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CPUC, Gary M. Cohen, Geoffrey Brown, Henry Weissmann, Jeffrey Bleich, Michael Peevey, Munger Tolles & Olson, O’Melveny & Myers, Peter Arth, PG & E, Ronald Olson

PG & E CORPORATION, Petitioner, v. PUBLIC UTILITIES COMMISSION, Respondent; Office of Ratepayer Advocates et al., Real Parties in Interest (TLR Note: Notice Henry Weissmann and RS Jeffrey Bleich of Munger Tolles & Olsen)

PG CORPORATION v. PUBLIC UTILITIES COMMISSION

PG & E CORPORATION, Petitioner, v. PUBLIC UTILITIES COMMISSION, Respondent; Office of Ratepayer Advocates et al., Real Parties in Interest. [And five other cases.].

Nos. A099858, A099863, A099864, A100892, A100895, A100896, A100897.

— May 21, 2004

 Orrick, Herrington & Sutcliffe, Frederick Brown, William F. Alderman, Howard M. Ullman, David T. Alexander, Joseph M. Malkin;  Bruce Worthington, Gary P. Encinas, San Francisco, CA, for Petitioner PG & E Corporation.Munger Tolles & Olson, Henry Weissmann, Jeffrey L. Bleich, San Francisco, CA, Beong-Soo Kim, Los Angeles, CA, Barbara E. Mathews, Rosemead, CA, for Petitioner Edison International.David E. Van Iderstine, Rosemead, CA, for Petitioner Southern California Edison Company.O’Melveny & Myers, John W. Stamper, Sharon L. Tomkins, Marc S. Williams, Los Angeles, CA;  John R. Light, Los Angeles, CA, David B. Follet, David J. Gilmore, for Petitioner Sempra Energy.Roger J. Peters, Christopher J. Warner, Michelle L. Wilson, Shirley A. Woo;  Heller, Ehrman, White & McAuliffe, Jonathan P. Hayden, Sheldon H. Jaffe, San Francisco, CA, for Petitioner Pacific Gas and Electric Company.O’Melveny & Myers, John W. Stamper, Sharon L. Tomkins, Marc S. Williams, Los Angeles, CA, for Petitioner San Diego Gas and Electric Company.Lionel B. Wilson, Gary M. Cohen, Mary F. McKenzie, Mary M. Adu, Dale Holzschuh, Laurence G. Chaset, San Francisco, CA, for Respondent Dennis J. Herrera, City Attorney, David F. Campos, Joseph Peter Como, Deputy City Attorneys, for Real Party in Interest City and County of San Francisco.Matthew Eric Freedman, San Franciscon, CA, for Real Party in Interest The Utility Reform Network.

I. INTRODUCTION

Disputing the jurisdiction of the Public Utilities Commission (PUC or Commission) over entities other than public utilities, the parent holding companies of California’s three large investor-owned electric utilities seek to be dismissed from a pending PUC proceeding investigating actions taken by the holding companies and their utility subsidiaries during the electricity energy crisis of 2000 and 2001.   The holding companies and their utility subsidiaries also challenge an interim opinion of the PUC interpreting one of the conditions imposed at the time the utilities sought approval to form holding company structures.

The challenged rulings arise out of an investigation initiated by the PUC during the height of California’s electricity energy crisis in 2001.  (See Cal.P.U.C. Order Instituting Investigation, Investigation No. 01-04-002, 2001 WL 710117 (Apr. 3, 2001) [2001 Cal.PUC Lexis 405] (hereafter Order Instituting Investigation).)   In addition to naming the utilities as parties to the investigation, the PUC also included as parties their parent holding companies-Edison International (EIX), Sempra Energy (Sempra), and PG & E Corporation (PG & E Corporation) (collectively, the holding companies).

The PUC’s investigation relates back to a series of proceedings in the 1980’s and 1990’s in which California’s investor-owned electric utilities each sought approval to reorganize under a holding company structure, which would permit each utility to become the wholly owned subsidiary of a holding company.   The PUC approved the requests of the three utilities-Southern California Edison Company (Edison), San Diego Gas & Electric Company (SDG & E), and Pacific Gas and Electric Company (PG & E Utility) (collectively, the utilities)-subject to certain conditions referred to as the holding company conditions.   The holding company conditions were intended to protect ratepayers and to address the potential for abuse arising from the holding company structure.

 One of the holding company conditions is the so-called first priority condition, also referred to as the capital requirements condition,1 which in general requires that the holding companies give first priority to the capital requirements of their utility subsidiaries as determined to be necessary to meet their obligation to serve.   The investigation initiated by the PUC in 2001 sought to determine, among other things, whether the holding companies had violated the first priority condition by failing to infuse capital into their financially distressed utility subsidiaries.

Fundamentally, these seven petitions raise two issues.   The threshold issue is whether the PUC has jurisdiction to enforce the holding company conditions against the holding companies.   The second issue raised by these petitions concerns the PUC’s initial interpretation of the first priority condition.   We have consolidated the three petitions challenging jurisdiction;  we have separately consolidated the four petitions raising substantive issues;  and we have granted a writ of review in each consolidated proceeding.   We now order all seven cases consolidated for purposes of decision.

On the jurisdictional question, we affirm the PUC’s decisions denying the holding companies’ motions to dismiss.  (Cal.P.U.C. Dec. Nos. 02-01-037 (Jan. 9, 2002) [2002 Cal.PUC Lexis 7] & 02-07-044, 2002 WL 31006238 (July 17, 2002) [2002 Cal.PUC Lexis 430].)   Under the circumstances presented here, the PUC has jurisdiction over a holding company to enforce conditions imposed by the PUC pursuant to its statutory authority to approve applications by public utilities for certain mergers, acquisitions, changes in control, or issuances of securities.  (See Pub. Util.Code,2 §§ 701, 818, 819 & 854.)   On the interpretation of the first priority condition, we conclude the issue is not yet ripe for review.  (Cal.P.U.C. Dec. Nos. 02-01-039 (Jan. 9, 2002) [2002 Cal.PUC Lexis 5] & 02-07-043, 2002 WL 31006348 (July 17, 2002) [2002 Cal.PUC Lexis 440].)

II. FACTUAL AND PROCEDURAL BACKGROUND

A. The Holding Company Decisions1. SDG & E I

In 1985, SDG & E was the first electricity utility to apply to the PUC to reorganize under a holding company structure in order to facilitate the  decision of SDG & E management to diversify its business.  (Re San Diego Gas and Electric Co. (1986) 20 Cal.P.U.C.2d 660, 662 (SDG & E I ).)   SDG & E sought approval of its proposed reorganization under section 854, which provides that no person or corporation may acquire or control a public utility, either directly or indirectly, without first securing the authorization of the PUC.3 (SDG & E I, supra, 20 Cal.P.U.C.2d at p. 662.)   The proposed reorganization took the form of a reverse triangular merger, in which SDG & E would become the wholly owned subsidiary of a newly formed public utility holding company that would own the stock of the regulated utility and nonregulated affiliated enterprises.  (Ibid.;  cf.  Re Pacific Gas and Electric Co. (1996) 69 Cal.P.U.C.2d 167, 180 & fn. 3 [describing reverse triangular merger] (PG & E I ).)

The PUC ultimately approved SDG & E’s application subject to 20 conditions intended to insulate utility operations and ratepayers from potentially adverse consequences of diversification.  (SDG & E I, supra, 20 Cal.P.U.C.2d at pp. 662, 676-686.)   Several of these conditions related to the maintenance of the utility’s financial strength.  (Id. at p. 681.)   Among these financial conditions were the “balanced capital structure” condition, which requires the holding company to maintain a balanced capital structure in its utility subsidiary.   Another financial condition was the “stand-alone dividend” condition, which requires the utility to continue to set its dividend policy as if it were a stand-alone entity.   As relevant here, one of the conditions imposed upon SDG & E and its holding company was the “capital requirements” or “first priority condition” condition, which reads as follows:  “The capital requirements of the utility, as determined to be necessary to meet its obligation to serve, shall be given first priority by the Board of Directors of [the holding company], and SDG & E.” (Ibid.) Other than describing the first priority condition as a condition related to “financing priorities,” the PUC’s 1986 decision approving SDG & E’s application contains no discussion of the meaning, purpose, or interpretation of the first priority condition.   (Ibid.)

In the SDG & E I decision, the Commission devoted considerable attention to the PUC’s authority to enforce the conditions.  (SDG & E I, supra, 20 Cal.P.U.C.2d at pp. 686-687.)   Parties opposing SDG & E’s application “allege[d] that the Commission has questionable jurisdiction to enforce any conditions adopted in this order as against [the holding company].”  (Id. at p. 686.)   In contrast to the position SDG & E asserts now in its petition before  this court, SDG & E at the time argued that the PUC possesses the authority to enforce the conditions as against SDG & E and its holding company parent, citing section 2111 4 as evidence of the PUC’s ability to enforce Commission orders violated by entities other than public utilities.   Indeed, SDG & E conceded the PUC’s jurisdiction by itself proposing conditions governing the holding company’s activities.   Additionally, if the PUC deemed it necessary, SDG & E proposed entering into a contract with its holding company parent agreeing to the performance of the conditions and naming the PUC as a third-party beneficiary to the agreement.   Thus, according to SDG & E, the PUC would be entitled to sue either SDG & E or its parent holding company for specific performance of any of the conditions.  (20 Cal.P.U.C.2d at p. 686.)

The PUC concluded in SDG & E I that it has jurisdiction over the holding company parent, reasoning as follows:  “Section 854 vests in this Commission a broad authority to approve or deny applications for transfers of utility ownership or control.   Implicit in this authority is the right to place reasonable conditions upon the transferor and/or transferee should a need for conditions be shown.   SDG & E, on its own behalf and [of its holding company parent], itself argues this proposition.   We cannot believe that the right to impose conditions carries with it no right to enforce those conditions;  without the latter right, the former is meaningless.”  (SDG & E I, supra, 20 Cal.P.U.C.2d at p. 686.)   The PUC went on to explain why a contract between SDG & E and its holding company parent incorporating the PUC’s conditions was unnecessary, stating, “The Commission is empowered in myriad ways to secure compliance with its orders.   The broad regulatory discretion described in the Public Utilities Act is ample evidence of [this] fact.   SDG & E cites the most extreme example of our powers, the ability to pursue contempt remedies for regulatory law violations.   SDG & E and [its parent holding company] must, under the terms of Section 854, submit to the Commission’s fullest authority if they in fact intend to consummate the transactions described in their application.   Having so submitted, SDG & E and [its parent holding company] need not execute their proposed contract;  it would be a superfluous act in light of our existing authorities to pursue the enforcement of any of the foregoing adopted conditions.” 5  (20 Cal.P.U.C.2d at pp. 686-687.)

  Ultimately, SDG & E chose not to form a holding company structure in the mid-1980’s because it was unwilling to agree to some of the PUC’s conditions.

2. Edison

One year after the decision in SDG & E I, Edison applied to the PUC under section 854 for approval to reorganize under a holding company structure implemented through a reverse triangular merger.  (Southern California Edison Co. (1988) 27 Cal.P.U.C.2d 347, 357, 1988 WL 391351 (Edison ).)   The PUC approved the application, again subject to certain conditions intended to mitigate the dangers stemming from the reorganization so that ratepayers would be indifferent to the change.   The PUC’s decision in SDG & E I formed the touchstone for the analysis of Edison’s application.   (See Edison, at p. 357.)   Indeed, in considering Edison’s application, the PUC asked Edison to comment on each of the 20 conditions imposed in the SDG & E decision.  (Ibid.) Once again, the first priority condition was included among the conditions imposed by the PUC.6 (Edison, at p. 368.)   Edison agreed to this condition without objection, and the decision contains no discussion of the meaning or application of the first priority condition.   (Ibid.)

Unlike the decision in SDG & E I, which included a lengthy discussion of jurisdictional concerns, the 1988 Edison decision touches on jurisdictional issues only briefly.   Responding to an argument that a holding company structure would reduce the PUC’s regulatory oversight, the PUC stated that “[w]e do not agree that the Commission needs to exert direct authority over the holding company to regulate the utility effectively․ The utility must still respond to Commission orders regardless of what the parent may do.”   (Edison, supra, 27 Cal.P.U.C.2d at p. 361.)   However, in a dissent from the decision to permit Edison to form a holding company structure, Commissioner Donald Vial 7 expressed his concern that the decision would limit the PUC’s ability to control or regulate the new affiliate relationships under the holding company structure.  (Edison, at p. 395 (disn. opn. of Comr. Vial).)

Edison chose to proceed with its plans to adopt a holding company structure.   Accordingly, as required by the PUC’s decision in Edison, Edison  filed a written notice reflecting the agreement of Edison and its parent holding company to the conditions imposed in the decision.   Like the decision in SDG & E I, the Edison decision did not require the utility to enter into a contract with its holding company parent incorporating the conditions imposed by the PUC. (See Edison, supra, 27 Cal.P.U.C.2d at pp. 374-376 [order approving reorganization].)

3. SDG & E II

In 1994, SDG & E returned to the PUC, once again seeking authorization to reorganize under a holding company structure.  (Re San Diego Gas and Electric Co. (1995) 62 Cal.P.U.C.2d 626, 632, 1995 WL 768624 (SDG & E II ).)   At the time, the PUC permitted the application to proceed under section 818 of the Public Utilities Code instead of section 854 because the PUC determined the reorganization involved no change in actual control of SDG & E. Section 818 covers a utility’s issuance of certain debt or equity instruments, while section 854 relates to a change in utility ownership or control.8

The decision to consider the application under section 818 did not result from a change in the nature of the proposed transaction, which still involved a reverse triangular merger in which SDG & E would end up becoming the wholly owned subsidiary of a parent holding company.  (See SDG & E II, supra, 62 Cal.P.U.C.2d at p. 633.)   Rather, the decision to consider the application under section 818 appears to have been motivated by a change in the wording of section 854, which had been amended by 1989 legislation.   The 1989 amendments to section 854 require the PUC to make a number of specific findings before authorizing a change in control of a utility,9 and the revised section 854 places the burden on the party seeking to obtain control of a public utility to prove by a preponderance of the evidence that the requirements of the section are met.  (See former § 854, as amended by Stats.1989, ch. 484, § 1, pp. 1706-1707.)

  Despite considering SDG & E’s application under section 818 instead of section 854, the PUC once again imposed certain conditions on the utility and its holding company in order to maintain ratepayer indifference to the proposed reorganization.   Once again, the PUC referred back to its 1986 decision in SDG & E I as the genesis of the conditions imposed on utilities seeking to reorganize under holding company structures.  (SDG & E II, supra, 62 Cal.P.U.C.2d at p. 635.)   As before, the PUC imposed a first priority condition with wording similar to that adopted in the SDG & E I and Edison decisions:  “The capital requirements of SDG & E, as determined to be necessary to meet its obligation to serve, shall be given first priority by the Board of Directors of Parent and SDG & E.” (SDG & E II, at p. 651.)

The issue of the PUC’s jurisdiction arose in the SDG & E II decision in the context of a request by the PUC’s Division of Ratepayer Advocates to impose a condition preserving the PUC’s regulatory control over SDG & E’s activities.   (SDG & E II, supra, 62 Cal.P.U.C.2d at p. 643.)   The PUC rejected the proposal, reasoning that the proposed reorganization would not diminish its regulatory control and that “[a] condition neither adds to nor diminishes our regulatory control.” 10  (SDG & E II, at p. 643.)   The PUC also explained that “if [it] imposed this condition, we could expect an endless litigation in which the condition would be invoked as establishing a “historical” test of utility regulation in 1995 as the standard by which all future regulation of SDG & E and its affiliates would be assessed.   Parent, SDG & E, the electric utility industry, and our regulatory role will continue to evolve in the future as we revisit the scope and scale of regulatory interests.”  (Ibid.)

Both the utility and the holding company passed board resolutions signifying their agreement with the conditions.   In 1996, SDG & E’s parent holding company, Enova Corporation, applied to merge with Pacific Enterprises to form a new holding company that would eventually become Sempra Energy (Sempra), the current holding company parent of SDG & E. The PUC approved that application pursuant to section 854, once more imposing certain conditions intended to protect the public interest, and requiring that the newly formed holding company agree to those conditions.

 4. PG & E

In 1995, PG & E Utility applied under section 818 to reorganize under a holding company structure, proposing a reverse triangular merger in which PG & E Utility would become the wholly owned subsidiary of newly created holding company.11  (PG & E I, supra, 69 Cal.P.U.C.2d at pp. 180-181 & fn. 3.) The PUC approved the application, subject again to conditions designed to maintain ratepayer indifference and protect the public interest, and subject to the agreement of the boards of directors of PG & E Utility and its holding company to the conditions.   Once again, the PUC referred back to the “history of conditions” associated with holding company reorganizations.   (Id. at p. 188.)   Among other things, the PUC conditioned its approval of PG & E Utility’s application on compliance with the first priority condition, which was recommended jointly by PG & E Utility and the PUC’s Division of Ratepayer Advocates.  (Id. at p. 194.)   As ultimately adopted by the PUC in a follow-up decision in 1999 (after an audit had been performed pursuant to the PG & E I decision), the PG & E first priority condition provides that “[t]he capital requirements of PG & E, as determined to be necessary and prudent to meet the obligation to serve or to operate the utility in a prudent and efficient manner, shall be given first priority by PG & E Corporation’s Board of Directors.”  (Re Pacific Gas and Electric Co. (1999) 86 Cal.P.U.C.2d 76, 90, 1999 WL 589171 (PG & E II ).)   The Division of Ratepayer Advocates proposed adding the language, “or to operate the utility in a prudent and efficient manner,” and PG & E Utility agreed to the revision.  (Ibid.)

Unlike the earlier holding company decisions, the 1996 PG & E I decision and the follow-up 1999 PG & E II decision contain no discussion of the PUC’s jurisdiction to enforce the conditions as against the holding company.   PG & E Utility and its holding company parent, PG & E Corporation, agreed to the PUC’s conditions.

 

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About Leslie Brodie

Leslie Brodie is a reporter, writer, blogger, activist, and a religious leader in the community.

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