2. Introduction

A. Factual Background

This investigation concerns the accuracy of information SoCalGas supplied to the Commission in connection with its Montebello Gas Storage Facility (Montebello or the facility). The primary allegations in the order instituting investigation (OII), based on a report from CSD, are that SoCalGas misrepresented to this Commission that Montebello was needed for utility operations when SoCalGas had already made the decision to dispose of Montebello, and that SoCalGas had acquired by eminent domain mineral rights to a depth deeper than needed, and may have acquired the mineral rights at less than fair market value. The June 30, 1999 Scoping Memo and Ruling of Assigned Commissioner and Administrative Law Judge (ALJ) further defined the investigation's scope to include both (1) SoCalGas'operations and practices surrounding the acquisition of fee ownership interests in the mineral rights in connection with Montebello; and (2) SoCalGas' representations or omissions in response to Commission staff requests for information and plans for Montebello. Misrepresentations or omissions by SoCalGas to the Commission or its staff, if proven, would constitute a violation of Rule 1. 1

The facility is located in an underground formation, conducive to holding natural gas injected under pressure, and consisting of the top two sands of the Eighth Zone of the West Montebello oil field. SoCalGas began operations at Montebello in the mid-1950s. For a number of years, SoCalGas did not own the facility in its entirety, but operated it pursuant to leases with many owners of the storage and mineral interests. SoCalGas would occasionally acquire some subsurface rights, but was not actively pursuing the purchase of the leased rights.

In 1955, the Commission issued Decision (D.) 51554, which approved SoCalGas' application to operate the facility, and for about 10 years Union Oil Company managed the facility for SoCalGas. In 1966, Union Oil Company no longer wanted to use the facility for oil production, so SoCalGas took over the operation. In 1996, the lease agreements with landowners for storage rights accessing the Eighth Zone started to expire. Under the lease terms, SoCalGas had three years from lease termination to withdraw stored gas, which meant that SoCalGas had use of the Eighth Zone into 1999.

Beginning in about 1991, SoCalGas decided to purchase the facility from the property owners. If these owners would not voluntarily sell their property to SoCalGas, the utility indicated that it would initiate condemnation proceedings. At some point in time, SoCalGas determined that it no longer needed the facility, and in early 1998, it filed Application (A.) 98-01-015 requesting authority from this Commission to sell the facility because it was no longer needed for utility service.

The OII alleges (based on a report by CSD) that SoCalGas misrepresented to the Commission, to Commission staff, and to the Los Angeles Superior Court that the facility was needed for utility operations when SoCalGas had already made the decision to dispose of the facility because in fact it was not needed. According to CSD, SoCalGas made these misrepresentations to the Commission's Energy Division staff during staff's inquiry into SoCalGas' plans for Montebello. The Energy Division conducted this inquiry in response to then State Senator Calderon, who had called staff's attention to contested eminent domain actions which SoCalGas had initiated in Los Angeles Superior Court. These actions concerned SoCalGas' condemnation of a fee ownership (as opposed to a leasehold) interest in the storage and mineral interests at Montebello, and they included representations by SoCalGas to the Los Angeles Superior Court that the facility was needed to provide utility service. According to CSD, before SoCalGas made these representations, the utility had (1) decided that the facility was not needed; (2) not used the facility in over a year; and (3) initiated environmental review to be used in connection with disposing of the facility. Also according to CSD, SoCalGas acquired by eminent domain mineral rights to a depth far deeper than needed, and may have acquired the mineral rights at less than fair market value.

SoCalGas, in its response to the OII, claimed that the Commission had no jurisdiction to consider alleged civil wrongs concerning SoCalGas' actions in acquiring property interests at Montebello. SoCalGas argued that the courts, and not the Commission, should provide a remedy in this situation, reasoning that while these claimed civil wrongs were committed by a regulated utility, they do not involve SoCalGas' relations with its customers or its provision of utility service. Thus, while the Commission could determine that SoCalGas' costs in property acquisition are not reasonable for ratemaking purposes, SoCalGas maintained that the allegations themselves are outside of the Commission's regulatory oversight.

B. Procedural Background

On June 11, 1999, the Commission held a prehearing conference (PHC). Following the PHC, Assigned Commissioner Duque and ALJ Econome issued the Scoping Memo which, among other things, defined the scope of the proceeding, confirmed the OII's categorization of this investigation as an adjudicatory proceeding, and confirmed that evidentiary hearings were necessary. The Scoping Memo also set a schedule under which this investigation could conclude within 12 months of initiation, 2 and designated ALJ Econome as the presiding officer.

The Scoping Memo stated that the ratepayer implications of SoCalGas' alleged conduct in these two areas (e.g., acquisition of mineral rights at Montebello and representations to the Commission regarding the continued need for the facility) were within the scope of this proceeding. The Scoping Memo did not consolidate this investigation with A.98-01-015, SoCalGas' application requesting to sell the facility, although the OII gave the ALJ the discretion to do so, and stated that all issues presented in A.98-01-015 were not necessarily presented in this proceeding. For example, the Scoping Memo stated that the OII was not the forum to determine the precise cost of any environmental cleanup of Montebello that may be necessary.

The parties conducted extensive discovery in preparation for the evidentiary hearings set for mid-October 1999. Prior to entering into the settlement, CSD had served its testimony, which consisted of additional testimony from Margaret C. Felts, Investigative Consultant for CSD, who prepared the report that accompanied the OII. CSD's testimony also included declarations from three Commission staff members concerning the representations SoCalGas employees made to them regarding the continued need to operate Montebello as a gas storage facility, and numerous declarations from landowners from whom SoCalGas acquired gas storage and mineral interests in Montebello.

The Utility Reform Network (TURN) was the only interested party to serve prepared testimony. TURN focused its testimony on recommended remedies to prevent recurrence of the wrongdoing, should CSD's allegations prove correct.

Prior to SoCalGas serving its testimony, the ALJ issued an August 24, 1999 ruling which granted SoCalGas' motion to compel discovery, and directed CSD to produce to SoCalGas the retainer contract between CSD and Felts, her invoices to CSD concerning work on this OII, and written communications between Felts and CSD's counsel concerning this matter. The ALJ reasoned that, for purposes of the motion, Felts should be considered an expert witness, because she is not a percipient witness (i.e., not a landowner or a Commission staff member to whom SoCalGas made certain representations), and she is offering her conclusions and opinions on the ultimate issues in the case.

On August 27, 1999, SoCalGas filed a motion to dismiss or, alternatively, to compel discovery and to extend the time for serving its testimony. SoCalGas and CSD resolved all issues raised by this motion except for the issues that SoCalGas had previously raised in its response to the OII.

On August 31, 1999, CSD filed an appeal to the full Commission of the ALJ's August 24 ruling. A September 3, 1999 Joint Assigned Commissioner and ALJ ruling denied this request. On September 3, CSD filed a request for reconsideration and for stay of the joint ruling.

On September 8, 1999, the ALJ issued a ruling which suspended the schedule until further ruling, but urged the parties to continue to work diligently on all other outstanding issues. The ruling also set a briefing schedule for outstanding pleadings, and a date certain for CSD to serve its privilege log to the parties and to produce to the Chief ALJ under seal the materials designated by the August 24 ALJ ruling. The ruling further stated that the Chief ALJ would hold the material under seal pending further disposition of the matter.

On October 15, 1999, CSD and SoCalGas noticed a settlement conference pursuant to Rule 51.1(b). On November 12, SoCalGas and CSD moved to adopt the settlement. The Commission's Office of Ratepayer Advocates (ORA) and TURN filed timely oppositions, to which SoCalGas and CSD, jointly, and Southern California Edison Company (Edison) filed timely replies on December 28.

As a result of the schedule suspension and the proposed settlement, SoCalGas has not yet served its testimony. However, SoCalGas filed and served, together with its brief supporting the proposed settlement, the most recent draft of SoCalGas' nine witnesses' testimony.

On February 1, 2000, the ALJ issued a ruling requesting additional information regarding the settlement. The ruling set a briefing schedule by which the matter was submitted on March 8, 2000. 3

On March 16, 2000, the Commission issued D.00-03-045, which extended the 12-month deadline set forth in Pub. Util. Code § 1701.2(d) for the resolution of this adjudicatory case in order to fully consider the settlement.

The OII categorized this investigation as an adjudicatory proceeding and set the matter for evidentiary hearings. The Scoping Memo confirmed this designation. Because this matter can be resolved by adopting the settlement as more fully set forth below, we determine that hearings are no longer necessary, and our order today makes that change in the OII and Scoping Memo's determination.

C. The Settlement

The settlement agreement is attached hereto as Appendix A. The main terms of the settlement are that SoCalGas will:

CSD agrees that this settlement fully resolves the matters presented in the OII and that SoCalGas may submit to the Commission the then-current draft of its testimony in response to CSD's testimony in the OII. The settlement also states that shareholders will fund the settlement agreement, and that nothing in the agreement is intended or shall be construed to impact SoCalGas' ratepayers. The settlement states that the agreement is not an admission of any wrongdoing by SoCalGas, and SoCalGas continues to deny that it has committed an ethical violation or any other wrong with respect to the matters set forth in this investigation. Finally, the settlement states that it is conditioned on the Commission approving the agreement in its entirety, and in the event such approval is not received, the agreement shall no longer be in force.

D. The Parties' Positions in the Underlying Controversy

As stated above, no hearing has yet occurred in this case. The OII and attached report set forth some of CSD's allegations, on which CSD elaborates in its proposed testimony. Together with its comments on the motion to approve the settlement, SoCalGas filed a copy of the latest draft of its testimony, which has not yet been served. No other party served testimony addressing the underlying facts of the case. Based on the above, we have a record to evaluate the proposed settlement. A broad summary of CSD's and SoCalGas' allegations are as follows.

CSD

In the OII, and again in its served testimony, CSD states that SoCalGas misled the Commission in its actions concerning Montebello. The OII focuses on two issues: (1) whether SoCalGas provided the Commission with inaccurate information, both by affirmative statements or material omissions, to the Commission and its staff; and (2) allegations that SoCalGas may have misled persons from whom it acquired property interests at Montebello or otherwise acted improperly in acquiring those interests.

The ordering paragraphs in the OII provide in pertinent part that (1) providing the Commission with misleading or inaccurate information, or making a material omission in response to an agency request for information is a violation of Rule l (the Commission's ethical rules) which could subject SoCalGas to certain monetary penalties; and (2) if the Commission finds SoCalGas was too reaching in deploying its powers of eminent domain or failed to fully disclose to landowners material information, that the Commission will entertain recommendations on what orders to enter which could reasonably and fairly restore affected parties' interests. SoCalGas challenges the Commission's jurisdiction to issue an order restoring affected parties' interests, while CSD responds that the Commission has broad authority to issue appropriate remedies.

As to the first issue, CSD primarily focuses upon a June 4, 1997, meeting between SoCalGas representatives and members of the Commission's Energy Division, where SoCalGas told Energy Division that SoCalGas needed to obtain the storage and mineral rights to the Montebello field through eminent domain because the leases were to expire and SoCalGas needed to continue to operate Montebello. CSD also states that SoCalGas made this representation in the civil court condemnation actions concerning Montebello. Based upon these representations, Commission staff also advised then-Senator Calderon (who questioned the Commission on behalf of certain landowners) in part, that the court condemnation actions appeared appropriate because Montebello was needed to provide utility service, but the particular questions would be referred to the Commission's Legal Division for further review. According to CSD, the Commissioners were ultimately advised of Senator Calderon's questions about SoCalGas' condemnation actions, and that the utility appeared to need Montebello for future utility operations.

Through the OII and other served testimony, CSD alleges that at the time SoCalGas was advising the Commission that Montebello was needed and was litigating the condemnation cases, SoCalGas had initiated environmental reviews in order to sell Montebello, because the utility decided that Montebello was not needed and had not used it in over a year. Ultimately, in early January 1998, SoCalGas filed an application requesting that the Commission permit SoCalGas to sell Montebello, with no restriction on use or buyer, because the storage facility was no longer needed.

As to the second issue, the primary concern expressed in CSD's served testimony is that the landowners did not receive fair market value for their mineral rights, and that SoCalGas acquired mineral rights to a depth deeper than needed. CSD also states that SoCalGas threatened to take some landowners' property by eminent domain if they did not voluntarily sell their property to SoCalGas.

SoCalGas

SoCalGas denies that it engaged in any communications to deceive this Commission, the California Superior Court, and the property owners, as described in CSD's report.

As to the first issue, SoCalGas denies that it deceived this Commission in June 1997 because SoCalGas, through Enova, did not make the decision to dispose of Montebello until December 19, 1997. According to SoCalGas' draft testimony, between late 1995 and December 1997, SoCalGas was studying whether to dispose of two storage fields, Montebello and Playa Del Rey, and made contingency evaluations to do so if SoCalGas were to make a decision to dispose of either or both facilities. The testimony reflects that SoCalGas ultimately determined to dispose of Montebello (in December 1997), but not Playa Del Rey. Furthermore, the testimony of certain SoCalGas staff who met with the Commission's Energy Division in June 1997 is that they were unaware that SoCalGas was considering plans to dispose of Montebello.

The issues of whether SoCalGas misled the Los Angeles Superior Court and SoCalGas' dealings with certain Montebello property owners are more intertwined. According to SoCalGas, its predecessor [Pacific Lighting Gas Supply Company] became both the owner and manager of Montebello in the mid 1960s. At that point, Pacific owned a total fee interest of about 43% of the storage rights and about 56% of the mineral rights, and had long-term leases for the remaining rights, which were expiring in the mid 1990s (and which had a three year grace period). According to SoCalGas, over the years, many of the leasehold interests were subdivided due to leaseholder deaths, marriages, and other transfers, while the size of the semi-annual payments decreased as oil production declined. SoCalGas states that by 1991, it was making payments to hundreds of lessors.

According to SoCalGas' draft testimony, in 1991, before the leases expired, SoCalGas determined to acquire the storage rights in fee, because the administrative costs of maintaining the lease arrangements were becoming burdensome, both because of the difficulty in tracking the legal owners, as well as overhead expenses. SoCalGas' testimony is that although it was uncertain whether it needed to acquire the mineral rights as well as the storage rights, it did so because the royalty payments were as costly to administer as the storage payments, and because the holder of the mineral rights might claim a legal right to drill to produce oil, which would disrupt the gas storage operations.

According to SoCalGas, it first attempted to acquire the storage and mineral rights voluntarily, and in about May 1995, when SoCalGas had been unable to obtain rights from about one third of the holders, it decided to file condemnation actions.

SoCalGas' draft testimony states that it reached agreement with landowners to purchase about 65% of the outstanding total rights holders and filed condemnation actions on the rest of the property interests. These actions were filed and handled in the Los Angeles Superior Court. SoCalGas enumerates each action and indicates that many resulted in default judgments or settlements, with many concluding prior to December 1997, when SoCalGas states it made the decision to dispose of Montebello. As to the remaining actions, SoCalGas' testimony is that rights sought to be condemned were still needed whether the field was eventually abandoned or kept in operation to avoid a situation of trespass. In one 1998 motion for summary adjudication made in a condemnation action, SoCalGas states it attached to the court papers a copy of its January 1998 application before this Commission to sell Montebello. SoCalGas has also tendered an expert witness in condemnation law who believes that SoCalGas acted consistent with California law when it continued to pursue acquisition of the few remaining property interests in Montebello after December 19, 1997.

Finally, SoCalGas' draft testimony raises multiple concerns about any future duty that the Commission may impose that would require SoCalGas to disclose confidential potential and contingent business strategies to the Commission before the utility in fact decides to adopt them.

E. Position of the Settling Parties on the Settlement

The settling parties believe that the settlement complies with Rule 51.1(e) because it is a reasonable compromise supported by the entire record, is consistent with applicable law, and is in the public interest. SoCalGas believes its monetary contribution to energy-related low-income research and development programs, and its agreement to develop and present an ethics course, is reasonable in light of the contested nature of the allegations, and the fact that the settlement is funded by shareholders. SoCalGas also states that the settlement is consistent with the law.

The OII stated that it would entertain recommendations on what orders to enter "which could reasonably and fairly restore affected parties' interests." According to SoCalGas, the primary concern expressed in CSD's testimony, including the declarations submitted by the Montebello landowners, is that the landowners did not receive fair market value for their mineral rights. Although SoCalGas has a pending motion to dismiss where it argues that the Commission does not have jurisdiction to adjudicate these issues, SoCalGas believes that the settlement is reasonable because it includes an offer to rescind SoCalGas' acquisition of mineral rights acquired after January 1, 1991, and to restore the mineral rights to the prior owner. According to SoCalGas, this provision would place Montebello property owners in the same position they would have occupied had SoCalGas never acquired the mineral rights in the first place.

In response to the ALJ's request for additional information on the settlement, SoCalGas and CSD state they intend the settlement to resolve all allegations that SoCalGas' conduct, either in acquiring storage and mineral interests at Montebello or in providing information about its activities to the Commission's staff, was wrongful. However, they state that the question of whether certain costs - such as the costs of acquiring storage rights - are unreasonable, is preserved to be addressed in future proceedings. SoCalGas and CSD further state that the settlement would not preclude the former Montebello rights holders from seeking relief in state court, should they conclude that a civil action is warranted and would be meritorious, because they are not parties to the OII.

Application of these general principals, according to SoCalGas and CSD, means that the settlement would resolve all issues associated with SoCalGas' representations and omissions in response to Commission staff requests for information and plans for the facility, including reasonable legal costs of defending against this OII, and whether ratepayers were injured by any delay the OII or SoCalGas' conduct allegedly caused in processing SoCalGas' application for approval to sell the Montebello gas storage field (A.98-01-015). The settling parties maintain that disallowing costs or otherwise penalizing SoCalGas for the claimed delay would amount to penalizing SoCalGas for the alleged ethical violations, which are matters that SoCalGas and CSD have agreed to settle.

F. Position of the Parties Opposing the Settlement

ORA and TURN object to the settlement on various grounds. Both parties voice concerns regarding the settlement of the alleged ethical violations. ORA also states that the settlement's offer of rescission to landowners may not be adequate if the allegations of SoCalGas' bad faith in conducting the eminent domain actions are proven to be correct.

Both ORA and TURN also believe that the settlement does not address certain ratemaking or ratepayer issues. For example, ORA believes that ratepayers have incurred certain expenses for SoCalGas' lease acquisition activities related to Montebello and its costs of litigation in this case. ORA also seeks protection for ratepayers against additional litigation expenses that may arise from SoCalGas' conduct in acquiring the leases. ORA believes that the settlement or the Commission should address these issues in this proceeding. TURN voices similar concerns, and also believes that SoCalGas' actions in these areas have harmed ratepayers by delaying the disposition of Montebello.

ORA also believes that the settlement violates the law because, according to ORA, the Commission cannot order a utility to make a contribution to a charitable organization as part of the resolution of a Commission investigation. ORA also believes that if any of the landowners elect to rescind the mineral interest transaction, SoCalGas' shareholders, not its ratepayers, should finance the effects of inflation on the transaction. 4 The objections to the settlement do not specify factually contested issues or request evidentiary hearings on the settlement.

In response to the ALJ's ruling requesting further information on the settlement, TURN recommends that the Commission reject the settlement. Alternatively, if the Commission approves the settlement, TURN recommends that the Commission explicitly state that all issues regarding harm to ratepayers are preserved for future consideration in appropriate proceedings. For example, TURN believes that the Commission should be able to address, in a subsequent application for sale of Montebello, the question of whether SoCalGas contributed to an unreasonable delay which harmed ratepayers, regardless of the outcome of this OII.

ORA maintains that it should not be precluded from examining the wrongfulness of SoCalGas' actions concerning Montebello in any subsequent proceeding where the reasonableness of SoCalGas' Montebello related expenditures might be examined. ORA also disagrees with the settling parties' position that disallowing costs or otherwise penalizing SoCalGas for the claimed delay of A.98-01-015 would be tantamount to penalizing SoCalGas for the alleged ethical violations. ORA asserts that SoCalGas' expenditures to condemn and otherwise acquire property it did not need to provide gas service in its service territory are of concern quite apart from the question of whether SoCalGas committed ethical violations in justifying those expenditures. ORA believes that the OII contained more issues than just the alleged ethical violations, and the Commission has not authorized SoCalGas or CSD to enter into a settlement to remove these other issues from further consideration. According to ORA, the settling parties have attempted to arrogate powers they do not possess by trying to limit the Commission's ability to fully consider all the implications of the OII. ORA therefore continues to recommend that the Commission reject the settlement.

G. Responses to the Opposition

The settling parties contend that this investigation was not intended to address ratepayer issues. They state that the settlement was designed to avoid ratepayer impact, and does not purport to resolve or to foreclose future redress of any ratepayer issues that may exist.

Edison believes that both ORA's and TURN's positions incorrectly assume that the Commission has determined that the facility should be sold, which issue was the subject of A.98-01-015. (The Commission dismissed A.98-01-015 without prejudice.) Edison argues that the Commission can address ORA's and TURN's ratepayer issues in a separate proceeding, either in A.98-01-015 if it is reopened, or in a new application which SoCalGas may file.

1 All rule citations are to the Commission's Rules of Practice and Procedure. Rule 1 embodies a code of ethics, and states: 2 Pub. Util. Code § 1701.2(d) states that adjudication cases shall be resolved within 12 months of initiation unless the Commission makes findings why the deadline cannot be met and issues an order extending that deadline. 3 The ALJ ruling set a date for replies no later than March 7, but the ALJ granted the joint request of SoCalGas and CSD to file their reply on March 8. 4 ORA explains that SoCalGas paid various amounts for the mineral interests over the years in nominal dollars, and the settlement provides that SoCalGas will receive the same amount back from the landowners in year 2000 dollars. ORA believes that SoCalGas' shareholders should finance the present value difference between the acquisition cost and sale price for those leaseholders that repurchase their leasehold interest.

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