CALIFORNIA SUPREME COURT HEARS ARGUMENT ON SCE/CPUC SETTLEMENT

By Steven F. Greenwald
[May 2003]

On May 27, 2003, the California Supreme Court heard oral argument from Southern California Edison Company (SCE), the California Public Utilities Commission (CPUC) and The Utility Reform Network (TURN) on three issues that the United States Court of Appeals for the Ninth Circuit has certified for its review. This unusual sua sponte certification arose from a proceeding that commenced with SCE initiating its “filed rate doctrine” complaint against the CPUC in U.S. District Court in Los Angeles in November 2000. SCE sought an order directing the CPUC to allow SCE to recover in its retail rates all of its costs of its wholesale power purchases from the California Power Exchange Corporation.

SCE and the CPUC settled the filed rate doctrine litigation in September 2001. The settlement's essential terms were termination of the litigation in return for SCE being allowed to continue to recover in retail rates approximately $3.6 billion of its unrecovered wholesale power procurement costs. TURN intervened in the U.S. District Court proceeding and objected to the settlement. The District Court denied TURN’s claims, and approved the settlement as being “fair, adequate and reasonable.”

On appeal, in September 2002, the Ninth Circuit rejected all of TURN’s challenges to the settlement based on federal law. (See Southern California Edison Co. v. Lynch, 307 F.3d 794 (9th Cir. 2002).) However, in reviewing TURN’s challenges based on California state law, the Ninth Circuit suggested that it would likely find that CPUC’s participation in the settlement violated:

• Public Utilities Code §368 by raising retail rates in violation of the “rate freeze” which had been an integral part of the California AB 1890 electric restructuring legislation;
  
  
• Public Utilities Code §454 by raising retail rates for SCE’s customers without complying with the statutory requirements for notice and hearing; and
  
  
• Bagley-Keene Open Meeting Act by “changing” rates in a closed session.
  

The Ninth Circuit accordingly, on its own motion, certified these state law questions to the California Supreme Court. The Supreme Court issued an order in November 2002 accepting the request to respond to the questions. Over the last several months, SCE, CPUC and TURN have filed a series of briefs addressing these certified questions. Numerous parties have also filed amicus briefs.

At the oral argument, Chief Justice George, and Justices Kennard, Baxter, and Werdegar asked numerous questions directed at whether the CPUC’s entry into the settlement and the resulting maintenance of SCE’s rates at the levels established by the two rate surcharges the CPUC approved in early 2001 constituted a “change” in rates which required the CPUC to conduct its decision-making in public and/or to comply with the various notice and procedures necessary to raise rates. SCE and the CPUC advocated that the maintenance of rates the CPUC has previously established does not constitute such a “change” in rates; conversely TURN argued that the settlement’s effect of transferring $3.6 billion from ratepayers to SCE necessarily from an economic perspective constituted an increase in rates. The SCE and CPUC attorneys also stressed that no action by the CPUC is necessary to maintain rates; just the contrary, once established by the CPUC, rates remain in effect unless and until the CPUC orders they be changed.

Interestingly, and in contrast to the emphasis on the rate “change” and associated procedural issues in their questions, the Justices did not appear to focus on the AB 1890 rate freeze and its possible substantive implications.

Justices Brown and Moreno did not ask any questions. Justice Chin had previously recused himself and did not participate. Associate Justice Cushing of the California Court of Appeals substituted for Justice Chin at the oral argument.

The matter is now submitted and the next step will be for the Supreme Court to issue an order with its answers to the certified questions. The California Rules of Court provide that these answers shall have “the same authoritative and precedential force” as any of the Court’s other decisions. After issuance of the Supreme Court decision, the matter will return for final disposition by the Ninth Circuit.

Any questions about this Advisory should be directed to:

Steven F. Greenwald, San Francisco, (415) 276-6528, stevengreenwald@dwt.com

This Energy Advisory is a publication of the Energy Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in energy law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2003, Davis Wright Tremaine LLP.

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