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A recent California Appellate decision underscores the broad authority of the California Public Utility Commission ("CPUC") to make policy and encourage settlements intended to apportion risk and to remediate the effects of the California energy crisis. In Utility Consumers' Action Network v. Public Utilities Commission of California, 2004 Cal. App. LEXIS 1102 (July 12, 2004), the Court rejected an attempt by the Utility Consumers' Action Network, ("UCAN") to overturn a settlement agreement reached between the CPUC and San Diego Gas & Electric Company ("SDG&E").

The settlement arose out of measures taken by the California State Legislature and by the CPUC in response to California's energy crisis. In 2000, the Legislature enacted Assembly Bill 265 ("AB 265"), which set "a 6.5 cents per kilowatt hour rate ceiling for SDG&E's residential, small commercial and street lighting customers through December 31, 2002, retroactive to June 1, 2000."The statute also directed the [CPUC] to establish an accounting procedure that would allow SDG&E to recover the amount of its shortfall, if any, between the ceiling and its actual electricity costs and would use 'revenues associated with sales of energy from utility-owned or managed generation assets' for that purpose."

In 2001, the CPUC ruled that SDG&E had to "use all electricity resources under [its] control"--including intermediate term ("IT") contracts--"to first serve existing customers at cost-based rates." The IT contracts were very profitable to SDG&E - bringing in over $380 million from April 1998 through December 2001. SDG&E objected both to using the IT contracts to serve customers at cost-based rates, rather than turning a profit with them, and to using any profits to pay down the AB 265 shortfall. The shortfall ran as high as $338 million in March of 2002. SDG&E responded to these measures by filing state and federal litigation, claiming that the CPUC's ruling violated California law and constituted an "unconstitutional taking without just compensation." SDG&E offered to settle its lawsuits against the CPUC in June 2002.

"Under the proposed settlement, SDG&E would write-off--[i.e.,] not collect from its customers--$24 million of the current AB 265 shortfall," which it would otherwise be permitted to collect. "Additionally $175 million in IT contract profits that SDG&E had already allocated for the benefit of ratepayers . . . would remain with ratepayers." SDG&E, in turn, "would retain as its property $173 million in IT contract profits that SDG&E accrued prior to decision No. 01-01-061", the CPUC decision requiring SDG&E to use IT contracts to serve existing customers at cost-based rates, rather than reselling the energy for profit.

On September 24, 2002, a CPUC administrative law judge ("ALJ") rejected SDG&E's position that the IT contract profits should not be used to pay down the AB 265 shortfall. The ALJ held that "the phrase 'utility owned or managed generation asset' does not make a distinction between a generation asset that serves shareholder interests, such as a hedging instrument, and a generation asset that is used by the utility for the benefit of utility customers." The ALJ recommended that the CPUC require SDG&E to pay $130 million of its IT contract profits toward the AB 265 shortfall. The CPUC, however, rejected the ALJ's recommendation and instead found that "it would be in the best interests of ratepayers and SDG&E's financial integrity to adopt SDG&E's proposed settlement of its federal lawsuit and not to determine whether the IT contracts were ratepayer or shareholder assets. According to the decision, the $24 million write-off plus revenues from other sources identified during the [CPUC] hearing had the potential to eliminate the AB 265 shortfall by the end of 2003." Therefore, the CPUC approved the settlement agreement.

UCAN then brought suit against the CPUC and SDG&E, which centered around the CPUC's agreement with SDG&E that it could retain IT contract profits as shareholder assets, rather than using those profits to pay down the AB 265 shortfall. UCAN thus alleged that the CPUC's approval of the settlement agreement violated AB 265's requirement that SDG&E assets be used to pay down the budget shortfall and not just the approximately half of the profits allocated by the settlement agreement for this purpose. SDG&E argued that the IT contracts were shareholder assets and were not "utility-owned or managed generation assets" under AB 265. Therefore, according to SDG&E, it was not required to use the IT contract profits to pay the AB 265 shortfall. SDG&E urged that as opposed to "utility-owned or managed generation assets," the IT contracts were hedge contracts intended to minimize shareholders' exposure from deregulation. UCAN countered that in 1997 and the first 3 months of 1998, SDG&E had used energy supply from the IT contracts to supply power to SDG&E customers, rather than to hedge against market fluctuations.

The court agreed with UCAN that both shareholder and ratepayer assets are "utility owned or managed generation assets," which generally should be used to pay down the AB 265 shortfall. Nevertheless, the court ruled that the settlement should not be set aside and noted that "[CPUC] decisions are presumed valid," and that the CPUC had "considered the interests of ratepayers, SDG&E shareholders and the public in general, and decided that the agreement was appropriate as a matter of public utility policy." The court stated "the [CPUC] is not an ordinary administrative agency, but a constitutional body with far-reaching powers, duties and functions."