# Amicus Curiae Brief — Duquesne Light Co. v. Barasch

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0631%3A15

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1989
- **Citation:** 488 U.S. 299

## Text

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

i

15

16

19

19

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 .

ii

31

36

41

56

64

TABLE OF AUTHORITIES

COURT CASES

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

’
— £8 rr
20, 24, 27, 30, 36,

38
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

iv

’
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 =

55

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) .

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

52

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

vi

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

7
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

ix

1
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

2
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.

3

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

5
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

6
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").

7
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

8

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

9
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

va

10
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

a

11
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

12

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.'...").

13

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).

14
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

15

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.

16
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").

17
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,

18
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

19
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.

20

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).

21
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

22

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).

—

23

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").

24

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~-

25
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."

26
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

27
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.

28
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.

29

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 ——

30
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.

31

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.").

32

"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

33

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.

34

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).

i
4

35

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;

36
(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").

:

37
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).

aa

38

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

39
$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

40

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).

41
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

43

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

44

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

5

’
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.

45
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

46
"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

47

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

48
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

49

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).

50
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

51

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).

52
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.

53
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).

54
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.

55
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).

56
(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).

57
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).

58
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).

59

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

60

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.

61
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

62
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

63

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

64
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

AA

Scott Hempling

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0631%3A15. Public record. Not legal advice.