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Pinal Energy, LLC v. Southwest Gas Corporation

Court of Appeals of Arizona, First Division, Department B

October 15, 2013

PINAL ENERGY, LLC, an Arizona limited liability company, Plaintiff/Appellant,
SOUTHWEST GAS CORPORATION, a California corporation, Defendant/Appellee.

Not for Publication - Rule 28, Arizona Rules of Civil Appellate Procedure

Appeal from the Superior Court in Maricopa County Cause No. CV 2012-050939 The Honorable Michael D. Gordon, Judge

Craig A. Marks, PLC Phoenix By Craig A. Marks And Quarles & Brady, LLP Phoenix By Don P. Martin and Lauren Elliott Stine And Fennemore Craig, P.C. Phoenix By Timothy J. Berg Attorneys for Plaintiff/Appellant

Gallagher & Kennedy, P.A. Phoenix By Michael M. Grant and Mark Deatherage and Laura E. Antonuccio Attorneys for Defendant/Appellee



¶1 This appeal arises out of the superior court's dismissal of a lawsuit filed by Pinal Energy, LLC against Southwest Gas Corporation for lack of subject matter jurisdiction. We affirm the superior court's dismissal of count 3 of the complaint, but we hold the superior court has exclusive subject matter jurisdiction over the parties' dispute as to counts 1 and 2 and accordingly should not have dismissed those counts. Therefore, we reverse and remand for further proceedings consistent with this decision as to counts 1 and 2. We also vacate the superior court's fee award in Southwest Gas's favor.


¶2 Southwest Gas is a public service corporation as defined in Article 15, Section 2, of the Arizona Constitution. It has the exclusive right to distribute and sell natural gas in Pinal County.

¶3 Pinal Energy operates an ethanol production facility in Pinal County that consumes large quantities of natural gas. Because of its then-current and projected natural gas needs, Pinal Energy planned to build a pipeline to bypass Southwest Gas and obtain natural gas services directly from the El Paso Natural Gas Pipeline rather than Southwest Gas. Rather than build its own pipeline, however, Pinal Energy negotiated with Southwest Gas to have Southwest Gas build pipeline facilities and continue to supply natural gas to Pinal Energy at a reduced rate. It did this pursuant to a B-1 tariff issued by Southwest Gas.[2]

¶4 The B-1 tariff allows Southwest Gas to negotiate rates with customers who demonstrate they would otherwise "bypass" Southwest Gas and obtain their natural gas service from some other source at rates lower than Southwest Gas's effective rates. Pinal Energy demonstrated to Southwest Gas's satisfaction that bypassing services from Southwest Gas was "economically, operationally and physically feasible and imminent." Thus, Pinal Energy was able to receive its natural gas and transportation service from Southwest Gas at a lower negotiated rate.

¶5 The parties entered into four agreements, including a September 11, 2006 Incremental Natural Gas Facilities Agreement as modified by an April 10, 2007 Addendum 1; an April 10, 2007 Facilities Extension Agreement; and a July 20, 2007 Service Agreement - Transportation of Customer Secured Natural Gas Under Rate Schedule B-1. Under these agreements, Southwest Gas built a pipeline denominated as the "Northern Route." It also agreed to use all "commercially reasonable efforts" to build a second pipeline denominated as the "Permanent Route" by October 1, 2008.

¶6 The parties further agreed to effective rates or volumetric charges. Pinal Energy agreed to pay a "Type A" rate for fixed annual volumes of natural gas -- minimum amounts --and a "Type B" rate for all volumes actually delivered. The parties also agreed to an arrangement whereby these charges would be adjusted according to a formula that would reflect the actual cost of constructing the facilities, described in the facilities agreement as the "construction cost true-up." According to Pinal Energy, because of the deteriorating economy, reduced customer demand, and Southwest Gas's improved distribution system, Southwest Gas neither built the Permanent Route nor adjusted the Type A charges.

¶7 On March 9, 2012, Pinal Energy sued Southwest Gas and, in counts 1 and 2 alleged breach of contract and breach of the covenant of good faith and fair dealing asserting Southwest Gas had failed to build the Permanent Route and adjust the charges under the agreements.[3] Southwest Gas moved to dismiss for lack of subject matter jurisdiction[4] arguing the superior court lacked jurisdiction because the dispute concerned rates and therefore was within the exclusive ...

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