California Supreme Court Upholds Settlement Between Southern California Edison Co. and California Public Utilities Commission

By Christopher A. Hilen
[Sept. 2003]

On Aug. 21, 2003, the California Supreme Court issued a decision finding that the adoption of a settlement between the California Public Utilities Commission (CPUC) and Southern California Edison Company (SCE) of SCE’s “filed rate doctrine” lawsuit against the CPUC did not violate either the state statute that imposed a retail rate freeze as part of California’s electric restructuring law or the statutes that govern the procedure by which the CPUC makes decisions.

The Court delivered its decision on three issues that the United States Court of Appeals for the Ninth Circuit certified for its review. This unusual sua sponte certification arose in 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.

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. The Utility Reform Network (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 the Electric Restructuring Statute, the Bagley-Keene Open Meeting Act, and Public Utilities Code section 454 governing the Commission’s adoption of rate changes. The Ninth Circuit certified the following three questions to the California Supreme Court:

• Did the CPUC have the authority to propose the settlement in light of the provisions of AB 1890 (California’s electric restructuring statute), particularly 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?
  
  
• Did the procedures employed by the CPUC in adopting the settlement violate the Bagley-Keene Open Meeting Act by “changing” rates in a closed session?
  
  
• Did the CPUC violate Public Utilities Code §454 in adopting the settlement by altering SCE’s retail rates without a public hearing and issuance of findings?

This past August, the state’s Supreme Court held unanimously that the CPUC had the authority to enter into the settlement and did not violate Public Utilities Code section 368. The Court rejected TURN’s argument that the settlement violated section 368 by not reducing SCE’s rates at the end of the rate freeze, holding that section 368 does not dictate that rates be reduced, or changed in any way, at the end of the rate freeze period.

The Court also rejected TURN’s argument that the settlement allowed SCE to recover in the post-rate freeze period costs incurred during the rate freeze period, in violation of section 368. The Court held that the enactment of Assembly Bill 6X in 2001 eliminated any possible restriction section 368 may have imposed on certain rate changes. Giving due deference to the CPUC’s interpretation of Assembly Bill 6X, the Court held that whether the costs authorized to be recovered by SCE under the settlement were characterized as energy procurement costs or as generation-related costs, they are not “uneconomic costs” restricted in recovery by section 368 and, hence, their recovery under the settlement did not violate the statute.

The Court also held 6-1, with Justice Baxter dissenting, that in approving the settlement in a closed-door meeting after secret negotiations, the CPUC did not violate either the Bagley-Keene Open Meeting Act by “changing” rates in a “closed session” or Public Utilities Code §454 by raising retail rates without complying with the statutory requirements for notice and hearing. The Court majority rested this holding on two principal grounds. First, it found that the settlement maintained SCE’s rates at their then-current level; it did not change those rates. Second, the Court held that the Bagley-Keene Act permits the Commission not only to confer with counsel and deliberate on the settlement of pending litigation in closed session, but also to act on that litigation and adopt a settlement of it in closed session without accepting public comment on the proposed settlement.

The matter will now return for final disposition by the Ninth Circuit. Given the Supreme Court’s near unanimity in its decision, it is unlikely the Ninth Circuit take issue with the Supreme Court’s answers to the Ninth’s Circuit’s certified questions.

The most important aspects of the Court’s decision in future cases are likely the holding on the two procedural issues:

1. The Commission can not only discuss litigation and instruct counsel in closed session, it can settle the litigation in closed session, without identifying in advance the litigation that will be discussed in the closed session and without accepting public comment on it, as long as the Commission immediately announces the vote in public session; and
   
   
2. Voting to maintain a utility's existing rates does not constitute a rate change and, therefore, does not trigger the notice and hearing requirements of the Bagley-Keene Act and Public Utilities Code section 454, even if the Commission's action means that rates will not change when they would otherwise would have been reduced in the absence of the decision.

Published by Davis Wright Tremaine's Energy Law Group

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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