Process & Management

		Potential competitors and consumer interests are concerned about PUC Commissioners making "policy" decisions based on closed-door discussions with investor-owned utilities, particularly since those decisions cannot be reviewed by a court to determine if they were based on the factual record.
		The significant organizational changes facing the PUC require that a partnership be established between labor and management that could best be nurtured if the PUC were relieved of some civil service regulations.

Procedural Accountability

Finding 13: The PUC's procedures, even as amended by the Legislature in 1996, provide the least accountability to the public and the fewest assurances that decisions will be based on the factual record in precisely those cases where the greatest profits and the greatest public interests are at stake.

As the PUC participates in the development of competitive utility markets and its jurisdiction is curtailed to focus solely on telecommunications, the credibility of its decision-making procedures will be critical. The PUC envisions itself taking on a larger policy making role in the future. That will require spending less time in the judge-and-jury role of a full-time regulator and more time defining the rules that market players and consumers will live by and redefining the public interest.

This distinction -- between the PUC's quasi-judicial and quasi-legislative roles was the source of significant debate during the recent legislative reform efforts because it goes to the long-standing controversies about how the PUC makes decisions, the roles of individual Commissioners themselves and the finality of those decisions.

Commissioners assert that policy making is legislative in nature, and when acting as legislators they should be given freedom to meet privately with stakeholders and among themselves. The Commissioners also asserted that they should retain freedom from expanded judicial review, effectively making their decisions final.

Freedom, however, cannot be expanded incommensurately with accountability, or granted in a way that erodes confidence in public decision making. The process the Commission uses to make policy decisions needs further refinements to bring these values into balance.

A Policy of Process

While complex in the detail, the PUC's procedures are simple in their intent. The PUC establishes rules for how it will function and then uses those rules to process hundreds of individual cases a year. Through hearings and written filings, the PUC gathers evidence, ideas and feedback from parties and the public. With the assistance of analytical staff and hearing officers known as Administrative Law Judges (ALJs), Commissioners craft proposed decisions and consider public comments on those proposals. After ruling, the Commissioners weigh any requests for reconsideration before making the decision final.

Of greatest concern in recent years has been the role of the individual Commissioners. With more than 900 active cases at any one time and more than 600 hearing days calendared each year, Commissioners rely extensively on their staff to develop and analyze the record and craft proposed decisions.

In addition to the case work, the Commissioners spend considerable amounts of time attending national and international conferences and meeting with other public officials in the State, the region and in Washington, D.C. Without judging the value of those trips, any effort to make Commissioners more involved in individual cases must consider the role Commissioners have taken in representing the State in other venues.

The dynamics of this controversy are framed by two factors that have significant impacts on the decision-making process -- the ability to lobby Commissioners in private meetings before a decision is made, and the right to seek a court review of those decisions after the fact.

Private Meetings. As a result of the heavy caseload -- and their other duties -- Commissioners concede that they are unable to sit through many of the hearings in which facts are gathered for their consideration. Similarly, they do not have the time to read all of the written submittals. The decisions themselves often run in the dozens of pages, making that task alone burdensome given the hundreds of cases before the Commission.

To compensate, Commissioners have relied on private and individual meetings with participants in the proceedings, known as "ex parte" contacts. During these meetings the issues are "telescoped" and Commissioners have the opportunity to ask questions directly that might be indirectly addressed in hundreds of pages of testimony. A review of the Commissioners' calendars show that some Commissioners spend a considerable amount of time in private discussions -- usually at the request of the party rather than the Commissioner.

The Commissioners have been free to set their own ex parte rules -- and for years they had no ex parte restrictions of any kind. After considerable controversy in the late 1980s, the Commission developed rules that required contacts to be "noticed" after the fact and a summary provided by the party making the contact, along with any written materials used in the discussion.

It is up to other parties to monitor the ex parte log if they are concerned about what another is saying in the private meetings. The rules covered rate cases and adjudicatory issues. Notification was not required for meetings to discuss rule-making or policy-making cases before the Commission, or for social engagements.

Commissioners have been criticized by consumer groups, small businesses and its own advocacy staff for the heavy reliance on ex parte contacts. The concern is that Commissioners are persuaded to alter proposed decisions based on those private conversations -- potentially making decisions inconsistent with the factual record or without benefit of having heard the rest of the arguments. The consumer group Toward Utility Rate Normalization (TURN) testified:

Such last-minute changes to proposed decisions nearly always shift the outcome in a manner more favorable to the regulated entity, and less favorable to consumer and competitor interests. To say that such a process breeds cynicism toward government would be an understatement.⁽¹⁵¹⁾

The owner of Zond Energy Systems, an independent wind power producer, said the lobbying rules are biased in favor of investor-owned utilities and against small companies:

Probably the most frustrating aspect of working at the CPUC is participating in the time-consuming and expensive process of a litigated proceeding before an administrative law judge, receiving a decision you believe is favorable then having that decision changed materially to your detriment by an assigned commissioner's ruling.

The failure of the Commission to issue a decision based upon the evidence or hearing record is a gross abuse of process. This failure of process occurs because that Commissioner has been effectively lobbied by the (investor-owned utility) lobbyist who maintains offices next door to the PUC and expends ratepayer funds in support of those efforts.⁽¹⁵²⁾

The concern is heightened by the fact that the vast majority of private meetings are conducted with representatives of regulated utilities. A review of ex parte records for a 16-month period in 1995 and 1996 showed that for every private discussion held with a consumer interest, Commissioners met four times with a utility representative.

A review of Commission calenders also showed that some Commissioners have social, casual and other contacts with the same utility officials. But those meetings are not reported as ex parte contacts -- presumably because the conversation did not involve a specific issue before the Commission or it involved a "policy-making" case, which does not have to be noticed.

While consumer groups have long been troubled by the social contacts, it also is a concern of new market players who do not have the benefit of years long relationships with Commissioners. Representatives of the cable television industry -- which has not been regulated by the PUC, but will be as they offer telecommunications services -- believe that social contacts should be noticed: "The contact is influence in itself."⁽¹⁵³⁾

For the most part, the large utilities do not favor tight ex parte rules, particularly for quasi-legislative or policy making cases. The Commission's proceedings to restructure the electrical industry is an example of such a proceeding: The Commission held workshops and hearings and private meetings before crafting and adopting a policy.

While such policies are more general than a specific rate increase application, they can significantly influence how much consumers pay. In the case of the electrical restructuring policy, the Commission decision provided the utilities an opportunity to be repaid by ratepayers for billions of dollars worth of investments that were made in a regulated era that will be worthless in a competitive market.

The utilities, however, are more open to the idea of increasing judicial review -- giving them greater opportunity to appeal Commission decisions that are less to their liking.

Judicial Review. Some practitioners maintain there is a relationship between the latitude that Commissioners are given in the decision-making process and an independent review of those decisions by the courts. If the PUC faced more meaningful judicial review to determine if decisions are supported by the facts, then Commissioners should have latitude in how they collect information and balance competing interests.

Under the current arrangement, Commissioners are lobbied by parties before making decisions and decisions cannot be appealed to determine if they were made based on the evidence. Rather, cases can only be reviewed to determine if constitutional rights were violated and they can be reviewed only by the California Supreme Court.

Other fourth branch agencies -- in California, other states and at the federal level -- often have elevated thresholds for judicial review, usually to a court of appeal. The commissions are granted that elevated threshold on the theory that their own quasi-judicial proceedings are the functional equivalent of a trial court, and the public is willing to trade some of the normal checks and balances of the three-branch system of government for the efficient decision making provided by fourth-branch agencies.

All states except California, New Mexico and West Virginia provide for appeal of all PUC decisions to an intermediate court -- and New Mexico and West Virginia both provide more opportunities for appeals to be heard than does California. As a result, California has had the highest threshold in the nation for judicial review of PUC decisions. Appeals could only be made to the State Supreme Court. The court is free to review only cases it wants to and it only reviews cases to determine if the Commission violated the law.

This threshold was lowered slightly by SB 1322 (Calderon) enacted in 1996, which allows for appellate court review of the PUC's adjudicatory cases and allows for the appellate court to review those decisions to determine if they are supported by the evidence.

The State Supreme Court has historically turned down 90 percent of appeals without any review. In the last 10 years, the Supreme Court has issued 10 decisions on appeals made from the PUC. That is 10 out of more than 7,000 decisions that the Commission made during that period. The PUC cites those facts to assert that judicial review exists; critics cite the numbers to show how few cases receive judicial review.

Ironically, the decisions of federal energy and telecommunications agencies are subject to federal appellate review and the PUC has frequently exercised that opportunity to challenge rulings by those agencies.

What the Legislature Started

The Legislature has tried to reconcile these issues by turning to the legislative decision-making model: Elected officials are given great freedom in how they make decisions. Those decisions can be challenged in Superior Court, but usually the only test is whether a statute violates the Constitution. The Legislature also looked at the judicial decision-making model: Appointed jurists remain detached from the participants to preserve the integrity of the records established in open meetings, and rulings can be appealed to a higher court.

The idea was to tailor procedures after the court model when the Commissioners act as judges, such as in enforcement actions, and tailor procedures after the legislative model when Commissioners set policy. But the approach was burdened by the hybrid nature of the PUC: Appointed Commissioners make decisions based on a factual record and influenced by casual discussions, with extremely limited judicial review.

Complicating the debate is the fact that Commissioners use a "quasi-judicial process" to reach "quasi-legislative outcomes," that is, to set policy. And the greatest concern is Commissioners drifting from the record in rate-making cases. Rate cases are among the most litigated issues before the PUC, but are legally "quasi-legislative" because rate-making sets policy for how utilities will recover costs.

SB 960 (Leonard), the PUC reform bill of 1996, addressed these issues by establishing three procedural tracks: quasi-judicial, rate-making and quasi-legislative. In the judicial cases, there would be no ex parte contact, and as provided in separate legislation, SB 1322 (Calderon), some judicial review. In rate-making cases, ex parte contacts would be restricted. And in quasi-legislative cases, ex parte contact would be unrestricted.

In the future, the Commission will be conducting far fewer rate cases. As a greater portion of utility bills are determined by competitive services, the PUC's rate-setting process will determine an increasingly smaller portion of utility bills.

Commission proceedings, at least through the transition to competitive markets, will continue to have enormous consequences for company profits and ultimately consumer prices. But many of those issues will be resolved in policy-making or quasi-legislative proceedings -- not rate-making or quasi-judicial cases.

In the quasi-legislative cases, there are no restrictions on ex parte contacts and the same level of judicial review that was set by the Legislature in 1912 remains in effect.

Proponents of greater judicial review believe that a reasonable opportunity to appeal by itself will encourage Commissioners to rely only on the record to make decisions and increase the Commission's motivation to ensure due process.

The experience in other states shows that more opportunity for judicial review does not result in a rush of costly litigation. Florida and Texas, two large states with a lower threshold for judicial review and the highest number of appeals in the nation, average a dozen appeals a year.⁽¹⁵⁴⁾ Most participants are deterred from filing frivolous appeals because they have a number of other cases pending before the commissions and are reluctant to formally challenge rulings in the hope of getting a better result in the courts.

The consumer group TURN said more than anything else, judicial review would infuse a reality check into the PUC's process:

The absence of effective judicial oversight is now well known to the CPUC itself, as well as to the parties. Such knowledge naturally creates a sense of omnipotence in the agency that breeds arbitrary and sometimes even careless decision-making. TURN believes that an effective threat of judicial review, perhaps as much as the reality of the review itself, will restore a sense of self-discipline to the agency that most observers agree is sadly lacking today.⁽¹⁵⁵⁾

Similarly, consumer advocates in other states with greater judicial review say their standing in the regulatory arena is enhanced by the regulator knowing that a decision can be appealed.⁽¹⁵⁶⁾

Most of the participants in PUC proceedings believe there should be more opportunity for judicial review, and virtually all believe that the concern over excessive litigation can be eased by some common restraints. The most widely supported way to efficiently deal with appeals is to restrict cases to a single intermediate court, so that a group of jurists could develop some expertise, be able to respond to appeals quickly, and be more likely to write consistent decisions.

It was suggested during legislative deliberations that the appropriate appeal for legislative-like decisions should be to the Legislature. But it seems inappropriate, costly and destructive to an efficient market to encourage competitors and consumers to go through the PUC process, and then "appeal" to the open-ended legislative process.

The legislative process has proven itself most productive in those case where its sets policy goals and allows oversight agencies to implement them. If the policy choices turn out to be wrong or are rendered obsolete by time, the Legislature should revisit them. If during policy implementation, a participant believes the public process was unfair or rights were denied, the most appropriate place to test those complaints against the standards and precedents of the land is in the judiciary.

While people often complain about the time it takes courts to review issues, there is widely held confidence that the courts will act -- and will act consistently. The Legislature, however, is under no formal obligation to respond to appeals, or to respond in a timely matter to make decisions based on the facts of a case or with regard to precedents.

Next Steps

Creating the accountability within the PUC that consumer groups, businesses and policy makers need is a multi-faceted task. Some of those other facets are described in other portions of this report: The Commission, in cooperation with the Legislature needs to set annual goals and be assessed to see if those goals are met. Commissioners need to have a realistic workload so they are not expected to do the undoable. Commissioners also should put a priority on being part of the fact gathering process -- and not just the final decision maker.

But there is another critical element: Because they are not elected officials, yet are charged with fashioning and enforcing rules that affect essential services and determine mountains of profits -- they must make decisions, even policy decisions, based on a factual record.

There are two tried-and-true mechanisms that we know will help make this happen. The first is public debate and public decision making. And the second is the opportunity for a separate authority -- the courts -- to review appeals based on the assertion that the facts were disregarded in the process.

The Commissioners' rationale for ex parte meetings is their need to have complex cases telescoped for them -- because they are too busy to attend any of the hearings or review all of the written material -- and they need the opportunity to ask questions. In the future, if the Little Hoover Commission recommendations are followed, they would have a significantly reduced workload and be able to concentrate on the specifics of cases by attending more of the public hearings. In addition, since the law now allows for summary arguments before the Commission, each Commissioner should have the opportunity to ask questions of participants.

A large difference between the PUC and the Legislature is that legislators are elected directly by the people. In addition, with many more legislators and many more issues, the impact of individual contacts is diluted. And of equal importance, even when setting policy, the Commissioners are expected to make legally and factually supported decisions based on the record established in the case -- something that is undermined in perception if not reality by ex parte contact and could be assured with greater judicial review.

Recommendations

Recommendation 13-A: The Governor and the Legislature should amend the Public Utilities Code to limit ex parte contacts after a proposed decision is issued in rule-making proceedings to meetings in which all the parties are invited to attend. All private meetings and discussions between Commissioners and parties with a matter pending before the Commission should be noticed and summarized for the public record.

The Legislature in SB 960 made significant improvements in the PUC's decision-making process. That effort could be further advanced by increasing the accountability in policy-making proceedings, as well. The greatest conflict between the need for Commissioners to discuss issues with individual parties and to preserve the integrity of a fact-based process from political lobbying is after proposed decisions are issued. The integrity of the process will be further enhanced if the notification procedures are expanded to include substantive policy discussions between Commissioners and parties -- even if they are not based on the particulars of a pending case.

Recommendation 13-B: As the workload of the PUC is reduced -- and as some of its functions are transferred to agencies more suitable to perform them -- the Legislature and the Governor should enact legislation requiring Commissioners to rely solely on open meetings to gather information and make public decisions.

Even when acting in a policy-making capacity, Commissioners differ fundamentally from legislators: They are not elected and so are never held directly accountable to the public. And with a membership of only five, the effects of special interest lobbying are significantly more concentrated than in a 120-member legislature. As the number of market players increases, the importance of giving everyone a chance to speak -- and listen to the arguments made by their adversaries -- will increase in importance. As its caseload is diminished by transferring some responsibilities to agencies better able to perform them, relying on an open decision-making process will be possible.

Recommendation 13-C: The Governor and the Legislature should grant parties a right to appeal all PUC decisions, or the decisions of its successor agencies, to the court of appeal.

The experience in other states is that the accountability provided by broader judicial review can be achieved without significant delays in the public process. To encourage uniformity of decisions and subject expertise, the appeals should be restricted to the court located in the same city as the Commission, now the First District Court of Appeal in San Francisco. The standard of review should include a review of the facts to determine if they support the Commission's decision.