Virtually every affirmative obligation in the Settlement Agreement is addressed to some restriction on Commission actions, with no corresponding limitation on PG&E action. Particularly with respect to achieving and maintaining investment grade credit, PG&E's management is the primary party responsible for the bankruptcy of NEG, and was the decision-maker in escalating the energy crisis by taking the utility into bankruptcy. We know this because of the very different behavior of Edison's management and the very different outcome.
PG&E's management must be fully committed to minimizing risks, prudently managing its business, fully disclosing its costs and practices to this commission as an element in restoring the confidence of the investment community. Much has been said about the role of this Commission and state government in dashing investor confidence, but it is clear that around the country the management of energy companies - from Enron to PG&E's unregulated businesses to the rest of them - are a grave source of concern. We are willing to step up and make commitments; so must PG&E.
The Majority Decision could be in effect for 9 years, and could be enforceable by the federal court for nine years. The issue of whether the Commission can enter into an enforceable judicial settlement agreement has been hotly debated. After the Supreme Court's approval of the Edison settlement, I think it is clear that we can settle cases, but only under some fairly stringent statutory guidelines. I want to discuss this in detail, because it affects numerous provisions of the Peevey Proposal.
There cannot be any doubt that under certain circumstances, the Commission can legally settle litigation by agreement. In Southern California Edison Co. v. Peevey the California Supreme Court relied upon the Commission's broad authority under Article XII of the California Constitution, sections 701 and 728 of the Public Utilities Code, and prior precedent to conclude that the Commission is 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.'" Because the Commission had not acted contrary to specific state laws and in light of the Commission's inherent authority, the California Supreme Court upheld the Commission's entering into a binding judicial settlement with SCE in its federal district court case against the Commission. This case stands for the general proposition that the CPUC may enter into judicial settlements, but only to the extent consistent with state law.
As Judge Barnet and numerous parties have pointed out, in the Diablo Canyon Case we held that we lack the power to approve settlements that bind future Commissions. We relied upon cases which hold that a legislative body cannot restrict its own power or that of subsequent legislative bodies, as well as §§ 728 and 1708, which provide that, after a hearing, the Commission may rescind, alter or amend previous decisions, or may declare rates are unjust and unreasonable and fix the just and reasonable rates to be thereafter observed and in force.
The Majority Decision distinguishes Diablo Canyon, because that case involved a settlement pending before the Commission, whereas the PSA would be entered into by the Commission itself to settle litigation in federal courts. The proponents claim that a decision of the Commission by itself may not bind future Commissions, but the Commission may execute a judicial settlement agreement to bind future Commissions.
I agree with the Majority Decision that a court-approved settlement, consistent with state law, would bind the Commission to a limited extent. There is an important difference between the Commission's authority within the scope of its own proceedings, and the Commission's efforts to resolve litigation in courts.
The Commission must abide by court orders and a subsequent Commission does not have the authority to ignore a court order approving a settlement to which the Commission is a party with impunity. The Commission has the authority to exercise its regulatory and police powers to resolve the Bankruptcy Court litigation through a settlement which it is legally bound to honor.
However, when entering into settlement agreements or contracts the Commission may not act inconsistent with state law. As the Court declared in Southern California Edison Co. v. Peevey, supra, 31 Cal. 4th at 792: "If PUC lacked substantive authority to propose and enter into the rate settlement agreement at issue here, it was not for lack of inherent authority, but because this rate agreement was barred by some specific statutory limit on PUC's power to set rates."
This is an application of the more general principle that:
"[P]owers conferred on public agencies and officers which involve the exercise of judgement or discretion are in the nature of public trusts and cannot be surrendered or delegated to subordinates in the absence of statutory authorization.
The issue is whether the specific terms of a judicial settlement agreement, including the one at issue here, are enforceable or not enforceable, based on the legislative authority under which the Commission operates. The Commission's authority to enter into judicial settlement agreements is not unlimited.
The Peevey Proposal relies on an expansive view of the Commission's "necessary and proper clause," Pub. Util. Code section 701 as statutory support for a binding settlement. The California Supreme Court recently expressed a very different view of section 701 in a suit brought by the State Legislature:
... Section 701 provides that "[t]he commission may supervise and regulate every public utility in the State and may do all things, whether specifically designated in this part or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction." Past decisions of this court have rejected a construction of section 701 that would confer upon the Commission powers contrary to other legislative directives, or to express restrictions placed upon the Commission's authority by the Public Utilities Code. ... Whatever may be the scope of regulatory power under this section, it does not authorize disregard by the commission of express legislative directions to it, or restrictions upon its power found in other provisions of the act or elsewhere in general law.
Assembly of the State of California v, CPUC,(1995), 12 C. 4th 87, 103.
The federal courts also recognize this doctrine of limited surrender of state regulatory authority. In Southern California Edison Co. v. Lynch (9th Cir. 2002) 307 F.3d 794, 809, the Ninth Circuit held that if the Commission's judicial settlement agreement violated state law, "then the Commission lacked capacity to consent to the Stipulated Judgment, and [the Ninth Circuit] would be required to vacate it as void. State officials cannot enter into a federally-sanctioned consent decree beyond their authority under state law."
We therefore must determine that the Peevey Proposal is consistent with state law before we can enter into the settlement. First, Paragraphs 21 and 32 of the Negotiated Agreement provided that the settlement agreement, the settlement plan and any court orders was intended to be binding and enforceable under federal law, "notwithstanding any contrary state law." My alternate, like the Peevey Proposal, strikes that language.
However, there remains the problem of Pub. Util. Code section 1708, which authorizes the Commission to:
...at any time, upon notice to the parties, and with opportunity to be heard as provided in the case of complaints, rescind, alter, or amend any order or decision made by it. Any order rescinding, altering, or amending a prior order or decision shall, when served upon the parties, have the same effect as an original order or decision.
Some parties try to sweep this statute away by characterizing the Settlement Agreement as a "contract," not an "order."
Like the economist who gets out of a hole by assuming a ladder, this argument ignores the reality that the "decision" approving the Settlement Agreement predetermines the decisional outcome of specific future commission proceedings and - if valid - is both itself unalterable and prevents the rescission, alteration or amendment of those future decisions for an extended period of time. There is a potentially a double violation of a specific statute that, after Assembly, section 701 cannot over-ride.
The specific decisions in question are Commission cost-of-capital proceedings that occur annually. These are the essence of Commission ratemaking activity, because they directly control utility profitability and indirectly control a host of cost elements including state and federal taxes of all varieties. The Peevey Proposal would radically affect these proceedings in two different ways for nine years.
In Section 2.b. of the Peevey Proposal, the return - or earnings -- on the Regulatory Asset is to be set by the Commission, but with a floor of 11.22 % on the equity component. There is no authority for creating a floor or a ceiling on authorized return that cannot be altered for a period of nine years. 1708 would permit the Commission to affirmatively alter it in any case.
In Peevey Proposal Section 3.b. the return on the equity component of PG&E's entire rate base is set at 11.22% until PG&E achieves a target credit rating from specified rating agencies, without any obligation on PG&E's part to undertake affirmative steps including ridding itself of holding company entanglements, to achieve the objective.3 Attempting to abrogate section 1708 on these issues for nine years, or three complete ratecase cycles under the Commission's Rate Case Plan, is not lawful, because it attempts to prevent the Commission from altering decision in response to changing conditions.
In light of the constitutional requirement that the Commission actively supervise and regulate public utility rates and the statutory requirements under sections §§451, 454, 728 that the Commission ensure that the public utilities' rates are just and reasonable, the Commission must retain its authority to set just and reasonable rates during the term of the settlement and thereafter free from the threat of federal court coercion.
The regulation of utilities is one of the most important of the functions traditionally associated with the police power of the states. This Commission's authority to regulate public utilities in the State of California is pursuant to the State's police power. The California Supreme Court has held that "it is settled that the government may not contract away its right to exercise the police power in the future."
Whether or not the Commission could enter into a settlement agreement without violating state law turns on whether the settlement agreement would surrender or suspend the Commission's exercise of its police powers or whether the settlement agreement is consistent with the Commission exercising its regulatory powers. In every case cited by any party to this proceeding on the subject, there has been an express legislative authorization for the contractual limitation on the police power. For example, in the case of Santa Margarita Area Residents Together v. San Louis Obispo County Bd. of Supervisors ,on which the Peevey Proposal relies, the Court found that a development agreement at issue there was an appropriate exercise of a county's powers under the Development Agreement Statute, Gov. Code sections 65684 et seq. In rejecting the argument that the development agreement was an unconstitutional restraint on the county's police powers, the court focused on two factors: (1) the conclusion that the county had reasonably interpreted an express statutory authorization and (2) the limited duration of the contract - not more than five (5) years.
There is no express statutory authorization for the type of judicial settlement agreement that is proposed in the Peevey Proposal. Under cases like those discussed above, and those relied on by other parties, this would be fatal. However, in the Edison case, the Commission entered into a judicial settlement that expressly limited the duration of its obligation for four (4) years and in fact accomplished the objectives in 21 months. While the Santa Margarita concept of a limited waiver of police power authority may be applicable here, the absence of an express statutory authorization makes compliance with the other factor - limited duration - even more important. It is the only way arguably to get within the ambit of the Edison case. The 9 year duration must be reduced to four years.
Paragraph 23 of the Settlement Agreement says:
It is understood and agreed by each of the parties hereto that money damages would not be a sufficient remedy for any material breach of any provision of this Agreement by any party, and each non-breaching party shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach, without the necessity of securing or posting a bond or other security in connection with such remedy, consistent with state law.
By putting in this provision in connection with the provisions of 2.b. and 3.b., PG&E is attempting to create a regime where it can use the federal court to control the outcome of cost of capital proceedings, and therefore its profits, for 9 years.
The idea that the Commission is "bound" for the term of the Agreement implies that there must be remedy for breach, and I accept that. However, the remedy for breach, if there is one, is normally damages for economic harm, if any. The Commission cannot be powerless to protect PG&E's ratepayers from unjust and unreasonable rates or practices during the term of the proposed settlement. The police power being in its nature a continuous one, must ever be reposed somewhere, and cannot be barred or suspended by contract or irrepealable law. It cannot be bartered away even by express contract."
The effect of section 23 is to create a gaping hole in the police power which may be created at any time by a federal court. We must strike Section 23, in order to obtain a lawful judicial settlement agreement.
I can understand why PG&E would want this provision, but it is over-reaching and illegal. It must be stricken.