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31 Cal. 4th 781 (2003)
Supreme Court of California
SOUTHERN CALIFORNIA EDISON CO., Plaintiff and Respondent,
v.
Michael R. PEEVEY, as Commission President, etc., et al., Defendants and
Respondents;
The Utility Reform Network, Intervener and Appellant.
No. S110662.
Aug. 21, 2003.
Rehearing Denied Oct. 22, 2003.
Robert E. Finkelstein; Strumwasser & Woocher, Michael J. Strumwasser,
Fredric D. Woocher, Santa Monica, Johanna R. Shargel and Lea Rappaport
Geller, Stanford, for Intervener and Appellant.
Sutherland Asbill & Brennan, Steuart H. Thomsen, James M. Cain, Keith
R. McCrea, James M. Bushee and Alisa N. Stein, Washington, DC, for the
California Manufacturers & Technology Association as Amicus Curiae
on behalf of Intervener and Appellant.
Harvey Rosenfield, Santa Moncia and Pamela Pressley, for the Foundation
for Taxpayer and Consumer Rights as Amicus Curiae on behalf of Intervener
and Appellant.
Stephen Pickett, Rosemead, Barbara Reeves, Kris G. Vyas; Munger, Tolles
& Olson, Ronald L. Olson, John W. Spiegel, Henry Weissmann, Los Angeles,
and Kelly M. Klaus, San Francisco, for Plaintiff and Respondent.
Gary M. Cohen, Mary F. McKenzie, San Francisco, Harvey Y. Morris and Carrie
G. Pratt, for Defendants and Respondents.
Barry P. Goode, for Governor Gray Davis as Amicus Curiae on behalf of Defendants
and Respondents.
Smiland & Khachigian, William M. Smiland, Kenneth L. Khachigian, Christopher
G. Foster, Los Angeles; Adams, Broadwell, Joseph & Cardozo and Marc
D. Joseph, South San Francisco, for California Chamber of Commerce, California
Small Business Roundtable, California Business Roundtable, Consumers First,
Consumers Coalition of California, Los Angeles County Federation of Labor,
AFL CIO and the Coalition of California Utility Employees as Amici Curiae
on behalf of Plaintiff and Respondent and Defendants and Respondents.
WERDEGAR, J.
Southern California Edison Company (SCE) sued the Commissioners of the
California Public Utilities Commission (PUC) in the United States District
Court for the Central District of California, claiming PUC's regulation
of electricity rates violated federal law in several respects. The parties
later reached an agreement settling the action, which became the basis
for a stipulated judgment proposed to the district court. The Utility
Reform Network (TURN), which had intervened in the action, opposed the
stipulated judgment, claiming, among other things, that PUC's agreement
to the settlement violated California law. The district court approved
the settlement as fair and entered the stipulated judgment over these
objections.
On appeal, the United States Court of Appeals for the Ninth Circuit discerned
"a serious question" whether the agreement violated California
law in several respects, both substantive and procedural. (Southern California
Edison Co. v. Lynch (9th Cir.2002) 307 F.3d 794, 809.) Because "as
a matter of federal law, state officials cannot enter into a federally
sanctioned consent decree beyond their authority under state law,"
the federal court of appeals believed the resolution of state law issues
was essential to determining the validity of the stipulated judgment.
(Id. at p. 812.) The court of appeals therefore certified to this court
(Cal. Rules of Court, former rule 29.5; see id., rule 29.8) three questions
of California law. We accepted the certification request, modifying one
of the questions slightly. As accepted, the questions to be answered are:
1. Did the Commissioners of the California Public Utilities Commission
have the authority to propose the stipulated judgment in light of the
provisions of Assembly Bill No. 1890 (1995-1996 Reg. Sess.) codified in
Public Utilities Code sections 330-398.5 (Stats.1996, ch. 854)?
2. Did the procedures employed in entering the stipulated judgment violate
the Bagley-Keene Open Meeting Act (Gov. Code, ß ß 11120-11132.5)?
3. Does the stipulated judgment violate section 454 of the Public Utilities
Code by altering utility rates without a public hearing and issuance of findings?
Having analyzed these questions, we conclude the settlement did not violate
California law in any of these three respects.
BACKGROUND
The essential background of this case lies in California's attempt,
beginning in 1996, to move the system for provision of electrical power
from a regulated to a competitive market, the crisis caused in mid-2000
to early 2001 by soaring prices for electricity on the wholesale market,
and the urgency legislation enacted in January 2001 in response to that crisis.
Assembly Bill No. 1890 (1995-1996 Reg. Sess.) (hereafter Assembly Bill
1890), which became law in 1996 (Stats.1996, ch. 854), was intended to
provide the legislative foundation for "California's transition
to a more competitive electricity market structure." (Assem. Bill
1890, ß 1, subd. (a).) The new market structure included the creation
of the California Power Exchange (CalPX), which was to run an "efficient,
competitive auction" among electricity producers, and the Independent
System Operator, which would control the statewide transmission grid.
(Id., ß 1, subd. (c).) The state's main investor-owned electric
utility companies (SCE, Pacific Gas and Electric Company (PG & E),
and San Diego Gas and Electric Company (SDG & E); hereafter the utilities)
were expected to divest themselves of substantial parts of their generating
assets, while retaining others at least during the period of transition.
(Id., ß 10, adding Pub. Util.Code, former ß 377.) Under the
Assembly Bill 1890 scheme as implemented, all generators, including the
utilities, sold their power through the CalPX; the utilities also bought,
through that exchange, the electricity they needed to supply their retail
customers. (Cal. Exchange Corp. v. FERC (In re Cal. Power Exchange Corp.)
(9th Cir.2001) 245 F.3d 1110, 1114-1115.)
Because this competition among producers was expected to bring down wholesale
prices, the utilities believed that some of their generating assets, which
they had built or improved with PUC approval, would become "uneconomic,"
in that the costs of generation (and of certain long-term contracts between
the utilities and other generators) would be higher than prevailing wholesale
rates would support. The costs associated with these potentially uneconomic
assets are also known as "stranded costs" or "transition
costs." The Legislature, in Assembly Bill 1890, intended to allow
for "[a]ccelerated, equitable, nonbypassable recovery of transition
costs" (Stats.1996, ch. 854, ß 1, subd. (b)(1)) and thereby
to "provide the investors in these electrical corporations with a
fair opportunity to fully recover the costs associated with commission
approved generation-related assets and obligations" (Pub.Util.Code,
ß 330, subd. (t)). The legislative scheme for doing so without subjecting
consumers to increased rates was complex, but consisted in its essentials
of the following:
Under Public Utilities Code section 367, [FN1] PUC was to identify and
quantify potentially uneconomic costs (i.e., the PUC-approved costs that
"may become uneconomic as a result of a competitive generating market").
The identified costs were to be recoverable through rates that would not
exceed "the levels in effect on June 10, 1996," and the recovery
was not to "extend beyond December 31, 2001." (ß 367,
subd. (a).) The component of rates dedicated to recovery of transition
costs was nonbypassable, i.e., it had to be paid to the utility whether
the consumer bought power from the utility, from a generator in a single
direct transaction, or from a generator in an aggregated direct transaction
with other consumers. (ß ß 365, subd. (b), 366, 370.)
FN1. All further statutory references are to the Public Utilities Code
unless otherwise specified.
Section 368 required each utility to propose, and PUC to approve, a "cost
recovery plan" for the costs identified in section 367 that would
set rates at June 10, 1996, levels, with a 10 percent reduction for residential
and small commercial customers. Section 368, subdivision (a) continues:
"These rate levels ... shall remain in effect until the earlier of
March 31, 2002, or the date on which the commission-authorized costs for
utility generation-related assets and obligations have been fully recovered.
The electrical corporation shall be at risk for those costs not recovered
during that time period."
PUC implemented this cost-recovery scheme in part by creating, for each
electric utility, a transition cost balancing account (sometimes herein
referred to as a TCBA), in which the PUC-identified stranded costs were
tracked. Transition costs were not to be forecast, but rather entered
in the transition cost balancing account as the PUC determined them. Costs
associated with utility-retained generating assets were to be determined
by comparing the book value of the assets with their market valuations,
a process to be completed by the end of 2001. These uneconomic generating
costs were to be netted against the benefits of any economic generating
assets (those having higher market than book value). The difference between
rate revenue and the utility's other (nongeneration-related) costs
was designated the utility's "headroom" and was to be credited
against the stranded costs in the transition cost balancing account. The
portion of each rate serving as headroom was designated the competition
transition charge. (In re Pacific Gas & Electric Co. (1997) 76 Cal.
P.U.C.2d 627, 646-653, 740-744, 1997 WL 781987.)
In the first few years of the transition period, the utilities recovered
much of their stranded costs. SDG & E was found to have recovered
all its transition costs, ending the rate freeze for that utility under
section 368. SCE and PG & E, however, were still subject to the rate
freeze when, in the summer of 2000, power procurement prices, and particularly
prices on the CalPX spot market, rose drastically. They incurred huge
debts buying electricity through the CalPX. (Cal. Exchange Corp. v. FERC
(In re Cal. Power Exchange Corp.), supra, 245 F.3d at p. 1115.)
In November 2000, as the wholesale price and supply problems continued,
SCE brought its federal action against PUC, the subsequent settlement
of which is the subject of this decision. In essence, SCE claimed the
rate freeze imposed by Assembly Bill 1890 was now depriving SCE of its
right, under federal law, to recover the costs of purchasing electricity
for its customers. More particularly, SCE claimed the freeze rates had
become unconstitutionally confiscatory and violated the federal "filed
rate" rule, which assertedly allows a utility to recover in state-regulated
retail rates the costs of purchases made under federally approved tariffs.
PUC granted SCE and the other utilities emergency rate relief in early
2001. Deeming the crisis one "that involves not only utility solvency
but the very liquidity of the system," PUC in January 2001 authorized
a temporary surcharge of one cent per kilowatt-hour. (Application of Southern
California Edison Co. (2001) Cal. P.U.C. Dec. No. 01-01-018, pp. 1-4,
2001 WL 55738.) Two months later, still finding that "SCE's and
PG & E's continued financial viability and ability to serve their
customers has been seriously compromised by the dramatic escalation in
wholesale prices," PUC made the January increase permanent and authorized
an additional three cents per kilowatt-hour increase. (Application of
Southern California Edison Co. (2001) Cal. P.U.C. Dec. No. 01-03-082,
pp. 2-4, 2001 WL 327151.) PUC refers to these increases collectively as
the "four cent surcharge," a usage we adopt. (According to SCE,
the surcharge amounted to an average increase of 40 percent in retail
rates.) PUC's March 2001 decision, while authorizing an increase to
pay for ongoing power purchases, did "not address recovery of past
power purchase costs and other costs claimed by the utilities." (Id. at p. 2.)
The Legislature also took action in January 2001, in an extraordinary session
called to address the power crisis. In that session's Assembly Bill
No. 1 (Stats.2001, 1st Ex.Sess., ch. 4; hereafter Assembly Bill 1X), the
Legislature authorized the state Department of Water Resources to begin
buying power for customers of SCE and PG & E. (Id., ß 4, adding
Wat.Code, ß ß 80100-80122.) In Assembly Bill No. 6 of that
session (Stats.2001, 1st Ex.Sess., ch. 2; hereafter Assembly Bill 6X),
the Legislature amended several provisions of Assembly Bill 1890, halting
at least temporarily the transition to a competitive electricity market.
In particular, Public Utilities Code section 377, as first enacted by
Assembly Bill 1890, had provided that PUC would continue regulating the
utilities' retained nonnuclear generating assets "until those
assets have been subject to market valuation," after which they would
be sold off unless the utility convinced the PUC their retention was in
the public interest. (Stats.1996, ch. 854, ß 10.) As amended by
Assembly Bill 6X, section 377 provides that all the remaining generating
assets are subject to PUC regulation and may not be sold until January
1, 2006, at the earliest. (Assem. Bill 6X, ß 3.) Similarly, as enacted
by Assembly Bill 1890, Public Utilities Code section 330, subdivision
(l )(2) had provided that the generating assets "should be transitioned
from regulated status to unregulated status through means of commission-approved
market valuation mechanisms." (Stats.1996, ch. 854, ß 10.)
Assembly Bill 6X deleted this language, leaving only the general statement
that "[g]eneration of electricity should be open to competition."
(Id., ß 2.) PUC subsequently issued decisions, based on Assembly
Bill 6X, reestablishing cost-based rate regulation of SCE's retained
generating assets and modifying restrictions on the use of the four cent
surcharge. (E.g., Application of Southern California Edison Co. (2002)
Cal. P.U.C. Dec. No. 02-04-016, p. 2, 2002 WL 988148; Application of Southern
California Edison Co. (2002) Cal. P.U.C. Dec. No. 02-11-026, pp. 11-16,
2002 WL 31557670.)
In October 2001, SCE and PUC reached a settlement of SCE's federal
rate action. In the settlement's recitals, the parties agreed that
during the period of very high wholesale power prices, SCE accumulated
procurement-related liabilities and indebtedness of about $6.355 billion,
creating severe liquidity and credit problems for the company. Conditions
in 2001, including the four cent surcharge, had allowed SCE to collect
retail revenues in excess of current costs. The settlement was intended
to use the opportunity thus provided to restore SCE's creditworthiness
and avoid further instability and uncertainty for the company and consumers.
(Settlement, Recitals D-F.)
PUC's principal substantive concession in the settlement was its agreement
to permit SCE to recover its past procurement-related costs by maintaining
the existing rates until the end of 2003, if necessary. The parties agreed
to establish a procurement-related obligations account (sometimes herein
referred to as the PROACT), the initial balance of which was SCE's
procurement-related liabilities less its cash on hand. (The parties estimated
the initial balance at about $3.3 billion.) (Settlement, ß 2.1(a).)
SCE agreed to apply all its surplus (its revenue in excess of defined
recoverable costs), with some exceptions, to the account, gradually reducing
its balance. (Settlement, ß 2.1(b).) The PUC agreed to maintain
the rates in effect on the settlement date (with some adjustments) during
the "rate repayment period," which was defined to end when the
PROACT was paid down to zero or on December 31, 2003, whichever came first.
(Settlement, ß ß 1.1(p), 1.1(w), 2.2(a).) A potentially longer
"recovery period" was defined as ending when the account was
completely paid down or on December 31, 2005, whichever came first. (Settlement,
ß 1.1(q).) The parties agreed that, if necessary, any obligations
left in the PROACT at the end of the rate repayment period (i.e., at the
end of 2003) would "be amortized in retail rates ratably during all
or a portion of the remainder of the Recovery Period." (Settlement,
ß 2.2(b).) [FN2]
FN2. In a July 10, 2003, decision, PUC approved SCE's application to
substantially reduce electricity rates upon completion of the PROACT pay-down,
an event SCE anticipated would occur by July 2003. Effective August 1,
2003, PUC ordered SCE's rates reduced by about $1.25 billion over
the subsequent 12 months. (Application of Southern California Edison Co.
(2003) Cal. P.U.C. Dec. No. 03-07-029, pp. 2, 5, 12, 16-17, 22, 2003 WL
21705428.)
Over TURN's objection, the federal district court entered a stipulated
judgment incorporating the terms of the settlement agreement, finding
the agreement "adequate and fair." On TURN's appeal, the
court of appeals resolved the federal law issues in favor of SCE and PUC
(Southern California Edison Co. v. Lynch, supra, 307 F.3d at pp. 802-809),
but found that the settlement and stipulated judgment appeared to violate
California law in certain respects and, following "principles of
comity" (id. at p. 812), tendered those state law questions to this
court and stayed further proceedings pending our response (id. at p. 813).
We proceed to decide the certified questions.
Question 1: Did the Commissioners of the California Public Utilities Commission
have the authority to propose the stipulated judgment in light of the
provisions of Assembly Bill No. 1890 (1995-1996 Reg. Sess.) codified in
Public Utilities Code sections 330-398.5 (Stats.1996, ch. 854)?
Answer: Yes.
PUC's authority derives not only from statute but from the California
Constitution, which creates the agency and expressly gives it the power
to fix rates for public utilities. (Cal. Const., art.XII, ß ß
1, 6.) Statutorily, PUC is authorized to supervise and regulate public
utilities and to "do all things ... which are necessary and convenient
in the exercise of such power and jurisdiction" (ß 701); this
includes the authority to determine and fix "just, reasonable [and]
sufficient rates" (ß 728) to be charged by the utilities. Adverting
to these provisions, we have described PUC as " 'a state agency
of constitutional origin with far-reaching duties, functions and powers'
" whose " 'power to fix rates [and] establish rules'
" has been " 'liberally construed.' " (San Diego
Gas & Electric Co. v. Superior Court (1996) 13 Cal.4th 893, 914-915,
55 Cal.Rptr.2d 724, 920 P.2d 669, quoting Consumers Lobby Against Monopolies
v. Public Utilities Com. (1979) 25 Cal.3d 891, 905, 160 Cal.Rptr. 124,
603 P.2d 41.) If PUC lacked substantive authority to propose and enter
into the rate settlement agreement at issue here, it was not for lack
of inherent authority, but because this rate agreement was barred by some
specific statutory limit on PUC's power to set rates. (See Assembly
v. Public Utilities Com. (1995) 12 Cal.4th 87, 103, 48 Cal.Rptr.2d 54,
906 P.2d 1209.)
TURN contends, first, that PUC's agreement to the settlement violated
a legislative directive in section 368, enacted as part of Assembly Bill
1890, which froze rates at June 1996 levels during the transition period.
In particular, TURN argues the settlement illegally "extend[ed]"
the freeze period. But TURN errs in assuming that section 368 requires
that rates be reduced at the end of the freeze period. In this respect,
section 368 provides only that the freeze rates "shall remain in
effect until the earlier of March 31, 2002, or the date on which the commission-authorized
costs for utility generation-related assets and obligations have been
fully recovered." Section 368 does not dictate that rates be reduced,
or changed in any way, at the end of the freeze period. True, section
330, subdivision (a) recites the Legislature's "intent ... that
a cumulative rate reduction of at least 20 percent be achieved" by
April 1, 2002, but section 330 consists of findings and declarations providing
"guidance in carrying out" the provisions of Assembly Bill 1890,
not binding limitations on PUC authority. While the Legislature certainly
intended its Assembly Bill 1890 scheme to bring down retail rates through
wholesale competition, progress toward that result was delayed, to say
the least, by the unanticipated 2000-2001 rise in wholesale rates.
With more force, TURN contends the settlement allowed SCE to recover in
the postfreeze period, in violation of section 368, costs incurred during
the freeze period. TURN relies on the third sentence of section 368, subdivision
(a), which provides: "The electrical corporation shall be at risk
for those costs not recovered during that time period," i.e., the
freeze period ending March 31, 2002. After careful consideration, we conclude,
contrary to TURN's contentions, that after the enactment of Assembly
Bill 6X in 2001, which required electrical utilities to retain their generating
plants until at least 2006 and returned retained generating-asset rates
to cost-based regulation, PUC was authorized to approve rates allowing
SCE to recover the costs covered by the settlement agreement. While Assembly
Bill 6X did not repeal section 368 or reverse all aspects of electricity
deregulation, it constituted a major retrenchment from the competitive
price-reduction approach of Assembly Bill 1890, reemphasizing instead
PUC's duty and authority to guarantee that the electric utilities
would have the capacity and financial viability to provide power to California
consumers.
We first consider whether, the effect of Assembly Bill 6X aside, the costs
slated for recovery by the settlement agreement are uneconomic generating-asset
costs (i.e., stranded or transition costs) restricted by section 368.
On their face they are not: the settlement agreement expressly provides
for postfreeze recovery of energy procurement, rather than generation,
costs. Under the settlement, PUC agrees to maintain the rates in force
at the time of the settlement until the earlier of December 2003 or the
date the obligations recorded in the procurement-related obligations account
have been recovered. SCE's procurement-related liabilities are tallied
in schedule 1.1 of the settlement, and include SCE's debts to banks,
electricity generators, the CalPX and Independent System Operator, and
the Department of Water Resources, which in January 2001 began purchasing
electricity for SCE customers. These liabilities resulted from "wholesale
electricity procurement costs" (Settlement, Recital D) rather than
from the "costs for generation-related assets and obligations"
referred to in section 367, the recovery of which sections 367 and 368
restrict to the freeze period.
PUC nevertheless maintains that the costs to be recovered in retail sales
under the settlement are not procurement costs but rather SCE's "generation-related
costs ... which were previously called stranded costs." PUC bases
this characterization on an accounting change it made in March 2001, at
TURN's suggestion, by which SCE's accumulated procurement liabilities
were transferred into its transition cost balancing account, which had
previously been used to track recovery only of stranded costs and which
was, according to SCE, "overcollected" (i.e., in the black)
at that time. [FN3] AS A RESULT OF THIs change, puc later determiNED that
sce had, at the time of the settlement, a substantial amount of unrecovered
transition costs. (Application of Southern California Edison Co., supra,
Cal. P.U.C. Dec. No. 01-03-082, pp. 26-32, 2001 WL 327151; see Cal. P.U.C.
Res. E-3765 (Jan. 23, 2002), p. 13.) Thus, PUC explains, "the effect
of the Settlement is to recover the large stranded cost balance in the
TCBA." (Cal. P.U.C. Res. E-3765, supra, p. 13.)
FN3. Under section 368, the freeze on SCE's retail rates would have
ended had PUC agreed that SCE's transition cost balancing account
was fully recovered.
Although PUC's position is consistent with its earlier determination
(in proceedings unrelated to this case) that costs are fungible for purposes
of Assembly Bill 1890's restrictions on cost recovery, [FN4] we do
not fully accept for present purposes PUC's equation of SCE's
procurement liabilities accumulated during the wholesale rate crisis with
its unrecovered transition costs. As discussed below, SCE's true unrecovered
transition costs appear indeterminable in light of PUC's failure,
following the changes wrought by Assembly Bill 6X, to complete the planned
transition by assigning market values to SCE's generating assets,
a step that would have reduced the transition cost balancing account balance
by an unknown but potentially significant amount. But whatever the amount
of SCE's unrecovered transition costs, there is no reason to assume
it was exactly equivalent to the amount of the utility's unrecovered
procurement costs. Even assuming that when the March 2001 accounting change
was made, some amount of transition costs should have remained in SCE's
transition cost balancing account, neither PUC nor TURN endeavors to explain
why that amount would necessarily have been equal to the amount of SCE's
procurement costs (about $6.355 billion, according to the settlement)
and hence, why the settlement recovery figure of $3.3 billion, calculated
from SCE's outstanding procurement liabilities, should be deemed to
represent instead the exact amount of transition costs unrecovered at
the time of the settlement. While the March 2001 accounting change may
have been properly used to determine that the Assembly Bill 1890 rate
freeze had not then ended (see fn. 3, ante ), it should not bind us to
a counterfactual characterization of all the procurement costs at issue here.
FN4. See Application of Pacific Gas & Electric Co. (1999) Cal. P.U.C.
Dec. No. 99-10-057, pages 18-20, 1997 WL 781987; Application of Pacific
Gas & Electric Co. (2000) Cal. P.U.C. Dec. No. 00-03-058, pages 18-
19, 1997 WL 781987. Under that view, permitting recovery of any authorized
transition period cost to be postponed until after the transition period
had ended would violate sections 367 and 368, because it would increase
the "headroom" available for recovery of transition costs.
The passage of Assembly Bill 6X in January 2001 introduced additional grounds
against deeming recovery of procurement liabilities to be limited by section
368. Assembly Bill 6X eliminated Assembly Bill 1890's requirement
for market valuation of utility-retained generating assets, required SCE
to keep its remaining generating assets until 2006, and allowed PUC to
regulate the rates for power so generated pursuant to ordinary "cost-of-service"
ratemaking. PUC was thus authorized to permit SCE such recovery of past
costs as necessary to render the utility financially viable and to ensure
SCE would be able to continue serving its customers through electricity
generated in its retained plants. In a technical sense, moreover, Assembly
Bill 6X largely eliminated the category of "uneconomic" generating
asset costs, the only costs whose recovery is limited under section 368.
Since "uneconomic" costs are those that "may become uneconomic
as a result of a competitive generating market" in that they "may
not be recoverable in market prices in a competitive market" (ß
367), and under Assembly Bill 6X the retained assets will not be included
in a competitive generating market until at least 2006, section 368, as
PUC argues, "no longer applies to the generation-related costs of
the utilities."
TURN concedes that Assembly Bill 6X returned to cost-of-service regulation
those generating assets SCE still owned when the law was enacted. [FN5]
The January 2001 measure, TURN further concedes, meant that PUC would
be able to ensure, by rate regulation, that SCE "would be given an
opportunity, in the future, to earn a return on [its] investment in those
plants" and that, consequently, "[t]he remaining book-value
of utility-retained generation is not any part of the unrecovered stranded
costs." But TURN argues Assembly Bill 6X did not affect section 368's
mandate that SCE be "at risk" for what TURN calls "the
stranded costs represented by the plants it did sell, or by the depreciation
expense already recorded on its retained plants during the rate freeze."
The stranded costs accumulated by January 2001 were, TURN argues, unrecoverable
under section 368 after the freeze period ended in March 2002.
FN5. TURN asserts SCE sold almost two-thirds of its 1996 generating capacity
during the transition period. PUC responds that SCE retained its nuclear
power capacity and its above-market power contracts with certain facilities,
which together were the main source of the stranded costs dealt with by
Assembly Bill 1890, and which are now again recoverable under cost-of-service
ratemaking. (See In re Pacific Gas & Electric Co., supra, 76 Cal.
P.U.C.2d at p. 647 ["Costs related to nuclear generating assets and
above-market contracts with Qualifying Facilities (QFs) account for the
majority of estimated transition costs"].)
We are not persuaded the settlement violates section 368 as TURN claims,
even if the settlement is regarded as permitting recovery of some generation-related
costs rather than, as indicated on its face, only procurement costs. SCE's
transition cost balancing account, designed to track its transition costs,
was overcollected at the beginning of 2001. Even if, as TURN claims, the
January 2001 account balance understated SCE's transition costs, SCE
persuasively argues it also overstated such costs because it did not reflect
the increased market value of SCE's retained generating assets in
an environment of higher wholesale prices.
The process of selling, appraising, or otherwise placing a market value
on the utilities' generation assets, to be completed by December 31,
2001 (ß 367, subd. (b)), was essential to the Assembly Bill 1890
scheme, since the true stranded cost of an asset depended in part on its
market value. (See In re Pacific Gas & Electric Co., supra, 76 Cal.
P.U.C.2d at pp. 674-675, 1997 WL 781987.) Each utility's transition
cost balancing account tracked not only its generating assets' amortized
book values and its competition transition charge revenues, but also any
"market valuation credits." (Id. at p. 674.) The utilities thus
expected to "adjust the transition cost balancing account when assets
are sold or market-valued." (Id. at p. 675.) But according to SCE,
PUC "had never rendered a decision assigning market values to SCE's
generation assets--assets that became extremely valuable in a market in
which prices had risen dramatically." The passage of Assembly Bill
6X, which ended the sale of generating assets and returned them to traditional
PUC rate regulation, removed the rationale and opportunity for market
valuation, thus preventing the transition cost balancing account from
serving as a complete or accurate record of transition costs.
Finally, we note that the Legislature, in section 367, gave PUC the authority
to identify uneconomic costs. Pursuant to that authority the agency has
determined that after passage of Assembly Bill 6X, generation-related
costs are, for the reasons already stated, no longer "uneconomic"
within the meaning of section 367. (Application of Southern California
Edison Co., supra, Cal. P.U.C. Dec. No. 02-11-026, p. 14, 2002 WL 31557670.)
Cognizant of the principle that PUC's interpretation of the Public
Utility Code "should not be disturbed unless it fails to bear a reasonable
relation to statutory purposes and language" (Greyhound Lines, Inc.
v. Public Utilities Com. (1968) 68 Cal.2d 406, 410-411, 67 Cal.Rptr. 97,
438 P.2d 801), we are unable to reach a different conclusion here.
Whether we regard the costs to be recovered under the PUC-SCE settlement
as procurement costs or as generation-related costs, therefore, they were
not uneconomic costs restricted in recovery by section 368. Consequently,
PUC's agreement to the settlement was not in violation of Assembly
Bill 1890.
Question 2: Did the procedures employed in entering the stipulated judgment
violate the Bagley-Keene Open Meeting Act (Gov.Code, ß ß 11120-11132.5)?
Answer: No.
The Bagley-Keene Open Meeting Act (the Bagley-Keene Act) applies to most
state boards and commissions, including PUC. (See Gov.Code, ß ß
11121, 11121.1, 11126, subd. (d).) The purpose of the law, stated in Government
Code section 11120, is to ensure that "actions of state agencies
be taken openly and that their deliberation be conducted openly."
The Bagley-Keene Act implements this policy by mandating that "[a]ll
meetings of a state body shall be open and public ..." (Gov.Code,
ß 11123), by requiring advance public notice of meetings (id., ß
11125), by authorizing legal actions to prevent threatened violations
of the act or declare its applicability to past or threatened future "actions"
of a body (id., ß 11130), and to declare null and void an "action
taken" in violation of Government Code sections 11123 or 11125 (id.,
ß 11130.3). "Action taken" is defined broadly to include
"a collective decision" of the members and "a collective
commitment or promise ... to make a positive or negative decision."
(Id., ß 11122.)
The October 2001 settlement, which the subsequent stipulated judgment implemented,
was signed by the five PUC commissioners and was both a collective decision
of the commissioners and a collective commitment or promise to take further
actions. It was thus an "action taken" by PUC and subject, under
the above provisions, to the Bagley-Keene Act. The parties, moreover,
agree this action was taken in a meeting, to wit, the closed or executive
session of the regularly scheduled PUC meeting of October 2, 2001. The
published agenda for the October 2 meeting listed, in the closed session
section, this item: "FEX-2: Conference with Legal Counsel--Existing
... Litigation. Case name unspecified. (Disclosure of case name would
jeopardize existing settlement negotiations.) (Gov.Code Sec. 11126(e)(2)(A).)"
According to PUC, the commissioners unanimously approved the settlement
during the closed session, then reconvened in public session to announce
their action. This is confirmed by the published PUC results sheet for
the October 2 meeting, which lists this item: "FEX-2: SCE Settlement.
Approved Staff Recommendation as Modified 5- 0. Reconvened in Public Session
at 1:30 p.m. to announce the action taken in Executive Session."
PUC contends taking this action in closed session did not violate the Bagley-Keene
Act, but, rather, was permitted under an exception to the law's open-meeting
requirement, Government Code section 11126, subdivision (e)(1), which
provides as follows: "Nothing in this article shall be construed
to prevent a state body, based on the advice of its legal counsel, from
holding a closed session to confer with, or receive advice from, its legal
counsel regarding pending litigation when discussion in open session concerning
those matters would prejudice the position of the state body in the litigation."
We agree. On its face, subdivision (e)(1) permits a body only to "confer
with" and "receive advice from" its attorney regarding
litigation. But subdivision (e)(1) must be read in light of its purposes
and in consonance with a closely related provision of the Bagley-Keene
Act, Government Code section 11126.3, subdivision (a), which allows a
body to withhold the identity of litigation to be considered in closed
session if to identify it would "jeopardize its ability to conclude
existing settlement negotiations to its advantage." (Italics added.)
Read in light of its purposes and in that statutory context, Government
Code section 11126, subdivision (e)(1) was, as will be seen below, clearly
intended to permit the body not only to deliberate with counsel regarding
a settlement, but actually to settle the litigation in a closed session
when closure is deemed necessary to avoid prejudice to a favorable settlement.
Settlement discussions with counsel are obviously an aspect of litigation
particularly vulnerable to prejudice through public exposure and are thus
one of the areas Government Code section 11126, subdivision (e)(1) was
centrally intended to shelter from public revelation. In Sacramento Newspaper
Guild v. Sacramento County Board of Supervisors (1968) 263 Cal.App.2d
41, 69 Cal.Rptr. 480, the court held that the enactment of the Ralph M.
Brown Act (Gov.Code, ß ß 54950-54962; hereafter Brown Act),
the open meeting law applicable to local public entities, was not intended
to remove protection of the attorney-client privilege from local government
bodies' deliberations with their attorneys concerning litigation.
Public entities have as great a need for confidential counsel from their
attorneys as private litigants and should not be put at a disadvantage
in litigation by depriving them of that essential assistance. (Sacramento
Newspaper Guild, supra, at p. 55, 69 Cal.Rptr. 480.) In particular, the
court explained, a public entity's discussion with counsel about possible
settlement must occur in private, for such conferences require a frank
evaluation of the case's strengths and weaknesses, and "[i]f
the public's 'right to know' compelled admission of an audience,
the ringside seats would be occupied by the government's adversary,
delighted to capitalize on every revelation of weakness." (Id. at
p. 56, 69 Cal.Rptr. 480; accord, Roberts v. City of Palmdale (1993) 5
Cal.4th 363, 373-374, 20 Cal.Rptr.2d 330, 853 P.2d 496.) The Legislature
subsequently added protective provisions to both the Bagley-Keene and
Brown Acts, vindicating the view expounded in Sacramento Newspaper Guild.
Both new provisions were phrased in the language of current Government
Code section 11126, subdivision (e)(1). (See Stats.1981, ch. 968, ß
12, p. 3690, adding former subd. (q) to Gov.Code, ß 11126; Stats.1984,
ch. 1126, ß 3, p. 3802, adding Gov.Code, ß 54956.9.)
In 1992, the California Attorney General's Office construed Government
Code section 54956.9, the Brown Act provision paralleling Government Code
section 11126, subdivision (e)(1), as authorizing a public entity to act
on a settlement proposal, as well as deliberate on it, in closed session
with its counsel. (75 Ops.Cal.Atty.Gen. 14 (1992).) The Attorney General
noted, first, that the Brown Act's "personnel exception"
(Gov.Code, ß 54957) has been construed to permit closed-session
action on appointments and dismissals (see Lucas v. Board of Trustees
(1971) 18 Cal.App.3d 988, 991, 96 Cal.Rptr. 431), even though on its face
the statute authorizes only a closed session to "consider" such
personnel matters. "The parallel between section 54957 ('to consider')
and section 54956.9 ('to confer') warrants similar treatment."
(75 Ops.Cal.Atty.Gen., supra, at p. 19.)
The same parallel may be drawn between the corresponding provisions of
the Bagley-Keene Act. Subdivision (a)(1) of Government Code section 11126
permits closed sessions "to consider" personnel matters. Though
case law has not yet addressed the point, we note that the immediately
following provision, subdivision (a)(2), refers to "any disciplinary
or other action taken against any employee at the closed session,"
indicating that the Legislature intended, in the Bagley-Keene Act as (according
to the Attorney General) in the Brown Act, that the government body could
not only deliberate, but act, in closed session. The language used in
Government Code section 11126, subdivision (e)(1), permitting a body "to
confer" with counsel on settlement of pending litigation, is not
so dissimilar to that in subdivision (a)(1) ("to consider")
as to warrant a different interpretation.
Interpreting the Brown Act counsel provision, the Attorney General also
reasoned that consultation with counsel in the course of litigation often
focuses on possible action--e.g., whether to file a suit or countersuit,
what claims and defenses to plead, what parties to join. Conferring with
counsel on these matters necessarily includes deciding on a course of
action and instructing or authorizing counsel to pursue it. The same applies
to settlement discussions. "Unless a local agency is to be a 'second
class citizen' with its opponents 'filling the ringside seats'
(Sacramento Newspaper Guild v. Sacramento County Bd. of Suprs., supra,
263 Cal.App. 2d at p. 56, 69 Cal.Rptr. 480), it must be able to confer
with its attorney and then decide in private such matters as the upper
and lower limits with respect to settlement, whether to accept a settlement
or make a counter offer, or even whether to settle at all. These are matters
which will depend upon the strength and weakness of the individual case
as developed from conferring with counsel. A local agency of necessity
must be able to decide and instruct its counsel with respect to these
matters in private." (75 Ops.Cal.Atty.Gen., supra, at pp. 19-20.)
This reasoning is equally applicable to state bodies governed by the Bagley-Keene
Act. In providing (in Gov.Code, ß 11126, subd. (e)(1)) for private
conferences with counsel regarding pending litigation, the Legislature
must have intended the scope of privacy to be broad enough to include
the bodies' instructions to their attorneys as to how to proceed,
including whether and with what limits to negotiate settlement. The legislative
purpose of placing public agencies on a roughly equal footing with private
parties in litigation would otherwise be defeated.
In this case, of course, PUC went beyond instructing counsel in the closed
meeting of October 2, 2001; it actually concluded the settlement, unanimously
voting to accept the proposed agreement with SCE, and reconvened in public
session only to announce the action taken. Theoretically, the PUC commissioners
could instead have deliberated in private on this step, then reconvened
in public session (at the same or a later meeting) to actually vote. But
such a procedure could serve the purposes of the Bagley-Keene Act only
if the body announced, before the public session, the identity of the
litigation proposed for settlement, for only then could the public possibly
be informed of, and comment on, the substance of the proposed action.
(See Gov.Code, ß 11125.7, subds. (a), (g) [state bodies, specifically
including PUC, to provide opportunity for public comment during consideration
of each agenda item]; id., subd. (d) [requirement does not apply to closed
session items].) To convene publicly simply to vote on an unidentified
and undescribed litigation proposal, without the opportunity for meaningful
public comment, would be an empty gesture, which we will not assume the
Legislature intended to require.
The question, then, is whether the Bagley-Keene Act requires a state body,
after deliberating on a proposed settlement in closed session pursuant
to Government Code section 11126, subdivision (e)(1), to announce its
proposed decision in public session--identifying the litigation involved--and
accept public comment on the proposed settlement before voting on it.
To this question we think Government Code section 11126.3, subdivision
(a) dictates a negative answer.
Government Code section 11126.3 sets forth the required procedures for
closed sessions. Subdivision (a) mandates public disclosure of the "general
nature" of each closed session item by, for example, a listing on
the public agenda. The last sentence of subdivision (a) provides: "If
the session is closed pursuant to subparagraph (A) of paragraph (2) of
subdivision (e) of Section 11126 [pending litigation or administrative
adjudications], the state body shall state the title of, or otherwise
identify, the litigation to be discussed unless the body states that to
do so would jeopardize the body's ability to effectuate service of
process upon one or more unserved parties, or that to do so would jeopardize
its ability to conclude existing settlement negotiations to its advantage."
(Italics added.)
Under the quoted provision, a body may decline to identify the litigation
under discussion in closed session if the body states that to identify
it would jeopardize the conclusion of an advantageous settlement. Were
the body required, after its closed-session deliberations but before actually
concluding the settlement, to announce publicly the proposed settlement
and the name of the litigation, the protective purpose of Government Code
section 11126.3, subdivision (a) would be defeated. The Legislature clearly
intended, in enacting Government Code section 11126.3, subdivision (a),
that a state body be able to keep private the identity of litigation it
is considering settling until it has "conclude[d]" the settlement
(assuming the body believes privacy is strategically necessary to the
settlement negotiations). Construing the closely related provisions of
Government Code section 11126, subdivision (e)(1) to require a public
identification of the proposed settlement, before it has been concluded,
would defeat that purpose and could not have been the legislative intent. [FN6]
FN6. Justice Baxter argues that allowing an agency to agree to a settlement
in closed session when, as here, "significant regulatory decisions
are at stake" in the litigation, is inconsistent with the Bagley-Keene
Act's fundamental policy of public decisionmaking. (Conc. & dis.
opn. of Baxter, J., post, 3 Cal.Rptr.3d at p. 727, 74 P.3d at p. 815.)
Our conclusion that such closed sessions are permitted rests on the operative
language of the law, in particular Government Code sections 11126, subdivision
(e)(1) and 11126.3, subdivision (a), which makes no such distinction among
the types of litigation. If we have misjudged the legislative intent,
however, the error may be readily corrected by the insertion of an express
requirement that any settlement of litigation involving regulatory decisions
take place in an open meeting.
In this case PUC strictly followed the procedure mandated in Government
Code section 11126.3, subdivision (a), noting in the closed-session agenda
item, "Case name unspecified. (Disclosure of case name would jeopardize
existing settlement negotiations.) (Gov.Code Sec. 11126(e)(2)(A).)"
To require PUC, under Government Code section 11126, subdivision (e)(1),
to reconvene in open session and publicly announce it was considering
settling SCE's federal litigation would subject PUC to the potential
loss of the very negotiating equality that Government Code section 11126.3,
subdivision (a) was designed to preserve. Reading Government Code section
11126, subdivision (e)(1) in statutory context, therefore, we conclude
it authorized PUC not only to discuss, but also to conclude the settlement
in closed session.
TURN contends that even if Government Code section 11126, subdivision (e)(1)
generally permits state bodies to take action on a settlement in closed
session, another provision of that section, subdivision (d)(1), specifically
required this settlement agreement to be acted on in public session because
the settlement raised electricity rates. Government Code section 11126,
subdivision (d)(1) provides: "Notwithstanding any other provision
of law, any meeting of the Public Utilities Commission at which the rates
of entities under the commission's jurisdiction are changed shall
be open and public."
We agree, however, with PUC and SCE that by agreeing to the settlement
PUC did not "change[ ]" the "rates" (Gov.Code, ß
11126, subd. (d)(1)) that SCE could charge for electricity. The central
commitment PUC made in the settlement was to maintain the then existing
rates for an agreed period. (Settlement, ß 2.2(a).)
According to TURN, the settlement agreement changed rates by making regulatory
concessions to SCE that (TURN asserts) will lead to future rates higher
than would otherwise obtain. Government Code section 11126, subdivision
(d)(1), TURN argues, applies to "any PUC decision that results in
customers paying higher rates than they would absent the action."
We reject this interpretation of the statute as establishing a standard
impossible to apply, because it depends on the unknowable course of future
events under hypothetical conditions. Had PUC not settled SCE's federal
lawsuit, SCE might have won its case and rates might have been raised
even higher or been kept in place longer; had SCE lost or continued in
protracted litigation, it might have gone into bankruptcy and the bankruptcy
court might have approved higher rates. This court, moreover, cannot know
whether at some time in the future PUC would or would not have ordered
rate reductions, customer refunds, or cost-accounting changes that might
indirectly have resulted in lower rates. Under TURN's interpretation,
virtually any regulatory action would be a change in rates because PUC
could have taken some other action potentially leading to lower rates
in the future. (See Toward Utility Rate Normalization v. Public Utilities
Com. (1988) 44 Cal.3d 870, 873, 245 Cal.Rptr. 8, 750 P.2d 787 [PUC "authorized
no changes in rates" in adopting accounting procedure that prevented
otherwise automatic rate reduction].)
In this case, for example, TURN asserts the settlement agreement deprived
customers of refunds they would otherwise have been entitled to receive
for overcollection of the four cent surcharge, that is, for any collections
of the surcharge not needed for current power purchases, as was the originally
stated purpose of the surcharge. But TURN cannot show PUC would, absent
the settlement, have ordered refund of surcharge revenues used to pay
procurement debts incurred during the crisis. While the March 2001 PUC
decision allowing the surcharge stated that the surcharge's purpose
was to pay for ongoing power purchases and that surcharge revenues were
"subject to refund if, at a later date, we determine that the utilities
failed to use the funds to pay for future power purchases," that
decision explicitly did "not address recovery of past power purchase
costs and other costs claimed by the utilities." (Application of
Southern California Edison Co., supra, Cal. P.U.C. Dec. No. 01-03-082,
pp. 2, 60, 2001 WL 327151.) Later, the PUC explicitly permitted use of
the surcharge revenues to pay utilities' past power purchase debts.
(Application of Southern California Edison Co., supra, Cal. P.U.C. Dec.
No. 02-11-026, pp. 2, 4, 15-16, 2002 WL 31557670.) [FN7] Given PUC's
stated concern with restoring SCE to "reasonable financial health"
in order that it be able to reliably provide electric power to its customers
(Application of Southern California Edison Co., supra, at p. 4), we cannot
assume PUC would have taken a different regulatory course absent the settlement. [FN8]
FN7. Both the March 2001 establishment of the surcharge rates and the November
2002 modification in use of surcharge revenue were decided at open PUC
meetings. (Cal. P.U.C., Pub. Agenda 3099 (Nov. 7, 2002) item H 9; id.,
Pub. Agenda 3060 (Mar. 27, 2001) item 5b.)
FN8. TURN, quoting the federal court of appeals, identifies several other
aspects of the settlement that assertedly will result in higher rates,
but we reject the characterization of these promises, as well, as rate
changes. PUC promised not to unreasonably withhold consent to any future
request by SCE to pay its common stock shareholders a dividend, but only
after the end of the rate repayment period (Dec. 31, 2003); until that
time, surplus revenue was, under the settlement, to be used to reduce
the procurement-related obligations account, and SCE promised to declare
and pay no dividend. (Settlement, ß 2.5.) Any effect of these reciprocal
promises on rates is speculative. The dividend provision, moreover, may
not have been a change at all since, as far as the briefing indicates,
PUC had no prior duty or commitment, or even any authority, to unreasonably
deny such dividend requests. Similarly, PUC's commitment to implement
its "capital structure" requirements so as not to reduce the
revenues available for procurement debt recovery, and not to penalize
SCE for any noncompliance with those requirements (Settlement, ß
2.3), may not have been a change at all, since the briefing does not indicate
PUC was under a duty to implement its capital structure requirements in
a manner disadvantageous to SCE's debt recovery or to penalize SCE
for any noncompliance. With respect to SCE's and PUC's legal claims
against wholesalers, SCE agreed to cooperate and coordinate litigation
strategies with PUC and the Attorney General of California, to notify
PUC of any settlement reached by SCE prior to March 1, 2002, and not to
settle any claim without PUC's permission after March 1, 2002. (Settlement,
ß ß 3.1, 3.2.) Any effect of this agreement on rates is, to
say the least, unclear. Finally, even to the extent any of these promises
may affect future rates--itself a tenuous and speculative result--they
are not themselves rate changes.
TURN also cites legislative history documents indicating that the 1975
amendment adding the language in Government Code section 11126, subdivision
(d)(1) was intended to require that meetings for any PUC "deliberation
on rate proceedings" or "at which rates of entities under PUC
jurisdiction are considered" be open and public. (Legis. Analyst,
analysis of Sen. Bill No. 1 (1975-1976 Reg. Sess.) as amended Apr. 24,
1975, p. 1; Assem. Ways & Means Com., staff analysis of Sen. Bill
No. 1 (1975-1976 Reg. Sess.) as amended June 24, 1975, p. 2.) The cited
history, however, does not indicate an intent to apply Government Code
section 11126, subdivision (d)(1) to regulatory decisions other than rate
changes. As the language of subdivision (d)(1) reflects, the primary legislative
concern was with decisions to change rates; decisions leaving rates unchanged,
but taking regulatory action that results in rates remaining at current
levels longer than they otherwise might--the most that can be said about
the settlement agreement's effect--are not clearly within the legislative
purpose. For this reason, and because we have earlier found a clear legislative
intent, expressed in Government Code sections 11126, subdivision (e)(1)
and 11126.3, subdivision (a), to allow settlement of pending litigation
without a public meeting, we conclude PUC's agreement to the settlement
was not a meeting "at which the rates of entities under the commission's
jurisdiction are changed" for purposes of Government Code section
11126, subdivision (d)(1).
Question 3: Does the stipulated judgment violate section 454 of the Public
Utilities Code by altering utility rates without a public hearing and
issuance of findings?
Answer: No
Section 454, subdivision (a) provides that "no public utility shall
change any rate or so alter any classification, contract, practice, or
rule as to result in any new rate, except upon a showing before the commission
and a finding by the commission that the new rate is justified."
Contrary to the premise of the certified question, section 454 does not
require PUC to hold a "public hearing" before allowing a change
in rates. Indeed, the statute provides that PUC may adopt rules governing
"the nature of the showing required" and "the form and
manner of the presentation of the showing, with or without a hearing."
(ß 454, subd. (b), italics added; see also Wood v. Public Utilities
Commission (1971) 4 Cal.3d 288, 292, 93 Cal.Rptr. 455, 481 P.2d 823 ["The
Public Utilities Code does not require public hearings before rate increases
or rule changes resulting in rate increases may be authorized"].)
Section 454 contemplates an "application" for a rate change by
the utility and requires a "showing" in support of the application
and a "finding" by PUC that the change is justified. How the
statutory requirements of a showing and finding might be applied to a
settlement agreement, rather than an application, is unclear. But the
problem in applying section 454 is more fundamental still: SCE submitted
no application for a change in rates. If, as appears from section 454,
a major rate change may be made only by application (see Pacific Bell
v. Public Utilities Com. (2000) 79 Cal.App.4th 269, 274, 93 Cal.Rptr.2d
910 [under ß 454 and PUC's implementing regulations, a utility
may raise rates significantly only through the process of a formal application
to PUC] ), then a settlement agreement like that in dispute here, which
resolved a federal court suit rather than an application before the commission,
could not include a change in rates. We need not decide whether such a
reading of section 454 is correct, however, because the settlement agreement
effected no rate change subject to section 454. [FN9]
FN9. This is not to say that no formal PUC process was contemplated or
undertaken to implement the settlement. The settlement itself (ß
ß 2.1(a), 2.9) contemplated that PUC would adopt the decisions or
orders needed for implementation, and in particular that PUC would issue
an order establishing the procurement-related obligations account. SCE
sought such an order by Advice Letter (see Cal. P.U.C., Gen. Order No.
96-A, as amended Sept. 28, 1988, ß ß III, V), and that request
was granted, after consideration of various objections and protests, in
a PUC resolution setting forth the accounting structure and procedures
under which the PROACT agreement would be implemented. (Cal. P.U.C. Res.
E-3765, supra, pp. 1-2.)
As discussed in relation to the second certified question, PUC agreed,
in the settlement, to maintain SCE's approved rates for a specified
period, rather than to change them; nor did the other regulatory actions
promised in the agreement change rates. TURN suggests that by allowing
the current rates, including the surcharge, to be used for past procurement
debts, the settlement established a "new rate" within the meaning
of section 454. The premise of TURN's argument is that, absent the
settlement, rates would have been reduced when the freeze ended in March
2002 and wholesale prices dropped, making the surcharge unnecessary for
current power purchases. In answering the first certified question, however,
we explained that nothing in Assembly Bill 1890 required freeze rates
to be changed after March 2002, and in answering the second question we
noted that the original restriction on use of the surcharge revenue could
have been, and was, eventually removed on grounds independent of the settlement.
Again, to assert PUC would have reduced rates at any particular time,
if not bound by the settlement to maintain them, would be to speculate.
TURN's effort to transmute a continuing rate into a new rate therefore fails.
Section 454, moreover, contemplates a formal application for a "change"
in rates or for alteration of some condition of service so as to create
a "new rate." That a utility would formally apply merely to
maintain a rate appears not within the statute's contemplation. The
setting of a future rate to be the same as the present rate, as here,
is thus not within the purview of section 454, which focuses more narrowly
on changed or new rates, which must be pursued by application.
For these reasons, we conclude PUC's agreement to the settlement did
not violate section 454's requirement that a rate change or new rate
be justified by a showing and finding.
CONCLUSION
In response to the court of appeals' certified questions, we conclude
that PUC's agreement to the settlement and stipulated judgment did
not violate the provisions of Assembly Bill 1890 and that the procedures
employed in entering the stipulated judgment did not violate either the
Bagley-Keene Act or Public Utilities Code section 454.
WE CONCUR: GEORGE, C.J., KENNARD, BROWN, MORENO and RUSHING, JJ. [FN*]
FN* Presiding Justice of the Court of Appeal, Sixth Appellate District,
assigned by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
Concurring and Dissenting Opinion by BAXTER, J.
I accept the majority's conclusion that the terms of the settlement
between the Public Utilities Commission (PUC or Commission) and Southern
California Edison Company (SCE), which became the basis for a stipulated
judgment in federal district court, did not exceed the Commission's
authority under Assembly Bill No. 1890 (1995-1996 Reg. Sess.) (Assembly
Bill No. 1890), as codified in Public Utilities Code sections 330-396.
(Stats.1996, ch. 854, ß 10.) Unlike the majority, however, I believe
the process by which the PUC entered the settlement violated two other
important statutes.
First, the PUC contravened the Bagley-Keene Open Meeting Act (Act or Bagley-Keene
Act; Gov.Code, ß 11120 et seq.). The Commission misused an exception
in the Act, intended to permit closed meetings to "confer with, or
receive advice from, ... counsel" about pending litigation (id.,
ß 11126, subd. (e)(1)), to approve in secret a legal settlement
in which it guaranteed SCE billions of dollars in past and prospective
rate relief, and thus "changed" the rates to be paid by SCE's
customers (id., ß 11126, subd. (d)(1)).
Second, the PUC acted illegally under the Public Utilities Code, by so
"chang[ing]" SCE's rates, through a secretly approved settlement,
without any "showing before the [C]ommission and a finding by the
[C]ommission that the new rate [was] justified." (Pub.Util.Code,
ß 454, subd. (a), italics added.)
The Bagley-Keene Act was adopted to require state agencies to exercise
their essential regulatory authority through public deliberations and
decisions, subject to direct scrutiny and comment from the citizens whose
daily lives these decisions affect. Because the PUC's power over utility
rates is especially crucial, the Legislature added specific provisions,
in both the Bagley-Keene Act and the Public Utilities Code, requiring
the Commission to make its rate decisions openly, and to follow formalities
designed to ensure its determination that the approved rates are in the
public interest.
The majority's holding that the PUC could bypass these protections
if it did so to settle litigation opens the door to a widespread danger
of secret "government by lawsuit," in which state agencies conduct
their most important regulatory business in private, through the device
of settling litigation between themselves and the entities they regulate.
By the same device, the majority allow the PUC to engage in significant
ratemaking decisions without showings or findings that the rates thereby
set are just and reasonable. I cannot accept such a conclusion. I therefore
respectfully dissent from the majority's answers to questions 2 and
3 certified by the Ninth Circuit Court of Appeals.
I address the two critical statutes in turn.
A. Bagley-Keene Act.
The majority correctly note the general outlines of the Bagley-Keene Act,
adopted in 1967 (Stats.1967, ch. 1656, ß 122, p. 4026) and often
amended thereafter. The Act states "[i]t is the public policy of
this state that ... the proceedings of [covered state] agencies be conducted
openly," and declares the intent of the statute to be "that
actions of state agencies be taken openly and that their deliberation
be conducted openly." (Gov.Code, ß 11120, italics added.)
Accordingly, the Act mandates that, except as otherwise specifically provided,
a covered "state body" (Gov.Code, ß 11121.1) must (1)
conduct its "meetings ... open[ly] and public[ly]" (id., ß
11123, subd. (a)), (2) provide advance public notice and an agenda for
each such meeting (id., ß 11125); (3) allow members of the public
to address the body on each agenda item (id., ß 11125.7, subd. (a));
and (4) permit public criticism of the body's policies or actions
(id., ß 11125.7, subd. (c)). The Attorney General, a district attorney,
or an interested person may sue to prevent future violations of the Act,
or to determine the applicability of the Act to past or threatened future
conduct by a state body. (Id., ß 11130, subd. (a).) An interested
person may also sue to obtain a judicial determination that an "action
taken" in violation of the open-meeting requirements is null and
void. (Id., ß 11130.3, subd. (a).) Any member of a state body who
attends a meeting of that body in violation of the Act, with intent to
deprive the public of information to which the member knows or has reason
to know the public is entitled under the Act, is guilty of a misdemeanor.
(Id., ß 11130.7.) "Except as expressly provided by [the Act],
no closed session may be held by any state body." (id., ß 11132.)
A "meeting" includes "any congregation of a majority of
the members of a state body at the same time and place to hear, discuss,
or deliberate upon any item that is within the subject matter jurisdiction
of the state body to which it pertains." (Gov.Code, ß 11122.5,
subd. (a), italics added.) An "action taken" includes "a
collective decision " of the members and any "collective commitment
or promise ... to make a positive or negative decision." (Id., ß
11122, italics added.)
Thus, except as otherwise specified, the Act (1) directly prohibits closed
or secret meetings of state bodies to discuss or deliberate on public
business, and (2) separately provides for nullification of the actions
and decisions taken at such illegal meetings.
As the majority indicate, all agree that the PUC's decision to approve
the SCE settlement was an "action taken" at a "meeting"
that did not conform to the open and public requirements of the Bagley-Keene
Act. The PUC's published agenda for the regularly scheduled commissioners'
meeting of October 2, 2001, listed "Conference with Legal Counsel--Existing
... Litigation. Case name unspecified" as a matter to be discussed
in closed session. As suggested by the official minutes of the October
2 meeting, the commissioners unanimously approved the "SCE [s]ettlement"
during the closed discussion, then reconvened in public session to announce
their action.
To validate the "action taken" at this closed meeting, the PUC,
SCE, and the majority invoke an exception to the openmeeting requirements,
set forth in subdivision (e)(1) of Government Code section 11126. Subdivision
(e)(1) states that "[n]othing in [the Act] shall be construed to
prevent a state body, based on the advice of its legal counsel, from holding
a closed session to confer with, or receive advice from, its legal counsel
regarding pending litigation when discussion in open session concerning
these matters would prejudice the position of the state body in the litigation."
(Italics added.) But neither the plain meaning of this language--whether
read in isolation or in the overall statutory context--nor its legislative
history supports the majority's conclusion that the limited right
to confer with counsel in closed session connotes the additional right
to take final action in secret on the matter discussed.
The majority concede that "[o]n its face, subdivision (e)(1) permits
a [state] body only to 'confer with' and 'receive advice from'
its attorney regarding litigation." (Maj. opn., ante, 3 Cal.Rptr.3d
at p. 714, 74 P.3d at p. 804, italics added.) Indeed, subdivision (e)(1)
uses more restrictive language in this regard than the several other open-meeting
exceptions contained in Government Code section 11126. These variously
allow the state body, meeting in closed session, to "consider,"
"discuss," "deliberate on," or even "give instructions"
concerning the subject matter addressed. (See, e.g., id., subds. (a)(1)
[state body may "consider" employee personnel matters], (c)(3)
[state body may "deliberate on" quasi-judicial decision under
Administrative Procedure Act], (4) [state body may "consider[ ]"
term, parole, or release of prisoner if public disclosure of subject matter
is prohibited by statute], (5) [state body may "consider" conferring
of honorary degrees, or gifts, donations, or bequests, where donor desires
confidentiality], (7)(A) [state body may "give instructions to"
negotiator regarding purchase, sale, exchange, or lease of real property],
(7)(E) [state body may "discuss[ ]" eminent domain proceedings],
(8) [California Postsecondary Education Commission may " consider"
appointment or termination of commission's director], (9) [Council
for Private Postsecondary and Vocational Education may "consider"
appointment or termination of council's executive director], (10)
[Franchise Tax Board may "consider[ ]" appointment or termination
of board's executive officer], (16) [appropriate state body may "consider[
]" investment decisions for retirement or pension funds], (17) [state
body may hold closed sessions when "discharging responsibilities"
with regard to labor negotiations], (18) [state body may "consider"
matters posing criminal or terrorist threats to its personnel or property],
(d)(2) [PUC may "deliberate" on disciplinary actions against
any person or entity under its jurisdiction].)
Moreover, Government Code section 11126, subdivision (e) makes clear that
the "confer with counsel" exception is not intended to grant
state bodies a general license to decide in secret whether to enter settlements.
Instead, the purpose of subdivision (e) is merely to preserve for a state
agency, in the context of actual, threatened, or proposed litigation (see
id., subd. (e)(2)(A)-(C)), a limited form of the privilege available to
private litigants for confidential communications between lawyer and client.
Subdivision (e)(2) specifies that "[f]or purposes of [the Act], all
expressions of the lawyer-client privilege other than those provided in
this subdivision are hereby abrogated. This subdivision is the exclusive
expression of the lawyer-client privilege for purposes of conducting closed
session meetings pursuant to [the Act]." (Italics added.)
The legislative history of subdivision (e) of Government Code section 11126
confirms that a state body's privilege to confer privately with counsel
about pending litigation should be construed narrowly, to cover only lawyer-client
consultation and advice. As originally adopted, neither the Bagley-Keene
Act nor its local-agency counterpart, the Ralph M. Brown Act (Brown Act;
Gov.Code, ß 54950 et seq.), included any reference to an agency's
right to meet in private to consult with its counsel or discuss litigation.
A subsequent Court of Appeal decision, Sacramento Newspaper Guild v. Sacramento
County Bd. of Suprs. (1968) 263 Cal.App.2d 41, 69 Cal.Rptr. 480 (Sacramento
Newspaper Guild ), addressed whether the public-meeting provision of the
Brown Act "abrogates by implication the statutory policy [of Evidence
Code sections 950-952] assuring opportunity for private legal consultation
by public agency clients." (Sacramento Newspaper Guild, supra, at
p. 55, 69 Cal.Rptr. 480, italics added.) The Court of Appeal concluded
that public agencies involved in actual or pending litigation, facing
the same stakes and realities as private litigants, should have the same
privilege as their private counterparts to " 'the effective aid
of legal counsel,' " and thus to the " 'opportunity
for confidential legal advice.' " (Id. at p. 56, 69 Cal.Rptr.
480, italics added.)
The court reasoned that "[s]ettlement and avoidance of litigation
are particularly sensitive activities, whose conduct would be grossly
confounded, often made impossible, by undiscriminating insistence on open
lawyer-client conferences. In settlement advice, the attorney's professional
task is to provide his client a frank appraisal of strength and weakness,
gains and risks, hopes and fears. If the public's 'right to know'
compelled admission of an audience, the ringside seats would be occupied
by the government's adversary, delighted to capitalize on every revelation
of weakness." (Sacramento Newspaper Guild, supra, 263 Cal.App.2d
41, 56, 69 Cal.Rptr. 480, italics added, fn. omitted.)
The Legislature later codified this principle in the Bagley-Keene Act by
adding former subdivision (q) to section 11126. (Stats.1981, ch. 968,
ß 12, p. 3690.) As adopted in 1981, former subdivision (q) simply
provided that "[n]othing in [the Act] shall be construed to prevent
a state body from holding a closed session to confer with legal counsel
regarding pending litigation when discussion in open session concerning
those matters would adversely affect or be detrimental to the public interest."
In 1987, however, the Legislature tightened and refined the Act's provision
for private conferences with counsel concerning pending litigation. (Stats.1987,
ch. 1320, ß 2, p. 4762.) At that time, former subdivision (q) of
Government Code section 11126 was rewritten in language roughly equivalent
to that of current subdivision (e). The 1987 amendment removed permission
for state bodies to meet with counsel in closed session about pending
litigation whenever public discussion would adversely affect the "public
interest." Under the amendment, a closed-session consultation was
allowed only when public discussion "would prejudice the position
of the state body in the litigation." (Gov.Code, ß 11126, subd.
(e)(1); see id., former subd. (q).) The amendment added the further proviso
that, for purposes of the Act, the section is the "exclusive"
expression of the lawyer-client privilege, which is otherwise "abrogated." (Ibid.)
The 1987 amendment also included the extensive discussion, now contained
in Government Code section 11126, subdivision (e)(2), of when "litigation
shall be considered pending" for purposes of the privilege to confer
in private with counsel. This requires that (1) an adjudicatory proceeding
before a court, an administrative body, a hearing officer, or an arbitrator,
to which proceeding the state body is a party, has already been initiated;
(2) existing facts and circumstances have persuaded the state body, based
on counsel's advice, that it faces significant exposure to litigation;
or (3) based on existing facts and circumstances, the state body has decided
to initiate, or is deciding whether to initiate, litigation. (Gov.Code,
ß 11126, subd. (e)(2)(A), (B)(i), (C)(i); see id., former subd.
(q)(1), (2)(A), (3).)
Finally, the 1987 amendment added the requirement, still in effect, that
counsel prepare and submit to the state body, prior to the closed session
if possible, but in no event more than a week thereafter, a memorandum
stating "the specific reasons and legal authority for the closed
session." This memorandum must include, in the case of litigation
not yet formally initiated, "the facts and circumstances" justifying
a belief that the body faces a significant exposure to litigation or should
decide whether to initiate such proceedings. (Gov.Code, ß 11126,
subd. (e)(2)(C)(ii); see id., former subd. (q).)
The source of the 1987 legislation was Senate Bill No. 200 (1987-1988 Reg.
Sess.) (Senate Bill No. 200). The bill was described as "codif[ying]
the exclusive use of the attorney-client privilege for the purpose of
conducting closed sessions," and as allowing "[c]losed sessions
... to seek the advice of legal counsel with regard to 'pending litigation'
if discussion with legal counsel in open session would 'prejudice
the position' of the public entity." (Assem. Subcom. on Admin.
of Justice, Analysis of Sen. Bill No. 200, as amended May 4, 1987, p.
1, italics added.)
Urging passage of Senate Bill No. 200 in the Assembly, the California Attorney
General explained the concerns that had prompted the proposed legislation
(which made conforming amendments to both the Brown and Bagley-Keene Acts):
"Briefly, the problem is this: Several years ago the courts ruled
that, absent specific legislation to the contrary, the Brown Act will
not be construed to limit the availability of the traditional attorney-client
privilege to local governmental bodies. [Citations.] This leaves ... public
agencies with broad freedom to go into executive session for confidential
attorney-client discussion of virtually any issue which may involve 'pending
litigation' or the 'avoidance of litigation.' [∂ ] [Senate
Bill No.] 200 will eliminate this loophole by placing clear and reasonable
limitations upon when ... governmental agencies may hold closed meetings
to discuss legal issues. It protects the legitimate need of public officials
to obtain confidential legal advice on issues which may end up in litigation
but does not sacrifice the public's right to open meetings. In short,
the bill strikes an appropriate balance between two important but often
conflicting principles of public policy." (Atty. Gen. John K. Van
de Kamp, letter to Assembly Member Lloyd G. Connelly, re Sen. Bill No.
200, July 10, 1987, italics added.)
The 1987 amendments, and the accompanying analyses and comments, do not
directly address whether, during a closed lawyer-client litigation conference,
a state body may make its final decision on how to resolve the pending
proceeding. However, the amendments do confirm these general principles:
First, Government Code section 11126, subdivision (e) defines, and strictly
limits, a state agency's exercise of its attorney-client privilege
under the Bagley-Keene Act. (See Roberts v. City of Palmdale (1993) 5
Cal.4th 363, 373-381, 20 Cal.Rptr.2d 330, 853 P.2d 496 [construing parallel
provisions of the Brown Act].) Second, this privilege has been statutorily
narrowed over time, and is not coextensive with a private party's
rights to maintain secrecy in litigation matters. Third, the scope of
the privilege has been carefully calibrated to allow the state body to
conduct necessary private consultations with its counsel about pending
litigation, while still maintaining, to the maximum possible extent, the
Act's overall requirement of public deliberation and decision. All
these circumstances suggest that the privilege must be narrowly, not broadly,
construed, where final decisionmaking by the agency is at stake.
The majority's expansive interpretation of the privilege contravenes
these tenets. The majority imply, on the basis of obsolete authority,
that the public and private attorney-client privileges are coextensive.
(Maj. opn., ante, 3 Cal.Rptr.3d at pp. 714-715, 74 P.3d at pp. 804-805,
citing Sacramento Newspaper Guild, supra, 263 Cal.App.2d 41, 55, 69 Cal.Rptr.
480.) More importantly, the majority's construction far exceeds a
public agency's need for attorney-client confidentiality, while unduly
restricting the right of the people to public decisionmaking by state agencies.
As major support for their conclusion that the closed-session provision
extends beyond the limited privilege to confer with counsel, and encompasses
a final decision by the state body to accept a proposed settlement, the
majority cite another provision of the Bagley-Keene Act, Government Code
section 11126.3, subdivision (a). Under this provision, a state body that
intends to consult its counsel in closed session about already existing
litigation must publicly identify, by name or other specific means, the
litigation to be discussed "unless the body states that to do so
would jeopardize ... its ability to conclude existing settlement negotiations
to its advantage." (Ibid., italics added.) The PUC availed itself
of the privilege not to identify the SCE settlement as the subject of
its closed session on October 2, 2001, stating in its public agenda that
"( [d]isclosure of case name would jeopardize existing settlement
negotiations)."
Focusing on the single word "conclude" in Government Code section
11126.3, subdivision (a), the majority reason broadly that this must mean
the state body can use the cloak of confidentiality, not only to discuss
the pros and cons of settlement with its counsel, but also to "conclude"
the settlement. But this is a thin reed for the majority to grasp. Just
as the inability to confer with counsel in private might compromise the
agency's strategy and jeopardize its ability to "conclude"
a settlement to its advantage, a requirement that the agency prematurely
identify the matter to be discussed in such a conference may also do so.
But however confidential such preliminary legal discussions and negotiations
may be, nothing in section 11126.3, subdivision a) states or implies that
the agency may actually resolve pending litigation in a regulatory matter
without warning that a settlement of the particular case is imminent,
explaining in public the proposed settlement terms, and allowing public
response, at a public meeting, before making its final decision.
Certainly a state body may frankly discuss with its counsel, in private,
the progress of ongoing settlement negotiations, including a candid assessment
of the agency's negotiating strategy, the "strength and weakness"
of the agency's position, and the "gains and risks, hopes and
fears" a settlement entails, without affording its opponents "ringside
seats" at these preliminary discussions. (Sacramento Newspaper Guild,
supra, 263 Cal.App.2d 41, 56, 69 Cal.Rptr. 480.) No doubt the agency may
privately instruct its counsel, negotiating on its behalf, concerning
terms it is inclined to accept. [FN1] Moreover, it may well be that in
subsequent public consideration of the matter, the state body need not
fully disclose the litigation-related concerns that it discussed privately
with its counsel under cover of the attorney-agency privilege, even if
this means the public is less than fully informed about all the reasons
the agency is tentatively prepared to accept a resolution on particular terms.
FN1. I note, however, that subdivision (e)(1) of Government Code section
11126, allowing a state body, in closed session, to "confer with,
or receive advice from, its legal counsel" concerning pending litigation,
does not grant secret negotiating authority parallel to that expressly
provided in subdivision (c)(7)(A) of the same section, which, in significantly
different words, empowers a state body to "hold[ ] closed sessions
with its negotiator prior to the purchase, sale, exchange, or lease of
real property by or for the state body to give instructions to its negotiator
regarding the price and terms of payment for the purchase, sale, exchange,
or lease." (Italics added.)
But none of this implies that a final regulatory decision, framed as the
settlement of a pending lawsuit, itself can be undertaken without any
public scrutiny or input, as occurred here. Government Code sections 11126,
subdivision (e) and 11126.3, subdivision (a) were not intended to provide
state agencies conducting the public's business with the same right
private litigants may have to resolve their disputes entirely away from
the public's prying eyes. Where significant regulatory decisions are
at stake, parties involved in litigation with a state agency must understand
that this is so. Whatever incidental litigation disadvantage this may
impose on state agencies in the conduct of their regulatory business,
as opposed to individuals and organizations in the conduct of their private
affairs, is a necessary corollary to the express statutory policy of public
decisionmaking.
To this extent, I am not persuaded by the California Attorney General's
construction of Government Code section 54956.9, the Brown Act analog
to section 11126, subdivision (e)(1). (75 Ops.Cal.Atty.Gen. 14 (1992).)
The Attorney General reasoned that the language of section 54956.9 (a
local governmental body may meet in closed session to "confer with,
or receive advice from, its legal counsel regarding pending litigation")
allows a local government body not simply to consult and confer in private
on litigation matters, but also to take final action to settle a lawsuit.
For this conclusion, the Attorney General first cited language in the Brown
Act's "personnel" exception, now contained in subdivision
(b)(1) of Government Code section 54957, which permits closed meetings
"to consider the appointment, employment, evaluation of performance,
discipline, or dismissal of a public employee...." (Italics added;
see Gov.Code, ß 11126, subd. (a)(1) [parallel Bagley-Keene Act personnel
exception].) Noting that several Court of Appeal decisions had construed
the personnel exception to permit not only deliberation, but final action,
the Attorney General asserted that the operative word "consider"
in the personnel exception, and the operative word "confer"
in the pending-litigation exception, were enough alike to dictate a similar
interpretation of the latter provision. (75 Ops.Cal.Atty.Gen., supra,
at p. 19.)
The Attorney General also reasoned that a public agency's right to
confer with counsel in secret about confidential litigation and settlement
strategy necessarily implies the further right to decide, in confidence,
what course to take. Otherwise, the Attorney General cautioned, an agency's
litigation adversaries would have " 'ringside seats' "
for its decisions, and public litigants would be " 'second-class
citizen[s],' " at a disadvantage compared to their private counterparts.
(75 Cal.Ops.Atty.Gen., supra, at p. 19, quoting Sacramento Newspaper Guild,
supra, 263 Cal.App.2d 41, 56, 69 Cal.Rptr. 480.)
For reasons I have already discussed at length, I believe these conclusions
are flawed. The words of the pending-litigation and personnel exceptions,
respectively, are materially different. The former permits the public
entity only to "confer with, or receive advice from, its counsel"
in private (Gov.Code, ß 11126, subd. (e)(1)), while the latter,
by its use of the broader word "consider" (id., subd. (a)(1)),
specifically allows active deliberation on the issue under discussion.
In light of the 1987 narrowing of the pending-litigation privilege, and
given the overall statutory policy of open deliberations and actions,
these linguistic distinctions should not be conflated to allow a broad
right of agencies to settle regulatory litigation in private.
Moreover, as we have seen, the current pending-litigation exception is
not intended to afford public agencies litigation privacy entirely equivalent
to that enjoyed by private parties. Instead, the statutory exception seeks
to balance competing policies by providing a limited, and exclusive, form
of attorney-client confidentiality for public agencies, while interfering
as little as possible with the fundamental requirement that the collective
actions of such agencies be taken in public. Thus, the pending-litigation
exception does not imply a loophole allowing agencies covered by the Bagley-Keene
Act to meet in secret to make final decisions on matters of significant
regulatory interest.
In this age of high-stakes litigation, the majority's contrary conclusion
opens the door to secret "government by lawsuit," allowing governmental
bodies to exercise significant portions of their regulatory authority
in private by the device of settling lawsuits between themselves and the
entities they regulate. I cannot accept such a weakening of the clear
purposes of the Bagley-Keene Act. I conclude that subdivision (e) of Government
Code section 11126 did not permit the PUC to act in secret to finally
approve a settlement of its litigation with SCE.
But even if Government Code section 11126, subdivision (e) generally allowed
state bodies to approve regulatory settlements in closed session, respondent
The Utility Reform Network (TURN) correctly urges that the PUC's approval
of this particular settlement nonetheless violated the Bagley-Keene Act.
TURN points to another portion of section 11126--subdivision (d)(1)--
that deals specifically with this agency and the subject matter of this
settlement. Section 11126, subdivision (d)(1) provides that "[n]otwithstanding
any other provision of law, any meeting of the Public Utilities Commission
at which the rates of entities under the [C]ommission's jurisdiction
are changed shall be open and public." (Italics added.) By any common
understanding, the PUC's agreement to entry of the stipulated judgment
in SCE's federal action constituted the Commission's commitment
to "change [ ]" the electricity rates SCE could charge.
As the majority indicate, the parties to the October 2001 settlement agreed
that, because of falling wholesale electricity prices during 2001, SCE's
existing rates "had allowed SCE to collect retail revenues in excess
of current costs." (Maj. opn., ante, 3 Cal.Rptr.3d at p. 709, 74
P.3d at p. 800.) Among other components, these rates included emergency
surcharges, totaling four cents per kilowatt-hour, which the PUC had granted
to SCE, and to Pacific Gas and Electric Company (PG & E), in early
2001, at a time of very high wholesale power prices. When the PUC granted
these surcharges, it had restricted their application to future power
purchases, not past liabilities, and had made surcharge revenues refundable
to ratepayers to the extent not used for this limited purpose. (Application
of Southern California Edison Co. (2001) Cal. P.U.C. Dec. No. 01-01-018,
pp. 2-3, 10-17, 24, 2001 WL 55738; Application of Southern California
Edison Co. (2001) Cal. P.U.C. Dec. No. 01-03-082, pp. 16-18, 60-61, 2001
WL 55738.)
In the settlement, however, the PUC agreed, as its "principal substantive
concession" (maj. opn., ante, 3 Cal.Rptr.3d at p. 709, 74 P.3d at
p. 800), to permit SCE to recover certain past costs by (1) applying the
overcollections already in SCE's coffers--i.e., its "cash on
hand" (ibid.)--to this purpose and (2) "maintaining [SCE's]
existing rates until the end of 2003, if necessary," to allow further
such recovery (ibid., italics added). The settlement called for the establishment
of a tracking account, known as PROACT, that would record SCE's progress
toward recouping these costs. (Ibid.) PROACT's initial balance would
be the gross amount of SCE's accumulated past liabilities subject
to recovery--an amount the parties agreed to be about $6.355 billion--less
the surplus SCE had already collected. (Id., at pp. 708-709, 74 P.3d at
799-800.) Under this formula, the initial PROACT balance was estimated
at some $3.3 billion. (Id., at p. 709, 74 P.3d at p. 800.) The settlement
rates would remain in effect until "the PROACT [account] was paid
down to zero or ... December 31, 2003, whichever came first. [Citation.]" (Ibid.)
The settlement thus authorized three fundamental "change[s]"
in SCE's rates. First, it either provided, or extended, a guaranteed
duration to the rates in existence at the time of the settlement. [FN2]
Second, it cancelled, nunc pro tunc, ratepayers' rights to refunds
of amounts SCE had already collected under the 2001 surcharges, but had
not used for ongoing power purchases as the terms of those surcharges
originally required. Third, it removed, for the future, the original limitation
on SCE's use of the surcharges. That allowed SCE to continue to assess
the surcharges, and to retain the revenues therefrom, under circumstances
not permitted by the original terms and conditions of these special rates.
FN2. There is considerable confusion about whether the 1996 rate freeze,
as authorized by Assembly Bill No. 1890, had ended, with respect to SCE,
by the time SCE and the PUC entered the settlement at issue here. As of
this writing, it appears the PUC has not finally resolved that issue.
If the 1996 rate freeze was still in effect, the settlement "changed"
that component of SCE's then existing rates by extending the maximum
duration of the freeze from March 31, 2002 (see Pub. Util.Code, ß
368, subd. (a)), to December 31, 2003. If the 1996 rate freeze had ended,
the settlement nonetheless "changed" SCE's rates by placing
a guaranteed duration on rates otherwise subject to alteration or fluctuation.
The majority insist the PUC did not agree in the settlement to " 'change
[ ]' " SCE's rates, but only made a "commitment ...
to maintain the then existing rates for an agreed period." (Maj.
opn., ante, 3 Cal.Rptr.3d at p. 717, 74 P.3d at p. 807.) This pinched
and hypertechnical analysis ascribes too narrow a meaning to the broad
statutory phrase "rates ... are changed." (Gov.Code, ß
11126, subd. (d)(1).) Surely it does not comport with the legislative
purpose to ensure that the PUC's core ratemaking decisions be open
and public.
The complex and crucial task of ratemaking does not simply set the amount
of money a utility may charge for a unit of service at any particular
moment. It also necessarily establishes the terms and conditions attached
to the authorized charge. When, as here, the PUC agrees to grant or extend
a rate freeze, or alters the circumstances under which a rate may be charged
or its revenues retained, it "change[s]" the rate.
The majority reject TURN's argument that the settlement "changed"
rates because it will lead to higher future rates than customers would
otherwise have paid. This is an impossible standard to apply, the majority
reason, because "it depends on the unknowable course of future events
under hypothetical conditions." (Maj. opn., ante, 3 Cal.Rptr.3d at
p. 718, 74 P.3d at p. 807.) In other words, the majority explain, for
all we know, events other than the settlement, whether regulatory, legal,
or economic, would have produced those same future rates.
This rationale misses the point. The settlement's effect was to (1)
provide, or extend, the guaranteed duration of a rate, (2) allow SCE to
retain past and future surcharge revenues that would otherwise have been
subject to refund, and (3) thereby narrow the opportunity for electricity
customers to obtain rebates, or to enjoy lower future rates, based on
the conditions that might then prevail. In making these fundamental alterations
in the structure of SCE's existing rates, the settlement "changed"
the rates. And the effect on SCE's ratepayers was hardly minimal.
The settlement's avowed purpose was to enable SCE to secure from its
customers billions of dollars in excess of current operational costs that
were deemed necessary to restore SCE to financial health. [FN3]
FN3. I am aware that, as the majority indicate, the PUC recently approved
SCE's application to reduce its rates, effective August 1, 2003, upon
completion of the PROACT pay-down. (Application of Southern California
Edison Co. (2003) Cal. P.U.C. Dec. No. 03-07-029, pp. 2, 5, 12, 16-17,
22, 2003 WL 21705428.)
The Legislature cannot have meant to allow ratemaking decisions with such
significant effect on the public to escape the open-meeting requirement
set forth in subdivision (d)(1) of Government Code section 11126. Indeed,
this is confirmed by the legislative history of subdivision (d)(1), a
factor discounted by the majority. The substance of present subdivision
(d)(1) was adopted in 1975 as part of former subdivision (p). (Stats.1975,
ch. 959, ß 5, p. 2238.) Legislative analyses of this provision,
as enacted by Senate Bill No. 1 (1975-1976 Reg. Sess.) (Senate Bill No.
1), frequently described its effect as prohibiting the PUC from holding
closed sessions for "deliberation on rate proceedings" (Legis.
Analyst, analysis of Sen. Bill No. 1, as amended Apr. 24, 1975, p. 1;
see also Assem. Of. of Research, Dig. for Assem.3d reading of Sen. Bill
No. 1, as amended Aug. 12, 1975, p. 1), and as requiring any PUC meeting
where "rates ... are considered" to be open and public (Assem.
Ways & Means Com., Staff Analysis of Sen. Bill No. 1, as amended June
24, 1975, p. 2).
The PUC urges that even if its initial acceptance of the settlement in
closed session violated the Bagley-Keene Act's open-meeting requirement,
the Commission "cure[d]" or "correct[ed]" the violation
(Gov.Code, ß 11130.3, subd. (a)) by two subsequent actions taken
in public meetings. But the two actions the PUC cites merely implemented
the terms of a settlement, and the resulting stipulated judgment, already
reached in violation of the Act.
By P.U.C. Resolution No. E-3765 (2002), the Commission simply granted,
with minor modifications, SCE's request to establish the PROACT account
called for by the settlement. (Cal.P.U.C.Res. No. E-3765, p. 37.) Indeed,
in the resolution, the PUC rebuffed an argument by the California Manufacturers
& Technology Association that granting SCE's request would impermissibly
change certain prior Commission decisions. According to the PUC, "this
... issue argue[d] the legality of the [s]ettlement, which [was] beyond
the scope of" the proceeding then before the Commission. (Id., at p. 35.)
The PUC also points to its Decision No. 02-11-026, which modified Application
of Southern California Edison, supra, Cal. P.U.C. Decision No. 01-03-082.
As indicated above, Decision No. 01-03-082, issued in March 2001, had
granted both PG & E and SCE a three-cent surcharge (and had also made
"permanent" an additional one-cent surcharge granted to those
utilities in January 2001), but had restricted use of these surcharges
to ongoing power procurement and made them otherwise refundable. Decision
No. 02-11-026 relaxed this restriction by allowing the 2001 surcharges
to be used both for future power purchases and for the more general purpose
of "returning each utility to financial health." (Application
of Southern California Edison Co. (2002) Cal. P.U.C. Dec. No. 02-11-026,
p. 2, 2002 WL 31557670.)
But Decision No. 02-11-026 neither mentioned the SCE settlement nor reflected
any effort to reconsider its terms. Moreover, as applied to SCE, repeal
of prior restrictions on use of the four-cent surcharge had already occurred
by virtue of the settlement, and was required in any event by the resulting
stipulated judgment in the federal action, entered October 5, 2001. Nothing
in Decision No. 02-11-026 indicates it was a sincere and effectual attempt
by the Commission to reassess the SCE settlement itself in an open and
public meeting. [FN4]
FN4. In a final thrust, the PUC urges that even if its closed-session approval
of the settlement violated the Bagley-Keene Act, and even if this violation
was not cured or corrected by the Commission's later actions, the
settlement, and the resulting stipulated judgment, must nonetheless be
upheld under Government Code section 11130.3, subdivision (b), which provides
that "[a]n action [governed by the Act] shall not be determined to
be null and void if ... [∂ ] ... [∂ ] (2) The action taken gave
rise to a contractual obligation upon which a party has, in good faith,
detrimentally relied." The Commission asserts that SCE has placed
good faith detrimental reliance on the settlement by using resulting rate
revenues to pay its creditors. But the quoted language appears to refer
to the Act's special procedures, also set forth in section 11130.3,
by which an "interested person," acting within a specified time,
may sue to "obtain[ ] a judicial determination that an action taken
by a state body in violation of [the Act] is null and void under this
section." (Id., subd. (a), italics added.) Here, the legality of
the PUC-SCE settlement, and the resulting stipulated judgment, is at issue,
not by collateral attack from an outsider under section 11130.3, but on
appeal from the stipulated judgment itself. SCE, a party to the stipulated
judgment, and presumably aware at all times that it was subject to reversal
on appeal, cannot be said to have detrimentally relied "in good faith"
on its terms, in the sense meant by section 11130.3, subdivision (b)(2).
For all these reasons, I would answer "yes" to the Ninth Circuit's
question whether the PUC's approval of the SCE settlement in a closed
session violated the Bagley-Keene Act.
B. Public Utilities Code section 454.
As indicated above, the Public Utilities Code separately provides, in pertinent
part, that "no public utility shall change any rate or so alter any
classification, contract, practice, or rule as to result in any new rate,
except upon a showing before the [C]ommission and a finding by the [C]ommission
that the new rate is justified...." (Pub.Util.Code, ß 454,
subd. (a) (section 454(a)), italics added.) The obvious purpose of the
statute is to require a demonstration by the utility, and a resulting
determination by the Commission, that the rate change is just and reasonable.
As discussed above, the settlement between the PUC and SCE constituted
their agreement to a "change" in SCE's rates. The settlement
either froze rates or extended a freeze already in effect. It eliminated,
for both past and future purposes, prior restrictions on SCE's use
of the 2001 surcharges. It cancelled ratepayers' rights, both past
and future, to refunds of surcharge amounts overcollected by SCE under
the terms and conditions originally applicable to these rates. It thus
afforded SCE the opportunity to recover from its ratepayers some $6.355
billion in liabilities already accrued by SCE, with approximately $3.3
billion of that amount to appear on their future electricity bills. Insofar
as the PUC accepted this "change" without resort to the requirements
of Public Utilities Code section 454(a), it acted illegally. [FN5]
FN5. Before 1988, Public Utilities Code section 454(a) had provided that
"no public utility shall raise any rate or so alter any classification,
contract, practice, or rule as to result in any increase in any rate"
except upon a showing and finding of justification. (Pub. Util.Code, ß
454, former subd. (a), italics added.) In that year, the statute was amended
to refer more broadly to "change[s]" in rates and "new"
rates. (Stats.1988, ch. 108, ß 1, p. 446.) On the other hand, section
454(a) states that its procedures shall apply "[e]xcept as provided
in [s]ection 455." Section 455 deals with filed utility rate schedules
"not increasing or resulting in an increase in any rate." Whatever
the interplay between sections 454(a) and 455, the SCE PUC settlement,
by providing a guaranteed future rate structure designed to allow SCE
to recover billions of dollars in past costs, appears to have effectively
authorized an "increase" in SCE's rates. No party or amicus
curiae has invoked section 455 to argue that the settlement was exempt
from section 454(a).
SCE and the PUC argue that even if the settlement did authorize a change
in SCE's rates, Public Utilities Code section 454(a) has no relevance
here. According to SCE and the PUC, the statute and its implementing regulations
are concerned solely with the procedures by which a utility may seek the
Commission's approval to change the utility's "tariff,"
or published schedule of rates (see, e.g., Pub.Util.Code, ß ß
489, subd. (a), 491; Cal. P.U.C. Gen. Order No. 96-A (1996) ß ß
I.B, III.C, VI; Pacific Bell v. Public Utilities Com. (2000) 79 Cal.App.4th
269, 274, 93 Cal.Rptr.2d 910)-- procedures that simply do not pertain
to a settlement and stipulated judgment in a lawsuit. (See also maj. opn.,
ante, 3 Cal.Rptr.3d at pp. 719-720, 74 P.3d at p. 808-809.)
Moreover, SCE and the PUC insist, a utility may change its rates only through
the formal alteration of its tariff. (See Pub. Util.Code, ß ß
489, subd. (a), 491, 532; Cal. P.U.C. Gen. Order No. 96-A, supra, ß
VI; see also Transmix Corp. v. Southern Pacific Co. (1960) 187 Cal.App.2d
257, 265, 9 Cal.Rptr. 714.) As SCE and the PUC observe, any modification
of SCE's tariff did not occur directly by virtue of the settlement
and stipulated judgment, but only through implementing decisions, such
as P.U.C. Resolution No. E-3765 (see discussion, ante ), that resulted
from formal Commission proceedings. Hence, these parties conclude, the
settlement itself did not violate Public Utilities Code section 454(a).
Neither SCE nor the PUC cites authority holding that the Commission may
authorize a utility rate change, by means of a legal settlement, without
complying with the basic requirements of Public Utilities Code section
454(a). The majority in this case deliberately avoid that issue by concluding,
erroneously in my view, that the instant settlement involved no "change"
in SCE's rates. (Maj. opn., ante, 3 Cal.Rptr.3d at pp. 719-720, 74
P.3d at pp. 808-809.)
In any event, the technical arguments advanced by SCE and the PUC obscure
the fundamental purpose of the scheme for public utility regulation. Such
utilities are subject to control by the Legislature (Cal. Const., art.
XII, ß 3), which has mandated in the Public Utilities Act that their
rates be "just and reasonable" (Pub.Util.Code, ß 451).
Regulatory authority over the rates of public utilities is vested in the
Commission (Cal. Const., art. XII, ß ß 1, 4, 6), which is
responsible, through specified procedures, to assure that these rates
meet the "just and reasonable" standard required by law (Pub.Util.Code,
ß ß 454(a), 728). Allowing the Commission to use a legal settlement
to grant a significant change in a utility's rates, without resort
to a showing and finding that the change is just and reasonable, fundamentally
undermines this regulatory structure. It invites such utility litigation
as a means of "end-running" the established regulatory process.
As TURN suggests, the contention by SCE and the PUC that rates are "change
[d]," for purposes of Public Utilities Code section 454(a), only
upon completion of the tariff-setting process unduly elevates the ministerial
act of implementing rate changes already mandated, in essential outline,
by a prior Commission decision. Section 454(a) is superfluous unless it
means that the fundamental determination whether a proposed change in
rates is to be allowed at all can be made only upon a showing and finding,
under normal regulatory procedures, that the change is just and reasonable.
I recognize that the regulatory process for approving rate changes is not
readily compatible with the practicalities of settling lawsuits. My conclusion
that Public Utilities Code section 454(a) nonetheless applies may well
mean that the Commission simply cannot engage in significant ratemaking
by such means. But any disadvantage this may ascribe to the Commission,
or to a financially distressed utility, in a particular case is outweighed
by the overarching regulatory policy of assuring that the rates paid by
California's utility customers are just and reasonable.
For all these reasons, I would answer "yes" to the Ninth Circuit's
question whether the settlement and stipulated judgment between SCE and
the PUC violated Public Utilities Code section 454.
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