Amicus Curiae Brief — General Motors Corp. v. Tracy

ae ee | supreme Court, U.S.

, FILED

9) JUL 17 1996

No. 95-1232

CLERK

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IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

GENERAL MOTORS CORPORATION,

Petitioner,

, 3

ROGER W. TRACY,

TAX COMMISSIONER OF OHIO,

Respondent.

On Writ of Certiorari to the

Supreme Court of Ohio

BRIEF OF THE STATES OF KANSAS, CALIFORNIA,

CONNECTICUT, ILLINOIS, NEVADA, NORTH DAKOTA,

VIRGINIA AND WEST VIRGINIA

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

CARLA J. STOVALL

Kansas Attorney General

301 S.W. Tenth Street

Topeka, KS 66612-2215

(913) 296-2215

STEPHEN R. MCALLISTER

Special Assistant Attorney General

Counsel of Record

University of Kansas

School of Law, Green Hall

Lawrence, KS 66045

(913) 864-4550

(Additional List of Counsel on Inside Front Cover)

DANIEL E. LUNGREN

General

1515 K Street, Suite 511

Sacramento, California 95814

RICHARD BLUMENTHAL

Attorney General —

55 Elm Street

Hartford, Connecticut 06141-0120

JAMES E. RYAN

Attorney General

State of Illinois

100 West Randolph Street

12th Floor

Chicago, Illinois 60601

FRANKIE SUE DEL PAPA

Attorney General

State of Nevada

Capitol Complex

Carson City, Nevada 89710

HEIDI HEITKAMP

Attorney General

600 East Boulevard Avenue

Bismarck, North Dakota 58505-0040

JAMES S. GILMORE, Ill

Attorney General

900 East Main Street

Richmond, Virginia 23219

DARRELL V. McGRAW, Jr.

Attorney General

State Capitol, Room E-26

Charleston, West Virginia 25305

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ...........22. ii

INTEREST OF THE AMICI CURIAE ......... 1

SUMMARY OF ARGUMENT ..........ee¢. 6

DT ceeeebetvesccwdccéccocecsece 7

The States Traditionally Have Distinguished Between

Public Utilities And Private Businesses For Both

Regulatory And Taxation Purposes. .......... 7

1. The Public Service Business

Of Local Distribution Is A

Distinct Business From The

Private Business Of

Marketing The Bare

Commodity Of Natural Gas. ...... 9

2. The "“Unbundling" That

Occurred In General Motors’

Marketer Purchases

Demonstrates The Continuing

Rationality Of Separately

Taxing Public Utilities. ........ 12

COMLEAMIOUN cc ccccccccccccccccccces 16

ii

TABLE OF AUTHORITIES

FEDERAL CASES

Allied Stores of Ohio, Inc v. Bowers,

ee a ee Eb ee ees eee es 7

Amerada Hess Corp. v. N.J. Taxation Div.,

og OF ae ara 12

Arkansas Elec. Cooperative-Corp. v.

Arkansas Pub. Serv. Comm’n,

ey Ss SI ahs a Chg 0 ea ee sd a ms 7

Atlantic Coastline R. Co. v. Doughton,

ee Wc C4: 4 boa a a3» 6 0 08 69 9

CTS Corp. v. Dynamics Corp. of Am..,

et ef Pe eee ee ee 10

Central Hudson Gas & Elec. Corp. v.

Pub. Serv. Comm’n of New York,

hte ae ae eee 8

Exxon Corp. v. Eagerton,

fe ee a ee eee 8

Exxon Corp. v. Governor of Maryland,

Cor Was Bee ee | 0 6 0'6 0 b's pene ees 11

New Orleans Public Service, Inc. v.

City of New Orleans, 491 U.S. 350 (1989) ....7

New York Rapid Transit Corp. v. City of New York,

En ee ee 8

Oregon Waste Systems v. Dep’t. of Environmental Quality,

ee ere eee 9,10

State of Alaska v. Arctic Maid,

Se ls os ow oe bob ke 7,11

State of Wisconsin v. J.C. Penney Co.,

ae 7

FEDERAL STATUTE

ae Ss ORE: ak CGN Re ahs ko 8 bk 8 5

STATE STATUTES

Ala. Code § 40-1-1 et seq. (1995) .............. 3

Ala. Code §§ 37-4-80, 37-4-83 (1995) ........... l

Ala. Code § 40-21-80 (1995)...............2.. 3

Ala. Code §§ 40-23-4(8), 40-23-62(10) (1995) ...... 4

Alaska Stat. § 43.55.016 (1962) ............... 3

Alaska Stat. §§ 42.05.141, 42.05.291 (1995) ....... l

Ariz. Rev. Stat. Ann. § 42-101 et seq. (1996) ....... 3

Ariz. Rev. Stat. Ann. §§ 40-201(4), 40-203 (1995) ...1

iv

Ark. Code Ann. §§ 23-15-203, 23-15-204 (Michie 1995) 1

Cal. Public Utilities Code § 701 (Deering 1990) ..... l

Colo. Rev. Stat. Ann. §§ 39-4-101,-102 (West 1990) ..3

Colo. Rev. Stat. §§ 40-1-103, 40-2-108 (1995) ...... l

Conn. Gen. Stat. Ann. § 12-264 (West 1990) ....... 3

Conn. Gen. Stat. § 12-412 (1994) .............. 4

Conn. Gen. Stat. §§ 16-270, 16-271 (1994) ........ l

Del. Code Ann. tit. 26, §§ 102, 201 (1990) ....... 1

Del. Code Ann. tit. 30, §§ 5501, 5502 (1985) ...... 3

D.C. Code Ann. § 43-1001(3) (1996) ............ l

D.C. Code Ann. §§ 47-2005(24), 47-2206 (1996) ....4

Fla. Stat. Ann. § 203.01 (West 1993) ............ 3

Fla. Stat. ch. 366.02, 366.03, 366.14 (1995) ....... 1

Ga. Code Ann. §§ 46-1-1(15), 46-2-20(a),

oo ae UL eee See Tee eee l

Ga. Code Ann. § 48-5-510 et seq. (Harrison 1984)... . 3

ae. Hav. GU. Bare CH ccc eeseessenes 3

Haw. Rev. Stat. §§ 269-1, 269-6 (1996) ..........

Idaho Code §§ 61-129, 61-301, 61-303 (1996) ...... 1

oe Et ee 3

Ill. Ann. Stat. ch. 220, para. 5/3-105, 5/4-101 (1993) .. 1

Ill. Rev. Stat. ch. 220, para. 5/2-202 (1993)........ 3

Ind. Code Ann. § 6-1.1-8-1 et seq. (West 1978) ..... 3

Ind. Code Ann. § 8-1-2-1 (Burns 1996) ............ l

Ind. Code Ann. §§ 6-2.5-5-16 (Burns 1996) ........ 4

Iowa Code Ann. § 438.1 et seq. (West 1992) ... vane

mowe Come © 470.101) CISee) oc ke ect cw cee 1

me, Soe, Rs ke CE cc whet ce rece uc 3

Kan. Stat Ann. § 79-3606(f) (1993)............. 4

Kan. Stat. Ann. §§ 66-104, 66-1,185, 66-1,204 (1993) . 1

Ky. Rev. Stat. Ann. §§ 278.010, 278.040, 278.495

re era ee ry ea l

La. Rev. Stat. Ann. § 47:1031 (West 1982) ........ 3

La. Rev. Stat. Ann. § 47:1854 (West 1982) ........ 3

vi

La. Rev. Stat. Ann. §§ 45-301, 45-302 (West 1982) ... 1

Me. Rev. Stat. Ann. tit. 35-A, §§ 102-103 (West 1982) . 2

Me. Rev. Stat. Ann. tit. 36, § 1811 (West 1964) ..... 3

Md. Ann. Code §§ 78-1, 78-2 (1957) ............ ]

Md. Code Ann., Tax-Gen § 11-207(2) ........... 4

Md. Code Ann., Tax-Gen. §§ 8-401, -402 (1973) ....3

Mass. Ann. Laws ch. 164 §§ 1, 93,

oe LW. CPR, DER 6 vero ee ie de ce eee 1

Mass. Gen. Laws Ann. ch. 63, § 52A

CL, CO Tee aa as ea tA ce cence 3

Mich. Stat. Ann. § 460.6 (Callaghan 1995) ........ l

Minn. Stat. Ann. § 216B.36 (West 1995).......... 3

Minn. Stat. Ann. § 216B.045 (West 1995) ......... l

Miss. Code Ann. § 27-31-1 et seq. (1996) ......... 3

Miss. Code Ann. §§ 77-3-3, 77-3-5 (1991)......... l

ee se BS Ff. eee ee 2

Mont. Code Ann. § 15-6-137 (1995) ............ 3

Mont. Code Ann. § 15-6-141 (1995) ............

Mont. Code Ann. §§ 69-3-101, 69-3-102 (1995) .....

Neb. Rev. Stat. § 19-4603 (1995) ..............

Nev. Rev. Stat. § 704.075 (Michie 1995) .........

N.H. Rev. Stat. Ann. §§ 362:2,374:3 (1995) .......

N.J. Rev. Stat. § 48:9-17 (1994) .............-.

N.J. Stat. Ann. § 54:30A-1 et seq. (West 1983) .....

N.M. Stat. Ann. § 7-33-1 (Michie 1978) ..........

N.M. Stat. Ann. § 68-3-2(F)(2) (1974) ...........

N.Y. Public Utilities Law § 47-65(Consol. 1995)... ..

N.Y. Tax Law § 186-a (McKinney 1987) .........

N.C. Gen Stat. §§ 62-3 (23), 62-30 (1995) ........

N.C. Gen. Stat. § 105-116 (1994) ..............

N.D. Cent. Code §§ 49-02-01, 49-02-02 (1995) .....

Ohio Rev. Code Ann. § 4933.01 (Baldwin 1991 .....

Okla. Stat Ann. tit. 17, §§ 151-152 (West 1987) .....

Vili

Okla. Stat. Ann. tit. 68, §§ 2847, 2852 (West 1993) .. . 3

Or. Rev. Stat. §§ 50-757.005, 50-756.040 (1995) ....2

66 Pa. Cons. Stat. Ann. §§ 102,501 (1993) ........ 2

Pa. Stat. Ann. tit. 72, § S101 (1990) .. ww ee ew es 3

Pa. Stat. Ann. tit. 72, § 8101-A et seq. (1990) ...... 3

a ee ee ek Sei... rr 3

R.I. Gen. Laws §§ 39-1-2(7), 39-1-3 (1995) ........ |

S.C. Code Ann. §§ 58-5-10, 58-5-210 (Law co-op. !993) 1

S.D. Codified laws Ann. §§ 49-34A-2, 49-34A-4 (1993) 2

Tenn. Code Ann. § 67-1-201 et seq. (1995) ........ 4

Tenn. Code Ann. § 67-4-405 (1995) ............. 3

Tenn. Code Ann. §§ 65-4-101, 65-4-117 (1993) ..... 2

Tex. Rev. Civ. Stat. Ann. art. 1446c, 1446e (West 1980) 1

Tex. Tax Code Ann. § 182.021 (West 1992) ....... 3

Utah Code Ann. §§ 54-2-1(8), 54-4-1 (1995) ....... 1

Vt. Stat. Ann. tit. 30, §§ 201, 203 (1987)......... 2

ix

Va. Code Ann. §§ 56-1, 56-2, 56-232, 56-232.2 (1995) . 2

Va. Code Ann. §§ 58.1-2600, 2620 (Michie 1991) ... . 3

Wash. Rev. Code Ann. § 82.16.020 (West 1994) ..... 3

Wash. Rev. Code Ann. §§ 80.04.010,80.04.015 (1995) . 1

W. Va: Cody 6 11-19-06 GO)... . css. 3

W: Vu Coe 6 0 .... . oe ss 1

Wis. Stat. §§ 196.01, 196.02- 196.03 (1994) .......

Wyo. Stat. §§ 37-1-101, 37-2-112 (1996).......... 1

LAW REVIEW ARTICLES

J. Fagan, From Regulation To Deregulation: The

Diminishing Role Of The Small Consumer Within the Natural

Gas Industry, 29 Tulsa L. Rev. 707 (1994) ...... 15

R. Pierce, The State Of The Transition To Competitive

Markets In Natural Gas And Electricity, 15 Energy L. Rev.

Ss Sareea a aD el ae igi ca A ce a emg et 13

l

INTEREST OF THE AMICI CURIAE

Amicus State of Kansas and other amici States write

to urge the Court not to abandon its traditional deference to

the States’ exercise of police powers in separately regulating

and taxing the local distribution of vital commodities such as

natural gas. Currently all 50 States regulate the business of

local natural gas distribution, which is performed by

regulated utilities usually called “local distribution

companies" ("LDCs").' Such regulation universally imposes

' State statutes that specifically provide for regulation of sales of

natural gas include: Ala. Code §§ 37-4-80, 37-4-83 (1995); Del. Code

Ann. tit. 26, §§ 102, 201 (1990); D.C. Code Ann. § 43-1001(3) (1996);

Fla. Stat. ch. 366.02, 366.03, 366.14 (1995); Ga. Code Ann. § 46-1-

1(15), 46-2-20(a), 46-2-21, 46-2-23(a) (1996); lowa Code § 476.1(1)

(1995); Ky. Rev. Stat. Ann. §§ 278.010, 278.040, 278.495 (Michie

1989); La. Rev. Stat. Ann. §§ 45-301, 45-302 (West 1982); Md. Ann.

Code §§ 78-1, 78-2 (1957); Mich. Stat. Ann. § 460.6 (Callaghan 1995);

Miss. Code Ann. §§ 77-3-3, 77-3-5 (1991); Minn. Stat. Ann. § 216B.045

(1995); Neb. Rev. Stat. § 19-4603 (1995); Nev. Rev. Stat. § 704.075

(Michie 1995); N.H. Rev. Stat. Ann. §§ 362:2,374:3 (1995); N.J. Rev.

Stat. § 48:9-17 (1994); N.C. Gen Stat. §§ 62-3 (23), (2-30 (1995); Ohio

Rev. Code Ann. § 4933.01 (Baldwin 1991); R.I. Gen. Laws §§ 39-1-

2(7), 39-1-3 (1995); S.C. Code Ann. §§ 58-5-10, 58-5-210 (Law co-op.

1993); Tex. Rev. Civ. Stat. Ann. art. 1446c, 1446e (West 1980) ; Utah

Code Ann. §§ 54-2-1(8), 54-4-1 (1995); Wash. Rev. Code Ann. §§

80.04.010,80.04.015 (1995); W. Va. Code § 24-2-1 (1996); Wis. Stat.

§§ 196.01, 196.02- 196.03 (1994); Wyo. Stat. §§ 37-1-101, 37-2-112

(1996).

State statutes providing for general power to regulate public utilities

include: Alaska Stat. §§ 42.05.141, 42.05.291 (1995); Ariz. Rev. Stat.

Ann. §§ 40-201(4), 40-203 (1995); Ark. Code Ann. §§ 23- 15-203, 23-15-

204 (Michie 1995); Cal. Public Utilities Code § 701 (Deering 1990);

Colo. Rev. Stat. §§ 40-1-103, 40-2-108 (1995); Conn. Gen. Stat. §§ 16-

270, 16-271 (1994); Haw. Rev. Stat. §§ 269-1, 269-6 (1996); Idaho Code

§$§ 61-129, 61-301, 61-303 (1996); Il}. Ann. Stat. ch. 220, para. 5/3-105,

5/4-101 (1993); Ind. Code Ann. § 8-1-2-1 (Burns 1996); Kan. Stat. Ann.

$§ 66-104, 66-1,185, 66-1,204 (1993); Mass. Ann. Laws ch. 164 §§ 1,

2

public service requirements upon LDCs that include

comprehensive rate regulation.

Although rate regulation constitutes perhaps the best

known feature of public utility regulation, it forms only one

aspect of State involvement in supervising the local

distribution business. That supervision traditionally involved

the grant of a monopolistic francnise along with attendant

powers--such as eminent domain authority--to carry out the

purposes of the franchise. On the other hand, the States

would impose constraints in the form of rate regulation and

other defined public service obligations.

aN oR aera

Because the character of local distribution as a

regulated monopoly virtually assured returns on investment

and insulated utility investors from competitive enterprise,

the States and their subdivisions regularly imposed special

tax burdens on utilities to meet various needs of the public

fisc. This Court repeatedly upheld such exactions against

equal protection challenges, recognizing the legitimate State

objectives in separately regulating and taxing the activities of :

utilities and common carriers.

Of the 50 States, 31 States have enacted separate

taxation structures that reflect the regulated and monopolistic

93, 94 (Law. Co-op. 1988); Me. Rev. Stat. Ann. tit. 35-A, §§ 102-103

(West 1982); Mo. Rev. Stat. § 393.010 (1995); Mont. Code Ann. §§69-

3-101,69-3-102 (1995); N.M. Stat. Ann. § 68-3-2(F)(2) (1974); N.Y.

Public Utilities Law § 47-65(Consol. 1995); N.D. Cent. Code §§ 49-02-

01, 49-02-02 (1995); Okla. Stat Ann. tit. 17, §§ 151-152 (West 1987);

Or. Rev. Stat. §§ 50-757.005, 50-756.040 (1995); 66 Pa. Cons. Stat.

Ann. §§ 102,501 (1993); S.D. Codified laws Ann. §§ 49-34A-2, 49-34A-

4 (1993); Tenn. Code Ann. §§ 65-4-101, 65-4-117 (1993); Vt. Stat. Ann.

tit. 30, §§ 201, 203 (1987); Va. Code Ann. §§ 56-1, 56-2, 56-232, 56-

232.2 (1995).

3

character of LDC business,” including at least 8 States like

Ohio that subject LDCs to a significantly higher burden of

personal property taxation.’ Five States and the District of

2 The statute cites for States with generally separate tax structures

includes the following: Ala. Code § 40-21-80 (1995), Alaska Stat. §

43.55.016 (1995), Colo. Rev. Stat. Ann. §§ 39-4-101, -102 (West 1990),

Conn. Gen. Stat. Ann. § 12-264 (West 1990), Del. Code Ann. tit. 30, §§

5501, 5502 (1985), Fla. Stat. Ann. § 203.01 (West 1993), Ga. Code

Ann. § 48-5-510 et seq. (Harrison 1984), Haw. Rev. Stat. § 239-5

(1994), Idaho Code § 63-701 (1994), Ill. Rev. Stat. ch. 220, para. 5/2-

202 (1993), Ind. Code Ann. § 6-1.1-8-1 et seq. (West 1978), Iowa Code

Ann. § 438.1 et seq. (West 1992), La. Rev. Stat. Ann. § 47:1031 (West

1982), Me. Rev. Stat. Ann. tit. 36, § 1811 (West 1964), Md. Code

Ann., Tax-Gen. §§ 8-401, -402 (1973), Mass. Gen. Laws Ann. ch. 63,

§ 5ZA (Law. Co-op. 1991), Minn. Stat. Ann. § 216B.36 (West 1995),

Mont. Code Ann. § 15-6-137 (1995), N.J. Stat. Ann. § 54:30A-1 et seq.

(West 1983), N.M. Stat. Ann. § 7-33-1 (Michie 1978), N.Y. Tax Law

§ 186-a (McKinney 1987), N.C. Gen. Stat. § 105-116 (1994), Okla. Stat.

Ann. tit. 68, §§ 2847, 2852 (West 1993), Pa. Stat. Ann. tit. 72, § 8101

(1990), R.I. Gen. Laws § 44-13-1 (1995), Tenn. Code Ann. § 67-4-405

(1995), Tex. Tax Code Ann. § 182.021 (West 1992), Va. Code Ann. §§

58.1-2600, 2620 ‘Michie 1991), Wash. Rev. Code Ann. § 82.16.020

(West 1994), W. Va. Code § 11-13-2d (1995).

> Ala. Code § 40-1-1 et seq. (1975) (utilities pay not only a gross

receipts tax, but utility property is assessed at 30%, while other non-

utility property is assessed at 20% or less);Ariz. Rev. Stat. Ann. § 42-

101 et seq. (1996) (utility property is assessed at a ratio of 30%, while

other commercial or industrial non-utility property is assessed at 25%);

Kan. Const. art. 11, § 1 (1995) (utility property is assessed at ratio of

33%, while commercial property is assessed at 25%); La. Rev. Stat.

Ann. § 47:1854 (West 1963) (public service property is assessed at ratio

of 25%; non-utility at 15%); Miss. Code Ann. § 27-31-1 et seq. (1996)

(public utility property assessed at ratio of 30%, non-utility and railroad

at 15%); Mont. Code Ann. § 15-6-141 (1995) (centrally-assessed utility

property at 12%; non-utility and other non-centrally assessed utility

property ranges from 3 - 9%); Pa. Stat. Ann. tit. 72, § 8101-A et seq.

(1990) (utility property is not assessed locally; instead a statewide public

utility realty tax, PURTA, is levied on utility real property, with rate of

30 mills to the dollar; additional realty tax at 12 mills imposed at end of

4

Columbia at present draw distinctions between purchases

from LDCs and purchases from unregulated, private

businesses that might be called into question by the challenge

made in this case.* The States’ foremost concern in this case

is that a decision of this Court invalidating these traditional

distinctions would impose significant forfeitures upon State

treasuries. Moreover, it would be particularly disruptive for

this Court to render a decision that calls into question any

treatment of LDCs distinct from private businesses.

Contrary to suggestions of General Motors and the

amici supporting its position, the deregulation of interstate

pipeline business at the federal level does not imply any need

to activate the dormant commerce clause to effect similar

deregulation at the level of local distribution. Not only has

Congress granted and never withdrawn its express statutory

preceding calendar year); Tenn. Code Ann. § 67-1-201 et seq. (1995)

(real property of utility assessed at 55%, non-utility at 40%; personalty

of utility at 55%, non-utility at 30%).

* The statute cites for States which similarly distinguish between

purchases of natural gas from marketers and purchases from public

utilities include the following: Ala. Code §§ 40-23-4(8), 40-23-

62(10)(1995); Conn. Gen. Stat. § 12-412 (1994); D.C. Code Ann. §§ 47-

2005(24), 47-2206 (1996); Ind. Code Ann. §§ 6-2.5-5-16 (Burns 1996);

Kan. Stat Ann. § 79-3606(f)(1993); Md. Code Ann., Tax-Gen § 11-

207(2). In addition, numerous States exempt sales to residential

consumers, which currently are virtually the exclusive province of LDCs.

oe 7

5

endorsement of State regulation in this regard,’ but other

considerations show the legitimate State interests that

continue to undergird Congress’ determination.

The States are committed to deriving each and every

benefit that may be obtained from loosening the traditional

bonds of regulation. But deregulation at the level of local

distribution is not only fraught with challenges different from

those faced in deregulating interstate pipeline business, but

has been profoundly affected by the very fact of deregulation

at the federal level. It is widely acknowledged that the

average residential consumer has not shared in the lower-cost

boons of deregulation to date. Less clear is what structures

will both contain costs and assure service to each and every

residential consumer on the coldest day of the year.

Moreover, the pursuit of regulatory objectives has led

to special structuring of the business of local distribution,

which clearly demarcates it as a separate business from the

ordinary private business engaged in by the marketers from

whom General Motors purchased in this case. Specifically,

rate regulation and the requirement to serve the general

public--including the obligation to reserve adequate

commodity and pipeline capacity to serve consumers on

demand on the coldest day of the year--mean that a utility

consumer pays a price reflecting the total costs of utility

service. Unlike General Motors’ commodity purchases from

marketers, the utility service price bundles together (i)

acquisition cost of gas to the utility; (ii) cost of interstate

pipeline capacity, including ratable share of enhanced cost of

the assuring service at peak demand; and (iii) other public

service costs, such as payment to help defray losses from

* Under the Natural Gas Act, Congress expressly granted

authority to States to regulate the local distribution aspect of the natural

gas industry. See 15 U.S.C. §717(c).

6

sales to poor customers unable to pay full price.

The States do not contend that they constitutionally

may engage in genuine discrimination against interstate

commerce. They only seek deference to their legislative and

administrative efforts to protect the legitimate needs of their

citizens by exercising long-standing and well-recognized

powers to distinguish between the regulated business of local

distribution and other private businesses.

SUMMARY OF ARGUMENT

Numerous decisions of this and lower courts have

upheld the rational basis for making precisely the distinction

Ohio law makes here between regulated utilities and

unregulated private businesses. No subsequent development

justifies calling such well-settled doctrine into question.

Specifically, the fact of interstate pipeline deregulation

at the federal level represents a trend which the States

themselves are attempting to follow without sacrificing the

legitimate traditional goals of regulating local distribution.

Not only do the particular exigencies associated with local

distribution continue to raise troubling questions in the

context of deregulation, but the process of deregulation itself

may necessitate new measures that distinguish between LDCs

and private marketing enterprises. Indeed, the imposition of

charges or other burdens on marketer transactions may

become a necessary piece of the deregulation process.

7

ARGUMENT

States Traditionally Have Distinguished Between Public

Utilities And Private Businesses For Both Regulatory

And Taxation Purposes.

General Motors asserts violations of both the equal

protection and commerce clauses of the Constitution because

Ohio distinguishes between sales of natural gas by

unregulated marketers and regulated LDCs. These

contentions must overcome decisions of by this Court long

establishing the validity of such distinctions. First, this

Court has recognized that, because the States’ taxation power

constitutes such a fundamental aspect of their sovereignty,

special deference is due to the manner in which the State

exercises that power. The States’ power to tax has been

acknowledged to be "the most basic power of government."

State of Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444

(1941). This has led the Court to reject routinely equal

protection challenges to State taxes on the principle that

"’[t]he States have a very wide discretion in the laying of

their taxes." Allied Stores of Ohio, Inc v. Bowers, 358 U.S.

522, 526 (1959). Indeed, "[nJo ‘iron rule of equality’

between taxes laid by a State on different types of business

is necessary." State of Alaska v. Arctic Maid, 366 U.S. 199,

231 (1961).

This Court repeatedly has recognized the rational

basis for separate regulation and taxation of public service

corporations such as utilities and common carriers. Thus,

"‘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), citing Arkansas

Elec. Co-operative Corp. v. Arkansas Pub. Serv. Comm’n,

8

461 U.S. 375, 377 (1983); Central Hudson Gas & Elec.

Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557,

569 (1980) (holding that, under First Amendment standard

for commercial speech regulation, "[t]he State’s concern that

rates be fair and efficient represents a clear and substantial

governmental interest"). Moreover, the underlying

regulatory interest of the States can furnish independent,

rational grounds for specific tax measures. E.g., Exxon

Corp. v. Eagerton, 462 U.S. 176, 196 (1983) (upholding

imposition of severance tax with pass-through-prohibition

upon oil producers as to intrastate transactions) ("We

conclude that the measures at issue here pass muster under

this standard. The pass-through prohibition plainly bore a

rational relationship to the State’s legitimate purpose of

protecting consumers from excessive prices. Similarly, we

think the Alabama Legislature could have reasonably

determined that the royalty-owner exemption would

encourage investment in oil or gas production. Our

conclusion with respect to the royalty-owner exemption is

reinforced by the fact that that provision is solely a tax

measure.").

The legitimate goals of utility regulation together with

the structural reasons for deferring to State tax classifications

account for the relative ease this Court has had in upholding

separate taxation of public service corporations and utilities.

E.g., New York Rapid Transit Corp. v. City of New York,

303 U.S. 573, 579 (1937) ("Since carriers or 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

ee See ete eee ee

9

class [cites omitted] and, as such, taxed differently or

additionally. [cites omitted] ..."); Atlantic Coastline R. Co.

v. Doughton, 262 U.S. 413, 423-24 (1923) ("The state

might, consistently with the equal protection clause, have

subjected only public service corporations to the income tax,

or it might have laid upon them a higher income tax than

upon others, as it laid upon railroads a higher franchise tax

than it did upon other corporations.").

In light of this jurisprudence, it is very late in the day

for General Motors to assert that distinguishing between

taxation of marketer sales and LDC sales has no rational

basis. What General Motors needs is some way to make old,

settled questions appear to be new. Realizing this, General

Motors and the amici supporting its position try two

strategies: (i) they dress up the equal protection argument as

a commerce clause argument; and (ii) they suggest that the

process of deregulation somehow strips settled classifications

of rationality.

he The Public Service Business

Of Local Distribution Is A

Distinct Business From The

Private Business Of

Marketing The Bare

Commodity Of Natural Gas.

The distinction between (i) a local distribution

business and (ii) a selling business not involving local

distribution is not, as General Motors suggests,

discrimination against interstate commerce, but a distinction

between two separate businesses. This is so because facial

commerce clause discrimination requires a "geographic

distinction" which establishes that a tax measure "patently

discriminates" against interstate commerce. Oregon Waste

Systems v. Dep’t of Environmental Quality, 128 L.Ed.2d 13,

10

22 (1994). The method for showing a "geographic

distinction" is set forth in the preceding sentence in Oregon

Waste Systems: the differential charge in that case "favor[ed]

shippers of Oregon waste over their counterparts handling

waste generated in other States." Jd. In short, the Oregon

waste--"local" waste--had an out-of-State "counterpart" that

alone was subject to surcharge. The surcharge was therefore

a classification based upon a geographic distinction.

General Motors cleverly uses the term "local" utility

to suggest that the same situation is present here, but this is

only a semantic game. A classification distinguishing "local"

distribution is not a geographic distinction, because there is

no "counterpart" for that distribution activity outside the

State. Thus the classification does not favor an in-state

activity at the expense of an out-of-state counterpart. A

public natural gas utility is referred to as a "local distribution

company," but this does not mean a "distribution company"

that could just as easily operate "out-of-State." To the

contrary: it means a company that engages in the unique and

heavily regulated business of "local distribution" of an

essential commodity. "Local" pertains to the level of

distribution, not to the geographic identity of the company.

Once the rules of the semantic game are revealed, it becomes

clear that General Motors only raises an equal protection

challenge--one to be rejected under the prior holdings of this

Court.

In any event, no commerce clause discrimination

exists unless a State law is shown to "impose[ ] a greater

burden on out-of-state [interests] than it does on similarly

situated [in-state interests]"._ CTS Corp. v. Dynamics Corp.

of Am., 481 U.S. 69, 88 (1987) (emphasis added). The

unique character of the business of physically supplying gas

arises both from the natural fact of owning and controlling

pipelines that convey gas at a certain pressure to the burner

1]

tip and from the legal fact that that business is heavily

regulated by the States. Under both of these factors, the

marketers General Motors purchased from are situated

differently than LDCs. Because marketers and LDCs are

identifiably different businesses, "no iron rule of equality"

controls the manner in which the transactions may be taxed.

E.g., State of Alaska vy. Arctic Maid, 366 U.S. 199, 231

(1961). See also Exxon Corp. v. Governor of Maryland,

437 U.S. 117,125-29 (1978) (no discrimination against

interstate commerce based upon burden on distinct business

of integrated oil companies even though such were all "out-

of-State").

The difference between the local distribution business

and the marketing business shapes the distinct nature of their

respective sales transactions. A marketer sale is a sale of

commodity (natural gas), and the sale price accordingly

includes (i) the marketer’s cost of acquiring gas; (ii) the

marketers’s profit on gas; and (iii) certain overhead costs.

Like sales of tangible personal property generally, natural

gas sales by marketers are subject to sales and use taxation

under Ohio law. By contrast, purchasing gas from a utility

means purchasing utility service--the price includes

commodity (natural gas--sold at cost, since the utility is not

permitted to profit on the commodity itself), plus capacity

(space to transport gas on interstate pipeline), plus the

utility’s recovery of and return on investment in its own

pipeline infrastructure, plus public service obligation costs.

The salient facts are these: (i) the utility incurs a

substantially greater interstate pipeline cost because of its

public service obligation to provide for "peak demand," with

the result that utility customers must each help pay for that

public service cost:--a cost that is "bundled" into the price of

utility service; and (ii) the utility incurs additional public

service costs, such as programs to defray the cost of

12

supplying natural gas to poor customers who cannot pay full

price--which costs are also "bundled" in the service charge

to utility consumers. Surely, such different business and

distinct transactions merit different tax treatment. Amerada

Hess Corp. v. N.J. Taxation Div., 490 U.S. 66,78 (1989);

Artic Maid, supra.

y & The "“Unbundling" That

Occurred In General Motors’

Marketer Purchases

Demonstrates The Continuing

Rationality Of Separately

Taxing Public Utilities.

General Motors suggests that the deregulation of

interstate pipeline business at the federal level somehow

creates a new constitutional bar to traditional state regulation

of local distribution. Apparently, General Motors means to

imply that federal deregulation instantaneously removed all

traditional reasons for reguiation and differential treatment by

States. However, the commentators General Motors cites

paint a more complicated picture:

The PUCs confront a more daunting task than -

the FERC. Once the FERC creates the

conditions in which markets can perform the

functions of allocating and pricing gas and

transportation capacity, it can simply step

aside and allow those markets to function with

little regulatory oversight. By contrast, the

PUCs cannot realistically expect to create

conditions in which competitive markets will

yield acceptable results with respect to all

LDC transactions. At a minimum, provision

of distribution service to small volume

consumers is likely to remain a classic natural

13

monopoly function for the foreseeable future.

The PUCs retain the important role of

protecting small consumers from potential

abuse by monopolistic LDCs. Yet the PUCs

cannot perform this role effectively through

the use of traditional cost-of-service regulation

with its reliance on inherently arbitrary

allocations of common costs. The LDCs have

limited market power with respect to most

large consumers. Those consumers have

access to competitive alternatives at varying

and constantly changing prices. If a PUC

insists that an LDC charge its large consumers

rates determined through use of traditional

cost-of-service methods, including some

specified allocation of common costs, it will

create a situation in which all affected parties

lose. ...

... [T]he PUCs need to create incentives for

the LDCs to minimize their total costs and to

charge prices that maximize large consumers’

contributions to common costs in order to

minimize the costs that must be borne by

small customers. It is not easy to devise a

regulatory system that furthers all of these

goals simultaneously. ... This difficult step in

the transition will not be completed for many

years and will have to proceed primarily by

trial and error.

[R. Pierce, The State Of The Transition To

Competitive Markets In Natural Gas And

Electricity, 15 Energy L. Rev. 323, 327-28

(1994) (emphasis added). ].

14

Federal deregulation of interstate pipeline business has

itself raised new challenges at the level of local distribution.

...Occupying the last link in the natural gas

distribution chain, end-users purchase gas on

the intrastate market from the local

distribution companies. The fixed costs which

the LDCs incur in purchasing gas from the

regulated pipelines and then reselling it to

end-users was typically spread throughout

their customer base (subject of course to the

applicable local regulations). Under the

system of "open access” however, the larger

industrial end-users opted to pursue more

competitively priced alternatives. ... The loss

of these large "switchable" customers left the

"captive" users to absorb the LDC costs as

reflected in the gas rate. Such users, usually

smaller industrial units or individual

residences, had neither the means nor the

flexibility to bypass the LDC market. Forced

to receive gas from the LDCs, these

remaining "captives" were exposed to large

scale increases in their gas rates because they

were the end-user least able to respond to

price changes. Perhaps in the long run, these

prices will ultimately decrease as a

competitive natural gas market forces sellers

to lower rates. In the meantime, however,

consumers are sure to be harmed if rates

increase with the lifting of regulatory controls.

Organizations representing small customers

have responded quickly to Order No. 636.

15

Generally, their concerns reflect the belief that

this segment of the industry is the least able to

take advantage of the opportunities presented

by open-access. This inherent iniicxibility

will not only deny captive customers the

benefits of the new competitive marketplace,

it will also shift onto them a disproportionate

share of the transition burden. ...

[J. Fagan, From Regulation To Deregulation:

The Diminishing Role Of The Small Consumer

Within the Natural Gas Industry, 29 Tulsa L.

Rev. 707, 723, 727 (1994).]

General Motors’ marketer purchases in this case

demonstrate the points made by the commentators. By

purchasing from marketers, General Motors escaped the

gross receipts tax that Ohio imposes upon utility sales (which

is passed through to the consumer), but incurred the use tax.

Avoiding a double taxation burden on utility sales was

unquestionably the original purpose of the sales and use tax

exemption General Motors is challenging. The advent of

marketer purchases in the 1980’s vastly strengthened this

rationale for exempting utility purchases. In its marketer

purchases, General Motors "unbundled" its interstate pipeline

capacity costs from its purchase price--the figure upon which

the use tax is calculated--while at the same time evading any

share of additional public service cost. By contrast, utility

customers pay for these extra public service charges, and

also pay the passed-through gross receipts tax on those extra

charges. This situation raises the very "captive consumer"

problem referred to by the commentators, whereby marketers

skim off the "cream" of large, paying customers and leave

behind an ever diminishing base to fund the public service

functions of the utility.

16

The States clearly need flexibility in dealing with this

situation, but General Motors in effect asserts in this case

that any flexibility is unconstitutional. The amici States

respectfully submit that their sovereign powers encompass

the authority to ensure that their residents do not freeze to

death in the winter. There is no constitutional bar to the

exercise of such State authority where, as here, such

measures place absolutely no added burden on commerce that

happens to cross state lines, or in any way disfavor a product

or service that happens to originate out-of-State.

CONCLUSION

For all the foregoing reasons, the amici States request

the Court to affirm the decision of the Ohio Supreme Court.

Respectfully submitted,

CARLA J. STOVALL

Attorney General of Kansas

STEPHEN R. MCALLISTER

Special Assistant Attorney General

Counsel of Record

University of Kansas

School of Law

Green Hall

Lawrence, KS 66045

(913) 864-4550

CARLA J. STOVALL

301 S.W. Tenth Street

Topeka, KS 66612-2215

(913) 296-2215

July 17, 1996