Respondents Brief — General Motors Corp. v. Tracy

Y ee

preme Court, U.S.

FILED

JUL 23 196”

In The ES,

SUPREME COURT OF THE UNITED SYATES — cuer«

October Term, 1995

No. 95-1232

GENERAL MOTORS CORPORATION,

Petitioner,

v.

ROGER W. TRACY, TAX COMMISSIONER OF OHIO,

Respondent.

On Writ of Certiorari to the

Supreme Court of Ohio

BRIEF FOR RESPONDENT

BETTY D. MONTGOMERY

Attorney General

JEFFREY S. SUTTON

State Solicitor

Counsel of Record

BARTON A. HUBBARD

ROBERT C. MAIER

PAUL A. COLBERT

THOMAS MCNAMEE

Assistant Attorneys General

State Office Tower

30 East Broad Street, 17th Floor

: Columbus, Ohio 43215-3428

(614) 466-8980

Counsel for Respondent

i

QUESTION PRESENTED

Does the dormant Commerce Clause or the Equal

Protection Clause compel States to tax purchases from

natural gas public utilities and natural gas marketers in the

same way, where the former undertake a heavily-regulated

public service obligation to sell and deliver gas on demand

while the latter do not?

ii

TABLE OF CONTENTS

QUESTION PRESENTED ........--e00: vou

TABLAS GF AUTHMESEED cc cccscsecesbesen Vv

DEMEMEEENE cc cceae st n0ens bs enna eeee I

A. The Natural Gas Market .......... l

B. Federal Regulation of the Natural Gas

_ sss VETTES TT ee 2

Fe ees re eer ee 4

l. State Law Prior to Federal

Deregulation ......2cc006:. 4

= State Law After Federal

Pee ere eee 7

3. The Ohio Sales and Use Tax

DOE 0 Sew wee aes 8

D. Impact of Deregulation and the Ohio

Tax Exemption on the Ohio Natural

Ce BS .n nc SR ae eee 10

E The Natural Gas Transactions in

PPP TRET TTT ee ee 11

F. The Ohio Supreme Court’s Decision .. 11

SUMMARY OF ARGUMENT .............. 12

I hn ks kS Sc bak 0.0 6 ee 0 ccc 15

I. OHIO’S REGULATION OF NATURAL GAS

PUBLIC UTILITIES AND MARKETERS DOES

NOT VIOLATE THE DORMANT COMMERCE

eT Ae wks ak seb ke 6s 000 15

A. This 62 Year Old Tax Exemption Does Not

Impermissibly Discriminate Against

Interstate Commerce ............ 16

a Ohio Plainly Did Not Intend to

Discriminate Against Interstate

Commerce When it Passed this Tax

Exemption in 1934 ........ 16

me The Tax Exemption Does Not

Facially Discriminate Against

Interstate Commerce ....... 17

a. No “Explicit Discrimination”

Appears on the Face of the

a 20

b. Differential Treatment of

Different Businesses and

Different Transactions Does

Not Constitute Facial

Discrimination ...... 23

3. Ohio’s Regulatory Scheme Does Not

Place a Disproportionate Burden on

Interstate Commerce ....... 30

iv

B. Congress Has Explicitly Permitted Ohio to

Treat Natural Gas Utilities as a Separate

Regulatory Classification ......... 33

Il. OHIO’S REGULATION OF NATURAL

GAS UTILITIES AND MARKETERS

DOES NOT DENY EQUAL PROTECTION

Vv

TABLE OF AUTHORITIES

CASES

Alaska v. Arctic Maid,

Pe es SED vk ok ok cece cee nnn 18

Allied Stores of Ohio, Inc. v. Bowers,

EE 39

Amerada Hess Corp. v. Director,

Div. of Taxation, 490 U.S. 66 (1989) .... passim

Arkansas Electric Coop. v. Arkansas

Pub. Serv. Comm’n,

we 36

Associated Gas Distribs. v. FERC,

824 F.2d 981 (D.C. Cir. 1987),

cert. denied, 485 U.S. 1006 (1988) ........ 4

Associated Indus. of Mo. v. Lohman,

BEG SD. Oh. TRE CIID Ow wk ce passim

Attorney General of New York v. Soto-Lopez,

OVO Wie GP nck ccc ccc cs ccces 40

Bacchus Imports, Ltd. v. Dias,

GOS U8, BUG COD nw ccc cc cee 21, 34

Best & Co. v. Maxwell, 311 U.S. 454 (1940) ..... 17

Brimmer v. Rebman, 138 U.S. 78 (1891) ........ 21

CTS Corp. v. Dynamics Corp. Of Am..,

ok 13, 18, 24

C & A Carbone, Inc. v. Town of

Clarkstown, 114 S. Ct. 1677 (1994) ........ 22

Carmichael v. Southern Coal & Coke Co.,

ee 8 Fe a ee 38

Carnegie Natural Gas Company v. Tax

Comm’r, Case No. 94-K-526,

Ohio Bd. Tax App. (Reported in Ohio Tax

Rep. (CCH) at { 402-254) (Nov. 17, 1995) .. 29

Chrysler Corp. v. Tracy,

652 N.E.2d 185 (Ohio 1995) ......... 10, 12

vi

Commonwealth Edison v. Montana,

2 ef. ere a ere 20

Complete Auto Transit, Inc. v. Brady,

a Fe.) rr 15

Cooper v. Williams,

4 Ohio (Hammond) 253 (1831) .......... 25

Dean Milk Co. v. City of Madison,

RR 21

Dennis v. Higgins, 498 U.S. 439 (1991) ........ 40

Dumbar-Stanley Studios v. Alabama,

SE ee eee ee 19

Exxon Corp. v. Governor of Maryland,

ee Se BON COND a Ae es Kee se es 19

In re FERC Order 636, No. 93-1636-GA-UNC

(PUCO Entry at 7) (Dec. 1, 1994) ....... 1]

Federal Power Comm’n v. East Ohio Gas,

ge ee i ao

Federal Power Comm’n v. Southern Cal.

Edison Co., 376 U.S. 205 (1964) ........ 36

Fort Gratiot Sanitary Landfill v. Michigan

Dep’t of Natural Resources,

ee Oe OE 8 ws eon cK Kw a 21

Fulton Corp. v. Faulkner,

oR ee eee 22

General Am. Transp. Corp. v.

Limbach, 15 Ohio St.3d 302 (1984) ....... 27

Gibbons v. Ogden,

ae U3. © Waeet.) t (1824)... ww ee ce 25

Gregg Dyeing Co. v. Query,

2). a a 31, 40

Haefner v. City of Youngstown,

68 N.E.2d 64 (Ohio 1946) .......... 10, 17

Halliburton Oil Well Cementing Co.

v. Reify, 373 U.S. 64 (1962) ........... 31

Hooper v. Bernalillo County Assessor,

gt Reet. . ee er errr 40

Vii

Hughes v. Oklahoma, 441 U.S. 322 (1979) ....... 17

Kraft General Foods v. Iowa Dept. of

Revenue and Finance,

| 18

Lehnhausen v. Lake Shore Auto Parts Co.,

oo Re 40

Madden v. Kentucky, 309 U.S. 83 (1940) ........ 38

Metropolitan Life Ins. Co. v. Ward,

ee 34, 40

Michigan-Wisconsin Pipe Line Co. v.

ee eR ee | 40

Minnesota v. Clover Leaf Creamery Co..,

eo 22

Motor Cargo, Inc. v. Board of

Township Trustees, 117 N.E.2d

224 (Summit Co. C.P. 1953) ........... 25

New Energy Co. of Indiana v. Limbach,

486 U.S. 269 (1988) ................ 33

New Orleans v. Dukes, 427 U.S. 297 (1976) ...... 40

New Orleans Public Service v.

City of New Orleans,

A re 26

New York Rapid Transit Corp. v.

City of New York, 303 U.S. 573 (1938) .... 26

North Dakota v. United States,

oe I Te af

Northeast Bancorp, Inc. v. Board of Governors,

ee Se BU gk cece ites 14, 34

Norton Co. v. Department of Revenue,

pe 30

Oregon Waste Sys., Inc. v. Dep’t of Envtl.

Quality, 114 S. Ct. 1345 (1994) .... 18, 21, 24

Pacific Tel. and Telegraph Co. v. Tax Comm’n,

Po 37

Panhandle Eastern Pipeline Co. v. Michigan

Pub. Serv. Comm’n, 341 U.S. 329 (1951) ... 36

Vill

Pike v. Bruce Church Inc.,

pS RS RS 2). re are 30

Polar Ice Cream and Creamery Co. v. Andrews,

ee es a iw és ee 21

Prudential Ins. Co. v. Benjamin,

co Be eee eee ee 14, 34

Roemer v. Board of Public Works,

426 U.S. 736 (per curiam) (1976) ........ 28

Royster Guano Co. v. Virginia,

roc PR Oe ee)! rar 38

United States v. Salerno,

ee aie, POET) he oe ens oh a 28

West Lynn Creamery, Inc. v. Healy,

Poe Ao Bee OR a1, 3

Williams v. Vermont, 472 U.S. 14 (1985) ........ 40

Wyoming v. Oklahoma,

RE gS a era 23

CONSTITUTIONAL AND STATUTORY PROVISIONS

Oo A a So tae eo ee 15

McCarran-Ferguson Act, 59 Stat. 33,

he Tote 2) GON a rere ere are ae 34

Noetural (ius At. 19 U.S.C. BET nw ce a wee ss oe

i ee Pe oa se eee woe ee Oe passim

ee ee og 6 ye eke a ee SO 2

ey I sak eb ow wR 3

ee nc gg we ok a a aa el we 6

eS cg 56k 2K 8 OR 32

ep Fg ch Se a eo ae 36

ae ger I st args 3. 2

a TR ee oak gw eke wae 9

St SS ere ee eer aera 32

iis oS So oe Gar cua as ee Le 5, 32

Sa I 8g Soa ee a ae ee ee 6, 32

eS ee err er eee ee eee 6, 33

ES 5 neh 6 VA eee ek ee ees 6, 32

Eo honk 5 dk bdo w Swe ok ao 32

JL rae ee ere a5 ae

ay ila hw Sina iw kG 6 ooo 6 on 32

a ots os Sas oad bee wo «0's 32

kn ag 50 bb i ain ob oko cd 32

I Sr iy nasa oS Go wo Nw a ke 6h on 32

F's N's an Wd oe be be ko es 31, 32

tne 3S UW's bd SK bb ke Ae Re 6, 32

MI 5.54 Sie. ow oo a oe 4b Oe ee 0 6, 32

Se I 5's oe bse ook he hae eo oe 32

SE eb Vn e's 3 Ao 6 Aw wo so 40 6s 6, 32

es as Sa gk G be aes wk woke eo 5

Cee «bk doh yb 6S aoe PASO 31

I is ook koe ed on we ke 32

I ia ook ew ao ak a kw Kae 0 6, 32

I 5 ak edd ea heed bee we Oke 3, oe

I sks vas bald a8 6h Ww ok ele 32

I, id ks bo oe bd oe eso be wes »

te I bdo soe kee bees oe eee eres 32

I eae bk '6- Gb 04 a Slee a es 4 wR 6. 33

oy ota a aha eg tl 6, 31

SI ita Wino 4 6 fs ck a hoo eo ok 6 os 29

eg Bd | Sa 9

eS a 31

a ee sc ww ce hws eRe ban 6, 31

NT as a eo oo ole ni ao wo seed 6, 31

kag to bu os ohn le ow aw 22

eo LS nes 9

Ree PE MED) og oe cee cece cccs 31

gs ao wes be ok a ew wR 9

ee TRIER + wv eo os bc sas escesecs 10

ee ee Age how an Sw ow 0 + 08% wie own 31

1934 Laws of Ohio 115 Pt. 11306 ........... 9, 16

101 Ohio Law 399 (1910) ..... 2.2... 2 eee. 10

OTHER AUTHORITIES

H.R. Rep. No. 899, S. Rep. No. 817,

83d Cong., 2d Sess. (1953),

reprinted in 1954 U.S.C.C.A.N. 2101 . 3, 35, 36

Joseph Fagan, From Regulation to Deregulation:

The Diminishing Role of the Small

Consumer Within the Natural Gas

Industry, 29 Tulsa L. Rev. 707 (1994) ..... 31

Peter W. Huber, et al.,

_ Federal Telecommunications Law (1992) .... 24

Order No. 436, Regulation of Natural Gas

Pipelines After Partial Wellhead Decontrol,

50 Fed. Reg. 42,408 (1985),

(to be codified at 18 C.F.R.§2) ......... 4

Order No. 636, Pipeline Service Obligations

and Revisions to Regulations Governing Self-

Implementing Transportation; and Regulation of

Natural Gas Pipelines After Partial Wellhead

Decontrol, 57 Fed. Reg. 13,267 (1992), (to be

codified at 18 C.F.R. § 284) ............ 4

Richard J. Pierce, Jr., The State of the Transition

to Competitive Markets in Natural Gas

and Electricity, 15 Energy L.J. 323 (1994) .. 24

STATEMENT

This case involves the constitutionality of a 62 year

old tax exemption that applies to purchases of natural gas

from regulated public utilities but not to purchases of natural

gas from unregulated marketers. In making this

classification, Ohio has drawn on a deep tradition of federal

and state law respecting the unique public services performed

by State utilities and the unique regulatory status given to

them. In order to put Ohio’s reliance on this classification

in context, it is important briefly to describe the nature of the

natural gas market, the evolution of federal and state

regulations in this area, and the origin of this tax exemption.

A. The Natural Gas Market.

From beginning to end, there are four essential tasks

performed by participants in the natural gas market: (1)

extracting the gas, (2) physically transporting it through

pipelines, (3) brokering sales of the gas, and (4) consuming

it. Extraction is performed almost exclusively by producers

of natural gas. They locate, drill for, and ultimately

withdraw gas from underground reservoirs located

throughout the country, including Ohio. They then prepare

the gas for transportation.

Transportation of the gas has long been performed by

two different participants in the market -- local natural gas

utilities (otherwise known as “local distribution companies”

or “LDCs”) and interstate pipeline companies. The

federally-regulated interstate pipeline companies transport the

gas between the States, while the State-regulated utilities

transport the gas within each State. Both companies own or

control their respective transportation equipment.

Brokering sales of natural gas has long been

performed by various participants in the market. Whether it

be producers, interstate pipeline companies, public utilities

2

or independent marketers, they have all had authority to

broker sales of natural gas. What has changed over time, as

shown below, is the ability of each market participant to sell

gas and the accessibility of the end user to each seller.

Finally, consumption of natural gas is divided into residential

and industrial use. Residential end users buy natural gas

primarily to heat their homes, while industrial end users buy

the gas primarily for manufacturing purposes. J.A. 74.

B. Federal Regulation of the Natural Gas

Market.

Congress has not been inactive in regulating the

natural gas market under its Commerce Clause powers. For

nearly sixty years, it has exercised broad authority in this

area, both through federal legislation and through the

rulemaking powers of the agency responsible for natural gas,

now known as the Federal Energy Regulatory Commission

(“FERC”). The one constant in these federal regulations has

been a hands-off policy with respect to State regulation of

“intrastate” distribution of natural gas. See 15 U.S.C. §

717(c).

In 1938, Congress enacted the Natural Gas Act, 15

U.S.C. § 717, et seg., which established a regulatory

dichotomy between interstate and intrastate distribution of

natural gas. The legislation thus regulated the transmission

of natural gas through interstate pipeline companies, and

allowed the newly-created federal commission to set rates for

sales by these companies. 15 U.S.C. § 717(d). At the same

time, the law gave the States authority to regulate intrastate

distribution of natural gas through their public utilities.

After passage of the legislation, the structure of the

natural gas industry remained straightforward. Producers

sold gas in the production area to interstate pipelines at

3

prices set by the federal commission. The pipelines, in turn,

transported the gas to the “city gate” -- the point at which

the interstate pipelines met the distribution systems of the

local utilities. The utilities then sold the gas directly to

industrial and residential consumers at rates set by their

public utility commissions. Under this regulatory regime,

neither producers nor independent marketers sold gas directly

to utilities or end-users.

In 1953, Congress amended the Natural Gas Act to

resolve a problem of overlapping state and federal regulation

caused by the Court’s decision in Federal Power Comm’n v.

East Ohio Gas, 338 U.S. 464 (1950). In East Ohio Gas, the

Court allowed the federal commission to regulate intrastate

distribution of natural gas by local utilities. Jd. at 472. In

direct response, Congress “eliminate[d] this duplication by

leaving the jurisdiction over these companies [i.e., public

utilities] exclusively in the States, as always has been

intended.” H.R. Rep. No. 899, S. Rep. No. 817, 83d

Cong., <1 Sess. (1953), reprinted in 1954 U.S.C.C.A.N.

2101, 2102. After the 1953 amendments, responsibility for

regulating natural gas utilities once again lay with the States

and their public utility commissions. 15 U.S.C. § 717(c)

(granting the States “jurisdiction” over “natural gas received

. . . within or at the boundary of a State if all the natural gas

so received is ultimately consumed within such State”).

In 1978, Congress took an initial step toward

lowering competitive barriers in the interstate natural gas

markets by enacting the Natural Gas Policy Act. See 15

U.S.C. § 3391, et seg. For the first time, the law gave

utilities and industrial end-users limited ability to purchase |

gas directly from producers and to transport the gas through

interstate pipelines. Jd.

In 1985, FERC continued to deregulate this aspect of

iia

4

the market. It established a rule of open access to interstate

pipelines, which permitted public utilities and industrial end-

users to buy gas directly from producers and marketers in the

production area, and then to ship that gas via interstate

pipelines. See Order No. 436, Regulation of Natural Gas

Pipelines After Partial Wellhead Decontrol, 50 Fed. Reg.

42,408 (1985) (to be codified at 18 C.F.R. § 2), Associated

Gas Distribs. v. FERC, 824 F.2d 981 (D.C. Cir. 1987), cert.

denied, 485 U.S. 1006 (1988).

In 1992, FERC took the policy of open access to

interstate pipelines a step further. It required all pipelines to

“unbundle” their transportation services from _ their

commodity-sales services. This meant that marketers, public

utilities and industrial consumers could buy natural gas

directly from the purchaser and then arrange separately to

pay for the interstate and intrastate transportation of the

commodity. See Order No. 636, Pipeline Service

Obligations and Revisions to Regulations Governing Seif-

Implementing Transportation; and Regulation of Natural Gas

Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg.

13,267, 13,269 (1992) (to be codified at 18 C.F.R. § 284).

Through each of these changes in federal law,

Congress continued to delegate primary authority to the

States for regulating intrastate distribution of natural gas.

ot State Regulation of the Natural Gas

Market.

1, State Law Prior to Federal

Deregulation.

Prior to the wave of federal deregulation that hit the

natural gas industry between 1978 and 1992, Ohio regulated

participants in the market in one of two general ways.

ae eee ee er ee a

5

Natural gas utilities lived under a distinct regulatory regime,

while all other participants in the natural gas market were

simply regulated like other Ohio businesses.

Ohio has long imposed unique regulatory burdens on

natural gas utilities, as well as other utilities, in view of the

important public service they perform and the distribution

monopoly that they possess. For example, natural gas

utilities:

. Must serve all members of the

public and must ensure access

to natural gas for residential

and industrial consumers alike,

RC, § GOGG; RC. 6

4905.06;

° Must guarantee a supply of

natural gas for all consumers at

all times, and thus must enter

into costly long-term purchase

and storage contracts, R.C. §

4905.22;

’ May not set their own rates

and are prohibited from selling

natural gas above cost, R.C. §

4905 .302;

° May not terminate service for

non-payment in the winter,

R.C. §§ 4933.12, 4933.122;

and

° Must meet complex reporting

requirements and may not issue

6

securities or enter into

contracts without the

permission of the Ohio public

utility commission, R.C. §§

4905.14, 4905.40, 4905.41,

4905.48, 4935.04.

In return for these unique regulatory burdens and for

the special public service that utilities provide, public utilities

receive unique regulatory benefits. For example, utilities:

° Have powers of eminent

domain, R.C. § 1723.01-.03;

and

. Are assured a reasonable return

on their capital equipment,

R.C. § 4909.15.

Nor has Ohio historically limited the unique

regulation of public utilities to rates, access, eminent domain

powers and the like. The State has long treated public

utilities differently from other businesses for purposes of

taxation. Utilities pay essentially three types of taxes: (1) a

personal property tax on 88% of the true value of their

property, R.C. § 5727.111; (2) a special tax assessment for

the expenses of the Public Utility Commission of Ohio, R.C.

§ 4905.10, and for the expenses of the Ohio Consumer

Counsel, R.C. § 4911.18; and (3) a gross receipts tax of

4.75% on their accumulated sales. In contrast, other Ohio

businesses generally pay the following taxes: (1) a personal

property tax on 25% of the value of their property, R.C. §

5711.22; and (2) a franchise tax, R.C. § 5733.01, et seq.

Be State Law After Federal

Deregulation.

Continuity and change marked Ohio’s regulation of

distributors of natural gas after federal deregulation. On the

one hand, public utilities saw virtually no change in their

regulation. They continued to face the same oversight, pay

the same types of taxes, and live under the same restrictions

on pricing and delivering natural gas. On the other hand,

federal deregulation gave rise to a new industry of

independent marketers who could make direct sales to Ohio

consumers but were not subjected to this regulatory regime.

Though in-state and out-of-state marketers do business in

Ohio, they are regulated the same without regard to their

location. Ohio ultimately decided to regulate marketers in

the same way it generally regulates other businesses that sell

tangible personal property in the State.

In the aftermath of federal deregulation, Ohio now

has two very different sets of rules governing the entities

responsible for making final sales of natural gas to Ohio

consumers:

Public Utilities Marketers

Sales price set by Sales price set by market.

regulators.

Must sell to all consumers. Can sell to whomever they

please.

Operate pipelines. Do not operate pipelines.

Limited ability to terminate | May terminate whenever

for non-payment. contract permits.

Public Utilities

May correct for

underbilling for restricted

reasons.

Face heavy utility

disclosure requirements.

Must treat customers

equally on an average cost

basis.

Need approval from PUCO

to issue securities, issue

bonds or enter into a

contract.

Must submit long-term

forecasts to PUCO

detailing future demand and

supply of gas.

Pay personal property tax

on 88% of true value.

Pay a tax assessment for

PUCO expenses.

Pay gross receipts tax of

4.75%.

3. The Ohio Sales and Use Tax

Marketers

May correct for

underbilling at any time.

Face no utility disclosure

requirements.

May negotiate different

deals with different

customers.

No such approval needed.

No such reporting

requirements.

Pay personal property tax

on 25% of true value.

Exempt from PUCO

assessment.

Pay franchise tax.

Exemption.

In 1934, the Ohio legislature enacted the tax

9

exemption now under attack. Included in the same bill that

established Ohio’s first sales tax on tangible personal

property, the provision exempted from taxation all purchases

from public utilities. 1934 Laws of Ohio 115 Pt. II 306,

308.

In its current (essentially unchanged) form, the statute

exempts the following purchases from the sales tax:

Sales of natural gas by a natural gas company,

of electricity by an electric company, of water

by a water-works company, or of steam by a

heating company, if in each case the thing

sold is delivered to consumers through wires,

pipes, or conduits, and all sales of

communications services by a telephone or

telegraph company, all terms as defined in

section 5727.01 of the Revised Code.

R.C. § 5739.02(B)(7). To be a “natural gas company,” one

must be

engaged in the business of supplying natural

gas for lighting, power, or heating purposes to

consumers within this state.

R.C. § 5727.01(D)(4). A similar definition of “natural gas

company” applies to the statutes governing Ohio’s public

utility commission. See R.C. § 4905.03(A)(6) (companies

“engaged in the business of supplying natural gas for

lighting, power, or heating purposes to consumers within this

state”).!

' Ohio also imposes a complementary tax on the use of

tangible personal property in Ohio. R.C. § 5741.02. The use tax

does not apply to purchases that, “if made in Ohio, would be a

10

From its inception, this exemption was designed to

account for another tax already paid by public utilities.

Because utilities were subject to the gross receipts tax, 101

Ohio Law 399, 412-13 (1910), the legislature determined that

there was no need to impose a separate 5% sales tax on each

individual purchase of the commodity. “[T]he whole

legislative course,” the Ohio Supreme Court has recognized,

“shows an intent to avoid double taxation of receipts whether

they come from sales proper or are the ‘gross receipts’ of

utilities that are subject to the excise tax under [R.C. §

5727.30 and .31].” Haefner v. City of Youngstown, 68

N.E.2d 64, 67 (1946).

The tax exemption, however, does not apply to

natural gas sales by unregulated marketers, who likewise do

not pay Ohio’s 4.75% gross receipts tax. In construing the

statute, the Ohio Supreme Court has determined that

marketers are not natural gas utilities because they do not

“own or operate the transportation and distribution equipment

and deliver the natural gas to consumers in Ohio.” G.M.

Petition for Certiorari Appendix (“Pet. App.”) 3a. See also

Chrysler Corp. v. Tracy, 652 N.E.2d 185, 187 (Ohio 1995).

D. Impact of Deregulation and the Tax

Exemption on the Ohio Natural Gas

Market.

While deregulation of natural gas sales has had a

significant impact on the Ohio market, the record contains no

indication that the tax exemption has impacted the free flow

of natural gas in Ohio or elsewhere. Over the last decade

and a half, the principal change has been a segregation of the

industrial and residential markets. Independent marketers

now control roughly 90% of the industrial market, while

sale not subject” to the sales tax. R.C. § 5741.02(C)(2).

il

utilities continue to dominate the residential market. See

J.A. 194; In re FERC Order 636, No. 93-1636-GA-UNC

(PUCO Entry at 7) (Dec. 1, 1994). Thus, even though

deregulation facilitated marketers’ efforts to sell directly to

residential customers, they have not done so. The apparent

reason for this development has nothing to with the sales and

use tax exemption, and everything to do with the Ohio

requirement that all suppliers of natural gas to “human needs

customers” provide a firm backup supply of gas. Id.

“Human needs customers” include all residential consumers

as well as hospitals, college dormitories and other uses

involving principal living quarters. Id. at Appendix A, 9-10.

In-state or out-of-state marketers willing to undertake the

obligation to provide a firm backup supply of gas and the

other duties of a public utility could qualify as Ohio utilities

and thus obtain the benefits of the tax exemption.

E. The Natural Gas Transactions in Dispute.

The natural gas transactions at issue arose during the

audit period January 1, 1987 through December 31, 1989,

Pet. App. 7a. Each of the disputed transactions involves

purchases from independent marketers, Pet. App. la, and

concerns purchases both from Ohio-based and out-of-state

marketers. Jd.; J.A. 16-57 (Ex. 10-A), 142, 148-50, 192

(Ex. 9A-15H). In each instance, General Motors’ purchase

contracts provided that the contract would become void if the

marketer became subject to regulation as a public utility.

See, e.g., J.A. 37-38.

F, The Ohio Supreme Court’s Decision.

General Motors presented two issues to the Ohio

Supreme Court. It first made a statutory construction

argument, contending that it was entitled to the tax

exemption because independent marketers constituted natural

12

gas public utilities for tax purposes. Pet. App. 2a. Not so,

the Court held: “[A] vendor in the type of sales now before

us” is not a natural gas public utility under either the

language of the statute or the public utility commission’s

interpretation of it. Jd. See also Chrysler Corp. v. Tracy,

652 N.E.2d 185, 187 (Ohio 1995).

General Motors then argued that denying the

exemption to marketers violated the Commerce and Equal

Protection Clauses. Jd. In making this argument, General

Motors relied on several different factual allegations,

including the following: (1) that the tax “is imposed only on

goods originating outside the State,” Jt. App. 262; (2) that

“[t]here is no sales tax on in-state purchases of natural gas,

but gas purchased out-of-State and brought into Ohio is

subject to use tax,” Jt. App. 262; (3) and that “GM has to

purchase the gas in Ohio to qualify for the exemption,” Jt.

App. 259.

Each of these factual premises, however, was

incorrect. No distinctions are made between in-state and out-

of-state natural gas. And natural gas marketers and utilities

engage in different businesses that warrant different

treatment. The Court thus rejected General Motors’

constitutional arguments, and ultimately concluded that “the

commissioner does not favor in-state purchases over out-of-

state purchases.” Pet. App. 4a.

SUMMARY OF ARGUMENT

General Motors’ dormant Commerce Clause argument

contains several flaws. First, the Ohio legislature plainly did

not intend to discriminate against interstate commerce when

it enacted this exemption for public utilities from its sales tax

in 1934. The supposed objects of discrimination (in-state and

out-of-state marketers) did not even exist at that time and did

Ce RAPE CTE TENE EH LD

UTERO F eEp in Net ee

13

not begin selling natural gas to Ohioans until the early

1980’s.

Second, the unintended consequences of the statute do

not rise to the level of facial discrimination against interstate

commerce. The written words do not contain an “explicit

discriminatory design,” Amerada Hess Corp. v. Director,

Div. Of Taxation, 490 U.S. 66, 76 (1989), or favor an in-

State entity over a “similarly situated” out-of-state

counterpart, CTS Corp. v. Dynamics Corp. of Am., 481 U.S.

69, 88 (1987). The statutory language contains none of the

hallmarks of interstate commerce discrimination: (1) the

exemption is generally applicable and benefits all public

utilities, not just natural gas utilities; (2) the exemption

makes no classifications based on the origin of the natural

gas; (3) the statute does not make it more difficult for

companies headquartered out of state to become members of

one or the other regulated class; and (4) the statute treats in-

State and out-of-state marketers entirely the same.

Nor does Ohio’s extension of the exemption to natural

gas utilities, but not to unregulated marketers, alter this

conclusion. Utilities undertake an obligation to serve all

members of the public on demand, sell at regulated rates,

and sell both a commodity (natural gas) and a service

(delivery of the gas). Marketers, by contrast, undertake no

statutory obligation to serve the public on demand, sell at

whatever price the market will bear, and sell just a

commodity (natural gas). The former is not a relevant

counterpart of the latter, making it entirely permissible for

Ohio to classify them differently for tax purposes.

A similar flaw plagues General Motors’ allegation that

Ohio denies the tax exemption to purchasers from out-of-state

utilities and therefore discriminates against foreign utilities.

One group simply is not like the other. When an out-of-state

14

utility sells to an Ohio consumer, it incurs none of the

regulatory burdens of being a public utility in making that

sale (e.g., rate control or delivery obligations), and thus

properly shares in none of the benefits Ohio extends such

companies. At all events, the allegation is entirely

speculative. General Motors did not purchase gas from out-

of-state utilities in this instance, has not established that Ohio

would deny the exemption under those circumstances, and

has overlooked at least one Ohio case suggesting that

General Motors’ speculation is incorrect. Because the Court

has “never deemed a hypothetical possibility of favoritism to

constitute discrimination that transgresses constitutional

commands,” Associated Indus. of Mo. v. Lohman, 114 S. Ct.

1815, 1824 (1994), this argument must be rejected.

Third, General Motors has not argued, much less

shown, any disproportionate burden on interstate commerce

caused by Ohio’s adherence to this traditional regulatory

classification. Far from burdening marketers, in fact, it

appears that the Ohio classification has been a blessing.

Marketers now dominate the industrial natural gas market in

Ohio, and apparently have chosen not to enter the residential

market only because ef the additional requirements they must

meet to make such sales.

But even if impermissible discrimination existed, the

statute should still be sustained because Congress has not

been silent in this area and has explicitly endorsed the very

classification Ohio has drawn. From 1938 to the present,

Congress has clearly delegated exclusive “jurisdiction” to the

States to regulate intrastate distribution of natural gas. 15

U.S.C. § 717(c). See Northeast Bancorp, Inc. v. Board of

Governors, 472 U.S. 159, 174 (1985) (“When Congress so

chooses, state actions which it plainly authorizes are

invulnerable to constitutional attack under the Commerce

Clause.”); Prudential Ins. Co. v. Benjamin, 328 U.S. 408

2? ere eo

15

(1946).

No less flawed is General Motors’ equal protection

claim. Because natural gas utilities and marketers engage in

fundamentally different businesses, sell fundamentally

different products -- one sells a naked commodity, the other

sells a commodity plus the delivery service -- and have

fundamentally different obligations to the public, Ohio acted

rationally in regulating and taxing them differently.

ARGUMENT

I. OHIO’S REGULATION OF NATURAL GAS

PUBLIC UTILITIES AND MARKETERS DOES

NOT VIOLATE THE DORMANT COMMERCE

CLAUSE.

By its terms, the Commerce Clause is a grant of

congressional authority. It provides that “Congress shall

have Power . . . [t]o regulate Commerce . . . among the

several States.” U.S. Const., art. I, § 8, cl. 3. Over time

the Court has interpreted the Clause to contain a negative

component as well -- to mean that, even when Congress does

not exercise its plenary authority over interstate commerce,

the Clause nonetheless restricts state regulations that atettone

with interstate commerce.

Such “dormant” commerce clause challenges to state

tax regulations, the Court has held, are assessed under a

four-part test: (1) does the regulation apply to an activity

with a substantial nexus to the regulating state; (2) is the

regulation fairly apportioned; (3) does the regulation

discriminate against interstate commerce; and (4) is the

regulation fairly related to services provided by the state?

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 287

(1977).

In this instance, General Motors does not dispute

three aspects of the Complete Auto test. It thus agrees that

the tax has a “substantial nexus” to Ohio, is “fairly

apportioned,” and is “fairly related” to services provided by

the State. General Motors instead argues solely under the

third prong of the Complete Auto test -- that the tax

discriminates against commerce. The automotive giant is

wrong in doing so.

A. This 62 Year Old Tax Exemption Does Not

Impermissibly Discriminate Against

Interstate Commerce.

No cognizable theory under the dormant Commerce

Clause prevents Ohio from enforcing this venerable tax

exemption. The exemption does not have a discriminatory

purpose; it does not facially discriminate between similarly

situated in-state and out-of-state businesses; and it does not

disproportionately burden interstate commerce. See Amerada

Hess, 490 U.S. at 75-76.

1. Ohio Plainly Did Not Intend to

Discriminate Against Interstate

Commerce When It Passed This Tax

Exemption in 1934.

The sales tax exemption under attack is not new. It

was enacted in 1934 as part of the same bill that established

Ohio’s first sales tax. 1934 Laws of Ohio, 115 Pt. II, 306,

307-08 (1934). The initial legislation thus created a

generally applicable sales tax and a generally applicable

exemption for all purchases from public utilities of natural

gas, water, electricity, and other utility services. Id. The

twin purpose of the exemption was to account for the gross

-

Ra ie se sci eS i i, a ana a

aa a

17

receipts tax that public utilities already paid on accumulated

sales of their services, and to avoid imposing a sales tax on

each individual purchase which would at best be redundant

and at worst a form of double taxation. See Haefner v. City

of Youngstown, 68 N.E.2d 64, 67 (1946) (“the whole

legislative course shows an intent to avoid double taxation of

receipts whether they come from sales proper or are the

‘gross receipts’ of utilities”); id. (“the exemptions . . . are

in keeping with a legislative policy of excepting from the

sales tax proper sales already taxed in the same or a similar

way”). The substance of the exemption has not changed

during the 62 years since it was enacted.

Under these circumstances, the exemption plainly was

not designed to discriminate against interstate commerce. It

was enacted long before the supposed objects of

discrimination (independent marketers) came into existence,

and thus long before the Ohio legislature could even conceive

a discriminatory motive. At the time the tax exemption was

enacted, all natural gas was sold through public utilities and

thus all natural gas sales were exempt from sales and use tax.

Only the broadest conception of an “ingenious”

discriminatory motive, see Best & Co. v. Maxwell, 311 U.S.

454, 455-56 (1940), could condemn ‘legislation in this

situation. The law, in short, does not have a discriminatory

motive, as General Motors seems to concede. G.M. Br. 17

n.14.

2. The Tax Exemption Does Not

Facially Discriminate Against

Interstate Commerce.

Nor do the unintended consequences of the exemption

rise to the level of facial discrimination. In attempting to

meet its “burden” of showing such discrimination, Hughes v.

Oklahoma, 441 U.S. 322, 336 (1979), and of invoking the

18

“virtually per se“ rule of unconstitutionality, Oregon Waste

Sys., Inc. v. Department of Envtl. Quality, 114 S.Ct. 1345,

1347 (1994); see G.M. Br. 17, General Motors

understandably does not proceed on the theory that the statute

as enacted in 1934 discriminated on its face. Instead,

General Motors argues that the discrimination arose as a

matter of historical accident. Once marketers were able to

sell natural gas directly to Ohio consumers, the argument

goes, facial discrimination sprang into existence when Ohio

did not immediately extend the exemption to unregulated

marketers. This truly dormant theory of interstate commerce

discrimination, however, does not accord with precedent,

fact or common sense.

Two fundamental principles allow Ohio to weather

this claim. In the first place, the rule of “virtually per se”

invalidity is not implicated when “there is no explicit

discriminatory design” in the words of the statute. Amerada

Hess, 490 U.S. at 76. In the second place, facial

discrimination does not exist unless the State law “imposes

a greater burden on out-of-state [companies] than it does on

similarly situated [in-state companies].” CTS Corp. v.

Dynamics Corp. of Am., 481 U.S. 69, 88 (1987) (emphasis

added). There thus is “no ‘iron rule of equality’ between

taxes laid by a State on different types of business.” Alaska

v. Arctic Maid, 366 U.S. 199, 205 (1961) (citation omitted)

(allowing differential treatment of fish processed by freezer

ships and fish processed by local canneries). See also

Associated Indus. of Mo. v. Lohman, 114 S. Ct. 1815, 1825

n.5 (1994) (requiring comparison between “substantially

equivalent events” in order to “avoid[] being drawn into an

amorphous inquiry that involves balancing incommensurate

burdens imposed on disparate activities throughout the

complex structure of a State’s tax system”) (internal

quotation omitted); Kraft General Foods v. Iowa Dept. of

Revenue and Finance, 505 U.S. 71, 80-81 (1992) (requiring

——e

19

comparison between companies who are “most similarly

situated”) (citation omitted); Dumbar-Stanley Studios v.

Alabama, 393 U.S. 537 (1969) (allowing differential tax

treatment of traveling photographers and photographers

operating out of fixed locations).

Illustrating these principles are Amerada Hess, 490

U.S. 66 (1989) and Exxon Corp. v. Governor of Maryland,

437 U.S. 117 (1978). In Amerada Hess, the Court held that

New Jersey’s differential tax treatment of oil producers and

retailers, which were both engaged in direct sales of oil, was

not facially discriminatory. “Whatever different effect the

challenged regulation] may have on these two categories of

companies,” the Court held, “results solely from differences

between the nature of their businesses, not from the location

of their activities.” 490 U.S. at 78. And that was true even

though the tax benefit at issue was denied to a group of

companies -- oil producers that market their oil -- located

exclusively out of state. Jd. at 77-78.

Exxon is to the same effect. At issue was a Maryland

statute that prohibited oil producers or refiners from

operating retail service stations in the State and that required

them to extend price reductions uniformly to all retail

stations they supplied. Even though the burden of the statute

fell solely on out-of-state producers and refiners and even

though the statute benefitted in-state independent retailers,

the Court found no discrimination. The statute, the Court

held, had “no demonstrable effect whatsoever on the

interstate flow of goods” -- and thus no discriminatory effect

on interstate commerce -- because, as here, “[t]he sales by

independent retailers are just as much a part of the flow of

interstate commerce as the sales made by the refiner-operated

stations.” Exxon, 437 U.S. at 126 n.16.

Much like the above cases, General Motors cannot

—

20

establish “explicit” facial discrimination or discrimination

between “similarly situated” companies and “substantially

equivalent” sales.

a. No “Explicit Discrimination”

Appears on the Face of the Statute.

General applicability of exemption. On its face, the

statute bears none of the hallmarks of facial discrimination.

The law grants a generally-applicable exemption, and extends

the benefit not just to natural gas public utilities but to all

public utilities -- whether they provide telephone services,

electricity, water or in this instance natural gas. That in

itself ought to be enough to show that the “explicit” design

of the law is to treat a uniquely regulated class of businesses

as one, just like other tax and regulatory provisions of the

Ohio Revised Code. Nothing about the language of such a

statute, or the general division between regulations for public

utilities and other businesses, shows discrimination against a

discrete group of out-of-state brokers of natural gas.

No discrimination based on origin of goods. The

statute likewise does not draw any distinctions based on

where the natural gas originated. Natural gas produced in

Texas is as apt to obtain the exemption as gas produced in

Ohio. What matters is who retails the commodity -- a

company that chooses to own and operate distribution

equipment and therefore become regulated as a public utility

or a company that does not and therefore remains an

unregulated marketer. Under these circumstances, whether

commerce in gas is interstate or intrastate is irrelevant under

Ohio tax law. The salient distinction is between public

utilities and marketers. The Court is “not, therefore,

confronted here with the type of differential tax treatment of

interstate and intrastate commerce that the Court has found

in other ‘discrimination’ cases." Commonwealth Edison v.

21

Montana, 453 U.S. 609, 618 (1981).?

No geographic barriers to becoming a public utility

or marketer. The statute also does not make it more

difficult for companies headquartered out-of-state to become

members of one or the other regulated class. No geographic

lines or preferences are drawn. In point of fact, the question

whether to live under one set of rules or another has nothing

to do with geography or local favoritism. It initially has to

do with whether the business wishes to sell just one thing (a

naked sale of natural gas) or two things (a sale of natural gas

together with the service of delivering the gas through

owner-operated pipelines). And it ultimately has to do with

whether the business wishes to live under a regime of heavy

* The absence of any discrimination based on the origin of the

natural gas distinguishes this regulation from the laws at issue in

virtually all of the facial discrimination cases relied on by General

Motors. See, e.g., West Lynn Creamery, Inc. v. Healy, 114 S.

Ct. 2205 (1994) (Massachusetts subsidy provided to in-state milk

producers but not to out-of-state producers); Oregon Waste Sys.,

Inc. v. Department of Envtl. Quality, 114 S. Ct. 1345 (1994)

(Oregon charged higher disposal fee for out-of-state solid waste

than in-state solid waste); Fort Gratiot Sanitary Landfill vy.

Michigan Dep’t of Natural Resources, 504 U.S. 353 (1992) (law

permitted county landfill operators to refuse to accept solid waste

from outside the county); Bacchus Imports, Ltd. v. Dias, 468 U.S.

263, 271 (1984) (Hawaii exemption “applie{d] only to locally

produced beverages”); Polar Ice Cream and Creamery Co. vy.

Andrews, 375 U.S. 361 (1964) (Florida law required local milk

processor to purchase milk requirement from producers within a

four-county marketing area); Dean Milk Co. v. City of Madison,

340 U.S. 349 (1951) (Madison, Wisconsin ordinance prohibited

the sale of pasteurized milk in the city unless it had been

pasteurized “within a radius of five miles” from downtown);

Brimmer v. Rebman, 138 U.S. 78 (1891) (Virginia imposed tax on

meat slaughtered 100 miles or more from the place of sale).

22

regulations or a regime of no regulations.

No geographic preference for in-state marketers.

Ohio denies all marketers, whether in-state or out-of-state,

the benefits of the exemption, just like it does with respect to

most businesses that sell tangible personal property. Thus,

a sales tax payment results if General Motors purchases

natural gas from an Ohio-based marketer, and a use tax

payment results if it purchases natural gas from an out-of-

state marketer. See R.C. § 5739.02. The only difference is

that the legal incidence of tax changes because the consumer

pays the one (the use tax) while the seller pays the other (the

sales tax). The two taxes, this Court has properly

recognized, do not discriminate against interstate commerce.

Fulton Corp. v. Faulkner, 116 S. Ct. 848, 854 (1996).

That Ohio denies the exemption to in-state marketers

and to virtually all industrial consumers of natural gas in the

State offers one more piece of statutory evidence that the law

is non-discriminatory. “The Court generally defers to health

and safety regulations because ‘their burden usually falls on

local economic interests as well as other States’ economic

interests, thus insuring that a State’s own political processes

will serve as a check against unduly burdensome

regulations.’” C & A Carbone, Inc. v. Town of Clarkstown,

114 S. Ct. 1677, 1689 (1994) (O’Connor, J., concurring)

(quoting Raymond Motor Transp., Inc. v. Rice, 434 U.S.

429, 444 n.18 (1978)). Indeed, “[t]he existence of major in-

State interests adversely affected by the Act is a powerful

safeguard against legislative abuse.” Minnesota v. Clover

Leaf Creamery Co., 449 U.S. 456, 473 n.17 (1981).?

> Not just Ohioans, but citizens of all States, would be unlikely

to suffer if the Ohio sales tax exemption were adopted in every

State in the country. That, too, undermines General Motors’

claim. “[TJhe practical effect of [the exemption] must be

23

In the end, the statute contains none of the telltale

signs of facial discrimination -- be it a tariff, an embargo,

local “protectionism,” “economic Balkanization,” or any

other explicit favoritism for intrastate over interstate

interests. On its face, the law grants a generally-applicable

exemption from a generally-applicable tax, and does so on

the basis of a distinction (between public utilities and other

businesses) that is as wide-spread among the States as it is

time-honored. See State Amicus Br. 1-4. Such a law simply

does not discriminate against interstate commerce.

b. Differential Treatment of Different

Businesses and Different

Transactions Does Not Constitute

Facial Discrimination.

In response, General Motors advances essentially one

theory of discrimination. The Ohio regulatory scheme is

facially discriminatory, General Motors submits, because the

allegedly favored class (public utilities) is defined by control

of pipelines in Ohio and distribution of gas through them.

The argument is at once creative but at the same time

implausible, and in the end fails to show any “explicit

discriminatory design.” Amerada Hess, 490 U.S. at 76.

The key flaw is that this “geographic distinction” does not

evaluated not only by considering the consequences of the statute

itself, but also by considering how the challenged statute may

interact with the legitimate regulatory regimes of the other States

and what effect would arise if not one, but many or every, State

adopted similar legislation.” Wyoming v. Oklahoma, 502 U.S.

437, 453-54 (1992) (quoting Healy v. Beer Institute, 491 U.S. 324,

336 (1989)). In view of the States’ wide-spread tradition of

separately regulating intrastate sales and distribution of natural gas,

it is too late in the day to argue that a State law respecting that

tradition would somehow impair the stream of commerce.

24

benefit an in-State entity at the expense of similarly situated

“counterparts . . . in other States.” Oregon Waste, 114 S.

Ct. at 1350. See CTS Corp., 481 U.S. at 88.

Deregulated marketers are not “similarly situated”

“counterparts” of regulated utilities. Each group has

separate obligations and lives under exceedingly different

regulations. The tax exemption at issue in this case thus

plays but a small part in the broad regulatory scheme that has

long treated public utilities differently from other businesses

-- in matters both of taxation and other regulations. The

two entities sell natural gas differently, buy natural gas

differently, price natural gas differently, and treat customers

differently.

No less than General Motors itself has acknowledged

this fundamental distinction through its conduct in this case.

The car company entered into contracts that terminated as a

matter of law if any of the marketers became regulated as

utilities. J.A. 37-38. That fact, better than any legal

argument, illustrates the difference in kind between the two

entities and General Motors’ ultimate design to reap the

benefits but not the burdens of utility status.

Utilities are different from marketers in another

important respect. They operate as “natural monopolies”

and deliver an essential commodity that the public has a

statutory right to demand. See Peter W. Huber, et al.,

Federal Telecommunications Law, 9.1, at 423-28 (1992).

Unlike marketers and other businesses, utilities participate in

a distribution system that contains a finite supply of pipeline

equipment. Because States understandably wish to have just

one set of water pipes, electric wires or pipelines, as the case

may be, criss-crossing their territory, they limit the supply

of this equipment and heavily regulate its owners. Richard

J. Pierce, Jr., The State of the Transition to Competitive

25

Markets in Natural Gas and Electricity, 15 Energy L.J. 323,

328 (1994). Even after federal deregulation, this feature of

public utilities will remain. At the same time, utilities also

provide a product and distribution service that Ohio citizens

have a right to obtain on demand. See R.C. § 4905.22

(imposing an “obligation to serve” the public); Motor Cargo,

Inc. vy. Board of Township Trustees, 117 N.E.2d 224, 226

(Summit Co. C.P. 1953) (“[T]he principal determinative

characteristic of a public utility is that of service to, or

readiness to serve an indefinite public . . . which has a legal

right to demand and receive its services or commodities. ”)

Because marketers, by contrast, simply broker sales and do

not undertake physical delivery to customers on demand,

there is no equivalent reason to regulate them like utilities.

They simply do not undertake the yoke of utility status and

quite fairly do not share in its benefits.

Nor is Ohio’s separate taxation and regulation of

utilities a recent innovation. All 50 States and the District of

Columbia separately regulate the business of local natural gas

distribution. See State Amicus Br. 1 n.1. And 31 States

have separate taxation structures for public utilities. Jd. at

2-3 n. 2. Moreover, for nearly as long as the dormant

Commerce Clause has been a feature of constitutional law,

see Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824), Ohio

has regulated utilities differently from other businesses,

Cooper v. Williams, 4 Ohio (Hammond) 253 (1831).

Fully recognizing the legitimacy of this distinction,

Congress itself has given the States broad authority to make

this precise regulatory classification. Under 15 U.S.C.

§ 717(c), States have explicit authority to regulate natural gas

utilities. No such federal legislation applies to marketers.

Both before and after the passage of this federal

legislation, moreover, this Court has acknowledged the

26

unique status of public utilities.

Since carriers and other utilities with the right

of eminent domain, the use of public property,

special franchises or public contracts, have

many points of distinction from other

businesses, including relative freedom from

competition, especially significant with

increasing density of population and municipal

expansion, these public service organizations

have no valid ground by virtue of the equal

protection clause to object to separate

treatment related to such _ distinctions.

Carriers may be treated as a separate class. .

and, as such, taxed differently or

additionally.

New York Rapid Transit Corp. v. City of New York, 303 U.S.

573, 579 (1938). For similar reasons, the Court recently

reaffirmed that “the regulation of utilities is one of the most

important of the functions traditionally associated with the

police power of the States.” New Orleans Public Service,

Inc. v. City of New Orleans, 491 U.S. 350, 365 (1989)

(citation omitted).

Against this economic, legislative, and _ historical

backdrop, the dormant Commerce Clause does not suddenly

compel Ohio to abandon this dichotomy. It does not put

Ohio to the all-or-nothing-at-all choice of regulating every

retailer in the natural gas market the same, whether they

operate distribution equipment or not. Neither does it

compel the lesser alternative that General Motors seeks here

-- namely, permitting marketers to slice off the benefits of

being a public utility but not the burdens. Ohio permissibly

requires its companies to take the bitter with the sweet. In

the end, marketers and utilities may well distribute the same

27

commodity. But they clearly are not “similarly situated”

“counterparts” of one another when it comes to establishing

a case of facial discrimination and harvesting the benefits of

the rule of “virtually per se” invalidity that allegedly comes

with it.

In-state and out-of-state utilities are not similarly

situated counterparts. Despite the well-established

distinction between utilities and other businesses, General

Motors posits that facial discrimination still exists because

Ohio does not extend the exemption “to purchases from out-

of-state public utilities.” G.M. Br. 18. This hypothetical

inconsistency, however, does not help the car company.

As an initial matter, the same defect that condemns

General Motors’ marketer comparison condemns this one.

When all is said and done, there simply is no out-of-state

analogue to an Ohio utility and thus no similarly situated

group to which Ohio could extend this exemption. True,

out-of-state utilities operate pipelines. True also, they use

pipelines to deliver natural gas and live under heavy

regulations in doing so. But that is not to say that these

aspects of their business have any relevance to a natural gas

transaction with an Ohio consumer. If, for example, an

Indiana utility chooses to broker a natural gas sale to an

Ohioan, it does so in the capacity of a marketer, not in the

capacity of a utility. The Indiana utility merely sells a naked

commodity to an Ohio consumer, but relies on others to

distribute the gas, relies on other pipelines for doing so, and

accordingly is spared the heavy Ohio (and Indiana) regulation

that comes with the territory of owning and using distribution

equipment in a State.

Ohio has long recognized, moreover, that utilities

may operate in a “‘dual capacity,’” and thus may be

regulated differently in each capacity. See General Am.

28

Transp. Corp. v. Limbach, 473 N.E.2d 814, 817 (Ohio

1984) (subjecting “dual capacity” enterprise to general

business regulations when operating as a manufacturer and to

utility regulations when operating as a utility). Thus, an out-

of-state utility may act as a marketer and thus free itself of

State regulatory burdens; or it may act as a utility and take

on those burdens. The two transactions are not

“substantially equivalent events” and treating them separately

is the only way to “avoid[] being drawn into an amorphous

inquiry that involves balancing incommensurate burdens

imposed on disparate activities throughout the complex

structure of a State’s tax system.” See also Associated

Indus. of Mo. v. Lohman, 114 S. Ct. 1815, 1825 n.5 (1994)

(citation omitted). In sum, while Ohio presumably has

authority to extend this tax exemption to out-of-state utilities,

nothing in the Commerce Clause compels it to do so.

General Motors, in any event, cannot rely on its

out-of-state utility hypothetical. Perhaps more importantly,

Ohio’s hypothetical treatment of out-of-state utilities is just

that -- a conjured vision of discrimination that has no place

in a facial challenge, no support in the record and no

foundation in Ohio law. Just three terms ago, the Court

reminded taxpayers that “we have never deemed a

hypothetical possibility of favoritism to constitute

discrimination that transgresses constitutional commands.”

Associated Indus., 114 S. Ct. at 1824. General Motors did

not meet any of its natural gas needs through out-of-state

utilities in this instance, and thus did not challenge the

validity of the statute as applied to that situation. Under

these circumstances, the carmaker cannot invoke the specter

of discrimination in some other setting in order to make up

for the utter lack of discrimination here. See id.; United

States v. Salerno, 481 U.S. 739, 745 (1987); Roemer v.

Board of Public Works, 426 U.S. 736, 761 (per curiam)

SS Ce eee in considering

29

facial challenges to statutes of this kind, to strike them down

in anticipation that particular applications may [be]

unconstitutional. ”).

That General Motors offers no evidentiary or legal

foundation for its argument confirms the wisdom of this rule.

Nothing on the face of the statute indicates that Ohio draws

a line between in-state and out-of-state utility sales. And

nothing obtained during discovery or at the hearing in this

case supports the assumption either. It may well be that

under some circumstances (or even under all circumstances)

Ohio would extend the exemption to out-of-state utilities.

Indeed, the one Ohio case to consider this issue suggests that

General Motors’ assumption is wrong. At issue in Carnegie

Natural Gas Company v. Tax Comm’r, Case No. 94-K-526,

Ohio Bd. Tax App. (reported in Ohio Tax Rep. (CCH) at 4

402-254) (Nov. 17, 1995) was whether a Pennsylvania public

utility should be regulated as an Ohio utility when selling

natural gas to an Ohio consumer. /d. at 3-7, 9. The Board

of Tax Appeals concluded that the company was an Ohio

utility under R.C. § 5727.01, potentially making it eligible

for the tax exemption at issue in this case.

The real point, however, is not that Ohio would or

would not extend the exemption to an out-of-state utility. It

is that General Motors did not purchase from out-of-state

utilities in this instance and thus cannot deploy a case of

hypothetical discrimination to shore up its claim that the

dormant Commerce Clause forbids Ohio from taxing utility

and marketer sales differently.

30

3. Ohio’s Regulatory Scheme Does Not

Place a Disproportionate Burden on

Interstate Commerce.

For many of the same reasons that General Motors

cannot establish facial discrimination here, it cannot show

that the Ohio regulations place an undue burden on interstate

commerce. While the Court has held that a facially neutral

statute may impermissibly burden interstate commerce in

application, no such showing has been made in this instance.

See Pike v. Bruce Church Inc., 397 U.S. 137, 142 (1970)

(“Where the statute regulates evenhandedly to effectuate a

legitimate local public interest, and its effects on interstate

commerce are only incidental, it will be upheld unless the

burden imposed on such commerce is clearly excessive in

relation to the putative local benefits.”); Amerada Hess, 490

U.S. at 75.

First, it is not even clear that General Motors is pressing

this argument. It did not argue below -- and does not appear

to be arguing now -- that Ohio has offended the dormant

Commerce Clause on this ground.

Second, even if General Motors purports to be making

this argument, it has not established any factual predicate for

doing so. See Associated Indus., 114 S.Ct. at 1824 (actual,

not “hypothetical,” discrimination violates the Commerce

Clause); Norton Co. v. Department of Revenue, 340 U.S.

534, 537 (1951) (“a taxpayer claiming immunity from a tax

has the burden of establishing his exemption”). The record

is completely barren of evidence that this particular tax

exemption, or Ohio's general segregation of the regulations

applicable to utilities and marketers, has caused an undue

burden on interstate commerce.

Finally, what evidence there is leads to a contrary

31

conclusion. Far from impeding commerce, Ohio’s overall

regulation of marketers and utilities has allowed marketers to

corner the market for industrial sales of natural gas. J.A.

194. At the same time, even though marketers have been

able to enter the residential market for some time, they have

not done so. J.A. 195. The reason, however, has nothing

to do with this tax exemption and everything to do with the

requirement that sellers in this market neec to guarantee a

firm back-up supply for meeting the gas needs of individual

consumers. See Joseph Fagan, From Regulation to

Deregulation: The Diminishing Role of the Small Consumer

Within the Natural Gas Industry, 29 Tulsa L. Rev. 707, 723-

27 (1994).

At a more general level, no tenable argument exists that

public utilities receive easier treatment than unregulated

marketers. See Halliburton Oil Well Cementing Co. v. Reily,

373 U.S. 64, 69 (1963) (Court “must take the whole scheme

of taxation into account”); Gregg Dyeing Co. v. Query, 286

U.S. 472, 481-82 (1932). Consider the stark differences in

tax treatment between the two entities. Utiliies pay property

taxes on 88% of the true value of their txable property,

R.C. § 5727.111, while marketers pay tax based on 25% of

the true value of their taxable property, k.C. § 5711.22.

Utilities pay a gross receipts tax of 4.75% aid cannot deduct

ordinary and necessary expenses in doing 0, R.C.

sale, while marketers are permitted to mae an unlimited

profit on each sale and thus must pay a ranchise tax on

profits (if incorporated) or an income tax (if not). R.C.

§§ 5733.01, 5747.02. Utilities must pay a tx assessment for

the expenses of the PUCO and the Otio Consumer's

while marketers pay no such asessment. R.C.

|

32

§ 4905.10; R.C. § 4911.18. As the amicus brief of one of

the participants in this market illustrates, a comparison

between the effective rate of taxation for the two groups

shows that marketers are the favored class. See Brief of

Columbia Gas of Ohio, 19-23.

The disproportionate tax burden assessed against

utilities, moreover, is just the beginning of the regulatory net

that ensnares utilities but not marketers. Both the FERC and

the PUCO regulate natural gas public utilities, but not

marketers. 15 U.S.C. § 717, et. seqg.; R.C. Title 49. In

light of these regulations: (1) utilities cannot terminate

service to a customer for non-payment or any other reason,

except in extremely limited circumstances, R.C. §§ 4933.12,

4933.122, 4933.123, while marketers may terminate service

whenever they see fit subject only to the terms of their

contract with each customer; (2) utilities are restricted in

their ability to correct for underbilling, while marketers are

not, R.C. § 4933.28; (3) utilities’ rates and their method of

operation are governed by the PUCO during a costly hearing

process, while marketers are free to charge whatever the

market will bear, R.C. §§ 4909.15, 4905.37; (4) utilities

must make public all information pertaining to their

operations, contracts and sales efforts and provide such

information on demand to the PUCO and the Ohio

Consumer’s Counsel, while marketers do not, R.C.

§§ 4905.05, 4905.06, 4905.15, 4905.16, 4905.30, 4905.37,

4911.16; (5) utilities must treat similar customers equally,

while marketers may negotiate the best deal they can obtain

with each customer, R.C. §§ 4905.33, 4905.35; (6) utilities

must receive approval from the PUCO before issuing

securities, bonds, dividends, or even entering into a contract,

while marketers need no such approval, R.C. §§ 4905.31,

4905.40, 4905.41, 4905.46(A), 4905.48; (7) utilities must

submit and obtain hearing-mandated approval of a long-term

forecast to the PUCO detailing their future demand for and

33

supply of gas, while marketers need not, R.C. § 4935.04;

and (8) utilities must submit an annual report to the PUCO

concerning their operations and finances, while marketers

need not, R.C. § 4905.14.

All things considered, the cumulative regulatory and tax

burdens piaced on public utilities far outweigh those placed

on marketers. There simply is no undue burden on interstate

commerce in this instance.‘

B. Congress Has Explicitly Permitted Ohio to

Treat Natural Gas Utilities As A Separate

Regulatory Classification.

Even if there were impermissible discrimination in this

instance (which there is not), General Motors’ Commerce

Clause claim still would have to be rejected. Congress has

been far from dormant in this area, and has authorized the

States to draw the very classification at issue in this case.

Since 1938, when the federal government first began

regulating natural gas, Congress has expressly granted the

States authority to regulate intrastate distribution of this

commodity. Because Ohio has simply adhered to that federal

classification in regulating sales by utilities differently from

sales by other distributors, the dormant Commerce Clause

* Whether one views this as a facial discrimination challenge

or an undue burden challenge, any finding of discrimination “is

demonstrably justified by a valid factor unrelated to economic

protectionism.” New Energy Co. of Indiana v. Limbach, 486 U.S.

269, 274 (1988). See West Lynn Creamery, Inc. v. Healy, 114 S.

Ct. 2205, 2211 (1994). Because Ohio's health, safety and

economic interest in regulating utilities separately from other

businesses predated even the potential for discrimination in this

instance, there can be little doubt that the State's interest is

“unrelated to economic protectionism.”

34

does not restrict its actions in this instance. See, e.g,

Northeast Bancorp, Inc. v. Board of Governors, 472 U.S.

159 (1985); Prudential Ins. Co. v. Benjamin, 328 U.S. 408,

423 (1946).°

The dormant Commerce Clause does not independently

restrict State action when Congress authorizes the States to

regulate an area of interstate commerce. In that situation,

there is no danger that the concern underlying the dormant

Commerce Clause -- State “usurpation” of the power to

regulate interstate commerce “conferred by the Constitution

upon the Congress of the United States,” Bacchus Imports,

Lid. v. Dias, 468 U.S. 263, 271 (1984) (internal citation

omitted) -- will present itself. Accordingly, “[wJhen

Congress so chooses, state actions which it plainly authorizes

are invulnerable to constitutional attack under the Commerce

Clause." Northeast Bancorp, 472 U.S. at 174.

In this instance, Congress has firmly placed its stamp of

approval on the regulatory classification that Ohio has drawn.

Congress has explicitly granted the States exclusive

jurisdiction to regulate entities that receive gas in interstate

commerce at the borders of the State and that sell to ultimate

consumers within the State. 15 U.S.C. § 717(c). In full,

section 717(c) provides:

The provisions of this chapter shall not apply to any

nay in

light of the McCarran-Ferguson Act, 59 Stat. 33, 15 U.S.C. §

1011, et seq., it was fully entitled to bring an equal protection

challenge to those regulations).

35

person engaged in or legally authorized to engage in

the transportation in interstate commerce or the sale

in interstate commerce for resale, of natural gas

received by such person from another person within

or at the boundary of a State if all the natural gas

so received is ultimately consumed within such

State, or to any facilities used by such person for

such transportation or sale, provided that the rates

and service of such person and facilities be subject

to regulation by a State commission. The matters

exempted from the provisions of this chapter by this

subsection are declared to be matters primarily of

local concern and subject to regulation by the

several States. A certification from such State

commission to the Federal Power Commission that

such State commission has regulatory jurisdiction

over rates and service of such person and facilities

and is exercising such jurisdiction shall constitute

conclusive evidence of such regulatory power or

jurisdiction.

Id. (emphasis added).

The circumstances leading to the passage of the statute

confirm its applicability here. Enacted in 1953, the law

represented a direct response to the Court’s decision in

Federal Power Comm’n v. East Ohio Gas, 338 U.S. 464

(1950). There the Court for the first time allowed the

federal commission to regulate intrastate distribution of

natural gas by local public utilities. Jd. at 472; see also

H.R. Rep. No. 899, S. Rep. No. 817, 83d Cong., 2d Sess.

(1953), reprinted in 1954 U.S.C.C.A.N. 2101, 2102 (East

Ohio Gas allowed the federal commission to regulate public

utilities “engaged in the distribution of natural gas whose

opefations take place wholly within a single State and which

can be completely regulated by the respective States”). As

36

a direct result of East Ohio Gas, Congress “eliminated

[federal and State regulatory] duplication by leaving the

jurisdiction over these companies exclusively in the states, as

always has been intended.” See H.R. Rep. No. 899, S. Rep.

No. 817, 83d Cong., 2d Sess. (1953), reprinted in 1954

U.S.C.C.A.N. 2102 (1954) (emphasis added); id. (“The

purpose of this legislation is to clarify the Natural Gas Act

by further defining the limits of the Federal Power

Commission’s jurisdiction with respect to operations of

companies engaged in the local distribution within a State of

out-of-State natural gas which has been received by such a

company at or within the State borders.”).

In addition to the plain language of the statute and the

revealing circumstances leading to its adoption, this Court’s

cases recognize the bright jurisdictional line drawn by this

provision between the State’s authority to regulate intrastate

distribution through their public utilities on the one hand and

the FERC’s ability to regulate interstate transportation on the

other. See, e.g., Arkansas Electric Coop. v. Arkansas Pub.

Serv. Comm’n, 461 U.S. 375, 392-93 (1983); Federal Power

Comm ’n v. Southern Cal. Edison Co. , 376 U.S. 205, 211-17

(1964); Panhandle Eastern Pipeline Co. v. Michigan Pub.

Serv. Comm’n, 341 U.S. 329, 337 (1951).

Ohio’s regulation of natural gas public utilities falls well

within these parameters. All natural gas received by Ohio

public utilities is delivered to consumers within the State.

See R.C. § 4905.03. And the Ohio Public Utility

Commission is statutorily authorized to regulate the

acquisition of natural gas, the rates charged for natural gas

and the delivery of natural gas by these utilities. See R.C.

§§ 4905.02, 4905.03.

Nor can General Motors escape the consequences of this

congressional action by arguing that it has challenged a State

37

tax rather than a State regulation. The Court has recognized

that the power to tax is "one of the forms of regulation,"

Pacific Tel. and Telegraph Co. v. Tax Comm’n, 297 U.S.

403, 413 (1936), and thus has consistently found that taxing

authority is a subset of regulatory authority, see North

Dakota v. United States, 495 U.S. 423, 434 (1990) (listing

state tax laws as a form of regulation along with licensing

provisions, contract laws and street regulations). Plainly, a

grant of congressional authority to establish a separate

regulatory classification for natural gas utilities encompasses

the power to respect that classification by taxing such entities

separately.

In the last analysis, Congress has given Ohio and the

other States exclusive jurisdiction to regulate intrastate

distribution of natural gas. All Ohio has done here is

exercise that grant of authority and respect the very

regulatory line that Congress has drawn: It separately

classifies, regulates and taxes those participants in the natural

gas market that engage in “transportation” of natural gas

within “the boundary of a State.” Other participants in the

market, be they interstate pipelines, marketers, producers or

anyone else, are treated differently because (as Congress

itself has recognized) they are different. The dormant

Commerce Clause simply does not prohibit such legitimate

State action. Indeed, the rhetoric of the prohibition -- that it

was designed to prohibit “economic Balkanization” and

“local protectionism” -- makes little sense in the context of

the intrastate distribution market, which Congress itself has

Balkanized and which Congress itself has said may be

entirely “protectionist.” In short, whether interstate

commerce discrimination occurs here or not, General

Motors’ dormant Commerce Clause challenge should be

rejected.

38

Il. OHIO’S REGULATION OF NATURAL GAS

UTILITIES AND MARKETERS DOES NOT DENY

EQUAL PROTECTION.

Just as Ohio has not violated the Commerce Clause

through its regulatory distinction between natural gas utilities

and marketers, neither has it violated the Equal Protection

Clause by establishing two very-different sets of regulations

for two very-differert sets of businesses. Much like the

Commerce Clause, this provision limits discrimination only

between two "similarly circumstanced” entities, and gives the

States substantial discretion in drawing these classifications.

Royster Guano Co. v. Virginia, 253 U.S. 412, 415 (1920).

Judicial deference is at its height when a plaintiff attacks

a tax classification on equal protection grounds. “[IJn

taxation, even more than in other fields, legislatures possess

the greatest freedom in classification.” Madden v. Kentucky,

309 U.S. 83, 88 (1940). “Where the public interest is

served one business may be left untaxed and another taxed,

in order to promote the one or to restrict or suppress the

other.” Carmichael v Southern Coal & Coke Co., 301 U.S.

495, 512 (1937) (imernal citations omitted). For these

reasons,

it has repeatedly been held and appears to be

entirely settled that a statute which encourages the

location within the State of needed and useful

industries by exempting them, though not also

others, from its axes is not arbitrary and does not

violate the Equal Protection Clause of the

Fourteenth Amendment. Similarly, it has long been

settled that a classification, though discriminatory,

is not arbitrary o violative of the Equal Protection

Clause of the Fourteenth Amendment if any state of

facts reasonably an be conceived that would sustain

39

it.

Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 528

(1959) (internal citations omitted).

Measured against this modest test, Ohio’s regulatory

distinction between natural gas marketers and natural gas

public utilities clearly passes. In exercising its police power

in this area, as previously shown, Ohio has placed certain

public service obligations on utilities that it does not place on

marketers in view of the unique public services that utilities

perform. The heavy regulations applicable to one group but

not to the other by themselves supply a rational basis for

establishing a system of different tax benefits and burdens for

each group and for each group’s customers.

General Motors offers several responses to these

arguments, all unpersuasive. It initially contends that the tax

scheme is “irrational” because Ohio taxes “identical”

property differently depending on whether the seller is a

marketer or utility. G.M. Br. 30. Once there is a rational

basis for regulating utilities and marketers differently,

however, it follows that a State can respect that difference in

its sales regulations -- whether the two businesses sell the

same goods or not.

Next, General Motors alternatively argues that rational

basis scrutiny is not appropriate here. “[H]eightened judicial

scrutiny” under the Equal Protection Clause is required, the

company claims, because the classification “implicates other

constitutional rights” -- here, alleged rights under the

dormant Commerce Clause. G.M. Br. 30. That is wrong.

“Unless a classification trammels fundamental personal rights

or is drawn upon inherently suspect distinctions such as race,

religion, or alienage, our decisions presume the

constitutionality of the statutory discriminations and require

40

only that the classification be rationally related to a legitimate

state interest.” New Orleans v. Dukes, 427 U.S. 297, 303

(1976) (emphasis added). See Gregg Dyeing Co. v. Query,

286 U.S. 472, 482 (1932). Contrary to General Motors’

suggestion, the Court has never endorsed the sweeping

proposition that the dormant Commerce Clause creates

“fundamental” rights for purposes of equal protection

review. Given the array of state laws that presumably

“implicate” interstate commerce, moreover, it is difficult to

fathom a stopping point for this proposed rule.

Nor do the cases cited by General Motors support this

argument. Some of the cases explicitly applied rational basis

scrutiny to equal protection claims, see, e.g., Metropolitan

Life Ins. Co. v. Ward, 470 U.S. 869, 875 (1985),

Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356,

359-60 (1973); others did not involve the appropriate

standard of review in an equal protection case, see Dennis v.

Higgins, 498 U.S. 439 (1991) (addressing whether

Commerce Clause claims could be brought under section

1983), Michigan-Wisconsin Pipe Line Co. v. Calvert, 347

U.S. 157 (1954) (addressing Commerce Clause challenge);

and still others simply illustrated a division within the Court

about whether to apply strict scrutiny to equal protection

claims implicating the right to travel, see Attorney General

of New York v. Soto-Lopez, 476 U.S. 898 (1986), Hooper v.

Bernalillo County Assessor, 472 U.S. 612 (1985), Williams

v. Vermont, 472 U.S. 14 (1985). On this record, the Ohio

Supreme Court correctly rejected General Motors’ equal

protection claim.

41

CONCLUSION

For the foregoing reasons, the judgment of the Ohio

Supreme Court should be affirmed.

Respectfully submitted,

BETTY D. MONTGOMERY

Attorney General

JEFFREY S. SUTTON

State Solicitor

(Counsel of Record)

BARTON A. HUBBARD

ROBERT C. MAIER

Assistant Attorneys General

Taxation Section

PAUL A. COLBERT

THOMAS W. MCNAMEE

Assistant Attorneys General

Public Utilities Section

State Office Tower

30 East Broad Street, 17th Floor

Columbus, Ohio 43215-3428

(614) 466-8980

July 17, 1996