Reply Brief — San Diego Gas & Electric Co. v. Public Utilities Commission

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No. 85-1080 suprerme Court, U.S. “|

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IN THE FrR 12 66B

Supreme Court of the United. States. se

October Term, 1985

SAN DIEGO GAS & ELECTRIC COMPANY,

Appellant,

ae

v.

PUBLIC UTILITIES COMMISSION OF THE

STATE OF CALIFORNIA,

Appellee.

ON APPEAL FROM THE SUPREME COURT OF

CALIFORNIA

SAN DIEGO GAS & ELECTRIC COMPANY’S

REPLY TO MOTIONS TO DISMISS OR AFFIRM OF

THE CALIFORNIA PUBLIC UTILITIES COMMISSION

AND THE CITY OF SAN DIEGO

Stephen L. Baum

Jeffrey L. Guttero

*Barton M. Myerson

William L. Reed

*Counsel of Record for Appellant

San Diego Gas & Electric Company

101 Ash Street

San Diego, California 92101

(619) 235-7818

INTERIM PRINTING & MAILING COMPANY

HOS WEST MORENA BOULEVARD, SAN DIEGO, CALLBPORNIA 92110— 278 WSO

II.

an

TABLE OF CONTENTS

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I eras ee a as ena os aes

oe lies oR et od a Sune ee awe eo ks

NEITHER THE COMMISSION NOR CITY

OFFER SUBSTANTIAL CHALLENGE TO

SDG&E’S ASSERTION IT WAS DENIED DUE

PROCESS BY THE COMMISSION’S FAILURE

TO FIND ANY ALTERNATIVE ACTION

WOULD HAVE AVOIDED THE DISALLOWED

EXPENSES

A. The Necessity For Determining A

Be. ee

B. SDG&E’s Excluded Testimony Would

Provide Evidence Of The Proper Standard....

THE EQUITABLE ESTOPPEL ARGUMENT

WAS ADEQUATELY RAISED BELOW ..........

ek ere ee ene eee ee re

-ii-

TABLE OF AUTHORITIES

Case Page

UNITED STATES SUPREME COURT CASES:

Braniff Airways Inc. v. Nebraska State Board,

Say USS. SOG CIO... 6 bene te we paeeevess ines 7

Giaccio v. Pennsylvania,

; Bb a OF | ree ee rc ae yi 4

New York ex rei. Bryant v. Zimmerman,

p> SSE OS. erie ee er pene 7

Perkins v. Elg,

207 L1S. 325 (0909)... iad oe satan seas 2

Securities & Exchange Cammission v. Chenery Corp,

DEG TLS, TC) jw osc ase oe eee ee: 3

West Ohio Gas Co. v. Public Utilities

Commission of Ohio (No. 1),

Se GIS. GF Cie cw oi ie laws deen snsevensacesess 4

CALIFORNIA PUBLIC UTILITIES COMMISSION DECISIONS

Decision No. 84-12-033,

Pacific Gas and Electric Co., (12/5/84) .........+-- 3

Decision No. 85-12-104,

SE EEA BRO) 5s occ <4 cake abe ea tennN eso 3

The City of San Diego (City) and the Public Utilities Commis-

sion of the State of California (Commission), respectively, filed a

Motion to Dismiss or Affirm and a Motion to Dismiss (Motions)

San Diego Gas & Electric Company’s (SDG&E’s) appeal herein.

SDG&E files this response to those motions pursuant to Supreme

Court Rule 16.5.

Overview

The constitutional deficiencies of the Commission’s decisions, as

raised by SDG&E in its Jurisdictional Statement, are confirmed by

the failure of the Commission or City to squarely address them. For

example, the Commission and City repeatedly refer to the asserted

failure of SDG&E to meet its burden of proof as justification for

the Commission’s findings. Yet the Commission itself never invokes

this as a basis for its findings in either of its decisions. And neither

the Commission nor the City explain how the Commission could

approve two-and-one-half years of SDG&E’s expenses under the

Restated Agreement, which earlier Commission staff testimony

specifically supported as favorable, without having passed on the

reasonableness of the contract itself. Nor do they explain how the

Commission can now disapprove of the Restated Agreement from

its inception, contrary to its earlier decisions, without having engaged

in an unlawful hindsight analysis.

Moreover, the City argues that the “HIRI option” SDG&E gave

up in signing the Restated Agreement was either to maintain cur-

rent Hawaiian Independent Refinery, Inc. (HIRJ) volumes or to more

than double them for the last four years of the contract to 28,800

barrels per day. But the City fails to note that SDG&E’s exercise

of this “...flexible option to call on HIRI to deliver increased

volumes...” (Interim Opinion, Appendix p. A-16) would have

obligated SDG&E to purchase more than twice the amount of addi-

tional oil it actually purchased under the Restated Agreement!

The primary goal of the Commission’s and City’s Motions is to

2

obscure and divert this Court’s attention from appellant’s straight-

forward and substantial constitutional propositions. This is most

clearly demonstrated by their perfunctory and conclusory responses

to SDG&E’s central theme in this appeal: That until the Commis-

sion takes evidence on and determines that course of action which

SDG&E should have taken in 1979, the actual results of which can

be compared to SDG&E’s results under the Restated Agreement, the

Commission shall be constitutionally constrained from determining

the amount of expenses which should be disallowed. The Commis-

sion’s adoption of an expense disallowance which has no causal nexus

with SDG&E’s actions is arbitrary and unconstitutional. See Perkins

v. Elg., 307 U.S. 325, 349-350 (1939). As SDG&E shali discuss in

more detail below, the Commission’s stance on this issue cries out

for this Court’s correction.

ARGUMENT

I.

NEITHER THE COMMISSION NOR CITY OFFER

SUBSTANTIAL CHALLENGE TO SDG&E’S ASSERTION IT

WAS DENIED DUE PROCESS BY THE COMMISSION’S

FAILURE TO FIND ANY ALTERNATIVE ACTION WOULD

HAVE AVOIDED THE DISALLOWED EXPENSES.

A. The Necessity For Determining A Standard Of Conduct.

The Commission argued to the California Supreme Court, and

again asserts here that SDG&E has cited no authority for the pro-

position that the Commission had a duty to determine what

SDG&E’s reasonable course of action would have been before it

calculates the “excessive” costs to be disallowed for ratemaking pur-

poses. It disputes that civil tort case authority, requiring a causative

nexus between the wrongdoing and the damage assessment, has any

relevance to the Commission’s action or regulatory law in general.

3

The proposition SDG&E advances here is so fundamental to

damage assessment, and general logic, that it is incumbent upon

the Commission to provide legal authority why appellant’s position

should be rejected, not vice versa. The Commission and its staff

have consistently stressed that the $45 million disallowance assess-

ment is neither a penalty nor a fine. The Commission’s decision’s

challenged here make it abundantly clear that this disallowance is

intended to constitute ratepayer damages, imposed to make them

whole for SDG&E’s imprudence. (Appendix, p. A-22.) This Court

must judge the adequacy of the Commission’s order on the same

basis articulated by the Commission itself. Securities & Exchange

Commission v. Chenery Cerp.,318 U.S. 80 (1943). With that rationale

at the heart of the order, how could civil damage case authority,

representing literally hundreds of years of legal thought on this sub-

ject, be irrevelant? Yet the Commission’s Motion shows disrespect

for this fundamental legal precept of carsation.

In truth, the Commission harbors not mere disrespect, but actual

contempt, for the requirement of a causal relationship between utility

imprudence and ratemaking disallowances or penalties. In recent

decisions for SDG&E and Pacific Gas and Electic Company

(PGandE), the Commission has imposed substantial disallowances/

penalties for certain ECAC expenses which the utilities were other-

wise entitled to recover without even a finding of unreasonabieness.

(Decision Nos. 84-12-033; 85-12-104.)

The PGandE decision is particularly relevant. PGandE there

sought cost recovery in an Energy Cost Adjustment Clause (ECAC)

proceeding of amounts it expended to settle a lawsuit with Chevron

U.S.A., Inc. (Chevron) over PGandE’s termination of fuel oil

deliveries under a long-term contract. Except for PGandE’s ter-

minating first and settling on payment later, its payment to Chevron

was very analogous to SDG&E’s $45 million payment to Tesoro under

the Suspension Agreement to terminate the Restated Agreement. At

the time of PGandE’s payment, the Commission had in place a cost

recovery mechanism (Annual Energy Rate, or AER) whereby

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4

PGandE’s shareholders were required to bear 9% of any unforecasted

fuel related expenses. This mechanism was designed to provide

PGandE with an incentive to economically manage its fuel costs,

and actually gave it the opportunity to keep 9% of any fuel-related

savings if its expenses were below forecasted levels.

But the 9% penalty which the Commission imposed without a

finding of imprudence was not the 9% which PGandE already

expected to absorb under the AER. This was an additional 9%, on

top of the AER, of which PGandE had no notice when it negotiated

its settlement, and which it could have avoided only by avoiding set-

tlement, in contrast to the AER mechanism.

Similarly, the Commission’s Decision 85-12-104 (of which SDG&E

is currently seeking rehearing) disallows 8% of certain fuel oil

disposal costs incurred by SDG&E, even though the Commission

found SDG&E’s actions were reasonable. (Decision 85-12-104, p. 6.)

The Commission called these disallowances “risk sharing,” but

they really are arbitrary state action, taken in the absence of evidence

of imprudence and in open disregard of constitutional requirements.

The Commission’s disallowance of SDG&E’s Tesoro contract

expenses was no less arbitrary than its disallowance of PGandE’s

contract settlement expenses, or SDG&E’s fuel disposal expenses,

for it had no more evidence to support one than the others. If any

vigor remains in the precept stated by this Court in West Ohio Gas

Co. v. Public Utilities Commission of Ohio (No. 1), 294 U.S. 63,

72 (1935), that utilities are entitled to recover their reasonably incurred

expenses, then it is essential that this Court reassert that the rules

of ratemaking still require adherence to the United States Constitu-

tion. Giaccio v. Pennsylvania, 382 U.S. 399, 402-404 (1966).

B. SDG&E’s Excluded Testimony Would Provide Evidence Of

The Proper Standard

In this case that reassertion wiil include instructions that the

Commission admit the evidence of SDG&E’s proffered witnesses

who were prepared to testify to the consequences of the Restated

Agreement. They were prepared to testify in the penalty phase hear-

ings that there were no adverse consequences from the Restated

Agreement because, even granting all of the Interim Opinion’s

criticisms of SDG&E, prudent management by SDG&E would not

have resulted in SDG&E’s ratepayers bearing a lower level of expenses.

The Commission excluded the testimony, however, asserting that

SDG&E was only attempting to “reargue” the reasonableness of the

Restated Agreement, which the Commission had decided against

SDG&E in the Interim Opinion. The Commission’s decision never

goes beyond this simple rationale for rejection, though, to analyze

the alleged deficiencies of the testimony. While this constitutes an

easy basis upon which to reject testimony the Commission did not

want to hear, it is intellectually blind to the reasons for which SDG&E

offered it, which was to provide evidence of the prudent course of

conduct against which the Restated Agreement could be compared

in order to ascertain its “actual consequences.”

In fact, the Commission rejected this testimony only because of

the ultimate conclusions the witnesses reached, not because the

testimony attempted to justify the Restated Agreement — which it

did not. The purpose expressly recognized in the prepared testimony

of each of these witnesses was to consider, from the perspective of

facts and circumstances as each understood them to exist in 1978

and 1979, what fuel strategy a utility situated like SDG&E should

have followed at that time. Each discussed those facts and circum-

stances in some detail, including factors specific to SDG&E, and

the various options in fuel strategies that were available to SDG&E.

Each independently concluded that SDG&E should have sought to

reduce its short-term powerplant oil supplies to take advantage of

what was then considered to be the short-term availability of cheaper

natural gas, but also should have attempted to line up reliable future

oil supplies for the period when powerplant gas was not expected

to be available. In general, each believed that the Tesoro Restated

Agreement tended to conform to his recommended strategy.

6

But if these witnesses had reached some other conclusions, sug-

gesting that a lower cost strategy than the Restated Agreement should

have been pursued by SDG&E in 1979, SDG&E is certain the Com-

mission would have embraced this testimony. There can be no

misunderstanding on this point: The Commission rejected the

testimony of SDG&E’s consultants only because of its conclusions,

not because of anything objectionable about its methodology or true

purpose.

The Commission and City state SDG&E should have presented

this testimony in the first hearing phase when the prudence of the

Restated Agreement was at issue. SDG&E agrees this testimony would

have been relevant there. But that fact did not make it irrelevant

in the subsequent penalty phase hearings. For despite all the various

assertions of the parties about the sufficiency of the evidence to sup-

port the Commission’s findings and conclusions in its Interim

Opinion, the Commission never made the one and only finding that

could have justified its adopted expense disallowance, or any

disallowance. Without a finding based on evidence of what the pru-

dent course of conduct for SDG&E should have been, its findings

could support neither its conclusion of imprudence nor any calcula-

tion of economic consequences.

Thus, SDG&E presented its outside consultant’s testimony in the

penalty hearing phase to provide an evidentiary basis on which the

Commission could determine and measure the economic conse-

quences of the Restated Agreement. That was precisely what the

Commission ordered the parties to do in the Interim Opinion.

(Appendix, p. A-22.) The Commission did not say, and could not

have said, that such testimony would be objectionable if it failed

to find actual adverse consequences. That SDG&E’s excluded

evidence showed no disallowance was appropriate was neither

precluded by the Interim Opinion’s findings nor rendered irrelevent

thereby. The Interim Opinion’s findings confined themselves to pro-

cedural and motivational wrongdoing that said nothing about

ratepayer damages.

-

Accordingly, this Court should accepi SDG&E’s appeal to reverse

the Commission’s disallowance imposition and order the © 9mmis-

sion to hear SDG&E’s excluded evidence, thereby according SDG&E

the due process to which it is entitled, but has heretofore been denied.

THE EQUITABLE ESTOPPEL ARGUMENT WAS

ADEQUATELY RAISED BELOW

The contention that SDG&E failed to raise an equitable estoppel

argument in its earlier appeals is without merit. SDG&E’s Jurisdic-

tional Statement, at page 24, introduces the equitable estoppel argu-

ment under the heading:

THE COMMISSION’S $45 MILLION DISALLOW-

ANCE IS FUNDAMENTALLY UNFAIR IN LIGHT OF

ITS PRIOR APPROVAL OF THE RESTATED AGREE-

MENT AND ITS FAILURE TO PROVIDE SDG&E ANY

OPPORTUNITY TO MITIGATE ITS COSTS

THEREUNDER.

SDG&E’s previous filings have, in every instance, cited the factual

and legal underpinnings of the equitable estoppel argument as it

appears in the Jurisdictional Statement. If a litigant has brought

a federal claim and the grounds therefore to the state court’s atten-

tion with fair precision, and “. . .the record as a whole shows either

expressly or by clear intendment that this was done, the claim is to

be regarded as having been adequately presented.” New York ex.

rel. Bryant v. Zimmerman, 278 U.S. 63, 67 (1928); Braniff Airways

Inc. v. Nebraska State Board, 347 U.S. 590, 598-599 (1954).

In SDG&E’s Application for Rehearing of Decision 84-02-005

before the California Public Utilities Commission, the materials

presenting the grounds for equitable estoppel are contained in pages

13 through 18 of the Application, and the argument is succinctly

stated on page 19. In SDG&E’s Petition for Writ of Review with

California Supreme Court, filed on May 21, 1985, the factual and

8

legal bases for equitable estoppel are found at pages 15 through 18.

In addition, SDG&E’s Reply to Answers to the Petition for Writ

of Review, which was filed with the California Supreme Court on

July 19, 1985, contains the basis of the equitable estoppel argument

on page ll.

As SDG&E’s Jurisdictional Statement points out, the equitable

estoppel argument is rooted in the concepts of fundamental fairness

and due process. These grounds for review, as well as the factual

basis for the equitable estoppel! argument, have been repeatedly cited

throughout SDG&E’s appeals.

9

CONCLUSION

Neither the Commission nor the City have raised any dispositive

objections to SDG&E’s appeal herein, but have at best reaffirmed

their inability to overcome the substantial constitutional infirmities

of the Commission’s decisions in question here. The Court should

overrule their Motions for Dismissal and/or Affirmance.

Respectfully submitted,

Barton M. Myerson

Counsel of Record for Appellant

Stephen L. Baum

Jeffrey L. Guttero

William L. Reed

SAN DIEGO GAS & ELECTRIC CO.

Post Office Box 1831

San Diego, California 92112

(619) 235-7818

Dated: February , 1986