Court Upholds Edison Rescue

In a victory for Southern California Edison, the California Supreme Court on Thursday upheld a rescue agreement crafted in secret with state regulators that allowed the utility to pay off $3.6 billion in debts run up during the energy crisis.

The court unanimously turned down claims that the California Public Utilities Commission lacked the authority to negotiate the deal. And on a 6-1 vote, the justices said that because the commission’s closed-door settlement talks with the Rosemead company were about litigation, they didn’t violate an open-meeting law.

The ruling disappointed consumer activists who challenged the agreement’s legality. They wanted SCE to refund $3.6 billion to customers from a surcharge it used to cover the utility’s debts.

For SCE, the decision will help bring back its lost investment-grade credit rating and allow it to begin paying a dividend again to common shareholders by the end of the year, said John E. Bryson, chief executive of SCE’s parent company, Edison International.

The utility, which paid off its energy debts while it waited for a final court ruling and recently cut electricity rates for customers, has been unable to shake the junk-bond rating partly because of uncertainty over the litigation.

“It is a landmark not just for our company but, more broadly, in restoring stability to the California electric system,” Bryson said. “The decision is vital to our customers because we should be able to improve our credit standing, which in turn allows us to make efficiently the investments that are absolutely required for the California electric system to function reliably.”

Gov. Gray Davis said the high court decision validated the state’s approach to dealing with the energy crisis of 2000 and 2001 and restoring the financial health of its utilities.

“It was no accident that the lights did not go out here when they went out in New York, because we have more capacity and more conservation and now people are starting to see rebates” through decreased rates charged by SCE, Davis said.

The agreement was a settlement of a federal lawsuit brought by SCE, which claimed the state utilities commission was driving the utility to ruin by denying it the right to recover the full cost of the power it was buying during the energy crisis.

The settlement, approved by a federal district court, permitted SCE to apply $3.6 billion from an electricity surcharge to its $6 billion in debts. The Utility Reform Network, a consumer group, appealed to the U.S. 9th Circuit Court of Appeals.

The 9th Circuit referred the case to the California court to determine whether any state laws had been violated. Thursday’s ruling is expected to end the litigation because the federal court already has ruled for Edison on the federal issues raised in the lawsuit.

“The court has, in effect, said that the entire burden of the failed deregulation of the state should fall entirely on consumers and that shareholders should not share any risk,” said Bob Finkelstein, supervising attorney for the Utility Reform Network.

Bryson rejected the consumer group’s claim, pointing out that Edison shareholders have not received common stock dividends for three years and have seen the company’s stock price fall from a high of about $25 to a low of about $6.

“The effect of the power crisis was harsh with respect to the company and its stockholders,” Bryson said during a news conference. On Thursday, Edison shares jumped 53 cents to $18.89 on the New York Stock Exchange.

The court based its decision Thursday in part on the fact that the PUC did not raise rates to finance the settlement. Instead, the commission kept a 4-cent-per-kilowatt-hour surcharge in place that was supposed to pay for future electricity purchases and permitted the utility to use it to pay bills from previous energy purchases.

Consumer activists contended rates would have gone down but for the extended surcharge.

But Justice Kathryn Mickle Werdegar, writing for the majority, said there was no evidence the PUC would have cut rates if it had not entered into the settlement.

“To assert PUC would have reduced rates at any particular time, if not bound by the settlement to maintain them, would be to speculate,” she wrote.

The state high court said the PUC had the right to receive advice from its lawyers about the proposed settlement in a closed session. The PUC announced terms of the settlement afterward.

Consumer activists had cited a government code that says rate changes can be made only in a public session.

But Werdegar said the rates were not changed.

“The central commitment the PUC made in the settlement was to maintain the then-existing rates for an agreed period,” Werdegar wrote.

Justice Marvin Baxter dissented, arguing that the PUC should have acted in an open session and should have approved the settlement only after formally finding the rates were justified.

The commission “approved in secret a legal settlement in which it guaranteed Southern California Edison billions of dollars in past and prospective rate relief and thus ‘changed’ the rates to be paid by SCE’s customers,” Baxter wrote.

Baxter complained that the ruling would invite government agencies to conduct their most important business behind closed doors “through the device of settling litigation between themselves and the entities they regulate.”

Because of falling electricity rates, SCE was collecting revenue in excess of its costs by 2001, Baxter wrote. Those rates included the kilowatt surcharge that had been granted during a time of extremely high wholesale power prices, and which was used to pay off debt.

Gary M. Cohen, former general counsel of the PUC who represented the commission in the litigation, said Thursday’s decision confirmed that agencies can regulate utilities by determining their costs and reimbursing them for those costs.

Cohen said the PUC acted in closed session in an extraordinary circumstance because SCE was on the verge of declaring bankruptcy.

“I don’t think this case is going to provide a precedent for how the commission is going to decide things under normal circumstances,” he said.

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Dolan reported from San Francisco and Rivera Brooks from Los Angeles. Times staff writer Patrick McGreevy contributed to this report.