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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:
- 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
- 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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