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Muise v. GPU

July 08, 2004

MADELINE MUISE, INDIVIDUALLY AND AS OWNER AND OPERATOR OF MEDIATION AND THERAPY ASSOCIATES, ON BEHALF OF HERSELF AND ALL OTHER INDIVIDUALS AND USINESS ENTITIES SIMILARLY SITUATED, PLAINTIFF-APPELLANT,
v.
GPU, INC., ITS SUBSIDIARIES, AGENTS, SERVANTS AND/OR EMPLOYEES, AND/OR GPU ENERGY, ITS AGENTS, SERVANTS, AND/OR EMPLOYEES, DEFENDANT-RESPONDENT.
GEORGE J. TZANNETAKIS, AND PAULA R. ZACCONE-TZANNETAKIS, HUSBAND AND WIFE, ANNA JACOUBS, GERALD HOY AND KATHLEEN HOY, HUSBAND AND WIFE, LLOYD VACCARELLI AND DOROTHY VACCARELLI, HUSBAND AND WIFE, FRANK CRACOLICI, MARMOL, INC., D/B/A/ UMBERTO RESTAURANT, WARREN ABRAHAMSEN D/B/A FAIRWINDS CATERING, C.K. SEAFOOD, INC., D/B/A BAYSHORE FISHERY, CHARLES KURICA, JR. AND JANICE KURICA, HUSBAND AND WIFE, FOREIGN CARS OF MONMOUTH, INC., RAD ENTERPRISES, INC., D/B/A KRAUSZER CONVENIENCE STORE, AND FAIR HAVEN HARDWARE, INC., ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,
v.
GPU, INC., AND ITS SUBSIDIARY COMPANIES, JERSEY CENTRAL POWER & LIGHT COMPANY, GPU GENERATION, INC., AND GPU SERVICE, INC., ALL D/B/A/ GPU ENERGY, DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, L-3587-99.

Before Judges King, Lintner and Lisa.

The opinion of the court was delivered by: King, P.J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued: May 19, 2004

Plaintiffs, electrical utility customers who experienced power outages on the 4th of July 1999 weekend brought this class action for damages for failure to provide service. They also asserted claims for consumer fraud, negligence and breach of contract. This is an interlocutory appeal on leave granted from the order of decertification of plaintiffs' class and the denial of their motion to admit expert testimony on class-wide damages. R. 2:2-3(b).

We affirm the decertification of the class and the rejection of the proffered proof of class-wide damages. We remand for certification of a more limited class of customers whose outages directly resulted from alleged negligence in delaying the replacement of transformers at the Red Bank substation.

I.

Plaintiffs are residential and business customers of defendants GPU, Inc., and related affiliates (GPU or the utility), providers of electrical service. On July 20, 1999 the Tzannetakis plaintiffs filed a class action complaint in the Superior Court, Law Division, Monmouth County, alleging damages resulting from power failures in July 1999. On July 22, 1999 Muise filed a class action complaint in the same court against the same defendants, with similar allegations.

On August 4, 1999 Muise filed a motion for class certification. In September 1999 the Tzannetakis plaintiffs also moved for class certification. On October 8 consolidation was ordered. In an October 12, 1999 hearing Judge Chaiet granted plaintiffs' motions for class certification and denied defendants' motion to dismiss in favor of deferring to the primary jurisdiction of the Board of Public Utilities (the Board).

On January 11, 2000 we granted defendants' motion for leave to appeal from the denial of their motion to dismiss,"in order to determine the proper forum for [plaintiffs'] claims." Muise v. GPU, Inc., 332 N.J. Super. 140, 148 (App. Div. 2000). Defendants did not seek leave to appeal from the class certification because they wanted to develop the factual record. We concluded that the Law Division judge properly retained jurisdiction, rather than deferring to the Board. Id. at 146. We stated, however:"Future developments may require reference of certain issues to the Board, but not at present." Ibid.

At a hearing on May 24, 2001 Judge Uhrmacher denied defendants' motion to decertify the class. On January 28, 2002 she heard arguments on defendants' motion for partial summary judgment. In an opinion issued on August 14, 2002 Judge Uhrmacher granted defendants' motion for partial summary judgment, dismissing with prejudice plaintiffs' claims for fraud, negligent misrepresentation, violation of the Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -20, and strict product liability.

On November 8, 2002 defendants filed a renewed motion to decertify the class. On December 17, 2002 plaintiffs filed a notice of motion for a declaration of admissibility of their experts' class-wide damage model. On November 10, 2003 Judge Perri issued her opinion denying plaintiffs' motion to permit expert testimony on their proposed survey model for proof of class-wide damages, and decertifying the class. On January 5, 2004 we granted plaintiffs' motion for leave to appeal this ruling.

II.

Plaintiffs alleged damages resulting from electrical power interruptions, deficiencies or failure, and blackouts without notice, during a heat wave from July 4-10, 1999. The Tzannetakis plaintiffs specified damages including spoilage of food; damage to computers, appliances and other electronic equipment; inconvenience, emotional and physical pain and suffering and loss of use of electrically-powered equipment; loss of business income; and other consequential and incidental damages including the cost of alternative sources of power.

Planning engineer Andrew Zulkosky for GPU said it provides electrical service to about one million customers in two non- contiguous regions of New Jersey, separated by a territory served by Public Service Electric & Gas Company (PSE&G). The North Region includes all or part of Sussex, Morris, Passaic, Essex, Warren, Hunterdon, Union, Somerset and Mercer Counties, and the Central Region includes all or part of Monmouth, Middlesex, Ocean, Mercer and Burlington Counties.

The electrical infrastructure has three main levels: the interstate transmission system (originating at the power plants), the subtransmission system (here, two regions, functioning to reduce voltage and circulate power through a series of looped substations), and local distribution systems (here, more than 1000 circuits, functioning to further reduce voltage and distribute power radially to a particular geographic area). Voltage is again reduced at over 160,000 pole-top or pad-mounted transformers in the two energy regions before power is fed from each to a small number of customers (usually three to ten).

All levels of the electrical infrastructure are equipped with devices to protect individuals from harm and to protect equipment from damage; examples are circuit breakers, protective relays and fuses. Some of the devices operate automatically and some are used by system operators to avoid overloads when necessary to protect the system. Planning engineers attempt to forecast system conditions several years ahead to assure sufficient capacity. In a typical instance of widespread service interruptions, usually caused by severe weather, there are numerous"trouble locations" where those interruptions occur.

According to the Board, during the week of July 4, 1999 hot weather combined with the holiday created unprecedented demand for power. Defendants concede that during the relevant period about 250,000 of its customers lost power for periods ranging from a few minutes to more than fifteen hours. Defendants attribute these interruptions to at least forty-four distinct sources, including equipment failures, deliberate circuit shut- offs to permit access for maintenance or fire fighting, the triggering of protective devices, lightning and automobile accidents.

The parties do not seem to dispute the Law Division judge's synopsis of the power outages:

The evidence before the court, which is voluminous and will only be set forth here as a sampling, indicates that the first significant power outage occurred on July 4, 1999, with a"phase" or burn-out of a line in the Mantoloking substation which interrupted power to the customers served by that substation. Within the next 12-hour period, line repairs were required in Manasquan, which required the system operators to de-energize the system while the work was done. At the Cedar Bridge substation, power had to be interrupted for work to be performed on a messenger wire. On the evening of July 6, 1999, the operation of protective devices at the Manasquan substation affected 1,500 customers.

In the late evening hours of July 5, 1999, a bushing on the Bank 2 transformer at the Red Bank substation failed. The loss of this transformer, coupled with the unusually high demand occasioned by the heat, placed additional stress on the other transformers at the substation. On July 6, 1999, the Bank 1 transformer began overheating and service was manually interrupted to several distribution circuits in order to lessen the load on the transformers. These manual interruptions affected approximately 10,000 customers for periods ranging from 2.5 hours to 8 hours. On July 6, 1999, the Bank 8 transformer also overheated, and the Bank 7 transformer was automatically taken out of service by protective devices. These events affected approximately 70,000 customers.

During this time, GPU also implemented rolling blackouts in order to limit the load on Banks 7 and 8. The rolling blackouts continued through July 7, 1999 and affected approximately 46,000 customers. Typical service interruptions lasted for approximately four hours. On July 8, 1999, rolling blackouts continued but only lasted for 2 hours. At approximately 1:30 p.m. on July 8, 1999, the rolling blackouts ceased when there was a break in the heat and the load on the transformers lessened, allowing the two transformers to handle the load.

Other service interruptions occurred throughout the North and Central regions during this time. GPU has identified no less than 38 instances of entire circuit interruptions, the reasons for which included regulator failure, circuit breaker failure, underground feeder cable failure, line burn outs, operation of over-current relay protectors, circuit de-energization, tripping of transformer breakers and car pole accidents. Partial interruptions also resulted from causes such as animal or bird contact with electrical devices, digging activity, lightning strikes, general pole damage due to rotting, termites, woodpecker holes, age, or corrosion, insulation flashover or insulation breakdown, overvoltage, undervoltage, emergency load shedding and electrical surges (which occur when de-energized lines are suddenly re- energized). Additionally, GPU identified approximately 350 pole-top transformers that experienced interruptions during the week in question, affecting approximately 3,700 customers.

According to a report by plaintiffs' technical experts, Exponent Failure Analysis Associates (Exponent), GPU recognized before July 1999 that it was operating with a deficiency in reactive power. The power outages were the result of GPU's inability to comply with its own planning criteria, and deferring upgrades for budget reasons. This deferral of projects to meet forecast demand caused low voltage, overloads and equipment failures.

Plaintiffs assert that GPU's 1998 decision to defer installation of two larger capacity transformers at the Red Bank substation triggered the worst outages. According to Exponent, the vast majority of outages beginning at 1:22 p.m. on July 6 were related to events at the Red Bank substation. That included all the planned interruptions (rolling blackouts). A GPU internal analysis stated that interruptions resulting from a fire on the number 2 transformer at the Red Bank substation, overheating on numbers 1 and 8, and automatic shutdown of number 7, affected about 100,000 customers.

The Board determined that the majority of outages were concentrated in coastal Monmouth and Ocean Counties,"primarily due to the failure of two Red Bank Substation transformer bushings and associated rolling blackouts." It determined that at Red Bank, two bushings [insulating parts] failed independently, one on July 5 and one on July 7. According to GPU, although a series of equipment failures, deliberate load reductions and protective relay trippings occurred at Red Bank within a few days, they had different causes and affected different groups of customers for varying durations.

The October 18, 1999 order certifying the class defined the class as follows:

All customers of GPU Energy in New Jersey including, but not limited to, customers in Monmouth and Ocean Counties, and all dependents, tenants, employees and other intended beneficiaries of customers of GPU Energy in New Jersey including, but not limited to, Monmouth and Ocean Counties, who suffered damages as a result of the failure of GPU Energy to deliver electricity during the week beginning Sunday, July 4, 1999. The officers, directors and agents of the defendants are specifically excluded from the class. Any persons with claims for personal injury arising out of the power outages are excluded from the class.

At a case management conference on October 18, 1999, Judge Chaiet approved the provision of a notice of claim to class members, which was inserted in customers' bills and also published in the Newark Star Ledger and the Asbury Park Press. About 2500 claims were returned, ranging in amount from $1 to $150,000. Plaintiffs do not want to rely on individual claims, claiming it is unrealistic to expect thousands of class members to testify to their relatively small damages years after the event. Accordingly, they retained two experts, engineers Roy Billinton and Garry Wacker, to estimate class-wide damages.

Those experts estimated damages at $62 million. Billinton and Wacker used existing surveys of electrical customers in California and Canada asked to value hypothetical power outages. The experts relied primarily on four cost-of-interruption studies, two Pacific Gas and Electric (PG&E) studies and two of their own, in which a sample population was asked to state what their expected costs would be if an outage occurred under certain circumstances.

Billinton and Wacker adapted this data to New Jersey in order to"estimate customer damages resulting from GPU services interruptions from July 4 to 10, 1999." Billinton and Wacker explained in their report that customer surveys had"become widely accepted as the most suitable means to obtain accurate customer interruption cost data.""Typical applications of reliability worth data [estimated cost of unreliability] involve cost-benefit analyses to assist system planning decisions, justify new infrastructure, or support changes in electricity tariff structures." The actual losses due to service interruptions"are considered as a lower bound estimate or surrogate of reliability worth."

In several of their own papers on survey estimates of interruption costs, Billinton and Wacker listed some limitations of such survey results. In one paper, they cautioned that the results were predictions and estimations based on survey scenarios respondents had not experienced, and actual actions and costs might be different. In another they cautioned,"Limitations included here are: that the estimates are customer predictions of their losses or responses; that most respondents have little experience with longer interruptions; and costs of interruptions are likely socio-economic/demographic/geography specific; etc." In another they admonished:

The customer damage [cost of interruption] function is rather uncertain and incomplete for many reasons, most notable of which are the considerable variation of customer losses with each customer category and the inherent problem of combining widely varying components into a composite function. Any applications of the customer damage function are therefore similarly limited.

The authors also cautioned that"it would be necessary to generate a composite customer damage function for each region of a utility's service area or other service areas as required to undertake comparisons.""It is highly questionable, however, to make comparisons between systems or to determine the costs associated with those effective minutes of interruption." They concluded that the composite customer damage function, despite its variables and uncertainties, was"the most readily available tool for determining monetary estimates of reliability worth.""More credible values would be determined from customer cost data which are specific to the situation being studied."

Billinton knew of two studies that had used reliability worth assessment methodology to measure customer losses during an actual power interruption. A 1991 study in Norway had conducted a survey to assess the aggregate damages to customers of a blackout. An earlier Swedish study applied cost-of interruption data to estimate the total national cost of a 1983 blackout. Neither was done in a litigation context or even for the purpose of measuring individual damages and compensating customers.

Plaintiffs provided certifications from two other experts, population surveyor Michael J. Sullivan and engineer Douglas M. Logan. In his certification dated January 3, 2001 Sullivan said,"It is my opinion that reliable interruption cost estimates can be developed using information obtained from published literature and other sources." He explained,"Outage cost surveys are designed to accurately measure the average magnitude of the economic losses groups of customers, similar to one another in the way they use electricity, experience as a result of electric service interruptions.""Electric utilities use average interruption cost estimates (obtained from population surveys) to evaluate the benefits that can be obtained from investments in service reliability. In effect, they use avoided customer interruption costs to identify the cost effectiveness of reliability improvements."

Logan agreed with the statements of Billinton, Wacker and Sullivan about"the applicability of customer interruption costs obtained by surveys to determining the economic damages incurred by classes of customers resulting from power outages." He noted that the original purpose of those surveys was to rationalize reliability criteria and capacity pricing. Interruption costs had been used in the United States for generation planning, for tariff design and in investment decisions for transmission and distribution systems. He stated that interruption cost surveys"may be used as the basis for reliable estimates of the interruption costs for any other utility if there is a reasonable correspondence between the two utilities in terms of climate, economy, and demographics."

William Desvousges, an expert in the valuation of benefits and costs, submitted a report for defendants. He concluded that plaintiffs' methodology was improperly applied here because the value of reliability, even if assumed as accurately measured by these hypothetical studies, was not a reasonable proxy for actual damages. Moreover, the surveys used did not account for differences among customers; the customer composition and circumstances, such as season, were not comparable; and the studies had numerous methodological flaws.

Desvousges testified in deposition that it might be valid to apply data from existing surveys to another similar area, depending on the purpose of the transfer and the level of accuracy needed. It could be valid, for example, in a benefit - cost analysis or a natural resource damage assessment for purposes of settlement. Desvousges had used the benefits transfer method for the utility industry in one context only, in measuring potential environmental costs associated with utility supply plants. He conceded that the benefits transfer method might have been valid here if the surveys used by Billinton and Wacker had met the necessary criteria of soundness and similarity, but they did not. However, he qualified it by adding that such a benefits transfer method would have yielded only a"starting point," because any transfer has error associated with it.

When granting defendants' motion for decertification, Judge Perri found,"While not dispositive on the issue of decertification, the dismissal of the consumer fraud claims in this matter materially changed both the complexion of the case and the preference for certification which was present at the time Judge Chaiet decided the initial motion for certification."

Judge Perri explained that much of the law on the liberal construction of the class action rule was made in the context of consumer fraud actions, making it difficult to determine whether it was class actions, or consumer fraud actions, that actually deserved most of the credit. Moreover, the loss of the consumer fraud claims rendered plaintiffs' damages proofs more difficult. In addition, the consumer fraud claims provided a"cohesive, unifying effect" that contributed to the presence of the requirement for predominance of common issues.

Judge Perri stated that a canvass of other jurisdictions showed that, where class action status was sought for interruption of power supplies, courts had"resoundingly rejected the class action format." She found that the record showed no single catastrophic event that caused the outages, but rather, hundreds of"trouble locations" involving different equipment and distinct factual scenarios."With the dismissal of the consumer fraud claims, plaintiffs are left with what can best be described as a mass tort action sounding in negligence and breach of contract." Such actions lack class cohesion, unless a single event is the common cause. She rejected plaintiffs' theory that"lack of preparedness" qualified for that exception, noting"[T]here is no recognized cause of action in New Jersey for'lack of preparedness'." She concluded that there was no common nucleus of proof where plaintiffs would have to prove that each separate power interruption was attributable to a failure of GPU to properly allocate its resources. Therefore, class certification was not the superior method for resolving the issues.

Even if plaintiffs could maintain class status based on their theory of liability, there remained the issue of plaintiffs' effort to prove damages on a class-wide basis. Judge Perri rejected the premise that interruption of power per se constituted loss of use, and therefore each member of the class must have sustained damage; plaintiffs would have to prove the fact of damage for each class member. For example, a shopkeeper whose store was closed, or a homeowner not in residence, might have suffered no adverse consequences despite losing power. For those plaintiffs who could prove the fact of actual damage, the nature and degree of their losses would vary greatly. The disparity among commercial customers would be even greater than that among residential customers.

Judge Perri considered the damages model proposed by plaintiffs, based on consumer surveys conducted in California and Canada on projected harm caused by hypothetical outages. She denied plaintiffs' motion to admit the testimony of plaintiffs' two experts in the field of evaluating interruption costs of electric service, Billinton and Wacker. The proposed survey method for calculating damages had been used only in the context of infrastructure planning. Customer surveys had never been used for the purpose of awarding litigation damages, and never used to provide compensation following an actual power outage; they had been used to calculate theoretical losses sustained by customers after an actual outage only in two isolated instances, in Norway and Sweden. Such survey results had not been taken from the customers of one utility company and applied to a different one.

She found the report of Desvousges persuasive, though not dispositive. The studies on which plaintiffs' experts relied differed in location, sectors, duration of outages, season, day of the week and time of day. More important, the survey method focused on the value that customers placed on the reliability of their electric service, not on actual damages possibly suffered as a result of its interruption. Also, it used averages, thus failing to take into consideration individual differences among class members.

Judge Perri observed that there is a preference for individualized proof of damages. She did not find that individualized proofs were always required, but said,"A court should only depart from this general rule where class-wide damages can be calculated by a reliable mathematical formula." She added,"Even then, a statistical model estimating the total amount of damages should not be substituted for actual proof unless it can be presumed that all members of the class suffered damage."

She concluded that the damages model proposed by plaintiffs, a prediction of losses during a hypothetical power outage, could not serve as a substitute for proof of actual damages. Judge Perri added,"No mathematical formula could accurately deduce each class member's fact-of-damage nor can it determine the actual damages sustained during outages which varied as to length and time of day." She thought the model offered by plaintiffs was"too flawed to produce an accurate representation of damages."

Judge Perri also rejected plaintiffs' proposal that the fluid recovery rule applied to relieve them of their obligation to prove actual damages. The remedy of fluid recovery is applied in a class action only when funds from an award are distributed to non-class members because the identities of class members are not known. Here, the names and addresses of GPU customers, along with the precise length of each service interruption, were readily available.

IV. Standard of Review

Plaintiffs argue the judge erred by applying the standard for the initial determination of class certification instead of a more stringent standard allegedly applicable to decertification. Defendants respond that the judge acted within her discretionary authority to grant their decertification motion. We conclude that the judge applied the correct discretionary standard.

We review a determination of class certification for abuse of discretion. See In re Cadillac V8-6-4 Class Action, 93 N.J. 412, 436-37 (1983) (applying that standard). Class certification is governed by R. 4:32-1, which provides:

(a) General Prerequisites to a Class Action.

One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

(b) Class Actions Maintainable. An action may be maintained as a class action if the prerequisites of paragraph (a) are satisfied, and in addition:

(1) the prosecution of separate actions by or against individual members of the class would create a risk either of (A) inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class, or (B) adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other ...


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