Amicus Curiae Brief — Duquesne Light Co. v. Barasch

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ts Baprome Court, U.S.

HILL D

JUN 30 1986

F. SPANIGL, JR,

No. 87-1160

IN THE SUPREME COURT OF THE UNITED STATES

October Term 1987

DUQUESNE LIGHT COMPANY

and

PENNSYLVANIA POWER COMPANY,

Appellants

Vv.

DAVID M. BARASCH, ETAL.,

Appellees

On Appeal from the Supreme Court of

Pennsylvania

BRIEF FOR CONSUMER FEDERATION OF AMERICA,

ENVIRONMENTAL ACTION, AND CITIZEN/LABOR

ENERGY COALITION

Scott Hempling

Counsel of Record

Environmental Action

Foundation

1525 New Hampshire Ave.

Washington, DC 20036

(202) 745-4871

Roger Colton

72 Maple St.

Belmont, MA 02178

June 30, 1988

TABLE OF CONTENTS

INTEREST OF AMICI CURIAE .....+4e.-s

SUMMARY OF ARGUMENT .... + 6+ «© «© « «»

ARGUMENT . . . . . . . . . . . . e . . .

I. APPELLANTS' INSISTENCE ON AUTOMATIC

RECOVERY OF PRUDENT INVESTMENT IN

CANCELLED PLANT CONFLICTS WITH THIS

COURT'S TAKINGS PRECEDENT ... .

A. The Legal Test for Takings in

the Regulatory Context...

B. The Pennsylvania Statute

Embodies a Proper Public

Purpose eo . . o _ i *. *. . 7 .

1. The Legal Standard...

2. Application ......

Cc. The Pennsylvania Statute Does

Not Extinguish a Fundamental

Attribute Of Ownership ...

1. The Legal Standard...

2. Application ......

D. The Pennsylvania Statute Has

No Economic Impact Which

Conflicts With Distinct,

Reasonable, Investment-Backed

Expectations .... s+... -

1. The Legal Standards...

2. Appellants' Facial

Challenge to Section

1315's Economic Impact

rrr 6 «6 « © ¢ « «

Appellants Have Not

Demonstrated That Section

1315, As Applied,

Diminishes Shareholder

ns. «= & « ¢ © «© ec e

Section 1315, As Applied,

‘ Does Not Interfere With

Any Distinct, Reasonable,

Investment-Backed

Expectation ..... .

Il. THE METHOD FOR ASSIGNING

PROSPECTIVELY THE RISK OF

UNECONOMIC INVESTMENT IS A MATTER

OF POLICY, NOT CONSTITUTIONAL LAW

CONCLUSION .

TABLE OF AUTHORITIES

COURT CASES

Agins v. City of Tiburon,

447 U.S. 255 (1980)

’

— £8 rr

20, 24, 27, 30, 36,

Armstrong v. United States,

£8 5 Fo re

Comm'n, 532 A.2d 325 (Pa. 1987) ... 45

Bell Tele. Co. v. Pennsylvania

Public Utility Commission,

408 A.2d 917 (Pa. Commw. 1979) .... 43

Bluefield Water Works & Improvement Co. v.

Public Service Commission,

262 U.S. 679 (1923) ..

eo * oe oO — Si, 52

Board of Regents v. Roth,

408 U.S. 564 (1972)

> . . — 31

City of Pittsburgh v. Pennsylvania

Public Utility Commission,

171 Pa. Super. 187, 90 A.2d 607

(1952) oe e eo J — . oe @ _ . oe . * . > . 41

312 Pa. 381, 167 A. 565 (1933) .... 55

Demorest v. City Bank Co.,

321 U.S. 36 (1944)

Duquesne Light Co. v. Pennsylvania

107 A.2d 745 (Pa. 1954)

iii

Gas Co., 320 U.S. 591 (1944) . . 51, 589

369 U.S. 590 (1962) ... +. «6 « 12, 21

467 U.S. 229 (1984) . . ° ° o . . . o 14

y U.S. ,

107 S.Ct. 2076 (1987) .. 5, 6, 10, 11,

16, 17, 26, 28, 41, 56

Hode]_v. Virginia Surface Mining and

Reclamation Ass'n, Inc.,

452 U.S. 264 (1981) .... . 19, 21, 33

412 N.W.2d 600 (Iowa 1987) ..... . 55

Jackson v. Metropolitan Edison Co.,

SS SS) ST) ar

810 F.2d 1168 (1987) ....... 13, 53

Kaiser Aetna v. United States,

444 U.S. 164 (1979) . 4, 6, 16, 28, 55,

Keystone Bituminous Coal Ass'n v.

DeBenedictis, ___ U.S. ___,

107 S.Ct. 1232 (1987) ... . 5, 11, 12,

14-17, 19, 20, 23, 24, 26, 30, 32-34, 55

Co. Vv. United States,

5° eer | |

Lake Nacimiento Ranch v. San Luis

, 830 F.2d 977

(9th Cir. 1987) . . . eo ° . . . ° 21, 26

’

458 U.S. 419 (1982) .. 5, 15-18, 28, 32

289 U.S. 287 (1933) eo oO e J * @ . o * 52

’

749 F.2d 541 (9th Cir. 1984) .... . 38

’

324 U.S. 548 (1945) .... « 40, 46, 52

Miller v. Schoene,

Ee ll ee |

Montana Power Co. v. Montana Public Service

Commission, 692 P.2d 423

(Mont. 1984) J . @ . * > . > — o e o se =

Office of Consumers' Counsel v. Public

Utilities Commission, 67 Ohio St. 153,

423 N.E.2d 820 (1981), ances dismissed, |

455 U.S. 914 (1982) ..

Office of Consumers' Counsel v. Public

Utility Commission, 4 Ohio St. 3d 111,

115, 447 N.E.2d 749, 753-54 (1983) .. 59

Commission, 184 Pa.Super. 8,

132 A.2d 754, 758 (1957) ....... 55

, 438 U.S. 104 (1978) . . 5,

6, 10, 12, 15, 20, 21, 25, 27, 29, 31,

33, 34, 36, 56

Penn Power Co. v. Pennsylvania

Public Utility Commission,

412 A.2d 903 (Pa. Commw. 1980) .... 43

vani ,

-* YF a

Permian Basin Area Rate Cases,

Fe ff i |

Power Reactor Development Co. v.

Electricians, 367 U.S. 396 (1961) .

, 165 Pa.

Super. 393, 68 A.2d 448 (Pa. 1949) .. 42

Commission, 187 Pa.Super. 147,

144 A.2d 468 (1958) ee Es a ae a ae

State of Missouri ex rel. Southwestern

Telephone Co. v. Public Service

Commission, 262 U.S. 276 (1923) ... 13

U.S. v. Willow River Co.,

324 U.S. 499 (1945) ..... 9, 28, 29

United States v. Central Eureka

Mining Co., 357 U.S. 155 (1958) ...11

Washington Gas & Light Co. v. Baker,

188 F.2d 11 (D.C. Cir. 1950),

cert. denied, 340 U.S. 952 (1951) . 13,

Webb's Fabulous Pharmacies, Inc. v.

Beckwith, 449 U.S. 155 (1980) ..... 31

Western & Southern Life Insurance Co. v.

State Bd. of Equalization

’

451 U.S. 648 (1981) ....+..-e.-e.-.. 15

Hamilton Bank, 473 U.S. 172 (1985) . . 34

ADMINISTRATIVE DECISIONS

Atlantic City Elec. Co., 51 P.U.R.4th 109

(N.J.Bd. of P.U. 1983) * oe s — — so . oe 58

Bangor-Byuro-BisG._Sa., 46 P.U.R. 503

(Me. PUC 1982) e o 7 _ o _ . — o >. * o 58

, 49 P.U.R. 4th

188 (N.C. Util. Comm'n 1982) ..... 58

Investigation of the Need for Additional

Electric Generating and Transmission

Facilities, 46 Pa. P.U.C. 23 (1972) . 46

, No. 9617-sub

11 (Wyo. PSC Dec. 2, 1982) ...... 59

Notice of Proposed Rulemaking,

"Regulations Governing Independent

Power Producers," RM88-4-000

(Federal Energy Regulatory

Commission Mar. 16, 1988) ...... 37

, 49 P.U.R.4th 82

(Or. PUC. 1982) . . . . o . . . . . . . 59

, 53 P.U.R.4th

24 (Mont. PSC 1983) . * . . . . . . . 59

Pennsylvania Public Utilities Commission

, 5 P.U.R.4th 202

(Penn. Puc 1974) > > oO — — o — — — — — 44

p dente Sebhin Beth inn Comminns

, 97 P.U.R.3d 227

(Penn. PUC 1972) . . . . . . . . . . 7 43

Philadelphia Electric Co. v. Pennsylvania

Public Utility Commission, 37 P.U.R.4th

381 (Penn. PUC 1980)... Ses 6 «6 Oe

vii

49 P.U.R.4th 274 (Or. PUC 1982) .. 59

Potomac Elec. Power Co.,

50 P.U.R.4th 500 (D.C. PSC 1982) .. 58

’

45 P.U.R.4th 386 (NY PSC 1982) .... 57

Washington Utils. & Trans. Commission

v. Pacific Power and Light Co.,

52 P.U.R.4th 148 (Wash. UTC 1983) .. 60

of West Palm Beach, P.U.R. 1930A

177 (S.D.Fla. 1928) (aff'g Report of

Special Master) .....+++ ++ « 48

MISCELLANEOUS

66 Pa.C.S. sec. 1315 ...... . . passim

Case and Schoenbrod, Electricity or the

Environment: A Study of Public

Regulation without Public Control,

61 CALIF. L. REV. 961, 972 (1973) .. 48

Cleaves, Constitutional Protection for the

Utility Investor: The Confiscation

Doctrine after Cleveland Electric

Illuminating Co. v. Public Utilities

Commission of Ohio, 12 B.C.L. ENVTL. L.

REV. 527 (1985) — oO oO — — > J > . — _ 58

J. BONBRIGHT, A. DANIELSEN,

D. KAMERSCHEN, PRINCIPLES OF PUBLIC

UTILITY RATES (1988) .... +. + + 40, 52

Lippek, Power and the Environment: A

Statutory Approach to Electric

’

Facility Siting

47 WASH. L. REV. 35 (1971) ...... 49

viii

Sommers ’ Recovery of Electric Utility

Losses from Abandoned Construction

Projects, 8 WM. MITCHELL L. REV. 363,

(1982) @ @ eo e oe e oe _ oe _ o * o oO eo — o 58

Wilson,

Ratemaking Treatment of Abandoned

Generating Plant Losses, 8 WM. MITCHELL

L. REV. 343, 352-358 (1982) ..... 58

INTEREST OF AMICI CURIAE

Consumer Federation of America ("CFA"),

a non-profit organization founded in 1968,

is the nation's largest consumer advocacy

organization. CFA's membership encompasses

more than 200 national, state and local

consumer, senior citizen, low-income,

union, farm, labor, public power and

cooperative organizations representing more

than 35 million people. Environmental

Action ("EA") is a non-profit,

environmental research and education

organization based in Washington, D.C.,

with members located throughout the United

States. Citizen/Labor Energy Coalition

("C/LEC"), founded in 1978, is a coalition

of labor, citizen, religious and community

organizations working on energy issues

affecting low and moderate income groups.

Collectively, amici represent consumers

of electricity and residents of communities

affected by electric utility investment

decisions. They seek to ensure that

regulatory treatment of investment by

investor-owned utilities is responsive to

consumer, community and environmental

concerns.

SUMMARY OF ARGUMENT

Section 1315, the Pennsylvania statute 1

denying Appellants retail rate recovery of

their approximately $50 million investment

in cancelled nuclear plants, is not

confiscatory. At the time they made this

investment, Appellants had no property

interest in exacting charges for a product

their customers cannot use. Section 1315,

as interpreted by the Pennsylvania Supreme

Court in the decision below, merely

codified the existing ban on such charges.

Therefore, Section 1315 does not work a

"taking" under the Fifth Amendment to the

U.S. Constitution.

1 66 Pa.cC.S. sec. 1315.

This Court generally has examined

takings challenges by engaging in

"essentially ad hoc, factual inquiries."

In the special context of utility

regulation, where clear risk assignment is

essential to the efficient implementation

of long-term capacity planning, the ad noc

approach does not work well. Amici

therefore propose a constitutional test

which (1) adheres to this Court's takings

precedent; (2) leaves regulatory

jurisdictions free to choose among various

methods of assigning and compensating for

risk; but (3) avoids the inherent

unpredictability of the ad hoc approach.

Specifically, a regulatory act is a

taking only if it (a) does not advance a

legitimate state interest; (b) has a

character which conflicts with a

fundamental attribute of property

ownership; or (c) causes a diminution in

value which is inconsistent with distinct,

reasonable, investment-backed expectations.

Appellants ask this Court to impose a

"prudent investment rule" as the

constitutional standard. Such a rule would

supersede states' diverse experiments in

risk assignment, while viclating this

Court's admonition that the result, not the

method, must control constitutional review

of utility regulatory decisions.

ARGUMENT

I. APPELLANTS' INSISTENCE ON AUTOMATIC

RECOVERY OF PRUDENT INVESTMENT IN

CANCELLED PLANT CONFLICTS WITH THIS

COURT'S TAKINGS PRECEDENT

A. The Legal Test for Takings in the

Regulatory Context

This Court generally has "examined the

‘'taking' question by engaging in

essentially ad hoc, factual inquiries...."

Kaiser Aetna v. United States, 444 U.S.

164, 175 (1979). These "factual inquiries"

generally involve two analytical steps.

First, the Court identifies the relevant

factors. Four factors have appeared most

frequently: (1) legitimacy of the "public

purpose," Keystone Bituminous Coal Ass'n v.

DeBenedictis, ___ U.S. __,, 107 S.Ct. 1232,

1242 (1987); (2) “character of the

government action," Penn Central

Transportation Co. v. New York City, 438

U.S. 104, 124 (1978); (3) “economic

impact," Hodel _ v. Irving, ___ U.S. ___, 107

S.Ct. 2076, 2082 (1987); and (4)

"“interfere[nce] with distinct

investment-backed expectations," Penn

Central, supra, 438 U.S. at 124.

Second, the Court determines what role

each factor should play in the analysis of

the challenged governmental action.

Perhaps reflecting the "ad hoc" nature of

the Court's takings inquiries, the role of

each factor has varied. For example, in

Loretto v. Teleprompter Manhattan CATV, 458

U.S. 419 (1982), the "character" of the

government action -- requiring apartment

building owners to permit cable television

companies to attach equipment to building

roofs -- made it a taking per se. But in

Hodel_ v. Irving, supra, the Court appeared

to "weigh" and "balance" character along

with the other three factors. ? Cf.,

Kaiser Aetna, supra, 444 U.S. at 178 and

n.9 (while "[mjore than one factor"

contributed to Court's finding of a taking,

Court did not decide "whether in some

2 The statute challenged in Hodel v.

Irving prohibited Sioux Indians with less

than two percent interests in certain

parcels of land to pass on those interests

to their heirs. They could either sell

their interests to other tribal members, or

have their interests escheat to the tribe

upon their death. In invalidating the

statute, the Court strongly suggested that

the statute's character -- a "total

abrogation" of a fundamental property right

[the right to pass on property to heirs] --

made it a taking per se. See 107 S.Ct. at

2083-84. Yet the Court also appeared to

treat the four factors as items to be

weighed independently and balanced. See

107 S.Ct. at 2083 ("[{a]lso weighing weakly

in favor of the statute ... is something of

an ‘average reci»vrocity of advantage'");

and n.2 (descri ‘:g the analysis as "the

Penn Central balancing test").

circumstances one of these factors by

itself may be dispositive").

Amici do not seek to modify the Court's

general approach to takings cases. But in

the specific context of utility ratemaking,

where clear risk assignment is central to

efficient, long-term capacity planning, the

unpredictability inherent in the ad hoc

approach does not work well. The need for

predictability aside, the various interests

affected by regulatory policy -- utility

management, shareholders, competitors and

customers -- hold conflicting views on such

key planning questions as who should bear

the economic risks, and capture the

economic benefits, of utility

decisionmaking.

We therefore propose a framework for

analyzing takings claims in the context of

utility ratemaking. This framework (1)

assures that regulatory treatment of

utility investment is predictable and

internally consistent; (2) protects utility

property interests; and (3) leaves the

various interests free to debate, in

advance of construction, the policy issue

of who should bear risk and capture

benefits. That framework is as follows:

First, where a utility volunteers for

the duty and privilege of providing

franchise service, the regulatory agency

(or legislature) is free to assign in

advance, in any manner it wishes, the

economic risks associated with providing

such service. The agency's policy must be

consistent with this Court's "public

purpose" and "character" requirements.

Second, where such advance risk assignment

creates expectations that rise to the level

of a property right, the utility is

entitled to rates which are consistent with

those expectations. As with all takings

cases, the burden rests with the utility tec

demonstrate that rates conflict with

wit

distinct, reasonable, investment-backed

expectations.

Appellants' attack on Section 1315 is

circular. It boils down to the following

syllogism: (1) denial of recovery of

"property dedicated to public use" is a

taking; (2) cancelled plant is "property

dedicated to public use"; (3) therefore,

denial of recovery of cancelled plant is a

taking. Appellants beg one of the key

questions in this case: whether their

decision to build the cancelled plants was

based on a distinct, reasonable,

investment-backed expectation of freedom

from economic risk.

"We cannot start the process of

decision by calling such a claim as we have

here a 'property right'; whether it is a

property right is really the question to be

answered." U.S. v. Willow River Co., 324

U.S. 499, 502-03 (1945). As discussed 3

below, that question must be answered in

the negative.

B. The Pennsylvania Statute Embodies

a_ Proper Public Purpose _

1. The Legal Standard

"Public purpose" review ensures that

the “alleged 'taking' is for a valid

‘public use' within the meaning of the

Fifth Amendment." Hodel v. Irving, supra,

107 S. Ct. at 2089 (Stevens, J.,

concurring). The general test is whether

the statute forces "some people alone to

bear public burdens which, in all fairness

and justice, should be borne by the public

as a whole." Armstrong v. United States,

364 U.S. 40, 49 (1960).

That a statute leaves the claimant

"more burdened than benefitted" does not

invalidate it. Penn Central, supra, 438

U.S. at 133-35. As this Court recently

declared: “While each of us is burdened

somewhat by such restrictions, we, in turn

benefit greatly from the restrictions that

are placed on others....These restrictions

are ‘properly treated as part of the burden

of common citizenship.'" 3 This

requirement of "reciprocity of advantage"

will be met where the statute benefits

"widely varying interests," Keystone,

supra, 107 S.Ct. at 1242-43, or where there

is "substantial overlap" between the

burdened and benefited citizens, Hodel v.

Irving, supra, 107 S.Ct at 2083.

Exemplifying these characteristics would be

a statute designed to protect a state's

economy. 4

3 Keystone, supra, 107 S.Ct. at 1245

(quoting Kimball Laundry Co. v. United

States, 338 U.S. 1, 5 (1949)). See also

Pennsylvania Coal Co. v. Mahon, 260 U.S.

393, 415 (1922) ("reciprocity of advantage"

justifies burdening some more than others).

4 See, e.g., Keystone, 107 S.Ct. at

1243 ("fiscal integrity of the [affected]

area" a proper goal);

, 387 U.S. 155

(1958) (Government order closing gold mines

so that skilled miners would be available

for other mining work based on proper

purpose); Miller v. Schoene, 276 U.S. 272,

279 (1928) (destruction of red cedar trees

This Court will not second-guess

legislative judgments as to whether a

regulatory scheme benefits the public at

large. > And in determining legislative

purpose, this Court will defer to statutory

interpretations reached by lower courts. 6

Finally, the burden of demonstrating the

unreasonabless of government's use of the

police power lies with the rlaintiff. 7

2. Application

Section 1315 prohibits Appellants from

to save nearby apple trees a proper purpose

where apple industry was more important to

state's economy).

5 See, e.g., Penn Central, supra, 438

U.S. at 134 (deferring to City Council's

judgment that "the preservation of

landmarks benefits all New York citizens

and all structures, both economically and

by improving the quality of life in the

city as a whole...").

6 Keystone, supra, 107 S.Ct. at 1242

and n.15.

7 See Goldblatt v. Hempstead, 369 U.S.

590, 596 (1962) ("Our past cases leave no

doubt that appellants had the burden on

*reasonableness.'...").

recovering cancelled plant costs in retail

rates. It effectively bars Appellants from

charging captive ratepayers for a product

they cannot use, did not request and do not

want. The clear purpose of the statute is

to prevent what the Pennsylvania

Legislature deemed to be monopoly abuse of

captive customers. The courts have found

that purpose to be proper, repeatedly. 8

Appellants intimate (Br. at 19) that

Section 1315's purpose is improper because

8 See, e.g., State of Missouri ex rel.

Southwestern Telephone Co. v. Public

Service Commission, 262 U.S. 276, 290

(1923) (Brandeis, J., dissenting) (public

interest includes protection from rates

which are “prohibitive, exorbitant, or

unduly burdensome to the public"); Permian

Basin Area Rate Cases, 390 U.S. 747, 768-69

(1968) (noting public interest in

satisfying consumers' concern about

reasonable prices) ;

Co. v. Baker, 188 F.2d 11, 15 (D.C. Cir.

1950) (protection of consumers from

exorbitant rates is a proper public

purpose), cert. denied, 340 U.S. 952

(1951); Jersey Central Power & Light Co. v.

FERC, 810 F.2d 1168, 1181 n.34 (1987)

(ratepayer must be protected from

"exploitation," regardless of the resulting

impact on the utility).

it merely favors one set of private

interests (ratepayers) over another set

(shareholders). But reasonable rates

benefit utilities as well as ratepayers.

Reduced electricity costs make the

utility's business customers more

competitive, and leave residential

customers with more disposable income. The

resulting economic development can increase

utility revenues. Section 1315 thus

embodies the "reciprocity of advantage"

which has vindicated numerous other

regulatory actions. 9

9 The legitimacy of a statute's

purpose is, of course, "subject to

independent scrutiny by this Court."

, Supra, 107 S.Ct. at 1256

(Rehnquist, J., dissenting). But only the

state courts can determine what the

statutory purpose was. Moreover, only the

state can make the policy judgments which

determine when the public interest is

served by placing limits on certain private

interests, and how to design those limits.

Cf., Hawaii Housing Authority v. Midkiff,

467 U.S. 229, 242 (1984) ("‘whether in fact

the provisions will accomplish the

objectives is not the question: the

(constitutional requirement] is satisfied

C. The Pennsylvania Statute Does Kot

Extinguish a Fundamental Attribute

Of Ownership

1. The Legal Standard

The "character of the government

action" is a factor distinct from the

"purpose" of the action. 10 In Loretto,

supra, the Court held that "a permanent

physical occupation authorized by

government is a taking without regard to

the public interests that it may serve."

if ... the ... [State] Legislature

could have believed that the

[Act] would promote its objective'")

(quoting

, 451 U.S.

Co. v. State Bd. of Equalization

648, 671-72 (1981)) (quoted in Keystone,

supra, 107 S.Ct. at 1255-56 n.3 (Rehnquist,

J., dissenting) ).

10 See Keystone, supra, 107 S.Ct. at

1244 n.18 ("a 'taking' may more readily be

found when the interference with property

can be characterized as a physical invasion

by government, ... than when interference

arises from some public program adjusting

the benefits and burdens of economic life

to promote the common good") (citations

omitted). See also Penn Central, supra,

438 U.S. at 124; Loretto, supra, 458 U.S.

at 426.

458 U.S. at 426. 11

Circumstances warranting per se

invalidation on grounds of character are

"very narrow," Loretto, supra, 458 U.S. at

441; or “extraordinary," Hodel v. Irving,

supra, 107 S.Ct. at 2083. Thus economic

regulation which completely prohibits use

of particular property is still economic

regulation, not physical appropriation. 12

2. Application

Appellants argue (Br. at 31-32 n.25)

11 cf., Kaiser Aetna, supra, 444 U.S.

at 176 (right to exclude is "one of the

most essential sticks in the bundle of

rights that are commonly characterized as

property"); Hodel_v. Irving, supra, 107

S.Ct. at 2083 (statute “amounts to

virtually the abrogation of [a] right ...

{(which] has been part of the Anglo-American

legal system since feudal times").

12 See, e.g., Keystone, 107 S.Ct. at

1244 n.18 ("the Court has repeatedly upheld

regulations that destroy or adversely

affect real property interests"); Agins v.

City of Tiburon, 447 U.S. 255, 262 (1980)

(restrictions on economic development do

not, alone, amount to a taking where they

do not “extinguish a fundamental attribute

of ownership").

that Section 1315's denial of recovery is

analogous to "physical invasion by

government." The analogy is unacceptably

strained. The statute does not work a

physical invasion, and it does not

appropriate property. Rather, it

"restrains uses of property." Keystone,

supra, 107 S.Ct. at 1245. Specifically,

‘Section 1315 deprives Appellants of their

wish to charge captive customers for a

product they do not want. That wish hardly

constitutes a right which “has been part of

the Anglo-American legal system since

feudal times." Hodel v. Irving, supra, 107

S.Ct. at 2083.

Contrary to Appellants' assertion,

Loretto, supra, does not apply to the

instant case. By specifically authorizing

permanent physical occupation, the Loretto

statute prevented the property owner from

making any use of the occupied area. In

contrast, as discussed in Part I.D.2,

infra, Appellants remain free to use the

fruits of their $50 million investment,

with one exception: they may not impose the

costs on retail ratepayers. As the Loretto

Court stated:

To borrow a metaphor, cf. Andrus v.

Allard, 444 U.S. 51, 65-66 (1979),

the government [in authorizing a

physical invasion] does not simply

take a single 'strand' from the

'bundle' of property rights: it

chops through the bundle, taking a

slice of every strand.

Property rights in a physical

thing have been described as the

rights "to possess, use and dispose

of it." [citation omitted] To the

extent that the government

permanently occupies physical

property, it effectively destroys

each of these rights.

Loretto, supra, 458 U.S. at 435 (emphasis

in original). Because Appellants remain

free to utilize their cancelled plant

investment in other ways, they have lost

only one strand, if any. 13

13 Wwe argue in Part I.D.4, infra, that

Appellants had no reasonable expectation,

and therefore no property interest, in

charging captive ratepayers for a product

D. The Pennsylvania Statute Has No

Economic Impact Which Conflicts

With Distinct, Reasonable,

Investment-Backed Expectations _

1. The Legal Standards

A taking occurs where (a) there is a

diminution of value, (b) caused by

government action, (c) which is

inconsistent with distinct, reasonable,

investment-backed expectations. We discuss

each of these factors in turn.

a. Did the utility suffer a diminution

of value"? The takings analysis proceeds

only if the statute necessarily "denies an

owner economically viable use of his land."

Hodel_v. Virginia Surf Mini

Reclamation Ass'n, Inc., 452 U.S. 264,

294-96 (1981). To establish the absence of

economic viability -- an “uphill battie,"

Keystone, supra, 107 S.Ct. at 1247 -- the

Claimant must clear three hurdles.

they do not want. Consequently, Appellants

never owned the strand they claim to have lost.

First, the claimant cannot simply carve

out the affected property and insist it was

taken. "“(W)jhere an owner possesses a full

‘bundle' of property rights, the

destruction of one 'strand' of the bundle

is not a taking because the aggregate must

be viewed in its entirety." Andrus v.

Allard, supra, 444 U.S. at 65-66. 14

Second, the claimant must prove there

are no alternative uses for the affected

property. This requirement flows from the

14 In Andrus, it was "crucial that

appellees retain the rights to possess and

transport their property,...to donate or

devise the protected birds, and to exhibit

the artifacts for an admissions charge."

444 U.S. at 66. And in Keystone, supra,

appel*ants argued unsuccessfully that the

statute constituted a taking of the 27

million tons required to be left in the

ground. That coal was not a separate

segment of property for takings law

purposes. 107 S.Ct. at 1248-49. See also

Penn Central, supra, 438 U.S. at 130-31

(rejecting argument that "air rights" above

the terminal constituted a separate segment

of property; Court must “focus ... on the

nature of the interference with rights in

the parcel as a whole).

principle that there is no property

interest in the "most beneficial use of the

property," even where the claimant already

had devoted capital to that use. Penn

Central, supra, 438 U.S. at 125. Thus

where the challenged statute (a) merely

regulated the mining conditions, but did

not categorically prohibit surface coal

mining, and (b) did not regulate

alternative uses of coal-bearing lands,

claimants could not demonstrate that "mere

enactment" deprived them of economically

viable use of their property. Hodel v.

Virginia Surface Mining Mining, supra, 452

U.S. at 296-97. 15

15 see also Goldblatt v. Hempstead,

Supra, 369 U.S. at 597 n.4 (that appellants

made improvements on the lot previously was

"not indicative of the loss appellants

would presently suffer if the mine were

closed; perhaps the improvements are

commercially saleable"); Lake Nacimiento

Ranch v. San Luis Obispo County, 830 F.2d

977, 981 (9th Cir. 1987)° (the test for

whether a development restriction denies a

plaintiff the economically viable use of

its property focuses on the existence of

~ ai

Third, the utility complaining of a

loss must show it has not been compensated

already for the risk of loss. It must

demonstrate that either (1) the state

explicitly refused compensation for risk;

or (2) the rate of return methodology

imposed by the state during the investment

period did not compensate for risk.

Resolving the risk-compensation issue

requires a state-specific factual analysis.

A claimant may not avoid the required

factual analysis by asserting to this Court

that the specific rate methodology

necessarily fails to reflect risk. This

Court has properly refused to validate or

invalidate facially any particular

ratemaking methodology. Federal Power

Commission v. Hope Natural Gas Co., 320

permissible uses).

—

U.S. 591, 602 (1943). 16

b. Was the diminution caused by

government action? Diminution alone does

not establish a taking. The claimant must

show that the challenged government action

actually caused the claimed diminution. 17

In chant. if the diminution would have

occurred without the statute, it cannot be

16 Amicus Pennsylvania Electric

Association ("PEA") asserts (Br. at 23)

that the state should bear the burden of

demonstrating that the utility has already

been compensated for risk. But in takings

cases this Court has placed the burden of

proof on the claimant, consistently. PEA

offers no reason for changing this rule in

the specific instance of proving failure to

compensate for risk. The evidence on this

issue is a matter of public record

(primarily, state commission orders and the

underlying expert testimony). The state,

therefore, has no special ability to

produce the proof. The burden must remain

with the utility.

17 See Keystone, supra, 107 S.Ct. at

1248 (rejecting takings claim in part

because "the categories of coal that must

be left [in the ground] for Section 4

purposes and other purposes are not

necessarily distinct sets, and there is no

information in the record as to how much ‘

coal is left in the ground solely because

of Section 4").

attributed to the statute.

reasonable, investment-bcked expectations?

To analyze this question fully, we first

must clarify (a) the logical relationship

between expectations and diminution; and

(b) how expectations become property

rights.

i. Economic impact and

investment-backed expectations are not

independent factors; they are causally

linked. Unless the economic impact results

from interference with expectations, that

impact lacks constitutional significance.

The reason: There is no taking without

governmental destruction of a property

right. 18 tIn the context of economic

18 Note that governmental destruction

of a property right is necessary, but not

sufficient, to establish a taking. See

Andrus, supra, 444 U.S. at 65-66; Keystone,

supra, 107 S.Ct. at 1248-49.

now 6~-

regulation, the property right claimed is

the right to earn money conducting a

specific business. If any right exists, it

arises from, and is delimited by, distinct

expectations concerning that business. If

there are no expectations, there are no

property rights with which the government

can interfere. And if there is no

interference with a property right, then

the alleged economic impact must lack

constitutional significance.

The Court's decisions confirm this

causal relationship between economic impact

and expectations. Explaining its

rejections of various takings challenges,

the Court stated: "[W]hile the challenged

government action caused economic harm, it

did not interfere with interests that were

sufficiently bound up with the reasonable

expectations of the claimant to constitute

'property' for Fifth Amendment purposes."

Penn Central, supra, 438 U.S. at 124-25. 19

Indeed, the Court's language indicates that

economic impact analysis effectively

includes expectations analysis: "The

economic impact of the regulation on the

claimant and, particularly, the extent to

which the regulation has interfered with

distinct investment-backed expectations

are, of course, relevant considerations."

Id. 7°

19 See also Keystone, supra, 107 S.Ct.

at 1249 (amount of coal required to be left

in ground must be "viewed in the context of

... financial-backed expectations").

20 cf., Lake Nacimiento, supra, 830

F.2d at 981 n.3 (expectations analysis is

relevant only to “as-applied" challenges,

where “severity of the regulation's impact

on the specific plaintiffs" is at issue).

The Court in Hodel v. Irving also

appears to have linked diminution and

expectations in a causal relationship.

After describing the nature of the

diminution -- loss of the right to pass on

property -- the majority opinion implied

that the right was not very valuable

because appellees had only "dubious"

expectations in exercising it. Hodel v.

Irving, supra, 107 S.Ct. at 2083. Justice

Brennan's concurrence (id. at 2084) also

emphasizes the causal link. He found that

The link between diminution and

expectations surfaces in one further guise.

We noted previously that in measuring

economic impact, the Court will not carve

out the affected property interest and

treat it as "taken." The reason: the

claimant has no reasonable expectation of

using his full bundle of rights without

interference. Thus in Penn Central, supra,

the Court disagreed with the claimant that

"the full use of air rights [was] so bound

up with the investment-backed expectations

of appellants that governmental deprivation

of these rights invariably -- i.e.,

irrespective of the impact of the

the economic impact interfered with

specific expectations created by "unique

negotiations." Those expectations, he

argued, distinguished that case from Andrus

v. Allard, where a significant diminution

in value survived a taking challenge.

While both the majority opinion and

Justice Brennan's concurrence appear to

agree on the causal relationship between

diminution and expectations, they reached

opposite conclusions as to what claimant's

expectations were.

restriction on the value of the parcel as a

whole -- constitutes a 'taking.'" 438 U.S.

at 130 n.27.

ii. “[{N]ot all economic interests

are ‘property rights'; only those economic

advantages are 'rights' which have the law

back of them...." U.S. v. Willow River

Co., supra, 324 U.S. at 502. The question

is how to distinguish between economic

interests and propery rights. For example,

some rights lie at the core of Anglo-Saxon

property law. 21 Other rights may flow

from expectations created by government

consent. 22

21 see, e.g., Kaiser Aetna, supra, 444

U.S. at 179-80 ("'right to exclude' [is]

universally held to be a fundamental

element of the property right"); Loretto,

supra, 458 U.S. at 441 (property owner has

"historically rooted expectation of

compensation" for physical invasion); Hodel

v. Irving, supra, 107 S.Ct. at 2083 (right

to pass on property "has been part of the

Anglo-American legal system since feudal times")

22 Kaiser Aetna, supra, 444 U.S. at

179.

But expectations do not create property

rights automatically. 23 As this Court has

declared: "Rights, property or otherwise,

which are absolute against all the world

are certainly rare...." Willow River Co.,

supra, 324 U.S. at 510 (1945). 24 To get

from expectation to property right, the

claimant must answer a host of other

questions. 25 And whether an expectation

23 See Penn Central, supra, 438 U.S.

at 125 (citing cases in which "the

challenged government action caused

economic harm, [but] did not interfere with

interests that were sufficiently bound up

with the reasonable expectations of the

claimant to constitute 'property' for Fifth

Amendment purposes").

24 See also id. at 499 ("a strategic

position for the development of power does

not give rise to right to maintain [that positi:

25 In Willow River Co., supra, the

Claimants, operators of a hydroelectric

generation business, owned land adjacent to

a river. Based on that ownership, they

asserted a property interest in maintaining

a certain water level conducive to

operation of their plants. In considering

the claim, the Court analyzed the following

issues: "the claimant's rights in the land

to which he claims the water rights to be

appurtenant or incidental; on the navigable

Pe ad ——

amounts to a property right depends in part

on the law existing at the time the

plaintiff claims to have acquired his

property interest. 2© In determining

whether state law creates a property right,

this Court will defer to lower court

interpretations. 27

or non-navigable nature of the waters from

which he advantages; on the substance of

the enjoyment thereof for which he claims

legal protection; on the legal relations of

the adversary claimed to be under a duty to

observe or compensate his interests; and on

whether the conflict is with another

private riparian interest or with a public

interest in navigation." 324 U.S. at 503.

26 As the Chief Justice has written:

"Reliance on state law is necessitated by

the fact that ‘property interests ... are

not created by the Constitution. Rather,

they are created and their dimensions are

defined by existing rules or understandings

that stem from an independent source such

as state law...." Keystone, supra, 107

S.Ct. at 1259-60 (Rehnquist, J.,

dissenting). See also Andrus v. Allard,

supra, 444 U.S. at 64-65 n.21 ("timing" of

acquisition of a property interest,

relative to statutes affecting that

interest, is relevant to analysis of

investment-backed expectations).

27 Keystone, supra, 107 S.Ct. at 1250.

Biss.

Finally, to qualify as property rights,

expectations must be "distinct." Penn

Central, supra, 438 U.S. at 136-37. For

Fifth Amendment purposes, "a mere

unilateral expectation or an abstract need

is not a property interest entitled to

protection." Webb's Fabulous Pharmacies,

Inc. v. Beckwith, 449 U.S. 155, 161 (1980)

(citations omitted). 28

Before applying these three questions

to this case, we must confront one

preliminary issue: Appellants' facial

challenge to Section 1315.

2. Appellants' Facial Challenge

to Section 1315's Economic

Impact Must Fail

Appellants challenge Section 1315 on

both "facial" (Br. at 23-26) and

28 See also Board of Regents v. Roth,

408 U.S. 564, 577 (1972) ("To have a

property interest in a benefit, a person

clearly must have more than an abstract

need or desire for it. He must have more

than a unilateral expectation of it. He

must, instead, have a legitimat: claim of

entitlement to it.").

"as-applied" (Br. at 14-20) grounds. Their

facial challenge effectively seeks

invalidation of any statute imposing the

risk of prudent but uneconomic investment

on those initiating the investment. After

discussing the different analyses

applicable to facial and as-applied

challenges, we show that Appellants' facial

challenge must fail.

This Court has stated:

[Wje have recognized an important

distinction between a claim that

the mere enactment of a statute

constitutes a taking and a claim

that the particular impact of

government action on a specific

piece of property requires payment

of just compensation.

Keystone, supra, 107 S.Ct. at 1247. A

facial challenge is appropriate when the

regulation has an improper public purpose

or an “extraordinary" character, due to the

Court's per se rules in these areas. 29

29 See, e.g., Pennsylvania Coal, supra

(invalidation based on facial challenge to

public purpose); Loretto, supra

In the area of economic impact, the

matter is more complicated. Depending on

whether the challenge is facial or

as-applied, different standards will apply.

For a facial challenge, the question is

whether the government action necessarily

"denies an owner economically viable use of

his land." del v irgini u

Mining, supra, 452 U.S. at 294-96. 39 An

as-applied challenge, in contrast, requires

"careful assessment of the impact of the

regulation" on the specific affected

property, including an inquiry into (1) the

extent of interference with distinct

expectations, and (2) the permissible

remaining uses of the property. Penn

Central, supra, 438 U.S. at 136-37.

(invalidation based on facial challenge to

character of government action).

30 Making this type of claim involves

an "uphill battle," Keystone, supra, 107

S.Ct. at 1247; and a "heavy burden," id. at

1250.

Where expectations are at issue, the

courts have not welcomed facial challenges.

"(T]he submission that appellants may

establish a 'taking' simply by showing that

they have been denied the ability to

exploit a property interest that they

heretofore had believed was available for

development is quite simply untenable."

Penn Central, supra, 438 U.S. at 130. That

conclusion comports with this Court's view,

reiterated just last term, that a facial

challenge is a poor vehicle for testing the

constitutionality of statutes. 31

31 "rTj}he court below ignored this

Court's oft-repeated admonition that the

constitutionality of statutes ought not be

decided except in an actual factual setting

that make such a decision necessary.

[Citations omitted] Adherence to this rule

is particularly important in cases raising

allegations of an unconstitutional taking

of private property." Keystone, supra, 107

S.Ct. at 1247. See also Williamson

Vv i , 473

U.S. 172, 190-91 and n.12 (1985) (the

question whether a regulation interferes

with reasonable, distinct investment-backed

expectations belongs in an as-applied

challenge, not a facial challenge).

The foregoing principles support the

causal link drawn in Part I.D.1.c, supra,

between the economic impact factor and the

expectations factor. Unless the economic

diminution flows from a breach of

expectations, we argued above, the economic

impact has no constitutional significance.

Before determining whether economic impact

is constitutionally relevant, therefore,

one must investigate the claim of

expectations, including all circumstances

consistent or inconsistent with such clain.

That factual investigation is impossible in

the context of a facial challenge.

Appellants do not make the traditional

facial challenge -- that Section 1315

renders their property economically

unviable. Rather, their facial challenge

proceeds argue as follows: (1) we had an

expectation of recovery of the specific

investment; (2) Section 1315's denial of

recovery conflicted with that expectation;

(3) therefore, Section 1315 is a taking.

That argument collides with this Court's

instructions not to resolve expectations

questions in the context of a facial

challenge.

We turn now to Appellants' as-applied

challenges.

3. Appellants Have Not

Demonstrated That Section

1315, As Applied, Diminishes

Shareholder Value

investment. To establish any diminution in

value, Appellants must show, inter alia,

that they cannot put their investment to

alternative uses. Appellants bear the

burden of proof on this issue. 32

32 See Andrus v. Allard, supra, 444

U.S. at 66 (claimants lost because they

could not show they were “unable to derive

economic benefit from the artifacts"); Penn

Central, supra, 438 U.S. at 136 ("it simply

cannot be maintained, on this record, that

appellants have been prohibited from

occupying any portion of the airspace above

the Terminal").

Appellants have made no such showing. Nor

could they, since they can put their

investment to a variety of uses. For

example:

Appellants' cancellation decision was

voluntary. They can reverse that decision

and continue to build one or more plants.

Then they can seek buyers on the wholesale

market from whom to recover their

investment. 33 or, the engineering reports

and other fruits of the cancelled

investment could be shared for a fee with

33 Throughout their briefs, Appellants

and supporting amici suggest that the only

way for them to recoup their cancelled

plants investment is to foist the costs

onto captive retail customers. That is

incorrect. In recent years, a thriving

wholesale electric market has come to life.

Some utilities use this market as an outlet

for excess plant capacity not needed to

serve their retail traditional loads.

Other utilities are seeking to build plants

expressly for the purpose of serving this

interstate wholesale market. See generally

Notice of Proposed Rulemaking, "Regulations

Governing Independent Power Producers,"

RM88-4-000 (Federal Energy Regulatory

Commission Mar. 16, 1988).

other utilities planning similar projects,

or used for internal planning or training

purposes. 34

Appellants may argue that unlike the

property in Andrus v. Allard, supra, their

$50 million in cancellation costs --

consisting of engineering reports and other

allegedly nonproductive assets -- has no

salvage or other value whatsoever. Nothing

on the record supports that argument. But

even assuming the absence of value, that

fact is not attributable to Section 1315.

Rather, it is attributable to Appellants'

voluntary choice to build the kind of plant

they built. Had they sought to meet their

predicted load through, for example, a

series of small power plants, each costing

34 cf., Andrus v. Allard, supra, 444

U.S. at 66 (claimants could exhibit

unmarketable avian artifacts for a fee);

MacLeod v. Santa Clara County, 749 F.2d

541, 547 (9th Cir. 1984) (denial of right

to harvest timber not a taking; affected

ranch owner retained the right to, inter

alia, continue to hold the property as an invest

$50 million, their cancellation decision

might have left them with one completed

plant, which now might have market value.

Where the utility, not the state, chose the

nature of the investment, the utility, not

the state, must bear the risk that the

result will lack market value.

In short, the Pennsylvania statute does

not preclude all beneficial uses of the

investment. It precludes only one use:

charging captive customers for goods they

do not want.

b. Even if Appellants can demonstrate

liminuti t) t bl t) tatut

To test if the Pennsylvania statute was

responsible for Appellants' claimed loss,

assume that the statute stated the

opposite; i.e., that it did permit recovery

from retail ratepayers of the cancellation

costs. Would the Appellants then recover

the money? Not necessarily. If Appellants

raised their price to recover the cancelled

plant costs, customers might reduce their

purchases and leave Appellants with lower

revenues. 35 Appellants, who bear the

burden of proof on this issue, have not

established that the statute's denial of

recovery rights in fact cost them anything.

In light of this failure of proof,

Appellants' argument can succeed only if

this Court finds that captive ratepayers

have a constitutional duty to buy a product

they have not ordered and do not want.

That is not, and should not be, the law.

See Market St. Railway, supra, 324 U.S. at

567 ("The due process clause ... has not

and cannot be applied to insure values or

to restore values that have been lost by

the operation of economic forces.").

35 See J. BONBRIGHT, A. DANIELSEN, D.

KAMERSCHEN, PRINCIPLES OF PUBLIC UTILITY

RATES 358 (1988) (discussing "elasticity of

demand"). Cf., Market St. Railway v.

j , 324 U.S. 548 (1945)

(utility not entitled to higher rate where

it was not clear customers would pay it).

4. Section 1315, As Applied,

Does Not Interfere With Any

Distinct, Reasonable,

Investment~-Backed Expectation

The burden lies on the claimant to

demonstrate distinct, reasonable,

investment-backed expectations. See Hodel

v. Irving, supra, 107 S.Ct. at 2083. As

discussed below, Appellants cannot carry

that burden.

a. At the time they undertook

construction, Appellants had no reasonable

basis for assuming that ratepayers would

insulate them from economic risk. At the

time Appellants undertook to build the

plants at issue here, Pennsylvania utility

rate doctrine had long held that property

not providing current service could not be

charged to ratepayers. For example, in

sit Pitts! : lvania Publi

Utility Commission, 171 Pa. Super. 187, 90

A.2d 607 (1952), the court refused to allow

Duquesne to charge ratepayers for a return

420

either of or on a $708,913 investment in

coal property. Despite Duquesne's good

intentions, the property "has not been

developed, is not presently in use, nor is

there evidence that it will be used in the

near future." 90 A.2d at 615. Similarly,

in Schuykill Valley Lines v. Pennsylvania

Public Utility Commission, 165 Pa.

Super. 393, 68 A.2d 448 (Pa. 1949), the

court noted that "although plans have been

drawn for a proposed [office] building, no

convracts have been let and the work has

been deferred indefinitely due to high

construction costs." 68 A.2d at 451-52.

The court upheld the Commission's denial of

cost recovery since the land "was not

property devoted to a public use." 68 A.2d

at 452.

The principle articulated in Schuykill

-- that a Pennsylvania utility may not

recover costs from ratepayers for

investments that are not providing current

service to ratepayers -- has been brought

forward to this decade in an uninterrupted

line of cases. 36

Appellants had early notice of

Pennsylvania's ratemaking policy through

direct experience. See Duquesne Light

Co. v. Pennsylvania Public Utility

Commission, 107 A.2d 745, 752 (Pa. 1954).

And in its 1972 retail rate case, just at

the time it initiated the investment

controverted here, Duquesne was reminded it

could recover plant investment (along with

a return on that investment) only “when

plant is placed in service." Pennsylvania

Public utilit : or ve. Light

Co., 97 P.U.R.3d 227, 256 (Penn. PUC

1972).

36 See, e.g., Duquesne Light

Co. v. Pennsylvania Public Utility

Commission, 107 A.2d 745, 752 (Pa. 1954);

cited in

, 408 A.2d 917,

Public Utility Commission

926 (Pa. Commw. 1979); cited in West

Penn Power Co. v. Pennsylvania Public |

Utility Commission, 412 A.2d 903 (Pa. Commw. 1980

As is clear from this review, a utility

in Pennsylvania in 1972 could expect to

recover its investment, and receive a

return on it, only by satisfying two tests:

(1) completing construction, and (2)

placing the plant in service. These tests

had been part of the jurisprudence of

Pennsylvania for years. 37

It is unreasonable to expect that the

state would have discarded this staple of

utility ratemaking -- i.e., investors are

responsible for risk prior to property

being placed into service -- without saying

37 In a 1974 decision, the

Pennsylvania Commission again applied the

principle in a very real way to one of

Appellants. Pennsylvania Public Utilities

’

P.U.R.4th 202 (Penn. PUC 1974). The

Commission there denied return (both of and

on investment) for certain power plants

that had been retired even though not fully

depreciated. 5 P.U.R.4th at 206-208. Just

as importantly, the Commission denied a

return both of and on investment for, among

other things, certain "transmission plant

constructed in various years but never

placed in service...." Id. at 211.

sc expressly. Indeed, the Pennsylvania

Supreme Court, in the opinion below, did

not discard the precedent; it reiterated

the precedent. Specifically, the court

found that "fundamental principles of

[Pennsylvania's] public utility

jurisprudence" prohibited the recovery of

costs from ratepayers not associated with

the actual provision of present utility

service to ratepayers. Barasch v.

Pennsylvania Pub. Util. Comm'n, 532 A.2d

325, 338 (Pa. 1987). Section 1315, the

court held (id. at 37),

was mainly an attempt by the 1982

legislature to make clear, by

codification, that the above

mentioned general principles of

utility law should govern the

then-ongoing efforts of some

electric utilities to recover

cancelled plant costs from their

customers. (emphasis added)

A different historical policy certainly

was not mandated by the Constitution.

Ratepayers never have acted as insurers of

a utility investment. The Constitution

"has not and cannot be applied to insure

values or to restore values that have been

lost by the operation of economic forces."

Market Street Railway Co., supra, 324 U.S.

at 567.

b. Appellants' rendition of

protection from economic risk. This is not

a case where an unwilling utility was

ordered to undertake a risky venture and

then denied cost recovery for it. Nothing

in the events leading up to the

construction of the plant supports

Appellants' claim that they reasonably

could expect protection from the ratemaking

risks discussed above.

In the early 1970s, the Pennsylvania

Commission had expressed a "concern" about

"whether current plans are satisfactory to

meet projected future needs for electric

power." Investigation of the Need for

Additional Electric Generating and

Transmission Facilities, 46 Pa. P.U.C. 23,

25 (1972). At the same time, the

Commission recognized that among the

"possible changes in conditions which may

affect the demand of future power during

the next several decades" was the

"developing trend to conserve the use of

electric service and a moratorium on the

promotion of total electric residential

living units." Id. That is hardly

language mandating power plant

construction.

In the same opinion, the Commission

articulated a clear division of

responsibility between itself and

management. In "“review[ing] the revised

plans of electric utilities," id. at 26,

the Commission would act in an oversight

capacity only. The plans would be

initiated and implemented by the utilities.

No state review would occur until the

utility included particular plants in

reports filed with the Commission. The

Commission's role would be passive;

Appellants' role active. 38

In short, no one told Appellants what

strategies to pursue to match capacity with

demand, or demand with capacity.

Nonnuclear, nonconstruction options were

readily available. But Appellants chose

the generation option, and they chose the

nuclear option. Those choices, while

deemed prudent by the Commission, were not

without risks. The electric utility

industry debate, as to whether or not to

respond to the risk of future energy

shortages by forever increasing capital

expansion, had already begun. 39

38 contrast West Palm Beach Water

Co. v. City of West Palm Beach,

P.U.R. 1930A 177 (S.D.Fla. 1928) (aff'g

Report of Special Master).

39 See, e.g., Case and Schoenbrod,

_ ; .

IE Coe oo

That Pennsylvania encouraged Appellants

to pursue some response to the predicted

gap between demand and capacity does not

make Appellants' voluntary decision to

build generation, and to build nuclear

generation, the decision of the state.

Under somewhat different circumstances,

this Court has addressed when the actions

of a utility can be held to be the

responsibility of the state. In Jackson

v. Metropolitan Edison Co., 419 U.S. 345

(1974), a customer argued that state

approval of the utility's service

disconnections made those disconnections

were the actions of the state. 419 U.S. at

354-55. This Court disagreed. Approval of

utility actions, "where the commission has

not put its own weight on the side of the

proposed practice by ordering it, does not

61 CALIF. L. REV. 961, 972 (1973); Lippek,

Power and the Environment: A Statutory

7 Meakele Seat iiie ai

ing, 47

WASH. L. REV. 35, 49 (1971).

transmute a practice initiated by the

utility and approved by the commission into

“state action.'" Id. at 357.

c. Appellants have not shown they were

not _ compensated for economicy risk. To

demonstrate they had a reasonable

expectation of freedom from economic risk,

Appellants must show they have not been

compensated already for that risk.

Appellants make no such showing. Nor can

they.

Appellants earn a rate of return. That

rate of return reflects some type of risk.

By asserting that they are insulated from

the risk of uneconomic results, Appellants

imply that the risk for which the rate of

return compensates them is the risk of

management imprudence. That cannot be

correct. Seminal rate of return cases make

clear that in setting a utility's rate of

return, there is an assumption of prudent

and efficient management. 4° Ratepayers

are never expected to compensate a utility

for negligent, wasteful or improvident

expenditures; or, by implication, for the

risk of such expenditures. 41 The risk of

imprudence simply is not a cost that

utilities may pass on to their customers.

Determining a response to management

imprudence is a matter strictly between the

utility's investors and the management they

hired.

If the risk of imprudence is not

compensable through the authorized rate of

return, then what risk is reflected in that

return? Compensation for the risk of

40 See Federal Power Commission v.

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

W Wo Vv.

Public Service Commission, 262 U.S. 679 (1923).

41 West Ohio Gas Co. v. Ohio Public

Utilities Commission, 294 U.S. 63 (1935);

Reagan v. Farmers’ Loan and Trust Co., 154

U.S. 362 (1894). See also Missouri ex

rel. S.W. Bell Tel. Co. v. Public Service

Comm'n, 262 U.S. 276, 290 n.1 (1923)

(Brandeis, J., dissenting).

uneconomic results, for one. That risk is

a major primary factor in determining the

rate of return allowed for utility debt and

equity instruments included in the

utility's capital structure. 42 Among

these economic risks: (a) a nuclear plant

might not be licensed to operate due to

unresolved safety factors; 43 (b) a

particular supply of energy might be

rendered unnecessary because of more

adequate substitute supplies; 44 and (c) an

enterprise might be rendered uneconomic due

to the presence of competition; 45

including, by implication, "competition"

42 Hope Natural Gas Co., supra, 320

U.S. at 603; Bluefield Water Works, supra,

262 U.S. at 691-93 (1923). Cf., BONBRIGHT,

supra at 316, 322-25.

43 Power Reactor Development Co. v.

Electricians, 367 U.S. 396, 415 (1961).

44 Los Angeles Gas and Electric

Vv s . . ;

289 U.S. 287, 306 (1933).

U.S. at 567.

from consumer conservation, alternative

fuels, and other contributors to declining

demand.

In short, Appellants have been

compensated already for precisely the risk

which befell them here. It would} be

illogical, and unfair, to require consumers

to compensate investors for the risk of

loss and then to exact the actual loss from

consumers should it occur. Jersey Central

Power and Light Co. v. FERC, supra, 810

F.2d at 1208-09 (dissenting opinion). 4°

” * * a x

The foregoing discussion demonstrates

that Pennsylvania and federal case law

furnished no basis for any reasonable

46 That cited passage was not

challenged by the majority. See also

188 F.2d at 20 (“Ratepayers cannot be

required both to carry this risk and to pay

the Company for carrying it."). Accord,

° e . ew

Hampshire, No. 87-311, slip op. at 10 (N.H.

Jan. 26, 1988).

expectation on Appellants' part that their

plant investment would be insulated from

economic risk. Moreover, none of the

events directly leading to Appellants'

investment decision altered this

expectation landscape. Only one possible

argument remains: that (1) Appellants'

initial franchise provided, in return for

their agreeing to serve the public, a state

promise to insulate them from economic

risk; and that (2) such promise amounted to

a property right protected by the Fifth

Amendment. That argument is directly

contradicted by Pennsylvania law. "A

certificate of public convenience [to serve

the public] is neither a contract nor a

property interest under which its holder

acquires vested rights." W Wa

Co. v. Commonwealth of Pennsylvania, 10 Pa.

Commw. 533, 311 A.2d 370, 375 (1973). 47

For these reasons, Appellants' expectations

argument must fail.

The facts set forth above are

undisputed. Thus this Court has more than

ample basis for upholding the Pennsylvania

Supreme Court's decision. But if there is

a factual dispute (and we do not believe

there is one), this Court may not resolve

it. The state courts must be the final

interpreters of state events and state law.

Keystone, supra, 107 S.Ct. at 1259-60

47 See also Snyder v. Pennsylvania

Public Utility Commission, 187 Pa.Super.

147, 144 A.2d 468, 470 (1958); Paradise v.

Pennsylvania Public Utility Commission, 184

Pa.Super. 8, 132 A.2d 754, 758 (1957); Day

vy. Public Service Commission, 312 Pa. 381,

167 A. 565, 567 (1933). Cf£., Montana Power

Co. v. Montana Public Service Commission

’

692 P.2d 423 (Mont. 1984) (certificate of

convenience and necessity approving plant

construction of makes no commitment to any

future ratemaking treatment); Iowa-Illinois

Gas_ and Electric Co. v. Iowa State Commerce

Commission, 412 N.W.2d 600, 605-06 (Iowa

1987) (same). Compare Kaiser Aetna, supra

(government consent to investment created

expectatio. amounting to property right).

(Rehnquist, J., dissenting). 48

II. THE METHOD FOR ASSIGNING PROSPECTIVELY

THE RISK OF UNECONOMIC INVESTMENT IS A

MATTER OF POLICY, NOT CONSTITUTIONAL

LAW

This Court has held repeatedly that the

Constitution does not dictate any

particular method of ratemaking so long as

the end result is just and reasonable.

Moreover, this Court will not "inquire

whether the rule applied by the state court

is right or wrong, or substitute its own

48 while this Court's takings analyses

have involved “essentially ad hoc, factual

inquiries," Hodel_v. Irving, 107 S.Ct.

2076, 2082 (1987) (quoting Kaiser Aetna v.

United States, 444 U.S. 164, 175 (1979))

the Court in those cases has not been a

fact finder. Rather, the Court has weighed

the facts before it, to determine when

"'justice and fairness' require that

economic injuries caused by public action

be compensated." Kaiser Aetna, supra, 444

U.S. at 175 (quoting Penn Central, supra,

438 U.S. at 124). The task of resolving

factual disputes has remained with the

lower courts. Cf., Hodel v. Irving, 107

S.Ct. 2076, 2084 (1987) (Brennan, J.,

concurring) (relying on Court of Appeals'

finding that negotiations giving rise to

plaintiff's property rights had created

specific expectations).

view of what should be deemed the better

rule, for that of the state court."

Demorest v. City Bank Co., 321 U.S. 36,

41-43 (1944).

Deference is particularly important

where there exists a multitude of state

regulatory agencies determining just and

reasonable rates under differing state

statutes and policies. New York, for

example, allows a return both of and on

prudent investment in cancelled plants.

New York views this allowance as consistent

with the utility's undertaking the

obligation to serve. “9 Other states

permit recovery of, but not return on, the

amounts invested in the cancelled plant.

They view the ratepayer-investor

relationship as a joint venture which

49 see, e.g., Rochester Gas and

Elec. Corp., 45 P.U.R.4th 386 (NY PSC 1982).

requires a sharing of risks and costs. °°

Still other states permit a return of

investment, but limit such return to the

cost of long-term debt (thus denying a

return on equity). These states reason

that while equity investors have a say in

the management of the utility, holders of

debt do not; therefore, the latter group

should not be held responsible management's

uneconomic decisions. °1

50 See, e.g., Atlantic City Elec. Co.,

51 P.U.R.4th 109 (N.J.Bd. of P.U. 1983);

Bangor-Hydro Elec. Co., 46 P.U.R. 503

(Me. PUC 1982).

51 See, e.g., Carolina Power and Light

Co., 49 P.U.R. 4th 188 (N.C. Util. Comm'n

1982); Potomac Elec. Power Co., 50

P.U.R.4th 500 (D.C. PSC 1982). Fora

review of plant cancellation decisions, see

generally Sommers, Recovery of Electric

Projects, 8 WM. MITCHELL L. REV. 363, 371,

n.43 (1982); Wilson, Ratemaking Treatment

of Abandoned Generating Plant Losses, 8

WM. MITCHELL L. REV. 343, 352-358 (1982).

See also Cleaves, Constitutional Protection

for the Utility Investor: The Confiscation

Illuminati Public Utiliti

Commission of Ohio," 12 B.C.L. ENVTL. L.

REV. 527 (1985).

Recoupment of all or part of a return

of and on and investment is not a universal

policy, however. In Oregon and other

states, recovery of cancelled plant costs

is forbidden by statute. 52 These states

have opted for a regulatory scheme that

imposes the entire risk of non-operational

plant on investors. Still other states

have barred the passthrough to ratepayers

of cancelled plant costs, but require

explicit compensation for investors

undertaking this risk of non-operation. 53

52 See, e.g., Pacific Power & Light

Co., 49 P.U.R.4th 82 (Or. PUC 1982);

Portland Gen. Elec. Co., 49 P.U.R.4th 274

(Or. PUC 1982). Accord, Pacific Power and

Light Co., 53 P.U.R.4th 24 (Mont. PSC

1983); Lower Valley & Light, Inc.,

No. 9617-sub 11, at 9 (Wyo. PSC Dec. 2,

1982) (denying recovery for the cancelled

WPPSS 4 and 5 and the Pebble Spring

plants).

53 Compare Office of Consumers'

, 67

Counsel v. Public Utilities Commission

Ohio St. 153, 423 N.E.2d 820 (1981) (denial

of recovery mandated by statute), appeal

dismissed, 455 U.S. 914 (1982); with Office

of Consumers' Counsel v. Public Utility

Commission, 4 Ohio St. 3d 111, 115, 447

A final ratemaking option is to eschew

establishing a doctrine involving the

"up-front" allocation of risk. Instead, a

a post-construction review would apportion

cancellation costs in some fashion

determined to be "just and reasonable."

This option is consistent with this Court's

holding in Hope Natural Gas, supra: ([I]jt

is the result reached not the method

employed which is controlling." 320

U.S. at 602. >4

This Court should not supersede this

rich variety of approaches to risk

N.E.2d 749, 753-54 (1983) (approving

commission's subsequent action raising

utility's rate of return due to increased

risk resulting from the cost recovery

decision). Accord, Washington Utils. &

Trans. Commission v. Pacific Power and

Light Co., 52 P.U.R.4th 148 (Wash. UTC

1983).

54 of course, if there was no clear

risk allocation rule determined in advance

of construction, the authorized rate of

return during construction would have to

reflect the uncertainty over the later risk

allocation.

assignment by imposing a single ratemaking

method under the guise of constitutional

construction. As discussed in Part I.A,

supra, the Constitution requires only that

the rate methodology not conflict with

distinct, reasonable, investment-backed

expectations. In the utility regulatory

arena, whether such a conflict occurs may

depend on specific expectation-creating

events like Commission orders, utility

proposals, or the absence of such orders

and proposals. These events will vary in

each regulatory jurisdiction.

Amicus Pennsylvania Electric

Association ("PEA") concedes that "there

are several methods of ratemaking that, at

least in theory, would fully protect the

ultimate constitutional interest," Br. at

23, and that "any standard that fairly

balances the benefits and burdens of

regulation can satisfy constitutional

standards," id. at 17 n.13. Yet PEA

instead would impose a single standard, the

"prudent investment" standard, as a matter

of constitutional doctrine. PEA cites no

authority for the principle that this

approach is the “appropriate ...

constitutional benchmark." No such

authority exists.

The prudent investment standard has

been rejected as illogical, let alone as

constitutionally-imposed doctrine.

Specifically, the standard misconstrues the

purpose of excluding nonoperational plant

from rates. The various methods cited

above are means of allocating risk; they

are not methods of punishing a "culpable"

party. As the Pennsylvania Commission

noted, where a utility overbuilt capacity:

[T]he fact that excessive plant

investments were prudent when made

does not necessarily preclude the

Commission from allotting

responsibility for their

cost....The sudden burden of this

new plant investment was no fault

of Penn Power of its investors; but

neither was it the fault of the

ratepayers.

Public Utility Commission, 37 P.U.R.4th

381, 387 (Penn. PUC 1980). Where, by

assumption, no one is at fault, it is

illogical to assign costs based on the

absence of fault. But that is exactly what

the prudent investment approach does.

The prudent management approach fails

on a policy level as well. By focusing

narrowly on the prudence of the decision to

build, the prudent investment policy

weakens any incentive to improve management

processes. Ratepayers and the public at

large, benefits from (1) accurate demand

forecasting; (2) precise determinations of

the type and timing of new capacity needs;

and (3) meaningful review of ongoing

construction. If rates are based only on

whether utility management is imprudent or

is acting in bad faith, little if any

economic incentive will exist for

management to produce these important

benefits.

CONCLUSION

WHEREFORE, for the foregoing reasons,

Amici respectfully request this Court to

affirm the decision below.

Sat f0~_

Scott Hempling

Counsel of Record

Environmental Action

Foundation

1525 New Hampshire Ave.

Washington, DC 20036

Roger Colton

72 Maple St.

Belmont, MA 02178

June 30, 1988

CERTIFICATE OF SERVICE

I hereby certify that on June 30, 1988,

I served a copy of the foregoing document

on those persons listed below, by

depositing the appropriate number of copies

thereof in the United States mail, postage

prepaid, or by equivalent method of

service:

William E. Zeiter, Esq.

Morgan, Lewis & Bockius

2000 One Logan Square

Philadelphia, PA 19103

Irwin A. Popowsky, Esq.

Office of Consumer Advocate

1425 Strawberry Sq.

Harrisburg, PA 17120

Bohdan R. Pankiw, Esq.

Pennsylvania Public Utility Commission

P.O. Box 3265

Harrisburg, PA 17120

Scott Hempling

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