Amicus Curiae Brief — Duquesne Light Co. v. Barasch

No. 87-1160

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

DUQUESNE LIGHT COMPANY

AND

PENNSYLVANIA POWER COMPANY,

A ppe llants.

DAVID M. BARASCH,

CONSUMER ADVOCATE, ef al.,

Appellees.

On Appeal from the Supreme Court of Pennsylvania

BRIEF OF EDISON ELECTRIC INSTITUTE

AS AMICUS CURIAE

IN SUPPORT OF APPELLANTS

ROBERT L. BAUM

Counsel of Record

PETER B. KELSEY

EDISON ELECTRIC INSTITUTE

1111 19th Street, N.W.

Washington, D.C. 20036

(202) 778-6500

May 5, 1988

rE

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

The Edison Electric Institute adopts the questions pre-

sented set forth in the brief of appellants Duquesne Light

Company and Pennsylvania Power Company.

(i)

TABLE OF CONTENTS

QUESTIONS PRESENTED .....0............:cccccceeccsesceeeeeeeees

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INTEREST OF AMICUS CURIAE

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SUMMARY OF ARGUMENT

ARGUMENT

I. The Pennsylvania Statute As Construed By The

Pennsylvania Supreme Court Represents A Re-

turn To Ratemaking By Rigid Legislative For-

mula Which Ignores The Teachings Of This

Court

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II. The Decision Of The Pennsylvania Supreme

Court Imposes A Fundamentally Unbalanced

Ratemaking Standard

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CONCLUSION

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(iii)

Page

iv

TABLE OF AUTHORITIES

CASES: Page

Barasch v. Peansylvania Pub. Util. Comm’n, 516

Pa. 142, 582 A.2d 325 (Pa. 1987) .................000-0:- 6

Bd. of Pub. Util. Comm’rs v. New York Tel. Co.,

Se eae See III scecensitonedaceiertitibctenstetettinnicndistmenn 12

Citizens Action Coalition of Indiana, Ine. v.

Northern Indiana Pub. Serv. Co., 485 N.E.2d

610 (1985), appeal dismissed and cert. denied,

U.S. , 106 S.Ct. 2239 (1986) ................ 3

Cohen v. Pennsylvania Pub. Util. Comm'n, 90 Pa.

Commw. Ct. 98, 494 A.2d 58 (Pa. 1985) ............ 9

Cleveland Elec. Illuminating Co. v. Pub. Util.

Comm'n, No. 82-165 (Ohio, July 7, 1982), ap-

peal dismissed, 459 U.S. 1094 (1983) 20000000000... 3

Covington & Lexington Turnpike Rd. Co. v. Sand-

Save, SEG Wie Cee Ce arriikietisieis 2

Dayton Power & Light Co. v. Pub. Util. Comm'n,

4 Ohio St.3d 91, 447 N.E.2d 733 (1983) ............. 3

Denver Union Stock Yard Co. v. United States,

Se ee I CI eee ee 15

Fed. Power Comm'n v. Hope Natural Gas Co.,

Se Ses CE CRD cccdndiatcentoricceinsenntidtceeinncl passim

Fed. Power Comm’n v. Memphis Light, Gas &

Water Div., 411 U.S. 458 (1978) ................... 6, 7, 10, 14

Fed. Power Comm'n v. Natural Gas Pipeline Co.,

Se Wy: Bee, CE ceitieciiticcntetiee 7,15

Jersey Central Power & Light Co. v. Fed. Energy

Reg. Comm'n, 810 F.2d 1168 (D.C. Cir. 1987).. 16

Los Angeles Gas & Elec. Corp. v. R.R. Comm’n,

_ St F . — eeeereeene eee eee 13

McCardle v. Indianapolis Water Co., 272 U.S. 400

REID csichscsichis leis ceaeahc pase ane ae eee Eade 12, 15

Missouri ex rel. Southwestern Bell Tel. Co. v.

Pub. Serv. Comm'n, 262 U.S. 276 (1923)

Nollan v. California Coastal Comm'n, ,

7] 6: & ) fee 4

Office of Consumers’ Counsel v. Pub. Util.

Comm'n, 67 Ohio St.2d 153, 423 N.E.2d 820

(1981), appeal dismissed, 455 U.S. 914 (1982).. 3

Vv

TABLE OF AUTHORITIES—Continued

Page

Permian Basin Area Rate Cases, 390 U.S. 747

RUAN AERA A one hike ie ORE 6, 7, 9, 10, 14

Railroad Commission Cases, 116 U.S. 307 (1886).. 6

Smyth v. Ames, 169 U.S. 466 (1898) 00000. passim

St. Joseph Stock Yards Co. v. United States, 298

U.S. 38 (1936) ........... ET ALM AAA keen Ll 15

United Gas Pub. Serv. Co. v. Texas, 303 U.S. 123

cee ee ee ae ee 15

Washington Gas Light Co. v. Baker, 188 F. 2d 11

(D.C. Cir. 1950), cert. denied, 340 U.S. 952

ih A OR DE RAR A SONA SR aL Doc ROR 12, 13

ADMINISTRATIVE DECISIONS:

New England Power Co., 42 FERC © 61,016, reh’g

SI Sse ree 3

Pennsylvania Pub, Util. Comm'n v. Metropolitan

Edison Co., 47 Pa. P.U.C. 56 (1978) .........0000..... 8

CONSTITUTION:

I ss cteppipmnecdavnasuluades i

ee i III I a. sscecsseninecessccaneisaubionsneupindtencasis i, 4,9

STATUTES:

Act 335, 66 Pa.C.S. § 1315 (1982) .............. nner 2, 5, 6, 8, 9

Atomic Energy Act, 42 U.S.C. §§ 2131-34 (1982). 8

S$ 2235 (1962) ................... Fr ee 8

Johnson Act, 28 U.S.C. § 1342 (1982) . PRED OR RA OE 10

Powerplant and Industrial Fuel Use Act, 42

Serr PI I nm a x

BD es SED CIID avec cccocciscsereiccnecadoseccdecssscece> 8

MISCELLANEOUS:

Federal Power Commission, The 1970 National

Power Survey, Part I (1971) 8

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

No. 87-1160

DUQUESNE LIGHT COMPANY

AND

PENNSYLVANIA POWER COMPANY,

Appellants,

Vv.

DAVID M. BARASCH,

CONSUMER ADVOCATE, et al.,

Appellees.

Gn Appeal from the Supreme Court of Pennsylvania

BRIEF OF EDISON ELECTRIC INSTITUTE

AS AMICUS CURIAE

IN SUPPORT OF APPELLANTS

The Edison Electric Institute (EEI) hereby submits

its brief amicus curiae in support of the appeal filed by

Duquesne Light Company and Pennsylvania Power Com-

pany.’

' EEI has obtained the written consents of all parties to this case.

The written consents have been filed with the Clerk of this Court.

2

INTEREST OF AMICUS CURIAE

EEI is the national association of investor-owned elec-

tric utility companies in the United States. Its members

supply electric service to consumers throughout the United

States, serving approximately 97 percent of all customers

of the investor-owned segment of the industry and 73

percent of the nation’s electricity customers.

The Pennsylvania Supreme Court has held that the

Pennsy!vania Public Utility Code and particularly Act

335 (as incorporated in the Code as 66 Pa.C.S. § 1315)

governing the determination of rates by the Pennsylvania

Public Utility Commission (PUC) precludes any recov-

ery through rates of costs of planning, engineering and

preliminary procurement prudently incurred by Appel-

lants in carrying out their obligation to provide neces-

sary and adequate facilities, when the projects for which

such costs were incurred were prudently canceled by rea-

son of changed circumstances. As so construed by the

Pennsylvania Supreme Court, the Pennsylvania statute

resurrects the pre-20th century practice of direct legis-

lative determination of utility rates by specific tariffs or

specific formulae which ignore the constitutional con-

straints upon such governmental actions.*

In recent years, there have heen many cancellations of

electric generating plant construction projects in which,

in the aggregate, billions of dollars had been invested by

the date of cancellation. In the great majority of such

cases, commissions and courts have allowed recovery of

2 Smyth v. Ames, 169 U.S. 466 (1898), upon which the Pennsyl-

vania Court purports to base its decision in this case in large part,

involved, for example, a Nebraska statute prescribing classifications

of freight and rates for intrastate railroad transport. Similarly,

Covington & Lexington Turnpike Rd. Co. v. Sandford, 164 U.S. 578

(1896), involved a Kentucky statute prohibiting a turnpike company

from charging tolls in excess of the rates specified therein.

3

the prudent investments made in such canceled projecis.*

However, as here, state legislatures have more frequently

enacted statutes which, as construed by the courts of

those states, have limited the authority of public utility

commissions to allow recovery of any portion of such

costs, without consideration of the constitutional limita-

tions upon the unbalanced results of such action.*

The fact that this Court has not heretofore fully ad-

dressed on the merits such state legislative and judicial

actions has been viewed by some as a demonstration that

“!t|he Constitution no longer provides any special pro-

tections for the utility investor,” Dayton Power & Light

Co. v. Pub, Util. Comm’n, 4 Ohio St.3d 91, 447 N.E.2d

733 (1983), and as providing carte blanche to state leg-

islators to deny utility investors recovery of the prudent

investment that the utilities previously made in response

to their statutory obligations to serve and, as here, spe-

* Such recovery of the investment in canceled projects is typically

permitted by the allowance of charges for amortization of the

prudent investment over a period of years without any return on

the unamortized investment, although some jurisdictions (e.g., New

York and Wisconsin) have permitted both return of, and on, the

prudent investment. After lengthy rulemaking proceedings, the

Federal Energy Regulatory Commission recently issued an order

authorizing amortization charges of one-half of the investment, but

also authorizing return on that one-half of the investment. New

England Power Co., 42 FERC { 61,016, reh’'g granted (1988). The

result is essentially equivalent to allowance of recovery of the

entire investment without any return on the investment.

4 See, e.g., Ohio and Indiana, whose statutes were involved in

appeals to this Court that were dismissed for want of a substantial

federal question or properly presented federal question. Office of

Consumers’ Counsel v. Pub. Util. Comm'n, 67 Ohio St.2d 153, 423

N.E.2d 820 (1981), appeal dismissed, 455 U.S. 914 (1982); Cleve-

land Elec. Illuminating Co. v. Pub. Util. Comm’n, No. 82-165 (Ohio,

July 7, 1982), appeal dismissed, 459 U.S. 1094 (1983); Citizens

Action Coalition of Indiana, Inc. v. Northern Indiana Pub. Serv.

Co., 485 N.E.2d 610 (1985), appeal dismissed and cert. denied,

U.S. ——, 106 S.Ct. 2239 (1986).

4

cific public utility commission directives. In the last

term, this Court struck down an effort by a state agency

to confiscate private property in the guise of conditioning

a building permit. Nollan v. California Coastal Comm’n,

U.S. , 107 S. Ct. 3141 (1987). This case dem-

onstrates the nationwide need to similarly preclude di-

rect confiscation of private property in the guise of pub-

lic utility regulation.

This appeal represents a critical juncture both for the

nation’s investor-owned electric utilities and for the con-

stitutional rules fashioned by this Court. For the Four-

teenth Amendment to have meaning and continuing va-

lidity as a check on state ratemaking authority, the Court

must remind state courts and regulators that the investor

interest articulated by this Court in Fed. Power Comm’n

v. Hope Natural Gas Co., 320 U.S. 591 (1944), is more

than a hollow phrase.

As the national association of investor-owned electric

utilities, EEI represents the interests of companies

throughout the country whose future rate cases may well

be affected by the decision in this case. This brief amicus

curiae presents, from the perspective of those companies

which have committed substantial investment in new

generating facilities pursuant to state-mandated obliga-

tions to serve, the reasons why the “used and useful”

test cannot be determinative under the Constitution and

this Court’s decision in Hope, of investors’ rights to re-

cover their prudent investment. This Court’s decision

will be highly significant to the privately-financed elec-

tric utility industry and the long-term costs to consum-

ers served by it. In light of the recent trend in state

court and commission decisions, as reflected in the deci-

sion below, it is essential that the balancing required

under Hope include consideration of factors contributing

to a continued supply of investment capital at reasonable

costs.

5

SUMMARY OF ARGUMENT

The Pennsylvania Supreme Court has leapt backwards

over intervening decisions of this Court to rely upon out-

moded ratemaking concepts in order to sustain the con-

stitutionality of a state law interpreted to preclude de-

cisions of the Pennsylvania Publie Utility Commission

(PUC) that fairly balanced the interests of utility rate-

payers and investors as required by Fed. Power Comm’n

v. Hope Natural Gas Co., 320 U.S. 591 (1944). The

court below seized upon the “used and useful” doctrine,

having its origins in Smyth v. Ames, 169 U.S. 466

(1898), to overturn the result of the Hope balance struck

by the PUC permitting Appellants a constitutionally re-

quired return of their investment in canceled generating

plants. Yet, while not acknowledged by the lower court,

this Court in Hope freed public utility commissions and

state courts from the shackles of Smyth v. Ames, requir-

ing commissions instead to reach an “end result” that

reflects a balance between the interests of investors and

ratepayers. The lower court’s attempt to resurrect that

ancient past, particularly where application of the ear-

lier ratemaking doctrine reaches a result inconsistent

with the requirements of Hope, must not go uncorrected.

In relying upon pre-Hope decisions of this Court to

uphold the constitutionality of Act 335, the Pennsylvania

Supreme Court failed to respond to the balancing re-

quired by Hope and struck by the PUC and to consider

the factors pertinent to that balance. For example, con-

struction of generating facilities was encouraged at the

national level and insisted upon at the state level. ©

Throughout the process of planning for and cancellation

of the subject facilities, the prudent nature of the in-

vestments was undisputed. The costs of planning, engi-

neering and preliminary procurement were initiated by

the utilities in recognition of their obligation to provide

their customers with continuous, reliable electric service.

Not until almost three years after cancellation of the

6

projects by Appellants was Act 335 adopted by the Penn-

sylvania Legislature.

As a consequence of ignoring this Court’s teachings in

Hope, Permian Basin Area Rate Cases, 390 U.S. 747

(1968), and Fed. Power Comm’n v. Memphis Light, Gas

& Water Div., 411 U.S. 458 (1973), the Pennsylvania

Supreme Court, unlike the Pennsylvania PUC, failed to

reach an end result that reflects a balance between the

interests of ratepayers and investors that is just and

reasonable. Under the factors present in this case, the

Pennsylvania Supreme Court decision striking down the

PUC rate determination that allows recovery of pru-

dently incurred investment fails to comply with the teach-

ings of this Court and must be overturned.

ARGUMENT

I. THE PENNSYLVANIA STATUTE AS CONSTRUED

BY THE PENNSYLVANIA SUPREME COURT

REPRESENTS A RETURN TO RATEMAKING

BY RIGID LEGISLATIVE FORMULA WHICH

IGNORES THE TEACHINGS OF THIS COURT.

In the decision which is the subject of this appeal, the

Pennsylvania Supreme Court purported to recognize that:

the property of a public utility, though devoted to

the public service and convenience, is still private

property; and neither the corpus of that property

nor the use thereof can be constitutionally taken for

a compulsory price which falls below the measure

of just compensation.

Barasch v. Pennsylvania Pub. Util. Comm’n, 516 Pa. 142,

532 A.2d 325, 335 (Pa. 1987).

In support of what it characterized as ‘“|t|his deeply

rooted principle of constitutional law,” the Pennsylvania

Supreme Court cited numerous decisions of this Court,

commencing with Railroad Commission Cases, 116 U.S.

7

307 (1986), through Fed. Power Comm’n v. Natural Gas

Pipeline Co., 315 U.S. 575 (1942). It is all the more

striking that the Pennsylvania Court did not even cite—

let alone attempt to distinguish—the decisions of this

Court in Fed. Power Comm’n v. Hope Natural Gas Co.,

320 U.S. 591 (1944), and its progeny, such as Permian

Basin Area Rate Cases, 390 U.S. 747 (1968), and Fed.

Power Comm’n v. Memphis Light, Gas & Water Div.,

411 U.S. 458 (1973).

In so doing, the Pennsylvania Court ignored the devel-

opments of the past four and half decades in applying

the principles of constitutional law to public utility rate-

making. Instead, the Pennsylvania Court largely par-

roted dicta from decisions of the pre-Hope era, without

pausing to consider the consequences of its actions.

At this late date, constitutional analysis of public util-

ity ratemaking that rests upon what the Pennsylvania

Court characterized as “the landmark case of Smyth v.

Ames, 169 U.S. 466 (1898)”’ may have interest for the

historian (although its deficiencies are an oft-told tale),

but it has little relevance to present-day governing ju-

dicial doctrines. Instead, while a legislature or its dele-

gate (a public utility commission) has discretion to se-

lect whatever ratemaking methodology or formula that

it chooses, the end result of its ratemaking and orders

must balance the interests of consumers and investors in

the manner delineated by this Court in Hope, namely:

(1) “to protect consumers against exploitation,” and (2)

“to promote the ‘financial integrity’ of the [utility] as

measured, not only by revenues sufficient to recover oper-

ating expenses and capital costs . . . but also by revenues

sufficient to assure confidence in the financial integrity of

the enterprise, so as to maintain its credit and to attract

capital.” *

5 This summary of the holding in Hope appears in the unanimous

opinion of the Court in Memphis, 411 U.S. at 465-66.

8

The opinion of the Pennsylvania Supreme Court also

lacks perspective about the role of government in causing

the projects that are the subject of this appeal to be

undertaken. Here, the “taking” that is the subject of

this appeal had its origin in the encouragement at the

national level, and insistence at the state level, upon the

construction of additional prudent generating facilities.

Moreover, at that time, national policy was for a variety

of reasons strongly oriented toward nuclear generation.°

Before the subject projects were undertaken in 1973,

President Eisenhower, each of his successors and the

Congress had expressly and repeatedly encouraged the

construction of nuclear power plants. At the state level,

in the face of rapidly soaring demands for electricity,

the PUC, as delegate of the Pennsylvania Legislature,

instructed Appellants and other Pennsylvania electric

utilities ‘“‘to add additional generating facilities as rap-

idly as possible to meet adequately the public demand

for service.” Pennsylvania Pub. Util. Comm’n v. Metro-

politan Edison Co., 47 Pa. P.U.C. 56, 59 (1973). Ap-

pellants responded in part by undertaking the four units

here involved.

As a result of subsequent unexpected, unforeseeable

developments, these governmental initiatives and the ac-

tions taken by Appellants in response thereto proved to

be unnecessary, and in January 1980 the four nuclear

units were canceled. In all relevant proceedings before

the PUC and the Pennsylvania courts, the prudent na-

ture of the investments made in connection with these

four units was undisputed. Almost three years after

such cancellation by Appellants, the Pennsylvania Legis-

lature adopted Act 335. Although the PUC and the Com-

® See, e.g., Atomic Energy Act, 42 U.S.C. §§ 2131-34, 2235 (1982) ;

Powerplant and Industrial Fuel Use Act, 42 U.S.C. § 8211 (1982);

16 U.S.C. § 824a(g) (1982); see also Federal Power Commission,

The 1970 National Power Survey, Part I at I-6-1, I-6-5 (1971).

9

monwealth Court had construed Act 335 as not preclud-

ing * the recovery in rates of the subject costs, the Penn-

sylvania Supreme Court held otherwise in the decision

that is the subject of this appeal.

Accepting, as one must, that construction of the Penn-

sylvania legislation by the highest court of that state,

the issue then posed is whether the Pennsylvania Su-

preme Court is correct in its assert‘on that the just com-

pensation safeguarded to a utili by the Fourteenth

Amendment does not include any y .urn on, or of, prop-

erty that is not “used and useful” in the public service.

As previously noted, the Pennsylvania Court purports to

rest that assertion on the pre-Hope “fair value” decisions

of this Court and did not address the question of whether

the end result of its decision would satisfy the Hope

and Permian standards.

The Pennsylvania Court’s decision starts with its pur-

ported acknowledgment that the Fourteenth Amendment

is a constraint on the ratemaking actions of a state legis-

lature and public utility commission. (Although not ad-

dressed by the Pennsylvania court, that constraint is ap-

plicable to a state court as well.) The Pennsylvania

Supreme Court’s decision then proceeds with an analysis

of the pre-Hope decisions of this Court as if they con-

tinued to provide an authoritative statement of govern-

ing law.

The whole of the discussion by the Pennsylvania Su-

preme Court of the pre-Hope decisions of this Court as-

sumes a unity of principle and application in those deci-

sions that is contrary to fact. During the pre-Hope

period, commissions and courts (principally the federal

7In a concurring opinion, the President Judge of the Common-

wealth Court stated, “Serious constitutional problems would be

raised by precluding a utility from ever regaining monies prudently

invested for the public’s benefit.” Cohen v. Pennsylvania Pub. Util.

Comm'n, 90 Pa. Commw. Ct. 98, 494 A.2d 58, 64 (Pa. 1985).

10

district courts until the enactment of the Johnson Act *)

struggled to apply a hodgepodge of concepts to regula-

tion of the rates of railroads and other utilities. Valua-

tions of utilities on the basis of fair value, going-concern

value and the like proved to be well-nigh unworkable, as

did the attempts by this Court to provide formulae or

methodologies capable of universal application. Although

Justice Brandeis was particularly articulate and compre-

hensive in his criticism of what had come to pass,’ he

was far from alone. The insistence of the Pennsylvania

Supreme Court on attempting to resurrect that discarded

past is unfortunate."®

The criteria of Hope and its progeny, when applied to

adequate findings of fact and conclusions of law,"' make

good sense and are susceptible to consistent application.

By contrast, it does not make good sense for government

8 28 U.S.C. § 1342 (1982).

® See, e.g., Missouri ex rel. Southwestern Bell Tel. Co. v. Pub. Serv.

Comm'n, 262 U.S. 276, 289-312 (1923) (Brandeis, J., concurring).

10 It is noteworthy that the Pennsylvania Supreme Court focused

on what it conceived to be a constitutional requirement limited to

property that is “used and useful” for public utility purposes and

wholly ignored the rate base, “fair value” criterion that was a part

of the pre-Hope era decisions. This is a curiously “unbalanced”

reading of those decisions.

In Permian, the Court emphasized the necessity for adequate

findings, stating.

Judicial review of the Commission’s orders will therefore func-

tion accurately and efficaciously only if the Commission indi-

cates fully and carefully the methods by which, and the pur-

poses for which, it has chosen to act, as well as its assessment

of the consequences of its orders for the character and future

development of the industry.

390 U.S. at 792. In this case, the PUC had met that requirement.

However, the Pennsylvania Court ignored completely the necessity

to do so. The admonitions of this Court in this regard are equally

applicable to intermediate appellate courts. See Memphis, 411 U S.

at 474.

11

at one time to insist that investment be made in new

facilities requiring long construction periods and then a

few years later to reject recovery of that investment (let

alone return on that investment). It makes even less

sense for the judiciary to impose that result, as the

Pennsylvania Court did in this case.

Il. THE DECISION OF THE PENNSYLVANIA SU-

PREME COURT IMPOSES A FUNDAMENTALLY

UNBALANCED RATEMAKING STANDARD.

The “used and useful” concept for determining the

composition of rate base is generally viewed (as indeed

the Pennsylvania Supreme Court appeared to do) as at-

tributable to the following statement in Smyth v. Ames:

We hold however that the basis of all calculations

as to the reasonableness of rates to be charged by a

corporation maintaining a highway under legislative

sanction must be the fair value of the property being

used by it for the convenience of the public. And in

order to ascertain that value, the original cost of

construction, the amount expended in permanent im-

provements, the amount and market value of its

bonds and stock, the present as compared with the

original cost of construction, the probable earning

capacity of the property under particular rates pre-

scribed by statute and the sum required to meet

operating expenses, are all matters for consideration,

and are to be given such weight as may be just and

right in each case. We do not say that there may

not be other matters to be regarded in estimating the

value of the property. What the company is entitled

to ask is a fair return upon the value of that which

it employs for the public convenience.

169 U.S. at 546-47 (emphasis added).

12 As noted below, the Smyth v. Ames Court did not employ the

term “used and useful,” but somewhere along the way that appar-

ently catchy phrase was substituted for the actual phrase employed

by the Court. Like most catch phrases, the ‘used and useful” phrase

is less than correct in this situation.

12

The Court did not in Smyth identify the test for de-

termining what “property [was] being used by [the cor-

poration] for the convenience of the public,” and indeed,

that issue was not presented in Smyth or in most of the

cases of the pre-Hope era cited by the Pennsylvania Su-

preme Court in which the “used and useful” phrase was

glibly employed.'* Moreover, although the Court in

Smyth held that the rates prescribed by the Nebraska

Legislature were unlawful because they would have de-

prived the railroads of “the just compensation secured

to them by the Constitution,” 169 U.S. at 547, the Court

did not provide a rationale for limiting rate base to

“property being used by [them] for the convenience of

the public.”

Subsequently, a rationale was supplied by commenta-

tors and lower courts, namely, that the utility was en-

titled to just compensation only for property that was

“taken” for the public service and that it could not ex-

pect just compensation (i.e., a return) on the invest-

ments in property which would not be “taken” because

it was not “used and useful.” ' Later, when reproduc-

tion cost became the favored method for determining rate

base, the rationale for limiting rate base to “used and

useful” property was that it would be unreasonable to

include in rate base (and burden consumers with the

reproduction cost of) property which no one would think

13 See, e.g., Bd. of Pub. Util. Comm'rs v. New York Tel. Co., 271

U.S. 23 (1926), and McCardle v. Indianapolis Water Co., 272 U.S.

400 (1926), both cited by the Pennsylvania Supreme Court as sup-

porting its view, where there was no issue in this Court’s discus-

sions of excluding property as not used or useful.

See Washington Gas Light Co. v. Baker, 188 F.2d 11, 18 (D.C.

Cir. 1950), cert. denied, 340 U.S. 952 (1951), commenting on that

rationale and explaining that, with the demise of “fair value,” the

“used and useful” concept ceased to have any constitutional signifi-

cance and is now simply one of several permissible tools of ratemak-

ing and one that need not be, and is not, employed in every instance.

13

of reproducing.” See Washington Gas Light Co. v.

Baker, supra n.14.

Thus, with the decision in Hope, the necessity to in-

voke the “used and useful” doctrine disappeared along

with the disappearance of the necessity to employ the

“fair value” ratemaking methodology required by Smyth

v. Ames. The Hope criteria for ascertaining whether the

rates prescribed are “just and reasonable” have no nec-

essary, or even rational, nexus to a rate base determined

on the basis of “used and useful” property, as distin-

guished from prudent investment. Ratemaking was

freed from the shackles of Smyth v. Ames because, as

evidenced by the instant proceeding, the “used and use-

ful” test is not necessarily consistent with the Hope

criteria.

In light of Hope and its progeny, reviewing courts

should put permanently to rest the impression that rate

regulatory bodies are required to employ the “used and

useful” principle as a matter of law, for at least three

reasons:

1. The “used and useful” principle is being increas-

ingly invoked to justify a breach of the implicit and

fundamental bargain between investors in the securities

of electric utilities and the utilities’ customers (some-

times referred to by judges and commentators as the

“regulatory compact”). It is resulting in the expropria-

tion of millions of dollars of investment with no excuse

5 In Los Angeles Gas & Electric Corp. v. R.R. Comm'n, 289 U.S.

287 (1933)—one of the last cases in which Smyth v. Ames was

attempted to be applied—-the vagaries of such treatment and their

rationale were illustrated when the Court upheld a rate order that

included in the $60.7 million historical-cost measure of value the

$10 million investment in a manufactured gas facility that was

being rendered unnecessary by reason of the introduction of natural

gas, but excluded such facility from the higher, reproduction-cost

measure of value, both of which measures of value were factored

into the development of a fair value rate base.

14

other than the glib “used and useful” phrase." Assuming

that rationality will prevail among investors in the long

run—whose investment decisions will refiect the increased

risk caused by unconstitutional takings—one can antici-

pate that at minimum the cost of electric power will be

increased and, if the trend is carried to its logical ex-

treme, the availability of electricity will be reduced as

a consequence of such expropriation.

2. Because the inappropriateness of the “used and

useful” principle has not been dealt with forthrightly, it

has become a rallying cry for those opposed to current

rate increases, no matter how well justified such current

increases are, and even for legislation enacted in several

states. Moreover, the opinion of the Pennsylvania Su-

preme Court in this case can only be read as holding that

the “used and useful” principle with its Smyth v. Ames

parentage takes precedence over the balancing require-

ments of Hope and Memphis.

3. The “used and useful” principle is inherently asym-

metrical and unfair when employed to exclude recovery

of prudent investment in assets that are not “used and

useful,” in conjunction with limiting recovery to prudent

investment, rather than current market value, for those

assets that are conceded to be “used and useful.”

Since Hope there has not been a decision of this Court

employing the “used and useful” concept as a limitation

on utility rates. Moreover, even in those pre-Hope deci-

sions of this Court that are cited by the Pennsylvania

Supreme Court as a basis for its decision in this case

to exclude recovery in rates of the subject prudent in-

16 See Permian, 390 U.S. at 791 n.60: “The Commission’s exercise

of its regulatory authority must be assessed in light of its purposes

and consequences, and not by references to isolated phrases from

previous cases,” and id. at 775: “{T]his Court does not decide

important questions of law by cursory dicta inserted in unrelated

cases.”

15

vestment, a careful examination discloses that the in-

vestments actually so excluded by this Court in those

cases were in property that was not, and had never been

intended for, use in the utility or regulated business.

Specifically, Denver Union Stock Yard Co. v. United

States, 304 U.S. 470, 475 (1938), involved a statute

authorizing the Secretary of Agriculture to regulate rates

for the furnishing of stockyard services. In exercising

that authority the Secretary employed a rate base/rate

of return methodology. Certain property was excluded

by the Secretary from rate base because it was not, and

had never been, rvoperty “used and useful” for the per-

formance of the stockyard services covered by the regu-

lated rates; i.e., the excluded property was wholly out-

side the scope of the statute because it involved an un-

regulated business. This was also the situation in St.

Joseph Stock Yards Co. v. United States, 298 U.S. 38,

56-57 (1936). And in United Gas Pub. Serv. Co. v.

Texas, 303 U.S. 123, 136, 144 (1938), although the com-

mission and court below questioned the inclusion in rate

base of some properties on the ground that they were not

used or necessary as standby equipment, such properties

were, in fact, included in rate base, albeit at modestly

reduced valuations. Finally, in Natural Gas Pipeline,

315 U.S. at 590, the statement made about “used and

useful” was of a general nature and not reflective of an

issue presented in that case.

In the pre-Hope period, it may have been conceptually

possible to reconcile the exclusion nature of the “used

and useful” concept with a “fair value” rate base—.e.,

a consistent, after-the-fact basis of valuation was being

employed.’ But, with Hope, which is now almost uni-

versally implemented in practice (regardless of the

17 See, e.g., McCardle, 272 U.S. at 410: “It is well established that

values of utility properties fluctuate, and that owners must bear the

decline and are entitled to the increase.”

16

phrasing of the valuation basis) by a prudent invest-

ment before-the-fact basis of valuation, it is asymmetri-

cal and incongruous to apply an after-the-fact basis of

valuation only to certain components of that total valua-

tion—i.e., to say that the investor may have included in

rate base only the lower of cost or current market value

(if any) of each asset, treated separately, and therefore,

that the investors must bear the entire loss of, as well as

on, prudent investments in projects which are prudently

canceled by reason of changed circumstances.

The three opinions of the en bane United States Court

of Appeals for the District of Columbia Circuit in Jersey

Central Power & Light Co. v. Fed. Energy Reg. Comm'n,

810 F.2d 1168 (D.C. Cir. 1987), are illuminating on this

score. In the Jersey Central case, there was a sharp dis-

agreement among the views expressed by (1) Judge Bork

for the majority, (2) Judge Starr in concurrence, and

(3) Judge Mikva on behalf of the dissenters. That dis-

agreement centered upon whether the “used and useful”

concept precluded a utility from receiving a return on its

unamortized investment in abandoned utility projects.

But all three opinions were unanimous in assuming or

holding that the ‘used and useful” concept does not con-

stitutionally preclude recovery of the utility’s total pru-

dent investment in a project intended for utility pur-

poses which is canceled. Thus, all three opinions in Jer-

sey Central support the view that the Pennsylvania Court

was wrong in its assertion in this case that the recovery

of the subject investment is constitutionally barred by

the “used and useful” concept. In fact, the PUC deci-

sions, unencumbered by the “used and useful” doctrine,

properly balanced the interests of investors and con-

sumers, and was correct. Recovery of prudent invest-

ment in this case is fair, logical and constitutionally re-

quired.

17

CONCLUSION

This Court should make clear that the Pennsylvania

Supreme Court erred in applying the Pennsylvania stat-

utes to bar the recovery of prudent investment in costs

for plants that because of unforeseeable circumstances

were subsequently canceled. Moreover, tuis Court should

recognize that the PUC, by permitting recovery of pru-

dently incurred costs, properly applied the law to the

facts of this case in a manner which prevented an un-

constitutional taking. Accordingly, this Court should

reverse the judgment below, thereby reinstating the de-

cisions of the PUC which conformed to applicable con-

stitutional standards.

Respectfully submitted,

ROBERT L. BAUM

Counsel of Record

PETER B. KELSEY

EDISON ELECTRIC INSTITUTE

1111 19th Street, N.W.

Washington, D.C, 20036

(202) 778-6500

May 5, 1988