TURN Exposes Back Door Deal and Urges New Rules on CPUC Bias

TURN Staff Attorney Matt Freedman


Matt Freedman’s Testimony to Senate Energy, Utilities and Communications Committee 

March 11, 2015
My name is Matthew Freedman and I have been a staff attorney with The Utility
Reform Network (TURN) for the past 15 years. Based on my experiences, I will
highlight a few key concerns with the current ex parte rules and practices at the
California Public Utilities Commission (CPUC), identify possible solutions, and
discuss the need for statutory reforms to the standards for the disqualification of
Commissioners who make private deals with utilities.

The current ex parte rules are riddled with loopholes that can be easily
manipulated by experienced parties. I will highlight a few examples to provide
context for my overall recommendations.

First, utilities routinely have discussions with Commissioners and their advisors
about “procedural” issues to avoid triggering the ex parte rules.1 A discussion
about “procedure” can easily stray into areas of substance.

Second, communications with the General Counsel, Executive Director and
Directors of all the various divisions are not covered under the ex parte rules.
Utilities frequently meet with these individuals to express their concerns about
issues pending in current cases. These staff are free to speak with any
Commissioner about any issue at any time and can privately pass along concerns
raised by the utilities.

Third, utilities often provide Commissioners and their advisors with “general
briefings” that are, in principle, unrelated to issues being litigated in pending
cases and therefore are not subject to the ex parte rules. But these “general
briefings” often echo and reinforce specific factual, legal and policy positions that
the utility is pushing the Commission to adopt in pending cases.

Fourth, representatives from credit rating agencies and investment firms
regularly meet with Commissioners to discuss ongoing General Rate Cases or
penalty proceedings. These individuals are concerned about the potential impact
of CPUC decisions on utility profits, spending, exposure to risk and credit
quality. Yet they have no ex parte reporting obligation.

Fifth, the ex parte disclosure requirements state that the party must provide
various details about the timing and location of the communication, which
individuals were involved, and a description of what was discussed.  The
description of the communication itself is perhaps the most critical element of the
reporting. Utilities routinely provide very generic statements about the content
of their conversation and omit meaningful details.

Sixth, parties in ratesetting proceedings must provide notice of private
communications with Commissioners within three working days in order to
allow other parties to seek equal time.  Utilities have gamed this rule by meeting
with Commissioners less than three days before a vote on a pending matter and
releasing their ex parte notice after the vote has occurred. This practice, which is
fully permissible, denies other parties an opportunity to even seek their equal
time before the issue has been decided.

Seventh, the sanctions for non-compliance with the ex parte rules are not
sufficient to deter repeat offenders and are not applied with any consistency. The
statutory penalty is set at between $500 and $50,000 “for each offense.”4 This
amounts to little more than a wrist-slap for a major utility seeking regulatory
approvals worth hundreds of millions, or billions, of dollars. Instead of financial
sanctions, the Commission has also devised alternative remedies such as in a
2006 case where violations by PG&E led to a requirement that the utility develop
“written best practices” to guide its own ex parte contacts.5 The CPUC General
Counsel found that the final document submitted to comply with this
requirement demonstrated that PG&E had “made a good faith effort to develop
best practices in this area.” That document was developed by the same PG&E
Vice President who was recently fired for rampant violations of the ex parte rules
and is currently a possible target of a criminal investigation into improper
influence peddling.

In light of these realities, TURN urges the Legislature to enact sensible reforms
that would limit loopholes and abuses. Our recommendations include the

Banning individual Ex Parte meetings in ratesetting cases
So long as individual parties can meet privately with Commissioners and
advisors at will in cases where large amounts of ratepayer money are at
stake, utilities will dominate the process. Utilities have massive staff
resources devoted to lobbying the Commission that are financed through
the rates charged to their customers. If individual meetings are
permissible, the utilities will continually deploy their well-funded staff to
make legal and policy arguments through private meetings with anyone
at the CPUC who will listen.

Reliance on all-party meetings and all-party written communications
In ratesetting cases, ex parte contacts should be limited to meetings where
all active parties are invited to participate. Any written materials provided
to a Commissioner or advisor should also be circulated to all other parties
at the same time.

Broaden the definition of decisionmaker to include top CPUC staff
The definition of decisionmaker should include the General Counsel, the
Executive Director, and the Directors of each of the major divisions. This
expansion would ensure that utilities aren’t getting around the ex parte
restrictions by simply routing their conversations through other key
CPUC staff.

Make individuals working for credit rating agencies or advising
investors subject to the ex parte rules
Anyone with a financial interest in the outcome of a CPUC decision
should be subject to the ex parte rules. Since the utilities often cite the
expectations of Wall Street in their requests for higher profits, individuals
representing credit rating agencies and advising utility investors should
be treated just like representatives of consumers for the purposes of the ex
parte rules.

Increase the sanctions for violations of the ex parte rules
As recent media reports demonstrate, the current sanctions are ineffective
in preventing repeat offenses by utilities. The sanctions should provide
effective deterrence by imposing meaningful financial penalties, revoking
ex parte privileges for repeat offenders, and perhaps even establishing
criminal liability.

Recent press accounts suggest that Commissioners have engaged in wheeling
and dealing with utilities behind closed doors. This behavior is not new and,
astonishingly, may not even be prohibited under the Commission’s own rules.
Even when a Commissioner privately directs a utility to undertake a particular
action, there is little recourse for parties seeking to litigate the outcome in a
contested Commission proceeding.

A motion seeking to disqualify the Commissioner assigned to a particular case
for impermissible bias or prejudice is typically ruled upon by the Commissioner
accused of bias. This sounds absurd but it is established Commission practice.
Even worse, the legal standard for disqualification in a ratesetting proceeding
(the most common type of case) is whether there is “clear and convincing”
evidence that the Commissioner “has an unalterably closed mind on matters
critical to the disposition of the proceeding.”

Although this issue has been litigated in a number of proceedings, I want to
discuss a specific case involving San Diego Gas & Electric Company, one of its
affiliates, and the Calpine Corporation. In May of 2003, SDG&E conducted a
solicitation and sought bids to satisfy an identified need for 291 MW of new
resources in its local area by 2007.

In the litigation that followed this solicitation, TURN and the Utility Consumer
Action Network (UCAN) uncovered significant evidence demonstrating that
CPUC President Michael Peevey had personally intervened to ensure that
SDG&E selected Calpine’s Otay Mesa Power Plant as a winning bidder. The
evidence demonstrated that Commissioner Peevey engaged in a series of ex parte
meetings with both Calpine and SDG&E executives. Commissioner Peevey also
sent Commission staff to directly participate in negotiations over the plant.
TURN obtained notes from these negotiations describing Commission
representatives explicitly telling SDG&E that Commissioner Peevey wanted
SDG&E to own or contract with Otay Mesa.

Despite originally expressing interest in a single new combined-cycle plant to
satisfy its identified need of 291 MW, SDG&E ultimately proposed 2 such plants
as part of over 1200 MW of new resources including a $739 million contract for
Calpine’s 573 MW Otay Mesa Power Plant and the acquisition of Sempra
Generation’s 542 MW Palomar project. The Commission ultimately approved
SDG&E’s proposals on a closely contested 3-2 vote, with Commissioner Peevey
providing the deciding vote.

TURN and UCAN filed two motions seeking to have Commissioner Peevey
disqualified from voting on the matter.10 Consistent with standard practice at the
CPUC, Commissioner Peevey himself considered, and then denied, our motions.
In his denial, he stated that although he had indeed facilitated negotiations
between Calpine and SDG&E, there was insufficient evidence to demonstrate
that he had an “unalterably closed mind” on the final proposal. He refused to
apologize for his active role and insisted that he would have done a “disservice”
to the public by failing to become involved.11 The Commission ultimately
concluded that, even if all the allegations of involvement were true,
Commissioner Peevey could not have been shown to have an “unalterably closed
mind” because he may have been open to different combinations of terms and
conditions governing the deal.

Today, we are publicly releasing new evidence highlighting the extent to which
Commissioner Peevey intervened in that case. This evidence comes in the form
of an eyewitness account from an individual who worked as a lawyer for Sempra
Generation during this period. In her account, she describes being called into a
meeting with representatives of SDG&E, Sempra Generation, Calpine,
Commissioner Peevey and the individual subsequently assigned to be the
Administrative Law Judge reviewing the reasonableness of the Otay Mesa
contract. In that meeting, Commissioner Peevey explicitly told SDG&E to make a
deal with Calpine for Otay Mesa and promised that all approvals related to Otay
Mesa, including SDG&E’s separate request for over $200 million in new
transmission, would be granted. According to the eyewitness account, Peevey
also told SDG&E that failure to complete a deal for Otay Mesa would lead to a
rejection of SDG&E’s efforts to acquire Sempra’s Palomar plant.

There is little doubt that Commissioner Peevey’s direct involvement forced
SDG&E to sign an expensive long-term contract that it did not want or need.
None of the entities participating in this meeting provided any public notice or
disclosure as required under the ex parte rules. Yet even if news of this meeting
had become public, it is not clear that Commissioner Peevey would have been
disqualified because it is almost impossible to demonstrate that a decisionmaker
has an “unalterably closed mind”. Indeed, no Commissioner has ever been
disqualified based on the “unalterably closed mind” standard.

The CPUC has repeatedly concluded that the “unalterably closed mind”
standard is a matter of law. This means that only a change in the law will cause
the CPUC to modify its own practices. The Legislature can address this problem
by making two specific statutory changes. First, under no circumstances should
the ALJ or Commissioner accused of bias or prejudice be permitted to rule on
any motion seeking their own disqualification. Second, the appropriate legal
standard should be modified to ensure that if the Commissioner was directly
involved in shaping a utility request or directing a specific contract to be
executed, they should not be allowed to vote on the proposal. These are modest
reforms but they represent a step in the right direction.

The Legislature must recognize that the CPUC is very unlikely to reform itself.
Real reform will require changes to state law. There are several reform bills that
will soon be coming before this committee. Hopefully, these bills will allow
legislators and stakeholders to find agreement on the desirable elements of
meaningful change.

I would be happy to answer any questions from the Chair and members of the