# Jersey Central Power & Light Company v. Federal Energy Regulatory Commission, Allegheny Electric Cooperative, Inc., Intervenors

> Court of Appeals for the D.C. Circuit · February 3, 1987 · 810 F.2d 1168

URL: https://www.frixlaw.com/law-library/cases/9475808

## Case

- **Full name:** JERSEY CENTRAL POWER & LIGHT COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Allegheny Electric Cooperative, Inc., Et Al., Intervenors
- **Court:** Court of Appeals for the D.C. Circuit
- **Decided:** February 3, 1987
- **Citations:** 810 F.2d 1168; 258 U.S. App. D.C. 189; 1987 U.S. App. LEXIS 1635
- **Precedential status:** Published
- **Opinion:** Concurrence by Starr
- **Judges:** Starr, Mikva, Wald, Robinson, Edwards, Ginsburg, Bork, Scalia, Silberman, Buckley
- **Cited by:** 74 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9475808

## How later opinions describe it (automated extraction)

- noting that both the Federal Power Act and the Natural Gas Act of 1938 require that rates be "just and reasonable”; that "courts rely interchangeably on cases construing each of these Acts when interpreting the other”; and that the "just and reasonable” standard prescribed by …
- noting that the utility’s "allegations of- financial plight were highly detailed and specific, indicating that the utility was skating on the edge of bankruptcy”

## Opinion text

STARR, Circuit Judge,
concurring:
Although I agree with my dissenting colleagues that Jersey Central has mounted an ill-conceived and overly broad attack on the “used and useful” principle, see Dissenting Opinion at 1197,1 am satisfied that under the circumstances presented this case must be returned to the Commission. For the reasons that follow, I concur in the opinion of the court and in the decision to vacate and remand the Commission’s orders.
I
The Commission has acted cavalierly in this case. As the court’s opinion persuasively demonstrates, the Commission failed to take seriously the allegations of severe financial plight confronting Jersey Central. Its discussion of that plight is intolerably terse. In its order on reconsideration, the Commission stated that no testimony or exhibits had been proffered to justify a higher return. Yet the allegations of financial plight were highly detailed and specific, indicating that the utility was skating on the edge of bankruptcy.
The Commission’s stated justification for summarily dismissing these allegations was the weight of its prior “used and useful” precedent. But as the court’s opinion shows, that body of precedent did not constitute as ironclad a rule as the Commission would have us believe. It is certainly not evident from those precedents that the rule could be summarily applied in the face of the financial demise of the regulated entity.
Indeed, the Commission as a matter of policy has departed over the years from the strictures of the “used and useful” rule. This is illustrated by its treatment of “construction work in progress” (CWIP), part of which, the Commission recently determined, can be included in a utility’s rate base. See Mid-Tex Electric Corporation v. FERC, 773 F.2d 327 (D.C.Cir.1985). In that proceeding, the Commission recognized that its own practice admits of “widely recognized exceptions and departures” from the “used and useful” rule, “particularly when there are countervailing public interest considerations.” See 48 Fed.Reg. 24,323, 24,335 (June 1, 1983) (CWIP final rule). In that setting, financial difficulties in the electric utility industry played a significant role in the Commission’s decision to bend the rule. See id. at 24,332; 773 F.2d at 332-34. See also, e.g., Tennessee Gas Pipeline Co. v. FERC, 606 F.2d 1094 , 1109-10 (D.C.Cir.1979) (departure from “used and useful” to permit rate base treatment of natural gas prepayment is justified as means of encouraging development of additional gas reserves), cert. denied, 445 U.S. 920 , 100 S.Ct. 1284 , 63 L.Ed.2d 605 (1980).
This policy of flexibility, it seems to me, reflects the practical reality of the electric utility industry, namely that investments in plant and equipment are enormously costly. Rigid adherence to “used and useful” doctrines would doubtless imperil the viability of some utilities; thus, while not articulating its results in Hope or “takings” terms, the Commission — whether as a matter of policy or perceived constitutional obligation — has in the past taken these realities into account and provided relief for utilities in various forms.
What the Commission now confronts in Jersey Central’s rate filing is an investment, prudent when made, in a nuclear power facility that was doomed to failure. The cost of that project prior to abandonment was enormous — $397 million. Under these circumstances, the Commission, in order to engage in reasoned decisionmaking, has a duty to consider the entire financial circumstances confronting the utility, as it did in the CWIP context, not to rely blindly on precedents which do not involve similarly situated utilities facing the most dire *1189 financial consequences. Should the Commission nonetheless choose to adhere to the “used and useful” principle in these circumstances, it must provide a reasoned explanation for that decision. “Judicial review of the Commission’s order [ ] will ... function accurately and efficaciously only if the Commission indicates fully and carefully the methods by which, and the purposes for which, it has chosen to act, as well as its assessment of the consequences of its order [ ] for the character and future development of the industry.” Permian Basin Area Rate Cases, 390 U.S. 747, 792 , 88 S.Ct. 1344, 1373 , 20 L.Ed.2d 312 (1968). It is scarcely reasoned decisionmaking to dismiss out of hand allegations that go to the heart of the utility’s financial viability.
II
The Commission’s arbitrary and capricious treatment of the issues presented by Jersey Central necessitates the return of this case for further proceedings. The specific questions on remand will be whether the Commission’s treatment of Jersey Central’s request is consistent with prior precedent and whether the rate order entered in this instance violates Hope’s “end result” test. To address the latter question, it will be necessary to take into account the constitutional considerations at stake, namely whether the rate order or any other agency action which preceded that order worked a “taking” within the compass of the Fifth Amendment’s Takings Clause. Those would appear to be novel issues for a Commission that seems determined to avoid an “end result” inquiry as such, while at the same time making various adjustments to bring relief to-troubled parts of the electric utility industry. Under these circumstances, a comment or two is in order as to why I have concluded that, notwithstanding the Commission’s agnosticism, Jersey Central’s complaint “sounds” in the constitutional demands of the Fifth Amendment. Whether the facts would indeed make out a constitutional violation is obviously not before us, Majority Opinion at 1174, and must await the Hope -mandated hearing which must now be held.
The utility business represents a compact of sorts; a monopoly on service in a particular geographical area (coupled with state-conferred rights of eminent domain or condemnation) is granted to the utility in exchange for a regime of intensive regulation, including price regulation, quite alien to the free market. Cf Permian Basin, 390 U.S. at 756-57 , 88 S.Ct. at 1354-55 (unlike public utilities, producers of natural gas “enjoy no franchises or guaranteed areas of service” and are “intensely competitive”). Each party to the compact gets something in the bargain. As a general rule, utility investors are provided a level of stability in earnings and value less likely to be attained in the unregulated or moderately regulated sector; in turn, ratepayers are afforded universal, non-discriminatory service and protection from monopolistic profits through political control over an economic enterprise. Whether this regime is wise or not is, needless to say, not before us. See generally Posner, Natural Monopoly and Its Regulation, 21 Stan.L.Rev. 548 (1969); Demsetz, Why Regulate Utilities?, 11 J. Law & Econ. 55 (1969).
In the setting of rate regulation, when does a taking from the investors occur? It seems to me that it occurs only when a regulated rate is confiscatory, which is a short-hand way of saying that an unreasonable balance has been struck in the regulation process so as unreasonably to favor ratepayer interests at the substantial expense of investor interests. Thus, in my view, a taking does not occur when financial resources are committed to the enterprise. That is especially so since a utility’s capital investment is made not simply in satisfaction of legal obligations to provide service to the public but in anticipation of profits on the investment. The utility is not a servant to the state; it is a for-profit enterprise which incurs legal obligations in exchange for state-conferred benefits. A profit-seeking capital investment is scarcely the sort of deprivation of possession, use, enjoyment, and ownership of property which can conceptually be deemed a taking. See generally R. Epstein, Takings 63-92 *1190 (1985). Indeed, it would seem odd to consider as a taking government’s disavowal of any interest in property which remains unregulated and which reflects a profit-seeking investment.
It is also of significance to the constitutional inquiry whether the regulators forbade completion of construction. Cf In re Public Service Co., 122 N.H. 1062 , 454 A.2d 435 (1982) (holding that under the New Hampshire constitution, the State cannot prevent completion of construction of the Seabrook nuclear power facility without providing just compensation). But see Penn Central Transportation Co. v. City of New York, 438 U.S. 104 , 98 S.Ct. 2646 , 57 L.Ed.2d 631 (1978) (New York City historic preservation law employed to forbid development of office building). It would seem that, at least conceptually, a taking of investment funds in the Forked River project would have occurred if government so regulated as to prevent the property, in whole or in part, from being employed in the manner desired by the owner. But as we know, these conditions did not occur.
Nor would a taking (pro tanto) automatically occur when regulation itself takes place, for that was part of the original compact between investors and the state. Rate regulaton is, in theory, the substitute for competition. The state stands in the shoes, as it were, of competitors, keeping the utility within bounds that would be drawn by market forces in a non-monopolistic market. Whether economically sound or not, utility rate regulation in itself raises no constitutional concerns.
Under one line of analysis, inclusion of prudent investments in the rate base is not in and of itself exploitative. See Washington Gas Light Co. v. Baker, 188 F.2d 11 (D.C.Cir.1950), cert. denied, 340 U.S. 952 , 71 S.Ct. 571 , 95 L.Ed. 686 (1951). I am not so sure that such an easy rule can automatically be properly employed consistent with the demands of the Fifth Amendment. Prudence is, of course, relevant to the process of striking a reasonable balance in rate-setting for public utilities. Requiring an investment to be prudent when made is one safeguard imposed by regulatory authorities upon the regulated business for benefit of ratepayers. As I see it, the “used and useful” rule is but another such safeguard. The prudence rule looks to the time of investment, whereas the “used and useful” rule looks toward a later time. The two principles are designed to assure that the ratepayers, whose property might otherwise of course be “taken” by regulatory authorities, will not necessarily be saddled with the results of management’s defalcations or mistakes, or as a matter of simple justice, be required to pay for that which provides the ratepayers with no discernible benefit. 1
The two principles thus provide assurances that ill-guided management or management that simply proves in hindsight to have been wrong will not automatically be bailed out from conditions which government did not force upon it. That is, government forced upon the utility an obligation to provide service, but that obligation, as we have seen, is the quid pro quo for a protected area of service (and eminent domain authority). What is fundamental is that government did not force upon the utility a specific course of action for achieving the mandated goal.
Indeed, it would be curious if the Constitution protected utility investors entirely from business dangers experienced daily in the free market, the danger that managers will prove to have been overly sanguine about business prospects or the danger that a particular capital investment will not prove successful. In the face of anticipated demand, an airline may acquire additional aircraft, only to face unhappy consequences when passenger traffic does not meet expectations, perhaps due to economic *1191 factors entirely beyond management’s control. Utilities are not exempt from comparable forces. 2 As the cases have repeatedly held, the Fifth Amendment does not provide utility investors with a haven from the operation of market forces. See, e.g., FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 590 , 62 S.Ct. 736, 745 , 86 L.Ed. 1037 (1942) (“[R]egulation does not insure that the business shall produce net revenues.”). Yet, the prudent investment rule, in full vigor, would accomplish virtually that state of insulation, all in the guise of preventing government from effecting a taking without just compensation.
For me, the prudent investment rule is, taken alone, too weighted for constitutional analysis in favor of the utility. It lacks balance. But so too, the “used and useful” rule, taken alone, is skewed heavily in favor of ratepayers. 3 It also lacks balance. In the modern setting, neither regime, mechanically applied with full rigor, will likely achieve justice among the competing interests of investor and ratepayers so as to avoid confiscation of the utility’s property or a taking of the property of ratepayers through unjustifiably exorbitant rates. Each approach, however, provides important insights about the ultimate object of the regulatory process, which is to achieve a just result in rate regulation. And that is the mission commanded by the Fifth Amendment. Unlike garden-variety takings, the requirements of the Takings Clause are satisfied in the rate regulatory setting when justice is done, that is to say the striking of a reasonable balance between competing interests.
Thus it is that a taking occurs not when an investment is made (even one under legal obligation), but when the balance between investor and ratepayer interests— the very function of utility regulation — is struck unjustly. Although the agency has broad latitude in striking the balance, the Constitution nonetheless requires that the end result reflect a reasonable balancing of the interests of investors and ratepayers. As we have seen, both investors and ratepayers were the intended beneficiaries of the Forked River investment; both should presumptively have to share in the loss. 4 Filling in the gaps, the making of the specific judgments that constitutes the difficult part of this enterprise, belongs in the first instance to the politically accountable branches, specifically to the experts in the agency, not to generalist judges.
It is here that Hope’s “end result” test comes into play. The judiciary is not to micromanage the rate regulation process, just as we are to be restrained in reviewing the other work of administrative agencies. We are not to impose procedures that we think are wise or methodologies that we think strike a better balance than that *1192 struck by the regulators. Our limited but vital role is to ensure that the end result of a rate order reasonably balances investor and ratepayer interests.
We are, fortunately, not left completely in a web of subjectivity in making these judgments. To be sure, Takings Clause law has not been marked by analytical consistency, as Professor Epstein has brilliantly demonstrated in his recent book. Nor has it been characterized, as much as we might care for them, by bright-line rules. In the words of then-justice Rehnquist speaking for the Court in Kaiser Aetna v. United States, 444 U.S. 164, 175 , 100 S.Ct. 383, 390 , 62 L.Ed.2d 332 (1979), the inquiry is “essentially ... ad hoe [and] factual” in nature. Nonetheless, we have been taught that several factors are worthy of consideration in determining whether regulation works a taking, including “the economic impact of the regulation, the extent to which it interferes with investment-backed expectations, and the character of the governmental action.” Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 432 , 102 S.Ct. 3164, 3174 , 73 L.Ed.2d 868 (1982); see also PruneYard Shopping Center v. Robins, 447 U.S. 74, 83 , 100 S.Ct. 2035, 2041 , 64 L.Ed.2d 741 (1980); Kaiser Aetna, 444 U.S. at 175 , 100 S.Ct. at 390 .
While it is premature to pass ultimate judgment on the question, some preliminary observations are in order. The first of the three considerations enumerated in Supreme Court decisions points powerfully in favor of Jersey Central. Forked River represents an enormous loss, and the very enormity of it must weigh heavily in the balance. No one maintains that exclusion of the abandoned plant from the rate base is de minimis, not affecting the return on property. Cf Loretto, 458 U.S. at 445 , 102 S.Ct. at 3181 . (Blackmun, J., dissenting); PruneYard, 447 U.S. at 83 , 100 S.Ct. at 2041 . To the contrary, Jersey Central represents that it is perilously close to the edge of bankruptcy, unable to secure long-term credit, and unable to attract capital to the enterprise.
The second consideration — the extent to which the agency’s action interferes with investment-backed expectations — is mixed. As a general rule, it would appear that investors purchase utility stocks as a mechanism for conservative, safe investments. Drobak, From Turnpike to Nuclear Power: The Constitutional Limit on Utility Rate Regulation, 65 B.U.L.Rev. 65, 106-107 (1985). Potentially high rewards are foresworn in favor of stability and safety. And now the situation of Jersey Central’s investors is grim. There is no prospect, we are told, for those investors to earn a return on their investment. Thus, in holding over strenuous dissents that no taking was occasioned by New York City’s interference with Penn Central’s plans to erect an office building atop Grand Central Station, the Supreme Court emphasized that the property owner could still earn a reasonable return on the investment notwithstanding the restrictive effects of the historic preservation law. 5 Jersey Central’s investors have nothing but bleak days ahead, we are told, unless regulatory relief is forthcoming. 6
On the other hand, FERC has already moved somewhat in the direction of balancing competing interests by permitting recovery of the costs of building the plant in the cost of service. Investor interests have not, therefore, been entirely ignored. In addition, as I indicated above, utilities are not shielded by the Constitution from the forces of competition and the uncertainties of economic life, and investors purchasing common stock are after all engaged in *1193 economic risk-taking. In addition, it surely cannot be reasonable for an investor to assume that each and every expenditure by a utility will be allowed by regulatory authorities. The very existence of regulation carries with it the hard fact that not every rate increase will be granted, not every expenditure will be allowed. Yet, “reasoned consideration” of investor interests requires more than the mechanical application of everyday rules to the loss of a $397 million investment in a power plant. Permian Basin, 390 U.S. at 792 , 88 S.Ct. at 1373 .
Finally, the character of the government action weighs for takings analysis in favor of the agency. The classic taking is when government invades and possesses property, partly or entirely. Permanent physical occupation provides the clearest example. United States v. Lynah, 188 U.S. 445, 468-70 , 23 S.Ct. 349, 356-57 , 47 L.Ed. 539 (1903). Occupation can, of course, be partial, and the taking can be the consequence of a private invasion if accomplished under the state’s auspices. Loretto, 458 U.S. 419 , 102 S.Ct. 3164 , 73 L.Ed.2d 868 (1982). A taking can occur when government imposes a right of access on private property, at least when the landowner had reasonably relied on government consent in making the improvements that purportedly opened the property to uninvited outsiders. Kaiser Aetna, 444 U.S. 164 , 100 S.Ct. 383 , 62 L.Ed.2d 332 (1979). The latter case teaches that the elimination of a basic incident of ownership — the right to exclude unwanted visitors from property — can constitute a taking. And, while the issue was sharply disputed in the Court and the resolution seemingly in conflict with Kaiser Aetna , it appears from the PruneYard case that the conduct of the landowner is of relevance in the constitutional analysis. That case teaches that willfully surrendering one of the “bundle” of property rights may result in greater, state-protected intrusion by outsiders than the property owner intended. Specifically, a shopping center owner may find that individuals may be permitted, over his objection, to exercise certain noncommercial rights on the shopping center property. 7 PruneYard, 447 U.S. at 83 , 100 S.Ct. at 2041 . Thus, in contrast to Kaiser Aetna , the owner of the PruneYard Shopping Center found that he had lost the right to exclude some visitors by issuing an invitation to the public generally to visit the center for commercial purposes. 8
The nature of the government action in this case obviously seems unintrusive in contrast to more typical takings cases. There has been no invasion, temporary or permanent. As I have previously indicated, the regulatory entity has not forbidden the Forked River project to proceed. What government has done is to forbid the investment to gamer a return, thus balancing competing principles of utility regulation. Forbidding a profit on an investment gone sour strikes me, conceptually, as recreating in part the marketplace environment; indeed, FERC’s permitting recovery of the investment itself through cost of service works an interference with what would otherwise occur in the unregulated setting, since the investors as risk takers would obviously bear the entire risk that the investment would not pan out. In addition, FERC’s obligation to consider consumer needs and expectations must be evaluated in determining whether its order arbitrarily limited the return to investors. Permian Basin, 390 U.S. at 769 , 88 S.Ct. at 1361 (“[Ijnvestors’ interests provide only one of the variables in the constitutional calculus of reasonableness.”).
*1194 But it is not for us to finally resolve these questions in the first instance. That job, as I have said, belongs to regulators, not judges. See Permian Basin, 390 U.S. at 792 , 88 S.Ct. at 1373 . In my view, this case must now be resolved by the Commission, facing up to the hard question of whether, under all the circumstances, a violation of Hope has been worked by this rate order. That determination, it seems to me, can only be made by a careful balancing of the competing considerations that are inevitably present in the setting of utility regulation. Id. While I am unable to pass judgment on the ultimate issue in this case, I am convinced that FERC has completely failed to come to grips with the question and that the question is now squarely before it for resolution.
. The obvious danger in not examining both ends of the continuum — both the prudence of the investment and whether the end result of the investment was used and useful — is to build in pressures for building excess generating capacity. The "used and useful” rule operates as a restraining principle, reminding utility managers that they must assume the risk of economic forces working against an investment which is prudent at the time it is made.
. The comparison is, of course, imperfect since the airline will enjoy the full fruits of financial success if its acquisition program succeeds. A utility’s rate of return, in contrast, is limited by regulation. On the other hand, the airline is not provided with the protection of a regulatory body’s interest in preserving the financial soundness of the enterprise.
. I recognize that venerable authority supports firm adherence to "used and useful" precepts. In Denver Union Stock Yard Co. v. United States, 304 U.S. 470 , 58 S.Ct. 990 , 82 L.Ed. 1469 (1938), for example, the Supreme Court (in an opinion joined by Justice Brandéis, the leading proponent of the prudent investment approach) embraced the "used and useful” rule in the following language:
The rate base. As of right safeguarded by the due process clause of the Fifth Amendment, appellant is entitled to rates, not per se excessive and extortionate, sufficient to yield a reasonable rate of return upon the value of property used, at the time it is being used, to render the services. But it is not entitled to have included any property not used and useful for that purpose.
Id. at 475 , 58 S.Ct. at 994 (citations omitted) (emphasis added). But it seems to me that this language was not meant to state an absolute and unchanging constitutional rule regardless of the nature of the investment and the impact of the rate order. The Court’s subsequent teaching in Hope makes it clear that no specific methodology is either inherently infirm or sacrosanct.
. In like manner, a regulatory order requiring ratepayers to pay monopolistic prices would fail to achieve the constitutionally required balance of interests. That sort of order would work a taking of ratepayers’ property, assuming the public purpose requirement of the Takings Clause had been met.
. Needless to say, this analysis does not respond to the objection that a partial taking, as opposed to a complete deprivation of property, was being effected.
. It also goes without saying that Jersey Central’s rate woes cannot in any event be laid entirely at the feet of FERC. It appears that state regulatory authorities, whose orders have considerably greater economic effect on Jersey Central than federal directives, have been inhospitable to efforts to include the Forked River plant in the state-regulated rate base. If that is so, relief from Draconian regulation in Trenton cannot come from Washington, D.C.
. Like Penn Central, this analysis does not squarely address the argument that a pro tanto taking has occurred, which, as Kaiser Aetna taught, demands compensation under the Takings Clause.
. Whatever its analytical strengths, the Prune-Yard opinion took pains to emphasize the limited nature of the intrusion by the petition-seekers. Surely the commercial invitation of the PruneYard center’s owner would not permit a political candidate to set up campaign operations in the mall’s common areas, or for the mall to serve as a makeshift lecture hall on foreign policy or a practice field for the local marching band on rainy days.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9475808. Public record. Not legal advice.