Amicus Curiae Brief — Alliant Energy Corp. v. Bridge

No. 03-569

IN THE

Supreme Court of the United States

ALLIANT ENERGY CORPORATION,

Petitioner,

V.

BURNEATTA BRIDGE, AVE M. BIE AND ROBERT M. GARVIN, IN

THEIR OFFICIAL CAPACITIES AS COMMISSIONERS OF THE

WISCONSIN PUBLIC SERVICE COMMISSION,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Seventh Circuit

BRIEF OF AMICI CURIAE

EDISON ELECTRIC INSTITUTE,

NATIONAL ASSOCIATION OF MANUFACTURERS,

AMERICAN GAS ASSOCIATION, AND

NATIONAL ASSOCIATION OF WATER COMPANIES

IN SUPPORT OF PETITIONER

CHARLES G. COLE

Counsel of Record

ALICE E. LOUGHRAN

CAROL R. GOSAIN

STEPTOE & JOHNSON LLP

1330 Connecticut Ave., N.W.

Washington, D.C. 20036

(202) 429-6270

Attorneys for Edison Electric

Institute

(counsel continued on inside of cover)

LA LATE LEAL LLL TES EIDE EL RBI DELETED TEA SOREN SEER BER

EDWARD H. COMER

BARBARA A. HINDIN

EDISON ELECTRIC INSTITUTE

701 Pennsylvania Ave., NW

Washington D.C. 20004

(202) 508-5000

Attorneys for Edison Electric Institute

PETER BUSCEMI

THOMAS P. GADSDEN

MORGAN, LEWIS & BOCKIUS LLP

1111 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

Attorneys for National Association of

Water Companies

JAN S. AMUNDSON

QUENTIN RIEGEL

NATIONAL ASSOCIATION OF

MANUFACTURERS

1331 Pennsylvania Ave., NW

Washington, D.C. 20004-1790

(202) 637-3000

Attorneys for National Association of

Manufacturers

KEVIN B. BELFORD

AMERICAN GAS ASSOCIATION

400 N. Capitol St., NW

Washington, D.C. 20001

Attorney for American Gas

Association

RTE Nl NUIT a oe wae RI

QUESTION PRESENTED

Whether a state law that regulates the transactions of a

public utility holding company outside of state borders is

unconstitutional under the Commerce Clause?

TABLE OF CONTENTS

INTEREST OF THE AMICI CURIAE..........:cccssccssssssseeeseeeeeees ]

REASONS FOR GRANTING THE PETITION .............00 3

I. The Decision Below Demonstrates The Need For

Clarification On Whether States May Regulate Out-of-

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A. The Wisconsin Law Regulates Out-of-State

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B. The Decision Below Conflicts With This Court’s

ELT ET RO OTE ES eT 4

C. The Decision Below Exemplifies Confusion In

The Lower Courts On When To Apply Per Se

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Il. The Seventh Circuit’s Decision Is Sufficiently

Important To A Broad Spectrum Of Industries To

Warrant This Court’s Review...............csscssesccssesesesoees 13

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TABLE OF AUTHORITIES

Page

FEDERAL CASES

ANR Pipeline Co. v. Schneidewind, 801 F.2d 228 (6th Cir.

1986), aff'd on other grounds,

Ses Be CD ti crksinamntineneninnnnnciind 10, 11

BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996)........... 6,9

Bigelow v. Virginia, 421 U.S. 809 (1975)... eeeeeeeeseeeeteees 9

Brown-Forman Distillers Corp. v. New York State Liquor

Pe, SOS Bis BAF CET Miciniirccttinacadinnnasinnies 6, 11

CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69

TET D ishiccsenininsnceaiiliipisilaskiteeaniinhiceagediteibsiaiiiaiiiensihdens 6,8

Edgar v. MITE Corp., 457 U.S. 624 (1982)....... ay Oe ae ae

Healy v. Beer Institute, 491 U.S. 324 (1989)....... 5,6, 7,9, 18

Huntington v. Attrill, 146 U.S. 657 (1892)... eeeeeeeeeeees 9

New York Life Ins. Co. v. Head, 234 U.S. 149 (1914)... 9

Pennsylvania v. West Virginia, 262 U.S. 553 (1923)........... 15

Pike v. Bruce Church, Inc., 307 it Bly) (| Seon 11

Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985).......... 9

Pub. Util. Dist. No. 1 of Snohomish County, Washington v.

FERC, 272 F.3d 607 (D.C. Cir. 2001) .................00. 15

ill

Southern Union Co. v. Missouri Public Service Commission,

289 F.3d S03 (Oth Cis. DOGZ) ...corsscnnssnrsosonesesereversesses 10

State Farm Mutual Automobile Insurance Co. v. Campbell,

£23 S. Ce. USES COGS) .vcecsersssonsossiapseriersinererncsannscvnnss 9

STATE CASES

Arizona Corp. Commission v. Media Products, Inc., 763 P.2d

S27 (AiR. BGG) a icseserecerserserescrresomsonseenemeannnins 12, 13

Diamond Multimedia Systems, Inc. v. Superior Court, 968

P.2d 539 (Cal.), cert. denied, 527 U.S.1003

(9DDD) asic resesviassrrevnspinsesansonnnsensetennercierenennanesmnirs 12

Haberman v. Washington Pub. Power Supply Sys., 744 P.2d

1032 (1987), modified, 750 P.2d 254

(Wate. 19GB) .ccerescerssssoorssnesessnesesvenovaninnse dincenvnin 12

Laird v. Baltimore & O.R. Ry., 88 A. 348 (Md. 1913)......... 12

Michigan Bell Communications, Inc. v. Michigan Pub. Serv.

Comm'n, 399 N.W.2d 49 (Mich. Ct. App. 1986)..... 12

Panhandle Eastern Pipe Line Co. v. Public Utilities Comm'n,

: 383 N.E.2d 1163 (Ohio 1978)..............ceeeeees 11, 12,17

State ex rel. Utilities Comm'n v. Southern Bell Tel. & Tel. Co.,

ZAP SB2e FES OC. TOFS) vcsceresorrvverscvcotiene 10, 12, 17

United Air Lines, Inc. v. Interstate Commerce Commission,

2077 28 433 CE. TIDY scevictrereteeeerencen 11,17

United Air Lines v. Nebraska State Ry. Comm'n, 112 N.W.2d

BIG CNed. 1961)....<csccoresssocovsssesessovesenovensesvesneneseneenes 12

——————_—

iV

STATE STATUTES

The Wisconsin Utility Holding Company Act

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LAW REVIEW ARTICLE

Donald H. Regan, Siamese Essays: (I) CTS Corp. v. Dynamics

Corp. of America and Dormant Commerce Doctrine;

(II) Extraterritorial State Legislation, 85 Mich. L. Rev.

LORS CIS FD tevusssnscaniieninnmaieiageaaaae 13

REPORTS

Eric Hirst & Brendan Kirby, Transmission Planning and the

Need for New Capacity, in U.S. Dep't of Energy,

National Trensmission Grid Study, D-1

CONE DEE «xs tisiisnisrnssiicinesitcianiaiianaineiahinaaaa 16

Div. of Inv. Mgmt., U.S. Sec. and Exch. Comm’n, The

Regulation of Public-Utility Holding Companies (June

Warf uissnnnrieunncsncestesnicentissonnaiiieaciieaaaetiaaaaaana 19

Vv

Nat'l Ass'n of Water Cos., 2002 Annual Report ..............+++ 15

Nat'l Petroleum Council, Meeting the Challenges of the

Nation's Growing Natural Gas Demand (1999) ...... 16

Office of Water, U.S. Environmental Protection Agency, The

Clean Water and Drinking Water Infrastructure Gap

Pane pels CAITR ace rnsneenerarvinasiarrensnemansntnvnnnnieonnenee 16

U.S. Gen. Accounting Office, Water Infrastructure:

Information on Financing, Capital Planning and

PRI CED wnvenctnevicennsdetnsntiinainitaninngeianainies 16

Water Infrastructure Network, Clean & Safe Water for the

Zi st Camteaty (Q0QD) ...ce.cccccversovesesccccccccccvsvessosesesonscees 16

INTEREST OF THE AMICI CURIAE'

The decision of the Seventh Circuit in this case—

rejecting a Commerce Clause challenge to a state law that

regulates out-of-state transactions of public utility holding

companies—has enormous implications beyond _ the

immediate parties. The wide range of amici curiae joining in

this brief illustrates this point. Amici are the leading trade

associations in the United States for the electricity, natural

gas, investor-owned water service, and manufacturing

industries. Together, they represent more than 20,000

companies whose interests will be directly affected by the

outcome of this case.

Edison Electric Institute (“EET”) is the national

association of over 200 U.S. shareholder-owned electric

companies, their affiliates and industry associates worldwide.

Its members generate approximately three quarters of all

electricity generated by electric companies and serve about

seventy percent of all retail customers in the nation. EEI

members include 54 holding companies serving customers in

at least 46 states. EEI’s members believe that their access to

capital may be impaired by the Seventh Circuit’s decision.

The American Gas Association (“AGA”) represents 191

local energy utility companies that deliver natural gas to

more than 53 million homes, businesses and industries

throughout the United States. AGA member companies

' Counsel of record for both petitioner and respondents have

consented to the filing of this brief in letters that have been lodged with

the clerk. No counsel representing a party authored this brief in whole or

in part, and no person or entity other than the amici curiae and their

members made a monetary contribution to the preparation or submission

of this brief. Petitioner is a member of one or more of the amici trade

associations, but has not made a monetary contribution to the preparation

or submission of this brief except as insofar as it, like other members,

provides overall support for activities of the association.

2

account for roughly 83% of all natural gas delivered by local

natural gas distribution companies. AGA is an advocate for

local natural gas utility companies and provides a broad

range of programs and services for member natural gas

pipelines, marketers, gatherers, international gas companies

and industry associates.

The National Association of Water Companies

(“NAWC’’) is the national trade association representing the

investor-owned segment of the water supply industry.

NAWC member companies operate in 39 States and provide

water service to over 22 million people. As this industry has

consolidated, many of its members have become multi-state

holding companies. Further, due to aging infrastructures,

increasingly stringent water quality standards, security

concerns and consolidation pressures, water utilities are

investing in new and replacement plant at an unprecedented

pace. Given the magnitude of this undertaking, the

membership of NAWC is also concerned that the decision of

the Seventh Circuit will impair access to needed capital.

The National Association of Manufacturers (the “NAM”)

is the nation’s largest industrial trade association. The NAM

represents 14,000 members (including 10,000 small and mid-

sized companies) and 350 member associations serving

manufacturers and employees in every industrial sector and

- all 50 states. More than 158,000 additional businesses are

affiliated with NAM through its Council of Manufacturing

Associations and National Industrial Council.

The companies represented by the amici have an interest

in the prompt resolution of the legal issue presented here.

Today, the growth of many public utility holding companies

is dependent upon the availability of capital for investment in

infrastructure. The Wisconsin utility law, however, inhibits

investment by out-of-state companies. For example, once an

investor acquires control of as little as 5% of a Wisconsin-

based utility, that investor becomes subject to Wisconsin

3

rules restricting investment and diversification options.

Faced with these onerous barriers, out-of-state investors are

unlikely to invest in companies holding utility assets.

Indeed, respondents readily admitted below that the state

provisions at issue “have the effect of discouraging entities

that are not based in Wisconsin from seeking to acquire a

controlling interest in Alliant Energy.” Appellee Br. at 32.

Amici are united in the belief that the uncertainty created

by the Seventh Circuit’s decision along with similar

decisions would have a severe adverse impact on their

respective industries. The Seventh Circuit’s decision not

only emboldens other states to enact similar laws, but the

mere perception that the states have such power will inhibit

investment in utility holding companies across the nation.

These concerns, which underlie the petition for a writ of

certiorari, are important to a wide spectrum of industries.

Amici, therefore, submit this brief in support of petitioner.

REASONS FOR GRANTING THE PETITION

I. The Decision Below Demonstrates The Need For

Clarification On Whether States May Regulate

Out-of-State Transactions

A. The Wisconsin Law Regulates Out-of-State

Transactions

The Wisconsin Utility Holding Company Act (WUHCA)

establishes a regime for controlling financial decisions of

public utility holding companies. A holding company iS

defined broadly to include any person owning or controlling

5% or more of a Wisconsin-based utility. Wis. Stat.

§ 196.795(1)(h)l.a. Thus, if an out-of-state investor acquired

as little as 5% of the shares of a Wisconsin utility, the

acquirer would itself become subject to state regulation.

The WUHCA then places significant restrictions on that

regulated company. One of the provisions precludes any

4

holding company from selling as little as 10% of its stock to

a potential investor without advance state approval, after

notice and a hearing. Wis. Stat. § 196.795(3) (Takeover

Statute). This provision applies regardless of whether the

stock will be sold in Wisconsin or whether the seller and

buyer are Wisconsin residents.

A second provision limits diversification of the holding

company. Known as the “asset cap,” it blocks a holding

company from owning 25% or more of non-utility assets.

Wis. Stat. § 196.795(6m)(b). Thus, this provision limits non-

utility investments in other states. Under a third provision,

even those holding companies that remain within the asset

cap, but that engage in any activities outside of four narrowly

defined energy functions, cannot issue securities to fund

those activities without prior administrative approval. Wis.

Stat. §§ 201.03, 201.05 (PSC Securities Regulation Statutes).

This provision also covers activities outside of Wisconsin.

B. The Decision Below Conflicts With This

Court’s Precedents

The Seventh Circuit upheld the Wisconsin statute, but on

theories that reveal a deep confusion about this Court’s

Commerce Clause jurisprudence. The court of appeals

agreed that the WUHCA regulated transactions occurring

wholly outside of Wisconsin borders. The court observed

that “some transactions regulated by these provisions may

occur entirely outside of Wisconsin.” (App. 30a). “For

example,” the court continued, “an Illinois corporation that

owns a Wisconsin utility would be subject to Wisconsin

regulation if it wished to sell 10% of its stock to an Indiana

corporation[.]” (App. 30a). The court had “no doubt” that

such transactions are “interstate in nature.” (App. 30a-31a).

The Seventh Circuit ruled, however, that such

extraterritorial applications are not per se invalid under this

Court’s Commerce Clause jurisprudence. The court

5

recognized that Edgar v. MITE Corp., 457 U.S. 624 (1982),

contains language favorable to Alliant: ““The Commerce

Clause ... precludes the application of a state statute to

commerce that takes place wholly outside of the State's

borders, whether or not the commerce has effects within the

State.”” (App. 31a) (quoting Edgar, 457 U.S. 642-43). “This

language, if controlling,” said the Seventh Circuit, “would

mean victory for Alliant.” (App. 31a). However, the court

said that this portion of Edgar had garnered only a plurality

of the membership of this Court,'and thus could be ignored.

(App. 31a-32a).

In this, the Seventh Circuit was profoundly wrong. The

quoted language is controlling because it has since been

adopted by a majority of this Court. In Healy v. Beer

Institute, 491 U.S. 324 (1989), the Court distilled the

principles underlying its Commerce Clause jurisprudence.

“Taken together,” the Court observed, “our cases concerning

the extraterritorial effects of state economic regulation stand

- at a minimum for the following propositions ....” Id. at 336.

The first such proposition consisted of precisely the language

from Edgar that the Seventh Circuit chose to ignore. The

Court reiterated:

the ‘Commerce Clause ... precludes the

application of a state statute to commerce that

takes place wholly outside of the State's borders,

whether or not the commerce has effects within

the State.’

Id. (quoting Edgar, 457 US. at 642-43). Thus, Healy

reaffirmed that an extraterritorial state law is per se invalid

even if it has some positive domestic effects. The Healy

Court applied that principle in striking down the Connecticut

liquor price posting statute, which clearly served the interests

of Connecticut consumers. That did not save the statute, the

Court explained, because the Commerce Clause protects

against “the projection of one state regulatory regime into the

6

jurisdiction of another State.” Healy, 491 U.S. at 336-37.

Thus, the very language that the Seventh Circuit thought

would be decisive had in fact been established as controlling

in Healy.” ;

On rehearing, the Seventh Circuit dodged the direct

conflict with Healy by inventing a new basis for its decision.

The court said that Healy dealt with “direct extraterritorial

interference” (App. 7a), while the Wisconsin laws at issue

here have only “indirect ... effects on extraterritorial

transactions.” (J.A. 4a). This distinction reflects a

conclusion rather than an analysis. In any event, it

incorrectly characterizes the Wisconsin provisions as having

only indirec: application. This Court has specifically ruled

that “[f]orcing a merchant to seek regulatory approval in one

State before undertaking a transaction in another directly

regulates interstate commerce” in violation of the dormant

Commerce Clause. Brown-Forman Distillers Corp. v. New

York State Liquor Auth., 476 U.S. 573, 582 (1986) (emphasis

added). This is, of course, precisely what Wisconsin does

here. (App. 30a).

In fact, the regulation of interstate commerce here is

much more direct than in Healy and Brown Forman. In those

cases the Court found that the “practical effect” of arguably

in-state regulation was to regulate out-of-state transactions.

In Healy, for example, the Connecticut statute required beer

distributors to file monthly statements affirming that their

prices in Connecticut did not exceed their prices in any

neighboring state. 491 U.S. at 328 & n.5. The statute did

> This portion of the Edgar opinion has also been cited with

approval in several other decisions. See BMW of N. Am., Inc. v. Gore,

517 U.S. 559, 572 (1996); CTS Corp. v. Dynamics Corp. of Am., 481 U.S.

69, 88 (1987); Brown-Forman Distillers Corp. v. New York State Liquor

Auth., 476 U.S. 573, 579, 582 (1986).

7

not, by its terms, require or prohibit any conduct outside

Connecticut. The Court nonetheless recognized that the

“practical effect” of the statute was to constrain the

distributors’ ability to adjust their prices in other states in

response to local market conditions. See id. at 337-39. Here,

by contrast, the Wisconsin law applies by its terms directly to

out-of-state activity. The Seventh Circuit admitted as much

when it said that “some transactions regulated by these

provisions may occur entirely outside of Wisconsin” (App.

30a-3 1a).

The Seventh Circuit also attempted to defend its direct-

indirect distinction by arguing that Alliant’s challenge was

based on the out-of-state “effects.” On the contrary, Alliant

challenges the Wisconsin law because it regulates out-of-

state conduct. The Wisconsin law could apply where the

seller, the buyer, both parties’ brokers, the securities

exchange, and the sale transaction are all in Illinois. This

would project Wisconsin law into what is clearly an Illinois

transaction, directly regulating interstate commerce.

The sweep of state power validated by the Seventh

Circuit is all the more striking in light of what it invalidated.

As originally enacted, the WUHCA required that all utility

holding companies within its terms be incorporated in

Wisconsin, Wis. Stat. § 196.53. The statute then sought to

regulate those entities as Wisconsin corporations. The

Seventh Circuit struck down the in-state incorporation

requirement, but left the other provisions of the WUHCA

intact. Thus, the broad provisions of the Wisconsin law

became applicable to out-of-state corporations—a scope not

even contemplated by the state legislature. Ironically, the

State had argued before the Seventh Circuit that the in-state

incorporation requirement had a rational purpose insofar as it

legitimized the dubious out-of-state sweep of the other

8

provisions of the Wisconsin statute.’ The Seventh Circuit,

however, blithely sustained the extraterritorial reach of the

Wisconsin statute without even the fig leaf of Wisconsin

incorporation to cover it.

The startling breadth of the Seventh Circuit’s decision

goes far beyond CTS Corp. v. Dynamics Corp. of America,

481 U.S. 69 (1987), where this Court upheld an Indiana anti-

takeover statute. There, this Court reasoned: “[w]e agree

that Indiana has no interest in protecting nonresident

shareholders of nonresident corporations. But this Act

applies only to corporations incorporated in Indiana.” Jd. at

93. As envisioned by the Seventh Circuit, the Wisconsin

Statute applies to entities incorporated elsewhere. In effect,

the Seventh Circuit has developed a special anti-takeover rule

for utilities when this Court had struck down anti-takeover

rules for other companies. See Edgar, 457 U.S. at 646.

The ruling of the Seventh Circuit is all the more

incongruous in light of this Court’s decisions over the past

decade, which have increasingly signaled limits to

extraterritorial state regulation. In a variety of constitutional

contexts, this Court has recognized that an extraterritorial

assertion of power by one state is actually an infringement on

the sovereignty of another.

> See App. 24a (“The only rationale the defendants provide to

save the in-state incorporation provision is the argument that in-state

corporation is necessary to save the constitutionality of the structural

provisions.”’); see also Appellee Br. 28 (“[T]he challenged provisions

only apply to Wisconsin utilities and utility holding companies, which by

definition are Wisconsin corporations. The state is not attempting to

govern out-of-state activities of foreign corporations in which the state

has no legitimate interest, the sort of overreaching that led to-Commerce

Clause condemnation in Edgar v. Mite Corp., 457 U.S. 624 (1982).”).

9

In BMW of North America v. Gore, 517 U.S. 559 (1996),

for example, the Court relied on Healy in recognizing limits

to punitive damages under the Due Process Clause. The

Court explained that no State can “impose its own policy

choice on neighboring States.” Jd. at 571. Indeed, “one

State’s power to impose burdens on the interstate market ... is

not only subordinate to the federal power over interstate

commerce, ... but is also constrained by the need to respect

the interests of other States.” Jd.

Similarly in State Farm Mutual Automobile Insurance

Co. v. Campbell, 123 S. Ct. 1513 (2003), this Court

explained that it is a “basic principle of federalism” that each

State may make its own judgment about what conduct is

proscribed and “what measure of punishment, if any, to

impose on a defendant who acts within its jurisdiction.” Id.

at 1523. In finding that Utah could not, consistent with Due

Process, impose punitive damages based on conduct in other

states, the Court pointed to a long line of precedents limiting

a state’s power beyond its borders.* Here, Wisconsin creates

civil liability for transactions in other states even when no

liability would exist under the law of the state where the

transaction actually occurres. See Wis. Stat. § 201.09(1).

In short, the Seventh Circuit opinion is profoundly out of

step with this Court’s precedents. By taking a narrow view

of this Court’s 1982 decision in Edgar, the court of appeals

missed the entire thrust of this Court’s subsequent

jurisprudence in the Commerce Clause and other areas. A

definitive articulation of the limits on extraterritorial

legislation is therefore necessary here.

4 coe State Farm, 123 S. Ct. at 1522 (citing Phillips Petroleum

Co. v. Shutts, 472 U.S. 797, 818-23 (1985); Bigelow v. Virginia, 421 US.

809, 824 (1975); New York Life Ins. Co. v. Head, 234 U.S. 149, 161

(1914); and Huntington v. Attrill, 146 U.S. 657, 669 (1892)).

10

C. The Decision Below Exemplifies Confusion

In Lower Courts On When To Apply Per Se

Scrutiny

The Seventh Circuit is not alone in its confusion over the

level of scrutiny to apply to laws that regulate out-of-state

transactions. As one state supreme court observed, “the

United States Supreme Court [has never] dealt with a case

involving a state’s attempt to regulate the issuance of

securities by a utility engaged in multi-state operations.”

State ex rel. Utilities Comm’n v. Southern Bell Tel. & Tel.

Co., 217 S.E.2d 543, 549 (N.C. 1975). Absent this guidance,

courts have struggled with the proper approach in reviewing

such state actions.

In Southern Union Co. v. Missouri Public Service

Commission, 289 F.3d 503 (8th Cir. 2002), a multi-state

holding company challenged a Missouri law that required

public utilities doing business in the state to receive

administrative approval before investing in another utility

company. In sustaining the law, the Eighth Circuit ruled that

the per se rule in Commerce Clause analysis did not apply

“in the context of public utility regulation” even when the

parties and transaction were outside of Missouri’s borders.

Id. at 507. The court reasoned that the interstate transaction

could “potentially affect the company’s regulated rate of

return in Missouri.” Jd. at 508. The Eighth Circuit also

relied on its belief that recent decisions of this Court have

“limited” the per se rule of invalidity to state laws that

“patently discriminate against interstate trade.” Id.

(quotations and citation omitted).

The Sixth Circuit adopted a different view in ANR

Pipeline Co. v. Schneidewind, 801 F.2d 228, 236-38 (6th Cir.

1986), aff'd on other grounds, 485 U.S. 293 (1988). In that

case, subsidiaries of a holding company challenged a

Michigan law that required wholesale utilities to obtain

administrative approval before issuing long-term securities.

‘lil

801 F.2d at 230. Although the state argued the law was

designed to protect local ratepayers, the court of appeals

struck it down as per se invalid. Relying on Brown-Forman,

the court held that requiring a utility to seek advance

approval in Michigan “before issuing securities, the proceeds

of which may be used to finance a project in another State,

directly regulates interstate commerce.” Id. at 236 (emphasis

added). Further, because there was no clear guidance from

this Court that the per se rule applied in these circumstances,

the Sixth Circuit proceeded to analyze the Michigan law

under the Pike balancing test, and found that the law failed

that test also. Id. at 236-38."

Other courts, including at least one state supreme court

within the Seventh Circuit, have struck down local securities

regulation of interstate utilities or common carriers on

Commerce Clause grounds. For example, in United Air

Lines, Inc. v. Interstate Commerce Commission, 207 N.E.2d

433 (Ill. 1965), the Illinois Supreme Court held that the state

violated the Commerce Clause when it sought to subject the

out-of-state issuance of the securities of a Delaware

corporation with its principal place of business in Illinois to

the scrutiny of the Illinois Commerce Commission. The

Court went as far as holding that even the domestic portion

of the distribution could not be regulated in this manner by

Illinois because it would sanction the potential imposition of

controls by each state of contact on a single, indivisible

interstate act and this would be expensive, time consuming

and burdensome. Id. at 437-38. Similarly, in Panhandle

5 This Court affirmed the Sixth Circuit’s decision in

Schneidewind on federal preemption, but specifically reserved the

Commerce Clause issue. 485 U.S. at 311 (“Because we have concluded

that Act 144 is pre-empted by the NGA, we need not decide whether,

absent federal occupation of the field, Act 144 violates the Commerce

Clause.”’).

12

Eastern Pipe Line Co. v. Public Utilities Commission, 383

N.E.2d 1163, 1167 (Ohio 1978), the Supreme Court of Ohio

held that a state statute regulating the issuance of securities of

a natural gas company imposed an undue burden on interstate

commerce because the operations of a public utility depended

on its ability to issue securities.°

Even more generally, in areas outside of utility

regulation, the courts have demonstrated confusion about

whether to apply per se scrutiny to laws regulating out-of-

State transactions. For example, in Diamond Multimedia

Systems, Inc. v. Superior Court, 968 P.2d 539 (Cal.), cert.

denied, 527 U.S. 1003 (1999), a divided California Supreme

Court upheld a state law imposing securities fraud liability

where the securities purchaser, seller and transaction all were

outside of California. The dissenting justices, relying on

Edgar, argued that the law was per se invalid because

California cannot apply its laws to out-of-state transactions,

“whether or not the commerce has effects within the State.’”

Id. at 1072 (quoting Edgar, 457 U.S. at 642-43). In Arizona

Corp. Commission v. Media Products, Inc., 763 P.2d 527

(Ariz. 1988), the Arizona Supreme Court sustained a

Commerce Clause challenge to an Arizona securities law

because it constituted “a direct burden on_ interstate

commerce,” as it regulated non-residents’ purchases from an

° See also Michigan Bell Communications, Inc. v. Michigan Pub.

Serv. Comm'n, 399 N.W.2d 49 (Mich. Ct. App. 1986); State ex rel. Utils.

Comm’n v. Southern Bell Tel. & Tel. Co., 217 S.E.2d 543, 551 (N.C.

1975); United Air Lines v. Nebraska State Ry. Comm'n, 112 N.W.2d 414,

422 (Neb. 1961); Laird v. Baltimore & O.R. Ry., 88 A. 348 (Md. 1913);

Haberman v. Washington Pub. Power Supply Sys., 744 P.2d 1032, 1054

(1987) (under Edgar, Washington Securities Act does not violate

Commerce Clause because the state does “not attempt to apply the [law]

to transactions completely unrelated to Washington’), modified, 750 P.2d

254 (Wash. 1988).

13

out-of-state corporation that had its principal place of

business in Arizona. Id. at 533-34.

In short, the manifest confusion in the courts concerning

what standard to apply to laws regulating out-of-state

conduct requires clarification by this Court. As one

commentator has noted, “what we know about

extraterritoriality is much less than what we have still to

work out.”’ This case presents an ideal vehicle for

consideration of this issue because there is no dispute that

Wisconsin law applies to transactions occurring entirely

outside of that state. (App. 30a-3la). This Court should

restore uniformity and predictability in this critical area of

the law.

II. The Seventh Circuit’s Decision Is Sufficiently

Important To A Broad Spectrum Of Industries

To Warrant This Court’s Review

The decisions of the Seventh and Eighth Circuits

authorizing states to regulate public utility holding

companies beyond their borders will have an immeciate and

serious negative impact on the industries that amici represent.

By virtue of historic capital needs and recent economic

trends, most consumers are now served by utilities owned by

multi-state holding companies. Those holding companies

need large amounts of additional capital to preserve aging

infrastructure and to meet the nation’s growing demands for

service. In this context, the threat of being torn between

various state laws limiting or prohibiting diversification,

7 Donald H. Regan, Siamese Essays: (1) CTS Corp. v. Dynamics

Corp. of America and Dormant Commerce Doctrine; ( Il) Extraterritorial

State Legislation, 85 Mich. L. Rev. 1865, 1913 (1987) (discussing

confusion created by this Court’s precedents on application of per se

rule).

14

restricting the issuance of securities, or otherwise controlling

the financial operations of the parent, acts as a powerful

deterrent to further investment. The issue raised in the

petition is thus of enormous practical importance.

The decision of the Seventh Circuit arrives in an

environment where multi-state holding companies are

prevalent in each utility industry. In the electrical industry,

for example, most U.S. consumers of investor-owned electric

utilities receive service from utilities that are owned by

multi-state holding companies. Such a holding company

may have utility subsidiaries in as many as 11 states.” Its

activities, especially mergers and acquisitions, will be

reviewed by multiple state commissions.” In some cases, the

multi-state holding companies are in turn owned by foreign

holding companies.” The consolidation of the electric

industry has accelerated as Congress and the Federal Energy

Regulatory Commission have encouraged development of

. E.g., American Electric Power Co., Inc. (11 states); Xcel

Energy Inc. (11 states); NiSouree-hc._(9 states); Northeast Utilities (6

states); Dominion Resources, Inc. (5 states); Southern Company (5

states); Entergy Corp. (5 states); Energy East Corp. (5 states); Pepco

Holdings, Inc. (4 states and the District of Columbia). Many utility

holding company systems combine eiectric and gas operations.

° For example, when Northern States Power Co. and New

Century Energies, Inc. combined to form Xcel Energy Inc., the merger

was reviewed by eight state public utility commissions.

'© National Grid plc owns the New England Electric System

(NEES)/Niagara Mohawk system, which serves over 3.2 million

customers in four states. E.ON AG owns LG&E Energy Corporation,

which has two utility subsidiaries that operate primarily in two states.

15

competition within large interstate markets and regional

management of the transmission grid."

Since the early twentieth century, the gas industry has

been characterized by interstate pipelines, Pennsylvania v.

West Virginia, 262 U.S. 553, 596-600 (1923), and, in recent

years, the water industry has also been marked by dramatic

consolidation and increasing globalization. Whereas the

provision of water service was once the province of local

providers, today many water companies are qwned by large

multi-state entities.'?_ Further, the two largest U.S. investor-

owned water companies, which account for a large share of

the revenues earned by U.S. investor-owned water utilities,

have foreign ownership.’®

One reason for the prevalence of the holding company

structure is that the operation of a utility in today’s

environment requires huge, ongoing capital investments.

Aging and insufficient infrastructure, growing demand and

ballooning regulatory and security costs have created a

tremendous need for investment in U.S. utilities. For

example, in the electrical industry, simply maintaining the

U.S. electrical transmission grid at its current level will

require an investment of about $56 billion during this

'" See Pub. Util. Dist. No. 1 of Snohomish County, Washington

v. FERC, 272 F.3d 607, 609-11 (D.C. Cir. 2001).

\2 See Nat’l Ass’n of Water Cos., 2002 Annual Report, at 3

(observing that the water industry has “certainly fulfilled expectations

about consolidation with a vengeance”’).

'3 RWE Aktiengesellschaft, a German conglomerate, is the

ultimate parent of American Water, which owns water utility subsidiaries

that operate in 27 states. Suez, a French company, Owns United Water,

which serves about 11 million customers in 18 states.

16

decade.'* The gas industry also needs capital infusions.

Demand for natural gas has risen spectacularly in the last 10

years, well beyond 1992 forecasts. The industry will require

about $1.5 trillion in funds through 2015."°

The water industry also has very high capital needs.

Hundreds of billions of dollars will be needed over the next

20 years to maintain the nation’s 100-year-old water system

and keep it compliant with EPA and other regulatory

requirements.'° EPA itself has identified a projected $534

billion water and wastewater funding gap between spending

and needs over that 20-year period.'’

In this environment of multi-state holding companies and

dire needs for capital, the Seventh Circuit’s decision is, quite

simply, a disaster. It opens the door to broad state regulation

of the holding company outside the state’s borders. It

permits limits to diversification, restricts stock issuance, and

subjects prospective investors to a cross-fire between

extraterritorial state restrictions.

'* Eric Hirst & Brendan Kirby, Transmission Planning and the

Need for New Capacity, in U.S. Dep’t of Energy, National Transmission

Grid Study D-1 (May 2002).

'S See Nat’! Petroleum Council, Meeting the Challenges of the

Nation’s Growing Natural Gas Demand, at 2, 16 (1999).

16 See generally U.S. Gen. Accounting Office, Water

Infrastructure: Information on Financing, Capital Planning and

Privatization (2002); see also Water Infrastructure Network, Clean &

Safe Water for the 21st Century, at ES-2 (2000) (projecting investment

needs of up to $1 trillion over 20 years).

"7 Office of Water, U.S. Envtl. Prot. Agency, The Clean Water

and Drinking Water Infrastructure Gap Analysis, at 25-26, 38, 41 (2002).

17

For example, prior approval of the issuance of securities

interferes with the system-wide financial planning essential

to the efficient and reliable provision of services. As one

court observed, “[flor this court to place a judicial stamp of

approval on such a potentially chaotic possibility would be to

ignore economic reality.” Panhandle, 383 N.E.2d at 1169.

Thus, “if [one state] may impose such regulations, so may

other States and interstate commerce ... would be thoroughly

stifled.” Edgar, 457 U.S. at 642. Indeed, the “cases

demonstrate” that the “mere possibility” of conflicting or

dual regulation makes the state law “‘a direct regulation and

an impermissible burden on interstate commerce.” Southern

Bell, 217 S.E.2d at 551, citing United Airlines, 207 N.E.2d at

438.

State limits on holding company diversification also pose

obstacles to investment. The asset cap is non-discriminating

and does not distinguish between diversified assets that have

- enhanced the financial stability of a holding company system

and those that have not. In fact, many successful overseas

utility holding company systems are highly diversified, by

U.S. standards. For such cash-rich companies, asset caps

present a harsh barrier that either precludes investment in

US. utilities or requires them to divest diversified assets that

have increased their earnings and allowed them to lower their

risk profiles.

Indeed, in view of the limits on diversification and the

obstacles to rational capital investment created by the

Seventh Circuit’s decision, even companies that do not hold

public utilities are concerned with this case. The National

Association of Manufacturers has joined this brief because it

recognizes the need for the free flow of capital to utility

projects. Manufacturers require well-built, well-maintained

utility systems to provide affordable, reliable service. A

crazy-quilt of extraterritorial state regulation will raise the

costs and possibly lower the quality of such service.

18

Holding companies already face the prospect of having to

obtain multiple state approvals for their actions. For

example, when a German company acquired a U.S. holding

company with water utilities, 14 state public utility

commissions reviewed the acquisition and many imposed

conditions. One local utility (Arizona-American) argued that

the Arizona Commission violated the Commerce Clause by

regulating a non-public stock transfer between nonresident

corporations and imposing conditions for the stated purpose

of extracting benefits for Arizona ratepayers. ® Arizona

regulators invoked the Seventh Circuit decision in defending

their rights to approve and condition the merger.’”

As this example illustrates, the Seventh Circuit’s

dramatic departure from this Court’s Commerce Clause

jurisprudence is likely to inspire other states to assert

jurisdiction beyond their borders. It comes on the heels of an

Eighth Circuit decision to similar effect. A_ structural

departure of this magnitude from the constitutional scheme

must be addressed promptly because of its potential to

engender regulatory havoc among the states. See Healy v.

Beer Institute, 491 U.S. at 333 n.9. It cannot to be allowed to

create paralysis in the financial markets.

The Seventh Circuit decision has serious, adverse

implications in the current environment. But the situation

can only get worse. The Securities and Exchange

Commission, charged with administering the federal Public

'8 Brief of Arizona-American Water Co., at 25-34, filed in

Arizona-American Water Co. v. Arizona Corp. Comm'n, No. 1 CA-CC

03-0001, Arizona Court of Appeals on May 12, 2003.

'? Brief of Arizona Corp. Comm’n, at 32, filed in Arizona-

American Water Co. v. Arizona Corp. Comm'n, No. 1 CA-CC 03-0001,

Arizona Court of Appeals on June 26, 2003.

19

Utility Holding Company Act (PUHCA), has called for its

abolition,” and this year both houses of Congress passed

bills containing PUHCA repeal provisions.” If the federal

PUHCA is repealed, additional states will undoubtedly seek

to impose their own forms of regulation on utility holding

companies, including regulation of their investments and

capital issuance in other states. The nation’s public utilities

will face further obstacles in their efforts to raise adequate

capital to meet the nation’s needs.

a

” See, e.g., Div. of Inv. Mgmt., U.S. Sec. and Exch. Comm'n,

The Regulation of Public-Utility Holding Companies (June 1995).

“| The PUHCA repeal measures are embedded in comprehensive

energy bills that have not been passed for reasons unrelated to PUHCA

repeal.

20

CONCLUSION

The Seventh Circuit’s decision is inconsistent with

decisions of this Court and reflects continuing confusion as

to the proper standard to apply to extraterritorial state

regulation of utility holding companies. This is a question of

great practical importance in today’s economy. The petition

for a writ of certiorari should be granted.

Respectfully submitted,

CHARLES G. COLE

Counsel of Record

ALICE E. LOUGHRAN

CAROL R. GOSAIN

STEPTOE & JOHNSON LLP

1330 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 429-6270

EDWARD H. COMER

BARBARA A. HINDIN

EDISON ELECTRIC INSTITUTE

701 Pennsylvania Ave., NW

Washington D.C. 20004

(202) 508-5000

Attorneys for Edison Electric

Institute

November 17, 2003

PETER BUSCEMI

THOMAS P. GADSDEN

MORGAN, LEWIS & BOCKIUS

LLP

1111 Pennsylvania Ave., N.W.

Washington, D.C. 20004

Attorneys for National

Association of Water

Companies

JAN S. AMUNDSON

QUENTIN RIEGEL

NATIONAL ASSOCIATION OF

MANUFACTURERS

1331 Pennsylvania Ave., NW

Washington, D.C. 20004

(202) 637-3000

Attorneys for National

Association of Manufacturers

KEVIN B. BELFORD

AMERICAN GAS ASSOCIATION

400 N. Capitol St., NW

Washington, D.C. 20001

Attorney for American Gas

Association