III. Standard of Review

A. Just and Reasonable and in the Public Interest

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 our rules. 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).) Here, we are not in the usual settlement situation in which parties bring to us a settlement and the Commission evaluates the settlement in its quasi-judicial capacity. Rather here it is the Commission itself that is the settling party, making our rules for parties before us inapplicable. Thus, this Commission is guided by our statutory and California Constitutional mandates to act in the public interest and ensure just and reasonable rates.

Our Commission's authority to regulate public utilities in the State of California is pursuant to the State's police power. See Motor Transit Company v. Railroad Commission of the State of California (1922) 18 Cal. 573, 581. As the United States Supreme Court stated in Arkansas Electric Coop. v. Arkansas Pub. Serv. Comm'n (1983) 461 U.S. 375, 377, "the regulation of utilities is one of the most important of the functions traditionally associated with the police power of the states."

The source of the Commission's authority to exercise the police power of the State in this regard is Article XII of the California Constitution, which requires that the Commission actively supervise and regulate public utility services and rates in order to protect the people of the State of California from the consequences of monopolies in the public service industries. See Sale v. Railroad Commission (1940) 15 Cal.2d 612, 617. In addition, there is statutory authority for the Commission to exercise the police power of the State pursuant to Public Utilities Code §§ 451, 454, 701, 728, 761, 762, which require the Commission to ensure that the public utilities' rates are just and reasonable and that their facilities and services are adequate. See Camp Meeker Water System, Inc. v. Public Utilities Com. (1990) 51 Cal.3d 845, 861-862. We cannot shirk these duties by invoking Commission-made rules intended for a different kind of settlement in a different context.

As the PSA must be approved by this Commission, we look to our own precedents. In our Diablo Canyon decision ((1988) 30 CPUC 2d 189), 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.

PG&E asserts the Commission's Rule 51 settlement criteria should apply to the PSA. As PG&E admonishes this Commission, 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.¹³

Under Public Utilities Code §§ 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.

Even though the schedule imposed has made it impossible to delve deeply into the particulars of this settlement and the gag orders issued by the bankruptcy settlement judge have made it impossible for other Commissioners and staff to evaluate fully the PSA and its underpinnings, we reject the PSA, because it is unjust and unreasonable. Many of the PSA's defects are patent and obvious on first reading. We will discuss the obvious defects 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. We agree that all allowed claims should be paid in full; and find that maintaining rates and requiring the payment of deferred dividends and earnings to reduce the back debt until PG&E has recovered its actual undercollection will achieve that result and constitutes a reasonable compromise of the differences between PG&E and the Commission staff.

B. Adequacy of Representation In the Settlement Process

The PSA was negotiated by President Peevey and selected Commission staff under the judicial supervision, restrictions, and mediation of a United States Bankruptcy Court judge.

We are unsure as to the adequacy of representation by the Commission staff involved in the settlement negotiations. We have no mechanism to evaluate the adequacy of representation given the continuing limitations of the gag orders issued by the bankruptcy settlement judge. We do not doubt the technical, financial, and ratemaking expertise of the Commission staff, yet we are troubled that the proposed settlement agreement put before us, even under conservative analysis, would attempt to resolve outstanding legal issues between PG&E and the Commission at 150% of claims. Many commissioners have been significantly hindered in their evaluation of the settlement because of the continuing gag orders which erect significant barriers to obtaining adequate advice of counsel and necessary financial consultant advice, and because of the truncated nature of the evidence and testimony before the Commission imposed the limits of the proceeding's scooping orders. Finally, the extremely expedited nature of the Commission's decision-making process in conjunction with the Thanksgiving holidays has resulted in cursory analysis without the benefit of thoughtful testing of that analysis commensurate with the enormity of this decision and its historic consequences. Nonetheless, we plunge forward into these uncharted and murky waters.