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Court May Decide if Power Users Pay More

A federal judge's recent ruling that Southern California Edison Co. has the right to pass on to consumers its costs of acquiring power on the wholesale market does not mean that ratepayers will have to bear any of those costs soon.

But the decision nonetheless provided immediate benefits to the beleaguered utility--primarily making the company look more financially secure and credit-worthy because the ruling could pave the way for a recovery of more than $2 billion for Edison.

Consequently, attorneys and spokesmen for Edison trumpeted the ruling of U.S. District Judge Ronald S.W. Lew as a significant victory.

Attorneys for the California Public Utilities Commission played down the decision's consequences, saying it was merely the first skirmish in a long process.

Regardless of how significant Lew's ruling was, the legal battle clearly has important ramifications, and they go beyond Edison's financial health.

Ultimately, the case, titled Southern California Edison vs. Loretta M. Lynch (president of the PUC), may determine whether Edison's customers have to pay more for electricity.

Moreover, the case--and a virtually identical one filed by Pacific Gas & Electric Co. in Oakland federal court--may clarify whether there will be any change in the traditional demarcation of regulatory authority over utilities as a result of deregulation.

Historically, the federal government has regulated wholesale power rates and state governments have regulated retail rates, those charged to consumers. One of the key issues in the Edison and PG&E cases is the utilities' contention that a PUC-imposed rate freeze violated the traditional demarcation by indirectly interfering with federal regulatory authority.

Both companies say that they have been prevented from recovering their wholesale purchase costs because of the rate freeze imposed by the PUC as part of the massive utility deregulation law enacted in 1996, known as AB 1890.

Unless the issues are resolved by legislative action on the state energy crisis, it seems likely that the two suits will wind up in the U.S. 9th Circuit Court of Appeals and perhaps ultimately the U.S. Supreme Court. The California Public Utilities Commission and the Utility Reform Network, a consumer advocacy group, are opposing the companies in court.

The 1996 deregulation law provides that the California rate freeze lasts until March 31, 2002, or until what are known as a utility's "stranded costs" (in essence, certain assets such as nuclear power plants that were overvalued in 1996) are recovered. The PUC determined last year that San Diego Gas & Electric, the state's other major privately owned utility, had recovered its "stranded costs," enabling that company to impose rate hikes. But the agency has said that Edison and PG&E are not entitled to take such action yet.

On Jan. 8, Judge Lew agreed in principle with Edison's contention that the Federal Power Act trumps California's 1996 energy deregulation law.

Lew rejected the PUC's argument that he should dismiss the case because retail rates are exclusively a matter of state regulation. The judge also rejected the agency's alternative request that he defer a decision for at least 120 days while the PUC gathered more facts. The judge said the gravity of the situation required immediate action.

PUC actions "are having devastating effects on [Edison's] current ability to obtain financing to enable it to continue to procure wholesale power at current prices," Lew said.

In essence, Lew agreed with Edison's lawyers, Ronald L. Olson and John W. Spiegel, that the company is caught in "a vise that threatens to squeeze it out of existence."

"On the one side, SCE has been forced to pay astronomically high prices to buy wholesale electricity," the lawyers said in a brief filed in Lew's court. The 1996 statute requires SCE "to procure all of the electricity needed to serve its 4.3 million retail customers from two wholesale market institutions, whose pricing practices are exclusively within the Federal Regulatory Commission's jurisdiction. Since last June, the cost of procuring electricity through these market institutions has increased nearly four-fold," the attorneys said.

"On the other side, SCE has been unable to recover these expenses through retail rates, which are currently frozen under California law." In addition, Edison's lawyers maintain that the PUC has interpreted California law "to prohibit SCE from recovering these costs, either now or in the future."

Consequently, Edison has had to buy high and sell low, leaving it with a shortfall in excess of $2.6 billion, the company says.

The PUC counters that a substantial portion of Edison's costs are paid to itself from power the company buys from its own plants and that Edison has reaped additional billions in the last two years from the sale of certain assets. The agency contends that those funds should be available to offset the financial problems the company is complaining about.

The PUC also contends that Edison failed to take other steps that could have lowered its costs in acquiring power.

In addition to the dispute over the facts, there has been a clash over Edison's contention that California's rate freeze interferes with federal regulation of the wholesale energy market. The PUC and the Utility Reform Network counter that the freeze is an essential component of the Federal Regulatory Commission's approval of wholesale sales.

The regulatory commission has taken no formal position on the pending litigation. However, Douglas W. Smith, the agency's general counsel, sent a letter to Edison attorney Spiegel saying that the "filed rate doctrine" applies in a situation such as this. The doctrine, according to a 1986 U.S. Supreme Court decision, holds that interstate power rates filed with the Federal Regulatory Commission or set by it must be given binding effect by state utility commissions determining intrastate rates.

However, Michael Strumwasser, attorney for the consumers group, said the 1986 Supreme Court decision arose in an entirely different context.

He said the specific question now at issue--whether the "filed rate doctrine" applies when wholesale rates have been set by market forces rather than a regulatory proceeding--has never been ruled on by an appellate court.

Lew made no explicit rulings on the PUC allegations that Edison should have offset wholesale payment costs through other revenues.

However, Lew said the PUC is entitled to present evidence about the prudence of Edison's wholesale electricity purchases. Further hearings on that issue could determine how much of its costs Edison is entitled to recover. The PUC contends that Edison could have made some purchases at lower prices than it did. But Edison attorneys counter that this is a disingenuous argument, because the PUC has not objected to the prudence of Edison's purchases.

Indeed, the Edison lawyers say the next phase of the case should be very brief because the PUC, in effect, consented to Edison's prior actions.

Attorneys for the PUC and the consumers group disagree sharply, saying a bevy of issues need to be reviewed in detail. There is no timetable for further proceedings in the Edison case. The next hearing on the PG&E case is scheduled for Jan. 30 in Oakland.

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