AB 32 was working its way through
As noted, the Legislature largely delegated to the CARB the task of determining how best to implement the broad goal of reducing GHG emissions. (Health & Saf. Code, § 38501, subds. (f)-(h).) The CARB held public hearings to assist in formulating a plan for implementing Assembly Bill 32, and in June 2008, the CARB released a draft scoping plan that included a proposed "cap-and-trade" program for the first time. (CARB Climate Change Draft Scoping Plan (June 2008) Executive Summary, pp. ES-1 to ES-9 at <http://www.arb.ca.gov/cc/scopingplan/document/draftscopingplan.htm> [as of July 1, 2016].)
After much consideration, on October 26, 2011, the CARB adopted final rules for a GHG cap-and-trade program, which became effective January 1, 2012. (See "California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms," Cal. Code Regs., tit. 17, art. 5, § 95801 et seq.) Under that program, utilities are granted free of charge emissions permits (called "allowances"), each authorizing the emission of one metric ton of GHG. (Cal. Code Regs., tit. 17, §§ 95820, subds. (a) & (c), 95892.) The utilities must then surrender their allowances to CARB, which in turn sells allowances to emissions generators, such as Panoche, in periodic auctions. (Cal. Code Regs., tit. 17, § 95910.) Allowances may be bought, banked, or sold. (Id., §§ 95910, 95920, 95922; Our Children's Earth Foundation v. State Air Resources Bd. (2015) 234 Cal.App.4th 870, 877 [184 Cal.Rptr.3d 365].) Energy producers must acquire, through quarterly auctions, sufficient allowances to cover the amount of their GHG emissions.
For Panoche, continued operation of its power plant requires procurement of allowances, which will become increasingly expensive over time. The theory underlying cap-and-trade is that, as time goes by, fewer allowances will be issued, thereby raising the price of allowances and creating a financial
Panoche claims the CARB made a policy determination that the ultimate consumer should bear the costs of GHG regulation on the theory that increased cost to the consumer would lead to reduced consumption and thus to curtailed GHG emissions. The CARB's final statement of reasons (FSOR) adopting the cap-and-trade program, dated October 2011, does say: "A primary goal of the program is to create a price signal to reduce greenhouse gas emissions." (CARB, FSOR for California's Cap-and-Trade Program (Oct. 2011) Response to Comment I-49, p. 592 at <http://www.arb.ca.gov/regact/2010/capandtrade10/capandtrade10.htm> [as of July 1, 2016].) With respect to GHG compliance costs generally, the CPUC also expressed a policy preference that utilities pay the costs of GHG compliance and compensate generators for those costs, including through modifications to power purchase agreements if necessary.
Once cap-and-trade was in place, both the CARB and the CPUC showed some sensitivity to the plight of energy producers whose contracts had been negotiated before Assembly Bill 32 went into effect, since those producers could be subjected to unexpected and unforeseeable costs associated with the cap-and-trade program. To the extent such costs were not considered in negotiating these antecedent contracts, the costs of cap-and-trade were likely to be "stranded" with these producers. Such contracts became known as "legacy contracts." The regulatory definition of that term — and whether the PPA in this case qualifies as a legacy contract — became a matter of intense dispute between Panoche and PG&E.
Both Panoche and PG&E participated in the CPUC and CARB proceedings to implement the cap-and-trade regulation, advocating opposite viewpoints. While Panoche favored imposing GHG compliance costs on the utilities and passing on the cost to consumers, PG&E advocated making the energy producers pay for allowances if they had contracted to do so. Panoche emphasized that its point of view best aligned with the intent of Assembly Bill 32 since putting compliance costs on utilities would send a "price signal" to consumers and thereby reduce consumption, but PG&E's theory was that where power purchase contracts are negotiated with anticipated GHG costs
With respect to Panoche in particular, PG&E told the regulators that Panoche had undertaken in the PPA to pay for costs related to Assembly Bill 32 and this was a "key issue in the parties' negotiations." Panoche told them the opposite: "The issue of GHG compliance cost responsibility is not addressed in the PPA, the CPUC testimony or exhibits, nor is there any allegation that [Panoche] would bear such potential costs in the CPUC public record." "Furthermore, the ... PPA does not include a change in law provision." Panoche even went so far as to say that "PG&E stated it was too early in the legislative process to address [GHG legislation] in the contract and withdrew the issue from consideration." Panoche further suggested to the CPUC it would be financially crippled and might be forced to discontinue operations if required to foot the whole bill for compliance with Assembly Bill 32. Panoche also opined that imposing Assembly Bill 32's GHG costs on energy generators might well be considered an unconstitutional "taking" or an "unlawful tax."
In April 2012, the CPUC ordered utilities such as PG&E to renegotiate within 60 days any contracts entered before Assembly Bill 32's effective date that "do not address the allocation of AB 32 compliance costs," so that they would "be consistent with [the CPUC] policy," including revisiting if necessary "questions of whether the existing contract may have taken the passage of AB 32 into consideration."
Beginning in June 2012, Panoche and PG&E exchanged correspondence in which both claimed they had attempted to renegotiate their dispute, each blaming the other for failure of the negotiations. Nearing the end of the 60-day period specified in the CPUC's renegotiation order, PG&E requested an extension. The executive director of the CPUC replied in a letter dated June 20, 2012, that the 60-day period indicated in the renegotiation order was not intended to impose a deadline: "The [CPUC] has a strong preference that contract disputes be addressed by the signatories to the contract given that such parties have the most in-depth knowledge of the contract itself and their own operations." The letter advised PG&E that it "may and should continue to negotiate bilaterally," although the CPUC did not intend to allow the issue to "languish indefinitely." The impasse in renegotiation ultimately led to PG&E's filing of a request for arbitration some four or five months later.
Meanwhile, after expiration of the 60-day renegotiation period, Panoche sought and was granted party status in the CPUC rulemaking proceeding (Administrative Law Judge's Ruling Confirming Party Status, Cal.P.U.C. Ruling No. 11-03-012 (July 9, 2012) <http://www.cpuc.ca.gov> [as of July 1, 2016]) in early July 2012 and also successfully moved to enlarge the scope of the CPUC proceeding to consider which party should bear responsibility for GHG compliance costs in legacy contracts. At this point the dispute between the parties intensified because, according to PG&E, Panoche had misrepresented to the regulators the contractual provisions of the PPA. PG&E suggested Panoche cannot rightly be considered a party to a "legacy contract" at all and is not being saddled with costs "stranded" by the PPA. Instead, according to PG&E, Panoche negotiated and entered into the PPA with its eyes wide open to the potential costs associated with GHG emissions, and yet was trying to evade the bargained-for costs that it agreed to bear and, at least at that point in the dispute, was attempting to shift those costs to PG&E and its ratepayers.
Panoche's version of events, not surprisingly, was sharply different. It told the CPUC on July 3, 2012: "The PPA does not address GHG compliance cost responsibility and does not compensate [Panoche] for the costs of obtaining GHG allowances...." In a separate filing the same date, Panoche elaborated: "The [Panoche] PPA includes no provision that can be reasonably read to assign GHG cost responsibility to [Panoche].... PG&E's position
In August 2012, two CPUC administrative law judges (ALJs) issued proposed criteria for determining whether parties to legacy contracts could obtain financial relief, which came to be known as "transition assistance" to the new cap-and-trade regime. The CPUC requested comment on the following proposed "Eligibility Guidelines": "We propose for comment that a contract between a generator and a utility must meet the following criteria in order to be eligible to receive relief, should the Commission decide relief is warranted, in this proceeding: [¶] 1. The contract must have been executed prior to the effective date of AB 32 (January 1, 2007); [¶] 2. The contract must not have been subsequently amended; [¶] 3. The contract does not provide for recovery of GHG costs, either explicitly or by virtue of a payment mechanism ...; and, [¶] 4. The contract does not expire before the start of the first cap-and-trade compliance period (i.e., January 1, 2013)." (Administrative Law Judges' Ruling Setting Forth Next Steps in Track 1 Phase 2 of This Proceeding, Cal.P.U.C. Ruling No. 11-03-012 (Aug. 7, 2012) <http://www.cpuc.ca.gov> [as of July 1, 2016].) The purpose of the proposal was to "set boundaries on the world of contracts that may be eligible for compensation." Compensation was not guaranteed by the establishment of these criteria, and no final resolution of the issue of stranded GHG costs was achieved. But at the time PG&E initiated arbitration some two or three months later, this pronouncement from the CPUC ALJs was the most recent regulatory iteration of the definition of a "legacy contract."
Later in August 2012, Panoche submitted comments on the proposed criteria. First, Panoche urged the CPUC to adopt a bright-line rule granting transitional relief to all independent energy producers who entered into PPAs with utilities "executed prior to the ... effective date" of Assembly Bill 32, arguing this should be the "sole necessary criterion" for such relief. Second, Panoche suggested the CPUC "may wish to avoid establishing criteria that will require the [CPUC] to review and interpret individual contracts." And third, Panoche suggested the CPUC should "provide relief for any generator providing service under a legacy PPA that does not include an express and explicit provision imposing GHG emissions reduction program costs ... on the seller. Mere reference to GHG reporting, environmental attributes, or Clean Air Act emissions reductions credits in the PPA should not be construed as addressing GHG compliance costs nor should any implicit assumptions be the basis for denying relief to the generator." (Original italics.) It appears, therefore, that Panoche was maneuvering in the regulatory
PG&E's comments on the proposed definition of "legacy contracts," likewise, reflected the position it had been taking for years on who ought to bear the burden of Assembly Bill 32 GHG compliance costs. PG&E opposed inclusion in the eligibility criteria of any requirement that the contract "explicitly" or "specifically" allocate costs to the energy producers. (Pacific Gas and Electric Company's (U 39 E) Comments on Administrative Law Judge's Ruling on Track 1 Phase 2 Issues, p. 3 <http://www.cpuc.ca.gov> [as of July 1, 2016].) PG&E also proposed that if contracts were modified to shift GHG costs to PG&E, the energy producers should be required to accept in return certain contractual modifications "to ensure that PG&E's customers are compensated for accepting GHG compliance cost responsibility for these sellers." It further recommended the "use of contractual dispute resolution processes to resolve disputes over" individuals contracts. (Ibid.)
Complicating the picture, in the fall of 2012 the CARB turned its attention to legacy contracts as well, which meant that regulatory proceedings on that issue were taking place before two different agencies. On September 20, 2012, the CARB issued a resolution stating its intention to develop a methodology to provide transition assistance to energy producers with a compliance obligation cost under the cap-and-trade regulation that could not be "reasonably recovered due to a legacy contract." (CARB Resolution 12-33 (Sept. 20, 2012), p. 3 <http://www.arb.ca.gov/cc/capandtrade/res12-33.pdf> [as of July 1, 2016].) Although the CARB would ultimately take the lead in propounding regulations to deal with legacy contracts, at the time of the arbitration the most recent attempt to establish a working definition was the August 2012 definition by the CPUC ALJs.
Negotiation and mediation having failed,
PG&E sought a declaration that the PPA (1) "addresses GHG compliance costs" and "assigns responsibility for those costs to Panoche," and (2) "at the time the PPA was signed, Panoche understood that, under the PPA, if there was a future change in law that imposed a cost on the facility because of its GHG emissions, Panoche would be responsible for paying that cost." PG&E sought a definitive interpretation of the PPA in the hope of convincing the regulators that Panoche should not be entitled to "legacy contract" status or to transitional relief.
Panoche filed a counterclaim for declaratory relief that (1) the PPA does not "provide for recovery of GHG costs, either explicitly or by virtue of a payment mechanism" (based on the language of the CPUC ALJs' August 2012 proposed eligibility criteria, and (2) "under section 3.1(b) of the PPA, [Panoche is not] required to bear AB 32 GHG compliance costs that exceed an annual average of the greater of $100,000 per year or $.50 per kW year."
On January 15, 2013, Panoche filed a motion to dismiss or stay the arbitration pending further proceedings by the CARB and the CPUC. It argued PG&E's declaratory relief claim was not "ripe" because of the pending regulatory proceedings. In Panoche's view, the real dispute between the parties was in relation to how the regulatory bodies would allocate costs for allowances. According to Panoche's theory, the action taken by the CARB and the CPUC would trump any contractual provision related to allocation of costs, and it was a waste of time and resources to arbitrate the contractual issues before the regulatory bodies had adopted a definite policy governing legacy contracts. Without the expected regulatory rules or criteria — rules or criteria that the CPUC and/or the CARB anticipated would issue by the end of August 2013 — Panoche contended that it was impossible for the arbitration panel to reach a decision that would dispose of the controversy between Panoche and PG&E over GHG costs. The sole basis Panoche gave for requesting a stay or dismissal was the claim of unripeness.
PG&E argued the arbitration concerned a simple matter of contract interpretation based on an analysis of the PPA's terms and the course of negotiations that occurred in 2005 and 2006. According to PG&E, this was not the same broad policy issue relating to overall GHG cost allocation that the CARB and the CPUC were considering, and the regulatory bodies had no intention of delving into the details of individual PPAs. Moreover, PG&E
The arbitrators found the dispute was ripe for adjudication and denied Panoche's motion. They reasoned: "Panoche has failed to demonstrate how proceeding with this arbitration would either replicate, interfere or conflict with, or provide an advisory opinion to the ongoing CPUC and CARB proceedings. Indeed, by Panoche's own admission, these public agencies are merely deciding how to handle power purchase agreements that were executed prior to AB 32 that lack terms and conditions specifically designating responsibility for GHG costs.... They are not deciding whether any individual contracts, such as the parties' PPA, actually lacked such terms and conditions — the sole and exact issue before the Panel here. [¶] Thus, because PG&E has presented a real controversy that is appropriate for immediate judicial resolution because it concerns an issue that will not be resolved by either of the public agencies, this contractually-agreed-to forum is the appropriate venue for the parties to resolve their claims." After significant discovery was conducted, a five-day arbitration was held in April 2013.
On May 2, 2013, the panel reached its decision, ruling in favor of PG&E. As quoted above, the PPA included section 3.6(a), a change in law provision, under which PG&E claimed the costs of compliance with Assembly Bill 32 had been assumed by Panoche. (See fn. 3, ante.) That provision required Panoche to "comply with all applicable requirements of Law ... relating to the Facility" and to "be responsible for procuring and maintaining, at its expense, all Governmental Approvals and emissions credits required for operation of the Units throughout the Service Term...." "Law" was also defined in the PPA to include a "statute, law, ... [or] enactment," including one "enacted, amended, or issued after the Execution Date [of the PPA] and which becomes effective during the Contract term," and it also included "regulation[s]." Thus, the arbitrators ruled that both Assembly Bill 32 and the CARB's cap-and-trade regulations were part of the "Law," as defined in the PPA, and by committing to comply with the "Law" within the meaning of the PPA, Panoche had contractually agreed to bear the costs of compliance. The arbitrators specifically concluded that "[o]ne such `Law' — the cap-and-trade regulations — requires entities such as Panoche to pay for and acquire sufficient GHG allowances to cover their carbon emissions. Panoche, therefore, agreed to comply with this requirement of the cap-and-trade regulations."
The arbitrators found support for this conclusion in the testimony of Panoche's lead negotiator, Keith Derman, one of Panoche's key witnesses in the arbitration. Derman was a partner at Energy Investors Funds (EIF), a private equity fund based in Boston, Massachusetts, that owns the Firebaugh plant. He admitted in a deposition that he understood when the PPA was signed that the "four corners of the contract" made Panoche responsible for the costs "if a government law changed and imposed a cost on Panoche relating to the facility's carbon emissions." His follow-up observation that "there was no specific language in the agreement to deal with greenhouse gases" struck the arbitrators as "unpersuasive."
As further support for their decision, the arbitrators noted that during contract negotiations, in response to PG&E's proposed "change in law" amendments, Panoche suggested that it should receive higher compensation in the event of a change in the law that imposed higher costs of performance on Panoche, but this change was never incorporated into later revisions. Panoche also proposed that both parties share responsibility for compliance with all applicable requirements of law; that the PPA should eliminate the language specifying that Panoche would have to pay for all "Governmental Approvals"; that Panoche could not be declared in default if it was unable to (or simply failed to) obtain necessary Governmental Approvals; that the PPA should eliminate the requirement that Panoche obtain all needed "emissions credits"; and that the force majeure clause should be modified to include Panoche's "inability to obtain and maintain any governmental Approvals required...." The markups of the PPA also show a note by Panoche requesting that the parties "[d]iscuss change in law issues."
PG&E also sent a letter to Panoche explaining that Panoche's proposed changes to the amended PPA "would make major changes to the benefits and burdens of PG&E's form PPA, significantly affecting the value of your Final Offers to PG&E." PG&E insisted that Panoche's offer "needs improvement in order to be further considered." Despite Panoche's early resistance to the
Documents generated by Panoche outside of the direct negotiations confirmed Panoche's contemporaneous understanding that it bore the risk of costs to comply with future GHG legislation. For instance, in a memorandum in March 2006 (before the PPA was signed), Derman advised EIF's investment committee of the benefits and risks of the Panoche project, noting as a risk that "there is remaining fear that [California] is monitoring carbon emissions" and that there was "no current mitigation in place" to address this risk. He testified in his deposition it was "true" that he understood that "California might impose a cost on carbon emissions." The arbitrators found Derman's admissions "telling" in reaching their conclusions.
EIF also issued a bond offering memorandum some two years after the PPA was signed (but before the present dispute arose), which discussed Assembly Bill 32, including that its "regulatory program may include a trading market for greenhouse gas emissions credits" and "the Facility [in Firebaugh] ... likely will be required to comply with these AB 32 regulations" and "likely ... will participate in the greenhouse gas emissions credit market, and will be required to make certain expenditures from time to time to purchase such credits." The arbitrators also considered this document to be "proof of Panoche's understanding and consideration of the impact that AB 32 could have on the [Firebaugh] Facility and its bottom line...."
Panoche argued that it would never have accepted the cost risk associated with GHG emissions because it would have viewed this risk as too "unknown, unlimited, unquantifiable." The arbitrators, however, found "overwhelming evidence" to the contrary. The arbitrators tracked the drafting changes proposed to the PPA during negotiations, which (as outlined above) showed that Panoche had initially resisted taking responsibility for costs of implementing Assembly Bill 32, but eventually agreed.
After weighing the evidence bearing on the parties' contracting intent, the arbitration panel found "clearly, Panoche was aware that it would be responsible for paying the cost of any change in law that imposed a cost on the Plant because of its GHG emission." The arbitrators concluded Panoche's failure to raise its price for electricity after PG&E insisted on the "change in law" provision reflected its "own evaluation of the risks" — which some of its witnesses considered "minimal" — rather than any misunderstanding that it was assuming the cost of changes in the law. Though they did not use the term "business judgment," the arbitrators found in essence that Panoche appreciated the risk involved in its decision not to raise the price of electricity
In light of their findings, the arbitrators granted PG&E's request for declaratory relief on both of its issues, as follows: (1) "It is hereby declared that the PPA addresses greenhouse gas emissions ... compliance costs and assigns responsibility for those costs to Panoche" and (2) "It is hereby declared that at the time the PPA was signed, Panoche understood that, under the PPA, if there was a future change in the law that imposed a cost on the facility because of its GHG emissions, Panoche would be responsible for paying that cost." The arbitrators emphasized they were "not rendering an advisory decision on an issue of great policy importance," but rather were concerned solely with "contract interpretation" and "what, exactly, the [p]arties understood."
With respect to Panoche's first counterclaim for declaratory relief, the panel was not swayed by the fact that the PPA does not specifically mention cost recovery for Assembly Bill 32 allowances or GHG emissions by name and found that fact was "not dispositive." The arbitrators found there was a "payment mechanism" in place under the PPA that allowed Panoche to recover GHG costs in that PG&E was required under section 4.3 of the PPA to make "full payment" for the electrical power produced by Panoche, in accordance with formulas set forth in the PPA. The arbitrators therefore denied Panoche's first counterclaim for declaratory relief. Panoche's second counterclaim for declaratory relief sought to establish limits on Panoche's liability for GHG costs based on section 3.1 of the PPA, which covered "Resource Adequacy Requirement." The arbitrators found that section inapplicable to GHG costs and denied the requested relief. Finally, the arbitrators postponed decision on attorney fees and costs under the PPA, section 12.4(c).
Eight days after the arbitrators' decision, PG&E advised the CPUC of the arbitrators' decision, apparently sending it a copy of the arbitration award. Shortly thereafter, on June 25, 2013, Panoche petitioned the superior court for an order vacating the award under section 1286.2, subdivision (a)(5). The award remained in effect from its inception until vacated by the superior court in late September 2013.
Even as the arbitration proceeded and afterwards, the regulators continued attempting to decide how to deal with legacy contracts. On May 1, 2013, the CARB held a workshop to discuss the issue of legacy contracts with stakeholders, at which it was suggested that contracts involving IOUs and contracts involving other utilities should all be dealt with by the CARB, not the CPUC, and should be subject to the same rules. Beginning in late June 2013, the CPUC began expressing a willingness to cede authority to the CARB over contracts involving IOUs, so that all parties in legacy contracts would be treated the same; ultimately, in March 2014, the CPUC did cede authority to the CARB. (Decision Clarifying Commission Policy on Greenhouse Gas Cost Responsibility for Contracts Executed Prior to the Passage of Assembly Bill 32 (Mar. 13, 2014) Cal.P.U.C. Dec. No. 14-03-003 [2014 Cal.P.U.C. Lexis 145, p. *1] (Decision Clarifying CPUC Policy).)
The CARB proposed a new regulation on July 15, 2013, that would provide transition assistance to energy producers in legacy contracts through the year 2014. The essence of that regulation, as will be discussed more fully below, was that energy producers who were party to a PPA in which the "price ... does not provide for recovery of the costs associated with compliance with" the cap-and-trade program would be entitled to free "direct allocation" of allowances by the CARB through 2014. (Cal. Code Regs., tit. 17, §§ 95802, subd. (a)(204), 95890, subd. (e), 95894.)
In recommending the new regulations, the CARB staff identified 19 contracts in dispute statewide and said: "In all cases, [the CARB] has encouraged resolution through contract renegotiation between the parties. In several cases, renegotiation has resolved the legacy contract concern. [The CARB] understands the approximately 19 remaining contracts to be in various stages of renegotiation. [The CARB] continues to encourage private resolution." The regulation the CARB proposed, staff believed, "maintain[ed] a strong incentive to continue renegotiation."
Stakeholder commentary on the proposed regulations continued through the summer, including commentary from PG&E and Panoche. Generally speaking, Panoche supported the new CARB regulation, while PG&E recommended changes. Among other things, PG&E suggested that "transition assistance" be provided only to those energy producers who signed contracts before August 15, 2005, when PG&E claimed the prospect of GHG-related costs was already clear. PG&E also suggested that the definition of legacy contracts should exclude contracts of energy producers against whom an
On September 4, 2013, while Panoche's petition to vacate the arbitration award was still pending, the CARB issued an initial statement of reasons (ISOR) for its proposed regulations, including proposing to add a definition of "legacy contracts" that in substance is identical to the definition ultimately adopted some nine months later. (Compare CARB, Proposed Amendments to the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms, ISOR, appendix E (Sept. 4, 2013) Proposed Regulation Order, § 95802, subd. (a)(195) at <http://www.arb.ca.gov/regact/2013/capandtrade13/capandtrade13.htm> [as of July 1, 2016] with current Cal. Code Regs., tit. 17, § 95802, subd. (a)(204).)
With respect to consideration of individual contracts, the ISOR explained: "[The CARB] is not in a position to have full knowledge of the original negotiation and how GHG costs were discussed during these contract negotiations. In comments that [the CARB] received, there was apparent disagreement during the various discussions among parties as to how to consider the inclusion of such costs. It is not appropriate for [the CARB] to interject itself into the interactions between parties in private contract discussions where [the CARB] cannot possibly know what both sides intended when they executed the contract."
The ISOR did not, however, abandon the notion that the parties should continue trying to resolve their differences independently: "While [the CARB's] preferred approach to resolving the situation is for the parties to renegotiate the contracts, [the CARB] recognizes that renegotiation takes time." In the meantime, the ISOR explained, transitional relief for generators in legacy contracts would be provided under section 95894 of title 17 of the Code of Regulations.
Panoche brought its petition to vacate the arbitration awards under section 1286.2, subdivision (a)(5), which authorizes a court to vacate an arbitration award if the "rights of the [petitioning] party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown...." Under that section, if the statutory requirements are met, the court "shall" vacate the arbitration award. PG&E opposed the petition and requested that the court instead confirm the arbitrators' interim award and enter judgment accordingly pursuant to section 1287.4. Again, Panoche's briefing focused exclusively on the concept of ripeness, but this time it attempted to mold its arguments to fit within the linguistic frame established by section 1286.2, subdivision (a)(5) by arguing that the lack of ripeness constituted "sufficient cause" to "postpone" the arbitration.
On September 20, 2013, the trial court, having been kept up to date on the regulatory developments, granted Panoche's petition. The court ruled that Panoche's ripeness motion before the arbitration panel could be reviewed under section 1286.2, subdivision (a)(5) because (1) it amounted to a request to "postpone" the arbitration within the meaning of the statute; (2) it was supported by "sufficient cause"; and (3) Panoche was "substantially prejudiced" by the arbitrators' refusal to grant a delay in the proceedings while the CPUC and the CARB completed their regulatory proceedings. PG&E filed a timely notice of appeal from the court's order.
In response to a request by Panoche, we take judicial notice of the following developments in the regulatory proceedings after the notice of appeal was filed. On November 8, 2013, the CARB proposed the amendments to the cap-and-trade regulation from the September 2013 ISOR, discussed above. Those amendments were adopted by the CARB in April 2014, and went into effect July 1, 2014. (CARB, Amendments to California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms, Resolution 14-4 (Apr. 25, 2014) (CARB Resolution 14-4) at <www.arb.ca.gov/regact/2013/capandtrade13/res14-4.pdf> [as of July 1, 2016]; history foll. Cal. Code Regs., tit. 17, § 95894.)
Meanwhile, at the CPUC, by February 10, 2014, an ALJ had also addressed the issue of legacy contracts in a proposed decision (Proposed CPUC Clarification Decision) setting forth a policy statement of the CPUC with respect to legacy contracts: "It is the policy of the [CPUC] that greenhouse gas costs and responsibility for such costs should be clearly articulated in Legacy Contracts in order to account for greenhouse gas costs
In the Proposed CPUC Clarification Decision, the CPUC also made the following observation: "Most of the contracts raised in this proceeding [including the Panoche contract] were negotiated and signed at a time when it was reasonably foreseeable that there would be costs for GHG compliance in the future, but the extent to which such costs were accounted for in the contracts may not be clear. To the extent that these Legacy Contracts do not contain terms that explicitly allocate responsibility for GHG compliance costs, it may not be clear which party, if any, bears responsibility for those costs under the contract. It would be inappropriate to amend a contract to require utilities and their ratepayers to pay those compliance costs a second time if they were accounted for in the original contract. At the same time, the [CPUC] is not in a position to know whether GHG costs are already embedded in existing contracts; that is a factual question that is beyond the scope of this proceeding. To make these factual determinations, Legacy Contracts must be examined individually, and avenues exist, such as a contract's explicit dispute resolution process, that are more appropriate than this proceeding for resolving questions of the presence or absence of specific GHG cost compensation terms and conditions in Legacy Contracts." (Italics added & fn. omitted.) The final decision omitted the first sentence of the quoted paragraph at Panoche's request. (See Decision Clarifying CPUC Policy, supra, 2014 Cal.P.U.C. Lexis 145 at pp. *14-*15, *19-*20.)
At the same time, however, the CPUC decided to defer to the developing CARB regulations on the issue of legacy contracts. Essentially, the CPUC decided that energy producers in contracts with IOUs should be treated the same as producers under contract with other utilities. The regulations now in force include the definition of "Legacy Contract" adopted by the CARB: "`Legacy Contract' means a written contract or tolling agreement, originally executed prior to September 1, 2006, governing the sale of electricity and/or legacy contract qualified thermal output at a price, determined by either a
However, before receiving the first such direct allocation, and for each year in which an energy producer seeks to renew its eligibility, it is required to make a "[d]emonstration of [e]ligibility," including an attestation under penalty of perjury that its PPA "does not allow the covered entity to recover the cost of legacy contract emissions from the legacy contract counterparty purchasing electricity and/or legacy contract qualified thermal output from the unit or facility."
Bunker Hill reasoned: "Arbitration is foremost a creature of contract. [Citation.] `Arbitration's consensual nature allows the parties to structure their arbitration agreements as they see fit. They may limit the issues to be arbitrated, specify the rules and procedures under which they will arbitrate, designate who will serve as their arbitrator(s), and limit with whom they will arbitrate.' [Citation.] Contracting parties also are free to negotiate and restrict the powers of an arbitrator and the universe of issues that he or she may resolve; `"[t]he powers of an arbitrator derive from, and are limited by, the agreement to arbitrate."' [Citation.] `As for the requirement that there exist a controversy, it is sufficient the parties contractually have agreed to resort to a third party to resolve a particular issue.' [Citation.] `The limited function reserved to the courts in ruling on an application for arbitration is not whether the claim has merit, but whether on its face the claim is covered by the contract.' [Citation.] Thus, we look to the terms of the parties' contract to ascertain whether they agreed to arbitrate a particular disagreement or to restrict the arbitrator to resolving certain issues." (Bunker Hill, supra, 231 Cal.App.4th at p. 1326.) Based on the foregoing considerations, the Court of Appeal in Bunker Hill ordered the superior court to compel the arbitration to proceed. (Id. at p. 1330.)
Bunker Hill recognized that parties may contractually limit arbitrators' roles to the adjudication of justiciable controversies, and the present dispute is one in which they have done just that. The clause in question, part of the arbitration provision (section 12.4(c)), does not actually mention ripeness or justiciability, but simply provides: "The Parties are aware of the decision in
In Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th 362 (Advanced Micro Devices), the Supreme Court upheld an arbitrator's award that arguably exceeded the powers a superior court judge could have exercised in fashioning a remedy for breach of contract. (Id. at pp. 367, 390-391.) Specifically, the arbitrator fashioned a remedy for Intel's breach of implied covenants of good faith and fair dealing that gave Advanced Micro Devices (AMD) a permanent, nonexclusive, royalty-free license to Intel's 8086 generation of microprocessors. (Id. at pp. 385-386.) AMD petitioned to have the superior court confirm the award (§§ 1286, 1287.4), and Intel petitioned for it to correct the award (§ 1286.6) by striking two paragraphs, arguing that the remedy granted by the arbitrator exceeded the contractual remedies for breach. (Advanced Micro Devices, supra, at p. 371.) The trial court confirmed the arbitrators' award, but the Court of Appeal reversed, granting Intel the relief it requested. The Supreme Court later reversed the Court of Appeal's decision.
The Supreme Court held "our statutes (§§ 1286.2, [former] subd. (d), 1286.6, subd. (b)) do not distinguish between the arbitrators' power to decide an issue and their authority to choose an appropriate remedy; in either instance the test is whether the arbitrators have `exceeded their powers.' Because determination of appropriate relief also constitutes decision on an issue, these two aspects of the arbitrators' authority are not always neatly separable." (Advanced Micro Devices, supra, 9 Cal.4th at p. 373.) "Arbitrators, unless specifically restricted by the agreement to following legal rules, `"may base their decision upon broad principles of justice and equity...." [Citations.] As early as 1852, this court recognized that, "The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [according to what is just and good]." [Citation.]' (Moncharsh [v. Heily & Blase (1992) 3 Cal.4th 1, 10-11 [10 Cal.Rptr.2d 183, 832 P.2d 899]].) Were courts to reevaluate independently the merits of a particular remedy, the parties' contractual expectation of a decision according to the arbitrators' best judgment would be defeated." (Advanced Micro Devices, supra, at pp. 374-375, fn. omitted.)
PG&E argues section 12.4(c) of the PPA does not incorporate the concept of ripeness into the arbitration because Advanced Micro Devices dealt only with the remedial powers of an arbitrator, whereas the ripeness limitation on adjudication has nothing to do with available remedies. Because of the
Before addressing the ripeness issue, we turn to another threshold issue, this one at the other end of the justiciability spectrum — mootness. On June 19, 2014, contemporaneously with filing its respondent's brief, Panoche filed a motion to dismiss the appeal as moot based on after-occurring developments in the regulatory proceedings, as described above.
Thus, "`ripeness is not a static state' [citation], and a case that presents a true controversy at its inception becomes moot `"if before decision it has, through act of the parties or other cause, occurring after the commencement of the action, lost that essential character"'" (Wilson & Wilson v. City Council of Redwood City (2011) 191 Cal.App.4th 1559, 1573 [120 Cal.Rptr.3d 665] (Wilson & Wilson).) "The pivotal question in determining if a case is moot is ... whether the court can grant the plaintiff any effectual relief. [Citations.] If events have made such relief impracticable, the controversy has become `overripe' and is therefore moot." (Id. at p. 1574.) An appeal is not moot, however, where "a material question remains for the court's consideration," so long as the appellate decision can grant a party to the appeal effectual relief. (Vargas v. Balz (2014) 223 Cal.App.4th 1544, 1550-1551 [168 Cal.Rptr.3d 154].) Thus, "[a]n appeal will be decided ... where part but not all of the controversy has been rendered moot." (Mercury Interactive Corp. v. Klein (2007) 158 Cal.App.4th 60, 78 [70 Cal.Rptr.3d 88].)
The unresolved question of costs and attorney fees, by itself, is enough to defeat Panoche's mootness argument. The PPA includes a fee-shifting provision that allows recovery of arbitration costs and reasonable attorney fees to the "prevailing party." The arbitrators' decision in May 2013 left the question of fees open, but PG&E was determined to be the prevailing party. After the arbitration, PG&E submitted a petition for fees and costs, claiming approximately $1.5 million in fees and nearly $228,000 in costs. After the arbitration award was vacated, Panoche filed a claim in the arbitration for approximately $1.7 million in attorney fees and $383,000 in costs. The arbitrators have postponed ruling on the fees issue pending the outcome of this appeal. Since the arbitrators' decision may drive the "prevailing party" determination in the arbitration, this appeal is not moot for that reason alone. (Center for Biological Diversity v. County of San Bernardino (2010) 185 Cal.App.4th 866, 881 [111 Cal.Rptr.3d 374]; Carson Citizens for Reform v. Kawagoe (2009) 178 Cal.App.4th 357, 365 [100 Cal.Rptr.3d 358]; Bolsa Chica Land Trust v. Superior Court (1999) 71 Cal.App.4th 493, 510, fn. 3 [83 Cal.Rptr.2d 850]; Mapstead v. Anchundo (1998) 63 Cal.App.4th 246, 278-279 [73 Cal.Rptr.2d 602] [no rationale supports the theory that "a party who should have lost on
While Panoche may ultimately be correct in its assessment of the course of public policy going forward, we note that it overstates what the future holds for GHG regulation in California. Panoche contends that Assembly Bill 32 "expir[es]" in 2017, but that does not appear to be the case. The current GHG reduction targets under Assembly Bill 32 extend until 2020 (Health & Saf. Code, § 38550), and the Legislature has expressed the intent that GHG emissions limits "shall remain in effect unless otherwise amended or repealed," with the expectation that such limits will "continue in existence and be used to maintain and continue reductions in emissions of greenhouse gases beyond 2020." (Health & Saf. Code, § 38551, subds. (a) & (b).) Thus, one of the foundations of Panoche's mootness argument crumbles. In addition, the PPA will remain in effect until sometime in 2029. Given these long-range legislative objectives and the long-term contract in dispute, we expect the question of GHG emissions and the cost of reducing those emissions to continue to be an issue subject to regulation in California — and subject to dispute between the parties — for the foreseeable future, not a matter that has been settled definitively by the regulations now in effect. Moreover, although the CARB has arrived at a final definition of "legacy contracts," Panoche suggests that this definition resolves all issues related to this appeal, but that is plainly not the case. The new regulation is not a self-executing grant of free allowances in perpetuity. It merely allows Panoche to receive such allowances if it attests under oath, annually, that the PPA "does not allow [Panoche] to recover the cost of legacy contract emissions from [PG&E]." (Cal. Code Regs., tit. 17, § 95894, subd. (a)(3)(A).)
Given the parties' disagreement over whether the PPA allows Panoche to "recover" the costs of GHG compliance, we think it undeniable that the "demonstration of eligibility" requirement contained in the new regulation draws into question the contents and meaning of the PPA, including the arbitrators' resolution of that dispute. Although we are of the view that the arbitration decision has clear, ongoing relevance to Panoche's eligibility for "legacy contract" treatment going forward, we hasten to add that it in no way binds the hands of the regulators. The CARB may decide for policy reasons that Panoche should get free allowances in spite of the arbitrators' decision. We have nothing to say about that. The regulators have broad policy-making power and they might decide, for example, that the general policy of sending a "price signal" to the public is a paramount consideration. Clearly, the arbitrators believed the risk of exposure to Assembly Bill 32 compliance costs was known to and taken into account by Panoche when it entered the PPA in March 2006. While they made a thoughtful, considered, and in many ways compelling determination on that issue, they repeatedly emphasized that
The parties agree that the court's order vacating the arbitration award is subject to de novo review on appeal. "We review the trial court's ruling de novo, but defer to the factual and legal findings made by the arbitrator. (California Faculty Assn. v. Superior Court (1998) 63 Cal.App.4th 935, 943-945 [75 Cal.Rptr.2d 1]; Oaktree Capital Management, L.P. v. Bernard (2010) 182 Cal.App.4th 60, 68-69 [106 Cal.Rptr.3d 16]....) `[W]e do not review the arbitrator's findings ..., but take them as correct.' (Roehl v. Ritchie (2007) 147 Cal.App.4th 338, 347 [54 Cal.Rptr.3d 185].)" (Cotchett, Pitre & McCarthy v. Universal Paragon Corp. (2010) 187 Cal.App.4th 1405, 1416 [114 Cal.Rptr.3d 781].) To the extent the superior court judge made factual findings that are not inconsistent with the arbitrators' findings, we review them for substantial evidence. (SWAB Financial, supra, 150 Cal.App.4th at pp. 1196, 1198.) Ripeness, too, is generally a legal issue subject to de novo review. (Bunker Hill, supra, 231 Cal.App.4th at p. 1324; Environmental Defense Project of Sierra County v. County of Sierra (2008) 158 Cal.App.4th 877, 885 [70 Cal.Rptr.3d 474].) We therefore employ our independent judgment in deciding this issue.
The regulatory proceedings, on the other hand, have led to and will continue to involve public policy determinations about how to fairly allocate the cost burden of Assembly Bill 32 more broadly. The interpretation of the PPA as reflected in the arbitrators' reasoned decision was certainly relevant to the public policy issues before the CPUC and the CARB; indeed, the pendency of those regulatory issues was the very reason PG&E initiated the arbitration. Panoche, understandably, wished to remain free in the regulatory arena to place its own "spin" on the PPA, but by agreeing to a private dispute resolution procedure, Panoche ran the risk that PG&E would call its bluff, obtain a binding ruling from an arbitration panel on disputed issues of contract interpretation, and use that ruling to try to block Panoche from continuing to promote what PG&E believed was an inaccurate view of the PPA before the agencies. The risk ran the other way as well, of course, and had the arbitrators adopted Panoche's perspective, the shoe would have been on the other foot. Because these are two very sophisticated parties, fully capable of assessing how the arbitration clause might be used — and rejecting it upfront, if it was a poor fit for the highly regulated environment involved here — we are loathe to prevent enforcement of the clause because the party invoking it, PG&E, may have found it useful as a means to gain perceived tactical advantage before the regulators. We would be surprised if there was not some such motivation at work, but in the end PG&E's motivation is irrelevant. Arbitration was a tool at the disposal of both parties, and we see nothing wrong with the way PG&E chose to use it here.
It is no mystery how the parties' contract interpretation dispute was pertinent to the regulatory proceedings at the time this dispute was arbitrated. The parties have long disagreed, and disagreed sharply, on who ultimately
But while it is clear the CPUC and the CARB wished to avoid deciding contract-specific issues, they never affirmatively indicated a disinterest in, refusal to consider, or rejection of the relevancy of such contracts to the question of an individual energy generator's eligibility for transition assistance. That is understandable because the issue of whether a particular contract allocated GHG compliance costs in a particular way was so plainly relevant for regulatory purposes when PG&E demanded arbitration, and is still relevant today. The CPUC ALJ's proposed definition of "legacy contracts" in August 2012 — the proposed definition upon which Panoche framed its counterclaim — focused on whether the contract at issue "explicitly" provided for allocation of GHG compliance costs or had a "mechanism" of doing so. And under the CARB's "legacy contract" definition, as finally adopted, any entity claiming to be a party to a legacy contract must prove its eligibility by attesting that the PPA "does not allow the covered entity to recover the cost of legacy contract emissions from the legacy contract counterparty...." (Cal. Code Regs., tit. 17, § 95894, subd. (a)(3)(A).) Thus, the definition adopted by the CARB, and the transitional relief offered, both to some degree turn on the content of the PPA: specifically, whether it "provide[d or did not provide] for recovery of the costs associated with compliance with [the cap-and-trade] regulation" (Cal. Code Regs., tit. 17, § 95802, subd. (a)(204)) and whether it "allow[ed or did not allow] the covered entity to recover the cost of legacy contract emissions from the legacy contract counterparty purchasing electricity ... from the unit or facility" (id., § 95894, subd. (a)(3)(A)).
Even to the extent there may have been some duplication of effort or some expense in conducting the arbitration, which Panoche characterizes as "wasted" if the regulators were to end up ignoring the arbitrators' reasoned decision, that risk is overridden when the second prong of the ripeness inquiry is considered, namely "`the hardship that may result from withholding [the arbitrators'] consideration'" (Wilson & Wilson, supra, 191 Cal.App.4th at p. 1582; accord, Pacific Legal Foundation v. California Coastal Com., supra, 33 Cal.3d at p. 171), which must be an "`"imminent and significant hardship inherent in further delay"'" (Stonehouse Homes LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 542 [84 Cal.Rptr.3d 223]; see Farm Sanctuary, Inc. v. Department of Food & Agricuture (1998) 63 Cal.App.4th 495, 502 [74 Cal.Rptr.2d 75]). PG&E has made a sufficient showing of hardship.
Panoche had been advocating in regulatory proceedings that PG&E should bear the cost of GHG allowances itself because it could pass the cost along to its customers, thereby sending a "price signal" to reduce consumption. The CPUC and the CARB both thought the best general policy was to have the utilities pay. But that is precisely what PG&E claims it had bargained to avoid before this general policy had been articulated, and the CPUC agreed
Panoche insists that the CARB and the CPUC have no use for any consideration of the terms of individual contracts when making policy for the whole state. We do not agree. We are not suggesting the regulators will necessarily be guided by the terms of individual contracts, nor does confirmation of the arbitration award in any way imply they should. But every indication so far from the regulators is that they are expecting and awaiting a definitive resolution of the parties' contractual dispute, which the regulators have instructed the parties to pursue outside of the regulatory proceedings. The weight to be given the arbitration award by the regulators — indeed, whether they will consider it at all — is entirely up to them, but for purposes of evaluating whether the dispute presented to the arbitration panel was sufficiently concrete for decision and whether its resolution was capable of putting to rest uncertainty around the meaning of the contract, the controversy was ripe.
Finally, we must note, to the extent any matter in dispute in the arbitration was unripe, it would appear to be Panoche's first counterclaim, which asked for an interpretation of the contract in accordance with the interim CPUC definition of legacy contracts, rather than awaiting the CARB's final definition. (Cf. Pacific Gas & Electric Co. v. Lynch (C.D.Cal., May 2, 2001, No. CV 01-1083-RSWL (SHx)) 2001 U.S.Dist. Lexis 5500, pp. *47-*51 [challenge to "non-final interim order of a state agency" held to be unripe].) By its framing of that counterclaim Panoche attempted to link inextricably the contract issues with the regulatory proceedings, arguing that the former could not be decided until after the latter were completed. As we have now explained, there is no necessity that the regulators decide the policy issue before the contract issues may be determined, and to the extent there is a natural sequence, it would seem better to decide the contract issues sooner rather than later. Panoche could not render the entire arbitration "unripe" by interjecting a premature counterclaim. PG&E's distinct contract interpretation claims were certainly ripe and subject to immediate arbitration. We conclude that, under both the first and second prongs of the ripeness analysis, the dispute between PG&E and Panoche was ripe at the time of the arbitration.
Despite our resolution of the ripeness issue, Panoche argues that "sufficient cause" may have existed for a postponement, even if PG&E's claims technically were ripe. Although we agree that the nomenclature of the statute governs the appeal, we note that Panoche's present stance seems at odds with the position it took in its motion for dismissal or stay of the arbitration, which was devoted exclusively to the question of ripeness, and the position it consistently took in the trial court and before this court that "sufficient cause" was established for a postponement precisely because the issues were unripe for arbitration.
Turning to the statute, preliminarily we note that Panoche asked for dismissal or a "stay" of the arbitration,
But moving beyond that issue, we also decline Panoche's invitation to formulate a shorthand standard expressly adapted to determining "sufficient
The trial court, too, relied heavily on Naing, calling it "largely indistinguishable." We disagree. In that case, Naing International Enterprises, Inc. (Naing), one of two companies that had signed a merger agreement, represented in the contract that it was eligible for participation in the Small Business Administration's (SBA) section 8(a) program (15 U.S.C. § 637(a)), which allows preferences in government contracting for disadvantaged minority-owned firms, and made related representations tending to assure such eligibility would continue. (Naing, at p. 2.) The other company (EAI) refused to go through with the merger after questions developed as to whether Naing's representations concerning eligibility were true. (Ibid.) The parties submitted the dispute to arbitration for alleged breach of contract. (Ibid.)
The federal district court granted the motion to vacate the award because "[t]here is little doubt that a final action by the SBA as a result of its investigation into [Naing's] eligibility would have been pertinent and material to EAI['s] ... claims and defenses during arbitration. The SBA, as the agency responsible for the 8(a) Program, is responsible for determining eligibility for participation in the program and to investigate matters related to participation therein. Its determination as to [Naing's] eligibility and the accuracy of the information [Naing] submitted to it would have been compelling evidence as to the respondents' principal claims and defenses." (Naing, supra, 961 F.Supp. at p. 3.) We note, in addition, that Naing never mentioned the word "ripeness," but rather focused its analysis on evidence that could have been admitted if a continuance had been granted, resulting in the deprivation of one party's right to a full and fair hearing. (Id. at pp. 3-6.)
Naing presents a factual scenario that in significant respects is quite different from ours. As noted, in Naing, the issue under regulatory consideration — Naing's eligibility for the section 8(a) program — was identical to the issue EAI was raising as its defense in the breach of contract arbitration as its explanation for refusing to go through with the merger. (Naing, supra,
Thus, we do not read Naing as having the far-reaching significance that Panoche ascribes to it. First, we do not agree that Naing sets forth a new and distinct "pertinent and material" standard for determining "sufficient cause" for a postponement of arbitration in light of pending regulatory action. The "pertinent and material" language is derived from a different clause of the federal statute, which relates to the arbitrators' refusal to hear evidence "pertinent and material to the controversy." (9 U.S.C. § 10(a)(3).) Moreover, the regulatory proceedings in Naing were not just "pertinent and material" to the broadly stated issues being arbitrated; the proceedings were "pertinent and material" to specific "claims and defenses" asserted in the arbitration, and were in fact likely to produce "`pertinent and material evidence'" for use in the arbitration. (Naing, supra, 961 F.Supp. at p. 3.) As we read Naing, it was the impact on the procedural fairness of the arbitration that the court found controlling: "[I]f the failure of an arbitrator to grant a postponement or adjournment results in the foreclosure of the presentation of `pertinent and material evidence,' it is an abuse of discretion." (Ibid., italics added.)
Hence, the rule we apply is consistent with Naing. A procedural disadvantage — or that a party was "prevented ... from fairly presenting its case" (Hall, supra, 18 Cal.App.4th at p. 439) — was a factor certainly at play in Naing, where EAI had a potential defense to the breach of contract claim based on Naing's failure to retain section 8(a) status. (Naing, supra, 961 F.Supp. at p. 3.) In our case, though Panoche refers to its "defenses" to PG&E's contract-related claims being dependent upon the regulators' decisions, in fact Panoche's entitlement or lack of entitlement to transition assistance would not constitute a "defense" to PG&E's declaratory relief claims. Nor has there been a regulatory determination that Panoche is entitled to transition relief "for at least the first five years of [the] CARB's cap-and-trade program," as it has represented; rather, Panoche is simply entitled to apply for such relief on an annual basis, with its ultimate eligibility to be determined on an individual year-to-year basis depending on a sworn factual showing. To the extent there is any required order in which the resolution of issues should proceed, we view the resolution of the contractual issues as a prerequisite to application of the entitlement criteria, and thus it was perfectly appropriate for the arbitrators to address the contract questions before the regulators' decisions were finalized.
Panoche identifies no procedural disadvantage it suffered in going forward with the arbitration as scheduled. Because Panoche failed to meet the "sufficient cause" prong under subdivision (a)(5), we need not decide whether its "rights" were "substantially prejudiced" by the arbitrators' ruling on the ripeness motion under the second prong of the statute.
The judgment is reversed. Panoche's motion to dismiss the appeal as moot is denied. Panoche's requests for judicial notice filed June 19, 2014, and November 26, 2014, are granted. PG&E's request for judicial notice filed January 4, 2016, is denied. The superior court's order vacating the arbitration award is reversed, as is the denial of PG&E's request to confirm the arbitration award. The superior court is ordered to confirm the arbitration award under section 1287.4, as requested by PG&E. PG&E shall recover its costs on appeal.
Ruvolo, P. J., and Reardon, J., concurred.
"In D.08-10-037, we emphasized the importance of treating all market participants equitably and fairly, and reiterated our statement in D.08-03-018 that, `[I]t is not our intent to treat any market participants unfairly based on their past investments or decisions made prior to the passage of AB 32.' (D.08-10-037 at 144-145, citing D.08-03-018 at 18.) While we do not need to treat everyone identically, and we are not in the business of bailing unregulated market participants out from their own past missteps, this fundamental concept still holds true: we do not want to inadvertently create or maintain unfair competitive impacts." (Cal.P.U.C. Dec. No. 12-04-046, supra, 2012 Cal.P.U.C. Lexis 192 at pp. *93-*94, italics added.)
