D0312035 Order Modifying the Proposed Settlement Agreement of PG&E, PG&E Corp. & the Commission Staff, & Approving the Modified Settlement Agreement

IV. Standard of Review

In evaluating whether the PSA is reasonable and in the public interest, we are guided not only by our precedents on settlements, but also by the overall "just and reasonable" standard of the Public Utilities Code. Under Rule 51 of the Commission's Rules of Practice and Procedure, we will not approve a settlement unless the settlement is "reasonable in light of the whole record, consistent with law, and in the public interest." (Commission Rule 51.1(e).) In our decision approving a settlement of SDG&E's 1992 test year general rate case, we held that in considering a proposed settlement, we do not "delve deeply into the details of settlements and attempt to second-guess and re-evaluate each aspect of the settlement, so long as the settlements as a whole are reasonable and in the public interest." (SDG&E, (1992) 46 CPUC 2d 538, 551.) We agreed that the hearing on the settlement need not be a "rehearsal for trial on the merits." (Id. at 551.) Similarly, in Officers for Justice v. Civil Service Commission, the Court, affirming a lower court decision approving a class action settlement, stated that "the settlement or fairness hearing is not to be turned into a trial or rehearsal for trial on the merits." (Officers for Justice v. Civil Service Commission, (9^th Cir. 1982) 688 F.2d 615, 625.)

As the PSA must be approved by this Commission, we look to our own precedents. In Re Pacific Gas and Electric Company (1988) D.88-12-083, 30 CPUC 2d 189 ("Diablo Canyon"), we approved a settlement proposed by PG&E and Commission staff (ORA's predecessor, the Division of Ratepayer Advocates (DRA)) that was vigorously opposed by other parties. The settlement resolved claims by DRA that $4.4 billion in previous costs incurred by PG&E to design and construct Diablo Canyon should be disallowed from recovery in PG&E's future electric rates. In settling the case, PG&E, DRA, and the California Attorney General proposed that PG&E's investment costs and return on rate base for Diablo Canyon be recovered in future rates exclusively under a non-traditional performance-based ratemaking mechanism that would be in place for 28 years.

In evaluating the Diablo Canyon settlement, the Commission cited the Officers for Justice decision approvingly, as well as the Commission rules on settlements:

[T]he settlement affects the interest of all PG&E customers. In such a case, the factors which the courts use in approving class action settlements provide the appropriate criteria for evaluating the fairness of this settlement... When a class action settlement is submitted for approval, the role of the court is to hold a hearing on the fairness of the proposed settlement... However, the fairness hearing is not to be turned into a trial or rehearsal for trial on the merits. [Citations omitted.] The court must stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case. [Citations omitted.]

The standard used by the courts in their review of proposed settlements is whether the class action settlement is fundamentally fair, adequate, and reasonable. [Citations omitted.] The burden of proving that the settlement is fair is on the proponents of the settlement. [Citations omitted.] Proposed [Commission] Rule 51.1(e) provides that this Commission will not approve a settlement unless the " . . . settlement is reasonable in light of the whole record, consistent with law, and in the public interest."

In order to determine whether the settlement is fair, adequate, and reasonable, the court will balance various factors which may include some or all of the following: the strength of applicant's case; the risk, expense, complexity, and likely duration of further litigation; the amount offered in settlement; the extent to which discovery has been completed so that the opposing parties can gauge the strength and weakness of all parties; the stage of the proceedings; the experience and views of counsel; the presence of a governmental participant; and the reaction of class members to the proposed settlement. [Citations omitted.] In addition, other factors to consider are whether the settlement negotiations were at arm's length and without collusion; whether the major issues are addressed in the settlement; whether segments of the class are treated differently in the settlement; and the adequacy of representation. [Citations omitted.] (Diablo Canyon, 30 CPUC 2d, 189, 222.)

PG&E agrees that these settlement criteria should apply to the PSA, and maintains that this is not the proceeding to consider alternative plans that one or more parties may prefer. Instead, PG&E contends that we should consider the proposed settlement on its own merits, "up or down," and approve or disapprove it without change, consistent with the expectations of the parties who are proposing it.¹⁰ We disagree with PG&E's view that our choices are so limited. We have often exercised our plenary power to modify settlements, which would otherwise not be reasonable or in the public interest. See e.g. D.02-12-068 (2002); D.01-12-018 (2001); D.01-04-038 (2001); D.99-12-032 (1999).

Under Rule 51 and §§ 451, 454, and 728, we review and approve a settlement if its overall effect is "fair, reasonable and in the public interest." California and U.S. Supreme Court decisions provide that we may consider the overall end-result of the proposed settlement and its rates under the "just and reasonable" standard, not whether the settlement or its individual constituent parts conform to any particular ratemaking formula. (FPC v. Hope Natural Gas Co. (1944) 320 U.S. 591, 602.)

In reviewing a settlement we must consider individual provisions but we do not base our conclusion on whether this or that provision of the settlement is, in and of itself, the optimal outcome. Instead, we stand back from the minutiae of the parties' positions and determine whether the settlement, as a whole, is in the public interest.

We will approve the PSA with certain modifications and clarifications that we believe are necessary in order to make the settlement fair, reasonable and in the public interest. We will discuss these matters more extensively, but we should begin our analysis of the PSA with its most important provisions, the regulatory asset and the total dollar amount of the settlement. To emerge from bankruptcy PG&E must pay its creditors in full. We agree that all allowed claims should be paid in full; and we agree that the dollar amount of the settlement, $7.2 billion, will achieve that result and is a reasonable compromise of the differences between PG&E and the Commission staff.

¹⁰ PG&E counsel: "Rather, in our view, the decision for the Commission is a binary one. That is, vote the settlement up, approve it, and adopt it, or vote it down. We are not here to renegotiate a settlement . . . ." (R.T. (PHC) pp. 3-4.)