Associated Press

SAN FRANCISCO, CA — A secretly negotiated deal that raised electricity rates for most California consumers by as much as 40 percent in 2001 was legal, the state Supreme Court has decided. Watchdog groups howled, but an aide to Gov. Gray Davis called the ruling an endorsement of the tough steps he took to resolve the state’s energy crisis.

The justices ruled Thursday the California Public Utilities Commission neither violated deregulation rules nor breached open meeting laws when it settled a lawsuit filed by Southern California Edison Co. The deal was reached after private meetings between commissioners, the governor’s staff and utility representatives.

“By stabilizing Edison, we were able to save the utility and now give the consumers the rate cuts they deserve,” said Steve Maviglio, spokesman for the governor, whose handling of the energy crisis has become a big issue in the state’s recall election.

The settlement allowed Edison to collect at least $3 billion in extra customer utility fees and pay off its debts, to the point that the PUC was able to cut electricity rates for SoCal Edison customers earlier this summer by up to 19 percent.

“It’s another critical step in restoring the financial health of the utilities and will help pave the way for additional cuts in rates in the months to come,” Maviglio said.

But that misses the point that consumers should have been spared, said Bob Finkelstein, a lawyer for the Utility Reform Network, which had challenged the rate hike in court. “If you keep rates high enough and long enough, eventually they will go down.”

The PUC settled the federal suit with Edison in October 2001 to help Edison pay debts by maintaining for two more years a temporary rate increase approved a year earlier. The PUC also allowed Pacific Gas & Electric Co. to collect a similar surcharge.

Consumer groups challenged the settlement after Edison and PG&E amassed billions in debts when wholesale electricity rates soared beyond the frozen retail rates that utilities could recover from customers in 2000 and 2001 under deregulation rules. The 9th U.S. Circuit Court of Appeals sent the issues resolved Thursday to the California Supreme Court.

After the utilities began paying more for electricity than they could charge under deregulation rules, they sued the PUC, arguing that federal energy rules demand they get compensated for the true cost of the electricity they are selling. The deal the PUC reached privately to settle Edison‘s suit allowed both utilities to generate billions in new revenues.

PG&E kept its suit against the PUC alive, and rather than settle, filed for bankruptcy protection. Proceeds from PG&E‘s rate hike are now being factored into its proposed deal to restore its solvency.

The Utility Reform Network and other watchdog groups said the decision means consumers, not utilities, must pay the price for California’s energy mess.

“What the Supreme Court has said here is the utility companies get to reap all the rewards of deregulation but when deregulation goes into the toilet, the utilities still win,” said Harvey Rosenfeld, of the Foundation for Taxpayer and Consumer Rights.

Edison International chairman and chief executive John Bryson called the ruling a “landmark” for the company and for the stability of California’s electric utility system.

Bryson dismissed critics of the settlement who charge that ratepayers are bearing the brunt of the state’s deregulation experiment – the company’s stock price and the suspension of shareholder dividends for the past two years show how the crisis hurt the company, he said.

“We were considerably adversely affected,” Bryson said.

In its unanimous decision, the court ruled that a 2001 bill approved by the Legislature gave the Public Utilities Commission the authority to increase rates so utilities could pay their expenses. The law, Assembly Bill 6X, demanded that the utilities not sell any of their power plants before 2007. Previous deregulation rules demanded a sell-off by Dec. 31, 2001.

The bill, in a bid to keep power generation in state, came as lawmakers scrambled to deal with power outages and spiking power prices. But a little noticed provision gave the PUC authority to make sure the utilities stayed solvent, the Supreme Court ruled.

Justice Kathryn Mickle Werdegar wrote the bill was a “major retrenchment” of the state’s 1996 deregulation scheme and granted the PUC the “authority to guarantee that the electric utilities would have the capacity and financial viability to provide power to California consumers.”

Assemblyman John Dutra, D-Fremont, who drafted the legislation, said he thought the court interpreted the law correctly.

First Amendment groups, meanwhile, decried the ruling, saying it gives public agencies the right to approve policies in private if the issue is in court. Justice Marvin R. Baxter, while supporting the majority’s conclusion that Dutra’s legislation legalized the rate hikes, wrote that the PUC violated open meeting laws.

The decision, he said, “opens the door to secret government-by-lawsuit, allowing governmental bodies to exercise significant portions of their regulatory authority in private.”

Terry Francke, of the First Amendment Coalition, agreed.

“This favors secrecy,” he said.

PG&E has 4.6 million residential and commercial customers in Northern and Central California. Edison serves 4.3 million Southern California customers. The state’s third largest utility, San Diego Gas & Electric Co., was not involved in this case.

The case is Southern California Edison v. Peevey, S110662.
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Associated Press Writer Gary Gentile in Los Angeles contributed to this report.

David Kravets has been covering state and federal courts for a decade.