Opposition Brief — Mountain Water Co. v. Montana Department of Public Service Regulation

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No. 92-829

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MOUNTAIN WATER CO.,

Petitioner,

V.

MONTANA DEPARTMENT OF PUBLIC SERVICE

REGULATION, et al.,

Respondents.

¢

Petition For A Writ Of Certiorari

To The Supreme Court

Of The State Of Montana

*

BRIEF IN OPPOSITION

TO PETITION FOR WRIT OF CERTIORARI

*

Rosin A. McHucH

Special Assistant Attorney

General

Montana Department of Public

Service Regulation

Montana Public Service

Commission

P.O. Box 202601

1701 Prospect Avenue

Helena, MT 59620-2601

(406) 444-6376

Attorney for Montana Department

of Public Service Regulation

Mary WRIGHT"

Special Assistant Attorney

General

Montana Consumer Counsel

34 West Sixth Avenue

Helena, MT 59620-1703

(406) 444-2771

Attorney for Montana Consumer

Counsel

*Counsel of Record

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i OFHMICE Of es GLERK |

Supreme Court of the United States

October Term, 1992

COCKLE LAW BRIEF PRINTING CO,, (800) 225-6964

OR CALL COLLECT (402) 342-283

QUESTIONS PRESENTED

1. Whether the Montana Supreme Court was in

error by holding that the Montana Public Service Com-

mission did not violate the fourteenth amendment’s

requirement of just compensation for property taken for

public use when it denied Mountain Water Company

certain compensation for money taken by a state statute

on the ground that granting compensation through rates

would violate the rule against retroactive ratemaking.

2. Whether there is any basis for this Court “to

protect the integrity of the federal judicial process” from

actions of the Montana Supreme Court or the Montana

Public Service Commission.

TABLE OF CONTENTS

Page

QUBSTIONS PRESENTED 005s ccescsavvcsctsdecnes i

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STATED, hs Sic e dkcS cen cade seeks sedwkeseeeeebes 1

SUMMARY OF THE ARGUMENT ................. 2

RIRAINIIGT, 6 bce svn bined yes beea weeny ke teneess 5

THIS PETITION PRESENTS NO CONFLICT

BETWEEN THE MONTANA SUPREME COURT

AND THE NINTH CIRCUIT COURT OF APPEALS

OVER A FEDERAL QUESIFON. ....0ccccccsecess 5

THIS COURT’S HOLDING IN FIRST ENGLISH

DOES NOT CONFLICT WITH THE DECISION BY

THE MONTANA SUPREME COURT............. 10

THIS COURT’S “AFFIRMATIVE ROLE” IN THE

FEDERAL JUDICIAL PROCESS DOES NOT

EXTEND TO SUPERVISION OF THE MONTANA

SUPREME COURT; THERE HAS BEEN NO

UNDERMINING OF THE INTEGRITY OF THE

FEDERAL JUDICIAL PROCESS IN THIS CASE .. 13

COINCTATSIONG 6 cide once sendevepeversoreaeneaee ees 17

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TABLE OF CONTENTS - Continued

Page

APPENDIX

Excerpt of Brief of Appellee, Department of Pub-

lic Service Regulation, Montana Public Service

Commission in Mountain Water Company v. Mon-

tana Department of Public Service Regulation, Mon-

tana Public Service Commission, United States

Court of Appeals for the Ninth Circuit CA No.

rey TTT Tere Tre Te ee

Excerpt of Brief of Defendant-Appellant Montana

Public Service Commission in Mountain Water

Company v. Montana Department of Public Service

Regulation, Montana Public Service Commission, and

Montana Consumer Counsel, Montana Supreme

RE I EME piece wns dencresseiccensaveres

Excerpt of Reply Brief of Defendant-Appellant

Montana Public Service Commission in Mountain

Water Company v. Montana Department of Public

Service Regulation, Montana Public Service Commis-

sion, and Montana Consumer Counsel, Montana

Supreme Court No. 91-446..........--200--+e5.

la

17a

iv

TABLE OF AUTHORITIES

Page

CASES

Board of Public Utility Commissioners v. New York

Telepnome Co., 271 U.S. Z3 (19ZB) ... 6 scenes 9

Duquesne Light Co. v. Barasch, 488 U.S. 299

BR ee err rere rr es ee 7, 8, 11

First English Lutheran Evangelical Church v. Los

Angeles County, 482 U.S. 304 (1987) ........... passim

Frazier v. Heebe, 482 U.S. 641 (1987)............... 4, 14

Galveston Electric Co. v. Galveston, 258 U.S. 388

CU Sea cA Ree RAED sda e ORG E Lohan dae saeead ceeknn 8, 9

In re Ruffalo, 390 U.S. 544 (1968).............00000s: 14

Mountain Water Company v. Montana Department of

Public Service Regulation, 919 F.2d 593 (9th Cir.

0 en Teer Tee rere re ere rer ee passim

Mountain Water Company v. Montana Department of

Public Service Regulation and Montana Consumer

eo ee Es ee eee passim

STATUTES

United States Code

ae cnc ct aceesacsesarncshewewene 1

ee ee ee Li kd nk end poasschenseunawen 14

Montana Code Annotated

NE PIE oes bodes cn sc rdcnscnaendenasand passim

amendmen

OPINION BELOW

The opinion of the Montana Supreme Court, (Pet.

App. 1-5), is reported at 835 P.2d 4 (1992).

.

JURISDICTION

The judgment of the Montana Supreme Court was

entered on July 21, 1992. (Pet. App. 6.) A petition for

rehearing was denied on August 13, 1992. (Pet. App. 92.)

The petition for a writ of certiorari was filed on Novem-

ber 12, 1992. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1257(a).

STATEMENT

Mountain Water Company (hereinafter “Mountain

Water”) is a private water utility regulated by the Mon-

tana Public Service Commission (hereinafter “PSC”). (Pet.

App. 195.) In 1987 the Montana legislature passed Mont.

Code Ann. § 69-4-511, requiring private water utilities to

pay part of the cost to maintain that portion of customer

servi-e lines that runs from the water main to the cus-

tomer property line. (Pet. 3-4.) In response, Mountain

Water filed for declaratory judgment in United States

District Court for the District of Montana, seeking decla-

ration that Mont. Code Ann. § 69-4-511, inter alia, violates

the fourteenth amendment by taking the property of

Mountain Water without just compensation. (Pet. App.

81.) The district court held that the statute does not

constitute a prohibited taking but that it does impose a

sil iitiiciaaiiaaiiia iii

a

service obligation on private water utilities, “for which

[they] will be compensated by an increase in rates if

necessary.” (Pet. App. 86.)

Mountain Water appealed the decision of the district

court to the Court of Appeals for the Ninth Circuit. The

court of appeals affirmed, holding that Mont. Code Ann.

§ 69-4-511 effects a taking of Mountain Water’s property,

but that in the special context of public utility law com-

pensation comes through the ratemaking process: “Any

failure of a rate order to compensate Mountain Water

justly for expenses incurred under the liability statute

would make the rate order, but not the statute, uncon-

Sstitutional.” (Pet. App. 79.)

In 1989 Mountain Water filed a general rate case with

the PSC, including a request to be compensated through

rates for expenses incurred in complying with Mont.

Code Ann. § 69-4-511. The PSC granted Mountain Water’s

request to include on-going compliance costs in rates on a

prospective basis. The PSC denied Mountain Water’s

request to include prior period compliance costs in rates

on the grounds that granting the request would constitute

a violation of the prohibition against retroactive ratemak-

ing. (Pet. App. 28-35.) Mountain Water appealed the PSC

decision to the Montana First Judicial District Court. The

district court reversed the PSC, finding that the refusal to

include prior period compliance costs did not justly com-

pensate Mountain Water for the taking. (Pet. App. 12-18.)

The PSC and the Montana Consumer Counsel appealed

and the Montana Supreme Court reversed, upholding the

rule against retroactive ratemaking and finding that

Mountain Water was justly compensated through rat-

emaking for costs incurred in complying with Mont.

ee

Code Ann. § 69-4-511. (Pet. App. 1, 5.) Mountain Water

asks this Court to review this decision of the Montana

Supreme Court.

SUMMARY OF THE ARGUMENT

There is no conflict between Mountain Water I and

Mountain Water II.! In Mountain Water I the court held

that Mont. Code Ann. § 69-4-511 does not impose an

uncompensated taking; just compensation comes through

rate setting. In Mountain Water II the court held that the

PSC had justly compensated Mountain Water for costs

incurred complying with Mont. Code Ann. § 69-4-511; the

court held that just compensation does not include retro-

active recovery of prior period expenses. In reaching its

decision in Mountain Water II the court was consistent

with its own precedent as well as precedent established

by this Court on the Takings Clause in the special context

of public utility law.

Mountain Water argues that this Court should grant

the requested writ because the decision of the Montana

Supreme Court conflicts with First English Evangelical

Lutheran Church v. Los Angeles County, 482 U.S. 304 (1987).

In First English the Court decided a narrow issue of law:

1 In its Petition Mountain Water designated Mountain Water

Company vs. Montana Department of Public Service Regulation, 919

F.2d 593 (9th Cir. 1990) as “Mountain Water I” and Mountain

Water Company vs. Montana Department of Public Service Regula-

tion, Montana Public Service Commission and Montana Consumer

Ccunsel, 835 P.2d 4 (1992) as “Mountain Water II.” In order to be

consistent these designations will also be used in this brief.

——————————————

just compensation requires compensation for property

taken by a land use regulation for the period of time

before the regulation has been adjudicated a taking. On

the other hand, previous holdings of this Court require

compensation through the ratemaking process for takings

of public utility property. The Montana Supreme Court

properly applied these holdings, and thus there is no

conflict between this Court’s holding in First English and

the Montana Supreme Court’s decision in Mountain Water

II. Mountain Water is not entitled to dollar-for-dollar

eminent domain type compensation for its costs of com-

plying with Mont. Code Ann. § 69-4-511.

Mountain Water urges this Court to grant the writ to

protect the integrity of the federal judicial process. It

argues that certain statements made by the PSC before

the federal district court and the court of appeals bound

it to a particular ratemaking method which it subse-

quently did not apply. No statements made in the lower

federal courts, however, contained any promise of a par-

ticular ratemaking treatment or in any way disrupted the

integrity of the federal judicial process. The precedent

cited in Mountain Water’s petition, Frazier v. Heebe, 482

U.S. 641. (1987), applies to this Court’s supervisory

powers over lower federal courts, and does not extend to

supervision of a state supreme court.

4

ARGUMENT

THIS PETITION PRESENTS NO CONFLICT BETWEEN

THE MONTANA SUPREME COURT AND THE NINTH

CIRCUIT COURT OF APPEALS OVER A FEDERAL

QUESTION

In Mountain Water I the issue relevant to this petition

was whether Mont. Code Ann. § 69-4-511 imposes a

taking without just compensation in violation of the fifth

and fourteenth amendments. The court of appeals con-

cluded that it did not, finding that while the statute

imposes a taking in the form of a utility service obliga-

tion, just compensation comes through PSC ratemaking.

The court of appeals further concluded that failure to

compensate justly for expenses incurred under the statute

would make the rate order, but not the statute, uncon-

stitutional. Mountain Water I, 919 F.2d at 600-601. (Pet.

App. 77-79.)

The statute was not at issue in Mountain Water II;

rather, the issue was whether a PSC rate order adequately

compensated Mountain Water for its expenses incurred

under the statute. The Montana Supreme Court ruled that

it did. Because Mountain Water I and Mountain Water II do

not contain holdings on the same issue there can be no

conflict in the decisions; thus, one of Mountain Water’s

arguments for granting certiorari is eliminated.

Mountain Water manufactures a conflict in the two

cases by reading selectively from Mountain Water I and

misstating the holding of that case. Mountain Water

emphasizes the following language from the court of

appeals: “Only if the PSC’s rate order fails to compensate

Mountain Water justly for all of its private property dedi-

cated to public use can Mountain Water complain of a

violation of its fifth amendment rights.” Mountain Water I,

919 F.2d at 600. (Pet. App. 78.) Mountain Water interprets

the word “all” in this sentence as indicating a holding

that just compensation requires recovery through rates of

all property taken, notwithstanding the prohibition

against retroactive ratemaking. Because the Montana

Supreme Court affirmed the PSC’s refusal to authorize

retroactive recovery of Mont. Code Ann. § 69-4-511

expenses, Mountain Water posits a conflict between

Mountain Water I and Mountain Water II. There are several

problems with this argument.

First, the discussion in Mountain Water I of the

requirements of just compensation in the context of pub-

lic utility regulation is dicta. The holding of the case on

the fourteenth amendment question is simply, 1) Mont.

Code Ann. § 69-4-511 imposes a taking for a public use,

and 2) just compensation is determined in the ratemaking

process. Second, the dicta on the requirements of just

compensation in Mountain Water I are fully in accord with

the conclusions of the Montana Supreme Court in Moun-

tain Water II. The court of appeals notes Mountain

Water’s argument that a taking in the public utility con-

text requires compensation consistent with a typical emi-

nent domain action - and rejects it. The court writes,

Under Mountain Water’s analysis then, the lia-

bility statute’s taking of these funds necessitates

a judicial eminent domain action, just as the

taking of a parcel of land would so necessitate.

Unlike judicial eminent domain proceedings,

Mountain Water points out, PSC rate setting is

prospective. PSC rate setting therefore, cannot

compensate Mountain Water dollar-for-dollar

for the funds the utility must transfer to its

customers.

Mountain Water I, 919 F.2d at 600. And the court con-

cludes “ . we note that utilities often in some sense

share their accumulated profits with customers when

utilities fail to achieve their authorized returns. Indeed,

Mountain Water’s ‘losses’ under the liability statute are

not constitutionally significant unless its set rates are

‘unjust.’ ” Id. at 601. This is an explicit recognition of the

prohibition against retroactive ratemaking and of the fact

that just compensation in the context of public utility law

does not require dollar-for-dollar recovery for property

taken.

Third, it is instructive to note that the court in Moun-

tain Water I cites several times to Duquesne Light Co. v.

Barasch, 488 U.S. 299 (1989). In Duquesne this Court was

faced with the constitutionality of a Pennsylvania statute

that prevented certain prudent utility planning costs from

inclusion in rates. Even though the statute made it impos-

sible for all property taken to be specifically recovered in

rates, the Court found it constitutional, stating that the

only relevant constitutional question is whether a rate

order allows a utility to earn a reasonable return on its

property devoted to utility service. Id. at 307-314. The

Court held that individual cost items within a rate case

(such as compliance with Mont. Code Ann. § 69-4-511) do

not have constitutional dimension. Id. In Mountain Water

II it was not questioned that the PSC rate order gave

Mountain Water the opportunity to earn a reasonable rate

of return. (Pet. App. 23-25.) Thus, the court’s decision in

Mountain Water II is consistent with this Court’s decision

in Duquesne.

In light of the above, Mountain Water's interpreta-

tion of Mountain Water I is untenable. To give the mean-

ing that Mountain Water suggests to the phrase

“compensate . . . justly for all of its property dedicated to

public use . . . ” (emphasis added) would be 1) inconsis-

tent with the totality of the fourteenth amendment dis-

cussion in Mountain Water I itself, 2) inconsistent with

Duquesne, and 3) inconsistent with other decisions of this

Court as discussed below.

The real issue that Mountain Water raises, in the

guise of asserting a conflict between Mountain Water I and

Mountain Water II, is whether the prohibition against

retroactive ratemaking is consistent with the fourteenth

amendment. As the court of appeals recognized in Moun-

tain Water I, the answer is yes. If the answer were to be

no, then numerous opinions of this Court and lower

courts would be overturned, and the regulation of public

utilities, as practiced for over a century, would be radi-

cally changed.

This issue was settled long ago, and Mountain Water

has provided no reason for this Court to revisit it. In

Galveston Electric Co. v. Galveston, 258 U.S. 388, 395 (1922)

(emphasis added), the Court wrote,

A company which has failed to secure from year

to year sufficient earnings to keep the invest-

ment unimpaired and to pay a fair return,

whether its failure was the result of imprudence

in engaging in the enterprise, or of errors in

management, or of omission to exact proper

prices for its output, cannot erect out of past defi-

cits a legal basis for holding confiscatory for the

future, rates which would, on the basis of present

reproduction values, otherwise be compensatory.

In Board of Public Utility Commissioners v. New York Tele-

phone Co., 271 U.S. 23, 31-32 (1926) (emphasis added), this

Court reiterated,

The revenue paid by the customers for service

belongs to the company. The amount, if any,

remaining after paying taxes and operating

expenses, including the expense of depreciation,

is the company’s compensation for the use of its

roperty. If there is no return, or if the amount is

ess than a reasonable return, the company must bear

the loss. Past losses cannot be used to enhance the

value of the property or to support a claim that rates

for the future are confiscatory. And the law does

not require the company to give up for the

benefit of future subscribers any part of its accu-

mulations from past operations.

These cases dispose of the issue. The Montana Supreme

Court has relied on Galveston and has established the

prohibition against retroactive ratemaking as a rule of

law. Mountain Water II, 835 P.2d at 6, and Montana cases

cited by PSC at Appendix 23a-24a. Mountain Water

repeatedly mischaracterizes the rule against retroactive

ratemaking as a “policy.” (Pet. 15-16.) The prohibition

against retroactive ratemaking is not a discretionary pol-

icy, it is the law. The decision in Mountain Water II was an

easy, straightforward application of the law to the facts. It

does not warrant further review.?

2 In both state and federal courts the PSC extensively

briefed retroactive ratemaking and the taking issue in the con-

rein

10

THIS COURT’S HOLDING IN FIRST ENGLISH DOES

NOT CONFLICT WITH THE DECISION BY THE

MONTANA SUPREME COURT

Mountain Water argues that the Court should grant

the writ in this case because the decision of the Montana

Supreme Court conflicts with this Court’s holding in First

English Evangelical Lutheran Church v. Los Angeles County,

482 U.S. 304 (1987). Mountain Water states that this Court

held in that case that compensation must be paid for past

economic losses which amount to a taking and which are

incurred as a result of state statutory law. Mountain

Water also states that the Montana Supreme Court

“ignored” First English and denied compensation even

though the statute in question had been adjudicated a

taking requiring compensation under the fourteenth

amendment. (Pet. 11.)

If the Montana Supreme Court “ignored” this Court’s

holding in First English, it may be because Mountain

Water did not bring the case to the attention of the court.

First English was not raised before the Montana Supreme

Court, or, for that matter, before any of the lower courts,

either state or federal. If that case had been raised before

the Montana Supreme Court, however, it would not have

changed the outcome.

The reason why First English would not have

changed the Montana Supreme Court’s decision in Moun-

tain Water II is that it is simply not applicable to Moun-

tain Water’s situation. In First English, this Court decided

text of public utility law. Two of these briefs are attached at

Appendix 1a and 17a. Mont. Code Ann. § 69-4-511 is referred to

as “S.B. 28” in the brief to the Montana Supreme Court.

11

a narrow issue, that is, that the just compensation clause

requires compensation for property taken by a land use

regulation for that period of time before it is determined

that the regulation is a taking.

Mountain Water attempts an analogy between the

State of California’s position in First English and that of

the State of Montana in this case. It points out that the

California courts believed that compensation for a taking

did not need to be paid for the period prior to adjudica-

tion of a taking because of important policy consider-

ations. (Pet. 17-18.) This Court rejected that position,

holding that where the government’s activities have

worked a taking, no subsequent government action can

relieve it of the duty to provide compensation. 482 U.S. at

321. In Mountain Water II, according to Mountain Water,

the State of Montana has taken its property and deprived

it of compensation on the basis of state policy, that is, the

“general policy” against retroactive ratemaking. This

analogy fails.

The rule against retroactive ratemaking is a rule of

law, and cannot be applied at the discretion of the PSC. In

addition, the rule is consistent with the fifth and four-

teenth amendments, as applied in the public utility con-

text, and as found in Mountain Water I and Duquesne.

Mountain Water argues that Duquesne and the traditional

public utility takings clause cases cannot “save” the Mon-

tana Supreme Court’s decision in Mountain Water II

because the Duquesne-type analysis is intended to deter-

mine whether a taking has occurred, while in this case the

taking has already been adjudicated. (Pet. 18-19.)

12

There is nothing special about the costs imposed by

Mont. Code Ann. § 69-4-511, except that Mountain Water

took the trouble to have them adjudicated a taking. The

PSC never argued that the statute did not take Mountain

Water’s property. Because state law requires public util-

ities to provide reasonably adequate service, a utility

could have any of its costs of service declared takings and

under Mountain Water’s theory, have them compensated

for other than through the ratemaking process. Costs

imposed by Mont. Code Ann. § 69-4-511 are no different

than any other costs incurred by Mountain Water. There

is simply no reason to treat them as typical eminent

domain type takings and require compensation other

than through the ratemaking process.

The very case in which Mountain Water’s compliance

costs were declared a taking recognizes the proper means

of compensating Mountain Water for those costs. In

Mountain Water I, the ninth circuit rejected Mountain

Water’s attempt to distinguish its case from traditional

fifth amendment public utility cases, and stated that the

fact that Mountain Water had to ‘seek compensation

through PSC rate setting rather than through eminent

domain was not of constitutional significance. It also

stated that any potential “losses” on the part of Mountain

Water under Mont. Code Ann. § 69-4-511 are not constitu-

tionally significant unless its set rates are unjust. (Pet.

App. 77-79.) Mountain Water, of course, has never chal-

lenged its set rates.

The court of appeals and the Montana Supreme

Court have correctly determined that Mountain Water is

not entitled to compensation other than through the tra-

ditional ratemaking process. The Montana Supreme

13

Court correctly concluded that rates set by the PSC must

be at a level that allows just compensation for any regula-

tion that impairs a utility’s property interest. (Pet. App.

3.) Mountain Water is not entitled to typical eminent

domain type compensation. The narrow holding of this

Court in First English is not applicable to costs incurred in

compliance with Mont. Code Ann. § 69-4-511, which the

Montana Supreme Court correctly determined were to be

treated in the traditional ratemaking process. This

Court’s holding in First English does not support granting

the writ.

THIS COURT’S “AFFIRMATIVE ROLE” IN THE FED-

ERAL JUDICIAL PROCESS DOES NOT EXTEND TO

SUPERVISION OF THE MONTANA SUPREME

COURT; THERE HAS BEEN NO UNDERMINING OF

THE INTEGRITY OF THE FEDERAL JUDICIAL PRO-

CESS IN THIS CASE

Mountain Water’s third reason given to the Court for

granting the writ is that it has an “affirmative role to play

in preventing the undermining of the integrity of the

federal judicial process.” It states that the Court must

reverse the Montana Supreme Court’s decision if the

integrity of the federal judicial process is to be vindi-

cated. (Pet. 22.) In support, Mountain Water alleges that

the PSC represented to the federal courts that Mountain

Water would be compensated for its compliance costs in

the ratemaking process, and that the courts relied on

those representations in upholding the validity of the

statute. Mountain Water goes on to say that the PSC’s

“general policy” against retroactive ratemaking was in

existence at the time the representations were made in the

14

federal courts, and that other PSC rules made it impossi-

ble for Mountain Water to apply for a rate increase in

time to recover the compliance costs in question. (Pet.

19-22.)

The only precedent cited in support of this Court's

granting the writ to protect the federal judicial process is

a portion of a footnote in Frazier v. Heebe, 482 U.S. 641

(1987): “The Court’s supervisory power over federal

courts allows the Court to intervene to protect the integ-

rity of the federal system. .. . ” 482 U.S. at 647 n.7. In

Frazier the Court considered a lower court ruling uphold-

ing a local federal district court rule preventing admis-

sion to practice of an attorney who was a member of the

state bar but had neither a residence nor an office within

the jurisdiction. The Court noted that federal district

courts have the discretion to adopt local rules, including

rules governing admission to practice before them. Their

discretion, however, has limits, including the U.S.

Supreme Court’s “inherent supervisory power to ensure

that these local rules are consistent with ‘the principles of

right and justice.’ In re Ruffalo, 390 U.S. 544, 554 (1968)[.]”

(other citations omitted). 482 U.S. at 645.

This Court’s jurisdiction in Frazier was also based

upon 28 U.S.C. § 2072, which states: “The Supreme Court

shall have the power to prescribe by general rules, the

forms of process, writs, pleadings and motions, and the

practice and procedure of the district courts . . . and

courts of appeals of the United States in civil actions

....” 482 U.S. at 646 n.4. Thus, this Court in Frazier was

dealing with its powers over lower federal courts in the

limited area of practice and procedure. The Court stated,

referring to its authority over matters such as rules for

15

admission to practice, that its authority over state court

bars is limited to enforcing federal constitutional require-

ments. 482 U.S. at 647 n.7. Although this Court’s author-

ity to intervene in lower federal court matters to protect

the integrity of the federal system is unquestioned, Fraz-

ier does not support Mountain Water’s position that this

Court should overturn a decision of a state supreme court

for the same reason.

Mountain Water’s charges with respect to statements

by the PSC before the federal courts, their effect and the

supposed conflict between the “general policy” against

retroactive ratemaking and other PSC rules must also be

addressed here, as they have been thoroughly and repeat-

edly before the lower courts. Mountain Water charges

that the PSC promised the federal courts that Mountain

Water would be compensated for all its property taken in

compliance with Mont. Code Ann. § 69-4-511, and that

the federal courts relied on the promise in reaching their

decisions. Mountain Water asserts that the PSC then

reneged on this promise by applying the “general policy”

against retroactive ratemaking to deny Mountain Water

prior period compliance costs. The PSC has responded

exhaustively to these charges. (App. 30a-35a, and Pet.

App. 29-35.) The Montana district court ignored the

charges, (Pet. App. 18), and the Montana Supreme Court

found them without merit. The court wrote as follows:

“[Mountain Water] argues that the PSC is bound by judi-

cial estoppel. The PSC admitted during the course of the

federal litigation that [Mont. Code Ann. § 69-4-511] was a

taking and that [Mountain Water] would be compensated

through rate-making. However, in making that admission

the PSC did not waive application of the rules involved in

16

rate-making.” Mountain Water II, 835 P.2d at 6. (Pet. App.

3-4.) Thus, the PSC stands convicted of promising that

property taken will be reflected in rates according to the

rules of ratemaking. The PSC, of course, did exactly as it

promised: it reflected compliance costs in rates according

to the rules of ratemaking, which do not permit the

recovery of prior period (retroactive) expenses. The fed-

eral courts did not rely on a PSC promise, because their

decisions were not determined by anything the PSC

might do, but to the extent the PSC made a promise to the

federal courts, it fulfilled it.

Mountain Water’s repeated assertions that the state-

ments made by the PSC to the federal courts constituted a

promise of a particular ratemaking treatment simply are

not accurate. Rather, the statements were simply straight-

forward characterizations of the ratemaking process.

Mountain Water was not placed in any sort of regula-

tory bind by conflicting PSC rules. Nor did the PSC

promise any particular regulatory treatment. When

3 Though it is of no consequence to this petition, the PSC

disagrees with the Montana Supreme Court that it admitted or

promised anything to the federal courts with respect to its rat-

emaking treatment of Mont. Code Ann. § 69-4-511 costs. This is

because 1) such a promise or admission was not necessary or

germane to the PSC’s theory of the case, and 2) the PSC does not

speak on rates except in an order following a hearing. However,

the PSC certainly does not object to the conclusion of the Mon-

tana Supreme Court that the PSC promised to do its job accor-

ding to law.

; _— oe

17

Mountain Water chose to wait until June of 1989 to apply

for a rate increase, it took the risk of making a proposal to

the PSC that could not be granted because of the prohibi-

tion against retroactive ratemaking. Nothing in the his-

tory of this case indicates that the PSC made misleading

or inaccurate statements or promises, or any way dis-

turbed the integrity of the federal judicial process. Nei-

ther Frazier nor the history of this case offers any reason

why this Court should grant the writ sought by Mountairi

Water.

CONCLUSION

Mountain Water has failed to establish any reason

why this Court should grant a writ of certiorari in this

case. There is no conflict between the decisions of the

Montana Supreme Court and the court of appeals. Nor

does the holding of the Montana Supreme Court, which

properly upheld the orders of the PSC determining com-

pensation in the ratemaking process, conflict with First

English. Nothing in the history of the case indicates any

interference with the integrity of the federal judicial pro-

cess or justifies overturning the decision of the Montana

Supreme Court.

For these reasons, the PSC and the Montana Con-

sumer Counsel respectfully ask that the writ sought by

Mountain Water not issue.

Respectfully submitted this 14th day of December,

1992.

18

Rosin A. McHucH

Special Assistant Attorney General

Montana Department of Public

Service Regulation

Montana Public Service Commission

P.O. Box 202601

1701 Prospect Avenue

Helena, MT 59620-2601

(406) 444-6376

Attorney for Montana Department of

Public Service Regulation

Mary WRIGHT*

Special Assistant Attorney General

Montana Consumer Counsel

34 West Sixth Avenue

Helena, MT 59620-1703

(406) 444-2771

Attorney for Montana Consumer

Counsel

“Counsel of Record

la

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

+ + *

MOUNTAIN WATER

COMPANY,

Plaintiff-Appellant,

CA NO.

88-4097

-VS-

MONTANA DEPARTMENT

OF PUBLIC

SERVICE REGULATION,

MONTANA PUBLIC

SERVICE COMMISSION,

Defendants-Appellee.

* a a

ON APPEAL FROM THE UNITED

STATES DISTRICT COURT

FOR THE DISTRICT OF MONTANA,

HELENA DIVISION

* + +

BRIEF OF APPELLEE

DEPARTMENT OF PUBLIC SERVICE REGULATION

MONTANA PUBLIC SERVICE COMMISSION

* + *

i i

ROBIN A. MCHUGH

STAFF ATTORNEY

DEPARTMENT OF PUBLIC SERVICE REGULATION

MONTANA PUBLIC SERVICE COMMISSION

2701 Prospect Avenue

Helena, Montana 59620

(406) 444-6376

2a

* * *

II. SECTION 69-4-511 DOES NOT VIOLATE THE FIFTH

AMENDMENT PROHIBITION AGAINST UNCOM-

PENSATED TAKINGS OF PRIVATE PROPERTY FOR

A NONPUBLIC USE.

Section 69-4-511 requires private water utilities to

pay part of the maintenance cost of a portion of the

service lines connected to private utility water mains.

Mountain Water argues that this requirement constitutes

an uncompensated “taking” of private utility property for

a nonpublic use. This argument is without merit.

A. Section 69-4-511 Does Not Mandate an Uncom-

pensated “Taking” of Private Property.

For purposes of this discussion the relevant language

from the fifth and fourteenth amendments is as follows:

No person shall be . . . deprived of life, liberty,

or property, without due process of law; nor

shall private property be taken for public use,

without just compensation.

U.S. Const. amend. V.

{NJor shall any State deprive any person of life,

liberty, or property, without due process of law.

U.S. Const. amend. XIV, § 1. It has been long settled that

the compensation clause of the fifth amendment has been

incorporated into the fourteenth amendment. Chicago,

Burlington and Quincy R.R. Co. v. City of Chicago, 166 U.S.

226 (1897), Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449

U.S. 155 (1980). Therefore, Montana must provide com-

pensation if it acts to “take” private property and such

3a

“taking” is deemed an exercise of the eminent domain

power. There can be “takings” under the general state

police power for which there need be no compensation.

Such “takings” are often accomplished under the general

rubric of business regulation. However, in the context of

public utility regulation, the state must provide adequate

compensation through rates for the use of utility com-

pany property for the provision of utility service. There-

fore, though the cases rarely speak in these terms, the

“taking” of utility property for the provision of utility

service is an exercise of eminent domain power and must

be compensated (albeit indirectly) under the same princi-

ple that a property owner must be compensated if his

property is “taken” for the construction of a highway."!

Historically, the Supreme Court has taken two con-

flicting positions on the “taking” issue. In Mugler v. Kan-

sas, 123 U.S. 623 (1887), the Court declared that a state

may regulate business through the exercise of the police

power, but that such regulation does not constitute a

“taking” unless property is actually appropriated for the

public benefit. In Pennsylvania Coal v. Mahon Co., 260 U.S.

393 (1922), the Court retreated from such a rigid position

and held that regulation may impair property interests to

such an extent as to constitute a “taking,” even where

there is not actual physical appropriation of the property.

In this view, valid exercise of the police power may

11 For an excellent capsule discussion of the “taking” issue

see J. Nowak, R. Rotunda, J. Young, Constitutional Law, 2d Ed.

493 (1983) and 2 R. Rotunda, J. Nowak, J. Young, Treatise on

Constitutional Law, § 15.12 (1986). Citation to authority suppor-

ting these general comments on “taking” will be made in the

following discussion.

4a

constrain property use sufficiently to be judged a “tak-

ing,” and to require compensation.

There is no question that Montana may validly regu-

late the service and rates of public utilities, or that such

regulation has the potential to constitute a “taking” in

violation of the fifth and fourteenth amendments of the

United States Constitution. However, it is equally appar-

ent that the “taking” issue, in the context of public utility

regulation, is not a question of adequate direct compensa-

tion for seizing property or impairing its use, but rather

is a question of whether authorized rates provide suffi-

cient revenue to generate a reasonable rate of return on

plant devoted to utility service.

An early and important case in this area is Smyth v.

Ames, 169 U.S. 466 (1897). Smyth involved the constitu-

tionality of an act of the Nebraska legislature setting

maximum rates to be charged by railroads for the trans-

portation of freight within the State of Nebraska. The

Court held that while the State of Nebraska had the

power to regulate railroad rates, it could not do so in

such a manner as to amount to a taking of private prop-

erty for public use without just compensation. The Court

further held that, though it is not the business of the

courts to set initial rates, a determination of whether

those rates amount to a deprivation of property is a

proper subject of judicial inquiry. Id. 169 U.S. at 522-526.

In a later case the United States Supreme Court heard

an appeal from the Supreme Court of West Virginia which

had upheld an order of the West Virginia Public Service

Commission over objections that rates set by the Commis-

sion were confiscatory in violation of the fourteenth

5a

amendment. Bluefield Water Works & Improvement Co. v.

Public Service Commission of the State of West Virginia, 262

U.S. 679 (1923). The Court in Bluefield stated the follow-

ing:

The question in the case is whether the rates

prescribed in the Commission’s order are confis-

catory and therefore beyond legislative power.

Rates which are not sufficient to yield a reason-

able return on the value of the property used at

the time it is being used to render the service are

unjust, unreasonable and confiscatory, and their

enforcement deprives the public utility com-

pany of its property in violation of the Four-

teenth Amendment. This is so well settled by

numerous decisions of this Court that citation of

the cases is scarcely necessary.

Id., 262 U.S. at 690. The Court went on to reverse the West

Virginia Court, holding that the return did not constitute

just compensation for the use of the property used to

render the service.

In a still later case the United States Supreme Court

reversed a ruling of the Ohio Supreme Court affirming an

order of the Ohio Public Utilities Commission fixing the

rates of a gas company in Lima, Ohio. West Ohio Gas Co. v.

Public Utilities Commission of Ohio, 294 U.S. 63 (1935). In

West Ohio Gas the Court found that the Public Utilities

Commission had reduced the return to West Ohio Gas Co.

to the point of confiscation by failing to allow certain

operating expenses to be reflected in rates. In reaching

that decision the Court wrote: “Our inquiry in rate cases

coming here from the state courts is whether the action of

the state officials in the totality of its consequences is

consistent with the enjoyment by the regulated utility of a

6a

revenue something higher than the line of confiscation.”

Id., 294 U.S. at 70. Upon concluding in West Ohio Gas that

the return allowed was confiscatory, the Court remanded

to the Ohio Commission to set compensatory rates consis-

tent with the Constitution.

In the landmark case of Federal Power Commission v.

Hope Natural Gas, 320 U.S. 591 (1943), the Court estab-

lished that whether or not rates are confiscatory does not

depend on the particular method used to value utility

plant. The Court wrote, “It is not theory but the impact of

the rate order which counts. If the total effect of the rate

order cannot be said to be unjust and unreasonable, judi-

cial inquiry under the 2Natural Gas Act is at an end.” Id.

at 602. The holding in Hope Natural Gas was recently

reaffirmed in Duquesne Light Co. and Pennsylvania Power

Co. v. David M. Barasch, 109 S.Ct. 609 (1989). In Duquesne,

the Court considered a Pennsylvania law that requires

that electricity rates be set without taking into account

utility expenditures for facilities planned but never built,

even though the expenditures were prudent and reason-

able when made. The Pennsylvania Supreme Court ruled

that the law did not take utility property in violation of

the fifth amendment, and the United States Supreme

Court agreed. The Court reiterated that, when consider-

ing whether or not a “taking” occurs in the ratemaking

context, it is the total impact of the rates on the financial

integrity of the company that is determinative. The indi-

vidual components of the rates do not have “constitu-

tional dimension.” Id. at 617. The Court also referred to

the concurring opinion of Justice Brandeis in Missouri ex

rel. Southwestern Bell Telephone Co. v. Public Service Com-

mission, 262 U.S. 276 (1923): “Justice Brandeis accepted

7a

the Smyth v. Ames eminent domain analogy, but con-

cluded that what was ‘taken’ by public utility regulation

is not specific physical assets that are to be individually

valued, but the capital prudently devoted to the public

utility enterprise by the utilities’ owners.” Duquesne, 109

S.Ct. at 616. Justice Brandeis’ analysis of the “taking”

issue in public utility law has been accepted by the Court.

Several points are clear from these cases: First, a state

legislature, either directly through statute, or through a

regulatory commission, can set rates that amount to a

“taking” in violation of the fifth and fourteenth amend-

ments. Second, state courts can and do review rates set by

regulatory commissions to determine whether they

amount to an unconstitutional “taking.” Third, a state

statute will not be considered an unconstitutional “tak-

ing” merely because the costs associated with compliance

with the statute by regulated utilities may be disallowed

by a regulatory commission. (Or, in the case of Duquesne,

a statute that forbids a regulatory commission from pass-

ing through in rates certain reasonable costs is not an

unconstitutional “taking.”) It is the act of a state, nor-

mally through a regulatory commission, that denies the

recovery through rates of a reasonable return on plant

devoted to utility service will be determined an uncon-

stitutional “taking.”

There is no question that Mountain Water will incur

certain operating expenses as a result of compliance with

69-4-511. Consequently, the next time Mountain Water

applies for a rate increase it will submit those expenses as

part of its case that its overall revenue requirement has

increased. The Commission, for its part, will scrutinize all

of Mountain Water’s expenses to determine whether or

8a

not they are reasonable. Reasonable expenses will be

added to a reasonable rate of return on Mountain Water’s

rate base to arrive at the total amount of revenue (reve-

nue requirement) that Mountain Water will be allowed to

recover through -rates. Once a decision is made on the

revenue requirement of any regulated utility, that utility

can appeal that decision to the courts. A possible basis for

appeal is that the order establishing the revenue require-

ment constitutes a “taking” in violation of the fifth and

fourteenth amendments. But the mere fact that a regula-

tory commission may disallow recovery of legitimate

expenses associated with compliance with a statutory

requirement does not render the statute to be complied

with inherently unconstitutional. The potential exists that

the Commission in an order could disallow legitimate

costs of compliance with 69-4-511, which could contribute

to a finding on appeal of an unconstitutional “taking.”

But in such a case it would be the action of the Commis-

sion that would comprise the unconstitutional “taking;”

section 69-4-511 itself would not thereby be rendered

unconstitutional.

Therefore, Mountain Water raises a totally false and

misleading issue when it charges that 69-4-511 constitutes

a prohibited “taking.” The regulation of public utilities in

the form of both service and rate regulation, is uncon-

testably within the police power of the states. See, €.8.,

Munn v. Illinois, 94 U.S. 113 (1877). Section 69-4-511, by

directing private water utilities to pay for a specific ser-

vice directly related to the provision of water, is inargua-

bly a legitimate extension of state police power. Not until

the Commission has acted on a water utility application

that includes costs of complying with 69-4-511, will there

9a

even be the potential for legitimately raising an issue

regarding the regulatory treatment of those costs. And, as

Duquesne makes clear, that issue will not be of “constitu-

. tional dimension” unless rates are set so as to deprive the

utility of a reasonable return on its investment devoted to

utility service.12

B. The Arguments in Section B(2) of Mountain

Water’s Brief are Misleading and Without Merit.

1. The Commission Recognizes that Utilities

have a Right to be Compensated for the Use

of their Property in the Provision of Utility

Service.

Mountain Water’s position on the “taking” issue

reveals that it does not understand the difference

between a “taking” in the context of public utility regula-

tion, just discussed, and a “taking” as traditionally under-

stood to require eminent domain proceedings and direct

compensation. Because of this lack of understanding

Mountain Water asserts that the Commission does not

recognize utility property rights, and asserts that it is the

theory of the Commission “that in the case of a utility, the

Fifth Amendment provides no protection against the con-

fiscation of the ownership or possession of utility prop-

erty itself, but only protection of its income-producing

12 The Montana Administrative Procedure Act, Mont. Code

Ann. § 2-4-701 - 711, allows for the appeal of a Commission

order into State district court. Appeal can then be made to the

Montana Supreme Court and from there to the United States

Supreme Court. The lower federal courts normally have no part

in the appeal of orders from state regulatory commissions.

10a

ability, and that utility property can be confiscated with

impunity as long as future rates are somehow determined

so as reflect the loss.” Appellant’s Brief at 29-30. This is,

of course, not true.

The Commission, at the very heart of its argument,

recognizes that public utilities have property rights in the

assets they employ to provide utility service. It is because

utilities have such rights that the courts have held that

the state must allow a reasonable return on those assets

or risk running afoul of the Constitution as “taking”

without just compensation. The application of the fifth

and fourteenth amendments on the “taking” issue makes

no sense without a property right; a “taking” without

compensation cannot exist absent a right in that which is

“taken.” Having recognized this, however, it is also nec-

essary to recognize that the “taking” issue in public util-

ity regulation exists in a unique context. A traditional

“taking” is better characterized as a confiscation, or an

expropriation: the seizing of land for the construction of a

public highway or building is a good example. That is the

kind of “taking” Mountain Water refers to when it writes

that, “The Fifth Amendment requires either just compen-

sation to be paid befgre the taking occurs, or that a later

payment must include interest on the principal amount

from the date of the taking . . . ”. Appellant’s Brief at 28.

The Commission does not doubt that this is a correct

statement of the law in a traditional eminent domain

setting (none of the cases cited to support it deal with the

regulation of public utilities). However, it has no rele- -

vance to the “taking” issue in public utility law.

One of the earliest cases that developed the “taking”

issue in the special context of public utility law, and a

———

lla

precursor to the cases cited by the Commission at 23-26,

supra, is Railroad Commission Cases, 116 U.S. 307 (1886). In

that case the Court wrote the following:

Under pretense of regulating fares and freights,

the State cannot require a railroad corporation

to carry persons or property without reward;

neither can it do that which in law amounts to a

taking of private property for public use without just

compensation, or without due process of law.

Id., 116 U.S. at 331 (emphasis added). The language, “do

that which in law amounts to a taking,” is an early

recognition that a “taking” in the context of utility regula-

tion, though potentially a violation of the fifth and four-

teenth amendments, is a very different sort of animal

than a “taking” in an eminent domain proceeding. In the

latest recognition of this fact the Court wrote that the

“partly public, partly private status of utility property

creates its own set of questions under the Takings Clause

of the Fifth Amendment.” Duquesne, 109 S.Ct. at 615.

Failure to understand the “taking” issue prompts

Mountain Water to contend that based on “Commission

theory,” the state could confiscate a portion of a utility’s

plant and compensate the utility through rates, rather

than through direct compensation. See Appellant’s Brief

at 30. This argument has nothing to do with the “taking”

issue as it relates to 69-4-511, a law that does not confis-

cate utility plant, but rather requires a private water

utility to pay part of the cost of utility service. The

Commission’s guess is that the courts would react to

Mountain Water’s argument by stating that the seizure of

utility property, like the seizure of the property of any

other entity or person, must be compensated for directly

through an eminent domain proceeding. However, the

12a

seizing of utility property for which direct compensation

must be made, should not be confused with the directed

use of utility property to provide a utility service, for

which another kind of compensation must be made.

2. The Prohibition on Retroactive Ratemaking

Does Not Affect the Commission’s Position

on the “Taking” Issue.

Mountain Water has su.pplied ample citation for the

proposition that ratemaking is prospective and cannot

provide compensation for past losses. See Appellant’s

Brief at 27. Mountain Water concludes from this that

69-4-511 is a “taking” in violation of the fifth and four-

teenth amendments because compliance with it may

cause Mountain Water to suffer losses that it cannot

recoup. This does not follow, however, for if it did, the

entire ratemaking process, as understood and practiced

for over a century, would be unconstitutional. The cases

have long recognized that public utilities must suffer

certain losses and accept certain gains as part of regula-

tion. No better statement of that principle is made than in

Board of Public Utility Commissioners v. New York Telephone

Company, 271 U.S. 23 (1926). In that case the New York

Telephone Company applied to the New Jersey Board of

Public Utility Commissioners for a rate increase. The

Board investigated and found that though an increase

was justified, it would be denied on the basis that excess

profits had been earned based on the lawful rates previ-

ously in force. The Supreme Court reversed the Board,

holding that,

13a

The revenue paid by the customers for service

belongs to the company. The amount, if any,

remaining after paying taxes and operating

expenses, including the expense of depreciation,

is the company’s compensation for the use of its

property. If there is no return, or if the amount is

less than a reasonable return, the company must

bear the loss. Past losses cannot be used to enhance

the value of the property or to support a claim that

rates for the future are confiscatory. And the law

does not require the company to give up for the

benefit of future subscribers any part of its accu-

mulations from past operations.

Id. 271 U.S. at 31-32 (citations omitted) (emphasis added).

As Mountain Water acknowledges, rates are intended to

reflect the estimated cost*of service during the time they

are effective. If that estimate is high the utility accepts the

gain and a regulatory agency cannot force the utility to

disgorge the gain for the benefit of future ratepayers. If

the estimate is low the utility must absorb the loss and

the, regulatory agency cannot compensate the utility for

the loss in future rates. As noted, this loss does not

represent a “taking;” a “taking” occurs, in utility rate-

making, if a regulatory agency sets rates so as not to

adequately compensate a utility in the future for the

reasonable estimate of costs it has demonstrated it will

incur based on an historic test period.

Mountain Water implies that the prohibition on retro-

active ratemaking makes it impossible to recover all costs

associated with 69-4-511. Even if this were true it would

not mean that 69-4-511 constitutes a prohibited “taking”

because it is a fact of regulation that utilities have to

absorb unanticipated costs (thus reducing their rate of

14a

return), including costs associated with government

action, that are not reflected until later in rates. If, how-

ever, it turns out that initial costs associated with 69-4-511

are not recoverable, the responsibility will lie with Moun-

tain Water management as much as with the prohibition

on retroactive ratemaking. Mountain Water knew on

March 24, 1987, that 69-4-511 would become effective on

October 1, 1987. Mountain Water thus had more than six

months to make an estimate of 69-4-511 costs and to ask

that rates be effective October 1, 1988, to reflect those

costs. Instead of that, Mountain Water filed this lawsuit.

The Commission has not made a decision on the treat-

ment of Mountain Water’s 69-4-511 costs because Moun-

tain Water has not filed an application. If those costs are

treated as a capital cost rather than as expense, Mountain

Water may still suffer little loss as a result of 69-4-511. If

initial costs of 69-4-511 are lost as a result of the prohibi-

tion on retroactive ratemaking, this will not reflect a

“taking,” it will reflect the failure of Mountain Water to

use the regulatory process available to it.

3. It is Misleading to Contend that Paying a

Portion of the Cost of Service Line Mainte-

“nance Amounts to a Sharing of Earnings

with Utility Customers.

Mountain Water writes that it “cannot fund its cus-

tomers’ repair and maintenance of their private property

without sharing with them its earnings from its utility

operations. Those earnings constitute the private prop-

erty of Mountain Water, and cannot, consistent with the

Fifth Amendment, be given to the Mountain Water cus-

tomer ...”. Appellant’s Brief at 26. In addition to the

15a

questionable, and in any event irrelevant, contention that

69-4-511 mandates the maintenance of private property,

this statement is seriously misleading. If a utility is

authorized to earn a 10 percent rate of return, and for a

variety of reasons reasonable costs of providing utility

service increase, causing the utility to earn only 5 percent,

then the additional 5 percent return, which the utility was

authorized, is forever lost to it due to the prohibition on

retroactive ratemaking. 5

Whenever a utility earns less than its authorized rate

of return it is in a sense sharing some of its authorized

earnings with its customers. This is so because if rates

could be raised to always reflect the authorized return

there would never be a difference between authorized

return and actual return. But rates cannot be changed

instantaneously to reflect every change in utility cost. For

that reason there are times when earnings to which the

utility would be entitled are left in its customers’ pockets.

But those potential earnings do not represent a gift to the

customer from the utility, because it is not the utility’s

money until it is paid as a result of a lawful rate. As the

Supreme Court said in Board of Public Utility Commission-

ers v. New York Telephone Co., 271 U.S. at 31, “The revenue

paid by the customers for service belongs to the Com-

pany.” Revenue not paid to the company, but which

would be paid if the lawful rate allowed the company to

3 As noted, however, the utility can head off this reduction

in earnings if it can reasonably measure an anticipated cost in

time to have higher rates in place when the cost occurs. Some

costs, of course, cannot be anticipated and that is why utilities

often suffer an erosion of their earnings.

l6a

earn its authorized return, does not belong to the com-

pany. Thus, whenever a utility bears legitimate costs

which reduce its earnings below the authorized level, it

results in a theoretical gain to the utility’s customers. But

this gain does not mean that there has been a “taking” of

utility property because the utility never had the prop-

erty to “take.”

When a utility is authorized a certain rate of return, it

is given the opportunity to earn that return. A utility has

a property interest in the return that is earned, not in that

which might have been earned. Property may, consistent

with the fifth amendment and the regulatory process, be

“taken” from utilities in the sense that its use is directed

toward providing utility service. But that property is not

given to utility customers; rather it is used to provide a

service from which the customers benefit. Customers pay

for that property (capital), which is “taken” (used), by

paying rates which give the utility the opportunity to

earn a reasonable return.

17a

NO. 91-446

* * .

IN THE SUPREME COURT OF THE

STATE OF MONTANA

* * *

MOUNTAIN WATER COMPANY, a Montana

corporation,

Plaintiff and Respondent,

vs.

MONTANA DEPARTMENT OF PUBLIC SERVICE

REGULATION, MONTANA PUBLIC SERVICE

COMMISSION, and MONTANA CONSUMER COUNSEL,

Defendants and Appellants.

BRIEF OF DEFENDANT-APPELLANT

MONTANA PUBLIC SERVICE COMMISSION

On Appeal from the District Court of the First Judi-

cial District of the State of Montana In and for the County

of Lewis and Clark, Cause No. CDV 90-607

APPEARANCES:

For Defendants-Appellants: For Plaintiff-Respondent:

Robin A. McHugh John Alke

Special Assistant Attorney HUGHES, KELLNER,

General SULLIVAN & ALKE

PUBLIC SERVICE 406 Fuller Avenue

COMMISSION Helena, Montana

1701 Prospect Avenue 59624-1166

Helena, Montana 59620

Mary Wright

Special Assistant Attorney

General

MONTANA CONSUMER COUNSEL

34 West Sixth Avenue

Helena, Montana 59620

18a

B. Fifth Amendment Taking Occurs in a Special

Context in Public Utility Law.

The relevant language from the fifth and fourteenth

amendments follows: “No person shall be . . . deprived of

life, liberty, or property, without due process of law; nor

shall private property be taken for public use, without

just compensation.” U.S. Const. amend. V. “[NJor shall

any state deprive any person of life, liberty, or property,

without due process of law.” U.S. Const. amend. XIV, § 1.

The compensation clause of the fifth amendment has

been incorporated into the fourteenth amendment. Chi-

cago, Burlington and Quincy R.R. Co. v. City of Chicago, 166

U.S 266 (1897), Webb’s Fabulous Pharmacies, Inc. v. Beck-

with, 449 U.S. 155 (1980). Therefore, Montana must pro-

vide compensation if it acts to take private property and

such taking is deemed an exercise of the eminent domain

power.® In the context of public utility regulation Mon-

tana, through the agency of the PSC, must allow adequate

compensation through rates for the use of utility com-

pany property for the provision of utility service. There-

fore, the taking of utility property for the provision of

utility service is a special kind of exercise of eminent

6 There can be takings under the general state police power

for which there need be no compensation. These takings are not

accomplished under the eminent do" ain power, but rather

under the general rubric of business, health and welfare regula-

tion. See Mugler v. Kansas, 123 U.S. 623 (1887) and its progeny;

also Yellowstone Valley Electric Cooperative, Inc. v. Ostermiller, 187

Mont. 8, 608 P.2d 491 (1980); and for an excellent capsule discus-

sion of the taking issue see J. Nowak, R. Rotunda, Constitutional

Law, 2d Ed. 493 (1983) and 2 R. Rotunda, J. Nowak, J. Young,

Treatise on Constitutional Law, § 15.12 (1986).

19a

domain power and must be compensated under the same

principle (though not in the same manner) that a prop-

erty owner must be compensated if his property is taken

for the construction of a highway.

The courts have long recognized the special meaning

of a taking in the context of public utility regulation. In

Railroad Commission Cases, 116 U.S. 307, 331 (1886) the

Court wrote the following (emphasis added):

Under pretense of regulating fares and freights,

the state cannot require a railroad corporation to

carry persons or property without reward; nei-

ther can it do that which in law amounts to a taking

of private property for public use without just com-

pensation, or without due process of law.

The language, “do that which in law amounts to a taking

.., is an early recognition that a taking in the context

of utility regulation, though potentially a violation of the

fifth amendment, is different from a taking in a typical

eminent domain proceeding. The Court recognized this

again in Smyth v. Ames, 169 U.S. 466, 522-526 (1897),

holding that while the State of Nebraska had the power

to regulate railroad rates, it could not do so in such a

manner as to amount to a taking of private property for

public use without just compensation. Recently, the Court

reaffirmed the special context of a fifth amendment tak-

ing in public utility law in Duquesne Light Co. v. Barasch,

488 U.S. 299, 307 (1989): “[The] partly public, partly pri-

vate status of utility property creates its own set of ques-

tions under the Takings Clause of the Fifth Amendment.”

20a

Later, the Court recognized “the Smyth v. Ames eminent

domain analogy, .. . ” Id. at 309.”

Therefore, while it is recognized that public utilities

must expend their property to provide utility service,®

and that this constitutes a special kind of fifth amend-

ment taking, the questions are 1) how are utilities com-

pensated? and 2) what constitutes just compensation?

First, utilities are compensated through rates, as opposed

to the direct compensation of a typical eminent domain

7 The Montana Supreme Court may have obliquely recog-

nized the special context of fifth amendment taking in public

utility law. In Yellowstone Valley Electric Cooperative v. Oster-

miller, 187 Mont. 8, 608 P.2d 491 (1980), the issue was whether a

statute requiring the raising of utility lines (by regulated and

unregulated utilities) to enable structures to pass, constituted an

uncompensated taking. This court held that, “The statute does

not involve the appropriation of a property right or a ‘taking’

under the laws of eminent domain in any traditional sense.” Id.

at 14, P.2d at 495. The court concluded that the statute was an

exercise of the police power, necessary to preserve the public

welfare, for which no compensation was due. The court recog-

nized (or assumed), however, that compensation would come in

the form of rates: “Imposing costs upon utilities and coopera-

tives is perhaps the most effective way of spreading the burdens

created by the statute. In this way, consumers share both the

burdens and the general benefits which the statute intended and

is calculated to secure.” Id. at 16, P.2d at 496. The PSC believes

that Yellowstone Valley was correctly decided because the statute

in question does not require an expenditure in the furtherance

of utility service. If, however, a statute does require expenditure

in the furtherance of utility service (SB 28), then it is clear that

such requirement constitutes a fifth amendment eminent

domain taking, though not in the “traditional sense.”

8 “Every public utility is required to furnish reasonably

adequate service and facilities.” § 69-3-201, MCA.

2la

proceeding. Second, just compensation is the opportunity

to earn a reasonable return on property devoted to utility

service; and the rates that allow that opportunity are

prospective in effect.

1. Utilities are Compensated Through Rates for

the Taking of Their Property.

The proper method of compensation for a taking in

the context of public utility regulation is through rates.

“The district court held that Mountain Water’s recourse

as a utility to obtain just compensation for the property

taken under [SB 28] is to seek rate increases before the

PSC. We agree.” Mountain Water, 919 F.2d at 600. The

court of appeals also stated, “ . . . that Mountain Water

must seek just compensation through PSC rate setting

rather than through an eminent domain action is not of

constitutional significance.” See also Duquesne, 488 U.S. at

307-315 (and authority cited therein).

2. Just Compensation is Achieved by Setting

Rates that Give a Utility an Opportunity to

Earn a Reasonable Return on Property

Devoted to Utility Service.

To understand what the courts consider just compen-

sation for a fifth amendment taking in the context of

utility regulation the PSC reminds this court of the stan-

dard formula for setting utility rates: R = O + B(r). See also

“Background to the Argument,” supra p. 7. The “R” is the

revenue requirement (sometimes referred to colloquially

as the “bucket of dollars”); the “O” refers to total operat-

ing expenses; the “B” is the rate base, or the capital

22a

investment made by the utility to provide service; and the

r” is the rate of return on capital investment that the

utility has the opportunity to earn through rates.

For fifth amendment taking purposes, the only rele-

vant question to ask about the application of this formula

is whether rates are set at a level that will allow the

utility the opportunity to recover its revenue require-

ment, which includes a reasonable return on utility

investment. If the answer to that question is yes, then for

purposes of the fifth amendment the inquiry is over.

Subsidiary questions about the particular ratemaking

treatment of certain expense or capital items are not

relevant to a fifth amendment inquiry if the overall effect

of the rates is just and reasonable. Duquesne, 488 U.S. at

310-315; see also Federal Power Commission v. Hope Natural

Gas Co., 320 U.S. 591, 605 (1944); see generally Kolbe and

Tye, The Duquesne Opinion: How Much “Hope” is There for

Investors in Regulated Firms?, 8 Yale J. on Reg. 113, 114-21

(1991).

In the present case neither Mountain Water nor the

district court asserted that the rates set by the PSC in

Order Nos. 5449a and 5449b were not justly compensa-

tory, on a prospective basis, to allow Mountain Water the

opportunity to earn its reasonable revenue requirement.?

Rather, Mountain Water asserted, and the district court

° As noted, a reasonable revenue requirement includes a

reasonable rate of return on capital devoted to utility service. In

Docket No. 89.6.23 the PSC approved a total cost of capital of

11.769 percent. Thus, Mountain Water’s rates are currently set to

provide sufficient revenue to cover all expenses plus a 11.769

percent return on rate base.

23a

held, that the authorized rates constituted a taking with-

out just compensation because they did not permit Moun-

tain Water to recoup prior period SB 28 expenses.!° The

district court holding is clearly in error.

3. Just Compensation Through Rates Does Not

Contemplate the Recovery of Prior Period

Expenses (Sometimes Referred to as Past

“Losses” ).

Ratemaking is a legislative activity and, therefore,

prospective only in its effect. This court has consistently

so held. See State ex rel. Billings v. Billings Gas Co., 55

Mont. 102, 110, 173 P. 799, 801 (1918), “As heretofore

observed, rate regulation of public utilities is distinctively

a legislative function of the state, .. . ”; Billings Utility Co.

v. Public Service Commission, 62 Mont. 21, 33, 203 P. 366,

__. (1921), “It is well-settled law that ratemaking is

purely a legislative act, and as such the power of the

courts is circumscribed and restrained in interference

with determinations reached within the scope of legisla-

tive authority.”; Montana Horse Products Co. v. Great North-

ern Railway, 91 Mont. 194, 203-4, 7 P.2d 919, 923-24 (1932);

10 Prior period expenses are those that are incurred prior to

a PSC order (either interim or final). An order establishes new

rates that are intended to recover costs, on a prospective basis,

that have been determined by a review of a historic test period

that includes adjustments for known and measurable changes.

The new rates do not recover costs incurred prior to the order;

rather, they are designed to match the costs that will occur

during the period rates are in effect. See “Background to the

Argument,” supra, p. 7.

24a

City of Baker v. Montana Petroleum Co., 99 Mont. 465,

482-83, 44 P.2d 735, 739 (1935),

Certainly, under the authority to which we have

already adverted, it would not be contended

that an order of the commission changing the

rates to be charged should operate retroactively.

As we have pointed out, the charge in question

was presumably one of the expense items upon

which the rates were based. Hence there is no

more reason for holding that an order eliminat-

ing that charge should operate retroactively

than there is for holding that an order changing

the rates should have retroactive effect.

Montana Citizens Freight Rate Association v. Board of Rail-

road Commissioners, 128 Mont. 127, 132, 271 P.2d 1024,

1027 (1954); Cascade City Consumers Association v. Public

Service Commission, 144 Mont. 169, 192, 394 P.2d 856, 868

(1964), “This court has pointed out that it is a legislative

function to regulate public utilities and that the legisla-

ture can do so through an administrative agency.”; City of

Polson v. Public Service Commission, 155 Mont. 464, 476,

473 P.2d 508, 514 (1970); City of Helena v. Montana Depart-

ment of Public Service Regulation, 194 Mont. 173, 182, 634

P.2d 192, 198 (1981), “It is clearly the law that utilities

may not set their rates so as to amortize past deficits.”

The United States Supreme Court has also clearly

held that rates may not recover past “losses.” In Galveston

Electric Co. v. Galveston, 258 U.S. 388, 395 (1922) (emphasis

added), the Court wrote that,

A company which has failed to secure from year

to year sufficient earnings to keep the invest-

ment unimpaired and to pay a fair return,

whether its failure was the result of imprudence

25a

in engaging in the enterprise, or of errors in

management, or of omission to exact proper prices

for its output, cannot erect out of past deficits a

legal basis for holding confiscatory for the

future, rates which would, on the basis of pre-

sent reproduction values, otherwise be compen-

satory.

Similarly, in Board of Public Utility Commissioners v. New

York Telephone Co., 271 U.S. 23, 31-32 (1926) (emphasis

added), the court held that,

The revenue paid by the customers for service

belongs to the company. The amount, if any,

remaining after paying taxes and operating

expenses, including the expense of depreciation,

is the company’s compensation for the use of its

property. If there is no return, or if the amount is

less than a reasonable return, the company must

bear the loss. Past losses cannot be used to enhance

the value of the property or to support a claim that

rates for the future are confiscatory. And the law

does not require the company to give up for the

benefit of future subscribers any part of its accu-

mulations from past operations.

Also, in Hope, 320 U.S. 591, the Court established the

standard for a fifth amendment taking in the context of

public utility regulation (reaffirmed in Duquesne, 488 U.S.

at 310). The Court wrote, “It is conceded that under the

Act the [Federal Power] Commission has no power to

make reparation orders. And its power to fix rates admit-

tedly is limited to those ‘to be thereafter observed and in

force.’ ” Hope, 320 U.S. at 618. The Court in Hope did not

find the prohibition against retroactive ratemaking to be

inconsistent with just compensation for a fifth amend-

ment taking. Upon such a finding the Court would have

26a

determined the Federal Power Act unconstitutional,

which it did not do. See also Federal Power Commission v.

Natural Gas Pipeline Co., 315 U.S. 575, 590 (1942).

Finally, in accord with these decisions, in Mountain

Water, 919 F.2d at 601, the court of appeals wrote, “[w]e

note that utilities often in some sense share their accumu-

lated profits with customers when utilities fail to achieve

their authorized returns. Indeed, Mountain Water’s

‘losses’ under [SB 28] are not constitutionally significant

unless its set rates are ‘unjust.’ [Duquesne], 488 U.S. at

310.” Thus, the court of appeals recognized that past

“losses” do not raise a fifth amendment problem. A fifth

amendment problem occurs only when “set” (prospec-

tive) rates are “unjust.”?!

C. Finding an exception to the prohibition against

retroactive ratemaking to permit recovery of past

SB 28 expenses cannot be reconciled with the law

discussed above.

The district court’s decision in this case, if affirmed,

would not simply create an exception for prior period SB

28 expenses, it would eliminate the prohibition against

11 The case law supporting the no past “losses” rule and the

prohibition against retroactive ratemaking is extensive and can-

not reasonably be cited here. The court is referred to the PUR

Digest, 2d and 3d Series, Rates, § 86, and the Decennial Digests,

Public Service Commissions, key 7.3, (later changed to Public

Utilities, key 122). Also, Michigan Bell Telephone Co. v. Michigan

Public Service Commission, 24 NW.2d 200 (1946) and Pacific Tele-

phone and Telegraph Co. v. California Public Utilities Commission,

401 P.2d 353 (1965) are cases containing extensive discussion

and citation on the issue of retroactive ratemaking.

27a

retroactive ratemaking. If past “losses” are relevant for

purposes of applying the fifth amendment taking clause

to public utility regulation, then it follows, not only that

there must be an exception to the rule against retroactive

ratemaking, but that the fifth amendment requires retroac-

tive ratemaking. The logic of the district court holding

would make the ratemaking process, as understood and

practiced for over a century, unconstitutional. There is

obviously no legal support for such a holding.

1. There is nothing special about SB 28 expenses

that requires an exception to the prohibition

against retroactive ratemaking.

It is simply a fact that utilities often incur increasing

costs over time that, absent additional revenues, or cost

savings measures, erode earnings and make a rate

increase necessary. These increased costs include a myr-

iad of things, many of them unexpected, and over which

a utility has limited control. Examples include increased

taxes from changes in tax laws, fuel costs, costs to comply

with government regulations of various kinds,!2 and

other costs driven by general inflation. In the case of

Mountain Water, electric power to run its pumps repre-

sents a significant cost. Obviously, an increase in the price

12 The 1991 Montana legislature imposed a fee on water

supply systems to cover certain Department of Health and Envi-

ronmental Sciences costs. See § 75-6-108, MCA. Like SB 28 this

fee represents a cost that under traditional principles of rate-

making will not be recoverable retroactively. (Municipal water

systems may pass this fee through in rates automatically, but

private water providers may not.)

28a

of electricity means an increased cost of providing water

service. An increased cost of electricity must be aggre-

gated with other Mountain Water costs (offset by any

increased revenues which may come from a growing

customer base, and cost savings) in order to determine

whether a rate increase is justified.

SB 28 has been upheld as simply another cost of

providing utility service. Mountain Water, 919 F.2d at 601.

It was governmentally imposed, but so are many other

costs of providing service.!3 It was not anticipated or

known as a cost of service included in Mountain Water’s

rates, but neither is it known what other unexpected costs

will arise to erode earnings. In short, there is very little, if

anything, to distinguish the “losses” imposed by SB 28

from the “losses” imposed by other unanticipated costs of

service. Therefore, even if the PSC had the power to make

an exception and authorize recovery of prior period SB 28

expenses in rates, there was no reasonable basis for such

an exception.

13 It can be argued that since utilities are required to pro-

vide adequate service, virtually all utility costs are govern-

mentally imposed.

29a

NO. 91-446

a * *

IN THE SUPREME COURT OF THE

STATE OF MONTANA

* + *

MOUNTAIN WATER COMPANY, a Montana

corporation,

Plaintiff and Respondent,

vs.

MONTANA DEPARTMENT OF PUBLIC SERVICE

REGULATION, MONTANA PUBLIC SERVICE

COMMISSION, and MONTANA CONSUMER COUNSEL,

Defendants and Appellants.

REPLY BRIEF OF DEFENDANT-APPELLANT

MONTANA PUBLIC SERVICE COMMISSION

On Appeal from the District Court of the First Judi-

cial District of the State of Montana In and for the County

of Lewis and Clark, Cause No. CDV 90-607

APPEARANCES:

For Defendants-Appellants: For Plaintiff-Respondent:

Robin A. McHugh John Alke

Special Assistant Attorney HUGHES, KELLNER,

General SULLIVAN & ALKE

PUBLIC SERVICE 406 Fuller Avenue

COMMISSION Helena, Montana

1701 Prospect Avenue 59624-1166

Helena, Montana 59620

30a

Mary Wright

Special Assistant Attorney

General

MONTANA CONSUMER

COUNSEL

34 West Sixth Avenue

Helena, Montana 59620

THE PSC MADE NO REPRESENTATIONS IN FEDERAL

COURT CONCERNING RATEMAKING TREATMENT OF

PRIOR PERIOD SB 28 EXPENSES; THEREFORE, THE

DOCTRINE OF JUDICIAL ESTOPPEL IS NOT RELE-

VANT TO THIS PROCEEDING.

Mountain Water asserts as a fact that the PSC prom-

ised (represented) in federal court to authorize the recov-

ery of prior period SB 28 expenses in rates.! Further,

Mountain Water asserts as a fact that the federal courts

relied on this PSC “promise” when they held that SB 28 is

not an uncompensated taking in violation of the fifth and

fourteenth amendments to the United States Constitution.

Brief of Plaintiff-Respondent at 4, 5, 7, 8 and 10. Mountain

Water contends that the PSC reneged on its “promise” by

refusing to authorize prior period SB 28 expenses in rates

and that such refusal is unlawful as a violation of the

principle of judicial estoppel. Mountain Water avers or

intimates that the PSC’s decision to disallow prior period

SB 28 expenses in rates 1) undermines the integrity of the

judicial process, 2) violates the obligation to the legal

system to act fairly and above reproach, 3) amounts to

playing fast and loose with the courts, and 4) is fraudu-

lent. Brief of Plaintiff-Respondent at 10.

1 Perhaps on the theory that stating a proposition makes it

true, Mountain Water makes this assertion at least 11 times. See

Brief of Plaintiff-Respondent at 1, 3, 5, 6, 7, 8, 10, 11 and 17.

3la

A serious charge against a government agency

requires a serious response — even if, as the PSC believes

in this case, the charge is reckless and completely without

merit. On four occasions Mountain Water has charged the

PSC with reneging on a promise to allow prior period SB

28 expenses in rates: a post hearing brief, a brief in

support of a motion for reconsideration, a brief to the

district court on judicial review, and its brief filed in this

appeal.2 On each occasion the PSC responded carefully

and conscientiously, and will do so again here. See PSC

Order No. 5449a, appendix document (app. doc.) 10, pp.

10-14; PSC Order No. 5449b, app. doc. 11, p. 7; and PSC

answer brief, Montana First Judicial District Court, app.

doc. 13, pp. 5-9. (As noted, supra at 1, the district court

did not address this issue.)

Before applying a principle of estoppel, it is first

necessary to determine whether an act has occurred on

which to base an estoppel. Whether or not the PSC prom-

ised to the federal courts a particular ratemaking treat-

ment of prior period SB 28 expenses is a question of fact

and the threshold issue to be determined. If it is deter-

mined that the PSC made no such promise, then it is

pointless to proceed to consider the application of the

legal principle of judicial estoppel.* Therefore, the first

issue is, what did the PSC state before the federal court?

2 In its post hearing brief Mountain Water argued that a

decision to disallow would renege on a promise. In the other

briefs Mountain Water argues that the PSC has reneged on a

promise.

3 The PSC presumes that this issue could be remanded back

to district court, but contends that, for reasons of judicial effi-

ciency, it should be decided here.

32a

As the PSC noted in its opening brief, the only way to

assess PSC communications to the federal courts is to

read them. Brief of Defendant-Appellant (PSC) at 28-29.

The relevant portions of the PSC’s three briefs to the

federal district court and brief to the court of appeals are

all contained in the Joint Appendix to Briefs of Defen-

dants-Appellants at app. docs. 4, 6, 7 and 9. It is not

necessary to argue extensively from these briefs, as they

clearly describe the constitutional issue and the PSC’s

theory of the case. The PSC will, however, respond to the

specific examples given by Mountain Water and will

identify certain critical language in the briefs.

Mountain Water refers to three passages in PSC briefs

that it claims promise to authorize prior period SB 28

expenses in rates:

There is no question that Mountain Water will

incur certain operating expenses as a result of

compliance with SB 28. Consequently, the next

time Mountain Water applies for a rate increase

it will submit those expenses as part of its case

that its overall revenue requirement has

increased.

It is first necessary to repeat that SB 28 does not

constitute an uncompensated taking. The Moun-

tain Water Company is a public utility regulated

by the PSC pursuant to Montana law. The PSC

recognizes, as it must, that along with the oblig-

ation of a public utility to provide adequate

service, goes the right of a public utility to be

reasonably compensated for the use of its prop-

erty in providing the service. SB 28, an exercise

of the police power of the State of Montana,

imposes a certain obligation on private water

utilities. That obligation, along with others

33a

imposed by statute and administrative rule, can

only be met through the expenditure of public

utility property. For the reasonable expenditure

of property, the utility must be compensated

through rates paid by utility customers.

The PSC, of course, defends SB 28 as a valid

exercise of the state’s police power for which

compensation is due through rates in the special!

context of public utility regulation.

Brief of Plaintiff-Respondent at 3-4. These passages can-

not accurately be characterized as constituting a promise

to authorize prior period SB 28 expenses in rates. The

first passage simply expresses the obvious point that the

PSC anticipates that Mountain Water will include SB 28

compliance costs as part of its revenue requirement. The

second passage is merely a summary of the PSC’s argu-

ment “that SB 28 does not constitute an uncompensated

taking,” and a description of adequate compensation in

the special context of public utility law. The third passage

is yet a more succinct statement of the PSC’s argument,

correcting Mountain Water’s mischaracterization of that

argument.

None of these passages contains a promise of particu-

lar ratemaking treatment. Moreover, from all the lan-

guage in the PSC’s briefs on the taking issue, it is

apparent that the PSC took great care not to convey a

promise of particular ratemaking treatment. Consider the

following passages from the three PSC briefs to federal

district court: “Failure to allow the reasonable costs of

compliance with SB 28 to be reflected in private water

utility rates could conceivably contribute to a finding,

upon review of a decision of the PSC, that those rates are

34a

confiscatory.” Opening brief, federal district court, app.

doc. 4, p. 6; “With respect to SB 28, the potential exists

that the PSC could disallow compliance costs which

could contribute to a finding of an unconstitutional “tak-

ing.” Id. at 13; “Not until the PSC has acted on a water

utility application that includes costs of complying with

SB 28, will there even be the potential for legitimately

raising a ‘taking’ issue, or for seeking the involvement of

the courts.” Id. at 13-14;

SB 28, like all other regulatory rules and statutes

that impose costs on utilities, may be adminis-

tered so as to contribute to a finding of an

uncompensated taking. It is at least conceivable

that the PSC, in a fit of petulance, could refuse

to allow the recovery in rates of any of the

reasonable costs associated with SB 28 compli-

ance.

Answer brief, federal district court, app. doc. 6, pp. 3-4;

“The question of PSC administration of SB 28 is not ripe

for review because, to date, there has been no Mountain

Water rate case where compliance costs with SB 28 have

been an issue.” Id. at 4; “The PSC must, consistent with

the fifth and fourteenth amendments, and consistent with

accepted ratemaking procedure, allow these costs to be

reflected in rates. How this is done, and whether it has

been done lawfully, are subjects of future PSC and possi-

bly state court consideration.” Reply brief, federal district

court, app. doc. 7, p. 3 (emphasis added); “The PSC has

not made a decision on the treatment of Mountain

Water’s SB 28 costs because Mountain Water has not filed

an application.” Id. at 8. Similar, if not identical passages

may be found throughout the relevant parts of the PSC’s

brief to the court of appeals. See app. doc. 9.

35a

These passages, along with all relevant parts of the

PSC briefs to the federal courts, make it plain that the

PSC’s argument on the constitutional issue presented

required no representation of particular ratemaking treat-

ment. The PSC made no such representation in federal

court; therefore, it is not necessary to consider the appli-

cation of the principle of judicial estoppel. The PSC trusts

that this court, upon review of the record, will reach the

same conclusion.

As noted, supra pp. 1-2, Mountain Water also argues

that the federal courts relied on promises of particular

ratemaking treatment of SB 28 expenses in reaching their

decisions. It is not possible to rely on a promise not given.

The PSC contends that no reasonable reader of the deci-

sions in question (including those parts of the decisions

cited by Mountain Water at pp. 4-5 of its brief) could

conclude that the holdings are based on a promise from

the PSC of particular ratemaking treatment of SB 28

expenses. The federal courts did not rely on anything;

they simply agreed with the PSC on a question of consti-

tutional law.