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A federal judge will decide this week whether the San Francisco-based Pacific Gas & Electric Co.’s suit against the California Public Utilities Commission (PUC) over rate hikes can proceed. On Monday, U.S. District Court for the Central District of California Judge Ronald Lew heard the PUC’s motion to dismiss the suit, which seeks relief from commission decisions against raising consumer electric rates in the face of rising wholesale electricity rates. In the same hearing, Lew granted permission to Southern California Edison to amend its complaint against the PUC, which raises arguments similar to PG&E’s. What’s at stake in the case is the state’s authority to govern the rates that a utility charges its customers when the utility is bound to buy power at rates governed by the Federal Energy Regulatory Commission. But first, Lew must decide whether the PG&E suit belongs in federal court. Also at issue is whether the PUC’s commissioners are protected from such suits under the 11th Amendment. The PUC argues that the complaint shouldn’t be in federal court because it addresses either interim decisions that are not yet ripe for review or decisions already upheld by the California Supreme Court when it refused to review them in November. Lawyers for PG&E and the PUC are sharply divided. According to Harvey Morris, chief lawyer for the PUC, the state agency has the authority to decide what costs can be included in utilities’ rates. “The PUC hasn’t decided that issue yet, so it shouldn’t be in any court, let alone a federal court of limited jurisdiction,” Morris said. “If Judge Lew denies our motion to dismiss we will appeal it to the 9th Circuit.” Morris contends that the 11th Amendment gives the state immunity from these types of suits. He argues that the PG&E suit is trying to get around the 11th Amendment by naming the agency’s five commissioners individually. Lawyers at the PUC are bolstered by the announcement a few weeks ago that the U.S. Supreme Court will revisit the legality of suing individuals who serve on an agency or board in Mathias v. Worldcom Technologies. Marie Fiala, a partner at Heller, Ehrman, White & McAuliffe who is serving as lead counsel for PG&E, called the 11th Amendment argument “legally bankrupt” and said she feels the suit is firmly supported by more than 50 years of federal case law. “Federal pre-emption is a federal issue, and federal judges are asked to apply federal law in very difficult and controversial contexts all of the time,” said Fiala, whose response to the PUC’s motion to dismiss lists nearly 50 cases that she says tackle the same issues but were not dismissed on 11th Amendment grounds. At the heart of the case is PG&E’s argument that the federal Filed Rate Doctrine allows the utility company to raise rates. Under the doctrine, federal rates trump state rates and the PUC cannot stop utilities from passing Federal Energy Regulatory Commission-approved rates on to consumers. FERC sets wholesale electricity rates. “What years of Supreme Court decisions teach us is that there are areas where the state’s jurisdiction over its own affairs has to yield for federal law, and this is one of those areas,” said Fiala. PG&E says the discrepancy between what it paid for wholesale electricity and what it could charge consumers for electricity cost it more than $6.6 billion between June and the end of 2000. “The Supreme Court has said you can’t force the utility to subsidize the ratepayers,” Fiala said, relying on such cases as Mississippi Power & Light Co. v. Mississippi ex rel Moore, 487 U.S. 354 (1988) and Nantahala Power & Light v. Thornburg 476 U.S. 953 (1986). The suit also makes a classic takings argument: The utility says the PUC can not simultaneously require PG&E to provide electricity and then force it to operate at a loss. “There’s no question that the retail power business of PG&E is clearly losing tons of money, but that doesn’t necessarily mean PG&E as a whole is,” said Howard Shelanski, a regulatory and antitrust lawyer who is an acting professor at Boalt Hall School of Law at the University of California-Berkeley. “It’s not certain there’s a takings going on here.” This gets to the core of the PUC’s defense, which says that PG&E was never guaranteed anything but the “opportunity” to recover all costs. “The retail rate freeze hasn’t allowed them to recover all the costs they want to recover. It’s not clear what costs are and aren’t allowed to be recovered,” Morris said. “Without a pre-emption argument they couldn’t be in a federal court against the PUC.” Shelanski, a former chief economist for the Communications Commission who is watching the case with interest, said he thinks it may have a positive effect on the state’s energy crisis either way. He said it could have a “practical effect” on the rates, as it may pressure the PUC to consider allowing PG&E to enter into more fiscally stable long-term electricity-buying contracts. Right now, power must be bought on a daily basis on the power exchange. “Some pass-through [of prices] to consumers is not necessarily a bad thing, as it could push the PUC to reconsider retail pricing and to allow pricing structures that give consumers better incentives to save energy or at least consume power more efficiently,” he said. This isn’t the first time Morris and Fiala have been across the table from each other. They’ve had what she characterizes as “an uneasy relationship” going back to a 1996 “natural gas reasonableness” case, PG&E v. CPUC, where the two were pitted against one another. The case settled. Fiala, a filed rate doctrine expert who is one of Heller’s top rainmakers, was a summer associate at PG&E 23 years ago. She says she spends between 50 and 60 hours a week on the PG&E case. She declined to discuss her compensation, but in 2000, average annual compensation for Heller Ehrman partners was $500,000. In contrast is Morris, who openly grouses about his exhaustion from working more than 100 hours of unpaid overtime every month and being hounded by national media outlets. He says he makes about $100,000 annually. An energy expert who says he’s contacted frequently by partners at major area firms, Morris says he will never leave the public sector for a firm. “I’d have to advocate a lot of positions I don’t believe in” at a firm, he said. “Here, I don’t have to.”

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