Case: 24-6696, 11/04/2024, DktEntry: 4.3, Page 1 of 43
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`ATTACHMENT B
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`

`

`Document Accession #:
`
`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 2 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`187 FERC 'I 61,146
`UNITED STATES OF AMERICA
`FEDERAL ENERGY REGULATORY COMMISSION
`
`Before Commissioners: Willie L. Phillips, Chairman,
`Allison Clements and Mark C. Christie.
`
`Public Utilities Commission of the State of California
`
`Docket Nos. EL02-60-016
`
`v.
`
`Sellers of Long-Term Contracts to the California
`Department of Water Resources
`
`California Electricity Oversight Board
`
`v.
`
`EL02-62-015
`
`(consolidated)
`
`Sellers of Long-Terrn Contracts to the California
`Department of Water Resources
`
`ORDER ADDRESSING ARGUMENTS RAISED ON REHEARING
`AND SETTING ASIDE PRIOR ORDER, IN PART
`
`(Issued June 7, 2024)
`
`On January 19, 2024, Shell Energy North America (US), L.P. (Shell)1 and the
`1.
`California Parties2 submitted a request for rehearing of the Commission's December 20,
`2023 order addressing the California Parties' challenges to two Western Energy Crisis-
`era long-term contracts between the California Department of Water Resources (CDWR)
`
`1 Shell was known during the relevant time period as Coral Power, L.L.C.
`
`2 The California Energy Oversight Board (CEOB) was defunded in 2008, at which
`time the Attorney General of California was granted authority to pursue claims relating to
`the Western Energy Crisis in its stead. See Cal. Pub. Util. Code § 343 (2022). Later, the
`Public Utilities Commission of the State of California (CPUC) and the Attorney General
`of California were joined by Pacific Gas and Electric Company and Southern California
`Edison Company to pursue the original claims and present witnesses and evidence during
`much of these proceedings. As such, this order will refer to both sets of complainants
`jointly as the California Parties.
`
`

`

`Document Accession #:
`
`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 3 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`2
`
`and, respectively, Shell (Shell Contract) and Iberdrola Renewables, LLC (lberdrola
`Contract).3
`
`Pursuant to Allegheny Defense Project v. FERC,4 the rehearing requests filed in
`2.
`this proceeding may be deemed denied by operation of law. However, as permitted by
`section 313(a) of the Federal Power Act (FPA),5 we are modifying the discussion in the
`June 2021 Order and setting aside the order, in part, as discussed below.6
`
`I.
`
`Background
`
`A.
`
`Origins of This Proceeding
`
`A brief summary of the recent history in these proceedings, as it is relevant to this
`3.
`order, is provided here. A comprehensive history of the background and procedural
`history of this case can be found in other judicial opinions and Commission orders.7
`
`On February 25, 2002, the CPUC and the now-defunct CEOB each filed separate
`4.
`complaints pursuant to section 206 of the FPA8 to abrogate the Shell and Iberdrola
`Contracts as unjust and unreasonable or reform the contracts to provide for just and
`reasonable rates, reduce their duration, and strike certain nonprice terms and conditions
`from the contracts." Complainants further alleged that Respondents exercised market
`power that forced CDWR to pay unjust and unreasonable prices and agree to onerous,
`unjust and unreasonable nonprice terms to secure the power necessary to ensure the lights
`
`3 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 'Z
`of Water Res., 185 FERC 1161,197 (2023) (Opinion No. 587).
`
`4 964 F.3d 1 (D.C. Cir. 2020) (en bane).
`
`5 16 U.S.C. § 825l(a) ("Until the record in a proceeding shall have been filed in a
`court of appeals, as provided in subsection (b), the Commission may at any time, upon
`reasonable notice and in such manner as it shall deem proper, modify or set aside, in
`whole or in part, any finding or order made or issued by it under the provisions of this
`chapter.").
`
`6 Allegheny Def Project, 964 F.3d at 16-17.
`
`7 See, et., Pub. Utils. Comm 'n ofCal. v. FERC, 462 F.3d 1027 (9th Cir. 2006).
`
`8 16 U.S.C. § 824e.
`
`9 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 't
`of Water Res., 99 FERC 'I 61,087, at 61,377 (2002) (April 25, 2002 Order).
`
`

`

`Document Accession #:
`
`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 4 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`3
`
`stayed on in Caiif0tnia1" In the April 25, 2002 Order, the Commission set the contracts
`at issue, including the Shell Contract, for hearing.11 Following hearing, the Commission
`affirmed the Administrative Law Judge's partial initial decision and found that (1) the
`applicable standard of review for the contracts was the Mobile-Sierra presumption of just
`and reasonable bilateral contract rates," and (2) CPUC and CEOB had not met their
`burden of proof to justify abrogating or modifying the contracts at issue, thereby
`dismissing Complainants' claims." The Commission then denied rehearing," and CPUC
`and CEOB appealed.
`
`In 2008, the Supreme Court issued the Morgan Stanley15 decision, which refined
`5.
`the application of the Mobile-Sierra presumption, holding that rates set through an arm's-
`length bilateral contract between sophisticated parties with equal bargaining power are
`presumed to be just and reasonable, unless there is unfair dealing by either of the parties
`at the contract formation stage or the contract seriously harms the public interest.16
`Specifically, the Supreme Court held that the Mobile-Sierra presumption could be
`avoided "where there is unfair dealing at the contract formation stage-for instance, if
`[the Commission] finds traditional grounds for the abrogation of the contract such as
`fraud or duress.9017 Other examples of "unfair dealing at the contract formation stage"
`could include "if the 'dysfunctional' market conditions under which the contract was
`
`10 Id. at 61377, 61583, app. A.
`
`11 Id. at 61,383-84.
`
`12 The Mobile-Sierra presumption takes its name from two cases decided by the
`Supreme Court of the United States (Supreme Court) on the same day: United Gas Pipe
`Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956) (Mobile) and Fed. Power
`Comm 'n v. Sierra Pac. Power Co., 350 U.S. 348 (1956) (Sierra).
`
`13 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 'Z
`of Water Res., 103 FERC 1] 61,354, at P 3 (2003).
`
`14 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 'Z
`of Water Res., 105 FERC 1] 61,182 (2003).
`
`15 Morgan Stanley Cap. Grp. Inc. v. Pub. Util. Dist. No. I of Snonomisn Cnty.,
`Wash., 554 U.S. 527 (2008) (Morgan Stanley).
`
`16 Id. at 547-55.
`
`17 Id. at 547.
`
`

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`Document Accession #:
`
`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 5 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`4
`
`formed were caused by illegal action of one of the parties ...."18 The Supreme Court
`reasoned that "[l]ike fraud and duress, unlawful market activity that directly affects
`contract negotiations eliminates the premise on which the Mobile-Sierra presumption
`rests: that the contract rates are the product of fair, [arm's-length] negotiations.,19
`However, the Supreme Court also emphasized that "the mere fact of a party's engaging in
`unlawful activity in the spot market does not deprive its forward contracts of the benefit
`of the Mobile-Sierra presumption. There is no reason why [the Commission] should be
`able to abrogate a contract on these grounds without finding a causal connection between
`the unlawful activity and the contract rate.,,20
`
`In light of the Supreme Court's decision, the United States Court of Appeals for
`6.
`the Ninth Circuit (Ninth Circuit) remanded the case to the Commission for proceedings
`consistent with the Supreme Court's opinion." On remand, the Commission ordered a
`trial-type, evidentiary hearing to supplement the existing record, in light of the Morgan
`Stanley decision." As relevant to this rehearing, the Commission reopened the record to
`allow parties to present evidence on whether the Mobile-Sierra presumption was avoided
`with respect to the implicated contracts." The Commission instructed that "if it is clear
`that one party to a contract engaged in such extensive unlawful market manipulation as to
`alter the playing field for contract negotiations, the Commission should not presume that
`the contract is just and reasonable.,,24 The Commission emphasized that the
`
`18 Id.
`
`19 Id.
`
`20 Id. at 554-55. The Supreme Court held that where the Mobile-Sierra
`presumption does attach to a contract, it may still be overcome in the traditional sense
`upon a showing that "[t]he contract rate ... seriously harm[s] the public interest.972° Id.
`at 548.
`
`21 Pub. Uzil. Dist. No. I of Snohomish Cry., Wash. v. FERC, 547 F.3d 1081 (9th
`Cir. 2008).
`
`22 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 'Z
`of Water Res., 149 FERC 1] 61,127, at P 1 (2014).
`
`23 Id. PP 19, 20, 23 .
`
`24 Id. P 17 (quoting Morgan Stanley, 554 U.S. at 554) (internal quotations
`omitted).
`
`

`

`Document Accession #:
`
`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 6 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`5
`
`Complainants must demonstrate a causal connection between any unlawful activity and
`the contract negotiations in order to find that the Mobile-Sierra presumption is avoided."
`
`B.
`
`2016 Initial Decision
`
`On April 12, 2016, the Presiding Judge issued the 2016 Initial Decision in this
`7.
`proceeding, which found, as relevant here, that the Mobile-Sierra presumption of justness
`and reasonableness was avoided as to the Shell Contract." The 2016 Initial Decision
`concluded that Shell committed unlawful activities in the spot market that possessed the
`requisite price effects." However, after concluding that the spot-market price effects had
`an upward influence on the forward-market pricing,28 the Initial Decision stated that
`Complainants did not demonstrate that forward prices influenced the Shell Contract
`negotiations." Thus, the 2016 Initial Decision concluded that Shell's unlawful market
`activity in the spot market did not have a direct effect on the contract negotiations and
`thus determined that the Mobile-Sierra presumption was not avoided on these grounds.3°
`The 2016 Initial Decision also considered and rejected several other theories, such as the
`exercise of market power31 and gas market manipulation" that could potentially avoid
`application of the Mobile-Sierra presumption to the Shell Contract.
`
`Upon consideration of traditional grounds for contract abrogation, the 2016 Initial
`8.
`Decision found that under the laws of California, which is the governing law under the
`Shell Contract, the torts of bad faith, duress, unconscionability, and fraud may serve as
`grounds for abrogating a bilateral power contract, but found that the California Parties
`
`25 Id. P 25.
`
`26 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 'Z
`of Water Res., 155 FERC 1163,004, at PP 1, 244, 356, 381, 386, 389, 390 (2016) (2016
`Initial Decision).
`
`27 Id. P 130.
`
`28 Id. P 176.
`
`29MP198.
`
`30 Id. P 197.
`
`31 Id. P 207.
`
`32Id. P 213.
`
`

`

`Document Accession #:
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`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 7 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`6
`
`failed to carry their burden in establishing any of these theories.33 Nevertheless, the 2016
`Initial Decision sum sponge considered the theories of both fraud-in-the-inducement and
`fraud-in-the-inception as alternative bases for avoiding Mobile-Sierra. The 2016 Initial
`Decision described fraud-in-the-inducement to a contract as :
`
`where the promiser knows what he is signing but his consent is induced by
`fraud, mutual assent is present and a contract is formed, which, by reason of
`the fraud, is voidable. In order to escape from its obligations the aggrieved
`party must rescind, by prompt notice and offer to restore the consideration
`received, if any.34
`
`The 2016 Initial Decision dismissed this theory, in part, because neither party rescinded
`the Shell Contract and because the contract had been carried out in full.
`
`However, the 2016 Initial Decision distinguished fraud-in-the-inducement from
`9.
`fraud-in-the-inception of a contract, which is where :
`
`the fraud goes to the inception or execution of the agreement, so that the
`promiser is deceived as to the nature of his act, and actually does not know
`what he is signing, or does not intend to enter into a contract at all, mutual
`assent is lacking, and it is void. In such a case it may be disregarded
`without the necessity of rescission.35
`
`The 2016 Initial Decision concluded that the California Parties established fraud-in-the-
`inception by demonstrating that Shell falsely claimed it was being forced to purchase
`power for CDWR beginning in April 2001 "at a loss.>=36
`c.
`
`2021 Limited Remand
`
`In an order issued on June 17, 2021,37 the Commission remanded the issue of
`10.
`fraud (including fraud-in-the-inception, fraud-in-the-inducement, and more general fraud
`theories) to the Presiding Judge for full briefing (Limited Remand Proceeding). The
`
`33 Id. P 214 (citing Morgan Stanley, 554 U.s. at 557).
`
`34 Id. at P 217 (emphasis in original).
`
`35 Id (emphasis in original).
`
`36 Id. PP 227-244.
`
`37 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 'Z
`of Water Res., 175 FERC 1161 ,233 (2021) (Limited Remand Order).
`
`

`

`Document Accession #:
`
`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 8 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`7
`
`Commission found that the Presiding Judge erred by raising the fraud-in-the-inception
`theory sum sponge in the 2016 Initial Decision as a basis for finding that the Mobile-Sierra
`presumption is avoided with regard to the Shell Contract. The Commission found that
`the Presiding Judge's finding raised due process concerns because the requirements of the
`Administrative Procedure Act ensure that parties will be given the opportunity to present
`rebuttal evidence on all matters decided at the hearing.38
`
`Despite these due process concerns, the Commission found potential merit to the
`11.
`argument that Shell's electric spot market activity could have contributed to inherent
`unfairness that tainted negotiation of the Shell Contract. Specifically, the Limited
`Remand Order highlighted Shell's claims of losses on the April/May 2001 sales to
`CDWR and the need to be made whole as potentially fraudulent." Given the potential
`merit of the argument that fraudulent conduct by Shell may form the basis for avoiding
`the application of Mobile-Sierra, the Commission found that full briefing on this issue
`was warranted before the Commission could fully consider the 2016 Initial Decision's
`findings. Thus, the Commission remanded this limited issue to the Presiding Judge to
`undertake additional fact-finding and issue a revised partial initial decision, consistent
`with the direction provided in the Limited Remand Order."
`
`The Commission explained that, although the California Parties still had the
`12.
`burden to plead and prove their allegations of fraud with specificity, the use of traditional
`grounds of contract abrogation, such as fraud, for the purpose of avoiding Mobile-Sierra
`is distinguishable from using such a claim to abrogate a contract under state law.
`Specifically, the Commission stated that it did not interpret Morgan Stanley as requiring a
`demonstration of unlawful activity that would independently satisfy all the elements of
`wrongdoing under a state or federal statute. Instead, consistent with its precedent in the
`Opinion No. 537 line of cases,41 the Commission stated that it would look to state law as
`a guide to determine whether the type of behavior in question resulted in unfair dealing at
`the contract formation stage such that the contract was not the result of legitimate arm's-
`
`38 Id. P 22.
`
`39 Id. P 24.
`
`40 Id. P 25. The Commission noted that all other issues in the 2016 Initial
`Decision remained pending before the Commission. Id. P 29.
`
`41 See, e.g., Puget Sound Energy, Inc. v. All Jurisdictional Sellers of Energy &
`Capacity at Wholesale into Elec. Energy and Capacity Mkts. In the Pae. No, 151 FERC
`ii 61,173 (2015) (Opinion No. 537), order denying ren 'g, 153 FERC 1161,386 (2015)
`(Opinion No. 537-A), Puget Sound Energy, Inc. v. All Jurisdictional Sellers of Energy &
`Capacity at Wholesale into Elec. Energy and Mkts. In the Pac. No , 157 FERC 1161,026
`(2016) (Opinion No. 552).
`
`

`

`Document Accession #:
`
`Case: 24-6696, 11/04/2024, DktEnt/1 4.3, Page 9 of 43
`Filed Date: 06 07/2024
`20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`8
`
`length negotiations. The Commission also emphasized that, while parties would be
`permitted to present any relevant evidence to support or rebut claims that fraud tainted
`negotiation of the Shell Contract, they would not be permitted to re-litigate any other
`issue in this proceeding, such as the question of whether evidence of Shell's fraud-in-the-
`inception of the Shell Contract also compels a finding that bad faith, unconscionability,
`or duress altered the playing field for negotiation of the Shell Contract."
`
`13. On July 13, 2021, Shell filed a request for rehearing of the Limited Remand Order.
`On August 13, 2021, the Commission issued a notice denying Shell's rehearing request
`by operation of law. On September 22, 2021, Shell filed a petition for review of the
`Limited Remand Order and Notice of Denial of Rehearing by Operation of Law.
`
`During the course of the Limited Remand Proceeding, Shell filed two
`14.
`interlocutory appeals with the Commission to request reconsideration of rulings by the
`Presiding Judge that (1) prohibited Shell from presenting new expert testimony regarding
`the causes of the Western Energy Crisis, and (2) establishing a page limit for post-hearing
`briefs. In both cases, the Commission issued notices of no determination on the
`interlocutory appeals.43
`
`D.
`
`Revised Partial Initial Decision
`
`In the Revised Partial Initial Decision, issued on June 23, 2022, the Presiding
`15.
`Judge found that the Mobile-Sierra presumption of the justness and reasonableness of the
`Shell Contract should be avoided because Shell committed fraud that directly affected
`contract negotiations.44
`
`The Revised Partial Initial Decision stated that, consistent with Morgan Stanley
`16.
`and the Limited Remand Order, the California Parties need not demonstrate fraud per se
`during contract negotiations to avoid application of Mobile-Sierra but need only
`demonstrate that Shell's fraudulent activity resulted in unfair dealing between the parties
`during the contract formation stage. The Revised Partial Initial Decision stated that it
`would look to state law as a guide to determine whether the type of behavior in question
`resulted in unfair dealing at the contract formation stage, but would not require a
`demonstration of unlawful activity that would independently satisfy all the elements of
`
`42 Limited Remand Order, 175 FERC 1] 61,233 at PP 26-29.
`
`43 Opinion No. 587, 185 FERC 1161,197 at PP 429-430.
`
`44 Pub. Utils. Comm 'n ofCal. v. Sellers of Long-Term Contracts to the Cal. Dep 'Z
`of Water Res., 179 FERC 1163,026, at P 1 (2022) (Revised Partial Initial Decision).
`
`

`

`Case: 24-6696, 11/04/2024, DktEntry: 4.3, Page 10 of 43
`Filed Date: 06/07/2024
`Document Accession #: 20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`9
`
`wrongdoing under a state or federal statute.45 Therefore, the Revised Partial Initial
`Decision concluded that the California Parties would not have to show the five elements
`of common law fraud46 in order to prevail in avoiding the Mobile-Sierra presumption."
`
`The Presiding Judge applied section 1572 of the California Civil Code,48 which
`17.
`defines "Actual Fraud" under California law, as a guide for evaluating the arguments and
`evidence. Under section 1572, actual fraud can be committed by any of the following
`actions, including:
`
`1. The suggestion, as a fact, of that which is not true, by one who does not
`believe it to be true, 2. The positive assertion, in a manner not warranted by
`the information of the person making it, of that which is not true, though he
`believes it to be true, 3. The suppression of that which is true, by one
`having knowledge or belief of the fact, 4. A promise made without any
`intention of performing it, or, 5. Any other act fitted to deceive."
`
`Based on this framework, the Revised Partial Initial Decision found that Shell's
`18.
`negotiating tactics satisfied several elements of section 1572. Thus, the Revised Partial
`Initial Decision concluded that Shell's unlawful manipulation of the electric markets
`constituted a form of fraud that directly affected negotiation of the Shell Contract.5° The
`Revised Partial Initial Decision noted that the 2016 Initial Decision rejected a theory of
`causation based on forward prices, finding that forward contract prices influenced Shell's
`view of the contract but did not affect CDWR's.51 However, the Revised Partial Initial
`Decision reaffirmed the 2016 Initial Decision's finding of causal effect in Shell's
`manipulation of spot prices. Specifically, the Revised Partial Initial Decision referenced
`
`4514. PP 115-116.
`
`46 The five elements of common law fraud in California are: (1) a
`misrepresentation or omission of material fact, (2) knowledge of falsity (or scienter), (3)
`intent to defraud or induce reliance, (4) justifiable reliance, and (5) resulting damages.
`See, e.g., id. P 174 (noting that all parties agree on the five elements of common law
`fraud under California law).
`
`47 Id. PP 174-180.
`
`48 Id. P 124 (citing Cal. civil Code § 1572 (West 2016);
`
`49 Id.
`
`5014. PP 118-124.
`
`5114. PP 134-135.
`
`

`

`Case: 24-6696, 11/04/2024, DktEntry: 4.3, Page 11 of 43
`Filed Date: 06/07/2024
`Document Accession #: 20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`10
`
`the 2016 Initial Decision's finding that Shell's purported losses, which it used to insist on
`a higher long-term contract price, stemmed directly from the inflated spot market price
`levels that Shell's own traders had a hand in influencing through manipulative
`strategies."
`
`The Revised Partial Initial Decision concluded that the doctrine of fraud-in-the-
`19.
`inducement does not fit these facts. The Revised Partial Initial Decision found that,
`because Shell's deception of CDWR rendered CDWR unaware of Shell's market
`manipulation when it entered the contract, there could be no mutual assent between the
`parties. However, the Revised Partial Initial Decision found that there was no recission
`of the Shell Contract by CDWR and, therefore, no fraud-in-the-inducement.53
`
`Finally, the Revised Partial Initial Decision concluded that Shell's conduct
`20.
`constitutes fraud-in-the-inception and, as such, the Mobile-Sierra presumption is
`avoided.54
`
`E.
`
`Opinion No. 587
`
`In Opinion No. 587, the Commission affirmed the Revised Partial Initial
`21.
`Decision's finding that Mobile-Sierra is avoided because Shell engaged in fraud that
`directly affected negotiation of the Shell Contract, but declined to adopt the Presiding
`Judge's reasoning and instead provided an alternative analysis.55
`
`The Commission first affirmed the Revised Partial Initial Decision's finding that it
`22.
`is not necessary for the California Parties to present a case that would support an
`independent cause of action under the California state law of fraud. The Commission
`noted that, throughout the Western Energy Crisis-related proceedings, it had consistently
`rejected a restrictive interpretation of Morgan Stanley that would require a showing that
`"traditional types of unfair dealing, such as fraud and duress, need to be independent
`statutory causes of action under state contract law ...."56 Instead, the Commission
`emphasized that it would look to state law as a guide to determine whether the conduct in
`question was the type of behavior that would result in unfair dealing at the contract
`formation stage. Based on this interpretation of the role of state law in the Mobile-Sierra
`
`52 Id. P 136 (citing 2016 Initial Decision, 155 FERC 1163,004 at P 241).
`
`53 Id. PP 195-199.
`
`54 Id. PP 203-218.
`
`55 Opinion No. 587, 185 FERC 1161,197 at P 176.
`
`56 Id. P 180 (quoting Opinion No. 537-A, 153 FERC 1161,386 at P 77).
`
`

`

`Case: 24-6696, 11/04/2024, DktEntry: 4.3, Page 12 of 43
`Filed Date: 06/07/2024
`Document Accession #: 20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`11
`
`analysis, the Commission found that it was appropriate for the Presiding Judge to frame
`the analysis based on a broader formulation of the law of fraud in California, namely,
`section 1572 of the California Civil Code, which defines Actual Fraud, in part, as "any
`other act fitted to deceive.#157
`
`The Commission affirmed that the evidentiary record supported a conclusion that
`23.
`Shell's representations about losses on the April/May 2001 sales, and its efforts to build
`then-current market prices into the long-term deal to make up for those purported losses,
`were "fitted to deceive" CDWR about Shell's role in artificially inflating those prices and
`misled CDWR into believing it was getting a good deal when it really was not.
`Accordingly, the Commission found that Shell's behavior was deceptive in nature and
`constitutes the type of fraudulent conduct under California state law that had the effect of
`altering the playing field for negotiation of the Shell Contract.58
`
`The Commission also affirmed the Revised Partial Initial Decision's finding that
`24.
`the required causal nexus between Shell's spot market manipulation and its effect on
`negotiation of the Shell Contract had been established. However, the Commission found
`that the chain of causation set forth in the Revised Partial Initial Decision was too
`attenuated and could be interpreted as a sweeping rule that anytime a seller engages in a
`bad act and then later enters into a related long-term contract, the resulting contract
`would not enjoy Mobile-Sierra protection. The Commission also rejected a theory of
`causal connection that attempts to create a nexus between Shell's fraudulent conduct and
`the general need for CDWR to seek and execute the Shell Contract. Instead, the
`Commission found that the required causal nexus is established by the fact that Shell's
`spot market strategies artificially inflated market prices and Shell then krlowingly
`negotiated to include those inflated market prices in the Shell Contract as make whole
`payments for the below market purchases in the early months of the contract.
`Specifically, the Commission found that Shell's representations to CDWR about its
`losses were deceptive in nature and were made with the intention to induce CDWR into
`agreeing to contract prices that reflected the fruits of Shell's unlawful market activity,
`whereas CDWR was unaware that the price terms of the contract were influenced by
`Shell's market manipulation.59
`
`The Commission reversed the Revised Partial Initial Decision's finding that the
`25.
`theory of fraud-in-the-inducement is inapplicable here. The Commission disagreed with
`the Revised Partial Initial Decision's finding that there was no mutual assent to the Shell
`Contract, highlighting that the record contains ample evidence of extensive bargaining
`
`57 Id. P 181 (quoting Cal. Civ. Code § 1572).
`
`5814. PP 178-183.
`
`59 Id. PP 220-228.
`
`

`

`Case: 24-6696, 11/04/2024, DktEntry: 4.3, Page 13 of 43
`Filed Date: 06/07/2024
`Document Accession #: 20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`12
`
`between the parties concerning various terms of the contract, including many concessions
`that were favorable to CDWR. Further, the Commission concluded that the Revised
`Partial Initial Decision's finding of no mutual assent relied on the flawed premise that,
`because CDWR was not aware of Shell's market manipulation, CDWR did not
`understand the nature of the document it was signing, a claim the Commission found to
`be contrary to relevant case law and record evidence. The Commission also found,
`consistent with its approach of not requiring a strict showing of all five elements of fraud,
`that recission of the contract was not necessary to find this theory to be applicable.
`Moreover, the Commission explained that, because claims of fraud-in-the-inducement are
`evaluated using the same elements as general fraud claims, the evidence that supports a
`general fraud finding equally supports a finding of fraud-in-the-inducement.6"
`
`The Commission also reversed the Revised Partial Initial Decision's finding that
`26.
`Mobile-Sierra should be avoided due to fraud-in-the-inception of the Shell Contract.61
`
`On January 19, 2024, Shell and the California Parties submitted requests for
`27.
`rehearing of Opinion No. 587.
`
`II.
`
`Discussion
`
`A.
`
`Elements of Fraud
`
`1.
`
`Opinion No. 587
`
`28. As noted above, the Commission looked to the California state law of fraud as a
`guide to determine whether Shell's conduct during negotiation of the Shell Contract was
`"the type of behavior that would result in unfair dealing at the contract formation
`stage.9162 As such, the Commission concluded that the Presiding Judge was not required
`to apply and analyze each of the five elements of common law fraud in the manner that
`would be necessary to support an independent cause of action under state contract law.
`Instead, the Commission found that it was appropriate for the Presiding Judge to look to
`the language of section 1572 of the California Civil Code, which defines "Actual Fraud,"
`among other things, as "any act fitted to deceive.9063 For that reason, the Commission
`
`60 Id. PP 245-249.
`
`61 Id. PP 260-265.
`
`62 Id. P 180.
`
`63 Cal. Civ. Code § 1572(5).
`
`

`

`Case: 24-6696, 11/04/2024, DktEntry: 4.3, Page 14 of 43
`Filed Date: 06/07/2024
`Document Accession #: 20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`13
`
`rejected exceptions concerning whether the California Parties succeeded in demonstrating
`all five elements of fraud.64
`
`The Commission found, based on evidence in the record regarding Shell's spot
`29.
`market manipulation, combined with evidence demonstrating Shell negotiators '
`knowledge of that unlawful spot market activity, that "Shell's statements about losses on
`the April/May 2001 sales constitute misrepresentations that were deceptive in nature.9765
`The Commission rejected Shell's contention that the record contains no evidence that
`statements about those losses were actually made, highlighting an express statement
`made by Ed Brown, chief Shell negotiator, confirming that CDWR "was fully aware"
`that Shell was taking a loss on the April/May 2001 sales.66 The Commission further
`noted that Mr. Brown's testimony also confirmed that Shell's "losses on these sales were
`to be made up for in future periods under the long-term agreement.>=67 In addition, the
`Commission rejected Shell's argument that, even if made, Shell negotiators would have
`believed any such statements about losses to be true. The Commission concluded that
`"Shell's statements about selling to CDWR at below market prices, or 'at a loss,' were
`misrepresentations because Shell, itself, was engaged in manipulative behavior that
`artificially inflated the market prices the parties were using as a benchmark.9168
`
`The Commission referenced undisputed evidence that Shell had engaged in
`30.
`numerous electric spot market strategies that the Commission has determined to be
`unlawful." The Commission explained that evidence of these violations was relevant to
`the analysis here because it "relates directly to the question of whether Shell's statements
`about the losses on the April/May 2001 sales were intended to induce CDWR into
`agreeing to prices that Shell, itself, inflated through its unlawful behavior, under the guise
`of making Shell whole for purported losses.977" The Commission also found that the
`
`64 Opinion No. 587, 185 FERC 1161,197 at P 182.
`
`65 Id. P 183.
`
`66 Id. P 184 (citing EX. snA-219 at 18:14-16).
`
`67 Id. (citing EX. snA-219 at 18:10-13).
`
`68 Id. P 185.
`
`69 Id. P 186 (citing Opinion No. 536, 153 FERC 161,144 at PP 3, 96-98, 101, 102,
`127, 128, 130, 132, 138, & 174, Opinion No. 537, 151 FERC 161,173 at P 118).
`
`70 Id.
`
`

`

`Case: 24-6696, 11/04/2024, DktEntry: 4.3, Page 15 of 43
`Filed Date: 06/07/2024
`Document Accession #: 20240607-3056
`
`Docket Nos. EL02-60-016 and EL02-62-015
`
`14
`
`record is replete with evidence confirming that Shell negotiators had knowledge of the
`unlawful trading strategies as well as their corresponding effects on prices and profits."
`
`The Commission noted that, although the California Parties were not required to
`31.
`prove all five elements of fraud, the record contains ample circumstantial evidence to
`demonstrate Shell's subjective state of mind during negotiation of the Shell Contract.
`Specifically, the Commission found that trader