Power & Pipes

FERC, CFTC, and State Energy Law Developments

On December 15, 2017, the California Court of Appeal, Second Appellate District, issued its opinion in Southern California Gas Co. v. Superior Court of Los Angeles County. In reversing the lower court’s decision, the appeals court concluded that Southern California Gas Co. (SoCalGas) could not be held liable in tort for economic damages in the absence of a transactional relationship unless its actions caused personal injury or property damage. This case underlines the importance of familiarity with the state legal protections that can shield utilities from claims for damages due to the indirect harms stemming from major service or infrastructure disruptions.

The Court of Appeal held that SoCalGas owed no duty to the business plaintiffs in the class action, who “claimed no injury to person or property. Instead, they alleged the gas leak and subsequent relocation of [nearby] residents caused crushing economic loss to their businesses.” The court explained that, under California law, “[g]enerally a defendant owes no duty to prevent purely economic loss to third parties under any negligence theory.” The appeals court determined that none of the various exceptions to this general rule applied to SoCalGas’s actions because those exceptions generally held true only when there was a direct injury to persons or property. Accordingly, SoCalGas could not be held liable to the plaintiffs because no injury to persons or property occurred and no transactional relationship existed that was intended to “directly” affect the plaintiffs.

The potential of tort liability for the generalized economic harms resulting from the effects of major service disruptions such as blackouts has always been a concern to utilities. In the electric utility business, widespread outages are uncommon, but not unprecedented, and when they occur the number of individuals and businesses affected is often enormous. For example, the August 14, 2003 Northeast blackout affected an estimated 50 million people and more than 61.8 gigawatts (61,800 megawatts) of electrical load were lost. Other outages tell similar stories: the blackout in Florida on February 26, 2008 led to power outages for more than three million people across southern Florida. Similarly, the September 8, 2011 Southwest outage left 2.7 million customers without power for up to 12 hours. And in February 2011, Texas and New Mexico customers experienced rolling blackouts because 210 individual generating units were unable to provide power during a sudden cold snap, leaving 1.3 million customers without service at the peak of the blackouts and affecting 4.4 million customers in total over a three-day period. Gas distribution companies in New Mexico, Arizona, and Texas also experienced extensive service curtailments during that cold snap.

The generalized economic harms stemming from utilities outages are hard to predict and can conceivably be very large given the sheer number of people affected and the hours or days that an outage can last. For example, estimates of the total economic cost of the August 2003 Northeast blackout range up to $14 billion dollars. Decisions such as this California state court ruling provide significant legal protections for utilities conducting business that is susceptible to significant unforeseeable disruption.

Utilities should be familiar with their protections under state law, such as the recent California decision, as well as state tariffs in the states where they operate. Utilities may also be able to take advantage of any liability protections under Federal Energy Regulatory Commission–filed agreements and tariffs providing the terms and conditions of service under which they conduct wholesale sales of electricity or operate transmission systems.

A Morgan Lewis litigation team led by David Schrader and Randy Levine represented SoCalGas before the California Court of Appeal, Second District.