Stanford Law School - Robert Crown Law Library

August 21, 2003



IN THE SUPREME COURT OF CALIFORNIA



SOUTHERN CALIFORNIA EDISON CO., )


Plaintiff and Respondent,

) S110662

v.

MICHAEL R. PEEVEY, as Commission

President, etc., et al.,

)


Defendants and Respondents; )

THE UTILITY REFORM NETWORK,

Intervener and Appellant.



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.

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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, §§ 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.

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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, § 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., § 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., § 10, adding Pub. Util. Code, former

§ 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, § 1, subd. (b)(1)) and thereby to “provide

the investors in these electrical corporations with a fair opportunity to fully

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recover the costs associated with commission approved generation-related assets

and obligations” (Pub. Util. Code, § 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 367,1 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.”

(§ 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.

(§§ 365, subd. (b), 366, 370.)

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.”


1

All further statutory references are to the Public Utilities Code unless

otherwise specified.

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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.)

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,

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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.) 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.) 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., § 4, adding Wat. Code, §§ 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.

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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, § 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, § 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, § 10.) Assembly Bill 6X deleted this language, leaving only

the general statement that “[g]eneration of electricity should be open to

competition.” (Id., § 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; Application of Southern California Edison Co. (2002) Cal. P.U.C. Dec.

No. 02-11-026, pp. 11-16.)

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

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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, § 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, § 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,

§§ 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, § 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, § 2.2(b).)2


2

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.)

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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, §§ 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” (§ 701);

this includes the authority to determine and fix “just, reasonable [and] sufficient

rates” (§ 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, quoting Consumers Lobby Against

Monopolies v. Public Utilities Com. (1979) 25 Cal.3d 891, 905.) If PUC lacked

substantive authority to propose and enter into the rate settlement agreement at

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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.)

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

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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

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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.3 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; 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.)

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,4 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


3

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.
4

See Application of Pacific Gas & Electric Co. (1999) Cal. P.U.C. Dec. No.

99-10-057, pages 18-20; Application of Pacific Gas & Electric Co. (2000) Cal.
P.U.C. Dec. No. 00-03-058, pages 18-19. 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.

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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. 2, ante), it should not bind us to a counterfactual

characterization of all the procurement costs at issue here.

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

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be recoverable in market prices in a competitive market” (§ 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.5

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.

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

5

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”].)

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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 (§ 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.) 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.) Cognizant of the principle that PUC’s interpretation

of the Public Utility Code “should not be disturbed unless it fails to bear a

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reasonable relation to statutory purposes and language” (Greyhound Lines, Inc. v.

Public Utilities Com. (1968) 68 Cal.2d 406, 410-411), 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,
§§ 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, §§ 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, § 11123), by requiring advance public notice of meetings (id.,

§ 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.,

§ 11130), and to declare null and void an “action taken” in violation of

Government Code sections 11123 or 11125 (id., § 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., § 11122.)

The October 2001 settlement, which the subsequent stipulated judgment

implemented, was signed by the five PUC commissioners and was both a

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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

17

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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, the court

held that the enactment of the Ralph M. Brown Act (Gov. Code, §§ 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.)

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; accord, Roberts v. City of Palmdale (1993) 5 Cal.4th

363, 373-374.) 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

18

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of current Government Code section 11126, subdivision (e)(1). (See Stats. 1981,

ch. 968, § 12, p. 3690, adding former subd. (q) to Gov. Code, § 11126; Stats.

1984, ch. 1126, § 3, p. 3802, adding Gov. Code, § 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, § 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), 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.

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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), 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, § 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

20

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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, § 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

21

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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.6

In this case PUC strictly followed the procedure mandated in Government

Code section 11126.3, subdivision (a), noting in the closed-session agenda item,


6

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, at p. 12.) 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.

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“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, § 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,

§ 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

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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 [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.) Later,

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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.)7 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.8


7

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.)
8

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, § 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, § 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, §§ 3.1, 3.2.) Any effect of this
agreement on rates is, to say the least, unclear. Finally, even to the extent any of


(footnote continued on next page)

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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).


(footnote continued from previous page)

these promises may affect future rates—itself a tenuous and speculative result—
they are not themselves rate changes.

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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.” (§ 454, subd. (b), italics

added; see also Wood v. Public Utilities Commission (1971) 4 Cal.3d 288, 292

[“The Public Utility 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 [under § 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

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such a reading of section 454 is correct, however, because the settlement

agreement effected no rate change subject to section 454.9

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.


9

This is not to say that no formal PUC process was contemplated or

undertaken to implement the settlement. The settlement itself (§§ 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, §§ 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.)

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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.

WERDEGAR, J.

WE CONCUR:
GEORGE, C. J.
KENNARD, J.
BROWN, J.
MORENO, J.
RUSHING, J.*

*

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.

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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, § 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, § 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., § 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., § 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, § 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,

1

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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, § 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, § 11120, italics added.)

Accordingly, the Act mandates that, except as otherwise specifically

provided, a covered “state body” (Gov. Code, § 11121.1) must (1) conduct its

“meetings . . . open[ly] and public[ly]” (id., § 11123, subd. (a)), (2) provide

advance public notice and an agenda for each such meeting (id., § 11125);

2

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(3) allow members of the public to address the body on each agenda item (id.,

§ 11125.7, subd. (a)); and (4) permit public criticism of the body’s policies or

actions (id., § 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., § 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., § 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., § 11130.7.)

“Except as expressly provided by [the Act], no closed session may be held by any

state body.” (Id., § 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, § 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., § 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,

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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 open meeting 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, at p. 17, 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

4

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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.)

5

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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,

§ 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 (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, 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, 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, italics added, fn. omitted.)

6

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The Legislature later codified this principle in the Bagley-Keene Act by

adding former subdivision (q) to section 11126. (Stats. 1981, ch. 968, § 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, § 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, § 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

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circumstances, the state body has decided to initiate, or is deciding whether to

initiate, litigation. (Gov. Code, § 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,

§ 11126, subd. (e)(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

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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 [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

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private attorney-client privileges are coextensive. (Maj. opn., ante, at p. 18, citing

Sacramento Newspaper Guild, supra, 263 Cal.App.2d 41, 55.) 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

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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.) No doubt the

agency may privately instruct its counsel, negotiating on its behalf, concerning

terms it is inclined to accept.1 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.

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

1

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.)


11

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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, § 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-

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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.)

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, § 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

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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, at p. 7.) 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,

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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; Application of

Southern California Edison Co. (2001) Cal. P.U.C. Dec. No. 01-03-082, pp. 16-

18, 60-61.)

In the settlement, however, the PUC agreed, as its “principal substantive

concession” (maj. opn., ante, at p. 8), 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. 7-8.) Under this

formula, the initial PROACT balance was estimated at some $3.3 billion. (Id., at

p. 8.) 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.2 Second, it cancelled, nunc pro tunc,

2

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


(footnote continued on next page)

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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.

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, at p. 23.) This pinched and

hypertechnical analysis ascribes too narrow a meaning to the broad statutory

phrase “rates . . . are changed.” (Gov. Code, § 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.


(footnote continued from previous page)

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, § 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.


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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, at p. 24.) 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.3

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

3

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., Cal. P.U.C.
Dec. No. 03-07-029, pp. 2, 5, 12, 16-17, 22.)


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subdivision (p). (Stats. 1975, ch. 959, § 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, § 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

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“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.)

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.4

4

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


(footnote continued on next page)

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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, § 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


(footnote continued from previous page)

detrimentally relied “in good faith” on its terms, in the sense meant by section
11130.3, subdivision (b)(2).


20

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accepted this “change” without resort to the requirements of Public Utilities Code

section 454(a), it acted illegally.5

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, §§ 489, subd. (a), 491; Cal. P.U.C. Gen. Order

No. 96-A (1996) §§ I.B, III.C, VI; Pacific Bell v. Public Utilities Com. (2000)

79 Cal.App.4th 269, 274)—procedures that simply do not pertain to a settlement

and stipulated judgment in a lawsuit. (See also maj. opn., ante, at p. 27.)

Moreover, SCE and the PUC insist, a utility may change its rates only

through the formal alteration of its tariff. (See Pub. Util. Code, §§ 489, subd. (a),

491, 532; Cal. P.U.C. Gen. Order No. 96-A, supra, § VI; see also Transmix

Corp. v. Southern Pacific Co. (1960) 187 Cal.App.2d 257, 265.) 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,

5

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, § 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, § 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).

21

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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,

at pp. 27-28.)

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, § 3), which

has mandated in the Public Utilities Act that their rates be “just and reasonable”

(Pub. Util. Code, § 451). Regulatory authority over the rates of public utilities is

vested in the Commission (Cal. Const., art. XII, §§ 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, §§ 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

22

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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.

BAXTER, J.

23

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See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Southern California Edison v. Peevey
__________________________________________________________________________________

Unpublished Opinion
Original Appeal XXX (on certification pursuant to rule 29.8, Cal. Rules of Court)
Original Proceeding
Review Granted
Rehearing Granted

__________________________________________________________________________________

Opinion No. S110662
Date Filed: August 21, 2003
__________________________________________________________________________________

Court:
County:
Judge:

__________________________________________________________________________________

Attorneys for Appellant:

Robert E. Finkelstein; Strumwasser & Woocher, Michael J. Strumwasser, Fredric D. Woocher, Johanna R.
Shargel and Lea Rappaport Geller for Intervener and Appellant.

Sutherland Asbill & Brennan, Steuart H. Thomsen, James M. Cain, Keith R. McCrea, James M. Bushee
and Alisa N. Stein for The California Manufacturers & Technology Association as Amicus Curiae on
behalf of Intervener and Appellant.

Harvey Rosenfield and Pamela Pressley for The Foundation for Taxpayer and Consumer Rights as Amicus
Curiae on behalf of Intervener and Appellant.

__________________________________________________________________________________

Attorneys for Respondent:

Stephen Pickett, Barbara Reeves, Kris G. Vyas; Munger, Tolles & Olson, Ronald L. Olson, John W.
Spiegel, Henry Weissmann and Kelly M. Klaus for Plaintiff and Respondent.

Gary M. Cohen, Mary F. McKenzie, 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; Adams,
Broadwell, Joseph & Cardozo and Marc D. Joseph 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.


1

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Counsel who argued in Supreme Court (not intended for publication with opinion):

Michael J. Strumwasser
Strumwasser & Woocher
100 Wilshire Boulevard, Suite 1900
Santa Monica, CA 90401
(310) 576-1233

Ronald L. Olson
Munger, Tolles & Olson
355 South Grand Avenue, Suite 3500
Los Angeles, CA 90071
(213) 683-9100

Gary M. Cohen
505 Van Ness Avenue
San Francisco, CA 94102
(415) 703-2742


2

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Request by the U.S. Court of Appeals for the Ninth Circuit for the answer to certified questions of state law pursuant to rule 29.5 of the California Rules of Court. As restated by the Court, the certified questions 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 (Act of Sept. 23, 1996, 1996 Cal. Legis. Serv. 854, codified in Cal. Pub. Util. Code sections 330-398.5)? (2) Do the procedures employed in entering the stipulated judgment violate the Bagley-Keene Open Meeting Act, Cal. Gov't Code sections 11120-11132.5? (3) Does the stipulated judgment violates section 454 of the Public Utilities Code by altering utility rates without a public hearing and the issuance of findings?"

Opinion Information

Date:	Citation:	Docket Number:
Thu, 08/21/2003	31 Cal. 4th 781, 74 P.3d 795, Util. L. Rep. P 26, 855, 03 Cal. Daily Op. Serv. 7580, 2003 Daily Journal D.A.R. 9474	S110662

Opinion Authors
Opinion	Justice Kathryn M. Werdegar
Concur	Justice Marvin R. Baxter
Dissent	Justice Marvin R. Baxter

Disposition
Aug 21 2003	Opinion filed

Dockets
Oct 15 2002	Request to answer question of state law filed   from the Ninth Circuit Court of Appeals
Oct 15 2002	Received:   record from U.S. Court of Appeal for the Ninth Circuit (1 box- 8-vols. of excerpts, 1-supplemental vol. of excerpts, 2-opening briefs, 3-responding briefs, 2-reply brief and 4-amicus curiae briefs)
Oct 29 2002	Filed:   "Brief of appellee Southern California Edison Company in Support of Request for Answer to Certified Questions". (Restatement of Third Question Requested)
Oct 29 2002	Received document entitled:   "Motion for Calendar Preference and to Shorten Time" appellee Southern California Edison Company
Nov 1 2002	Filed:   notice of errata for brief of appellee So. Calif. Edison Company in support of Request for Answer .
Nov 4 2002	Filed:   Brief of the Commissioners of the California Public Utilities Commission in support of the request from the Ninth Circuit Court of Appeals
Nov 4 2002	Received letter from:   The Office of the Governor urging (1) to expedite consideration and (2) to restate the first question certified by the Ninth Circuit.
Nov 5 2002	Filed:   Brief of the Utility Reform Network (Defendant/Intervenor and Appellant) CRC 40K
Nov 5 2002	Received letter from:   Manuel Medeiros, State Solicitor General , dated 11/4/2002
Nov 6 2002	Received letter from:   The Foundation for Taxpayer and Consumer Rights dated 11/5/2002 (40k)
Nov 12 2002	Received letter from:   California State Assembly dated 10/22/2002
Nov 12 2002	Filed:   Utility Reform Network's (Intervenor/Appellant) Reply to Southern California Edison's Motion for Calendar Preference and to Shorten Time
Nov 13 2002	Received letter from:   Los Angeles County Federation of Labor dated 11/6/2002
Nov 13 2002	Received letter from:   California Business Roundtable etc. et al.
Nov 15 2002	Filed:   Reply Brief of The Utility Reform Network [Intervenor/Appellant]
Nov 19 2002	Received:   Plaintiff/Appellee's Request for Leave to File Reply in Support of Motion for Calendar Preference; Proposed Reply Brief in Support of Motion for Calendar Preference
Nov 20 2002	Request for certification accepted   The certified questions, as accepted, are as follows: (1) As restated by this court (Cal. Rules of Court, rule 29.5(g)): "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 (Act of Sept. 23, 1996, 1996 Cal. Legis. Serv. 854, codified in Cal. Pub. Util. Code ?? 330-398.5)?" (2) "Do the procedures employed in entering the stipulated judgment violate the Bagley-Keene Open Meeting Act, Cal. Gov't Code ?? 11120-11132.5?" (3) "Does the stipulated judgment violate ? 454 of the Public Utilities Code by altering utility rates without a public hearing and the issuance of findings?" The motion by Southern California Edison Company (SCE) for shortened time for briefing is denied. The briefing shall proceed pursuant to California Rules of Court, rule 29.3, as follows: SCE and the California Public Utilities Commission shall file and serve their opening briefs within 30 days of the filing of this order. The Utility Reform Network (TURN) shall file and serve its answer brief within 30 days after the filing of the opening brief. SCE and the California Public Utilities Commission shall file and serve any reply briefs within 20 days after the filing of the answer briefs. Any entity granted permission to file an amicus curiae brief shall file and serve its brief within 30 days after filing of the reply briefs. Any response to an amicus curiae brief shall be filed and served within 20 days after the filing of the amicus brief. All briefs shall be filed in the San Francisco office of the court, and all briefs shall be hand-served on the other parties to this litigation. The court does not anticipate granting any extension of time to any party or amicus curiae. The motion by SCE for calendaring preference is granted. The court will expedite review of the matter and set it for oral argument as soon as possible after completion of the briefing. Chin, J., was recused and did not participate. Votes: George, CJ., Kennard, Baxter, Werdegar, Brown and Moreno, JJ.
Nov 20 2002	Letter sent to:   All parties enclosing a copy of the grant order and the "Certification of Interested Entities or Persons" form.
Dec 2 2002	Certification of interested entities or persons filed   By counsel for appellant {The Utility Reform Network}.
Dec 3 2002	Certification of interested entities or persons filed   By Defendant/Appellant {Commisioner of the California Public Utilities}.
Dec 5 2002	Certification of interested entities or persons filed   by Henry Weissman, Attorney for Southern California Edison Co. (plaintiff/appellant)
Dec 5 2002	Certification of interested entities or persons filed   by Keith R. McCrea of Sutherland Asbill & Brennan, 1275 Pennsylvania Avenue, N.W., Washington, D.C. 2004, Counsel for the California Manufacturers & Technology Association.
Dec 20 2002	Opening brief on the merits filed   by Commissioners of the California Public Utilities Commission
Dec 20 2002	Received letter from:   Manatt et al., counsel for the County of Los Angeles, dated 12/19/2002.
Dec 20 2002	Opening brief on the merits filed   Appellee Southern California Edison Company
Dec 20 2002	Request for judicial notice filed (in non-AA proceeding)   by Appellee Southern Cailfornia Edison Company
Jan 21 2003	Request for extension of time filed   along w/ declaration of M. Strumwasser for resp., The Utility Reform Network [TURN] to file answer brief/merits -asking to- Jan. 24, 2003.
Jan 22 2003	Telephone conversation with:   Michael Strumwasser (TURN) that he filed an E.O.T. yesterday afternoon in our L. A. Office requesting for a 3-day extension to Friday, 1/24/2003, within which to file the answer brief. Faxed copy received from counsel. E.O.T. granted to Friday, 1/24/2003 -- order prepared.
Jan 23 2003	Extension of time granted   On application of The Utility Reform Network and good cause appearing, it is ordered that the time to serve and file the answer brief on the merits is extended to and including January 24, 2003. No further extensionso f time will be granetd.
Jan 27 2003	Received:   Respondent's {The Utility Reform Network} oversized Answer Brief on the Merits./ 40(K).
Jan 27 2003	Application to file over-length brief filed
Jan 28 2003	Answer brief on the merits filed   Respondent {The Utility Reform Network}. Filed with permission.
Jan 28 2003	Request for judicial notice filed (in non-AA proceeding)   By counsel for Respondent {The Utility Reform Network}.
Feb 13 2003	Received:   Application of Southern California Edison Company (plaintiff/appellee) for leave to file an oversized reply brief on the merits (7,085 words)
Feb 13 2003	Reply brief filed (case not yet fully briefed)   by Southern California Edison Company (plaintiff and appellee) Filed with permission (oversized brief)
Feb 13 2003	Request for judicial notice filed (in non-AA proceeding)   Southern California Edison Company's Supplemental Motion to Take Judicial Notice
Feb 13 2003	Reply brief filed (case fully briefed)   by Commissioners of the California Public Utilities Commission (Defendants/Appellees)
Feb 13 2003	Received:   Oversized (7,085 words) Reply Brief on the Merits by Southern California Edison Company (Plaintiff and Apellee)
Feb 20 2003	Received:   proof of service for reply/brief; judicial notice motion and for the application to file oversized reply brief each were submitted on 2-13, by appellant, Southern Calif., Edison Co.
Mar 5 2003	Additional issues ordered   The court requests additional briefing on the following question: Did the Public Utilities Commission agree to the October 2, 2001, settlement agreement at a "meeting" as that term is used in the Bagley-Keene Open Meetings Act, Government Code sections 11120-11132.5? Simultaneous briefs shall be filed with 15 days of the date of the this order and shall comply with the length limits in California Rules of court, rule 29.1(d)(2).
Mar 17 2003	Received application to file amicus curiae brief; with brief   by The California Manufacturers & Technology Association in support of T.U.R.N.
Mar 17 2003	Application to appear as counsel pro hac vice (granted case)   by Keith R. McCrea, Sutherland Asbill & Brennan LLP, of Washington, D.C.
Mar 18 2003	Received application to file amicus curiae brief; with brief   The Foundation for Taxpayer and Consumer Rights in support of defendant/appellant (T.U.R.N.) (CRC 40k/FedExp)
Mar 18 2003	Request for Judicial Notice received (in non-AA proceeding)   separately with amicus application of The Foundation for Taxpayer and Consumer Rights. (CRC 40K)
Mar 18 2003	Received:
Mar 19 2003	Permission to file amicus curiae brief granted   The California Manufacturers & Technology Association in support of defendant and appellant, The Utility Reform Network. An answer thereto may be served and filed by any party within twenty days of the filingof the brief.
Mar 19 2003	Amicus Curiae Brief filed by:   The Manufacturers & Technology Association in support of The Utiilty Reform Network.
Mar 19 2003	Application to appear as counsel pro hac vice granted   The application of attorney Keith R. McCrea, Sutherland Asbill & Brennan LLP, of Washington, D.C. for admission to appear as counsel pro hac vice on behalf of amicus curiae The California Manufacturers & Technology Association is hereby granted. (See Cal. Rules of Court, rule 983.)
Mar 20 2003	Received application to file amicus curiae brief; with brief   by the California Chamber of Commerce, California Small Business Roundtable, California Business Roundtable, Consumers First, and Consumers Coalition of California, and the Los Angeles Couinty Federation of Labor, AFL-CIO and the Coalition of California Utiilty Employees, in support of Southern California Edison and Commissioners of the California Public Utilities Commission
Mar 20 2003	Supplemental brief filed   by plaintiff and appellant [Southern Callifornia Edison company]
Mar 20 2003	Supplemental brief filed   by defendants and appellees [Commissioners of the California Public Utilities Commission]
Mar 20 2003	Received application to file amicus curiae brief; with brief   by Governor Gray Davis in support of defendants and appellees [Lynch, et al.]
Mar 21 2003	Supplemental brief filed   by Defendant-Appellant The Utility Reform Network [PERM/wrong color covers]
Mar 21 2003	Request for judicial notice filed (in non-AA proceeding)   by Defendant/Appellant T.U.R.N.
Mar 24 2003	Permission to file amicus curiae brief granted   The application of The Foundation for Taxpayer and Consumer Rights for permission to file an amicus curiae brief in support of defendant and appellant, T.U.R.N., is hereby granted. An answer thereto may be served and filed by any party within twenty days of the filing of the brief.
Mar 24 2003	Amicus Curiae Brief filed by:   The Foundation for Taxpayer and Consumer Rights in support of defendant and appellant, T.U.R.N.
Mar 24 2003	Request for Judicial Notice received (in non-AA proceeding)   by Amicus Curiae The Foundation for Taxpayer and Consumer Rights
Mar 24 2003	Permission to file amicus curiae brief granted   The application of California Chamber of Commerce, California Small Business Roundtable, California Business Roundtable, Consumers First and Consumers Coalition of California, and the Los Angeles County Federationof Labor, AFL-CIO and the Coalition of California Utiilty Employees for permission to file an amicus curiae brief in support of Southern California Edision and the California Public Utilities Commission is hereby granted. An Answer thereto may be served and filed by any party within twenty days of the filing of the brief.
Mar 24 2003	Amicus Curiae Brief filed by:   California Chamber of Commerce, California Small Business Roundtable, California Business Roundtable, Consumers First and Consumers Coalition of California, and the Los Angeles County Federation of Labor, AFL-CIO and the Coalition of California Utility Employees in support of Southern California Edison and the California Public Utilities Commission.
Mar 25 2003	Permission to file amicus curiae brief granted   The application of Governor Gray Davis for permission to file an amicus curiae brief in support of defendants and appellees, The California Public Utilities Commission, is hereby granted. An answer thereto may be served and filed by any party within twenty days of the filing of the brief.
Mar 25 2003	Amicus Curiae Brief filed by:   Governor Gray Davis in support of defendants and appellees, The California Public Utilities Commission.
Apr 7 2003	Response to amicus curiae brief filed   By Plaintiff/Appellee {Southern California Edison Company} to AC Brief filed by California Manufacturers and Technology Assn. and Foundation for Taxpayers and Consumer Rights.
Apr 7 2003	Request for judicial notice filed (in non-AA proceeding)   By Southern California Edison Company Second Supplemental Motion.
Apr 8 2003	Response to amicus curiae brief filed   By Defendant/Appellant {The Utility Reform Network} to AC Brief of The California Chamber of Commerce et al., and AC Brief of Governor Gray Davis.
Apr 9 2003	Opposition filed   [PERM] by Plaintiff and Appellant (Southern California Edison Company) to Motion of Amicus Curiae Foundation for Taxpayer and Consumer Rights for Judicial Notice In Support of Its Amicus Brief
Apr 30 2003	Case ordered on calendar   5-27-03, 9am, S.F.
May 9 2003	Filed:   request of pltf/appellee So. Cal. Ed. and deft/appellee P.U.C. to divide oral argument time.
May 13 2003	Request for judicial notice granted   The Utility Reform Network's original and supplemental requests for judicial notice are granted. Southern Calif. Edison Company's original and first supplemental requests for judicial notice are granted. So. Calif. Edison's 2nd supplemental request for judicial notice and the Foundation for Taxpayer and Consumer Rights' request for judicial notice are denied.
May 13 2003	Order filed   The request of counsel for appellees to allow two counsel to argue on behalf of appellees at oral argument is hereby granted.
May 13 2003	Order filed   The request to allocate 15 minutes to appellee So. Calif. Edison Co. and to allocate 15 minutes to appellee Calif. P.U.C. of appellees 30 minute allotted time for or argument is granted.
May 19 2003	Supplemental brief filed   By Appellant {The Utility Reform Network}.
May 20 2003	Filed:   Response of Commissioners of the California Public Utilities Commission to Supplemental Brief filed by The Utility Reform Network Pursuant to Rule 29.1(d)(1) of the Cal Rules of Court
May 21 2003	Additional issues ordered   In addition to other matters raised in the briefs, counsel are requested to be prepared at oral argument to provide responses to the following questions: 1. The settlement agreement between the P.U.C and So. Calif. Edison Co. appears, on its face, to provide for SCE's recovery of certain of its "procurement" liabilities, yet PUC now maintains that "generation" related costs, rather than procure- ment costs, are intended to be recovered under the settlement. What is PUC's justification for taking apparently disparate positions on this point? 2.(a) Was the purpose of PUC's March 2001 account- ing change to more accurately measure recovery of stranded costs in order to determine whether or not AB 1890's rate freeze had ended? (b) If so, should that accounting decision also govern how costs recovered under a later settlement are to be characterized? 3(a) Did PUC, by agreeing to maintain the settlement-date rates through 2003 if necessary in order for SCE to recover its procurement costs "change" the rate (for purposes of either the Bagley-Keene Open Meeting Act or Public Utility Code section 454) by adding to it a fixed duration? (b) Do electricity rates determined by PUC ordinarily have a term of years? (c) If not, under what circumstances and at what time may PUC reduce an electric utility's rates? 4(a) Does Public Utility Code section 454 apply to all rate changes, or only those initiated by a formal application? (b) Can a rate ever be significantly increased by any means other than an application? (c) Can PUC ever, in settlement of litigation, change an electric utility rate? 5. If either the Bagley-Keene Act or Public Utility Code section 454 was violated, is that fatal to the settlement agreement in this case?
May 22 2003	Request for Extended Media coverage Granted   The request for extended media coverage of oral argument in this matter, filed May 21, 2003, is granted, subject to the conditions set forth in the rule 980, California Rules of Court.
May 27 2003	Cause argued and submitted
Jul 24 2003	Request for Judicial Notice received (in non-AA proceeding)   By the Utility Reform Network.
Jul 30 2003	Request for judicial notice denied   The Request for Judicial Notice by The Utility Reform Network is hereby DENIED.
Aug 21 2003	Opinion filed   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. Majority Opinion By Werdegar, J. -- joined by George, C. J., Kennard, Brown, Moreno, Rushing*, JJ. Concurring & Dissenting Opinion By Baxter, J. [*Presiding Justice, Court of Appeal, Sixth Appellate District, Assigned.]
Sep 8 2003	Rehearing petition filed   by Intervener and Appellant [The Utility Reform Network (T.U.R.N.)]
Sep 10 2003	Time extended to consider modification or rehearing   to and including November 19, 2003
Sep 15 2003	Answer to rehearing petition filed   by Commissioners of the California Public Utilities Commission
Sep 15 2003	Answer to rehearing petition filed   by attorneys for Plaintiff/Appellant Southern California Edison Company
Sep 25 2003	Received letter from:   Peter A. Bradford, Bradford Brook Associates, dated 9-15-2003.
Sep 30 2003	Received letter from:   Munger,Tolles, counsel for Southern California Edison Company dated 9-30-2003, in response to letter received from Peter Bradford.
Oct 22 2003	Case Final   Letter sent to all parties enclosing certified copies of the opinion.
Oct 22 2003	Rehearing denied   Baxter, J., is of the opinion the petition should be granted. Chin, J., was recused and did not participate. Brown, J., was absent and did not participate.

Briefs
Dec 20 2002	Opening brief on the merits filed
Dec 20 2002	Opening brief on the merits filed
Jan 28 2003	Answer brief on the merits filed
Feb 13 2003	Reply brief filed (case not yet fully briefed)
Feb 13 2003	Reply brief filed (case fully briefed)
Mar 19 2003	Amicus Curiae Brief filed by:
Mar 24 2003	Amicus Curiae Brief filed by:
Mar 24 2003	Amicus Curiae Brief filed by:
Mar 25 2003	Amicus Curiae Brief filed by:
Apr 7 2003	Response to amicus curiae brief filed
Apr 8 2003	Response to amicus curiae brief filed

Brief Downloads
Supplemental Brief_The Utility Reform Network.pdf (19682 bytes) - Supplemental Brief of The Utility Reform Network
Answer to Amicus Curiae_The Utility Reform Network.pdf (54383 bytes) - Answer to Amicus Curiae of The Utility Reform Network
Answer Brief on Merits_The Utility Reform Network.pdf (168865 bytes) - Answer Brief on the Merits of The Utility Reform Network

If you'd like to submit a brief document to be included for this opinion, please submit an e-mail to the SCOCAL website

May 22, 2013 Annotated by Lydia Gray

FACTS Beginning in 1996, California attempted to move its electric power system from a regulated to a competitive market. Assembly Bill 1890 provided the legislative foundation for this transition. Notably, the bill created the California Power Exchange ("CalPX"), a government-run marketplace through which the buying and selling of electricity was to take place. Because the newly introduced competition was expected to reduce electricity prices, the state's main investor-owned electric utility companies at the time, including Southern California Edison Company ("SCE"), voiced concern that some of their generating assets, which they previously built with California's Public Utility Commission's ("PUC") approval, would have higher costs of generation than the new rates that they would have to buy and sell at in the CalPX marketplace. These costs were deemed "transition costs." Assembly Bill 1890 intended to allow for recovery of transition costs. The recovery scheme, implemented by PUC, was to be accomplished through a rate freeze that temporarily kept selling rates high. Some limits, however, applied: rates were not to exceed the levels "in effect on June 10, 1996," and rate levels were to remain in effect "until the earlier of March 31, 2002," or the date on which transition costs were fully recovered. The statute noted that the electric utility companies were at risk for any costs not recovered within that time period. Unexpectedly, electric prices in the CalPX marketplace rose drastically in the summer of 2000. SCE, still subject to the rate freeze, incurred huge debts buying electricity through the CalPX and selling at its lower, frozen rate. In November 2000, SCE brought a federal action against PUC claiming that the rate freeze imposed by Assembly Bill 1890 deprived SCE of its right, under the federal filed-rate doctrine, to recover the costs of purchasing electricity for its customers through the CalPX. In response, PUC granted SCE rate relief in early 2001, authorizing a rate increase to pay for ongoing power purchases. However, this relief did not account for past power purchase costs incurred before the granted relief. In October 2001, SCE and PUC reached a settlement agreement to deal with such costs. Notably, PUC permitted SCE to recover its past purchase-related costs by maintaining the increased rates until the end of 2003, if necessary. PROCEDURAL HISTORY The United States District Court, Central District of California, approved the settlement agreement between SCE and PUC by entering a stipulated judgment. The Utility Reform Network, ("TURN"), a consumer advocacy organization, had intervened in the action and opposed the stipulated judgment. TURN appealed. On appeal, the Ninth Circuit Court of Appeals resolved the federal law issues in favor of SCE and PUC, but found that the settlement agreement and subsequent stipulated judgment violated California law in certain respects. That court certified those state law questions to the Supreme Court of California and stayed further proceedings pending a response. ISSUES 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 1890? Question 2: Did the procedures employed in entering the stipulated judgment violate the Bagley-Keene Open Meeting Act? 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? HOLDING Question 1: Yes, the PUC commissioners had the authority to propose the stipulated judgment per Assembly Bill 1890. Question 2: No, the procedures employed in entering the stipulated judgment did not violate the Bagley-Keene Open Meeting Act. Question 3: No, the stipulated judgment did not violate Section 454 of the Public Utilities Code. ANALYSIS Majority Opinion (Werdegar, J.): 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 1890? PUC's authority derives both from statutes and from the California Constitution. The California Constitution creates the agency and expressly gives it the power to fix rates for public utilities. Statutorily, PUC is authorized to "supervise and regulate every public utility in the State" and to "do all things . . . which are necessary and convenient in the exercise of such power and jurisdiction." The PUC’s power to fix rates and establish rules is to be liberally construed. San Diego Gas & Electric Co. v. Sup. Court, 13 Cal. 4th 893 (Cal. 1996). If PUC lacked authority to propose and enter into the settlement agreement, it was not for lack of inherent authority, but for a specific statutory bar. TURN's argument that Assembly Bill 1890 provided such a bar was rejected by the Court. First, TURN erred in assuming that Assembly Bill 1890 required rates to be reduced at the end of the March 31, 2002 freeze rate period. The bill did not mandate that rates be reduced or changed in any way. While the bill may have recommended such action, it did not constitute a binding limitation. Second, TURN erred in arguing that Assembly Bill 1890 prohibited the recovery of costs incurred in the post-freeze period, per its directive that electric corporations were to be at risk for any costs not recovered during the freeze period. The bill only restricts recovery of uneconomic generating-asset costs (i.e. transition costs), not purchasing costs. And the settlement agreement was mainly geared towards recovery of purchasing costs whenever prices on the CalPX market drastically increased. But even if the settlement agreement permits recovery of some generating-asset costs, such action is acceptable since a later statute, Assembly Bill 6X, permitted PUC to find that generating-asset costs are not "uneconomic" within the meaning of Assembly Bill 1890. Question 2: Did the procedures employed in entering the stipulated judgment violate the Bagley-Keene Open Meeting Act? The Bagley-Keene Open Meeting Act mandates that all meetings of a state body be open and public. Although the settlement was approved during a closed session, such action was permitted by an exception to the Act, 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." While the exception on its face only permits a body to "confer with" and "receive advice from" its attorney in closed sessions, the court noted that the statute must be read in light of its inferred purpose not to jeopardize the state's interest, to place agencies on a roughly equal footing with private parties in litigation, and not to prejudice the agency's case. Thus, the scope of this Act must be broad enough to include the bodies' instructions from their attorneys as to how to proceed, including whether and with what limits to negotiate settlement. Further, the agency was not required to announce its proposed decision in a public session—identifying the litigation involved—and accept public comment on the proposed settlement before voting on it. Although this is generally required, an additional exception to the Act allows an agency to bypass the requirement whenever doing so would jeopardize the body's ability to conclude existing settlement negotiations to its advantage. The legislature clearly intended, the Court reasoned, to allow a state body to keep private the identity of the litigation it is considering settling until the settlement is complete. 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? Section 454 of the Public Utilities Code 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 a public hearing. Moreover, the settlement agreement did not effect a "new rate." Rather, it maintained SCE's approved rates for a specified period. The maintenance of existing rates does not fall within the ambit of Section 454. Concurring and Dissenting Opinion (Baxter, J.): The majority is correct in answering question 1, as PUC did not exceed its authority under Assembly Bill 1890 in proposing the settlement agreement. However, question 2 and question 3 were incorrectly decided. First, the procedures employed in entering the stipulated judgment violated the Bagley-Keene Open Meeting Act. The exception noted in the majority opinion only allows for closed sessions to "confer with" or "received advice" from its legal counsel. This exception does not confer the additional right to take final action in secret. Second, the stipulated judgment violated Section 454 of the Public Utilities Code by altering utility rates without a public hearing and issuance of findings. By extending a rate freeze, the settlement changed rates. 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. TAGS Administrative law, agency, agencies, Assembly Bill 1890, Assembly Bill 6X, Bagley-Keene Open Meeting Act, California Power Exchange, CalPX, closed session, Electric, electric public utility, electricity, filed-rate doctrine, public hearing, Public Utilities Code, Public Utilities Commission, purchasing costs, rate freeze, settlement agreement, stipulated judgment, transition costs, utility, Utility Reform Network. ANNOTATED BY LYDIA GRAY

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