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TURN: Utility Deal Broke State Laws

The state Supreme Court on Tuesday began picking apart the legality of a 2-year-old bailout of Southern California Edison in a case that could affect the energy bills of millions of PG&E customers.

The 2001 bailout agreement between Edison and state regulators has kept electricity rates artificially high so the utility can collect enough money to pay its energy-crisis debts.

The consumer group The Utility Reform Network says the deal -- brokered in secret -- broke several state laws and should be voided. It says at least $3.6 billion in wrongly collected rates should be refunded to ratepayers.

The case could affect customers of Pacific Gas and Electric, whose rates are also being kept artificially high while the utility struggles to emerge from bankruptcy.

In oral arguments in San Francisco, justices zeroed in on two key issues: Did the Public Utilities Commission "change'' rates with the Edison agreement, and therefore violate its own rules by not holding public hearings? And did the commission violate open-meeting laws by approving the settlement in private?

Edison and PUC attorneys said the agreement did not affect Edison's rates and therefore did not require a public hearing.

"The rates being paid by every single customer did not change,'' said Ronald Olson, an attorney for Edison.

But TURN attorneys said the agreement effectively changed rates by keeping them higher than they would have been without the bailout.

"It is a change,'' said Michael Strumwasser, an attorney representing TURN. "Before the settlement, the ratepayers had $3.6 billion coming back to them.''

Energy deregulation

The case stems from the Legislature's deregulation of the energy market in 1996. To help ease the state's monopoly utilities into a competitive market, lawmakers froze consumer electricity rates at 1996 levels and said utilities could keep any excess profits to help pay the costs of their power plants.

The rate freeze was due to expire in March 2002. But in the meantime, PG&E and Edison had racked up billions of dollars in debt from skyrocketing energy costs.

The case has been winding through the courts since 2000, when Edison sued the PUC in federal district court, arguing that federal law required the commission to raise rates so the utility could recover costs related to buying power.

The following year, the PUC raised rates twice. It then settled the Edison lawsuit by promising to keep rates stable through 2005 or until the utility had recovered its losses.

TURN challenged the Edison deal in court, saying it violated the 1996 rate freeze by not allowing rates to drop to natural levels. Last year, the U.S. 9th Circuit Court of Appeals endorsed many of TURN's concerns, but said the state Supreme Court should review possible state-law violations.

Closed-door talks

The justices also asked several questions about why the deal was negotiated behind closed doors.

PUC attorney Gary Cohen said the Edison agreement was a sensitive legal matter and that "it would be impossible for the commission to engage in discussion of litigation and settlements'' in public.

"It's not as if it happened in the dark of night,'' said Cohen, noting that the commission immediately reported the deal in a public meeting and news conference.

But Strumwasser said the commission should have at least voted on the deal in an open meeting and allowed the public to be heard.

"I resist the suggestion that the values of our open-meeting laws need to be constrained,'' he told the court. "This decision was illegal.''

For the first time, PUC attorneys acknowledged that the case could affect PG&E. The Northern California utility filed for bankruptcy in 2001, and a U.S. Bankruptcy Court judge is trying to devise a plan that will allow the company to return to financial health.

Two proposals are being discussed, including one by the PUC that would keep rates high enough for PG&E to pay down its debts.

"I think if the court says we can't use the monies collected to help the utilities, then PG&E's plan and the PUC plan are in serious jeopardy,'' Cohen said after the court hearing.

The court has 90 days to rule on what Justice Joyce Kennard described as "highly complex litigation.''

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