On August 21, 2003, the California Supreme Court, answering questions certified to it by the Ninth Circuit Court of Appeals, held that a settlement entered into between the California Public Utilities Commission ("CPUC") and Southern California Edison Company ("SCE") did not violate state law. Southern California Edison Co. v. Peevey, docket no. S110662. The settlement allowed SCE to recover approximately $3.3 billion from its electricity customers to pay for costs SCE had incurred during the energy crisis. The California Supreme Court's opinion also affirms the CPUC's ability to make decisions to settle pending litigation in meetings closed to the public.

In November 2000, SCE initiated a federal action against the CPUC, asserting that a state law freezing retail rates during California's transition to a deregulated electricity market was preempted by federal law pursuant to the filed rate doctrine, and was unconstitutionally confiscatory, in that SCE was prevented from passing through the full cost of wholesale electricity purchased for its customers. The Utility Reform Network ("TURN"), a non-profit organization advocating on behalf of residential and small-commercial customers, intervened in the action. The CPUC and SCE subsequently settled the action, stipulating to entry of judgment in the case. That judgment allowed SCE to recover approximately $3.3 billion of losses it had incurred purchasing power for its customers by requiring the CPUC to maintain SCE's rates at existing levels. The stipulated judgment was entered over the objections of TURN, and TURN appealed to the Ninth Circuit, challenging the stipulated judgment on a variety of federal and state law grounds.

In Southern California Edison v. Lynch, 307 F.3d 794 (2002), the Ninth Circuit rejected TURN's federal law challenges. At the same time, however, the Ninth Circuit held that the stipulated judgment appeared to violate California Public Utilities Code §§ 368 and 454, and California's Bagley-Keene Open Meeting Act (California Government Code § 11120, et seq.). Finding that there was no controlling state law precedent concerning whether the stipulated judgment violated these provisions, the Ninth Circuit certified those state law issues to the California Supreme Court, and stayed its decision on the remaining state law issues pending a response from the California Supreme Court.

The California Supreme Court accepted the certification, and, in a majority opinion authored by Justice Werdegar, rejected TURN's contentions that the stipulated judgment violated state law.

Section 368 of the Public Utilities Code provides that the rate freeze imposed during California's transition to deregulation must end by March 31, 2002 (although it may end earlier pursuant to other provisions of that section). Section 330 recites that it is the Legislature's intent that rates be reduced by at least twenty percent after the end of the rate freeze. TURN argued that the CPUC violated these provisions by agreeing to maintain rates at rate freeze levels in order to allow SCE to recover its past losses. The California Supreme Court disagreed, holding that Section 330 merely provided guidance, and did not mandate that the CPUC reduce rates after the end of the rate freeze.

TURN also argued that the stipulated judgment violated Section 368(a), which states that "electrical corporations shall be at risk for those costs not recovered during [the rate freeze period ending March 31, 2002]." The Supreme Court held that this provision referred to uneconomic generation costs, and that the stipulated settlement allowed recovery of procurement costs that had not been found to be uneconomic, and that therefore this provision did not bar the stipulated judgment.

The Supreme Court also rejected TURN's contention that the stipulated judgment had violated the Bagley-Keene Open Meeting Act because the CPUC had voted in a closed session to approve the settlement embodied in the stipulated judgment. The Supreme Court interpreted a provision of the Bagley-Keene Act allowing the CPUC to confer in closed session with its legal counsel concerning pending litigation to allow the CPUC to also vote to settle pending litigation in closed session.

Finally, the Supreme Court rejected TURN's argument that the CPUC had violated Section 454 of the Public Utilities Code, which provides: "no public utility shall change any rate or so alter any classification, contract, practice, or rule as to result in any new rate, except upon a showing before the commission and a finding by the commission that the new rate is justified." The Supreme Court held that the CPUC's agreement to maintain rates at existing levels did not constitute a "rate change," and therefore Section 454 was inapplicable.

In a lengthy concurring and dissenting opinion, Justice Baxter rejected the majority's conclusion that the settlement did not violate the Bagley-Keene Open Meeting Act or Section 454. Justice Baxter argued that the Bagley-Keene Open Meeting Act should be interpreted to allow the CPUC to confer with legal counsel in private, but require that any decision concerning whether to settle pending litigation to be deliberated and made in public. Justice Baxter also contended that by holding otherwise, the Court gave the CPUC free rein to "conduct their most important regulatory business in private, through the devise of settling litigation between themselves and the entities they regulate." Justice Baxter also concluded that the CPUC's decision to extend existing rates constituted a "change" in rates, and thus Section 454 applied.

With the Supreme Court's opinion on the questions certified to it, the case now returns to the Ninth Circuit to allow it to enter a final decision on TURN's appeal.