Amicus Curiae Brief — Duquesne Light Co. v. Barasch

a Ee t iL. & D

No. 87-1160 / FUN 30 1938

IN THE | =o —

Supreme Court of the United States

OCTOBER TERM, 1987

DUQUESNE LIGHT COMPANY

and

PENNSYLVANIA POWER COMPANY,

. Appellants,

DAVID M. BARASCH,

CONSUMER ADVOCATE, et al.,

Appellees.

On Appeal from the Supreme Court of Pennsylvania

BRIEF OF INDUSTRIAL ENERGY CONSUMERS OF

PENNSYLVANIA; ELECTRICITY CONSUMERS

RESOURCE COUNCIL AND AMERICAN IRON

AND STEEL INSTITUTE AS AMICUS CURIAE

IN SUPPORT OF APPELLEES

HENRY R. MACNICHOLAS

H. LEE ROUSSEL

DAVID M. KLEPPINGER *

McNEES, WALLACE & NURICK

100 Pine Street

P.O. Box 1166

Harrisburg, PA 17108-1166

(717) 232-8000

Attorneys for Industrial Enerqy

Consumers of Pennsylvania,

Electricity Consumers Resource

Council and American Iron and

Steel Institute

* Counsel of Record

June 30, 1988

nn a a ee

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

QUESTION PRESENTED

Do the Fifth and Fourteenth Amendments require

state ratemaking agencies to allow recovery of or the

return on prudently incurred investments (including

but not limited to cancelled electric generating units)

without consideration of whether those investments con-

stitute used and useful utility property?

(i)

TABLE OF CONTENTS

QUESTION PRESENTED ...0......22-2-2------------00eee

TABLE OF AUTHORITIES .........---------.2:000000---e

INTEREST OF AMICUS CURIAE ..........22.0----------

COUNTERSTATEMENT OF THE CASE ....................

Il.

SUMMARY OF ARGUMENT ..............-----------------e--------

ARGUMENT. ........--------0----s--ccese-cceeneecenscenensenensssnnnnenensennseres

I.

The Pennsylvania Supreme Court’s Application

Of The Used And Useful Principle Did Not Re-

sult In An Unconstitutional Taking Of The Ap-

pellant’s Property Because The Fifth And Four-

teenth Amendments Do Not Entitle Regulated

Utilities To Recovery Of Or On Prudently In-

curred Investments Without Consideration Of

Other Factors, Including, But Not Limited To,

The Used And Useful Principle ....................---------

A. Appellants’ Interpretation Of Hope And Per-

mian Basin Violates The Basic Economic

Tenets Of Regulatory Law Which Are In-

tended To Mirror The Competitive Market-

B. The Decisions By This Court And The Lower

Federal Courts Before And After The Hope

And Permian Cases Confirm That The Con-

tinued Utilization Of The Used And Useful

Principle In Ratemaking Is Consistent With

This Court’s Holdings In Hope And Per-

I i a caemcnanauunenbeeestees CES a eee

This Court Has Regularly Dismissed Proceed-

ings Which Have Raised The Identical Constitu-

tional Arguments Made By Appellants In This

Te ss ensecenennincsosnsubeonsenssonapuasserssenstessiainoenens

Page

14

15

19

26

28

iv

TABLE OF AUTHORITIES

Cases: | Page

Barasch v. Pennsylvania Public Utility Comm'n,

532 A.2d 325 (Pa. 1987) .....---.--------------1-s---eee000- 15

Bluefield Waterworks & Improvement Co. v. Public

Service Comm’n, 262 U.S. 679 (1923) .........-..----- 23

Board of Public Utility Commissioners v. New

York Telephone Co., 271 U.S. 23 (1926) ............- 23

Cleveland Electric Illuminating Co. v. Public Utili-

ties Comm’n, 4 Ohio St.3d 107, 447 N.E.2d 746,

appeal dismissed, 464 U.S. 802 ¢ TET 13, 26, 27

Cleveland Electric Illuminating Co. v. Public Utili-

ties Comm’n, No. 82-165 (Ohio, July 7, 1982),

appeal dismissed, 459 U.S. 1094 (1983) ......... 13, 26, 27

Denver Union Stock Yard Co. v. U.S., 304 USS.

GE CD Kecctcinieeecs a a ee 22

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

Water Division, 411 U.S. 458 (1973) ............--------- 12

Federal Power Comm’n v. Natural Gas Pipeline

Co., 315 U.S. 575 (1942) .......----------------e-seeeteeteeeees 19

Federal Power Comm'n v. Hope Natural Gas Com-

pany, 320 U.S. 591 (1944) -........--------- 10, 12, 19, 20

Jersey Central Power & Light Co. v. Board of

Public Utilities, 466 U.S. 947 (1984) ...........-------- 13, 26

Jersey Central Power & Light v. FERC, 810 F.2d

1168, (D.C. Cir. 1987) ........-.-----------------+ 15, 16, 17, 24, 25

Kentucky Utilities Co. v. FERC, 760 F.2d 1321

(D.C. Cir. 1985) ............------c--c-sceeeeeeneensennees Sets 23, 24

Los Angeles Gas & Electric Corp. v. Railroad

Comm’n, 289 U.S. 287 (1933) -.... Eye Sanonere wanes 23

Market Street Railway Co. v. Railroad Comm'n of

Calif., 324 U.S. 548 (1945) .........---.----------e eee 18

Meek v. Pittenger, 421 U.S. 349 (1975) -............-- 27

Minnesota Rate Cases, 230 U.S. 352 (1918) -....... 23

Natural Gas Pipeline Co. v. FERC, 765 F.2d 1155,

(D.C. Cir. 1985), cert. denied, 106 S. Ct. 794

| See acassacadanasssereesvesssnauagensssoueseniene aa 24

Vv

TABLE OF AUTHORITIES—Continued

Page

Northern Indiana Public Service Co. v. Citizens

Action Coalition of Indiana, Inc., 485 N.E.2d

610 (Indiana 1985), appeal dismissed and cert.

denied, 476 U.S. 1137 (1986) ............----------------- 13, 26, 27

Office of Consumers’ Counsel v. Public Utilities

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

(1981), appeal dismissed sub nom., Cleveland

Electric Illuminating Co. v. Office of Consumers’

Counsel, 455 U.S. 914 (1982)... .........----------- 13, 26, 27

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

CBOE) nnncnenncnesesscnsccsnnnsesessctonnnsonnrnscnss eteisaealaimeetd 10, 12, 22

Smyth v. Ames, 169 U.S. 466 (1898) -.............-------- 10, 23

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

U.S. BB (19B6) ........--2-.---.--0-022-000---cceovseensenncesnnesenees 23

Willeox v. Consolidated Gas Co., 212 US. 19

(1909) ...-.--.-.----0----cecseceneneensenecronsssneenensensnescsernenncssons 23

Administrative Decisions:

Investigation of the Need for Additional Electric

Generating and Transmission Facilities, Investi-

gation Docket No. 138, 46 Pa. P.U.C. 23 (1972)... 7,8

Pennsylvania Public Utility Comm'n v. Metropoli-

tan Edison Co., Rate Investigation Docket No.

64, 47 Pa. P.U.C. 56 (1978) .........--------------2----- 7, 8-9

Pennsylvania Electric Co. v. Pennsylvania Public

Utility Comm'n, 509 Pa. 324, 502 A.2d 130

(1985), appeal dismissed sub nom., Metropolitan

Edison Co. v. Pennsylvania Public Utility

Comm’n, 106 S. Ct. 2239 (1986) ..... .......------------- 13, 26

Statutes:

1 Pa. C.S. § 1984 .........--.------------0-0---nc-cnennesnennneenenneenees 15

68 Pa. CE. 6 OS ......-.-..--..... a eee 9

I, a sacn-soctercananesceteiniessonianeniiniies 10, 14

] ees AES a ea 3 9

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

No. 87-1160

DUQUESNE LIGHT COMPANY

and

PENNSYLVANIA POWER COMPANY,

. Appellants,

DAVID M. BARASCH,

CONSUMER ADVOCATE, et al.,

Appellees.

On Appeal from the Supreme Court of Pennsylvania

BRIEF OF INDUSTRIAL ENERGY CONSUMERS OF

PENNSYLVANIA, ELECTRICITY CONSUMERS

RESOURCE COUNCIL AND AMERICAN IRON

AND STEEL INSTITUTE AS AMICUS CURIAE

IN SUPPORT OF APPELLEES

The Industrial Energy Consumers of Pennsylvania

(IECPA), the Electricity Consumers Resource Council

(ELCON), and the American Iron and Steel Institute

(AISI) hereby submit their Brief Amicus Curiae in

Support of Appellee David M. Barasch, Consumer Ad-

vocate, et al. and of the decision by the Supreme Court

of Pennsylvania.’

1 JECPA, ELCON and AISI have obtained the written consents

of,all parties to this case. The written consents have been filed with

the Clerk of this Court.

2

INTEREST OF AMICUS CURIAE

IECPA is a statewide group of energy intensive in-

dustrial consumers of electricity.» IECPA members em-

ploy approximately 130,451 Pennsylvanians and con-

sume 25% of the industrial electricity purchased in the

2 The members of IECPA are:

Air Products & Chemicals, Inc.

Airco Industrial Gases

Allegheny Ludlum Steel Corporation

Allentown Cement Company

Allied Corporation

Appleton Papers, Inc.

Armco Advanced Materials Corporation

Babcock & Wilcox Company

The J. E. Baker Company

Bethlehem Steel Corporation

Cabot Corporation

Carpenter Technology Corporation

Caterpillar Tractor Company

Cooper Industries

Corning Glass Works

Cressona Aluminum Company

Dana Corporation

Franklin Steel Company

General Battery Corporation

International Paper Company

Hercules Cement Company

Hershey Foods Corporation

Jessop Steel Company

Liquid Air Corporation

Lukens Steel Company

M G Industries

National Forge Company

New Jersey Zinc Company, Inc.

‘Owens-Illinois, Inc. ,

PPG Industries, Inc.

The Procter & Gamble Paper Products Co.

Rohm and Haas Company

Standard Steel

Sun Refining & Marketing Company

Union Carbide Corporation

USX Corporation

Washington Steel Corporation

a

3

Commonwealth. IECPA members operate 187 facilities

in Pennsylvania, including several within the service

territory of the Appellants, Duquesne Light Company

and Pennsylvania Power Company.

ELCON is a national organization of 17 energy in-

tensive industrial consumers of electricity which employ

more than 800,000 people. ELCON members operate

more than 650 different facilities in 49 of the 50 states

and, in addition, have sizeable operations in numerous

foreign countries. The electricity consumption by ELCON

members exceeds the total electricity sales of 36 of the

50 states. ELCON member companies produce a wide

range of products, including steel, chemicals, industrial

gases, glass, motor vehicles, electronic equipment, appli-

ances, textiles and food.*

AISA is the principal trade association of the domestic

steel industry. Its forty-three domestic member com-

panies account for more than eighty percent of the raw

steel production capability in the United States.* The

3 The members of ELCON are:

Air Products and Chemicals, Inc.

American National Can

Anheuser-Busch Companies, Inc.

Armco

Bethlehem Steel Corporation

Cone Mills Corporation

Corning Glass Works

Dow Chemical U.S.A.

E.1. duPont deNemours & Company

FMC Corporation

General Motors Corporation

Hercules Incorporated

Hershey Foods Corporation

Owens-Corning Fiberglass

PPG Industries, Inc.

A. E. Sialey Manufacturing Company

Union Carbide Corporation

4 The domestic member companies of AISI are:

Acre Steel Company

Armco Inc.

4

cost of electricity to AISI members may constitute as

much as forty percent of the cost of a steel mill product,

Atlantic Steel Company

Avesta Stainless Inc.

The Babcock & Wilcox Company

Bethlehem Steel Corporation

Berg Steel Pipe Corporation

California Steel Industries, Inc.

Carpenter Technology Corporation

Cleveland-Cliffs Inc.

Copperweld Steel Corporation

Electralloy Corporation

A. Fink] & Sons Co.

Geneva Steel Company

Georgetown Industries, Inc.

Gulf States Steel, Inc.

M. A. Hanna Company

Harsco Corporation

Hi Specialty America

Inland Steel Industries, Inc.

Earle M. Jorgensen Company

Laclede Steel Company

Lone Star Technologies, Inc.

LTV Steel Company

Lukens Inc.

McLouth Steel Products Corporation

National Steel Corportaion

North Star Steel Company

Oblebay Norton Company

Raritan River Steel Company

Rhode Island Forging Steel, Inc.

Rome Strip Steel Company, Inc.

Rouge Steel Company

Sandvik Inc.

Sharon Steel Corporation

Sharon Tube Company

Shenango Incorporated

The Timken Company

USS, A Division of USX Corporation

Valley-Vulcan Mold Company

Weirton Steel Corporation

Wheatland Tube Company

Wheeling-Pittsburgh Steel Corporation

5

making the steel industry one of the most energy-inten-

sive industries in the country.

Individual IECPA, ELCON and AISI members, either

directly or through industrial intervention groups, have

participated in numerous rate cases filed by utilities over

the last fiifteen years, including cases in which the issue

of a return of or on prudent investments, which have not

proven to be used and useful for producing electric serv-

ice, has been addressed. In no such case has the utility

been entitled to a return of or on its investment as a

matter of right. Rather, the respective state or the rate-

making agency of the state has always had the discre-

tion to determine whether the utility is entitled to a

return of or on prudent investment based on all the facts

presented, including whether the investment produced

used and useful property.

IECPA, ELCON and AISI have a direct and substan-

tial interest in this case. Each organization seeks to

assure that adequate and secure long-term supplies of

electricity will be available in Pennsylvania and the

nation at equitable and competitive prices. However,

the development of equitable and competitive prices for

electricity service to ratepayers must be based upon valid

cost of service principles. IECPAs, ELCON’s and AISI’s

interests are twofold in that their members must have

long-term supplies of electricity available in order to pro-

duce their respective products. However, the assurance of

a long-term supply of electricity must be at a price

which enables their members to produce competitively

priced products. An excessive supply of electricity at

excessive prices will not permit their members to main-

tain their competitive positions in the marketplace.

The position advocated by the Appellants and the

amicus curiae supporting the Appellants would create

a constitutional entitlement to the recovery of or the

return on any prudent investment made by an electric

ey ST

6

utility without consideration of whether that investment

resulted in used and useful public utility property pro-

viding actual utility service to customers. It would elim-

inate the flexibility and discretion which states have had

to decide whether a utility should be permitted to recover

a return of or on investments which may have been

prudent but which have not produced used and useful

property. The retention of that flexibility and discretion

is essential to the proper balancing of ratepayer and

shareholder interests. Appellants seek to establish a

constitutional right for utilities to recover a return of

and on investments which a private enterprise in the

competitive marketplace would have no such opportunity

to recover. Thus, the principle that regulation “mirror”

the operation of competitive markets would be shattered.

Removal of the “used and useful” standard, as ad-

vocated by Appellants and their amici would create a

“prudence-only” standard for the recovery of or on utility

investment. As members of energy intensive industrial

intervention groups, IECPA, ELCON and AISI members

have participated regularly in a substantial number of

rate cases filed by utilities over the last fifteen years.

That experience confirms their serious concerns with a

prudence-only standard because one of the few checks

state ratemaking agencies have been able to apply on

utility rate increases is the requirement that a prudent

utility investment should also result in the production of

used and useful utility property. A ‘“prudence-only”

standard would remove this check. Under current law,

if a prudent investment fails to produce used and useful

utility property, a state has discretion to deny a return

of or on that investment. States require such discretion

to properly balance the interests of utilities and con-

sumers. A constitutional entitlement to the recovery of

or on all prudent utility investment could cause greater

rate increases than are necessary or appropriate to

fairly compensate utility investors. Such increases would,

of course, be contrary to the public interest.

7

The argument set forth below will show that the

Pennsylvania Public Utility Code, as applied to Appel-

lants in this case, has not effected a taking of property

in violation of the Fifth and Fourteenth Amendments to

the Constitution.

COUNTERSTATEMENT OF THE CASE

IECPA, ELCON and AISI adopt the counterstatement

of the case as set forth in the Brief of Appellee David M.

Barasch, Consumer Advocate.

However, IECPA, ELCON and AISI must clarify the

mischaracterizations by Appellants and their amici of

two decisions by the Pennsylvania Public Utility Commis-

sion: Investigation of the Need for Additional Electric

Generating and Transmission Facilities, Investigation

Docket No. 138, 46 Pa. P.U.C. 23 (1972), and Pennsyl-

vania Public Utility Comm’n v. Metropolitan Edison Co.,

Rate Investigation Docket No. 64, 47 Pa. P.U.C. 56

(1973). Neither of these decisions imposed an affirma-

tive requirement on the Appellants, or any other juris-

dictional electric utility in Pennsylvania, to invest in ad-

ditional electric generating stations.

The Commission instituted Investigation Docket No. 138

due to the threat of electric power shortages and the need

to stimulate electric power companies “in the development

of plans for increasing generating capacity to meet antic-

ipated load growth and future demands.” 46 Pa. P.U.C.

at 23. The investigation was necessitated because load

growth had exceeded certain utility companies’ inaccurate

forecasts and because a “conservative attitude” on the

part of some utilities resulted in a serious installed ca-

pacity deficiency situation. Jd. at 24.

However, as the Commission sought to rectify the prob-

lem, it specifically left to each utility the determination

of whether that specific utility needed additional capacity.

It left to each utility the estimates of customer demand

8

requirements on which any determination of need for ad-

ditional capacity would be based. The Commission also

clearly left to each utility company the decision as to

whether sufficient reserve capacity should be achieved

through new construction, the importation of electricity

from other sources, or from conservation.’ In the event

a specific utility concluded it needed additional capacity

based on its estimates of consumer demand and its eval-

uation of the alternatives available for meeting that de-

mand, the Commission also left to each utility the devel-

opment of a generating capacity expansion plan, includ-

ing the schedules for generating plant and transmission

line additions, and the cost estimates for construction of

new generating plants. See Ordering Paragraphs at 46

Pa. P.U.C. at 26-27.

The Comm’‘ssion never directed or required the Appel-

lants to develop, plan for, or invest in the four cancelled

nuclear plants at issue in this case. The most the Com-

mission ever indicated to the utility industry as a whole

was that it “wanted 2,000 megawatts of combustion tur-

bine capacity immediately.” Jd. at 25. After the Com-

mission’s investigation, the Appellants, based upon their

own projections of capacity needs, load growth, and the

effect of conservation, chose to pursue the capacity plan-

ning schedule which resulted in the planning and can-

cellation of the four nuclear units in this case. The Com-

mission never “required” the Appellants to construct the

facilities which are the subject of this case.

In the context of rate relief requests by individual

utilities in the early 1970s, the Commission continued to

indicate its desire for specific individual utilities to con-

tinue construction of electric generating capacity where

necessary. See e.g., Pennsylvania Public Utility Comm’n

5 Even as early as this 1972 investigation, the Commission noted

the developing trend to conserve the use of electricity and the im-

plications that such conservation would have on the demands for

electric power. 46 Pa. P.U.C. at 26-27.

9

v. Metropolitan Edison Co., Rate Investigation Docket

No. 64, supra. However, these Commission desires were

expressed in the context of base rate increase requests

by specific utilities after such utilities had already made

their decision to invest in the construction of generating

capacity based upon their own specific capacity plan fore-

casts and specific load growth estimates. As individual

utilities approached the Commission for rate relief, one

reason relied on by the Commission in granting the re-

quested relief was the Commission’s distinct concern with

the sufficiency of the electric generating capacity in the

Commonwealth. Jd at 59. The Commission did not, how-

ever, in Metropolitan Edison or in any other rate case

actually require a utility to engage in a particular capa-

city expansion plan or to construct a particular type of

capacity. Furthermore, in no rate proceeding involving

Appellants did the Commission endorse the construction

program resulting in the cancelled plants at issue here.

A review of the Pennsylvania Public Utility Code, 66

Pa. C.S. § 101, et seg. (hereinafter “Code’”’) indicates that

che Pennsylvania Public Utility Commission does not have

the statutory authority to require investment in generat-

ing plants. The Code merely establishes that every public

utility must furnish and maintain adequate, efficient, safe,

and reasonable service and facilities. 66 Pa. C.S. § 1501.

Thus, the decision by the Appellants to pursue the capac-

ity expansion plan in question constituted a voluntary act

on their part based upon their own respective capacity

plan forecasts and load growth scenarios. Any references

by the Appellants, or the amici supporting Appellants, to

the proposition that the Commission required the invest-

ments subject to this case should be ignored.

wail

10

SUMMARY OF ARGUMENT

The Fifth and Fourteenth Amendments to the United

States Constitution do not require states to allow re-

covery of or on prudently incurred investments by reg-

ulated utilities without any consideration of whether

those investments produced used and useful utility prop-

erty. Section 1315 of the Pennsylvania Public Utility

Code, which denies recovery of or on an investment

which is not used and useful, is consistent with this

Court’s application of the Fifth and Fourteenth Amend-

ments to regulated industries in the line of cases pro-

ceeding from Smyth v. Ames, 169 U.S. 466 (1898)

through FPC v. Hope Natural Gas Co., 320 U.S. 591

(1944) to Permian Basin Area Rate Cases, 390 U.S. 747

(1968).

By creating a constitutional entitlement to utility in-

vestor recovery of or on prudent investment in property

which does not produce used and useful public service,

this Court would upset the long-established principle of

publie utility regulation that regulation should mirror the

competitive private marketplace in an otherwise mono-

polistic business. IECPA, ELCON and AISI members

compete in the private economy and are well aware of its

competitive nature. The United States economy is orga-

nized on the decentralized lines of private property and

private enterprise such that competition is relied upon

to promote the public welfare and the market is the cen-

tral institution regulating economic activity. However,

in some industries, like the electric utility industry, com-

petition has not traditionally been effective and regula-

tion by the government may be necessary to protect the

public interest. As noted by Walter Adams, “Here the

visible hand of public regulation was to replace the in-

visible hand of Adam Smith in order to protect consum-

ers against extortion of charges, restrictions of output,

6 Charles F. Phillips, Jr.. The Regulation of Public Utilities

(1984).

ll

deterioration of service, and unfair discrimination.” * In

the private unregulated economy, the invisible hand of

the market usually does not provide a return of, or on,

investments, however prudent, which turn out to be wrong

by not producing property which is used and useful in mak-

ing products or services consumers wish to purchase. Com-

petition prevents non-monopolists from raising their prices

above those of their competitors who did not make com-

parable investments. The visible hand of public regula-

tion should not provide an affirmative constitutional en-

titlement to the recovery of such prudent, yet uneconomic,

investments.

Such an entitlement would create an undue preference

for the utility investor over the investor in the private

competitive marketplace. It would not only shift the

balance in favor of the utility investor over the rate-

payer and the private investor, but would also upset the

balance inherent in the American economy between reg-

ulated entities and nonregulated entities. The former

would recover any prudent investment, with the cost of

prudent but uneconomic investment borne by their cus-

tomers and not by their shareholders. Competitive pri-

vate enterprises have no such guarantee and the cost of

their prudent, yet uneconomic investments are usually

borne entirely by their shareholders. No rational read-

ing of this Court’s teachings in the Hope and Permian

Basin cases would conclude that this Court intended the

former as a result.

During the Court’s application of the Fifth and Four-

teenth Amendments to regulated industries in the con-

text of these three cases, the utility investor has never

been granted a constitutional entitlement to the recovery

of all prudent investments without a consideration of

other relevant factors. Those factors include, but are not

limited to, the ability of the utility to maintain its finan-

7Walter Adams “The Role of Competition and the Regulated

Industries”, 48 American Economic Review, 527 (1958).

12

cial integrity, the ability of the utility to attract necessary

capital, fair compensation to investors for the risks they

have assumed, and protection of the relevant public in-

terest both at the present time and in the foreseeable

future. Permian, 390 U.S. at 792. These factors are

evaluated in the context of the total rate case effect of

the state ratemaking body’s decision and the end result

of that case. See Hope, 320 U.S. at 602-603.

No constitutional taking of property can exist when

the total rate case effect and the end result of that case

permits the utility to operate successfully and profitably.

Such a result indicates that a proper balancing has been

achieved between the interests of ratepayers and inves-

tors consistent with this Court’s teachings in Hope, Per-

mian Basin, and FPC v. Memphis Light, Gas & Water

Division, 411 U.S. 458 (1973). Not only have Appellants

continued to operate successfully and profitably, but each

has continued to engage in a substantial construction pro-

gram after the Pennsylvania Supreme Court’s decision to

deny a recovery of or on the prudently incurred invest-

ment in cancelled nuclear generating units.

The Appellants and the amici supporting Appellants

misinterpret and misapply the intent and teachings of the

Hope and Permian Basin cases. In those cases, this Court

did not create an additional constitutional right guaran-

teeing a recovery of or on all prudent investments made

by utility investors. Rather, those cases sought to remove

the courts from intervention in the minutia of regulatory

rate case proceedings and to have courts focus, instead,

on the issue of whether the regulatory decision permitted

the utility to operate successfully. If this end result is

obtained, then a utility should not have a complaint be-

cause the interests of ratepayers and investors have been

reasonably balanced.

This Court’s dismissal of comparable proceedings indi-

cates that the used and useful principle as applied by the

13

Pennsylvania Supreme Court was not overridden by Hope

and that utility investors have no constitutional right

to the recovery of or on all prudent investments.

Through a dismissal for want of a substantial federal

question, this Court refused to reverse on the merits

Pennsylvania and other states’ denial of cost recovery on

utility investment in nuclear power plants which have

been out of service for extended periods due to nuclear

accidents. Pennsylvania Electric Co. v. Pennsylvania

Public Utility Comm’n, 509 Pa. 324, 502 A.2d 130 (1985),

appeal dismissed sub nom. Metropolitan Edison Co. v.

Pennsylvania Public Utility Comm’n, 476 U.S. 11387

(1986). See also Jersey Central Power & Light Co. v.

Board of Public Utilities, 466 U.S. 947 (1984). The

Court dismissed several other cases, some of which in-

volved the same cancelled nuclear plants subject to this

ease. Cleveland Electric Illuminating Co. v. Public Utili-

ties Comm’n, 4 Ohio St.3d 107, 447 N.E.2d 746, appeal

dismissed, 464 U.S. 802 (1983); Cleveland Electric Illu-

minating Co. v. Public Utilities Comm’n, No, 82-165

(Ohio, July 7, 1982), appeal dismissed, 459 U.S. 1094

(1983); Office of Consumers’ Counsel v. Public Utilities

Comm’n, 67 Ohio St.2d 153, 423 N.E.2d 820 (1981),

appeal dismissed sub nom, Cleveland Electric Illuminating

Co. v. Office of Consumers’ Counsel, 455 U.S. 914 (1982) ;

Northern Indiana Public Service Co. v. Citizens Action

Coalition of Indiana, Inc., 485 N.E.2d 610 (Indiana

1985), appeal dismissed and cert. denied, 476 U.S. 1137

(1986).

Therefore, no basis exists in the context of economic

theory, in this Court’s teachings in Hope and Permian

Basin, or in this Court’s treatment of similar issues, to

create a constitutional entitlement for the recovery of or

on all prudent utility investments irrespective of whether

those investments ever produced used and useful utility

property.

14

ARGUMENT

I. The Pennsylvania Supreme Court’s Application of The

Used And Useful Principle Did Not Result In An Un-

constitutional Taking Of The Appellant’s Property

Because The Fifth And Fourteenth Amendments Do

Not Entitle Regulated Utilities To Recovery Of Or On

Prudently Incurred Investmen:s Without Considera-

tion Of Other Factors, Including, But Not Limited To,

The Used And Useful Principle.

Section 1315 of the Code reads as follows:

£1315. Limitation on consideration of certain costs

for electric utilities

Except for such nonrevenue producing, nonexpense

reducing investments as may be reasonably shown to

be necessary to improve environmental conditions at

existing facilities or improve safety at existing facili-

ties or as may be required to convert facilities to the

utilization of coal, the cost of construction or expan-

sion of a facility undertaken by a public utility pro-

ducing, generating, transmitting, distributing or fur-

nishing electricity shall not be made a part of the

rate base nor otherwise included in the rates charged

by the electric utility until such time as the facility is

used and useful in service to the public. Except as

stated in this section, no electric utility property shall

be deemed used and useful until it is presently pro-

viding actual utility service to the customers. 66

Pa. C.S. § 1315.

The Pennsylvania Supreme Court held that Section 1315

of the Code prohibits an electric utility from recovering

the costs of cancelled plants from ratepayers, either by

making such costs part of its rate base or by converting

them into operating expenses through amortization. To

have reached any other conclusion, the Pennsylvania

Supreme Court would have had to treat as surplusage

the portion of Section 1315’s proscription which states,

“ nor otherwise included in the rates charged by the

15

electric utility.” Barasch v. Pennsylvania Public Utility

Comm’n, 532 A.2d at 332. Section 1315 specifically

defines “used and useful” as property which is presently

providing actual utility service to customers. As a result,

investment in a cancelled plant which never provided

actual utility service had to be excluded from rate base

and not charged to ratepayers through an amortized

operating expense. Clearly, the Pennsylvania Supreme

Court applied the letter of the law to the Appellants con-

sistent with Section 1934 of the Statutory Construction

Act of 1972, 1 Pa. C.S. § 1934. Id. at 332.

Appellants now challenge the constitutional validity of

the statute itself, as well as other “unspecified ratemak-

ing legislation.”* In order for that constitutional chal-

lenge to be successful, this Court would have to find

that the Fifth and Fourteenth Amendments require states

to allow recovery of or on prudently incurred invest-

ments (including, but not limited to, cancelled electric

generating units) without any consideration of whether

those investments constitute used and useful property.

The establishment of such a constitutional entitlement

to the recovery of all prudent investments would be

directly contrary to the economic rationale underlying

utility rate regulation ard in direct contravention of this

Court’s definition of the rights of utility investors.

A. Appellants’ Interpretation Of Hope And Permian

Basin Violates The Basic Economic Tenets of Regu-

latory Law Which Are Intended To Mirror The

Competitive Marketplace.

Rate regulation is, in theory and in practice, hopefully,

the substitute for competition. Jersey Central Power &

Light v. FERC, 810 F.2d 1168, 1190 (D.C. Cir. 1987)

8 See Appellant’s Brief at pp. 2-3, footnote no. 2, for an explana-

tion of this term.

16

(Starr, concurring). Appellant’s interpretation of Hope

and Permian Basin creating a prudence-only standard

would prevent regulation from properly substituting for

competition. In a competitive marketplace, investors have

no constitutional entitlement to a return of or on prudent

investments which fail to produce economic results. If

rate regulation is performing its function as a substi-

tute for competition, the regulated entity, likewise, should

not be afforded a constitutional entitlement to a return

of or on prudent investments which never provide an

economic benefit to ratepayers. Jd. at 1190. Judge

Starr’s characterization of rate regulation as a substitute

for competition and his caution to examine both ends of

the continuum—both the prudence of the investment and

whether the end result of the investment was used and

useful—forms the crux of this amicus curiae brief in

opposition to the prudence-only standard advocated by

Appellants and the amici supporting Appellants.

The used and useful principle operates as a restraining

principle, reminding utility managers that they must

assume the risk of economic forces working against an

investment which is prudent at the time it is made.

810 F.2d 1190, fn.1. Without this “reminder” to utility

managers, no meaningful check would exist on managers’

decisions to plan and build excess generating capacity

and automatically pass the costs of that capacity on to

ratepayers. While prudence is a relevant issue in the

process of striking a reasonable balance in rate setting

for public utilities, the used and useful rule is another

safeguard. The prudence rule looks to the time of the

investment, whereas the used and useful rule looks to a

later time. These two principles are designed to assure

that the ratepayers, whose property might otherwise be

taken by regulatory authorities through approval of util-

ity rate increases, will not necessarily be saddled with the

results of management’s defalcations or mistakes, or as a

matter of simple justice, be required to pay for that

17

which provides the ratepayers with not discernible benefit.

Id, at 1190.

Without application of the used and useful principle to

offset the application of the prudence standard, the Con-

stitution would protect utility investors entirely from the

business risks experienced daily in the free market sys-

tem. These business risks are a component of the rate-

making process when regulatory bodies establish an au-

thorized overall rate of return for the utility. A business

in the private sector must constantly deal with the risk

of investing in too much capacity when the market does

not meet expectations due to economic factors beyond

management’s control. Absent a monopoly, a private

business cannot automatically increase prices to its cus-

tomers to recover a prudent but uneconomic expenditure,

since customers will switch to competitors’ products.

IECPA, ELCON and AISI are in full agreement with

Judge Starr’s statement that utilities should not be

exempt from comparable competitive economic forces.

Id. at 1191.

In the private competitive marketplace, prudence does

not guarantee a company economic success or a return of

or on its investment. Numerous private “prudent” com-

panies have gone bankrupt because of investments which

were prudent when made but which turned out to be poor

business or economic decisions. The regulatory system

already provides some relief to utilities from the threat

of bankruptcy for making uneconomic business decisions.

This Court should not ignore economic reality and entitle

utility investors to a return of or on investment which

does not produce used and useful utility property. If

such an investment were made in the private sector, no

such entitlement of a return would exist. Individual

members of IECPA, ELCON and AISI constantly make

prudent business decisions with the expectation that the

decision will represent a valid economic and business

judgment. Unfortunately, investments do not ~lways

18

achieve their desired expectations and shareholders must

absorb any resulting economic loss. This Court should

not place utility investors in a protective cocoon which

insulates them from valid business risks experienced by

unregulated entities.

Moreover, denial of recovery of a prudent investment

not used and useful for service to customers does not

constitute a taking of property by the state. No property

is taken since the private competitive marketplace it-

self denied any return. No property right exists en-

titling a regulated utility to recovery in excess of that

provided in the private, competitive, unregulated econ-

omy. Market Street Railway Co. v. Railroad Comm'n of

Calif., 324 U.S. 548, 566-67 (1945) (recovery not re-

quired where market forces, not the state, reduces the

value of property). Here, Appellants’ prudent invest-

ments were rendered uneconomic, and the plants can-

celled, as a result of market forces, not state action.

Pennsylvania’s decision to deny Appellants a recovery of

or on property that was not used and useful merely con-

firmed the operation of market forces. The purposes of

regulation is to deny utilities monopoly profits in excess

of that which a competitive marketplace would permit.

Here, Appellants attempt to manipulate the regulatory

system and this Court’s prior decisions to compel a re-

covery in excess of that which a competitive economy

would allow. This Court should not be manipulated so

as to create a constitutional standard which would man-

date the potential of monopoly profits for the utility

industry far in excess of what could be earned in the

competitive marketplace.

19

B. The Decisions By This Court And The Lower Fed-

eral Courts Before And After The Hope And Per-

mian Cases Confirm That The Continued Utilization

Of The Used And Useful Principle In Ratemaking

Is Consistent With This Court’s Holdings In Hope

And Permian.

The Appellants and amici supporting Appellants rely

upon a misapplication of this Court’s teachings in the

Hope and Permian Basin cases. Neither case held that

utility investors have a constitutional entitiement to the

recovery of all prudent investments without any con-

sideration of the used and useful principle. Appellants

seek to distort the Court’s holdings in these cases by

ignoring the “end result” of the case and by overturning

the Court’s opinion that “It is not theory but impact of

the rate order which counts.” Hope, 320 U.S. at 602.

Hope and Permian Basin clarified the Court’s ap-

proach to utility rate cases and utility investor expecta-

tions but did not override or overturn the used and use-

ful principle. In fact, Hope did not discuss the used and

useful principle when outlining this Court’s application

of the “just and reasonable” ratemaking standard.

In Hope, the Court refused to bind the Federal Power

Commission to the use of any single formula or combi-

nation of formulae in determining rates primarily be-

eause the ratemaking function involved the making of

pragmatic adjustments. 320 U.S. at 602; see also FPC

v. Natural Gas Pipeline Co., 315 U.S. 575 (1942). When

a ratemaking order is challenged in the courts, the ques-

tion under Hope is whether the order “viewed in its

entirety” meets the requirements of the statutory stand-

ard of “just and reasonable rates.” The result which is

obtained is the important factor and not the method em-

ployed in reaching that result. /d. The Appellants and

supporting amici in this proceeding would have this

Court focus entirely on one ratemaking item in a com-

20

plex rate proceeding which achieved the all important

result of just and reasonable rates.

In both Hope and Permian Basin, the Court held that

if the total effect of the rate order cannot be said to be

unjust and unreasonable, then judicial inquiry should

end. Even if the methods employed to reach a certain

result contain infirmities, the Court would not necessar-

ily conclude that the total effect of the rate order was in-

appropriate. Jd. The total effect of the rate order sub-

ject to this appeal on Duquesne Light Company resulted

in an 11.6% overall rate of return, a 16.14% return on

common equity, an annua! base rate increase in excess of

$105 Million, and total annual revenues in excess of

$800 Million. (App. 19C, 938C, 126C). For Duquesne

Light Company to contend that the disallowed $3.5 Mil-

lion annual amortization for the cancelled plant costs vio-

lated this Court’s teachings in Hope borders on the ri-

diculous. While Hope recognized the fixing of just and

reasonable rates involves a balancing of the investor and

consumer interests, the Duquesne Light Company in-

vestor interests in financial integrity were clearly served

even with the $3.5 Million annual amortization disal-

lowance.

The Hope court stated, “Rates which enable the com-

pany to operate successfully, to maintain its financial in-

tegrity, to attract capital, and to compensate its inves-

tors for the risks assumed certainly cannot be condemned

as invalid even though they might produce only a meager

return on the so called ‘fair value’ rate base.” 320 U.S.

at 605. Duquesne Light Company continues to operate

successfully, has maintained its financial integrity, its

ability to attract capital and has sufficiently compensated

its investors after the Pennsylvania Supreme Court dis-

allowed a return of and on its prudent investment in

cancelled generating plant. Therefore, all tests as stated

in Hope have been met and this Court should refrain

from establishing an additional constitutional entitle-

21

ment for those utility investors to recover all prudent

investment automatically without a treatment of the

other factors stated in Hope.°

While the Hope court established the above criteria, it

did not reject the used and useful doctrine or for-

bid its use by states or their ratemaking agencies when

balancing the interests of utility ratepayers and in-

vestors. Contrary to the assertions of the amici support-

ing the Appellants, the “used and useful’ doctrine did

not disappear or become unnecessary as a result of Hope.

It remained as a valid criteria for each state and each

ratemaking agency to consider when performing the

balancing of interests mandated by Hope. The lower fed-

eral and state courts have continued to apply the used

and useful doctrine and this Court continues to dismiss

appeals challenging its constitutionality. See Part II

below.

Similarly, in the Permian Basin Area Rate Cases,

eited so favorably by the Appellants and the supporting

amici, this Court never rejected the concept of the used

and useful principle. The Court merely clarified and

elaborated upon the Hope end result test by stating that

the reviewing court must determine whether the rate or-

der may be reasonably expected to maintain financial in-

tegrity, attract necessary capital, and fairly compensate

investors for the risks they have assumed, and yet pro-

vide appropriate protection to the relevant public inter-

®The other Appellant, Pennsylvania Power Company (Penn

Power), was authorized to charge a 15.72% return on common

equity, a 12.02% overall return on rate base, and received a $15.4

Million annual base rate increase bringing its total annual revenues

in excess of $184 Million. The Pennsylvania Supreme Court’s denial

of the annual amortization claim for the cancelled plants at issue

amounted to only $957,000. Despite the Pennsylvania Supreme

Court’s order, Penn Power has continued to operate successfully,

has maintained its financial integrity, and its ability to attract

capital.

22

ests, both existing and foreseeable. 390 U.S. at 792 (em-

phasis added).

Section 1315 of the Code and the Supreme Court of

Pennsylvania’s interpretation thereof allowed for con-

sideration of the present and the future public interest.

Rather than signalling to the regulated utility that any

prudent investment would produce a return of and on

that investment regardless of whether the investment

ever served the public, the Pennsylvania Supreme Court

chose to protect present and future ratepayers from such

an unwarranted constitutional entitlement. However, the

Pennsylvania Supreme Court did assure the Appellants

through other adjustments in its ratemaking process the

ability to attract necessary capital, maintain its financial

integrity and fairly compensate the utility investors for

the risks they had assumed. The fact that one particular

investment never produced used and useful public utility

property and the Court’s denial of a return of and on

that investment did not so damage the Appellants that

they could not continue to operate successfully. No case

ever decided by this Court or the lower federal courts

have bestowed a constitutional right for utility investors

to recover a return of and on any prudent investment

without consideration of any other factors.

Denver Union Stock Yard Co. v. U.S., 304 U.S. 470

(1938), established the boundaries of a utility investor’s

right to recover costs in a specific investment. The

Court stated that the due process clause of the Fifth

Amendment assures utility investors rates which are

sufficient to yield a reasonable rate of return on the value

of property used, at the time it is being used, to render

the services, but such rates cannot be per se excessive

and extortionate. 304 U.S. at 475. However, the Court

cautioned that the regulated entity is not entitled to have

included any property not “used and useful” for that

purpose. Jd. Just as the Court refrained from creating

an additional constitutional right to the return of or on

23

all prudent utility investment in the Denver Union Stock

Yard case, so should the Court refrain from conferring

such a substantial constitutional entitlement on the Ap-

peliants in this case.

The establishment of the used and useful principle in

the Denver Union Stock Yard case confirmed an extended

series of cases, all of which specifically refrained from

unreasonably expanding the constitutional entitlements

of utility investors. See Smyth v. Ames, 169 U.S. 466

(1898) ; Willcox v. Consolidated Gas Co., 212 U.S. 19

(1909) ; Minnesota Rate Cases, 230 U.S. 352 (1918);

Bluefield Waterworks & Improvement Co. v. Public Serv-

ice Comm’n, 262 U.S. 679 (1923); Board of Public Util-

ity Commissioners v. New York Telephone Co., 271 U.S.

23 (1926) ; Los Angeles Gas Corp. v. Railroad Commis-

ston, 289 U.S. 287 (1933) ; St. Joseph Stock Yards Co. v.

U.S., 298 U.S. 38 (1936).

} The lower federal courts have not chosen to expand the

interpretation of this extended line of cases based upon

the Court’s teachings in Hope and Permian. The novel

arguments raised by Appellants and the amici have not

been adopted by any court of which IECPA, ELCON or

AISI are aware. The used and useful principle “has

stood as a bedrock principle of utility rate regulation for

nearly a century” and should not be struck down by the

Court in a thinly veiled attempt, by the Appellants and

amici supporting the Appellants, to create a constitu-

tional entitlement to a return of or on every dollar in-

vested by regulated utilities without respect to whether

ratepayers are ever provided with any benefit from that

investment. Kentucky Utilities Co. v. FERC, 760 F.2d

1321, 1324 n.4 (D.C. Cir. 1985). States must retain the

discretion of employing the used and useful principle on

a case-by-case basis to decide whether a proper balancing

of ratepayer and shareholder interests requires or does

not require a return of or on prudent investment. Other-

wise, current ratepayers would bear more than the legiti-

mate costs of providing service to them.

24

The result sought by Appellants would be inconsistent

with the United States Court of Appeals for the District

of Columbia decision in Natural Gas Pipeline Co. v.

FERC, 765 F.2d 1155, 1157 (D.C. Cir. 1985), cert. de-

nied, 106 S. Ct. 794 (1986). That decision characterized

the “used and useful” principle as a “bedrock” of utility

regulation. It capsulized the principle as simply requir-

ing that costs associated with electric power plants be

paid by the ratepayers who benefit from the plant. 760

F.2d at 1324, fn.4. Ratepayers of the Appellants in this

proceeding will never benefit from the investments in

the cancelled nuclear plants in question and thus should

not be constitutionally required to bear the cost respon-

sibility of those investments.

The United States Court of Appeals for the District

of Columbia Circuit most recently addressed the constitu-

tional issues raised by the Appellants in Jersey Central

Power & Light Co. v. Federal Energy Regulatory Com-

mission, 810 F.2d 1168 (D.C. Cir. 1987) and confirmed

the constitutionality of employing the used and useful

test. After an extensive review of the standards estab-

lished in Hope and Permian Basin, the court characterized

those teachings as “straightforward”. Jd. at 1177. In

reviewing rate orders, the courts must determine whether

or not the end result of such orders constitute a reason-

able balancing, based on factual findings, of the investor

interests in maintaining financial integrity and access to

capital markets and the consumer interest in being

charged nonexploitative rates. Jd. at 1177-1178. While

the court concluded in Jersey Central that it was impos-

sible to answer the question of whether including the un-

amortized portion of cancelled plant in rate base would

exploit consumers in that case, or whether its exclusion,

on the facts in the case, constituted confiscation from the

utility, such a determination of the “central point” can

be made in the case which is the subject of this appeal.

Id. at 1181. The court specifically stated, “the Commis-

25

sion is not precluded from employing ‘used and useful’

or any other specific rate setting formula” and the case

was only remanded to the Federal Energy Regulatory

Commission because no hearing had been held consistent

with this Court’s directives in Hope and Permian. Basin.

The Jersey Central court went on to require the Commis-

sion to ensure that the resulting rate is just and reason-

able. Zd. at 1187.

The Jersey Central decision is also instructive on the

issue of what constitutes an unconstitutional taking of

utility investor property. In his concurring opinion,

Judge Starr indicated that such a taking occurs only

when a regulated rate is confiscatory, which is a short-

hand way of saying that an unreasonable balance has

been struck in the regulation process so as unreasonably

to favor ratepayer interests at the substantial expense of

investor interests.

Thus, in my view, a taking does not occur when

financial resources are committed to the enterprise.

That is especially so since the utility’s capital invest-

ment is made not simply in satisfaction of legal obli-

gations to provide service to the public, but in antic-

ipation of profits on the investment. The utility is

not a servant to the state; it is a for-profit enterprise

which incurs legal obligations in exchange for state-

conferred benefits. A profit-seeking capital invest-

ment is scarcely the sort of deprivation of possession,

use, enjoyment, and ownership of property which can

conceptually be deemed a taking. 7d. at 1189.

This Court should not now depart from its decisions in

Hope and Permian Basin as interpreted by the lower

federal courts in each of the proceedings discussed above.

No need exists for the establishment of a constitutional

entitlement in each and every utility investor to recover

a return of or on all prudent investments without regard

to the used and useful nature of those investments in pro-

viding public utility service.

26

Il. This Court Has Regularly Dismissed Proceedings

Which Have Raised The Identical Constitutional Ar-

guments Made By Appellants In This Case.

This Court’s dismissal of comparable proceedings ap-

plying the used and useful principle indicates it was not

overridden by Hope and that a utility investor’s alleged

right to the recovery of or on all prudent investments is

not of constitutional dimension.

Through a dismissal for want of a substantial federal

question, this Court has refused to reverse decisions on

the merits upholding Pennsylvania’s and other states’

denial of cost recovery on utility investment in nuclear

power plants out of service for an extended period due

to a nuclear accident. Pennsylvania Electric Co. v. Penn-

sylvania Public Utility Comm’n, 509 Pa. 324, 502 A.2d

130 (1985), appeal dismissed sub nom. Metropolitan

Edison Co. v. Pennsylvania Public Utility Comm’n, 476

U.S. 1137 (1986). See also Jersey Central Power &

Light Co. v. Board of Public Utilities, 466 U.S. 947

(1984). The Court dismissed several other cases, some

of which involved the same cancelled nuclear plants sub-

ject to this case. Cleveland Electric Illuminating Co. v.

Public Utilities Comm’n, 4 Ohio St.3d 107, 447 N.E.2d

746, appeal dismissed, 464 U.S. 802 (1983); Cleveland

Electric Illuminating Co. v. Public Utilities Comm’n,

No. 82-165 (Ohio, July 7, 1982), appeal dismissed, 459

U.S. 1094 (1983); Office of Consumers’ Counsel v. Pub-

lic Utilities Comm’n, 67 Ohio St.2d 153, 423 N.E.2d 820

(1981), appeal dismissed sub nom., Cleveland Electric

Illuminating Co. v. Office of Consumers’ Counsel, 455

U.S. 914 (1982); Northern Indiana Public Service Co.

v. Citizens Action Coalition of Indiana, Inc., 485 N.E.2d

610 (Ind. 1985), appeal dismissed and cert. denied, 476

U.S. 1137 (1986). These decisions confirm that Hope

did not reverse or override the application of the used

and useful principle.

The decision by the Pennsylvania Supreme Court to

deny the Appellants a return of and on its investment

sill

27

in the subject cancelled nuclear power plants was not

unique. The highest state court in Ohio reached an

identical result under its own public utility law and

this Court has dismissed three separate appeals which

argued that the denial of such cost recovery represented

an unconstitutional confiscation of property. One of those

dismissals, Cleveland Electric Illuminating Co. v. Public

Utilities Comm’n, 4 Ohio St.3d 107, 447 N.E.2d 746,

appeal dismissed, 464 U.S. 802 (1983) was for want of

a substantial federal question, thus, constituting a deci-

sion on the merits. See Meek v. Pittenger, 421 U.S. 349,

367 N. 16 (1975). The Court dismissed two other ap-

peals for lack of jurisdiction or lack of a properly pre-

sented federal question in Cleveland Electric Illuminating

Co. v. Public Utilities Comm’n, No. 82-165 (Ohio, July 7,

1982}, appeal dismissed, 459 U.S. 1094 (1983), and in

Office of Consumers’ Counsel v. Public Utilities Comm’n,

67 Ohio St.2d 153, 423 N.E.2d 820 (1981), anpeal dis-

missed sub nom., Cleveland Electric Illuminating Co. v.

Office of Consumers’ Counsel, 455 U.S. 914 (1982). This

Court most recently dismissed an appeal from the highest

court of the state of Indiana also addressing the denial

of recovery of cancelled plant costs. See Northern In-

diana Public Service Co. v. Citizens Action Coalition of

Indiana, Inc., 485 N.E.2d 610 (Ind. 1985), appeal dis-

missed and cert. denied, 476 U.S. 1137 (1986).

The Court’s action in these cases confirms that the

used and useful principle of utility regulation has a

continuing place in assuring utility’s ratepayers that

their interests are properly balanced with those of the

utility’s investors. Absent the used and useful principle,

the balance swings unconscionably to the side of the

utility investor and would result in ratepayers being

required to absorb the cost of any and all prudent invest-

ment made by the utilities regardless of whether that

investment ever provides any benefit to ratepayers.

28

CONCLUSION

The Fifth and Fourteenth Amendments do not con-

stitutionally require states to allow recovery of or on

prudently incurred investments, including, but not lim-

ited to, cancelled electric generating units without a

consideration of whether those investments constitute

used and useful utility property. The Court should re-

ject the Appellants’ contention that a prudence-only

standard is required by the Hope and Permian Basin

cases. In order for states to properly balance the inter-

ests of utility investors against utility ratepayers con-

sistent with the directives of Hope and Permian, the used

and useful principle must be continued for ratepayers’

protection. The balancing requirements of Hope and

Permian necessitate state discretion on a case-by-case

basis to deny or to allow a return of or on prudent

investment based on all the facts presented.

In any case, this Court should refrain from creating

an additional constitutional entitlement to utility in-

vestors which is not available to investors in the private

competitive marketplace. If the system of regulation is

to operate appropriately as a mirror of the competitive

marketplace, utility investors must expect to bear an

appropriate portion of the business risk inherent in

prudent managerial decisions regarding plant construc-

tion. These risks include the possibility of making a

prudent investment which never produces economic bene-

fits for ratepayers nor used and useful utility property.

In such events, a state must have the discretion of pur-

suing the appropriate balancing of interests between the

investor and the ratepaper by denying recovery of or on

property which is not used and useful for customer

service. Such denial does not confiscate constitutionally

protected property interests since the loss of value of

the investment for which recovery is denied resuits from

action of the free market rather than state regulation.

The utilities are not denied any recovery which they

as

29

would have received in a competitive market. Therefore,

Section 1315 of the Pennsylvania Public Utility Code and

the “unspecified ratemaking legislation” must be upheld

by this Court as being consistent with the Constitution

and this Court’s precedents in Hope and Permian Basin.

Respectfully submitted,

HENRY R. MACNICHOLAS

H. LEE ROUSSEL

DAVID M. KLEPPINGER *

MCNEES, WALLACE & NURICK

100 Pine Street

P.O. Box 1166

Harrisburg, PA 17108-1166

(717) 232-8000

Attorneys for industrial Energy

Consumers of Pennsylvania,

Electricity Consumers Resource

Council and American Iron and

Steel Institute

* Counsel of Record

June 30, 1988