Motion — Northern Indiana Public Service Co. v. Citizens Action Coalition of Indiana, Inc.

No. 85-1610

JOSEPH F. SPANIOL, JR.

In The esccpgameee

Supreme Court of the United States

October Term, 1985

NORTHERN INDIANA PUBLIC

SERVICE COMPANY,

Appellant,

v.

CITIZENS ACTION COALITION

OF INDIANA, INC., et al.

Appellees.

ra’

Vw

ON APPEAL FROM THE

SUPREME COURT OF INDIANA

hi

BRIEF OF APPELLEES

CITIZENS ACTION COALITION OF

INDIANA INC. IN OPPOSITION

TO JURISDICTION

yn

Mw

ARTHUR A. DARONATSY WILLIAM JULIAN II*

City of Gary Law Department 2301 Shire Lane

401 Broadway Davis, CA 95616

Gary, IN 46402 (916) 758-8882

(219) 881-1235

Attorney for Appellee MICHAEL A. MULLETT

CITY OF GARY, INDIANA 311 W. Washington Street

Indianapolis, IN 46204

FRANK E. SPENCER (317) 236-1734

450 Century Building

Indianapolis, IN 46204 Attorneys for Appellee

(317) 633-4230 CITIZENS ACTION COALITION

Attorney for Appellees OF INDIANA, INC.

CITY OF GARY, INDIANA, and

CITIZENS ACTION COALITION

OF INDIANA, INC.

* Counsel of Record

COCKLE LAW BRIEF PRINTING CO., (800) 835-7427 Ext. 333

QUESTIONS PRESENTED

Does the U.S. Supreme Court have jurisdiction on an ap-

peal from a state court decision on utility ratemaking,

where no federal question was considered or decided?

Does a state violate the Due Process Clause or the Taking

Clause of the Fourteenth Amendment when it limits pay-

ment of cash utility rates to payments for utility service

and for the property used to provide that service?

RULE 28.1 LISTING

Appellee CITIZENS ACTION COALITION OF IN-

DIANA, INC. has no publicly owned parent, affiliates or

subsidiaries.

il

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED i

RULE 28.1 LISTING .......... i

JURISDICTION . 1

STATEMENT OF THE CASE and

SUMMARY OF ARGUMENT:

1. Statement of the Case 1

11

2. Summary of Argument .

ARGUMENT: !

IL THE APPEAL SHOULD BE DISMISSED

FOR WANT OF A SUBSTANTIAL FEDERAL

QUESTION

A. Recent Cases in this Court ...............

B. The federal issues were not ‘‘pressed or

passed upon’’ below 0

C. The standard for review of state utility rate

one cc

13

13

15

19

21

mer mms

iil

TABLE OF AUTHORITIES

CasEs:

Page

Atlantic Coast Line v. Goldsboro, 232 U.S. 548 (1914) .. 20

Atomic Energy Commission v. Porter County

Chapter of Izaak Walton League, 423 U.S. 12 (1975) - 3

Bailey v. Anderson, 326 U.S. 203 (1946) 0. 19

Cardinale v. Louisiana, 394 U.S. 436 (1969) 000000... 15, 16

Chambers v. Mississippi, 410 U.S. 283 (1972) ............... . 19

Citizens Energy Coalition Indiana & Michigan

Electric Company, 396 N.E.2d 441 (Ind. App.

1979) 21

Cleveland Electric INuminating Company v. PUC,

4 Ohio St. 3d 111, 447 N.E.2d 746 (1983), appeal

dismissed 464 U.S. 802 (1983) .. 14

Coleman v. State, 241 Ind. 663 (1961) 18

Crowell v. Randall, 10 Pet. 368 (1836) 00 15

Dayton Power & Light v. Public Utilities Commis-

sion, 4 Ohio St. 3d 91, 447 N.E.2d 733 (1983) ............. 14, 15

Denver Union Stock Yard Company v. U.S., 304

EE 8 POE 20

DesMoines Gas Company v. DesMoines, 238 U.S.

RA ST OR 19

Dewey v. DesMoines, 173 U.S. 193 (1900) 0. 18

District of Columbia Court of Appeals v. Feldman,

a ee on oe, eee Cee) 16

Federal Power Commission v. Hope Natural Gas

Company, 320 U.S. 591 (1944) 0 12

Federal Power Commission v. Natural Gas Pipe-

line Company, 315 U.S. 575 (1942) ccc 21

aneaey v. aaa wen aia. bee (3000) 18

TI. 7. Gates, 103 S. Ct. 2317 (1983) 15, 16

™ rsey alias Power & Light Company v. FERC,

oe eee cee. cor. 1964) 20

iv

TABLE OF AUTHORITIES—Continued

Page

McCardle v. Indianapolis Water er 272

PB are ee nm noone 19

Morrison v. Watson, 154 U.S. 111 (1894) 0. 16

Norfolk Turnpike Company v. ie scam 225 U.S.

E.R lO EERE ot LGU Bes eel ries sien 20

N.Y., Cinn., St. Louis Railway Co. v. iat

Bank Co., 130 Ind. App. 638 (1960) 18

Office of Consumers Counsel v. PUC, 67 Ohio St.

2d 153, 423 N.E.2d 820 (1982), appeal dismissed

sub nom. Cleveland Electric Illuminating Com-

pany v. PUC, 455 U.S. 914 (1982) nanan cencenceneenenerne 13, 14

Pacific Gas & Electric Company v. California

Energy Commission, 461 U.S. 190 (1983) —.. 4

Porter County Chapter of Izaak Walton League

v. Atomic Energy Commission, 515 F.2d 513

yh Re) NRE ae Laas, Se sae Neto 3

Porter County Chapter of Izaak Walton League

v. Atomic Energy Commission, 532 F.2d 1011

gOS, TR Ria aioe RASA een Ge ae 3

Power Reaetor Development Corp. v. International

i ee acces 5

Smyth v. Ames, 169 U.S. 466 (1898) nance eceseeeneeneene 19

State Farm Mutual Automobile Insurance Co. v.

i a Ee RR a ere 16

Street v. New York, 394 U.S. 576 (1969) 0 15, 16, 19

Wisconsin Public Service Corp. v. Public Service

Commission, 109 Wis. 2d 256 (1982) LT, 18

STATUTES:

ee Ms a acai 1,15

Ind. Code 8-1-2212 cceonnnnoe re ate ad 9,10, 12

Ind. Code 8-1-2-4 cen RE RGE Re Oli 9,17

_

Pee

JURISDICTION

Appellee CITIZENS ACTION COALITION OF IN-

DIANA, INC. (hereinafter ‘‘CAC’’) respectfully submits

that the Court lacks jurisdiction of the appeal in this case

under 28 U.S.C. § 1257(2), because the case does not pre-

sent a substantial federal question. Alternatively, the

Court should refuse certiorari pursuant to 28 U.S.C. § 1257

(3) for prudential reasons related to the proper relations

between state and federal responsibilities in the utility

regulation field. In either case, the Court should dismiss

this appeal and terminate this litigation.

STATEMENT OF THE CASE AND

SUMMARY OF ARGUMENT

1. Statement of the Case

On August 26, 1981, the Board of Directors of Appel-

lant Northern Indiana Public Service Company (herein-

after ‘‘ NIPSCO’’) terminated efforts to construct a nuc! ear

fuel generating facility, Bailly Unit N-1, on the shores of

Lake Michigan.

As NIPSCO told prospective investors immediately

after the cancellation:

On August 26, 1981, the company terminated the con-

struction of Bailly N-1, a planned 644,000 kilowatt

unit that would have used nuclear fuel. The latest

year in which operation of Bailly N-1 would have been

economically feasible was 1989. During August 1981,

the company concluded that Nuclear Regulatory Com-

mission (NRC) resolution of the issues necessary to

l

achieve a 1989 in-service date would not be forthcom-

ing on a timely basis and concluded that the 1989 in-

service date had become unachievable. .. .

R.1521, NIPSCO Security Prospectus dated September 30,

1981, emphasis supplied.

This decision by NIPSCO’s management led to their

subsequent decision to attempt to charge NIPSCO rate-

payers some two hundred twenty million dollars ($220,

000,000) for the hole in the ground that was Bailly N-1.

Hence this litigation.

The matters described below are distilled primarily

from the securities prospectuses that NIPSCO issued dur-

ing the eight years that NIPSCO had an active NRC con-

struction permit for Bailly N-1.'. (R. 1089-1167 and 1385-

1536; Citizens Action Coalition Exhibits D-1 through D-

26.)

In 1970, NIPSCO applied to the Atomic Energy Com-

mission (AEC), the predecessor agency to the NRC, for a

permit to construct a nuclear fuel generating facility on a

sand dune on the shore of Lake Michigan. The site select-

ed was immediately adjacent to the Indiana Dunes Na-

tional Lakeshore. As subsequent events demonstrated,

(1) The somewhat extended factual presentation is necessi-

tated by misleading assertions in NIPSCO’s Jurisdictional State-

ment (hereimafter “J.S.”.) An example is the assertion that

“Faced with “ye prospect that further spending on the project

would be disullowed as ‘imprudent’ by the PSC, NIPSCO can-

celled the project.” (J.S., at 4.) There is not a shred of evidence

to support this statement, or from which an inference about the

directors’ thinking about possible disallowances could be drawn.

Of course, there is no finding to this effect by the Public Serv-

ice Commission of Indiana or by any of the reviewing courts.

Further examples will be noted as relevant.

3

this entailed undertaking substantial litigation risk.

NIPSCO had not applied for or received any certificate of

convenience and necessity from the Public Service Com-

mission of Indiana.

On May 3, 1974, the AEC granted NIPSCO a construe-

tion permit. Five months later, (October 18, 1974), the

Seventh Circuit Court of Appeals temporarily enjoined

construction, on the ground that the AEC had violated its

own regulations in siting the plant too near a dense popu-

lation area. The injunction was made permanent in April

1975. Porter County Chapter of Izaak Walton League v.

Atomic Energy Commission, 515 F. 2d 513 (7th Cir. 1975).

Subsequent to this order, the AEC adopted different siting

regulations, which caused this Court to vacate the perman-

ent injunction, and remand for further proceedings. Atomic

Energy Commission v. Porter County Chapter of Izaak

Walton League, 423 U.S. 12 (1975). On remand, the Sev-

enth Circuit approved the construction permit, in April

1976. Porter County Chapter of Izaak Walton League v.

Atomic Energy Commission, 533 F. 2d 1011 (7th Cir. 1976).

After this Court sustained the order of the Seventh Cir-

cuit in November 1976, construction commenced.

However, work progressed for only ahout nine

months. On September 28, 1977, the Nuclear Regulatory

Commission ordered NIPSCO to cease further construc-

tion activities pending a review of the impact of construc-

tion on the National Lakeshore. NIPSCO never resumed

construction after September 28, 1977.2

(2) This litigation summary highlights the fact that the key in-

teractions between Appellant and government involved the

(Continued on following page)

4

As NIPSCO told its prospective investors a year later,

in 1978:

On September 28, 1977, piie driving activities were

suspended at the request of the NRC until ground-

water monitoring wells were installed and a NRC re-

view completed. On October 3, 1977, the NRC staff

(Continued from previous page)

federal Nuclear Regulatory Commission, not any organs of state

government. The PSCI specifically so found.

. ultimately the delays resulting from regulatory inde-

cision on the federal level and the changing economics

forced the cancellation of Bailiy, N-1 in August 1981.)

Appendix 60a.

(Compare J.S. at 15: “ .... Although the state did not physi-

cally seize Bailly, or specifically order it cancelled, it left NIPSCO

no choice but to abandon the project once it had become clear

that the project could not economically be brought to com-

pletion. . . .”) The obstacles to NIPSCO’s “doing things with

its property” (see j.S. at 14) were primarily safety related ques-

tions within the jurisdiction of the NRC. However, the Takings

Clause implications of the NRC’s conduct were never explored

in this case. Nor were the intricate interrelationships between

state and federal authority in the nuclear power field explored.

See, Pacific Gas & Electric Co. v. California Energy Commission,

461 U.S. 190, 103 S. Ct. 1713, 75 L.Ed.2d 752 (1983):

“ _.. [F]rom the passage of the Atomic Energy Act in

1954 through several revisions, and to the present day,

Congress has preserved the dual regulation of nuclear

powered electricity generation: the federal government

maintains complete control of the safety and ‘nuclear’ as-

pects of energy generation; the states exercise their tra-

ditional authority over the need for additional generatin

capacity, the type of generating facilities to be come

land use, ratemaking, and the like.”

103 S.Ct. 1713, 1726.

Appellee CAC (Appellant below in the Court of Appeals

and the Supreme Court) argued in both the Indiana Court of

Appeals and the Indiana Supreme Court that federal law ailo-

(Continued on following page)

advised that resumption of pile driving was also con-

tingent upon a favorable safety review of the proposed

pile placement method. On October 28, 1977, the com-

pany received a copy of a petition addressed to the

NRC by joint intervenors requesting 1) the company

not resume pile placement or operate a well point de-

watering system; 2) a Supplement Environmental Im-

pact Statement be filed with respect to jetting of piles

and monitoring; and 3) an evidentiary hearing be

held on the questions of pile placement and monitor-

ing. All required additional groundwater monitoring

wells have been installed; however, pile driving activi-

ties are still suspended except for a limited indicator

(Continued from previous page)

cates the risk of loss due to failure to satisfy NRC licensing

criteria to utility investors, relying on Power Reactor Develop-

ment Corp. v. International Union, 367 U.S. 396 (1962.) (“The

petitioners concede that the [Atomic Energy Commission! is

absolutely denied any authority to consider [the developer’s |

investment when acting on an application for a license for op-

eration [of a nuclear powerplant.} PRDC has been on notice

long since that it proceeds with construction at its own risk,

and that all its funds may go for naught. With its eyes open,

PRDC has willingly accepted that risk, however great.” 367

U.S. 396, 414, quoted in Appellant’s Brief, pp. 33-34.)) Neither

court addressed the question, which implicates federal statutes.

The record in this case is not appropriate for consideration

of a federal constitutional issue under the Takings Clause, at

least in part because it is not clear which level of government,

state or federal, effected the “take,” if there was one. The

Court ought not address the constitutional question on this

record because there has been no exploration of the inter-rela-

tionship between state and federal responsibilities under the

federal statutory scheme for handling nuclear power issues.

The case was not litigated this way below, and there is no way

to do this on the instant record. Compare, J.S. footnote 16 and

related text, in which a creative but utterly unsupported conten-

tion about “inverse cond»mnation” is presented, without a single

animadversion to the sacord or the pervasive federal role ap-

parent therein.

6

pile driving program while the NRC reviews the com-

pany’s proposed pile driving method.

R. 1428-29; Prospectus dated October 3, 1978.3

Investors were aware of the difficulties experienced by

the company with the Bailly N-1 construction project, be-

cause NIPSCO disclosed them, as it was bound to do by the

federal securities laws. Every security prospectus issued

by NIPSCO during the period 1974 through 1981 was in-

troduced into evidence. (CAC Exhibits D-1 through D-26;

R. 1067-1136 ; 1385-1536.) These Exhibits demonstrate that

for a substantial period of time, NIPSCO’s management

was uncertain as to the effect of litigation and delay on

their ability to complete the project, and on the economic

viability of the project as delay at the federal level con-

tinued. Management fully disclosed the contingent nature

of the speculative investment in Bailly N-1. Typical is

the following:

If an event or events occur which would prevent con-

struction or operation of Bailly Unit N-1, it is uncer-

tain, at this time, just what part of the company’s

total expenditures would be recoverable and what the

extent and timing of the resulting adverse impact on

the company would be.

R. 1398; see also, R. 1409; R. 1418; R. 1429; R. 1438; R.

1444; R. 1455; R. 1479.

During this period. investors bid down the price of

NIPSCO’s common stock, as one would expect. Compare

R. 1160 (NIPSCO common stock price $18.50 per share on

Feb. 23, 1977) with R. 1533 (NIPSCO common stock price

(3) Compare the statement in J.S. at page 3: “Each of the

challenges mounted against Bailly was decided in NIPSCO’s

favor,...’” See also, Appendix, 62a-63a.

eae Ae ee ee ne eee

7

$11.25 on Dee. 4, 1981.) NIPSCO’s expert witness so tes-

tified, on cross-examination:

Q. We have talked about a number of factors that

investors look at in deciding what sort of a return

they will require on a common stock and presumably

what price they will pay for that stock. Do investors

using the sophisticated analyses you referred to earlier

look at whether particular assets have been impaired

in the capital structure of the company whose stock

they are considering buying?

A. For example, like the abandonment of the Bailly

plant?

Q. Well, for example, the possibility the Bailly plant

might be abandoned.

A. Yes, they do.

R. 2334-35.4

At the time of cancellation, the investment in Bailly

N-1 had bought a large water-filled hole in the sand. (R.

890-92) NIPSCO had spent $122 million out of pocket.’

—

(4) Compare the statement in J.S. at 16-17, fn. 15: “ .

Although NIPSCO’s stock declined in value throughout the

1970’s, the decline mirrored industry trends and could not be

ascribed to Bailly’s difficulties.”

(5) The total investment at the time of cancellation was $205

million, of which $122 million was out of pocket. (R. 2061) After

net salvage, primarily for sale of nuclear fuel and processing

rights, the net loss to NIPSCO was $190 million. The difference

between the two numbers is Allowance for Funds Used During

Construction (AFUDC), an accounting entry representing the

cost of money used for construction. It is capitalized and added

to the “cost” of construction, and is included in the annual

income statement as non-cash or “other” income. Under In-

diana law, this is made up of both “borrowed” and “other” funds.

Rate payers would have paid a total of $219 million dollars to

NIPSCO (R. 1838-39), including the $190 million loss, and taxes

(Continued on following page)

8

The Public Service Commission of Indiana (herein-

after PSCI) found that the investment in Bailly N-1 was

not property that was ‘‘used and useful’’ for the provi-

sion of utility service, and further found that it would

‘¢... never achieve that status.’’ (Appendix, 70a). Never-

theless, the PSCI permitted NIPSCO to recover its invest-

ment, including AFUDC and associated tax benefits, as

an ‘‘extraordinary cost of service loss.’’ (Appendix 60a-

61a). The PSCI considered that NIPSCO’s expenditures

for Bailly N-1 were prudently incurred in «n effort to pro-

vide service in the future, and that NIPSCO should be

permitted to recover them from ratepayers, notwithstand-

ing that the ratepayers would receive absolutely no bene-

fit. The PSCI also ‘‘allowed’’ NIPSCO a return on com-

mon equity of 17.50% in estimating an appropriate reve-

nue requirement (Appendix, 57a), a level of authorized

return higher than that allowed by any other state regu-

latory commission in the country at the time.

Appellees (Appellants below) successfully argued to

fre Court of Appeals® and the Supreme Court that the

question before them was a pure question of law, involv-

ing the application of the plain language of Indiana’s

Public Service Commission Act.

This is a simple case, presenting a simple legal issue.

The Publie Service Commission Act requires as a mat-

(Continued from previous page)

on the “equity” portion of AFUDC, which would be taxable

income.

NIPSCO pocketed a cash tax refund of $15-20 million gen-

erated by the Bailly N-1 write-off, which it did not share with

ratepayers. (R. 1850-51.)

(6) The decision of the Court of Appeals is reported at 472

N.E.2d 938.

9

ter of law that cash rates be based on a charge for

‘*service,’? IND. CODE § 8-1-2-4, as that term is de-

fined in the Act, IND. CODE §8-1-2-1. The Court

of Appeals so held, and on this point was unanimous.

(Compare 472 N.E.2d 938, 946 (Majority Opinion) with

472 N.E.2d 938, 953-54 (Dissent.) ....

Respondents’ (Appellants below) Brief in Opposition to

Transfer, p. 1.

NIPSCO attempted in the Indiana Court to rechar-

acterize the case as one involving the details of utility reg-

ulation accounting and methodology, beyond the expertise

of a reviewing court. The Indiana Supreme Court flatly

rejected NIPSCO’s invitation to abdicate its role of con-

struing Indiana law.’

The resolution of the issues in this case depends

on the definition of service in I.C. § 8-1-2-1 and the

construction of the other statutes in Title 8 which

confer upon the PSCI its ratemaking authority and

power. The construction of Indiana law is particu-

larly the province of this Court.

The Publie Service Commission derives its power

and authority from the statute, and unless a grant of

power and authority can be found in the statute it

must be concluded there is none.

Appendix 4a.

The Supreme Court plurality opinion, authored by

Justice DeBruler and concurred in by Justices Pivarnik

and Shepard is quite explicit in its holding.

NIPSCO argues that the PSCI’s characterization of

the Bailly N-1 project as an extraordinary cost of

service loss is correct... . The PSCI characterized the

(7) Curiously, NIPSCO echoes that argument in this Court,

citing an Indiana case ignored by all of the Indiana Supreme

Court Justices, majority and dissenters alike. (j.S., p. 7).

10

Bailly N-1 project as a reasonable undertaking by

NIPSCO to meet its duty to serve.

In essence, the PSCI order has unlawfully ex-

panded the definition of service found in I.C. § 8-1-2-1.

. .. The PSCI order places an additional charge on

consumers other than that allowed in I.C. § 8-1-2-4.

The additional charge is for reasonable and prudent

attempts at service that fail and that provide no bene-

fit to ratepayers.

Service commences with and includes ‘‘used and

useful’’ property. Without ‘‘used and useful’’ prop-

erty there cannot be any service. I.C. § 8-1-2-1, by de-

fining service in such a manner as to render it depend-

ent on ‘‘used and useful’’ property, is promoting a

clear delineation and balance of investor and con-

sumer responsiblities.

. . . NIPSCO embarked on a capital project to build

a nuclear generating plant and, before it ever pro-

duced electricity, NIPSCO cancelled it. The defini-

tion of service in I.C. §8-1-2-1 restricts the scope

of includable property to that property which per-

forms and furnishes, i.e., producing property or ‘‘used

and useful’’ property. .. . Since Bailly N-1 never be-

came ‘‘used and useful’’ property as I.C. § 8-1-2-1 con-

templates, the PSCI’s characterization of the can-

celled Bailly N-1 project as an extraordinary cost of

service loss was incorrect and the order allowing amor-

tization was contrary to law. In dealing with and

resolving this claim, we have been unable to conceive

of a situation on our own in which the consumers

could be required to act in aid and support of the

utility as an insurer of the investor’s risk,....

Appendix, pages 9a-1la.

None of the four separate opinions of the Indiana

Supreme Court Justices addressed any constitutional

questions, either under Indiana law or federal law. See

infra, footnote 8 and related text.

11

2. Summary of Argument

NIPSCO makes two related, but distinct arguments

to the Court. One is based on the ‘‘Due Process Clause’’

of the Fourteenth Amendment, the other on the ‘‘Taking

Clause.’’ The ‘‘Taking Clause’’ was never presented to

the Indiana Courts, and as indicated above, footnote 2,

cannot be addressed on this record. It is the federal gov-

ernment, and not any organ of Indiana, that is most in-

timately connected with the decision to cancel Bailly N-1.

The ‘‘Due Process Clause’’ argument was also not

‘‘nressed or passed upon’’ in a manner sufficient to con-

fer jurisdiction on this Court. However, it is also insub-

stantial on the merits.

As for the ‘‘ Due Process’’ argument, NIPSCO invites

the Court to return to the era of ‘‘substantive due proc-

ess,’’ where the details of state utility regulation and rate-

making methodology become constitutionalized. NIPSCO

is not so bold as to rely on any case decided by this Court

in the last half century applying the Due Process Clause

of the Fourteenth Amendment in reviewing a state utility

matter, because there are none. (J.S. at pages 11 and 12,

citing cases construing the Federal Power Act and the

Natural Gas Act.)

This case presents nothing more than the Indiana Su-

preme Court’s interpretation of state statutes governing

the rates to be charged electricity customers of a public

uility. The Appellant in this Court did not press any con-

stitutional question in the courts below; no constitutional

question was passed upon or presented for decision on

the record in this case.

12

The issue before the Indiana Supreme Court, and be-

fore the Court of Appeals, was the nexus under Indiana

statutes between cash rates to be charged customers and

the provision of service. The Indiana courts declared that

under the statutes of this state, utility customers can be

charged only for ‘‘service.’’ The term ‘‘service’’ is spe-

cifically defined under Indiana law. Ind. Code 8-1-2-1. A

failed construction project, which never amounted to more

than a hole in the ground, did not constitute ‘‘service’’

under that particular statutory definition. As a matter

of Ind ana law, therefore, ratepayers could not be made

to pay in cash rates for the cost of that hole in the ground.

Tais simple proposition, that Hoosiers should not pay

for something they did not get any ‘‘use’’ from, does not

contravene any constitutional principle. The earliest

‘‘Substantive Due Process’’ cases recognized that prop-

erty had to be ‘‘used and useful’’ before it was clothed

with constitutional protection. Other state jurisdictions

may disagree for their utility customers, but the Due

Process Clause of the Fourteenth Amendment of the U.S.

Constitution does not canonize any particular utility rate-

making methodology. Federal Power Commission v.

Hope Natural Gas Company, 320 U.S. 591 (1944). In par-

ticular, the Constitution does not describe how close a

state may require the connection between rates and serv-

ice to be. In Indiana the Legislature has declared in plain

language that the connection will be close. In asking this

Court to disregard the ‘‘used and useful’’ principle,

NIPSCO is insisting that this Court to surpass all of its

predecessors in meddling in the details of state utility

regulation. This Court should continue to reject the in-

vitation to expand its jurisdiction.

13

NIPSCO pretends to discover an ‘‘. . . emerging con-

flict among federal and state courts’’ on this issue, that

calls out for the intervention of this Court. J.S., at 12.

However, NIPSCO is candid enough to admit that this

discovery is the product of an active legal imagination,

acknowledging, as it must, that its argument is based on

the implications, rather than the holdings, of the Courts

to which it adverts. Since this Court does not consider

hypothetical, imaginary, or anticipated questions, this case

should be dismissed.

o

ARGUMENT

I. THE APPEAL SHOULD BE DISMISSED FOR

WANT OF A SUBSTANTIAL FEDERAL QUESTION.

A. Recent cases in this Court iiave held no substantial

federal question.

This is not the first nuclear cancellation case to be

presented to the Court. Two related cases from Ohio pre-

senting the identical questions presented in this case con-

trol disposition of this appeal.

In Office of Consumers Counsel v. PUC, 455 U.S. 914

(1982), the Court dismissed an appeal on precisely this

issue (ratemaking treatment of a cancelled construction

project) for ‘‘want of a properly presented federal ques-

tion.’’? In that case, as here, the state court judgment had

not specifically passed upon the constitutional issue urged

in this Court.

14

As in the instant case, there was nothing in the de-

cision of the Ohio Supreme Court to indicate that a fed-

eral question had been pressed or passed upon. 67 Ohio

St. 2d 153, 423 N.E.2d 820 (1982). ‘The Ohio decision treat-

ed Ohio statutory materials in a straightforward way. de-

elaring certain rules of ratemaking methodology under

Ohio law. There was quite simply nothing for this Court

to pass upon. The rate order in that case was remanded

by the Ohio Supreme Court to the Ohio Public, Utilities

Commission to effectuate the disallowance, as in the in-

stant case.

In Cleveland Electric Illuminating Co. v. PUC, 464

U.S. 802 (1983) (CEI II), the case was back before this

Court. This Court dismissed for lack of a substantial

federal question an appeal from an order of the Ohio Su-

preme Court again authoritatively construing certain Ohio

statutes, and disallowing the costs of the cancelled con-

struction project. In CEI II, the Ohio Supreme Court had

considered the asserted federal constitutional questions

and specifically rejected them. 4 Ohio St. 3d 11, 447

N.E.2d 746, 748. Relying on a detailed discussion of

the relevant constitutional principles in a contemporane-

ously decided case, Dayion Power & Light v. Public Utilt-

ties Commission, 4 Ohio St. 3d 91, 447 N.E.2d 733, the Ohio

Supreme Coourt rejected the utilities’ constitutional claims

on two related grounds: (1) Under Ohio law, investors

are ‘‘, .. assured a fair and reasonable return. . .’’ on

property which is ‘‘used and useful’’ in providing service,

‘¢ . . while consumers may not be charged for utility in-

vestments and expenditures that are neither included in

rate base nor properly categorized as costs... .’’ The

Ohio Court considered there was no constitutional infirm-

15

ity in the Legislature’s having struck this balance. (2)

Denying amortization of the investment in a failed con-

struction project did not result in a rate order confiscatory

‘‘in its entirety.’’

As NIPSCO acknowledges, this Court dismissed the

appeal in CEI II after consideration on the merits, and

after plenary consideration by the Courts below. These

cases are the Court’s last word on review of this type of

state court decision, and should control. NIPSCO has

cited no other decision of this Court intimating a contrary

result.

B. Claim never ‘‘pressed or passed upon.’’

This Court’s jurisdiction to hear this case is predi-

eated, if at all, on 28 U.S.C. § 1257. Appellant’s claim is

that certain statutes of the State of Indiana, as authori-

tatively construed by the Indiana Supreme Court, contra-

vene the Due Process Clause of the Fourteenth Amend-

ment, and result in an unlawful ‘‘taking’’ of the Appel-

lant’s property.

These claims were never ‘‘pressed or passed upon”’

in the Courts below; this Court therefore lacks jurisdic-

tion to consider them. Illinois v. Gates, 103 S. Ct. 2317,

2321-23 (1983); Street v. New York, 394 U.S. 576, 581-585

(1969).

As a general matter, this Court has no jurisdiction

under 28 U.S.C. § 1257, ‘‘. .. unless a federal question was

raised and decided in the state Court below. ‘If both of

these do not appear on the record, the appellate jurisdic-

tion fails.’’’ Cardwnale v. Louisiana, 394 U.S. 436, 438

(1969), quoting Story J. in Crowell v. Randall, 10 Pet. 368

16

(1836). The utter silence of the Indiana Supreme Court

on the constitutienal question should conclude this case,

State Farm Mutual Automobile Insurance Co. v. Duel, 324

U.S. 154 (1945), since the Indiana Court has clearly not

had the opportunity to construe its statutes in light of the

asserted constitutional claims. Cardinale v. Louisiana,

supra; ¢.f., Disrict of Celumbia Court of Appeals v. Feld-

man, 103 S.Ct. 1303, 1315, fn. 16 (1983).

Nevertheless, NIPSCO may show that, notwithstand-

ing the Indiana Court’s silence. the federal constitutional

question was presented ‘‘. .. in such a manner that it was

necessarily decided by the [state court] when it [ruled].

..’ Street v. New York, 394 U.S. 576,581 The Appel-

lant must affirmatively show both that the :‘onstitutional

question was ‘‘properly presented’’ and that the state

Court necessarily decided it, notwithstanding its silence.

That is, the Appellant must affirmatively show both that

the issue sought to be presented in this Court was both

‘‘pressed’’ and ‘‘passed upon.’’

Proper presentation requires a showing that there

was a ‘‘real contest’’ at all levels of the state procedure.

Morrison v. Watson, 154 U.S. 111 (1894.)

In [llmois v. Gates, Justice Rehnquist described the

‘real contest’’ element in detail. 103 S. Ct. 2317 at 2323-

24. The issue cannot have been presented in a merely

‘‘routine’’ manner; there must be live ‘‘adversarial dis-

on the record, ibid., so as to guarantee ‘‘. . . that

a factual rc *d will be available to us, thereby discourag-

9?

pute

ing the framing of broad rules, seemingly sensible on one

set of facts, which may prove ill-considered in other cir-

cumstances... .’’ Id. at 2325.

17

NIPSCO never addressed the statutory construction

of the Court of Appeals or the Supreme Court requiring

a close nexus between rates and service. It was there-

fore never in any position to argue a federal constitutional

claim. The fabrications and innuendoes in its Jurisdic-

(8) Although NIPSCO claims in this Court that it presented

the Indiana Supreme Court with its constitutional claims, ().S.

at 7) the record shows that at best it gave cursory nod in the

eneral direction of the Constitution, and that only after it

had lost in the Court of Appeals. There follows the entire pre-

sentation on rehearing in the Indiana Court of Appeals and

on Petition to Transfer in the Indiana Supreme Court.

E. Taking Service or Property Without Just Compensation

The State of Indiana may not constitutionally require

a utility to spend prudently large amounts of money for

the convenience of the public, and at the same time pro-

hibit the utility from recovering those expenditures through

rates. Ind. Const. Art. |, § 21; U.S. Const. Amend. XIV, § 1;

Wisconsin Public Service Corp. v. Public Service Commission

(1982), 109 Wis. 2d 256, 325 N.W.2d 867, 871. Simply

stated, it is unconstitutional for the state to demand some-

one’s services or take his property without just compen-

sation. Id.; Public Service Commission v. Indiana Bell

Telephone Co. (1955), 235 Ind. 1, 130 N.E.2d 467. NIPSCO

is under a statutory mandate “to furnish . . . service and

facilities.” Ind. Code 8-1-2-4. The Commission concluded

in the instant case that NIPSCO prudently expended in ex-

cess of $190 million pursuant to this statutory requirement.

(R. Vol. 4, pp. 573-591.) The majority opinion denies any

recovery at any time of any amount of this money or ac-

commodation service. (10) (Majority slip op. at 16-17.)

Accordingly, the majority opinion results in the unconsti-

tutional taking of property or service. As explained by the

Wisconsin Supreme Court:

‘Utilities have a statutory duty to engage in such ex-

penditures. Sec. 196.-03(1), Stats., states: ‘Every public

utility is required to furnish reasonably adequate serv-

ice and facilities.’ It is arbitrary and capricious to au-

thorize a utility to expand its facilities, spend large

amounts of money prudently to accomplish that goal,

and then force the utility to bear the entire risk of such

expenditures.’

(Continued on following page)

18

tional Statement in this Court intimate the sort of factua!

record NIPSCO might have made, but did not.

Although the state did not physically seize Bailly, er

specifically order it cancelled, it left NIPSCO no chcice

but to abandon the project once it had become clear

that the project could not economically be brought to

completion; ... (J.S. at 15; compare R. 1521, quoted

above, page 2.) ....

The perfunctory way in which NIPSCO raised its

‘*eonstitutional’’ issue discouraged even its supporters on

the Court from addressing the Constitution. Neither the

Order of the Indiana Supreme Court nor the multiple opin-

ions expounding upon that Order consider or decide any

constitutional question. This supports, rather than over-

comes, the presumption that the question was not properly

(Continued from previous page)

Wisconsin Public Service Corp. v. Public Service Commis-

sion, supra, 325 N.W.2d at 870-871.

fn. 10 Money is obviously property. E.g., Department

of Insurance v. Motors Insurance Corp. (1956), 236

Ind. 1, 12-13, 138 N.£.2d 157, 163; Black’s Law Dic-

tionary at 1096 (rev. 5th ed. 1979). Also, Ind. Const.

Art. 1, § 21 prohibits confiscation by the state, of ‘serv-

ices.’

Brief of Respondents on Rehearing, pages 36-38.

This language was repeated, verbatim even to the typo-

graphical errors, in NIPSCO’s Brief on the Merits in the Indiana

Supreme Court. This was it.

Although a party is not confined in this Court to the same

arguments made below. Dewey v. DesMoines, 173 U.S. 193,

197-98, it is apparent that no “Taking Clause” argument was

made here, and that no cogent Due Process Clause argument

was made.

Under Indiana faw, an appellate Court may disregard an

issue not supported by case authority aid argument. App. Rule

8.3(A)(7). Coleman v. Siete, 241 Ind. 663 (1961); N.Y., Cinn., &

St. Louis Railway Co. v. Mercantile Bank Co., 130 Ind. App. 638

(1960). This rule may provide an independent state procedural

ground for nonconsideration of the federal constitutional ques-

tion. Henry v. Mississippi, 379 U.S. 111 (1965).

19

raised in the Court below. Street v. New York, supra;

lailey v. Anderson, 326 U.S. 203 (1946). Given the sharp

disagreement among the Indiana Justices over the result,

one would expect a constitutional question properly raised

to have received appropriate attention from at least one

of the four Justices who chose to write separately. How-

ever, not a single word.

NIPSCO’s argument boils down to a contention analo-

gous to that of a criminal who argues that because he

was convicted, he was necessarily denied his constitutional

rights. This does not sustain the federal appellant’s bur-

den of establishing jurisdiction. Compare, Chambers v.

Mississippi, 410 U.S. 283, White concurring at 303, 304.

C. The standard of review of state utility rate orders.

NIPSCO’s core “due process” contention is a bald

assertion unsupported by case law or argument, that

investor interests are impermissibly sacrificed where,

as here, a state rate-setting system automatically jig-

nores their investment.

J.S. at 11-12

However, it- has been clear from the earliest cases

that property must be “used and useful” in the utility

enterprise before constitutional protections attach. Smyth

v. Ames, 169 U.S. 466, 546-47 (1898). Even under the most

abusive and intrusive notions of constitutional review of

state utility ratemaking, it is not any investment that the

federal courts protected. It is the investment in “produc-

tive” property. C.f., McCardle v. Indianapolis Water Co.,

272 U.S. 400 (1926); DesMoines Gas Co. v. DesMoines, 238

U.S. 153 (1915).

20

The constitutional bottom line was recently restated

by the Court of Appeals for the District of Columbia Cir-

cuit:

. Under ne Constitution, a utility is entitled to

rates, not pe se excessive or extortionate, sufficient

to yield a reasonable rate of return upon the value of

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

render the services. But it is not entitled to have

included any property not used and useful for that

purpose.’ ...

Jersey Central Power & Light Co. v. FERC, 730 F.2d 816,

819, quoting Denver Union Stockyard Co. v. U.S., 304 US.

470, 475.

The “used and useful” limitation on the property that

can be the basis for a rate is firmly embedded in the con-

stitutional jurisprudence of review of state utility rate

orders. It is probably for this reason that NIPSCO can-

not cite the Court to any cases in support of its conten-

tion. The recent cases from Wisconsin and Missouri

simply do not contain any clear constitutional holdings.

NIPSCO attempts to make much out of the “statutory

duty to serve” but it is clear that the duty to serve under

Indiana law does not compel a utility to make expenditures

of any particular type (for example, to make capital invest-

ments in nuclear power versus purchasing power on the

open market to resell for service to current customers.)

Even if it did, it is not clear that the U.S. Constitution

would be violated. See, Atlantic Coast Line v. Goldsboro,

232 U.S. 548, 558 (1914); Norfolk Turnpike Company v.

Virginia, 225 U.S. 264 (1912).

The U.S. Constitution does not guarantee that a utility

enterprise will result in net revenues, and it does not in-

21

sulate the utility from the vagaries of the general econ-

omy. Federal Power Commission v. Natural Gas Pipe-

line Company, 315 U.S. 575, 590. The assertion to the

contrary by Circuit Judge Wilkey, quoted by NIPSCO

at J.S. page 9, is a lone, and inaccurate voice.

Indiana law accords with the settled constitutional

principles. ;

Under traditional utilities concept, utility com-

pany shareholders and bondholders furnish the capi-

tal necessary for the operation of the business. The

consumer pays a fair return on utility capital and in

addition pays cost of operation including taxes, but

it is well established that the company’s investors

must contribute the working capital.

Citizens Energy Coalition v. Indiana & Michigan Electric

Company, 396 N.E.2d 441, 445 (Ind. App. 1979).

There is not a single authoritative holding that

NIPSCO can bring to the Court to establish the existence

of a constitutional question raised by the Indiana Court’s

reaffirmation of the “used and useful” principle. This

Court should dismiss.

t)

Vv

CONCLUSION

The appeal should be dismissed.

Respectfully submitted,

Wituam Junin IT

A Micuaret A, MULLETT

FranK EK. SPENCER

ArtHurR A. Daronatsy