Petition for Writ of Certiorari — Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Commission

88-94. ¥ Supreme Coutt, U.S,

FILED

No. JUL 15 1988

Iu the Supreme Court of the Unit

OCTOBER TERM, 1988

KENTUCKY WEST VIRGINIA GAS COMPANY AND

EQUITABLE GAS COMPANY, A DIVISION OF

EQUITABLE RESOURCES, INC., PETITIONERS

Vv.

PENNSYLVANIA PUBLIC UTILITY COMMISSION, ET AL.,

RESPONDENTS

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

WILLIAM A. MOGEL

Counsel of Record

WILLIAM R. MAPES, JR.

RANDALL C. SMITH

Ross Marsh Foster Myers

& Quiggle

888 16th Street, N.W.

Washington, D.C. 20006

(202) 822-8888

ANDREW L. FREY

ANDREW J. PINCUS

EVAN M. TAGER

Mayer, Brown & Platt

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 463-2000

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

QUESTIONS PRESENTED

1. Whether the “filed rate’ doctrine, reaffirmed by

this Court in Mississippi Power & Light Co. v. Missis-

sippi, No. 86-1970 (June 24, 1988), and Nantahala

Power & Light Co. v. Thornburg, 476 U.S. 953 (1986),

requires a state public utility commission to allow a util-

ity to recover through its retail rates a fixed, unavoid-

able cost incurred by the utility pursuant to a contract

with a pipeline embodied in a tariff approved by the

Federal Energy Regulatory Commission.

2. Whether the retroactive application of a new rate-

making standard to bar a utility from recovering costs

incurred by the utility prior to the adoption of the new

standard, and previously recoverable, constitutes a taking

of property without just compensation in violation of the

Due Process Clause of the Fourteenth Amendment.

3. Whether a state public utility commission order

directing a utility to hire separate and independent coun-

sel to represent the interests of ratepayers in proceed-

ings before the Federal Energy Regulatory Commission

violates the utility’s due process right to manage its legal

affairs free from arbitrary governmental interference.

(1)

II

PARTIES TO THE PROCEEDING

AND RULE 28.1 STATEMENT

In addition to the parties listed in the caption, Linda

C. Taliaferro, Frank Fischl, and Bill Shane, commission-

ers of the Pennsylvania Public Utility Commission, and

the Federal Energy Regulatory Commission were defend-

ants in the district court and are respondents in this

Court. The Office of the Attorney General for the Com-

monwealth of Pennsylvania and the Pennsylvania Office

of the Consumer Advocate intervened below and are re-

spondents in this Court. The American Gas Association

participated below as amicus curiae.

Pursuant to Rule 28.1 of the Rules of this Court, peti-

tioner Kentucky West Virginia Gas Company states that

its parent company is Equitable Resources, Inc.; peti-

tioner Equitable Gas Company states that it is a division

of Equitable Resources, Inc. Petitioners’ only other af-

filiate or subsidiary (other than wholly-owned sub-

sidiaries) is Metscan Technology Partners, a partnership.

TABLE OF CONTENTS

I a sanleniaaneinn

Parties to the proceeding and Rule 28.1 statement...

i estehiecisonicaladvianmsasnons

Er essai itusseariadacuncedosenniek

Constitutional and statutory provisions involved _.......:

es cedadesaiaabancone

Reasons for granting the petition...............00000000--.

A. The Court Of Appeals’ Interpretation Of The

Filed Rate Doctrine Conflicts With This Court’s

Decisions In Mississippi Power And Nantahala..

B. The Retroactive Application Of Act 74’s New

Ratemaking Standard Effected A Taking Of

Equitable’s Property Without Just Compensa-

ERT ESS GEE Ae 0 OR P OS Re

C. The PUC’s Order Directing Equitable To Hire

Separate Counsel Violates Equitable’s Due Proc-

i RE ea

Ee

(III)

10

12

20

24

29

IV

TABLE OF AUTHORITIES

Cases: Page

Appeal of Sinclair Machine Products, Inc., 498

PDA COG COUT. WOCB) nnn inncccsccseiceann-ancccsscccesesnes-.. 19

Arkansas-Louisiana Gas Co. V. Hall, 453 U.S. 571

CHOY acericeicctecccnseceninnsscsaetseneciennnnnsemnsnensotansnbnaamncs 12

Commonwealth Electric Co. V. Department of Pub-

lic Utilities, 397 Mass. 361, 491 N.E. 2d 1035

CRO) naan rence ncnenesmenenceennnsoneeomentnsnnsnnantninc 19

Duquesne Light Co. V. Barasch, prob. jur. noted,

Me. 87-1160 (Mar. 7, 1906) -...._--.....--.......... 2, 23, 24, 29

Equitable Gas Co., 28 F.E.R.C. © 61,235 (1984)...... 15

Equitable Gas Co. v. Pennsylvania Public Utility

Comm'n, 526 A.2d 823 (Pa. Commw. 1987) ......... 8

FCC vy. Florida Power Corp., 107 S.Ct. 1107

CRO acne reninecnnnaneccnccrecicenscscnencnesenchincnnimanepnnhaceesananens 20

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

CIE ieccictccevesceenannsninnsesnsinistebasinniemninsatnensieaneaaniaietn 21

Gagnon V. Scarpelli, 411 U.S. 778 (1973) -........------ 25

Hurper & Row Publishing, Inc. v. Nation Enter-

prises, 471 U.S. 539 (1985) ............---------------0------ 26

Joint Anti-Fascist Refugee Comm. Vv. McGrath, 341

Ee I CO acetate ciinitn ccerencsnprnernsemncbeoenies 24 |

Lassiter Vv. Department of Soc. Services, 452 U.S. ;

ET ili nate ter 7 ieetnniae sear ear omtonOM rarer er 24

Loretto v. Teleprompter Manhattan CATV Corp., )

FG hE. Ik. SO eestenemeemmeenenveuaernn nr remunaees 22

Miami Herald Publishing Co. v. Tornillo, 418 U.S. :

Oo sll 26 )

Mississippi Power & Light Co. v. Mississippi, No.

§, Fe} Re | Reeeremcnaseenenrenrcenenmnnn passim

Montana-Dakota Utilities Co. v. Northwestern

Public Service Co., 341 U.S. 246 (1951) ............ 12

Murray’s Lessee v. Hoboken Land & Improvement

Co., 59 U.S. (18 How.) 272 (1856) .................----- 26

Nantahala Power & Light Co. v. Thornburg, 476

ee a caaseinricaneinmsimnininas passim

Nissho-Iwai Co. v. Occidental Crude Sales, Inc.,

729 F.2d 1530 (5th Cir. 1984) ......................-....-.. 15

Vv

TABLE OF AUTHORITIES—Continued

Page

Northwest Central Pipeline Corp. v. State Cor-

poration Comm’n, prob. jur. noted, No. 86-1856

CR IR FO Svcecetei Sticke oe 2

Pacific Gas & Elec. Co. v. Public Util. Comm’n of

California, 475 U.S. 1 (1986) 0.00. .26, 27, 28

Penn Central Transp. Corp. v. City of New York,

UF TEs SU CRON visscccstictetitertebce eee 22

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

ID sashsscnsnsectacckedsasinecaetascainad ene nen 21

Public Service Comm’n Vv. Mid-Louisiana Gas Co.,

GD Tt BOD CIID sikcisecnceitideeetcie cece 3

Schneidewind vy. ANR Pipeline Co., 108 S.Ct. 1145

CID. inddantieetteeedthelcme ec eer a cae 2

Transcontinental Gas Pipe Line Corp. Vv. State Oil

& Gas Board, 474 U.S. 409 (1986) 2

Walters v. National Ass’n of Radiation Survivors,

Ba Tt Bee Ge eevee ncescsete sees 24, 25

West Virginia State Bd. of Educ. v. Barnette, 319

eRe rs NEL att 26

Wisconsin Gas Co. Vv. FERC, 770 F.2d 1144 (D.C.

Cir. 1985), cert. denied, 476 U.S. 1114 (1986)... 5

Wooley v. Maynard, 430 U.S. 705 (1977) .......... 26, 27

Statutes :

Administrative Procedure Act, 5 U.S.C. 555(b)...... 10

Natural Gas Act, 15 U.S.C. 717 et seq.: _.... lessusiation 2,3

DP MED cstaicennte ects kee ae ase 3

ND ginisaiscccdseceeanebaemakcuencaecias eke 3,12

ee seibaipaipieunicbiedeihsasdadadest nec acer aia 3

Pennsy!vania Act 74, 66 Pa. Cine. Stat. Ann.

Berane Ons ih ee 2

Sheen (eee fre 20

§ 1307(f) (Purdon 1988 Supp.) 2,4

§ 1317-1318 (P: don 1988 Supp.) ...... 2

§ 1318(a) (Purdon 1988 Supp.) . 423

§ 1318(a) (1) (Purdon 1988 Supp.) sen 7

§ 1318(b) (Purdon 1988 Supp.) —....... 4

Gas Cost Rate No. 5,58 P.U.R. 4th 369 (Pa. P.U.C.

RUS MERRY Rite it PAIR MN eRe Es 6, 21

VI

TABLE OF AUTHORITIES—Continued

Miscellaneous: Page

6 Corbin on Contracts §§ 1324-1329 (1962) -............ 15

Friendly, “Some Kind of Hearing’, 123 U. Pa. L.

Rev. 1267 (1975) . pisvanbe 25

Model Rules of Professional Conduct (1983) . seas eas 25

Smoots, Report on State Least-Cost Gas Purchas-

ing Requirements, 2 Natural Gas Lawyer's J.

B10 (1QB7) .........cccccccccocececsscecececcccscccssensessccassessssooses 19

In the Supreme Court of the United States

OCTOBER TERM, 1988

No.

KENTUCKY WEST VIRGINIA GAS COMPANY AND

EQUITABLE GAS COMPANY, A DIVISION OF

EQUITABLE RESOURCES, INC., PETITIONERS

Vv.

PENNSYLVANIA PUBLIC UTILITY COMMISSION, ET AL.,

RESPONDENTS

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Kentucky West Virginia Gas Company and Equitable

Gas Company, a division of Equitable Resources, Inc.,

respectfully petition for a writ of certiorari to review

the judgment of the United States Court of Appeals for

the Third Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra, 1la-

40a) is reported at 837 F.2d 600. The prior opinion of

the court of appeals (App., infra, 80a-95a) is reported

at 791 F.2d 1111. The opinion of the district court

(App., infra, 4la-79a) is reported at 650 F. Supp. 659.

The prior opinion of the district court (App., infra, 96a-

104a) is reported at 620 F. Supp. 1458. The order of

the Pennsylvania Public Utility Commission (App., infra,

107a-163a) is unreported.

JURISDICTION

The judgment of the court of appeals (App., infra,

105a) was entered on January 19, 1988, and a petition

for rehearing was denied on February 16, 1988 (App.,

2

infra, 106a). Pursuant to orders issued by Justice Bren-

nan, the time for filing a petition for a writ of certiorari

was extended to and including July 15, 1988. The juris-

diction of this Court rests upon 28 U.S.C. 1254(1).

CONSTITUTIONAL AND

STATUTORY PROVISIONS INVOLVED

The relevant provisions of the United States Constitu-

tion, the Natural Gas Act, 15 U.S.C. 717 et seq., and

Pennsylvania Act 74, 66 Pa. Cons. Stat. Ann. 1307(f),

1317-1318 (Purdon 1988 Supp.), are reprinted at pages

164a-175a of the appendix of this petition.

STATEMENT

The extent to which federal statutory and constitu-

tional principles circumscribe state utility regulators has

been a subject of considerable controversy in recent

years. See, e.g., Schneidewind v. ANR Pipeline Co., 108

S.Ct. i145 (1988); Nantahaia Power & Light Co. V.

Thornburg, 476 U.S. 953 (1986); Transcontinental Gas

Pipe Line Corp. vy. State Oil & Gas Board, 474 U.S. 409

(1986); see also Duquesne Light Co. v. Barasch, prob.

jur. noted, No. 87-1160 (Mar. 7, 1988); Northwest Cen-

tral Pipeline Corp. v. State Corporation Comm’n, prob.

jur. noted, No. 86-1856 ‘May 23, 1988). In this case,

intervention by this Court is necessary because respond-

ents have transgressed federal limits upon their regula-

tory authority in a manner that, if not corrected, is

likely to generate considerable confusion over the proper

relationship between state and federal regulatory au-

thority and to unsettle the expectations of public utility

investors. Indeed, respondents’ violation of federal law,

sanctioned by the court of appeals, is virtually identical

to the impermissible exercise of state regulatory power

overturned by this Court in its recent decision in Mis-

sissippi Power & Light Co. v. Mississippi, No. 86-1970

(June 24, 1988).

3

1. The Natural Gas Act, 15 U.S.C. 717 et seq., au-

thorizes the Federal Energy Regulatory Commission

(FERC) to regulate both the interstate transportation

of natural gas and sales of natural gas “in interstate

commerce * * * for resale” (15 U.S.C. 717(b)). Under

Sections 4 and 5 of the Act, 15 U.S.C. 717¢ and 717d,

the Commission oversees the price and other terms of

sales within its jurisdiction, evaluating rates and charges

as well as all rules, regulations, practices, and contracts

affecting those rates and charges, to determine whether

they are just and reasonable.'

The Natural Gas Act allows the states to regulate the

rates paid by retail natural gas customers (see 15 U.S.C.

717(b)), but, of course, such regulation is circumscribed

by the duty to refrain from actions that contradict or

undermine federal regulation. See, e.g., Mississippi

Power, slip op. 17 (“States may not bar regulated utili-

ties from passing through to retail consumers FERC-

mandated wholesale rates”). This case involves an ap-

plication by petitioner Equitable Gas to respondent

Pennsylvania Public Utility Commission (PUC) for an

increase in retail natural gas rates to reflect costs in-

curred by Equitable in purchasing natural gas at a fed-

erally-established rate during the period from July 1983

through December 1984.

Like other states and the FERC, Pennsylvania permits

a utility to change its rates to reflect changes in fuel

costs. Under Pennsylvania Act 74, which became effec-

tive on July 30, 1984, a utility is entitled to recover its

1 The Natural Gas Policy Act of 1978 eliminated price regulation

of wellhead sales of “new” gas and established a timetable for the

gradual decontrol of all wellhead sales. See generally Public Service

Comm'n Vv. Mid-Louisiana Gas Co., 463 U.S. 319, 332-336 & n.14

(1983). That limitation upon the Commission’s regulatory author-

ity is not relevant in this case, which involves purchases by a regu-

lated local distribution company from regulated interstate pipelines.

iterate

4

gas purchase costs only if it demonstrates that its gas

purchasing decisions satisfied the new standard set forth

in Act 74—‘“that the utility is pursuing a least cost fuel

procurement policy, consistent with the utility’s obliga-

tion to provide safe, adequate and reliable service to its

customers.” 66 Pa. Cons. Stat. Ann. 1318(a) (Purdon

1988 Supp.).2 If it is found, after application of the Act

74 standard, that the revenues received by the utility

exceeded the allowable gas purchase costs, all of the ex-

cess revenues must be refunded to the utility’s customers

through rate reductions; conversely, if revenues were

below allowable costs, the utility may recover the short-

fall through increased rates (id. at § 1307(f) (5) ).

2. Petitioner Equitable Gas Company sells natural gas

at retail to approximately 240,000 consumers in and

around the Pittsburgh, Pennsylvania area.* It obtains

approximately 80% of its natural gas supplies through

wholesale purchases from three interstate pipeline com-

panies: Kentucky West Virginia Gas Company, which is

an attiliate of Equitable; Texas Eastern Transmission

Corporation; and Tennessee Gas Pipeline Company.

Equitable purchases gas from these companies at rates

and under terms and conditions set forth in tariff sched-

ules approved by the FERC pursuant to its authority to

regulate rates under the Natural Gas Act. App., infra,

3a-4a.*

2 Section 1318(a) provides that the PUC must make a number of

specific findings before it concludes that a utility has satisfied this

standard, including finding that the utility “fully and vigorously

represented the interests of its ratepayers in proceedings before the

Federal Energy Regulatory Commission”; that, in the course of its

dealings with its suppliers, the utility has “taken all prudent steps”

to obtain low-cost gas supplies; and that the utility has not with-

held low-cost gas from the market. Section 1318(b) provides that

additional special findings are required when, as here, a utility has

purchased natural gas from an affiliate.

3 Equitable also serves consumers in West Virginia and Kentucky.

4 Equitable obtains the remainder of its supplies from its own gas

wells in Pennsylvania and West Virginia and from wells owned by

independent producers in those states.

5

The period at issue in this case is July 1983 through

December 1984 (all but five months of which preceded

the effective date of Act 74). During that period, Equi-

table was bound by long-term contracts with the three

pipelines; moreover, those contracts were themselves em-

bodied in the pipelines’ FERC-approved tariffs, under

which the pipelines agreed to supply Equitable with speci-

fied volumes of gas at specified rates (usually expressed

in dollars per thousand cubie feet). While Equitable

could to some extent reduce the quantities of gas it pur-

chased, the contracts and tariffs contained “minmum bill”

provisions, under which Equitable was required to pay for

a specified proportion of the gas to which it was entitled

under its contract with the pipeline, whether or not it

actually took delivery of the gas. See, e.g., C.A. App.

903-940.°

During the early 1980s, there was a sharp decline in

the demand for natural gas in Equitable’s service area.

As a consequence, beginning a year or more prior to the

period covered by the application at issue in this case,

Equitable’s need for gas fell below the amounts it was

obliged to purchase by virtue of the minimum bill obliga-

tions under its FERC-approved supply contracts. Equi-

table thereby became obligated to pay its interstate pipe-

line suppliers for gas not taken. Equitable responded by

pursuing a strategy, in months when purchases were

below minimum bill levels, of reducing the amounts of

gas taken from each of its three pipeline suppliers on

a pro rata basis. Equitable believed that such a strategy

would result in the lowest cost for gas consistent with

ensuring the company’s access to reliable long-term gas

supplies. App., infra, 21a; C.A. App. 263-264, 280, 364-

365. This pro rata reduction purchase strategy was ap-

5 Minimum bill provisions have been extremely common in whole-

sale natural gas rates. For a discussion of the reasons that suppliers

include minimum bill provisions in their tariffs, see Wisconsin Gas

Co. v. FERC, 770 F.2d 1144, 1150-1151 (D.C. Cir. 1985), cert. de-

nied, 476 U.S. 1114 (1986).

6

proved by the PUC in connection with its review of Equi-

table’s gas purchases for the period immediately preceding

that at issue here. Gas Rate Cost No. 5, 58 P.U.R. 4th

369, 380 (Pa. P.U.C. 1984).°

On March 1, 1985, Equitable initiated a proceeding

before the Pennsylvania Public Utility Commission seek-

ing a rate increase on the ground that its actual gas

costs during the period July 1983 through December

1984 exceeded its revenues. By its order, the PUC retro-

actively disallowed approximately $14.3 million of these

purchased gas costs, which consisted entirely of pur-

chases from petitioner Kentucky West Virginia Gas Com-

pany in partial satisfaction of Fouitable’s minimum bill

obligation.’

The question on which the PUC focused was whether

the costs incurred by Equitable in purchasing gas from

its affiliate Kentucky West, more than two-thirds of

which were incurred prior to Act 74’s effective date,

comported with Act 74’s least-cost procurement stand-

ard.* Equitable contended that the purchases from Ken-

6 Equitable gave notice to the three suppliers that, in its view,

the considerable oversupply of gas constituted force majeure that

excused Equitable from its obligation under the minimum bill pro-

visions of the suppliers’ tariffs to pay for gas not taken. App.,

infra, 21a. Equitable’s unilateral declaration of force majeure did

not. of course, itself suffice to relieve Equitable of its legal obliga-

tion to make the minimum bill payments. See note 13, infre.

7In a second part of its application, Equitable sought increases

in its future rates, based on its anticipated gas purchase costs for

the period from September 1985 through August 1986. The PUC

modified that request. It prospectively required Equitable to pur-

chase quantities of gas from what the PUC found to be lower cost

suppliers. Thus, the PUC directed Equitable to purchase more gas

from Texas Eastern Transmission Corporation and decrease its

projected purchases from Tennessce Gas Pipeline Corporation and

from independent producers in the Hawks Nest area of West Vir-

ginia. App., infra, 119a-152a.

8 The PUC rejected Equitable’s contention that Act 74 could not

be applied retroactively to assess the reasonableness of costs in-

curred prior to the Act’s effective date. App., infra, 133a-137a.

7

tucky West met this standard because the minimum bill

provision in Kentucky West’s FERC-approved tariff re-

quired Equitable to pay for the Kentucky West gas

whether or not it took delivery of that gas. App., infra,

140a. Thus, even if Equitable had purchased gas from

another supplier, the FERC-approved tariff required it

to pay Kentucky West’s minimum biil.

The PUC found that the purchases from Kentucky

West violated the least-cost purchase requirement of

Act 74 because gas available to Equitable from its own

production and from local suppliers was cheaper than the

gas purchased from Kentucky West. It based this con-

clusion solely upon the basic rates charged by the various

suppliers, ignoring both Equitable’s obligation to pay

Kentucky West under the minimum bill provision of the

FERC-approved tariff and the impact of the minimum

bill provision on the relative net costs of Equitable’s

sources of natural gas supply. Applying the standard set

forth in Act 74, the PUC concluded that reducing the

volumes of gas acquired from Kentucky West would have

cut Equitable’s costs by an amount greater than the

$14.3 million in costs claimed by Equitable; it therefore

declined to allow a rate increase to cover those costs.

App., infra, at 142a-148a.

In the course of making the specific findiigs man-

dated by Act 74 concerning Equitable’s purchasing strat-

egy ‘see note 2, supra), the PUC considered whether

Equitable had “fully and vigorously represented the in-

terests of its ratepayers in proceedings before the Fed-

eral Energy Regulatory Commission” (66 Pa. Cons.

Stat. Ann. 1318(a)(1) (Purdon 1988 Supp.)). The

PUC stated that, with respect to FERC proceedings to set

the rates charged by Equitable’s affiliate, Kentucky West,

“{a] serious question arises as to whether [vigorous rep-

resentation of the ratepayers’ interests] can take place

in view of Equitable’s present corporate structure.” App.,

infra, 148a. In order to eliminate what it found to be an

obstacle to Equitable’s performance of this statutory

8

duty, the PUC ordered Equitable to “obtain independent

representation of its interest by legal counsel and techni-

cal support staff wholly separate from Kentucky West”

in all FERC rate proceedings involving Kentucky West

(ibid.).

3. Following the issuance of the PUC’s order, Equi-

table, together with its affiliate, Kentucky West, com-

menced the present action in the United States Dis-

trict Court for the Middle District of Pennsylvania, join-

ing as defendants the Pennsylvania Public Utility Com-

mission, the members of that Commission, and the Fed-

eral Energy Regulatory Commission. Equitable sought

declaratory and injunctive relief directing the PUC to

allow Equitable to recover the $14.3 million in incurred

gas costs and invalidating the portion of the PUC’s order

requiring Equitable to employ separate counsel to op-

pose the interests of an affiliated company, Kentucky

West, in that company’s FERC rate proceedings. C.A.

App. 9-25.

The district court entered judgment in favor of re-

spondents (see App., infra, 41a-79a).° It found that

neither Act 74 nor the PUC’s order violated the Suprem-

acy Clause and that Act 74 did not violate either the

Commerce Clause or the Equal Protection Clause."®

® The district court had initially concluded that it should abstain

so that Equitable’s constitutional claims could be resolved in the

state court proceeding (App., infra, 96a-104a). That determination

was reversed by the court of appeals, which remanded the case for

determination on the merits by the district court (id. at 80a-95a).

Equitable also filed a petition for review of the PUC’s order in

the Commonwealth Court of Pennsylvania. That court upheld the

PUC’s determination against several state-law challenges. See

Equitable Gas Co. v. Pennsylvania Public Utility Comm’n, 526 A.2d

893 (Pa. Commw. 1987). Because of the pendency of the federal

court action, Equitable did not press its federal claims in the state

court proceeding.

10 The district court declined to rule on Equitable’s challenge to

the portion of the PUC’s order requiring Equitable to retain sepa-

9

The court of appeals affirmed (App., infra, 1la-40a).

It first found that Act 74 was not facially invalid under

the Supremacy Clause (id. at 12a-18a). (That ruling is

not at issue here.) The court then turned to Equitable’s

argument that the manner in which the PUC applied Act

74 in this case violated the Supremacy Clause because it

failed to recognize costs actually incurred by Equitable

in taking delivery of Kentucky West gas that Equitable

was bound under the FERC-approved tariff to pay for.

The court of appeals recognized (App., infra, 19a) that

Kquitable’s challenge to the statute as applied raised a

substantial claim under this Court’s decision in Nantahala

Power & Light Co. v. Thornburg, 476 U.S. 953 (1986),

but it rejected Equitable’s claim for two reasons. In-

voking the general principle that federal courts should

accord preclusive effect to factual determinations of state

administrative agencies, the court deferred to the PUC’s

implicit conclusion that it was not necessary to consider

the minimum bill provision of the FERC-approved tariff

in assessing the prudence of Equitable’s gas purchases

(App., infra, 21a-22a). The court went on to reject Equi-

table’s claim for the additional reason that Equitable had

not “challenge[d] the evidentiary support for the PUC’s

findings” by introducing into evidence “mathematical

figures * * * establishing what actual costs Equitable

had incurred” pursuant to the Kentucky West minimum

bill or what minimum bill costs Equitable would have

incurred if it had purchased gas from the suppliers

identified by the PUC (id. at 22a).

The court also rejected Equitable’s claim that the

PUC’s retroactive application of the Act 74 standard to

evaluate the reasonableness of gas costs incurred from

July 1983 through July 1984—prior to the effective date

of Act 74-—constituted a taking of property without just

rate counsel in future proceedings before the FERC, holding that

Equitable’s claim should be directed to the FERC (App., infra,

43a n.4).

10

compensation in violation of the Due Process Clause of

the Fourteenth Amendment. According to the court,

Equitable in effect waived the retroactivity objection

when it “voluntarily” chose to make use of the Act 74

procedures rather than the statutory procedure for a

general rate increase (App., infra, 35a).

Finally, the court of appeals held that the PUC did

not violate Equitable’s constitutional or statutory rights

by ordering Equitable to employ separate counsel in

future FERC proceedings. The court rejected Equitable’s

contention that the requirement of separate counsel vio-

lated its due process rights on the ground that “[t]he

Supreme Court has not recognized a constitutional right

to counsel in a civil case or in a civil matter before an

administrative agency” (App., infra, 37a). The court

also held that the PUC’s order did not violate the right to

assistance of counsel set forth in the Administrative Pro-

cedure Act (see 5 U.S.C. 555(b)). It found that the po-

tential for conflict between the interests of Equitable’s

ratepayers and the interests of Kentucky West justified

the requirement of separate and independent counsel to

represent the ratepayers’ interests before the FERC

(App., infra, 38a-39a).

REASONS FOR GRANTING THE PETITION

In its recent decision in Mississippi Power & Light

Co. Vv. Mississippi, No. 86-1970 (June 24, 1988), this

Court reaffirmed that “States may not bar regulated

utilities from passing through to retail customers FERC-

mandated wholesale rates. ‘* * * When FERC sets a

rate between a seller of power and a _ wholesaler-as-

‘buyer, a State may not exercise its undoubted jurisdic-

tion over retail sales to prevent the wholesaler-as-seller

from recovering the costs of paying the FERC-approved

rate... . Such a ‘trapping’ of costs is prohibited.’ ”

Slip. op. 17 (quoting Nantahala Power & Light Co. Vv.

Thornburg, 476 U.S. 953, 970 (1986)). The Court held

11

that a state could neither enter an order barring the re-

covery of FERC-mandated costs nor “undertake a ‘pru-

dence’ review for the purpose of deciding whether to

enter [such] an order” (slip op. 17).

The decision of the court of appeals erroneously sanc-

tions the very “trapping” of costs found impermissible by

this Court in Mississippi Power. Equitable was legally

obligated by the minimum bill provision in Kentucky

West’s FERC-approved tariff to purchase the gas it did,

but the PUC nonetheless refused to permit Equitable to

recover the cost of those purchases on the ground that

they were not prudently incurred costs. Mississippi

Power holds that the Supremacy Clause bars a state from

applying a state-law prudency standard to prevent a

utility from recovering costs that the utility was obli-

gated to incur under a FERC-approved tariff. In order

to permit the court of appeals to take account of the

subsequent decision in Mississippi Power, this Court

should grant the petition, vacate the judgment of the

court of appeals, and remand the case for reconsidera-

tion in light of that decision."

The court of appeals failed to correct two other im-

portant errors committed by the PUC. First, the PUC

applied Act 74’s cost recovery standard retroactively,

barring Equitable from recovering gas purchase costs in-

curred long before that statutory standard went into

effect and thereby disrupting Equitable’s reasonable ex-

pectations so as to effect a taking of property without

just compensation. Second, the PUC ordered Equitable

to engage separate and independent counsel to partici-

11 Substantial portions of the opinions below are devoted to the

“facial” attack on Act 74, @.e., the claims that all purchases of gas

at FERC-approved rates are beyond state regulators’ power to re-

view for prudency. That claim is not renewed here. Rather, we

focus solely on the power of the PUC to disallow costs incurred in

purchasing gas that the utility is obligated by the FERC and by its

contract with the pipeline to purchase.

12

pate in FERC ratemaking proceedings in opposition to

applications by its affiliate, petitioner Kentucky West, in

violation of Equitable’s due process rights to manage its

legal affairs free from arbitrary government interfer-

ence. The court of appeals’ erroneous disposition of these

important constitutional issues also warrants review by

this Court in the event the case is not remanded as

suggested above.

A. The Court Of Appeals’ Interpretation Of The Filed

Rate Doctrine Conflicts With This Court’s Decisions In

Mississippi Power And Nantahala.

1. Section 4(a) of the Natural Gas Act, 15 U.S.C.

717c, endows the Federal Energy Regulatory Commis-

sion with exclusive authority to fix the just and reason-

able rate for sales of natural gas in interstate com-

merce. Arkansas-Louisiana Gas Co. v. Hall, 453 U.S.

571, 577 (1981); see also page3 & note! , supra. This

exclusive authority is safeguarded by what is known

as the “filed rate” doctrine, which bars other tribunals

from second-guessing the reasonableness of a rate fixed

by the Commission. Thus, except for judicial review of

the Commission’s orders, federal courts may not conclude

that the proper rate for a sale within the FERC’s juris-

diction is anything other than the rate fixed by the

FERC. Montana-Dakota Utilities Co. v. Northwestern

Public Service Co., 341 U.S. 246, 251-252 (1951). State

courts are similarly bound to apply the Commission’s

determinations. Arkansas-Louisiana Gas Co. Vv. Hall,

supra,

Most significant for purposes of the present case are

this Covrt’s decision two years ago in Nantahala and its

recen’ uecision in Mississippi Power. Nantahala concerned

the proper allocation among related companies of entitle-

ments to purchase low-cost electrical power. The FERC

had issued a rate order allocating the low-cost power,

but the state public service commission used a different

allocation in fixing the rate te be charged to the utility’s

13

retail customers. The question before this Court was

whether the state commission’s order violated the filed

rate doctrine.

The Court explained that the “typical application” of

the filed rate doctrine in this context occurs when “a

middleman faces a FERC-fixed wholesale rate charged

by a power supplier. In that situation, for a state rate-

making agency to disregard a FERC-filed rate would

clearly be inconsistent with the exclusive federal regu-

latory scheme over wholesale power prices” (476 U.S.

969). Accordingly, “{[w]hen FERC sets a rate between

a seller of power and a wholesaler-as-buyer, a State may

not exercise its undoubted jurisdiction over retail sales

to prevent the wholesaler-as-seller from recovering the

costs of paying the FERC-approved rate” (id. at 970).

The “state utility commission setting retail prices must

allow, as reasonable operating expenses, costs incurred

as a result of paying a FERC-determined wholesale

price” (id. at 965). The Court stated that any other

result would lead to the impermissible “trapping” of costs

at the wholesale level, with the wholesaler obligated to

pay the FERC-approved rate on the one hand, and un-

able to recover those costs in its retail rates on the other.

Although the facts of Nantahala did not involve a

simple refusal to recognize a FERC-approved cost per

unit of power, the Court nonetheless held that the state

commission had violated the filed rate doctrine. The

Court first observed that the doctrine remained applicable

even though the FERC order did not set a monetary

rate: “the filed rate doctrine is not limited to ‘rates’ per

se: ‘our inquiry is not at an end because the orders do

not deal in terms of prices or volumes of purenases’ ”

(476 U.S. at 966 (citation omitted) ). Because the FERC

order “directly affect{ed] Nantahala’s wholesale rates

by determining the amount of low-cost power that it may

obtain, and FERC required Nantahala’s wholesale rate

14

to be filed in accordance with that allocation,” the Court

concluded that the filed rate doctrine barred the state

PUC from basing Nantahala’s retail rates upon a differ-

ent allocation of low-cost power (id. at 967).

Like Nantahala, Mississippi Power concerned the allo-

cation among several entities of electrical power pro-

duced by a single plant. The FERC issued an order allo-

cating 33% of the power to Mississippi Power & Light

Co. (MP&L), and the state public utility commission

permitted MP&L to increase its retail rates to recover

the cost of purchasing that power at the FERC-approved

wholesale rates. The state supreme court held that the

commission erred because it should have reviewed the

prudence of MP&L’s decision to purchase power from

the new plant before permitting MP&L to increase its

retail rates to recover the cost of that power.

This Court reversed, holding that the state prudence

review was preempted under the filed rate doctrine be-

cause the FERC allocation order compelled the state to

permit the recovery of the cost of the power allocated to

MP&L. “Just as Nantahala had no legal right to obtain

any more low cost [electric] power than the amount

allocated by FERC, it is equally clear that MP&L may

not pay for less [high-cost electric] power than the

amount allocated by FERC” (slip op. 19).

Application of the Mississippi Power/Nantahala prin-

ciple in the present case is straightforward. The min-

imum bill provision in the Kentucky West tariff required

Equitable to pay for at least two-thirds of the gas to which

it was entitled under its contract with Kentucky West.

It wes not obliged to take actual delivery of this gas, but

it was required to pay for it. Equitable thus had an un-

avoidable obligation, reflected in Kentucky West’s FERC-

approved tariff, to incur the expenses that the PUC

found imprudent under Pennsylvania’s least-cost pur-

os

15

chase requirement.* Since the minimum bill is part of

Kentucky West’s FERC-approved tariff, and “[o]nce

FERC sets * * * a rate, a State may not conclude in

setting retail rates that the FERC-approved wholesale

rates are unreasonable” (Nantahala, 476 U.S. at 966),

the PUC was bound to conclude that the purchases from

Kentucky West were reasonable and to permit Equitable

to recover for them through its retail rates. The PUC’s

decision barring recovery of these payments results in

the very trapping of costs at the wholesale level that the

Mississippi Power and Nantahala Courts identified as

the consequence of a violation of the filed rate doctrine:

Equitable was obligated by Kentucky West’s FERC-ap-

proved tariff to purchase the gas and to pay the rate set

by the FERC, but Equitable was not permitted to recover

those costs in its retail rates.”

Contrary to the apparent view of the court of appeals

and the PUC, the PUC was not entitled to ignore the

constraints of the filed rate doctrine because it was apply-

ing a state statute requiring review of the prudence of

Equitable’s gas purchase decisions. Indeed, this Court

rejected just such a contention in Mississippi Power.

This Court assumed that “it might well be unreasonable

True, because Equitable’s actual purchases were below the

minimum-bill level, they only partially satisfied Equitable’s uncon-

ditional, federally-imposed obligation. But Equitable did not seek

in this proceeding to recover costs beyond those actually incurred.

8 Equitable’s declaration of force majeure does not alter the

analysis. First, the declaration related only to gas not purchased

or paid for (see note 12, supra) and not to the purchases actually

made in partial fulfillment of the contractual obligation: but it is

only the latter that are at issue here. Second, Equitable’s unilateral

declaration did not vitiate the binding legal effect of the tariff.

See, e.g., Equitable Gas Co., 28 F.E.R.C. © 61,225 (1984); see gen-

erally 6 Corbin on Contracts §§ 1324-1329 (1962) (discussing stand-

ard governing proof of force majeure); Nissho-Iwai Co. v. Occiden-

tal Crude Sales, Inc., 729 F.2d 1530, 1539-1542 (5th Cir. 1984)

(same).

16

for a utility to purchase unnecessary quantities of high

cost power, even at FERC-approved rates, if it had the

legal right to refuse to buy that power” (slip op. 19).

But, the Court continued, “if the integrity of FERC

regulation is to be preserved, it obviously cannot be

unreasonable for MP&L to procure the particular quan-

tity of high-priced [electric] power that FERC has

ordered it to pay for” (ibid.). Because the FERC order

required MP&L to pay for all of the power allocated

to it by the FERC, the state could not bar MP&L from

recovering the full cost of that power through its retail

rates.

Mississippi Power makes clear that, assuming a state

utility commission may consider the prudence of a util-

ity’s purchasing decisions at all, that prudence inquiry

is circumscribed by the filed rate doctrine. State regula-

tors may find a utility imprudent in incurring particular

costs only if the utility “had the legal! right to refuse to

[incur] that [cost]” (Mississippi Power, slip op. 19). In

the present case, therefore, the PUC was not free to look

only to unit prices of the various potential suppliers in

assessing the prudence of Equitable’s gas purchasing de-

cisions. It also was obligated to take account of the fact

that the minimum bill provision of Kentucky West’s

FERC-approved tariff required Equitable to pay for a

certain minimum amount of gas each month."

™ The Federal Energy Regulatory Commission acrees with this

analysis. It stated in its brief in the court of appeals (at 47) that

“to the extent that a state commission, in passing on the prudence

of a retail distributor in buying from one source rather than an-

other, disregards or ignores the economic consequences of a mini-

mum bill in the wholesale rate schedule approved by FERC for that

distributor’s actual scller, te state is acting in violation of the

‘filed rate’ doctrine and thus outside its lawful regulatory au-

thority.”

The FERC did not take a position on the factual basis for Equi-

table’s claim but stated that “if the facts are as [ petitioners]

allege then the Pennsylvania Commission’s decision was inconsistent

17

The record clearly establishes that the PUC in fact

ignored the minimum bill provision, in violation of the

filed rate doctrine. First, the PUC’s opinion never men-

tions the fact that the disallowed costs were incurred in

satisfying a FERC-imposed duty to purchase gas from

Kentucky West and pay the tariff rate for that gas. Sec-

ond, the PUC’s evaluation of the relative costs of alterna-

tive sources of supply is blind to the consequences of the

minimum bill obligation. As long as Equitable’s total gas

purchases remained below minimum bill levels, as they

did during the period in question, Equitable’s true cost

for gas purchased from a supplier other than Kentucky

West was not simply the amount charged by that sup-

plier. The cost of that gas would also include the mini-

mum bill obligation that existed whether or not Equi-

table took gas from Kentucky West. For this reason, it

is quite clear that, unless and until Equitable was re-

lieved of its minimum bill obligation, purchasing gas

from another supplier could never be cheaper than pur-

chasing gas from Kentucky West. The PUC’s contrary

conclusion, without any mention of the minimum bill

obligation whatsoever, conclusively demonstrates that it

failed to take account of the minimum bill in assessing

the relative cost of purchasing gas from a supplier other

than Kentucky West."

The court of appeals compounded the PUC’s error.

The court purported to recognize that Equitable might be

entitled to relief under the filed rate doctrine if the PUC

with controlling pre-emption doctrine” (FERC C.A. Br. 45). The

FERC’s reluctance to opine on the particulars of a dispute between

private parties is understandable, but, as the discussion below

makes clear, there can be little doubt that the PUC violated the filed

rate doctrine.

145 This conclusion is bolstered by the fact that the Public Service

Commission of West Virginia, which expressly did take Equitable’s

minimum bill obligations into account, found that Equitable had

been pursuing a lowest cost purchasing strategy. See C.A. App.

1068.

:

18

had failed to consider the minimum bill provision (see

App., infra, 19a), but it went on to apply the doctrine in

a manner that is squarely inconsistent with this Court’s

decision in Mississippi Power. The court held that Equit-

able had not properly raised its claim under the filed rate

doctrine because Equitable had not established how the

minimum bill provision was relevant to the costs disal-

lowed by the PUC. The court found that Equitable’s

claim was precluded by the PUC’s “finding”, upheld by

the Commonwealth Court, that the minimum bill provi-

sion was not relevant to the state-law prudence inquiry.

Id. at 21a-22a."° .

This Court’s decision in Mississippi Power makes clear

that state regulators’ duty to take account of the provi-

sions of FERC-approved tariffs does not depend upon

the facts determined in the state-law prudence inquiry.

The prudence inquiry is circumscribed by federal law,

not vice versa. The decision below is wholly inconsistent

with Mississippi Power because its allows state regula-

tors to immunize their prudence determinations from

scrutiny by making the “factual” finding that a FERC-

approved tariff is not relevant in assessing the prudence

of the utility’s purchasing decisions. Mississippi Power

makes clear that once the court of appeals determined

that the minimum bill was part of the FERC-approved

Kentucky West tariff, that court was obligated to con-

clude that the PUC had erred by failing to consider the

effect of Equitable’s minimum bill obligation on the pru-

dency of Equitable’s purchasing decisions.’ Like the

16 Somewhat inconsistently, the court of appeals also faulted

Equitable for allegedly failing to quantify its minimum bill liability

in the district court. Of course, Equitable was not seeking relief

with respect to its minimum bill obligation generally, but only with

respect to the cost of federally required purchases actually made

and paid for.

17In any event, Equitable plainly raised the connection between

the ciaimed costs and the minimum bill before the PUC (see App.,

infra, 140a) and in the district court (see C.A. App. 268, 393-394,

424-425).

0 PR

19

lower court in Mississippi Power, the court of appeals

here simply failed to recognize that the filed rate doc-

trine requires state regulators to consider all of the pro-

visions of FERC-approved tariffs when they evaluate the

prudence of a utility’s purchasing decisions.

2. The court of appeals did not have the benefit of

this Court’s decision in Mississippi Power at the time it

decided this ease. As we have discussed, the court below

committed the same error as the lower court in Missis-

sip Power when it concluded that the PUC did not

violate ithe Supremacy Clause by conducting its prudence

inquiry outside the bounds permitted by the filed rate

doctrine. For that reason, it is appropriate for this Court

to grant this petition, vacate the judgment of the court

of appeals, and remand the case to permit the court of

appeals to reconsider its decision in light of the inter-

vening decision in Mississippi Power.

Indeed, intervention by this Court is particularly ap-

propriate because the application of the filed rate doc-

trine in the context of state statutes mandating review

of a utility’s gas purchasing decisions is a question of

considerable importance.'* Within the last five years

more than a dozen states have, by statute or regulation,

directed utilities to pursue least-cost purchasing strate-

gies and required regulatory review of a utility’s gas

purchasing decisions. See Smoots, Report on State Least-

Cost Gas Purchasing Requirements, 2 Natural Gas Law-

yer’s J. 110 (1987). The proliferation of state statutes

mandating inquiries essentially identical to that conducted

18The PUC’s application of the Pennsylvania prudence statute,

sanctioned by the court below, also conflicts with the approach

advocated by other courts. In Appeal of Sinclaiv Machine Products,

Inc., 498 A.2d 696, 705 (N.IT. 1985), for example, the court recog-

nized that a state commission was not free to ignore selected por-

tions of a FE RC-approved rate, but that “the FERC rate alternative

[should be] compared in its entirety against other available options.”

See also Commonwealth Electric Co. v. Department of Public Utili-

ties, 397 Mass. 361, 491 N.E.2d 1035, 1045 (1986).

20

by the Pennsylvania commission means that the fre-

quency of these inquiries is likely to increase dramati-

eally. The decisions of the court of appeals and the

Pennsylvania PUC could create considerable confusion

regarding the application of previously-settled federal

principles in this new procedural context. They should

not be permitted to stand.

B. The Retroactive Application Of Act 74’s New Rate-

making Standard Effected A Taking Of Equitable’s

Property Without Just Compensation.

1. The Takings Clause of the Fifth Amendment, ap-

plied to the states through the Due Process Clause of the

Fourteenth Amendment, limits government authority to

regulate “rates chargeable from the employment of pri-

vate property devoted to public uses.” FCC v. Florida

Power Corp., 107 S.Ct. 1107, 1113 (1987). This Court

has used the term ‘“‘confiscatory” as a shorthand descrip-

tion of government rate orders that violate the Takings

Clause (ibid.). The PUC acted in an impermissibly con-

fiseatory manner by retroactively applying a new rate-

making standard to bar Equitable from recovering ex-

penditures that met the prudency standards that applied

at the time those exnenditures were incurred.”

Equitable adhered to a consistent gas purchasing

strategy during the period from 1982, when demand first

fell below minimum bill levels, through 1984. It ad-

dressed its oversupply of gas by reducing the amount of

gas obtained from its pipeline suppliers on a pro rata

basis. See page 5, supra. Prior to the adoption of

Act 74, the PUC applied the “just and reasonable”

standard (see 66 Pa. Cons. Stat. Ann. 1301 (Purdon

19 This argument applies to the portion of the PUC’s order barring

Equitable from recovering purchased gas costs for the period prior

to the effective date of Act 74—July 1983 through July 1984. Equi-

table incurred approximately $12 million of the disallowed costs

during this period.

21

1979) ) to allow Equitable to recover gas purchase costs

incurred for the year 1982. The PUC specifically found

that Equitable had utilized “prudent gas supply manage-

ment” in view of the constraints imposed by the mini-

mum bill provisions in the tariffs of its pipeline suppliers.

Gas Cost Rate No. 5, 58 P.U.R. 369, 380 (Pa. P.U.C.

1984).

In an about-face, the PUC did not apply the general

‘just and reasonable” standard to evaluate Equitable’s

application for a rate increase to cover gas purchase

costs incurred from July 1983 through July 1984—the

period at issue in the present case. Even though Act 74

did not become effective until July 30, 1984, after Equi-

table had incurred the expenses that it sought to recover,

the PUC applied the new ratemaking standard set forth

in that statute, concluding that Equitable’s costs were

not allowable under the new statutory standard and de-

nying Equitable’s application for a rate increase. The

PUC thus applied the Act 74 standard retroactively to

prevent Equitable from recovering costs that previously

had been found to be recoverable under the standard in

effect at the time those costs were incurred. Such a

retroactive change in the standard governing recovery of

out-of-pocket costs plainly violates the Takings Clause.

The effect of government action upon the reasonable

expectations of investors is an important factor in ana-

lyzing the permissibility of a rate order under the Tak-

ings Clause. Thus, a court reviewing a rate order “must

determine whether the order may reasonably be expected

to maintain financial integrity, attract necessary capital,

and fairly compensate investors for the risks they have

assumed, and yet provide appropriate protection to the

relevant public interests, both existing and foreseeable.”

Permian Basin Area Rate Cases, 390 U.S. 747, 792

(1968) ; see also FPC v. Hope Natural Gas Co., 320 U.S.

591, 603 (1944) (“the return to the equity owner should

be commensurate with returns on investments in other

22

enterprises having corresponding risks”). And the gen-

eral standard for determining whether government ac-

tion constitutes a taking looks in part to “the extent to

which {the government action] interferes with invest-

ment-backed expectations.” Loretto v. Teleprompter

Manhattan CATV Corp., 458 U.S. 419, 482 (1982); see

also Penn Central Transp. Corp. v. City of New York,

438 U.S. 104, 124 (1978).

The key factor under all of these standards is whether

the challenged government action upsets the investor’s

reasonable understanding of the risk that he assumed at

the time he decided to make his investment. An impor-

tant element of the investor’s assessment of that risk in

the context of a regulated company is the legal standard

governing the company’s ability to recover its out-

of-pocket costs and earn a return on investment. Once

the investor places his money at risk, he has an invest-

ment-backed expectation that the company’s operations

will he governed by the then-current legal standard. A

prospective change in the legal standard does not inter-

fere with this expectation—new investment will be with-

held if the new standard increases risk without a com-

mensurate increase in return.

A retroactive change in the applicable legal standard

to bar recovery of previously-recoverable expenses or re-

duce the rate of return, however, raises serious issues.

Because the additional risk that costs wou!'d be disal-

lowed under changed regulatory policies was not known

at the time the investment was made, the investor did

not demand a rate of return commensurate with that

risk.” Such a development not only causes the investor

to lose the funds held to be nonrecoverable, but his re-

maining investment is riskier because more expenses

20 In this instance, the effect of the PUC’s $14.3 million gas pur-

chase cost disallowance was to reduce Equitable’s rate of return on

equity for the period in question to zero. C.A. App. 884.

2A aS Re tae,

23

could be retroactively disallowed in the future. For these

reasons, a retroactive change in the governing legal

standard, which bars recovery of costs incurred prior

to the change in the legal rule although those costs previ-

ously had been recoverable, impermissibly interferes with

investors’ expectations in a manner that violates the

Takings Clause.

The court of appeals concluded that Equitable waived

its taking claim by “voluntarily” subjecting itself to the

Act 74 standard, which the court thought could have been

avoided by applying for a general rate increase rather

than invoking the procedures for the recovery of gas

purchase costs. See App., infra, 35a. The court’s con-

clusion is wrong for the simple reason that the new Act

74 standard plainly applies to both types of ratemaking

procedures. See 66 Pa. Cons. Stat. Ann. 1318(a) (Pur-

don 1988 Supp.). Accordingly, Equitable could not have

avoided the injury it suffered by seeking a general rate

increase.”*

2. The question whether the Takings Clause permits

the retroactive application of a new ratemaking standard

to disallow costs that were recoverable under the rate-

making standard in effect at the time the costs were in-

curred is now before the Court in Duquesne Light Co. v.

Barasch, No. 87-1160. The Supreme Court of Pennsy]l-

vania held in that case that a state statute barred utili-

ties from recovering funds expended on the construction

of nuclear power plants that were subsequently aban-

doned. The statute was adopted after the costs in ques-

tion had been incurred, and the costs had been recover-

able under the ratemaking standard in effect at the time

they were incurred. The state court concluded that the

211Ip addition, the applicable regulations required Equitable to

use the purchased gas proceeding to seek a rate increase to recover

actual gas costs in excess of revenues under its gas-cost tariff. See

App., infra, 6a.

24

retroactive application of the new statute did not violate

the Takings Clause.

The appellants in Duquesne Light Co.—like petitioners

here—argue (see Br. 26-33) that the retroactive appli-

cation of the statute effects a taking and that they are

constitutionally entitled to recover through their retail

rates out-of-pocket costs that were recoverable at the

time they were incurred. In view of the close resemblance

between the issue now before the Court in Duquesne

Light Co. and the issue presented in this case, the Court

should, if it does not remand on the Mississippi Power

issue, hold the petition with respect to this question and

dispose of it as appropriate in light of the disposition of

Duquesne Light Co.

C. The PUC’s Order Directing Equitable To Hire Separate

Counsel Violates Equitable’s Due Process Rights.

In alleged implementation of the duty imposed on

Equitable by Act 74 to represent the interests of its rate-

payers in FERC proceedings, the PUC ordered Equitable

to retain separate counsel to participate in FERC pro-

ceedings in opposition to applications submitted to that

body by Equitable’s affiliate, Kentucky West. The court

of appeals’ conclusion that this extraordinary order com-

ports with due process is inconsistent with the core func-

tion of the due process clause to guarantee “fundamental

fairness.” See, e.g., Walters v. National Ass’n of Radia-

tion Survivors, 473 U.S. 305, 320 (1985); Lassiter v.

Department of Soc. Services, 452 U.S. 18, 24 (1981);

see also Joint Anti-Fascist Refugee Comm. v. McGrath,

341 U.S. 123, 161 (1951) (Frankfurter, J., concurring)

(“Fairness of procedure is ‘due process in the primary

sense’’’) (citation omitted).

Although the process necessary to assure fundamental

fairness varies depending on the circumstances, no proc-

ess can be fair if it requires a participant to argue

against its own perceived interests. Yet the PUC’s order

ee teen ere

25

does just that. It requires a parent company, Equitable

Resources, to hire counsel to represent the customers of

one of its subsidiaries, Equitable Gas, against its other

subsidiary, Kentucky West. Such a procedure is totally

unprecedented in Anglo-American jurisprudence. Indeed,

this procedure

misses a principle so plain and fundamental that

I would think it would not need to be stated:

Every citizen in this country is presumed to be un-

restricted in consulting or employing an attorney on

any matter, or in making the decision that legal

representation for any purpose is not needed.

Walters, 473 U.S. at 371 n.22 (Stevens, J., dissenting)

(emphasis added). “[{T]he citizen’s right to consult an

independent lawyer and to retain that lawyer to speak

on his or her behalf is an aspect of liberty that is price-

less.” Ibid. (emphasis added).

Although Walters ruled that Congress may establish in-

formal administrative proceedings and discourage the

participation of attorneys by limiting the amount they

can be paid to a nominal sum, this Court has never held

that a governmental body may force a party to appear

at an administrative proceeding and, at the same time,

require it to hire counsel to advocate a position that it

does not wish to take. To the contrary, this Court has

recognized that “lawyers, by training and disposition,

are advocates a° bound by professional duty to present

all available e ence and arguments in favor of their

clients’ positicus and to contest with vigor all adverse

evidence and views.” Gagnon v. Scarpelli, 411 U.S. 778,

787 (1973) (emphasis added); see also Friendly, “Some

Kind of Hearing”, 123 U. Pa. L. Rev. 1267, 1288 (1975)

(“Under our adversary system the role of counsel is not

to make sure the truth is ascertained but to advance his

client’s cause by any ethical means’); Model Rules of

Professional Conduct, Rule 1.3, Comment (1983) (“A

lawyer should act with commitment and dedication to the

26

interests of the client and with zeal in advocacy upon the

client’s behalf’).

Because the PUC order is so totally at odds with

Anglo-American legal tradition, it violates due process.

See, e.g., Murray’s Lessee v. Hoboken Land & Improve-

ment Co., 59 U.S. (18 How.) 272, 277 (1856) (in de-

termining whether a practice comports with due process,

the court “must look to those settled usages and modes of

proceeding existing in the common and statute law of

England, before the emigration of our ancestors, and

which are shown not to have been unsuited to their civil

and political condition by having been acted on by them

after the settlement of this country”’).

The PUC order also violates due process because it

conflicts with substantive constitutional rights. See Mur-

ray’s Lessee, 59 U.S. at 277 (in determining whether

a practice violates due process, the court “must examine

the constitution itself, to see whether this [practice] be

in conflict with any of its provisions”). Specifically, be-

cause the PUC order requires Equitable to advocate a

position with which it disagrees, the order impinges upon

Equitable’s First Amendment rights.

This Court has stated on several occasions that the

protections of the First Amendment extend to speakers

who have been compelled to disseminate or advocate

views with which they disagree. See, e.g., Pacific Gas

& Elec. Co. v. Public Util. Comm’n of California, 475

U.S. 1, 16 (1986) (plurality opinion); Harper & Row

Publishing, Inc. Vv. Nation Enterprises, 471 U.S. 539,

559 (1985); Wooley v. Maynard, 430 U.S. 705, 714

(1977); Miami Herald Publishing Co. v. Tornillo, 418

U.S. 241 (1974); West Virginia State Bd. of Edue. v.

Barnette, 319 U.S. 624, 642 (1943); see also id. at 645

(Murphy, J., concurring). Thus, it is impermissible to

“force[] speakers to alter their speech to conform with

an agenda they do not set.” Pacific Gas, 475 U.S. at 9

27

(plurality opinion). The speaker has “the right to be

free from government restrictions that abridge its own

rights in order to ‘enhance the relative voice’ of its op-

ponents.” Jd. at 14 (citation omitted). Accordingly,

“where the State’s interest is to disseminate an ideology,

no matter how acceptable to some, such interest cannot

outweigh an individual’s First Amendment right to avoid

becoming the courier for such message.” Wooley, 430

US. at 717.

The PUC’s order is a pure example of impermissible

compelled speech. The order requires Equitable to hire

counsel to make arguments contrary to the interests of

its sister company, Kentucky West. In other words, the

order forces Equitable to make statements, through in-

dependent counsel acting on behalf of the ratepayers,

with which it does not agree. Because the First Amend-

ment fully applies to compelled speech, a governmental

action requiring a person to disseminate information is

constitutional only if it is a content-neutral and other-

wise reasonable time, place, and manner restriction, Pa-

cific Gas, 475 U.S. at 20-21 (plurality opinion), or if it

is narrowly-tailored to achieve a compelling state inter-

est. Jd. at 19. The PUC order satisfies neither standard.

This Court’s decision in Pacific Gas establishes that the

order at issue here is not content-neutral. Pacific Gas

involved an order of the California PUC requiring the

appellant utility to include in its billing envelopes the

newsletters of a consumer group that opposed it in rate-

making proceedings and with whose views it disagreed.

The plurality held that the order was not content-neutral

because it did “not simply award access to the public at

large; rather, it discriminate[d] on the basis of the view-

points of the selected speakers.” Pacific Gas, 475 U.S.

at 12 (plurality opinion). The order at issue here also

discriminates on the basis of viewpoint. It requires

Equitable to hire counsel to espouse a particular view-

point, namely, one of support for ratepayers and opposi-

28

tion to Kentucky West’s proposed tariffs. Therefore, like

the order in Pacific Gas, the PUC order at issue here is

not content-neutral.

The PUC order also fails the strict scrutiny test for

governmental actions that discriminate on the basis of

viewpoint. The State’s interest in assuring low utility

rates for its citizens may well be compelling. However,

the order is not narrowly-tailored, because “the State

can serve that interest through means that would not

violate [Equitable’s] First Amendment rights.” Pacific

Gas, 475 U.S. at 19. Specifically, in addition to FERC’s

own staff, consumer interests can be and are repre-

sented in FERC proceedings by state regulators. In-

deed, both the PUC staff and Pennsylvania’s Office of

Consumer Advocate have taken active roles in ratemak-

ing proceedings involving Kentucky West. There is no

reason to think that Equitable’s arguments in such FERC

proceedings would add anything to those raised by the

array of other advocates for the ratepayers’ interests.

Thus, requiring Equitable to finance two sets of attor-

neys and legal staffs to take opposing positions is in no

way narrowly-tailored to achieve the State’s interest in

consumer protection.

In sum, the PUC’s order requiring Equitable to hire

attorneys to oppose Kentucky West in FERC tariff pro-

ceedings is neither content-neutral nor narrowly-tailored

to achieve a compelling state interest. Therefore, the

court of appeals’ decision upholding it is inconsistent

with this Court’s First Amendment and due process

jurisprudence.

29

CONCLUSION

The petition for a writ of certiorari should be granted,

the judgment of the court of appeals vacated, and the

case remanded for reconsideration in light of Mississippi

Power & Light Co. Vv. Mississippi, No. 86-1970 (June 24,

1988). In the alternative, the Court should grant the

petition or hold it for disposition as appropriate in light

of the decision in Duquesne Light Co. v. Barasch, prob.

jur. noted, No. 87-1160 (Mar. 7, 1988).

Respectfully submitted.

WILLIAM A. MOGEL

Counsel of Record

WILLIAM R. MAPES, JR.

RANDALL C. SMITH

Ross Marsh Foster Myers

& Quiggle

888 16th Street, N.W.

Washington, D.C. 20006

(202) 822-8888

ANDREW L. FREY

ANDREW J. PINCUS

EVAN M. TAGER

Mayer, Brown & Platt

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 463-2000

JULY 1988