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Despite an immediate energy crisis facing Californians when electric power prices skyrocketed this past summer, Gov. Gray Davis acted illegally when he seized more than $200 million worth of power contracts to keep the now bankrupt California Power Exchange from liquidating them, the 9th U.S. Circuit Court of Appeals has ruled. The Sept. 20 decision was a victory for Duke Energy, which had sued Davis alleging that his commandeering of the contracts violated the Supremacy Clause and forced the Charlotte, N.C.-based company to sell power at below-market rates. Duke v. Gray Davis, No. CV-01-01252-TJH. “It’s an important decision because it vindicates the right to bring an action in a federal court to enjoin state officials from violating the United States Constitution,” said Los Angeles lawyer Seth Ribner, whose New York-based firm, Simpson Thacher & Bartlett, briefed the case for Duke. FOLLOWING DEFAULTS The dispute followed the January 2001 defaults by Southern California Edison and Pacific Gas & Electric on payments relating to so-called block-forward contracts, which are future contracts for large amounts of electricity. During that time, Davis exercised his authority under the California Emergency Services Act to take over the contracts. He relied specifically on a provision that allowed him, in a state of emergency, to “commandeer or utilize any private property or personnel deemed by him necessary” in carrying out his responsibilities as the state’s chief executive. He said at the time that he had rescued the contracts from the auction block and preserved their low-cost value for consumers. After Duke filed its suit, the governor was able to get the case dismissed in the Central District of California on sovereign immunity grounds. A split three-judge 9th Circuit panel reversed the district court dismissal. Judge Diarmuid F. O’Scannlain wrote that the governor crossed a line when he interfered with the authority held by the Federal Energy Regulatory Commission (FERC) under the Federal Power Act. “By commandeering the block forward contracts, Duke lost its FERC-protected right to standard financial protection, i.e., to liquidate its collateral if the buyer defaults on their obligations,” wrote O’Scannlain, who was joined by Senior Judge Harlington Wood Jr., sitting by designation from the 7th Circuit. “Destroying Duke’s ability to exercise its rights to assure payment for third-party sales, is exactly why Gov. Davis’s executive order cannot stand,” O’Scannlain said. The opinion states that Duke is not seeking relief that would permanently divest the governor of his future ability to invoke his emergency powers. Rather, the court ruled that Duke sought “an injunction against a specific executive order in an area preempted by federal law.” In a sharp dissent, Judge Alex Kozinski took issue with the majority. He wrote that Davis exercised eminent domain in response to a “major emergency affecting the health, safety and comfort of the people of California.” He noted that the governor acted “decisively” as he faced rolling blackouts and had “good reason to believe that far worse was in store.” Despite Kozinski’s concerns, the majority sent the case back to the district court with instructions to enter a judgment in favor of Duke and an appropriate injunction against the governor’s commandeering orders. The California attorney general’s office said it is reviewing the decision and will determine whether to seek a rehearing before the full 9th Circuit.

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