Objection! Hearsay: The Prohibition Against Basing CPUC Findings on Uncorroborated, Contested Hearsay Evidence

February 12, 2014

Goodin Macbride Administrative Law Blog

On February 5, 2014, the First District Court of Appeal issued a clear directive to the California Public Utilities Commission (“CPUC”) and the parties coming before it: uncorroborated hearsay evidence does not qualify as the “substantial evidence” required to support a disputed finding of fact. The Utility Reform Network v. Public Utilities Commission (“TURN II”), __ Cal. App. 4th__, annulled a CPUC decision that relied solely on uncorroborated hearsay evidence in reaching its finding of a specific need for a new power plant, despite the presence of contrary direct testimony in the record, and significantly clarified the evidentiary standard required for valid CPUC decisions.

Background

TURN II is the second appellate decision to annul a CPUC decision arising out of PG&E’s quest for approval of a purchase and sale agreement (“PSA”) for PG&E’s proposed acquisition of the Oakley Generating Station, a new large gas-fired power plant.

The CPUC denied PG&E’s initial application for approval of the Oakley Project PSA in 2010, based on PG&E’s failure to demonstrate a definite need for the Project. PG&E was allowed to resubmit the application if, among other requirements, the final results of the California Independent System Operator (“CAISO”) Renewable Integration Study showed the 33% Renewable Portfolio Standard, which requires utilities to obtain increasing amounts of energy from renewable sources and to reach the one-third renewable figure by 2020, created significant negative system reliability risks due to the variable nature of solar, wind, and other renewable generation sources. The CPUC treated PG&E’s subsequent petition for modification of the Oakley Project decision as a new application, and approved the PSA. Applications and petitions for modification are procedurally distinct; each is governed by separate Articles of CPUC’s Rules of Practice and Procedure, which are set forth in the California Code of Regulations. Consequently, applications and petitions for modification may not be treated interchangeably. The CPUC’s approval was annulled by the Court of Appeal because (1) the CPUC’s treatment of the petition for modification as a new application was a failure by the CPUC to follow its own rules of practice and procedure, and thereby a failure to proceed in the manner required by law, and (2) that failure prejudiced other parties to the proceeding. (The Utility Reform Network v. Public Utilities Commission, Mar. 16, 2012, A132439, unpublished (“TURN I”)).

PG&E filed a new application for approval of the Oakley Project PSA shortly after the issuance of TURN I. The Scoping Memo for the proceeding provided that one of the issues to be addressed was whether the Oakley Project would meet a specific, unique reliability issue. The Independent Energy Producers Association (“IEP”) and TURN opposed approval of PG&E’s acquisition of the Oakley Project because: the CPUC was in the process of determining the amount, type, location, and timing of resources needed to support the integration of increasing levels of variable renewable resources; the Oakley Project was not shown to be the least-cost means of meeting any need; and the CAISO had not yet released the final results of its Renewables Integration Studies.

PG&E submitted prepared testimony in support of its application that addressed the need for, and benefits of, the Oakley Project. PG&E’s testimony referenced a petition the CAISO filed with the Federal Energy Regulatory Commission (“FERC”) seeking a waiver to prevent retirement of a different power plant, the Sutter Energy Center (Sutter Waiver Petition), and relied in particular on the declaration of CAISO Executive Director of Market Analysis and Development Mark Rothleder (Rothleder Declaration). The CAISO, however, was not a party to the Oakley Project proceeding, and neither Mr. Rothleder nor any other witness from the CAISO appeared at the evidentiary hearings.  All parties to the TURN II appeal, including the CPUC, agreed the Sutter Waiver Petition and Rothleder Declaration were hearsay and not admissible within any hearsay exception. During evidentiary hearings, the Administrative Law Judge (“ALJ”) expressly prohibited the use of the Rothleder Declaration and Sutter Waiver Petition to prove there was a specific, unique need for the Oakley Project; the evidence could only be used to show whether the CAISO had reached a final determination on the issue of significant negative reliability risks. This evidentiary limitation led the ALJ to strike portions of PG&E’s testimony that relied on the hearsay evidence from the record.

The CPUC adopted Decision (“D.”) 12-12-035, which approved the Oakley Project PSA and relied on the CAISO Sutter Waiver Petition as evidence of a specific need for the Oakley Project to provide backup power required by the greater use of highly variable renewable generation in California. IEP, TURN, and the Division of Ratepayer Advocates (now called the Office of Ratepayer Advocates) sought rehearing of D.12-12-035, asserting, among other arguments, that the CPUC’s reliance on the hearsay evidence for its finding of need was unlawful. The CPUC denied rehearing, and issued D.13-04-032, which modified D.12-12-035 to make it clear the CPUC reviewed and overruled the ALJ’s evidentiary ruling on the hearsay evidence.

IEP, represented by Goodin MacBride partner Brian Cragg, and Western Power Trading Forum filed a petition for writ of review in the Third District; TURN filed a concurrent petition in the First District. The California Supreme Court transferred the IEP/WPTF petition to the First District, where the petitions were granted and consolidated.

TURN II

TURN II declined to decide the petitioners’ procedural arguments arising from the CPUC’s reliance on the Sutter Waiver Petition and Rothleder Declaration. The court reasoned that “[e]ven if we assume the Commission’s procedures sufficiently preserved the substantial rights of the parties, we do not find substantial evidence to support its finding that the Oakley Project is needed to meet a specific, unique reliability risk.” (TURN II, at p. 11 (slip opinion).) The court acknowledged the strong presumption of validity of CPUC decisions, but ultimately found the mandate in Public Utilities Code section 1757(a)(4) that CPUC decisions must be supported by substantial evidence in light of the whole record to be the controlling principle. While hearsay evidence is admissible in CPUC proceedings, it may not be relied upon without limitation. “Consequently,” TURN II noted, “the issue before us is a narrow one. May the Commission base a finding of fact solely upon hearsay evidence where the truth of the extra-record statements is disputed?” (Slip opn. at p. 14.) The court answered “no.”

Administrative agencies are generally given greater latitude to consider hearsay evidence than are courts and juries, partly because fact-finders in administrative proceedings are more sophisticated than a lay jury or court. To this end, the CPUC generally allows hearsay evidence “if a responsible person would rely upon it in the conduct of serious affairs.” (Landmark Communications (1999) 84 C.P.U.C.2d 698, 701.) Hearsay evidence is, however, afforded less weight; “admissibility and substantiality of hearsay evidence are different issues.” (Gregory v. State Bd. of Control (1993) 73 Cal.App.4th 584, 597.)

Prior to the enactment of the Calderon-Peace-MacBride Judicial Review Act of 1998 (SB 779), Public Utilities Code section 1757 foreclosed challenges to CPUC factual findings unless a constitutional right was at issue. The Judicial Review Act called for application of the substantial evidence test, already familiar to appellate courts through review under the administrative mandamus provision of Code of Civil Procedure section 1094.5, to CPUC factual findings. TURN II identified the “residuum rule,” which requires the substantial evidence supporting an agency’s decision to consist of at least “a residuum of legally admissible evidence,” as a relevant principle in the determination of whether substantial evidence exists. (Slip opn. at p. 15.) TURN II acknowledged the residuum rule has been abandoned by federal courts, and has been criticized in academic circles, but showed California case law and CPUC decisions were largely in line with the principle of the rule: to wit, the CPUC has explicitly held that hearsay evidence cannot be the basis for an evidentiary finding without corroboration where the truth of the out-of-court statement is at issue. (Slip opn. at p. 16.) The substance of the Rothleder Declaration and Sutter Waiver Petition was contested by the parties to the Oakley proceeding, and TURN II therefore required corroborating evidence of the purported need for the project.

The court examined the record for competent corroborating evidence of the need for the Oakley Project and found the evidence offered by the CPUC and PG&E for that purpose fell short of the mark. Evidence presented by the CPUC spoke only to the Oakley Project’s ability to address general grid fluctuations due to the intermittent nature of renewable energy sources, and therefore did not address the primary question of whether Oakley would meet a specific, unique reliability need. (Slip opn. at p. 19.) Evidence offered by PG&E largely referred to or relied on the CAISO’s assessment of need, which simply stated there are “fears that reliability needs may occur” that other power plants could not meet. (Id. at p. 21 [italics original].) This testimony made no definitive statement as to reliability needs, and only made projections about certain costs if reliability needs occurred. (Ibid.) PG&E also referenced various attachments to the testimony of the Division of Ratepayer Advocates. The court found the collection of slides from a presentation on how electrical generating capacity varies over the course of a day were both hearsay and unresponsive to the question of need. Additional PG&E evidence also failed to directly address the question of specific need for the Oakley Project, or to contain the caveat that additional analysis would be necessary before any need determination could be made. (Id. at pp. 21-22.) In sum, the court found the corroborating evidence to be anything but.

TURN II annulled D. 12-12-035, as modified by D. 13-04-032, because “the Commission’s finding [of need for the Oakley Project] is based upon uncorroborated hearsay evidence, and the truth of the CAISO’s extra-record statements is disputed, [and therefore] the finding cannot be sustained.” (Slip opn. at p. 22.)

The Message for the CPUC and Its Practitioners

The requirement that CPUC findings of fact be supported by substantial evidence in light of the whole record is no longer new to the CPUC or the parties who come before it. Nor is the CPUC’s ability to admit hearsay evidence a groundbreaking proposition.

TURN II is notable in that it places limitations on the use of hearsay to meet the substantial evidence requirement of Public Utilities Code section 1757(a)(4) by providing  clear standards for what constitutes substantial and corroborating evidence. First, evidence of any type must be directly responsive to the scope of the proceeding as set forth in the Scoping Memo for that proceeding, a document that has increasingly drawn the attention of the appellate courts. (See City of Huntington Beach v. Public Utilities Commission (2013) 214 Cal.App.4th 566, 593; Southern California Edison v. Public Utilities Commission (2006) 140 Cal.App.4th 1085, 1104-1107.)  As the CPUC and PG&E demonstrated in this proceeding, that requirement is easily overlooked. Evidence that does not address the question at issue cannot be considered substantial or corroborating. Second, evidence should ideally support the specific argument being made—i.e., the CPUC and PG&E argued a specific need existed for the Oakley Project, but only presented evidence of general (and arguably theoretical) need.  As a practical matter, evidence will not always cleave closely to the argument being made, but TURN II is a reminder that evidence will likely not be deemed substantial if it does not support the proposition it is meant to prove. Third, with respect to hearsay evidence, it is mandatory to offer responsive corroborating evidence where the substance of the hearsay statement is disputed. Inadmissible hearsay may be allowed in CPUC proceedings, but it is now clear neither the parties nor the CPUC will meet the burden of substantial evidence with such hearsay alone.

TURN II arguably leaves open the question whether unsubstantiated hearsay may be relied upon for a CPUC finding where the substance of the extra-record statement is not in dispute. It is possible the answer to this question is “yes,” because if the hearsay evidence is uncontested, it is unlikely the parties will be prejudiced by reliance on it.  We do not, however, venture to examine this question here.

With respect to disputed hearsay evidence, however, there is no question. Though the CPUC is not bound by the rules of evidence that govern civil court proceedings, CPUC findings resolving a contested issue must be supported by some evidence that would be deemed relevant and admissible in civil court.

(The views, opinions, and errors in this blog are all solely those of the writer, Megan Somogyi. They are offered only to promote further thought and discussion and are not intended to be relied upon as legal advice on any matter or subject.)