Southern California Edison Company v. Loretta M. Lynch Henry M. Duque Richard A. Bilas Carl W. Wood Geoffrey F. Brown, Commissioners of California Public Utilities Commission, Utility Reform Network, Defendant-Intervenor-Appellant. Southern California Edison Company, Reliant Energy Services, Inc. Mirant Americas Energy Marketing, Lp, Intervenors-Appellants v. Loretta M. Lynch Henry M. Duque Richard A. Bilas Carl W. Wood Geoffrey F. Brown, Southern California Edison Company, California Manufacturers and Technology Assn., Intervenor-Appellant v. Loretta M. Lynch Henry M. Duque Richard A. Bilas Carl W. Wood Geoffrey F. Brown, in Their Official Capacities as Commissioner of the California Public Utilities Commission
Docket: 01-56879
Court: Court of Appeals for the Ninth Circuit; September 23, 2002; Federal Appellate Court
Southern California Edison Company (SoCal Edison), a retail electric utility, initiated legal action against the California Public Utilities Commission (CPUC) Commissioners, challenging regulatory practices under the stipulations of Assembly Bill 1890 (AB 1890). This legislation, enacted in 1996, aimed to deregulate California's power industry to foster competition and reduce electricity prices for consumers. Under previous laws, the CPUC regulated retail electricity rates, which included costs for constructing power plants and service obligations. The appeal reviewed a district court's order that entered a stipulated judgment in favor of SoCal Edison, affirming the judgment in part and certifying certain questions of California state law to the California Supreme Court. The case highlights the transition from a regulated electricity market to a competitive framework as outlined in AB 1890.
The legislature acknowledged the risk of 'stranded costs' for utilities transitioning from a regulated to a competitive market, which are costs incurred by electrical suppliers that cannot be recovered due to changes in rate structure. Under AB 1890, the Commission was tasked with calculating stranded costs, allowing utilities to recover these through cost-recovery plans during a rate freeze intended to maintain profitability. This transition required utilities to dismantle their vertically-integrated structures, sell off generation plants, and rely on the California Power Exchange Corporation (CalPx) for wholesale power purchases.
In 2000, a spike in wholesale electricity prices led to significant debt for SoCal Edison, which could not pass these costs to customers due to the rate freeze, resulting in over $6.5 billion in obligations. A power crisis ensued, prompting regulatory actions by the Federal Energy Regulatory Commission (FERC), while subsequent legislative measures aimed to address the crisis altered the effects of AB 1890. However, SoCal Edison claimed these changes did not resolve its financial issues, as a Commission decision prevented it from recovering costs incurred during the rate freeze. Consequently, SoCal Edison initiated legal action for injunctive and declaratory relief, arguing that the Commission's refusal to raise retail rates in light of increasing wholesale costs violated the federal filed-rate doctrine, which prohibits state interference with recovery of costs governed by FERC tariffs.
The Utility Reform Network (TURN), a non-profit organization representing residential and small-commercial utility consumers, initially faced a denial from the district court to intervene in a case involving SoCal Edison. After some preliminary proceedings, TURN was granted permissive intervention. Subsequently, the case was stayed to facilitate settlement negotiations, leading to a stipulated judgment where existing utility rates would remain unchanged for two years, allowing SoCal Edison to recover approximately $3.3 billion of its $6.3 billion loss from a previous rate freeze. TURN objected to the stipulated judgment, but after a brief period for objections and responses, the district court approved it. TURN then appealed this decision.
The district court's ruling was affirmed on all claims except those based on California state law, which were certified to the California Supreme Court. The court also upheld the denial of intervention motions from Reliant Energy Services, Mirant Americas Energy Marketing, and the California Manufacturers and Technology Association (CMTA). The district court's denial of intervention was reviewed de novo, particularly regarding the timeliness of the motions, which was reviewed for abuse of discretion. The court clarified that to intervene as of right under Rule 24(a), an applicant must demonstrate: a significant protectable interest in the subject matter, potential impairment of that interest by the case's outcome, timely application, and inadequate representation of their interest by existing parties.
The district court denied the Proposed Intervenors' motions to intervene as of right, finding they failed to demonstrate a significant protectable interest related to the subject of the action. The criteria for a significant protectable interest require that the applicant assert a legally protected interest and that this interest be related to the plaintiff's claims, meaning the resolution must affect the applicant. Reliant and Mirant argued they had a significant interest due to a $260 million debt owed by SoCal Edison, but the court ruled their claims were contingent and not directly related, thus not meeting the required threshold for intervention. CMTA's generalized interest as an association of companies purchasing electricity was also deemed insufficient for intervention, as it lacked the necessary specificity to establish a legally protectable interest. The court further affirmed its decision to deny permissive intervention for Reliant, Mirant, and CMTA due to their failure to meet the criteria of independent jurisdictional grounds and common questions of law or fact, emphasizing the court's discretion in granting or denying such interventions.
Proposed Intervenors do not satisfy the threshold requirements for permissive intervention due to the absence of a common question of law or fact between their claims and the main action. Their concerns regarding SoCal Edison’s potential repayment do not align with the issues in the underlying action, which prevents them from meeting the necessary criteria. The intervention rule is designed to avoid the creation of new lawsuits by intervenors. Additionally, Reliant, Mirant, and CMTA argue that they have standing to appeal the Stipulated Judgment despite the denial of their motions to intervene. However, they do not meet the criteria for nonparty standing to appeal, which requires participation in district court proceedings and exceptional circumstances favoring the appeal. Proposed Intervenors did not participate beyond their intervention applications, contrasting with the precedent set in Bank of America, where the appellant actively engaged in court proceedings. Furthermore, the Rooker-Feldman doctrine, which limits federal district court jurisdiction over state court decisions, does not apply to actions by the California Commission, as it is an administrative agency, not a court. The Supreme Court has clarified that this doctrine does not impede federal review of state administrative agency decisions.
The Commission contends that the Rooker-Feldman doctrine bars federal district court jurisdiction over Verizon's claim, as it limits federal courts to original jurisdiction and prohibits appellate jurisdiction over state court judgments, which is reserved for the Supreme Court. This doctrine does not apply to judicial reviews of executive actions by state administrative agencies. TURN's assertion that a collateral state court challenge by PG&E undermines federal jurisdiction is incorrect, as the Rooker-Feldman doctrine does not prevent jurisdiction when the federal litigant was not involved in the state case. SoCal Edison, not being a participant in PG&E's challenge, confirms that the federal court retains jurisdiction, and mere amicus participation does not invoke the Rooker-Feldman bar. Additionally, TURN argues for abstention under the Burford doctrine, which allows federal courts to refrain from jurisdiction in cases involving complex state law matters with significant public importance where state review is timely and adequate. For Burford abstention to apply, specific factors must be satisfied: the state must centralize challenges to agency actions in a particular court, federal issues must intertwine with complex state law issues, and federal review could disrupt state policy coherence.
The state has not designated a specific court for challenges to administrative actions and has waived any abstention defense regarding SoCal Edison's action while consenting to the Stipulated Judgment. A state can voluntarily submit to federal jurisdiction despite a potential abstention claim. Consequently, the criteria for Burford abstention were not met, and the preference of a non-state intervening party for a different forum is irrelevant. The district court's decision to proceed without abstaining was proper.
Additionally, the district court acted within its authority by approving the stipulated settlement between SoCal Edison and the Commission without the consent of TURN, an intervenor. An intervenor cannot prevent other parties from settling their disputes, and while they can present evidence and objections, they do not hold the power to block a consent decree solely by withholding consent. TURN's claims regarding the protection of refund rights and securing lower rates do not constitute valid claims warranting intervention as defined in prior case law. As a result, TURN's consent was not necessary for the district court's acceptance of the Stipulated Judgment. Furthermore, TURN's due process rights were not violated, as they were given adequate opportunity to voice opposition to the settlement.
District courts possess inherent power to manage their dockets, with appellate review being highly deferential. Reversal of a district court's decisions on litigation management occurs only if there is an abuse of discretion or a deprivation of due process as defined by the Fifth or Fourteenth Amendments. Due process requires that affected parties have the opportunity to be heard meaningfully. In assessing the sufficiency of notice, courts consider the private interest at stake, the risk of erroneous deprivation through the procedures used, the potential value of additional safeguards, and the government's interests, including administrative burdens.
In the case at hand, the district court expedited the notice and hearing process, and TURN filed a comprehensive brief addressing key issues. TURN's opponents also responded within the expedited schedule. However, TURN did not demonstrate the probable increased value of alternative procedures or the risk of erroneous deprivation. TURN's main issue pertained to the adequacy of consideration given to its arguments, which relates to the merits rather than procedural due process. Consequently, TURN failed to show that the expedited schedule prejudiced its ability to present its case.
Furthermore, the district court's approval of the Stipulated Judgment did not violate the Tenth Amendment. The application of federal preemption, as sought by SoCal Edison, does not encroach upon rights reserved under the Tenth Amendment. The court noted that federal regulation of intrastate operations of public utilities is valid if Congress has the authority to enact such legislation and intended to displace state law in that area.
The district court's approval of the Stipulated Judgment does not compel state involvement in enforcing federal laws or require state legislation to adopt federal regulations, as seen in Printz v. United States and New York v. United States. Instead, it affirms a settlement of a valid federal preemption claim, with the Tenth Amendment not serving as a barrier to enforce consensual judgments. The court had the authority under Article III to approve the settlement without unconstitutionally commandeering California’s regulatory system.
However, there is a critical concern regarding the agreement's compliance with state law, particularly whether the California Public Utilities Commission (Commission) had the authority to consent to the Stipulated Judgment. If the agreement violated state law, it could render the judgment void. Previous cases illustrate that state officials cannot enter into consent decrees that exceed their legal authority.
Substantively, the Stipulated Judgment raises questions about its compliance with California Public Utilities Code § 368, which mandates specific rate-setting procedures and timelines. The judgment seems to extend the rate freeze beyond the legally stipulated date of March 31, 2002, allowing SoCal Edison to recover prior procurement costs in violation of this statute. The contested terms indicate that the recovery period defined in the Stipulated Judgment allows for collections beyond the date specified in § 368, which restricts such recoveries.
The settlement in question seemingly breaches California Public Utilities Code § 368's rate-freeze guarantee, which protects consumers from price hikes during the transition to a competitive market. The Stipulated Judgment permits SoCal Edison to retain above-rate-freeze-level rates established in 2001 for the purpose of compensating the state for wholesale power procurement, thereby allowing the utility to impose a surcharge exceeding the rates effective on June 10, 1996.
Commission President Loretta Lynch testified that the Commission is bound by state law, specifically under AB 1890, which prevents recovery of such costs, and that federal law cannot override state law in this context. Despite claims by SoCal Edison and the Commission suggesting legislative changes restored the Commission's authority to allow cost recovery post-rate freeze, it is argued that these amendments (AB 6X and AB 1X) were not intended to absolve utilities of their regulatory commitments but rather to protect the state from potential utility failures in providing power.
Additionally, the interpretation that the legislature intended to repeal the earlier provisions is contested, as the legislative history does not indicate such intent. The 2001 legislation does not contradict the rate-freeze or the utilities' obligation to absorb the risk of unrecovered stranded costs.
On a procedural note, the Stipulated Judgment raises concerns about compliance with state laws governing open government, notably the Bagley-Keene Open Meeting Act and the Public Utilities Code, suggesting that the Commission may have adopted the agreement without proper evidentiary support or transparency.
The Stipulated Judgment is argued to violate the Bagley-Keene Act due to being approved in a secret meeting, contravening the requirement under Section 11126(d)(1) that meetings affecting rate changes be public. The Judgment removes rate-payers' rights to refunds and prevents potential reductions in rates, thereby triggering the open meeting requirement. SoCal Edison and the Commission contend that the Judgment does not change existing rates but obligates the Commission to maintain current rates. However, the cited provision merely defines "settlement rates" without imposing any obligation on the Commission.
The Commission asserts it can settle litigation in closed session under Section 11126(e)(1), which allows private consultations with legal counsel regarding pending litigation. Nonetheless, this section does not permit the agency to take action or issue regulatory orders in closed sessions. Additionally, the decision to eliminate ratepayer refund rights and maintain higher rates without a public hearing or findings is seen as a violation of Public Utilities Code Section 454, which mandates a public hearing and justification for any rate changes.
SoCal Edison and the Commission argue that Section 454 does not apply since they are not increasing rates but merely agreeing not to change them. However, this interpretation is inconsistent with the statute's text and the Judgment's implications, as the agreement entails more than simply maintaining existing rates.
The Stipulated Judgment allows the Commission to refrain from penalizing SoCal Edison for not meeting capital-structure requirements and limits its ability to unreasonably withhold consent for dividend payments. It permits SoCal Edison to increase rates by up to $900 million annually for capital additions, approve compromises on claims against wholesale-power sellers, and recover past costs not covered under the TURN Accounting Proposal. These changes are classified as alterations to SoCal Edison's rates, leading to an estimated $3.3 billion increase in electric costs for ratepayers.
From a legal standpoint, state officials cannot enter into a federally-sanctioned consent decree beyond their state law authority. California's Constitution prohibits agencies from agreeing to refrain from enforcing laws that have not been deemed unconstitutional by an appellate court. By accepting this judgment, the Commission effectively chose not to enforce limits on utilities' transition cost recovery and the required procedures for rate orders. This exemption from AB 1890 and the related injunction raises concerns about the validity of the Stipulated Judgment under California law.
While this interpretation of state law is not definitive and federal courts must adhere to the highest state court's rulings, there is no binding precedent from California appellate courts on these issues. Therefore, the case is eligible for certification to the California Supreme Court, as the resolution will significantly impact California law and its citizens. The district court's judgment is affirmed except for the state law claims, which are certified to the California Supreme Court for further consideration, with proceedings stayed pending their response.
The district court's stipulated judgment is under scrutiny for potential violations of several legal provisions:
1. Assembly Bill 1890, specifically section 368, which may have been breached.
2. The Bagley-Keene Open Meeting Act (Cal. Gov't Code 11120-11132.5), concerning the procedures used to enter the stipulated judgment.
3. Public Utilities Code section 454, which prohibits changes to utility rates without a public hearing and requisite findings.
All proceedings in this case are stayed pending responses to certified questions directed to the Supreme Court of California. Should the Supreme Court decline to certify, the Ninth Circuit will proceed based on its interpretation of California law. The order includes a directive for the Clerk of the Court to transmit relevant documents to the California Supreme Court and requires all parties to submit their briefs and excerpts from this Court to the California Supreme Court. The case is withdrawn from submission until further notice.
The case involves Southern California Edison Company as the plaintiff-appellee against various defendants, including commissioners of the California Public Utilities Commission. The utility reform network is noted as a defendant-intervenor-appellant, with multiple other intervenors also involved. Counsel for the parties is listed, detailing their affiliations and roles in the case.
Olson LLP represents the plaintiff-appellee, while various law firms represent intervenor-appellants Reliant Energy Services, Inc., Mirant Americas Energy Marketing, LP, and California Manufacturers and Technology Association. Key legal questions include whether the stipulated judgment violates Assembly Bill 1890, the Bagley-Keene Open Meeting Act, and Public Utilities Code § 454 concerning utility rate changes without a public hearing. The court recognizes the importance of resolving these state law issues, as federal questions have been settled, and California's highest court is the authoritative source for state law. Certification to the California Supreme Court is deemed necessary since California appellate court decisions do not provide controlling precedent on the matter. The resolution of these issues is expected to significantly impact California law and future administrative proceedings. The Ninth Circuit Clerk has been instructed to transmit relevant materials to the California Supreme Court. Additionally, the excerpt references legal precedents regarding federal jurisdiction limits and abstention doctrines pertinent to the case.
