IV. The Settlement Agreement

SCE's first amended complaint against the CPUC was filed in February 2001 in federal court (CV-00-12056-RSLW (Mcx). The Stipulated Judgment based on that complaint recites:

"B. Jurisdiction of the Court

"1. SCE's Complaint alleges that defendants' decisions are unlawful because they prevent SCE from recovering fully its costs, in particular, its costs of procuring electricity and its cost of interstate transmission. SCE's Complaint states causes of action based upon (a) preemption, including preemption under the filed rate doctrine, (b) facial takings, (c) due process, (d) as-applied takings, and (e) commerce clause.

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"D. Issues Not Resolved

"6. SCE and the CPUC recognize that SCE has presented substantial federal claims and that the ultimate judicial resolution of these issues is uncertain. SCE and the CPUC agree that the resolution of the case in accordance with this stipulated judgment is desirable to eliminate this uncertainty and to provide an outcome that is in the public interest.

The pertinent provisions of the Settlement Agreement to this ATCP are:

1. In the Recitals of the Parties section:

"B. In the Litigation, SCE has contended, inter alia, that Defendants have not permitted SCE to recover in retail rates the full amount of SCE's costs, including its wholesale electric procurement costs, as required by federal law."

2. In the Rate Stabilization and Cost Recovery section:

"Section 2.8. Disposition of TCBA. Balances in SCE's TCBA as of August 31, 2001 shall have no further impact on SCE's retail electric rates, Surplus or Recoverable Costs, except to the extent the CPUC authorizes the recovery after such date of costs previously recorded in the TCBA (e.g., accelerated amortization of SCE's investment in nuclear plants). Recoverable Costs incurred after August 31, 2001, which would otherwise have been recorded in the TCBA, shall be recovered in rates in accordance with further orders of the CPUC, whether or not the CPUC chooses to continue to have such costs recorded in the TCBA."

3. In the Litigation section:

"Section 4.4 Releases of Specified Claims. Promptly upon entry of the Stipulated Judgment, SCE shall deliver to the CPUC executed releases substantially in the form of Exhibit B hereto specifically releasing any and all claims and causes of action that SCE has or may have against the State of California and the CPUC that arise from:

"(a) The facts alleged by SCE in the Litigation, including without limitation claims and causes of action based upon the filed rate doctrine, takings, due process and commerce clause violations, except for claims and causes of action based upon this Agreement or as provided in the Stipulated Judgment;"

4. Exhibit B, the Release:

"Release

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"A. Except as provided in the Agreement and in the Stipulated Judgment, SCE hereby does forever release and discharge the CPUC, the State of California, and their respective agencies, departments, successors, officials, agents, representatives, and employees, and each of them from any and all claims, debts, liabilities, demands, obligations, promises, acts, agreements, costs, expenses (including but not limited to attorneys' fees), damages, actions, causes of action and claims for relief of whatever kind or nature, under any theory, whether legal, equitable or other, under the law, either common, constitutional, statutory, regulatory, or other, of any jurisdiction, foreign or domestic ("Claims"), that arise from:

"1. The facts pled, or that could have been pled, in Southern California Edison Company, Plaintiff, vs. Loretta M. Lynch et al., presently pending in the United States District Court for the Central District of California, Case No. 00-12056-RSWL(Mcx), including without limitation claims and causes of action based upon the filed rate doctrine, takings, due process and commerce clause violations;

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"B. With respect to the Claims that are the subject of release hereunder, SCE specifically waives all rights and benefits afforded by California Civil Code Section 1542 and does so understanding and acknowledging the significance of such specific waiver of such statutory protection, which provides as follows:

"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."

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SCE argues that the costs and incentives it has requested in this proceeding do not come within the subject matter of the Settlement Agreement, nor were they waived in the release. As matters governed by state tariffs under the exclusive jurisdiction of this Commission, those costs and incentives could not have been litigated in the federal filed rate doctrine lawsuit.

SCE states that,

"In sharp distinction to the costs and incentives at issue in this proceeding, the costs in dispute in the Federal Filed Rate Doctrine litigation were all subject to the exclusive jurisdiction of the Federal Energy Regulatory Commission. These were past wholesale procurement costs that SCE contended it had a right under federal law to recover. For example, in the Stipulated Judgment paragraph C (under "General Provisions") describes "Issues Previously Determined by the Court." Issue number 2 states, "SCE alleges that federal law preempts California from preventing SCE from fully recovering in retail rates its wholesale procurement costs, which are subject to the exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC). And Issue number 3 states, "SCE has paid wholesale procurement costs established pursuant to tariffs filed by the Independent System Operator and the Power Exchange with FERC, and has been charged additional amounts pursuant to such tariffs that it has not yet paid.

"Recital D in the Settlement Agreement speaks of "SCE's past inability to recover its wholesale electricity procurement costs" and of SCE's "having incurred procurement related liabilities and indebtedness totaling approximately $6.355 billion." On page 7 of the Settlement Agreement, Definition (n), "PX Billing Claim," refers to claims against SCE for its failure to pay timely "any amounts due or claimed to be due to the California Power Exchange...or the California Independent System Operator."

In regard to Section 2.8 of the Settlement Agreement which states that "Balances in SCE's TCBA as of August 31, 2001 shall have no further impact on SCE's retail electric rates, Surplus or Recoverable Costs...," SCE asserts that Section 2.8 applies only to costs that had been recorded in SCE's TCBA as of August 31, 2001. None of the costs or incentives at issue had been recorded in the TCBA as of that date because they all required Commission approval before SCE could transfer them to the TCBA. Since the Commission has not yet given such approval the costs at issue are not included in the category of costs excluded from rates under Section 2.8.

ORA claims that the costs and incentives at issue in this proceeding were waived by the release because these costs could have been alleged in the federal litigation. Further, ORA asserts that regardless of the release, Section 2.8 of the Settlement Agreement shows that costs recorded prior to the cut-off date are clearly not recoverable; costs incurred after the cut-off date are recoverable with further Commission approval. ORA maintains that the settlement does not address expenses incurred before the cut-off date, but recorded after the cut-off date. Two scenarios are possible: (1) SCE's position that the parties to the agreement meant to create a loophole and leave these costs un-addressed, or (2) ORA's position that the parties meant all relevant costs incurred or recorded prior to the cut-off date to be unrecoverable.

Discussion

1. The Release

In our opinion, SCE did not, by entering the Settlement Agreement and release, waive its right to pursue the costs and incentives at issue in this case. The disposition of those costs and incentives are governed by tariffs and decisions of this Commission: the NUIP reward by D.01-09-041; FOIMA by SCE Preliminary Statement, Para. N. 54; IROEDMA by SCE Preliminary Statement, Para. N. 44; and STGCMA by SCE Preliminary Statement, Para. N. 63. In contrast, it is clear that the federal court case was based on federal law and the federal filed rate doctrine.

The federal issues presented to the federal district court are set forth in Paragraph I.C. of the Stipulated Judgment under "Issues Previously Determined by the Court." Those issues include (1) SCE's allegation that federal law preempts California from preventing SCE from fully recovering in retail rates its wholesale procurement costs, which are subject to the exclusive jurisdiction of the FERC; (2) application of the federal filed rate doctrine to SCE's wholesale procurement costs, and (3) the court's rejection of the Commission's claim that SCE was equitably estopped from invoking the federal filed rate doctrine. In addition, Paragraph I.D. sets forth issues presented to, but not resolved by the court, that were resolved through compromise in the Settlement Agreement. Those issues include (1) whether the "Pike County" exception to the federal filed rate doctrine applied in the case; (2) whether SCE had recovered all of its wholesale procurement costs under the accounting change implemented by D.01-03-082; and (3) whether the Commission's refusal to allow SCE to pass its wholesale procurement costs incurred under federal tariffs through to retail customers constituted a taking of property without just compensation, a violation of due process, or a violation of the Commerce Clause, under the federal constitution.

The release provides for the release of all claims "under any theory" that arise from "the facts pled, or that could have been pled" (emphasis added) in SCE v. Lynch et al. (Release, A.1.) The first question to be addressed is whether a cause of action regarding the four accounts disputed in this application "could have been pled" in the federal lawsuit. We believe the answer is "no."

To have properly pled a cause of action for the four disputed claims in the federal litigation SCE would have had to bring itself within the supplemental jurisdiction of the federal court set forth in 28 USCA § 1367(a).

"§ 1367. Supplemental Jurisdiction

"(a) Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties."

In this event, SCE would have to show that the four claims "are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy...."³ To invoke the release, ORA would have to show the relationship of the claims in this application to the claims in the federal action. ORA has failed to do so.

In our view, the four claims do not arise from the facts that are part of the same case or controversy on which the federal case rested. The federal case raised issues concerning the filed rate doctrine, and did not consider issues regarding state tariffs under this Commission's jurisdiction. The federal case dealt only with federal issues, such as wholesale procurement costs incurred under federal tariffs and FERC jurisdiction, and principles of federal law. Since the costs and incentives at issue in this proceeding have nothing to do with wholesale procurement costs, they do not relate to the claims SCE alleged, or could have alleged, in the federal litigation. They are not part of the same case or controversy.

We have no doubt that the issues regarding costs presented in federal court were federal issues involving wholesale procurement costs. The issues in this application are state issues which were not included in the federal lawsuit. But merely because only federal issues were litigated in federal court, does not mean that the release signed by SCE could not release state causes of action or claims based on tariffs or decisions of the Commission.

We note that SCE filed this application on September 4, 2001, and that the Settlement Agreement was executed on October 2, 2001. Obviously, SCE knew of the claims at issue in this application as did ORA and the Commission. This is not the case of an unknown claim unsuspected by the parties when the release was executed. Therefore, ORA cannot benefit from SCE's waiver of Civil Code § 1542. Both parties knew of the claims.

In regard to the scope of the release, we find that it did not embrace the claims of this application. The instant claims did not arise out of the federal claims and we see no connection with those claims. The claims in this application are state claims which came into existence separately from the federal claims. The tenor of the release is specific to federal claims and terminates federal claims. To broaden the release to cover state claims, known to all parties at the time the release was executed, would be to expand a clear and specific reference to federal claims into an inchoate provision encompassing any possible claim arising prior to the settlement. Such an expansion would negate the specificity of the release.

2. Section 2.8 of the Settlement Agreement

Section 2.8 reads as follow:

"Balances in SCE's TCBA as of August 31, 2001 shall have no further impact on SCE's retail electric rates, Surplus or Recoverable Costs, except to the extent the CPUC authorizes the recovery after such date of costs previously recorded in the TCBA (e.g., accelerated amortization of SCE's investment in nuclear plants). Recoverable Costs incurred after August 31, 2001, which would otherwise have been recorded in the TCBA, shall be recovered in rates in accordance with further orders of the CPUC, whether or not the CPUC chooses to continue to have such costs recorded in the TCBA."

This section is clear. Under the first sentence, balances that were in SCE's TCBA as of August 31, 2001 are to have no further impact on SCE's rates, unless the Commission authorizes an exception to this clause by approving the recovery after August 31, 2001 of costs that were previously recorded in the TCBA. Under the second sentence, costs that SCE incurs after August 31, 2001, which otherwise would have been recorded in the TCBA, will be recovered in rates as the Commission directs. (The TCBA was eliminated in Resolution E-3765, dated January 23, 2002.)

ORA argues that Section 2.8 intended not only to eliminate balances that were in the TCBA as of August 31, 2001, but also to eliminate all costs SCE had incurred prior to that date, including balances that were in all of SCE's other regulatory accounts. According to ORA, accepting the plain meaning of Section 2.8 "is an irrationally restrictive and tortuously literal reading of one specific sentence taken out of context of the paragraph it falls within, and out of context of the Agreement as a whole." (ORA Opening Brief, p. 5.) Instead, ORA argues that the parties actually intended Section 2.8 to apply to all costs SCE had incurred as of August 31, 2001, not just to costs recorded in the TCBA. ORA claims that costs recorded prior to the cut-off date are clearly not recoverable, implying that costs recorded in any regulatory account prior to the cut-off date are not recoverable. Obviously, ORA has neglected the modifier "balances in SCE's TCBA." It is only costs that were recorded in the TCBA as of August 31 that were unrecoverable under Section 2.8, not all costs recorded in any regulatory account.

The costs SCE seeks to recover in this case were both incurred and recorded in regulatory accounts prior to August 31, 2001. But they were not recorded in the TCBA. SCE could not transfer those costs from their present accounts to the TCBA without a Commission decision authorizing their recovery. Since that decision is the subject of this proceeding, those costs could not have been recorded in the TCBA as of August 31, 2001.

ORA's argument comes down to an assertion that the August 31 date is meaningless. This argument has no merit. The use of the August 31 cut-off date to exclude from rates only the balance in the TCBA was an essential part of the Settlement. As of the close of the ATCP record period in this case (June 30, 2001), the undercollection in SCE's TCBA was slightly less than $3.46 billion. By August 31, the balance would have decreased somewhat, but would still have been well over $3 billion. Section 2.8 of the Settlement Agreement declared that this August 31, 2001 undercollection in the TCBA would have no further impact on SCE's rates. We acknowledged this fact by eliminating the TCBA and establishing the PROACT. It is "balances in SCE's TCBA as of August 31, 2001, (that) have no further impact...." Balances not in the TCBA as of August 31, 2001, are subject to proceedings such as this. ORA's convoluted argument would render Section 2.8 meaningless.