3. Discussion

We review the settlement pursuant to Rule 51.1(e), which provides that, prior to approval, the Commission must find a settlement "reasonable in light of the whole record, consistent with the law, and in the public interest."

The settling parties rely on the analysis of the reasonableness standard contained in Re Pacific Gas and Electric Company, D.88-12-083, 30 CPUC2d 189 (Diablo Canyon). The Commission there stated that the standard used by the courts in their review of proposed class action settlements is whether the class action settlement is fundamentally fair, adequate, and reasonable. (30 CPUC2d at p. 222.) The Commission thereafter quoted with approval Proposed Rule 51.1(e), which is now a final rule. Next, the Commission set forth various factors a court could use to determine reasonableness.

"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 the 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 the class members to the proposed settlement.

"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." (Diablo Canyon, 30 CPUC2d at p. 222, citations omitted.)

We believe these factors embodied in the three-pronged criteria set forth in Rule 51.1(e), to which we now turn.

Is the settlement reasonable in light of the whole record, consistent with the law, and in the public interest?

With the modifications set forth below, we conclude that the settlement is reasonable in light of the whole record, consistent with the law, and in the public interest. We reach this conclusion for the reasons set forth below.

Is the settlement reasonable in light of the whole record?

In Diablo Canyon, the Commission set forth various factors to determine a settlement's reasonableness including 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, as well as the risk, expense, complexity, and likely duration of further proceedings. In the instant case, the record supports a finding that the settlement is reasonable under the Diablo Canyon factors.

Our finding is based upon an analysis of the competing strengths and weaknesses of each parties' case and consideration of many of the other Diablo Canyon factors. Yet we do not convert our settlement review into a full scale mini-hearing on the merits of the case. Rather, we look to the evidentiary strengths of CSD's claims and SoCalGas' defenses, the seriousness of the allegations, as well as the subjective evaluations of the parties. Necessarily, a settlement generally occurs before the parties are aware of what the precise litigated result would have been after a full hearing. However, as established below, the settlement is thus reasonable in light of the whole record because it resolves this case by adopting a result that is in the range of reasonableness suggested by the seriousness of the allegations, the strength of the evidence, as well as the prehearing evaluations of the parties.

In this case, the settlement has occurred late enough so that the parties have been able to assess the strengths and weaknesses of their case, but early enough (before the start of hearings) that the settlement will avoid significant additional expense and the use of Commission resources. SoCalGas and CSD were the only parties to offer testimony on the factual allegations in the OII. A CSD-sponsored report was attached to the OII, CSD had served additional testimony, and SoCalGas filed draft testimony with the settlement. As set out more fully above, SoCalGas' draft testimony disputes each of CSD's material factual allegations. For instance, SoCalGas states that the corporate decision to sell Montebello was made approximately six month after SoCalGas representatives met with the Commission, thus disputing the allegations that the utility made misrepresentations to the Commission. With similar arguments, SoCalGas disputes that it misrepresented the need for the facility to the Los Angeles Superior Court. Although most of the discovery has been completed, the proceeding is still at an early procedural stage because hearings have not yet commenced, and thorny discovery issues, as well as challenges to the Commission's jurisdiction to order remedies to affected landowners, remain in dispute.

Further proceedings promise to be complex, contentious, and lengthy. As the settling parties stated, "after all that work [pretrial preparation], CSD and SoCalGas each concluded that the outcome of the case was not a sure thing - at the end of a lengthy and contentious hearing, each believed it was possible that the Commission could find either way on the allegations of the OII. As a result, CSD and SoCalGas agreed that a compromise made sense for both of them and the Commission." (CSD and SoCalGas' March 7, 2000 Joint Reply in Response to ALJ's Ruling at p. 1.)

We conclude that substantial considerations of litigation cost and uncertainty support approval of the proposed settlement. Other factors going to the reasonableness of the settlement overlap with the public interest criterion, so we next examine that criterion.

Is the settlement in the public interest?

The settlement also provides that SoCalGas will develop, in consultation with CSD and the Commission's Public Advisor, a course on professional responsibility and practice before the Commission, with special emphasis on responsibilities under Rule 1 of the Commission's Rules. The course would be open to all interested persons and SoCalGas will fund the course up to a maximum of $200,000.

The Commission has approved similar provisions in settlement of alleged ethical violations. (See D.97-08-055, 1997 Cal. PUC LEXIS at 765 [PG&E employees who routinely practice before the Commission would take an ethics training course of at least four hours and up to one full day regarding the preparation and processing of discovery and prepared testimony.]) This provision contributes to a finding that the settlement is reasonable and in the public interest, with a minor modification. This proceeding concerns both allegations of ethical violations and of the abuse of the utility's power of eminent domain. We will require that a portion of the professional responsibility course should address a utility's ethical obligations in exercising the power of eminent domain, and this portion of the course should be open to all SoCalGas employees and consultants who assist SoCalGas in exercising such powers. In developing this portion of the course, SoCalGas should keep in mind the admonitions of California Supreme Court concerning the duties of a government attorney in exercising the power of eminent domain. ⁵

"As suggested by the American Bar Association, a government lawyer may be under an even higher duty: `A government lawyer in a civil action ... has the responsibility to seek justice and to develop a full and fair record, and he should not use his position or the economic power of the government to harass parties or to bring about unjust settlements or results.' ... Occupying a position analogous to a public prosecutor, he is `possessed ... of important governmental powers that are pledged to the accomplishment of one objective only, that of impartial justice.' ... The duty of a government attorney in an eminent domain action, which has been characterized as `a sober inquiry into values, designed to strike a just balance between the economic interests of the public and those of the landowner' ... is of high order. `The condemnor acts in a quasi-judicial capacity and should be encouraged to exercise his tremendous power fairly, equitably and with a deep understanding of the theory and practice of just compensation.'" (City of Los Angeles v. Decker (1977) 18 Cal.3d 860, 871.)

The settlement is in the public interest because it offers certain affected landowners the opportunity to obtain rescission of SoCalGas' acquisition of the landowners' mineral interests. This portion of the settlement addresses another major contention of the OII, namely, that SoCalGas may have paid less than fair market value for the mineral interests. The settlement avoids the complexity of the jurisdiction issues because the settlement provides that SoCalGas will take action to initiate rescission (assuming the landowners agree), and it is relatively clear that it is within this Commission's jurisdiction to order utilities to take appropriate action with respect to their regulated assets. The settlement does not preclude any of these persons from seeking relief in state court should they conclude that a civil action is warranted. (See February 15, 2000 CSD and SoCalGas Joint Response to ALJ Ruling, at p. 2, n. 2.) The settlement's resolution of this issue appears reasonable, especially since it gives landowners the option to accept rescission and does not preclude any other remedies these landowners might elect to pursue in Superior Court or otherwise, should they not wish to obtain rescission under the settlement's terms.

The settlement states that SoCalGas agrees not to fund any portion of the agreement by money from ratepayers. In our draft decision, we agreed with ORA that if the landowners pay SoCalGas back the same dollar amount that SoCalGas paid for the mineral interests, ratepayers would be financing the present value difference between the acquisition costs and sale price for those leaseholders that repurchase their lease hold interest. That is not the intent of the settlement based on the plain language cited above, which states that shareholders will finance the settlement.

CSD and SoCalGas' joint comments to the proposed decision clarify that due to the small amount of money paid to acquire mineral rights, and the desire to mend relations with former mineral rights holders, SoCalGas does not intend to seek repayment of moneys paid to acquire these rights should a former owner request rescission under the settlement. Therefore, in order to make ratepayers whole, CSD and SoCalGas propose that within 210 days of final Commission approval of the settlement (30 days after the close of the period during which former rights holders can request rescission), SoCalGas will file an advice letter to reduce its rates prospectively by the amount of the authorized margin in then-current rates associated with the mineral rights that are returned to the prior owners. SoCalGas will also file by advice letter a plan to refund, with interest at a rate of ten percent a year, all revenue requirements associated with mineral rights returned to prior owners pursuant to the settlement that were collected in rates prior to the prospective reduction in rates. In its reply comments, ORA does not state any opposition to this clarification. This clarification is reasonable because it is consistent with the settlement's statement that ratepayer money should not funded the settlement. We therefore adopt this clarification.

Further, those landowners receiving a rescission offer from SoCalGas should have sufficient information in order to make an informed choice. Therefore, in SoCalGas' rescission offer to affected landowners, we direct SoCalGas to make a full disclosure of the condition of the property, including but not limited to (a) advising landowners of the nature and status of SoCalGas' A.00-04-031 (requesting Commission authority to sell Montebello); and (b) providing a copy of an informative environmental document that has been recently developed at the time the notice is sent, such as the Executive Summary of the Proponent's Environmental Assessment filed with A.00-04-031, as well as the Commission's Environmental Branch's deficiency letters thereto, or the Notice of Preparation (N.O.P.) filed with the State Clearinghouse, if such a N.O.P. has been prepared.

Also, in order to effectuate the intent of shareholder financing of the settlement, we direct that no later than December 31, 2000, and every 60 days thereafter until the acquisitions pursuant to the settlement have been completed, SoCalGas shall (a) provide the Commission with a full accounting of all mineral interests the acquisition of which is rescinded pursuant to the settlement agreement; and (b) document that shareholders have financed the entire acquisition, including the present value difference between the acquisition cost and the sale price. SoCalGas shall file this report with the Commission's Energy Division, shall serve it on all parties to this OII, and shall also make it part of its initial showing in its next cost of service performance based ratemaking application before this Commission.

We conclude that the settlement fairly addresses the public interest that prompted issuance of this OII. Finally, we consider the lawfulness of the settlement.

Is the settlement consistent with the law?

In this case, CSD and SoCalGas crafted a proposed settlement designed, among other things, to provide practical training targeting the alleged violations. We find the settlement consistent with the law, if modified as discussed in this decision, because the settlement consists of appropriate remedies in light of the allegations in the OII, the strength of the evidence, as well as the parties' prehearing evaluations.

However, we believe that a settlement calling for a voluntary contribution to certain energy-related low income and research and development programs would be inconsistent with applicable law under the facts of this particular case. Therefore, we propose a modification to the settlement.

The two controlling Commission decisions on this issue are Application of Long Distance Direct, Inc., D.98-03-071, 1998 Cal. PUC LEXIS 31 (LLDI) and Re GTE California Inc., D.98-12-081, 1998 Cal. PUC LEXIS 910 (GTEC). The LLDI case involved allegations of slamming, that is, of a reseller of certain telephone services switching some consumers' long distance service without proper authorization. In LLDI, the Commission held it did not have the authority to direct payment of a "settlement fee" to the designated trust fund rather than to the General Fund. Therefore, the Commission amended a settlement agreement between CSD and an applicant so that applicant would pay the proposed funds into the General Fund of the State of California, rather than a Consumer Protection Trust Fund administered by the state's District Attorneys Association.

In LDDI, the Commission stated that it has the authority to levy fines and penalties against the utilities pursuant to Pub. Util. Code §§ 2100 et seq., but that penalties assessed under those provisions must be deposited in the General Fund. The Commission also stated that it has the authority to require refunds to consumers pursuant to Pub. Util. Code § 453.5, but that such refunds must be disbursed to ratepayers or, through escheat, to the General Fund. The Commission concluded that simply calling the payment a "settlement fee" instead of a fine or penalty may not be sufficient to overcome the provisions of the Public Utilities Code that require the Commission to direct such payments to the General Fund.

Also, there was no nexus between the "settlement fee" and any wrong alleged in the case, nor was the "settlement fee" needed as an additional equitable remedy specifically designed to remedy the alleged harm. (See also TURN v. Pacific Bell, D.97-06-062, 72 CPUC2d 799, 801 [The Commission declined to use unclaimed refunds for "upfront" funding of nonprofit customer representatives in Commission proceedings, because this use served no equitable function connected with that proceeding.])

In contrast, the GTEC decision approved a settlement containing a $4.85 million payment to a consumer education fund. There, the purpose of the fund was not to penalize GTEC, but to remedy harm suffered by victims of GTEC's alleged marketing practices. The Commission reasoned that unlike LDDI, the GTEC proceeding raised the issue of the adequacy of prior restitution and consumer education. The Commission also circumscribed the fund's uses for education of non-English speaking customers only in the potentially affected service area. Thus, according to GTEC, a monetary payment to a consumer education fund is justified when other remedies are inadequate and the additional equitable remedy is specifically designed to remedy the alleged harm.

In this case, SoCalGas' proposed contribution to certain energy-related low income and research and development programs is not specifically designed to remedy harms alleged in the OII, nor do the settling parties suggest that other remedies are inadequate. In fact, SoCalGas implicitly acknowledges that this portion of the settlement is in compromise of the ethical violations, when it justifies the reasonableness of the monetary contribution on the grounds that if were to be found guilty of an ethical violation, it could be subject to a penalty of between $500 and $20,000 per violation (or per day of a continuing violation).

In other cases, the Commission has approved monetary settlements of alleged ethical violations, but in those cases, the money was paid to the General Fund. (See D.97-08-055, 1997 Cal. PUC LEXIS 763, 765, where CSD and PG&E settled such alleged violations for an $850,000 payment.)

As we did in LDDI, we approve the settlement in this case with the proviso that SoCalGas pay the funds designated in the settlement for certain groups instead to the General Fund of the State of California in the manner penalties are usually paid. As stated above, SoCalGas has agreed to "voluntarily contribute a total of $3,495,000" on the grounds that if SoCalGas were found guilty of an ethical violation, it could be subject to a penalty. Thus, SoCalGas' compromise is a payment in lieu of a penalty.

As to the monetary figure, the draft decision noted that the settling parties may have taken into account that such payments may be tax deductible for SoCalGas. ORA and TURN have referred to such payments as "charitable contributions," but this is not made a specific term of the settlement. The draft decision directed the settling parties to state in their comments to the draft decision whether tax deductibility was one of the bases for the parties' agreement to the amount of the monetary contribution. The draft decision stated that if so, and if the settling parties believed that as a result of the changes we impose, the monies would not now be tax deductible, they may recommend a monetary adjustment to the settlement taking into account the tax implications of our modification. The Commission can then determine in its final decision whether the entire settlement, including the adjusted amount, is reasonable, lawful and in the public interest.

In their comments to the settlement, the settling parties did not recommend a monetary adjustment to the settlement. Therefore, the Commission retains the monetary amount of the settlement and directs that it be paid to the General Fund.

Are the major OII issues addressed by the settlement?

In Diablo Canyon, the Commission stated that an additional factor to balance in order to determine whether the settlement is reasonable is whether the major issues are addressed by the settlement. This factor implicates all of the criteria mentioned above. One of ORA's and TURN's major objections to the settlement is that it fails to address all issues presented in the OII. For example, ORA argues that the Commission should not approve the settlement, in part, because it believes that ratepayers will be exposed to considerable expenses as a result of the settlement. These costs include SoCalGas' internal costs and the costs of retaining outside counsel to litigate the eminent domain proceedings, the costs of defense against this OII, and ratepayer protection from the expense of additional litigation which may arise from SoCalGas' conduct in acquiring the leaseholds.

As stated above, in response to an ALJ ruling, the settling parties state that it is their intent that the settlement resolve all allegations that SoCalGas' conduct, either in acquiring storage and mineral interests at the Montebello facility or in providing information about its activities to the Commission's staff, was wrongful. However, these parties 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. These parties 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 meritorious.

We clarify here the scope of issues which the settlement resolves. By adopting this settlement, issues concerning whether SoCalGas' conduct in acquiring storage and mineral interests at Montebello was wrongful, and all issues concerning SoCalGas' representations to Commission staff about Montebello, are resolved by this proceeding with the following clarifications.

The settling parties state clearly that this settlement does not preclude individual landowners from litigating against SoCalGas, should they believe that rescission is not an adequate remedy for any of SoCalGas' alleged wrongs at Montebello. We clarify that nothing in this decision precludes individual owners from litigating any issues regarding SoCalGas' actions at Montebello should they believe rescission is not an adequate remedy, and nothing in this decision or the settlement can be used by SoCalGas against these owners in any such litigation, in order to preclude litigation of such issues or otherwise. We also clarify that this settlement does not address or decide the issue of whether shareholders or ratepayers would be responsible for the costs of defending such litigation, or in paying any such judgments, should they occur. This potential issue is left open for an appropriate proceeding.

The settlement resolves issues at the Commission concerning SoCalGas' alleged wrongful conduct in acquisition of the leaseholds at Montebello and issues concerning SoCalGas' representations to Commission staff concerning Montebello. It also resolves the issue of who bears SoCalGas' reasonable costs for defending itself in the OII.

However, the settlement does not address or resolve the reasonableness of SoCalGas' conduct at Montebello for ratemaking purposes. Parties are therefore not precluded from examining in another proceeding whether SoCalGas' conduct at Montebello may lead to a finding of unreasonableness that supports a particular ratemaking conclusion. For example, parties in another proceeding may question the reasonableness of SoCalGas' decision to sell Montebello in 1998, arguing that SoCalGas should have made the decision to sell earlier. Similarly, they may examine the reasonableness of SoCalGas' property acquisition costs at Montebello. In another proceeding, parties may also address the reasonableness of SoCalGas' other expenses at Montebello, including the reasonableness of its expenses to defend itself in this OII. However, the settlement precludes parties from raising in another proceeding the argument that ratepayers were injured by any delay that this OII caused in the sale of Montebello, or in processing A.98-01-015, because this OII primarily dealt with SoCalGas' representations to this Commission regarding Montebello.

In summary, since the settlement resolves the major issues set forth in the OII, we believe it is reasonable to adopt it with the modifications set forth above. However, since the settlement by its own terms states that nothing in the agreement is intended or shall be construed to impact SoCalGas' ratepayers, the approval of the settlement is not res judicata as to issues concerning the reasonableness of SoCalGas' actions at Montebello if such issues arise in another appropriate proceeding before this Commission, although it resolves all issues concerning SoCalGas' representations made to the Commission about Montebello. With this clarification, we adopt the settlement.