Amicus Brief — Pacific Telephone & Telegraph Co. v. Public Utilities Commission

S IN THE

Supreme Court of the United States

October Term, 1978

No. 78-606

Tue Pacivic TELEPHONE AND TELEGRAPH CoMPANy,

Petitioner,

V.

Tue Pusuic Utiiities Commission or THE STATE OF

Cattrornia, and Roserr Batinovicn, Vernon L.

SturGceon, Ricuarp D. Gravei_tr, Cuarre T. Dep-

RICK, and WiLLiAM Symons, Jr., the members of

said Public Utilities Commission, et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF CALIFORNIA

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE

AND BRIEF OF EDISON ELECTRIC INSTITUTE AS

AMICUS CURIAE IN SUPPORT OF THE PETI-

TION FOR A WRIT OF CERTIORARI

Cameron F. MacRag

140 Broadway

New York, New York 10005

(212) 269-1100

Attorney for Amicus Curiae

Of Cownsel:

Ronaup D. JoneEs

LeBorvr, Lamp, Leipy & MacRag

140 Broadway

New York, New York 10005

October 25, 1978

IN THE

Supreme Court of the United States

October Term, 1978

No. 78-606

ee

THe Paciric TELEPHONE AND TELEGRAPH ComPANy,

Petitioner,

v.

Tue Pusuic Utimitims Commission oF THE STATE OF

Cauirornia, and Roserr Batrrnovicn, Vernon Ll.

SturGeON, RicHarp D. GRaAvELLE, Cuarre T. Dep-

ricK, and Wiii1AmM Symons, JR., the members of

said Public Utilities Commission, et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF CALIFORNIA

EE

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE

AND BRIEF OF EDISON ELECTRIC INSTITUTE AS

AMICUS CURIAE IN SUPPORT OF THE PETI-

TION FOR A WRIT OF CERTIORARI

Pursuant to Rule 42(3) of the Rules of this Court, the

Edison Electric Institute (“EEI’’) respectfully moves the

Court for leave to file the brief amicus curiae annexed

hereto. While Petitioner and Respondent Communications

Workers of America have granted consent,’ the other

Respondents have refused to do so.

1. Copies of the consents have been filed with the Clerk of the

Court. As of the date of this Motion, Respondent Toward Utility

Rate Normalization has not responded to EEI’s request for its con-

sent.

| ee

Interest of Amicus Curiae

EET is the national association of electric utility com-

panies. Its members serve more than 99% of all customers

of the investor-owned segment of the utility industry and

about 77% of the Nation’s electricity users. Among EEI’s

interests are the development nationally of sound policies

and procedures for the establishment of rates and tariffs

by regulatory agencies.

This case involves contrary interpretations of the

Internal Revenue Code (“Code”) by the Internal Revenue

Service and a state regulatory commission. The Code pro-

vides for reductions in currently payable federal income

taxes if two conditions are satisfied: one, a utility follows

certain accounting procedures; and two, the utility’s

state regulatory commission adopts a consistent rate-

making treatment. For Petitioner, the accounting and

ratemaking procedure is called “normalization”, as speci-

fied by Congress. The California Publie Utilities Commis-

sion (“Commission”) claims that the ratemaking treatment

it lus ordered for Petitioner is “normalization”, but the

Internal Revenue Service has determined that it is not

“normalization”, and that, if the Commission’s Decision is

applied to Petitioner, Petitioner will no longer qualify for

the reductions in current federal income taxes. The inecon-

sistency thereby created subjects Petitioner to the loss of

substantial federal income tax benefits and to enormous

financial risk.

EET members, like Petitioner, are sabject to both federal

and state regulatory jurisdiction. At the federal level,

EEI members are subject to the policies established by

Congress, including the provisions of the Internal Revenue

Code. At the state level, EET members are subject to the

ratemaking authority of state regulatory bodies. The vari-

ae ee eee.

3

ous states have provided differing accounting and ratemak-

ing treatment of federal income tax expense, as was

recognized by Congress when the current accelerated depre-

ciation and Investment Tax Credit provisions were

enacted.

The decision of the Commission is of great importance to

the member companies of EEI because the Commission has

made and is enforcing an interpretation of the federal tax

laws contrary to the interpretation of the Internal Revenue

Service.2. The Commission has acted on matters which are

reserved, in our federal system, for exclusive determination

in the federal domain.

The decision of the Supreme Court of the State of Cali-

fornia, in failing to review the decision of the Commission,

appears to leave the Commission free to interpret the

Internal Revenue Code in a manner at odds with the inter-

pretation of the Internal Revenue Service. This result is

of substantial importance not only to Petitioner, which has

very large sums at risk from the Commission’s Decision,

but also to EEI’s members. Petitioner has referred to

$218,000,000 as the amount of its deferred federal income

taxes in 1977. The income statements of EEI’s members

for 1977 showed amounts of deferred federal income taxes

resulting from liberalized (accelerated) depreciation and

the Investment Tax Credit aggregating in excess of

$2,000,000,000. EET Statistical Year Book, EEI Pub. No.

78-3, at 62. Estimates of the corresponding deferred

amounts for 1978, by EERI’s) members, approach

$3,000,000,000.

Adoption of the stated rationale for the Commission’s

decision by other regulatory agencies will imperil the con-

tinned eligibility of taxpaying public utilities for benefits

specifically made available by Congress in the Internal

2. The Commission’s September 13, 1977 Decision is unreported

as yet, but is set forth at App. B, pp. 3A-74A of the Joint Appendix

filed herein by Petitioner.

+

Revenue Code.’ In the area of federal taxation, national

uniformity is of particular importance, yet it is threatened

by variable and inconsistent determinations by state regula-

tory bodies. The disregard for the requirements of federal

law evidenced by the actions of the Commission, if emu-

lated by other state regulatory bodies, will make a shambles

of the Internal Revenue Code, contravene the Supremacy

Clause of the Constitution and, indeed, shake the very

foundation of our federal system.

EEI, as a national association, holds a position from

which it can meaningfully present the national importance

of the issues herein and their relationship to the regulation

of utility rate tariffs. Taking a broader view than is

normally available to the individual parties, the annexed

brief amicus curiae, in addition to endorsing the arguments

of Petitioner, demonstrates the unmistakable Congressional

intent in having determinations of eligibility for federal

tax law benefits made at the federal level and not usurped

by state regulatory bodies.

3. The Commission’s Decision may be read by regulatory bodies

in other states as precedent for such bodies to apply their own differ-

ing interpretations of the Internal Revenue Code to those EEI mem-

bers subject to their jurisdiction.

Conclusion

For the reasons stated above and in the annexed brief,

EEI requests leave to file the annexed brief amicus curiae

in support of the petition for a writ of certiorari.

Respectfully submitted,

Cameron F.. MacRae

140 Broadway

New York, New York 10005

(212) 269-1100

Attorney for Amicus Curiae

Of Counsel:

Rownatp D. Jones,

LeBorvr, Lams, Lersy & MacRar

140 Broadway

New York, New York 10005

October 25, 1978

TABLE OF CONTENTS

PAGE

Brief for Amicus Cunt 2..—5.2beeneeeee 1

Interest of Amicus Cwrite ice 2

nee eee Me min Bare 8 ORI at Is 2

AIQUIR Sivindcnaaeen ehianighacamadaaas 5

I. The California Commission, By Reason of the

Supremacy Clause of Article VI, Lacks the

Authority to Interpret the Federal Tax Laws In

a Manner Not Consistent With an Internal Reve-

A.

B.

C.

nue Service Interpretation .........................c..csscsec- 5

Congrosmene) S66GME seid ee 5

The California Decision ..............02..0...-.. uae 6

FICE csncnnseneeemeasioe 7

Direct Combinet anncanincceneninnsensnsntinnsninnnmnnnons 9

D.

If. The Action of the California Commission Con-

stitutes a Violation of Substantive Due Process. 11

CGI Bocce scccuasiaiviosiastaerdaaaa aaa 14

ii

TABLE OF AUTHORITIES

PAGE

Cases

Atlantic Coastline Ry. Co. vy. North Carolina Corpora-

tion Commission, 206 U.S. 1 (1907) -.22.--2...2--22-1222---- 12

Beal v. Doe, 482 U.S. 438 (1977) .............--ccsccccesscecccenee 10

Burnet v. Harmel, 287 U.S. 103 (1932) -20202222220.222-.-.--- 8

City and County of San Francisco v. Public Utilities

Commission, 6 Cal, 3d 119 (1971) 20222222 2

City of Los Angeles vy. Public Utilities Commission,

ee, Oe DE CRD prncereerrereietnee ices 2

Day-Brite Lighting, Inc. vy. Missouri, 342 U.S. 421

CN heh ec 12,13

Federal Power Commission vy. Corporation Commis-

sion of the State of Oklahoma, 362 F. Supp. 522

(W.D. Okla. 1973), aff'd 415 U.S. 961 (1974) 0002... 8

Ferguson v7. Skrupa, 372 U.S. 726 (1968) .................... 13

Helvering v. R. Douglas Stuart, 317 U.S. 154 (1942) 8

Hurtado vy. California, 110 U.S. 516 (1884) -...222222..... 12

Interstate Commerce Commission v. Union Pacific

Mel, Gee US. ORE (IGE icine eaaioee 12

Morgan vy. United States, 304 U.S. 1 (1988) 2202000000... 12

New York Dept. of Social Services v. Dublino, 413

RE Fos We MOOD cssecscccsretsectloagunnrieunaiioneae Vehencnieess 10

North Dakota Pharmacy Board vy. Snyder’s Stores,

414 U.S. 156 (1978) ........... sicoesinccnapcteaspalania aaimideden 13

Ray v. Atlantic Richfield Company, 4385 U.S. 151

CRIP EF } wnnainnsispaasassiniannanypesaomaduanpacedaateretnatetiieananaiemana aS 7,9

Rice v. Santa Fe Elevator Corporation, 331 U.S. 218

CIES ¥ | scniniccesysapaccacoasneancanegpepacsaieetaaetieun anes talirnomicns 7

West Ohio Gas Company v. Public Utilities Commis-

ston of Ohio (No. 1), 294 U.S. 63 (1935) 00. 12

Williamson v. Lee Optical Company, 348 U.S. 483

PE y cccacscenastionee 7 snliaiicabincd Riana 13

iil

Constitution, Statutes and Regulations:

PAGE

Constitution:

PIN GE scccstensven tists tececesinaasanisneebanGgtacceeaiagas ee

Fourteenth Amendment ......................... nes 11, 12, 13

Internal Revenue Code of 1954, as amended (26

US.C.):

OCT DIED « -sstncensscrithsiceptembeisiduacasimmue tae passin

DORNONS DIGG wiisesscishssaniees coceesenssgtienstilainsiatigsstaenaleiadae passim

Treasury Regulations on Income Tax (1954 Code)

(26 C.F.R.):

CTR: RTIEE OD - saisidssiecciccesdopuetecssntameaabediraaeLen 8

Miscellaneous:

H.R. Rep. No.:

83-1337, 83d Cong., 2d Sess. (1954) -....0020...... 5

91-413 (Pt. 1), 91st Cong., Ist Sess. (1969) 00000... 6, 7

92-533, 92d Cong., Ist Sess. (1971) -0002. i)

Internal Revénue Service Ruling Addressed to Pacifie

Telephone & Telegraph Company Dated June 8,

SOP O Ss © leomaapainenicercacsedidsacaondidantnntabacs i Lieneaaee ead 4,9, 10

Internal Revenue Service Ruling Addressed to Pacific

Telephone & Telegraph Company Dated July 27,

IPA | sasntidsiedhatsocinighcietacocesetelessestihadiathaelan-uckeiaincds toputacnccacadasaie 4,10

S. Rep. No.:

91-552, 91st Cong., Ist Sess. (1969) 000... 6,7

IN THE

Supreme Court of the United States

October Term, 1978

No. 78-606

ee

Tue Paciric TELEPHONE AND TELEGRAPH COMPANY,

Petitioner,

Vv.

THe Pusuic Urivitries CoMMisston oF THE STATE OF

Catirornia, and Roserr BatrnovicH, Vernon L.

Sturceon, RicHarp D, Gravetie, Cuarre T’, Dep-

rick, and WiLtiam Symons, Jr., the members of

said Publie Utilities Commission, et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF CALIFORNIA

= rt re

BRIEF OF EDISON ELECTRIC INSTITUTE AS

AMICUS CURIAE IN SUPPORT OF THE

PETITION FOR A WRIT OF CERTIORARI

The Edison Electric Institute (“EEI’) supports the peti-

tion of The Pacific Telephone and Telegraph Company

(“Pacific”) for a writ of certiorari to review the judgment

of the Supreme Court of the State of California in The

Pacific Telephone and Telegraph Company v. The Public

Utilities Commission of the State of California, et al., 21

Cal. 3d, Official Advance Sheets, No. 21, minutes, p. 3

(1978). In that decision, the California Supreme Court

refused to review Decision 87838 (“the California Deci-

2

sion”) issued on September 13, 1977 by the California

Public Utilities Commission (“Commission”).

Interest of Amicus Curiae

The interest of amicus curiae is set out in the motion for

leave to file, which is bound together with this brief.

Statement

The Commission proceeding considered the ratemaking

treatment of federal income taxes as affected by Pacific’s

use of accelerated depreciation and the Investment Tax

Credit (“ITC”) as provided in §§ 167 and 46(f) of the Inter-

nal Revenue Code (“Code”).' Both accelerated depreciation

and ITC are available to reduce the federal income taxes

actually paid during the vears in question provided that

specified ratemaking procedures are followed. The Com-

mission specifically found that Pacific’s continued eligibility

for these provisions was “an important goal of this Com-

mission in this decision” (47A):

In the final analysis a loss of eligibility to the utili-

ties would not only create service problems ... but

would create staggering financial problems to be

ultimately borne by the ratepayers whose interests

we are attempting to redress. We believe that

eligibility for these tax benefits should be main-

tained and proceed on this basis. (Emphasis added)

22A).

1. The Commission’s decisions respecting the ratemaking treat-

ment of federal income taxes in the 1970 and 1972 applications had

been set aside by the California Supreme Court in City and County

of San Francisco v. Public Utilities Commission, 6 Cal. 3d 119

(1971) and City of Los Angeles v. Public Utilities Commission,

15 Cal. 3d 680 (1975), respectively and remanded to the Commis-

sion for further consideration. The two remanded cases were

consolidated with consideration of the federal income tax aspects of

the 1975 rate application filed by Pacific (97A-99A). (Citations in

the form of a number followed by “A” refer to the specified page of

the Joint Appendix, as filed herein by Pacific.)

3

If Pacific’s eligibility for these benefits is to be main-

tained, two conditions must be fulfilled. First, the utility

must maintain its regulated books of account on a normal-

ization basis. This Pacific has done.

Second, the state regulatory commission must employ

“normalization” ratemaking consistent with §§ 167 and 46(1f)

of the Code.? This is the heart of the present controversy.

The Commission has independently defined normalization

under the Code, and required Pacific to act in accordance

with that definition. However, the Internal Revenue Serv-

ice (“IRS”) has ruled that the Commission’s definition is

inconsistent with the Code. Accordingly, Pacific faces the

dilemma of losing the tax benefits, and suffering grievous

loss, because the Commission erroneously insists that it has

the authority to interpret the Code in a manner inconsistent

with the interpretation of the IRS.

The Commission recognized that the question of Pacific’s

eligibility for both accelerated depreciation and ITC was

“a case of first impression under the tax laws” (40A). How-

ever, the Commission did not seek any determination from

the TRS of whether the ratemaking treatment imposed by

the Commission met federal requirements for continued

eligibility. The Commission also refused to stay its Deci-

sion pending determination by the IRS of Pacifie’s con-

tinued eligibility.’

Pacific thereupon sought, and obtained, rulings from the

IRS respecting Pacific’s continued eligibility for accelerated

depreciation and ITC under the ratemaking ordered by the

2. See Petition at 5-6; 11A-12A.

3. This failure led to strong dissents by Commissioners Symons

(71A) and Sturgeon (73A).

4

Commission.* These rulings determined that Pacific would

not be eligible for the tax benefits because of the rate-

making treatment being applied.

While the majority of this state commission staiwartly

maintains that the Commission has provided for Pacific’s

eligibility at federal law, two of the three Commissioners

comprising the majority entered a concurring opinion

acknowledging the need for prompt review by this Court:

The ultimate verdict on the validity of this decision

will have to be made in the United States Supreme

Court and the sooner that is accomplished the better

off all participants will be. (Emphasis in original)

(JOA).

This Court should grant certiorari to correct the wrongs

against the Petitioner and to permit the achievement of a

specified Congressional purpose. If the Commission’s

Decision is allowed to stand, the Commission may in the

future attempt to apply the same, or equally improper,

regniatory ratemaking methods to electric companies.

.Moreover, other state agencies and participants in rate

proceedings will be given the signal that they can inter-

pret and frustrate the requirements of federal law with

impunity.

4. Two rulings on the issues raised by Pacific were ultimately

issued by the IRS, one on June 8, 1978 (95A-115A) and the other

on July 27, 1978 (133A-142A). Since Pacific’s appeal to the

California Supreme Court was pending at the time the first ruling

was received, a copy of that IRS determination was lodged with

the California Supreme Court.

5

ARGUMENT

I

The California Commission, By Reason of the Supre-

macy Clause of Article VI, Lacks the Authority to Inter-

pret the Federal Tax Laws In a Manner Not Consistent

With an Internal Revenue Service Interpretation.

California’s Decision attempts to establish, absent [RS

review or consent, the eligibility requirements for accel-

erated depreciation and ITC available under the Code. In

so doing, the California Commission invades an exclusive

domain of the federal government and attempts to avoid

giving effect to Congressional policies underlying these

eligibility requirements. Moreover, despite the obvious

need for national uniformity in this area, Le., a single

arbiter of the meaning of the Internal Revenue Code, Cali-

fornia has arrived at conclusions that have been found by

the IRS to be contrary to the requirements of the eontrol-

ling federal law and regulations. This interference in an

area that is preempted by the federal government has pro-

duced a grave federal-state conflict (which will continue if

this precedent is allowed to stand). California’s action is

contrary to the Supremacy Clause of Article VI.

A. Congressional Intent

The reasons underlying Congress’ authorization of

accelerated depreciation and ITC are discussed in the

Petition.S

Two aspects deserve emphasis. First, a primary motiva-

tion for both of these provisions was Congress’ intent® to

5. Petition at +8.

6. See H.R. Rep. No. 83-1337, 83rd Cong., 2nd Sess. 24 (1954) ;

H.R. Rep. No. 92-533, 92nd Cong., Ist Sess. 23-26 (1971).

stimulate capital investment. For public utilities, the nor-

malization ratemaking required by Congress provides more

internally generated capital, in furtherance of this policy.

Second, Congress made an explicit determination to

restrict the future availability of these provisions to utili-

ties regulated on a normalization basis, so as to hold the

resulting reductions in utilities’ taxable income, and hence

taxes payable to the federal government, within limits.’

B. The California Decision

The California Decision indicates both an awareness of,

and a dissatisfaction with, the means chosen by Congress to

further the policies behind the accelerated depreciation and

ITC provisions of the federal tax laws.°

The Commission stated that these statutory provisions

have foreed “everyone involved in setting rates to go

through a series of contortions and distortions to attempt

to comply with or legally avoid the effect of the existing tax

laws...” (454A). In the California Decision, these “con-

tortions and distortions” have taken the form of an attempt

to redefine normalization accounting and the eligibility

requirements for accelerated depreciation and ITC.

Despite the novelty of the accounting method ordered by

the California Commission,’ the Commission casually

assumed that its method would meet the requirements of the

federal tax laws and be consistent with an IRS determina-

tion.'!° The Commission also failed to provide for any safe-

7. H.R. Rep. No. 91-413 (Pt. 1), 91st Cong., Ist Sess. 132

(1969); S. Rep. No. 91-552, 91st Cong., Ist Sess. 171-176 (1969).

8. 12A, and see the “Epilogue” to the Decision (43A-45A) and

Finding 17 (48A).

9. See 40A. ~

10. See 49A-50A.

7

guards in the event the IRS disagreed, safeguards which

are necessary to avoid dire consequences to Pacific and its

customers in the event the IRS decision differed.

C. Preemption

The well established legal standard for preemption!'

was repeated in this Court’s decision just last term in Ray

v. Atlantic Richfield Company, 435 U.S. 151 (1977). While

certain aspects of federal endeavor touch upon elements

of this standard, federal taxation is the very purse string

of the federal government and manifests preemption in a

mature and fully developed fashion. The criteria estab-

lished by this Court, case law, and the Code’s legislative

history elearly support the conelusion that the California

Decision intrudes improperly into matters reserved for

federal determination.

There can be no doubt that federal tax statutes are per-

vasive, and delineate specifically the eligibility require-

ments for acceler ited depreciation and ITC.'2 In fact, the

legislative history of these statutes indicates that Congress

was specifically aware of the efforts of regulatory agencies

to avoid implementing the policy objectives underlying these

laws.'’ Accordingly, Congress mandated specific forms of

ratemaking treatment of accelerated depreciation and ITC

in order that eligibility be maintained. These statutory

provisions are supplemented by the regulations issued by

the Treasury Department further prescribing the neces-

11. See, e.g., Rice v. Santa Fe Elevator Corporation, 331 U.S. 218,

230 (1947).

12. See Petition at 5-8.

13. See H. R. Rep. No. 91-413 (Pt. 1), 91st Cong., 1st Sess.

131-132 (1969); S. Rep. No. 91-552, 91st Cong., Ist Sess. 171-172

(1969).

8

sary conditions for eligibility."* In the face of this legisla-

tive history, California should not enter this area of per-

vasive and specific federal regulation by construing Peti-

tioner’s eligibility for certain federal tax benefits inconsist-

ently with the IRS."

The need for dominance of the federal interest in this

area of regulation is apparent. The California Decision,

if upheld, would hamper Congress’ ability to use the tax

laws to effectuate critical national economic policy goals

and to assure a continued and stable flow of revenues to the

federal treasury.

By its very nature, interpretation of federal tax law

requires national uniformity. Our unified system of fed-

eral taxation is predicated on a structure whereby the

authority to interpret the various provisions of the tax

laws is vested in one, and not many, regulatory bodies.

The Internal Revenue Service alone has the primary

authority to determine the meaning of the federal tax laws

and the eligibility requirements contained therein.

The approach followed by California could potentially

fragment this authority and disperse it to numerous state

14. See Treasury Regulations on Income Tax (1954 Code) (26

C.F.R.) § 1.167(1).

15. See Burnet v. Harmel, 287 U.S. 103 (1932); and Helvering v.

R. Douglas Stuart, 317 U.S. 154, 161 (1942). In a case involving a

conflict between a state regulatory commission and the Federal

Power Commission, a federal court prohibited the state commission

from interfering with actions of the federal regulatory agency.

Federal Power Commission v. Corporation Commission of the State

of Oklahoma, 362 F. Supp. 522 (W.D. Okla. 1973), aff'd 415 U.S.

961 (1974). The Court said: “The unequivocal language of the

Orders shows that the Oklahoma Corporation Commission is dis-

satisfied with the Federal Power Commission’s producer rate regula-

tion and that Defendant would, therefore, like to substitute its

judgment for that of the Plaintiff [Federal Power Commission]

regarding such rates .. . It is obvious that the Orders in question

would circumvent Plaintiff’s [Federal Power Commission] regulatory

jurisdiction.” (Emphasis added) 362 F. Supp. at 537-38.

9

regulatory bodies in addition to the Internal Revenue

Service. As a result, taxpaying utilities are put in an

impossible position. Rates set on the basis of a state com-

mission’s assumptions of the existence of federal tax bene-

fits are not reasonable when the controlling federal agency,

the IRS, concludes that the tax benefits will be terminated

as a result of the state commission’s decision.

Clearly, this is an instance where a state seeks to frus-

trate Congressional intent in an area of paramount federal

authority. California’s Decision cannot be allowed to stand.

D. Direct Conflict

This Court recently reaffirmed the rule that state action

is unconstitutional if it conflicts in fact with federal law,

even where Congress has not exclusively occupied an area.

Ray v. Atlantic Richfield Company, supra.

In the instant controversy, Pacific is in the middle of a

direct conflict between federal and state regulation, each

regulator pulling in opposite directions. Pacific is either

eligible for accelerated depreciation and ITC or it is ineli-

gible; it cannot be both simultaneously. The California

Commission has declared that Pacific is eligible. The

Internal Revenue Service has riled that under the Commis-

sion’s Decision, Pacifie will be ineligible.

The Commission said:

The methods described in findings 3 and 4 maintain

the eligibility of the utilities to use accelerated

depreciation and ITC and comply with the require-

ments of the Internal Revenue Code relating to

Pacific and General (49A-50A).

The IRS said:

[WlJe believe that the Commission’s annual average

adjustment method is not a proper normalization

method of accounting . . . Therefore, shouid the

10

Commission’s Decision No. X become final the tax-

payer would no jionger be eligible to use an accel-

erated method of depreciation ... (113A).

Accordingly, should Decision No. X of the Commis-

sion become a final determination pursuant to section

46(f)(4) [of the Code], we believe that its applica-

tion for the adjustment of rates in years subsequent

to the test year would be inconsistent with the

requirements of section 46(f)(2) and would result in

Pacifie’s ... loss of eligibility for the investment tax

eredit under section 58.'© (142A).

The conflict brought about frustrates the objectives of

Congress. The IRS has determined that Congressional

policies underiving the tax laws will be obstructed if the

California Decision is not reversed.'? The Decision boldly

announces its disagreement with these policies and an

intention to attempt to reach a result consistent with the

law while frustrating to the maximum extent possible the

underlying federal policy."

Federal taxation is an area in which Congress has pro-

vided a pervasive scheme of regulation. The subject matter

is one requiring uniform, national interpretation at the

federal level. The Supremacy Clause requires that the

state regulation must give way.

16. The interpretations of the Internal Revenue Service are to

be accorded great weight since “[t]he construction of a statute by

those charged with its execution should be followed unless there are

compelling indications that it is wrong.” Beal v. Doe, 432 U.S.

438, 447 (1977); New York Dept. of Social Services v. Dublino,

413 U.S. 405, 420 (1973).

17. 112A-113A, 142A,

18. 43A-45A,

11

The Action of the California Commission Constitutes a

Violation of Substantive Due Process.

Certiorari should be granted because the action of the

California Commission is an arbitrary and capricious denial

of substantive due process under the Fourteenth Amend-

ment of the Constitution. The Decision made no provision

which would allow Pacific a reasonable opportunity to

secure a ruling from the Internal Revenue Service on the

issue of eligibility. The Commission’s failure to ineor-

porate this simple safeguard in its Decision was described

by Commissioner Symons as “reckless” and by Commis-

sioner Sturgeon as “cavalier”.’? Pacific has been placed at

a totally improper, and unnecessary, risk. To date, the

Commission’s Decision is the final word, since that Decision

controls the federal tax treatment available. However,

unless this Court itself resolves the underlying issue of the

propriety of the Commission’s Decision, it will be impos-

sible to determine whether the California Commission's

interpretation is right or wrong. In the meanwhile, no

19. Commissioner Symons, dissenting, said: “California stands

to lose at least a billion dollars, with nothing to gain, as the Public

Utilities Commission majority again plays brinkmanship with the

United States Government. There is no need to recklessly risk eligibil-

ity for such enormous sums in federal tax deferrals and federal tax

forgiveness. . . . I cannot support a decision which fails to take the

opportunity to resolve the ‘eligibility’ issue before the Commission

decision is finalized and ‘set in concrete’” (71A). Commissioner

Sturgeon, dissenting, said: “The inconsistent and cavalier manner in

which the majority treats the key issue of eligibility . . . warrants my

strong dissent.. . . After recognizing and elaborating upon the

importance of eligibility, the majority then, incredibly, moves quickly

to jeopardize that eligibility by adopting a regulatory accounting

scheme whose compliance with the standards of normalization estab-

lished by the Internal Revenue Code and Tr asury Regulations must

be considered a matter of speculation” (Emphasis in original)

(73A).

protection is given to Pacific. If this Court does not act,

the ultimate determination will follow the tax assessments

hy the Internal Revenue Service many years in the future

and Pacifie will be compelled to pay out enormous amounts

which it stands no chance of recovering.

EEL believes that the Due Process Clause requires the

California Commission to treat Pacific in accordance with

basie principles of fairness. These basic principles of fair-

ness mandate that the Commission provide for (as dis-

tinguished from merely recognizing) the possibility of a

conflicting IRS determination on eligibility by establishing

some procedure either to maintain the status quo pending

an IRS determination or, if permissible under state law, to

undo the damage resulting from its order in the event the

IRS denies eligibility.

It has long been the rule that the arbitrary exercise of

power by the States is prohibited by the Due Process

Clause. Hurtado vy. California, 110 U.S, 516, 528, 532, 536

(1884). In Atlantic Coastline Ry. Co. v. North Carolina

Corporation Commission, 206 U.S. 1, 20 (1907), the Court

said that wherever the power of regulation is exerted in

such an arbitrary and unreasonable way as to be, in effect,

not regulation but an infringement on the right of owner-

ship, such an exertion of power is repugnant to the Due

Process Clause.

The Court has also overturned administrative action

which it found to be “an exercise of arbitrary power, at

variance with ‘the rudiments of fair play’... long known

to our law.” West Ohio Gas Co. v. Public Utilities Com-

mission of Ohio (No, 1), 294 U.S. 68, 71 (1935) ; Tnterstate

Commerce Commission vy. Union Pacific R.R., 222 U.S. 541,

547-8 (1912).°° The Court’s discussion of the limitations

20. See also Morgan vy. United States, 304 U.S. 1, 22 (1938)

where Chief Justice Hughes, speaking for the Court, said: “agencies

. . . must accredit themselves by acting in accordance with the cher-

ished judicial tradition embodying the basic concepts of fair play.”

13

upon state legislative actions in Day-Brite Lighting, Inc. v.

Missouri, 342 U.S. 421, 423 (1952) shows that substantive

due process is a vital antidote to remedy extreme actions

that reach beyond constitutional bounds and conflict with

the requirements of federal law.?!

This is an extreme case. The state regulation challenged

herein is manifestly arbitrary, capricious and unreason-

able. One may fairly inquire whether it was adopted only

for the purpose of questioning and challenging the federal

regulatory scheme established by Congress, rather than

incident to the purpose of implementing utility rates.?’

The issue of eligibility is of enormous importance to

Pacifie and its customers. In view of the express recogni-

tion that the case is one of first impression under the fed-

eral tax laws (40A), basie fairness and plain common sense

point to the need for safeguards to protect Pacifie in the

event that an [RS determination conflicts with the interpre-

tation of the Commission. The Commission’s refusal to

provide these safeguards fails to meet minimal standards

of due process required by the Constitution.

21. North Dakota Pharmacy Bd. v. Snyder's Stores, 414 U.S.

156, 164-167 (1973); Ferguson v. Skrupa, 372 U.S. 726, 731-732

(1963); Williamson v. Lee Optical Co., 348 U.S. 483, 488 (1955).

22. See, Concurring Opinion by Commissioners Gravelle and

Dedrick (70A). In the Epilogue to its Decision, the Commission said:

“This Commission believes that it has a legal duty to balance the

interests of the utilities and the ratepayers and is attempting to do so,

but finds itself more frequently hamstrung by the actions of Congress

where it appears that the interests of the utility ratepayers are not

adequately considered for whatever reason” (44A). In the body

of its Decision, the Commission stated: “This horrendous result has

been created by Congress through the options allowed the utilities

in the tax laws, which have the effect of allowing the regulatee to

regulate the regulator” (12A).

14

Conclusion

For all of the reasons stated above, Edison Electric Insti-

tute believes that this Court should grant the writ of cer-

tiorari requested by The Pacific Telephone and Telegraph

Company.

Respectfully submitted,

CaMERON F.. MacRak

140 Broadway

New York, New York 10005

(212) 269-1100

Attorney for Amicus Curiae

Of Counsel:

Rownatp D. Jones

LeBoevr, LaMs, Lersy & MacRag

140 Broadway

New York, New York 10005

October 25, 1978