Petition for Writ of Certiorari — Indianapolis Power & Light Co. v. Pennsylvania Public Utility Commission
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Supreme Gour, U.S.
( FILED
981065 DEC 2 81998
No. 98-__-
OFFICE OF THE CLERK
IN THE
Supreme Court of the United States
OcToBER TERM, 1998
INDIANAPOLIS POWER & LIGHT COMPANY,
Petitioner,
VS.
PENNSYLVANIA PUBLIC UTILITY COMMISSION
and PECO ENERGY COMPANY, et ai.,
Respondents.
On Petition for Writ of Certiorari
to the Commonwealth Court of Pennsylvania
PETITION FOR WRIT OF CERTIORARI
STANLEY C. FICKLE
Counsel of Record
DANIEL W. McGILL
PETER J. RUSTHOVEN
BARNES & THORNBURG
11 South Meridian Street
Indianapolis, Indiana 46204
(317) 236-1313
Attorneys for Petitioner
(Continued)
149852 @ Counsel Press LLC
FORMERLY LUTZ APPELLATE SERVICES
(800) 274-3321 * (800) 359-6859
BRYAN G. TABLER
MICHAEL G. BANTA
INDIANAPOLIS POWER & LIGHT
COMPANY
One Monument Circle
Post Office Box 1595
Indianapolis, Indiana 46206-1595
(317) 261-8449
WALTER W. COHEN
ANDREW J. GIORGIONE
OBERMAYER REBMANN MAXWELL
& HIPPEL LLP
204 State Street
Harrisburg, Pennsylvania 17101
(717) 221-7920
i
QUESTION PRESENTED FOR REVIEW
Whether the “stranded cost” provisions of Pennsylvania's
Electricity Generation Customer Choice and Competition Act, 66
Pa. Cons. STAT. §§ 2801 ef seq., violate the Commerce Clause of
the United States Constitution in requiring the State’s retail electric
customers, including those who buy electricity generated by an
out-of-state producer, to pay a surcharge to subsidize the
competing, formerly monopoly Pennsylvania utility for its
uneconomic costs of producing electricity.
il
RULE 14(b) LISTS
1. The parties to the proceeding before the Commonwealth
Court of Pennsylvania were (a) Indianapolis Power & Light
Company (as petitioner); (b) the Pennsylvania Public Utility
Commission (as respondent); and (c) PECO Energy Company;
Metropolitan Edison Co.; Office of Consumer Advocate; PA
Electric Company, trading as GPU Energy; Pennsylvania Power
and Light Company; and Philadelphia Area Industrial Energy Users
Group (as intervenors).
2. Indianapolis Power & Light Company’s (a) parent
corporation is IPALCO Enterprises, Inc., and (b) only non-wholly
owned subsidiary is Tecumseh Coal Corporation.
lil
TABLE OF CONTENTS
QUESTION PRESENTED FOR REVIEW ........--
RULE 14(b) LISTS .....--- ees scecccccecccceces
TABLE OF AUTHORITIES ......-------+se+507:
OPINIONS BELOW .......-----esere rere
STATEMENT OF JURISDICTION .....----------
CONSTITUTIONAL PROVISION AND STATUTE
coc tkn ber svesescerseess
STATEMENT OF THE CASE .....-----+--+-+-+>>
A. Pennsylvania’s Electricity Generation Act
B. Proceedings And Decisions Below .....---.-.
REASONS FOR GRANTING THE WRIT ......----
I. The Pennsylvania Act’s “Stranded Cost”
Provisions Violate Established Commerce Clause
Standards By Imposing A Surcharge That
Subsidizes Pennsylvania Producers And
Handicaps Their Out-Of-State Competitors —
Actions That Invite “Economic Balkanization”
And Retaliation By Other States In The
Developing Interstate Markets For Retail
Electricity Sales ........------++eeeeerre:
il
vl
IT.
III.
Table of Contents
The Need For Review Is Heightened By The
Pennsylvania Court’s Wrong And Unprecedented
Reasoning That The Commerce Clause Does Not
POE Fu tuec cr eukaece le Ure
A.
The Thesis That The Commerce Clause Is
Not “Implicated” Or “Involved” When States
Deregulate Economic Activity Conflicts
With The Purpose Of The Clause And This
Court’s Precedents, Is Sweeping In Its
Breadth, And Independently Warrants
SRPTI Sater es ieee coe
The State Court’s Theory That “Stranded
Cost” Provisions Escape Commerce Clause
Scrutiny Because They Fall Within
“Traditional” Retail Rate Regulation, And
That Congress Has “Apportioned” This Area
Of Utility Regulation To The States.
Contravenes And Misconstrues This Court’s
ot, Ee ee ee
No Statute Or Precedent Supports The Staie
Court’s Apparent Theory That FERC’s
Allowance Of Stranded Cost Recovery At
The Federal Level Renders Discriminatory
Stranded Cost Regulation By The States
Exempt From The Commerce Clause ..
The State Court’s Alternative Theories That There
Is No Discrimination Against Interstate Commerce,
And That Various “State Interests” Justify The Act’s
Stranded Cost Provisions. Directly Contravene This
Court’s Precedents ......... lapueeke ous os 6
Page
CONCLUSION ...
APPENDIX
APPENDIX TABLE OF CONTENTS
Table of Contents
The Stranded Cost Provisions Subsidizing In-
State Producers Unquestionably Discriminate
Against Interstate Commerce ..........
Pennsylvania Has Reasonable And Less
Discriminatory Means To Accomplish Any
Legitimate State Interests .............
Pennsylvania May Not Discriminate To
“Offset Advantages” Out-Of-State
Competitors Supposedly Receive From
Regulation In Their Home States .......
Page
21
i)
a |
la
rTABLE OF AUTHORITIES
Pa 4
Cases
Alliance for Clean Coal \ Miller
44 F.3d 591 (7th Cir. 1995) 19-20
Arkansas Elec. Coop. v. Arkansas Pub Seri
Comm'n, 461 U.S. 375 ¢ 1983)
Baldwin v. G.A.F Seelig, Inc., 294 U.S. 511 (1935) 8, 12
Bacchus Imports, Ltd. v. Dias.
468 U.S. 263 (1984) 22,24. 26
Bemdix Autolite Corp. v. Midwesco Enter..
486 U.S. 888 (1988) 13
Board of County Comm'rs \ Umbehr.
518 U.S. 668 (1996)
Bostton Stock Exch. \ State Tax Comm'n.
429 U.S 318 (1977) es
C & A Carbone. Inc. Clarkstown.
S11 U.S 383 (1994) 10, 12, 13.21. 24
CTS Corp. v. Dynamics ( orp. of America,
481 U.S. 69 (1987)
Camps Newfound/Owatonna. Inc. \ Town of
Harrison, 520 U.S. 564 (1997) 10, 16-18, 22, 24
Table of Authorities
Cases (cont’d)
City of Philadelphia v. New Jersey,
See Glee ONT CEPT os se cee dce Vee noek ee on
Connecticut Light & Power Co. v. FPC,
Fae Ee CEE ita kode ese ee sia ewes
Dolan v. City of Tigard, 512 U.S. 374 (1994) ...
Exxon Corp. v. Governor of Maryland,
Sar Gea BOT CUTE eke dececieen tere tees
First English Evangelical Lutheran Church v.
County of Los Angeles, 482 U.S. 304 (1987) ..
Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) ..
General Motors Corp. v. Tracy,
J ie Me Ft cy ee re See
Great Atl. & Pac. Tea Co. v. Cottrell,
See Shae RENTER cc bawaesneuee se esas ees
H.P. Hood & Sons, Inc. v. Du Mond,
RE ee, ee oe er ees
Hughes v. Oklahoma, 441 U.S. 322 (1979) .....
Hunt v. Washington State Apple Adver. Comm'n,
PELs RUOETE cvaccatxvcacaceevaeee
Peas 18
Page
labl OT Authoritie §
rave
Cases (cont’d)
Maine v. Taylor, 477 U.S. 131 (1986) 14
New Energy Co of Indiana v. Limbach.
486 U.S. 269 ( 1988) .. ; ; 12, 20, 24. 28
New England Power Co. v. New Hampshire,
455 U.S. 331 (1982) pe 1‘
Vynex Corp. v. Discon, Inc U.S , 1998
U.S. Lexis 8080 (Dec. 14. 1998)
Vregon Waste Sys., Inc. vy. Department of Envtl
Quality, 511 U.S. 93 (1994) ..... 2. 22,24
Panhandle Eastern Pipe Line Co. y Michigan Pub
Serv. Comm'n, 341 U.S. 329 (195] ) 16
South-Central Timber Dey. Inc. \ Wunnicke
467 U.S. 82 (1984) . 19
Sporhase v. Nebraska ex re] Douglas,
458 U.S. 941 (1982) _.. 4,28
West Lynn Creamery, Inc. y. Healy,
512 U.S. 186 (1994) 1» 7, 8, 9, 12, 13, 22. 33. 36
Western Union Tel. Co. y Kansas ex re]
Coleman, 216 US. ] ¢ 1910) 3
Table of Authorities
Page
Cases (cont’d)
Westinghouse Elec. Corp. v. Tully,
otk Se 40, | er aare re rr 8
Wyoming v. Oklahoma, 502 U.S. 437 (1992) ...... 14, 15,27
Constitutional Provision
U.S. Const. art 1, § 8, cl. 1
(ee) ee i, 1, passim
Statutes
66 Pa. Cons. StaT. §§ 2801 to -12
(Pennsylvania Electricity Generation
Customer Choice and Competition Act) ......./, 1, passim
G6 Pa. Cones. BAS. OB ZOOM) 6 oe ccccievusctses 3
66 Pa. Cons. Stat. § 2802(3)........ 3
66 Pa. fc, BAT: © DOORS) 6 vce ives es eeesesens: 3. gok
66 Pa. Cons. Stat. § 2802(5)........ 3
66 Pa. Cons. Stat. § 2802(10) ........ 27
3 /ae @ a eo he) ere
~
2
re rrr rs 2, 3, 8
66 Pa. Cons. STAT.
Mn
I
AC
yulatory
Materl:
:
+
Transmiss
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Indianapolis Power & Light Company (“IPL”) respectfully petitions
for a writ of certiorari to review the judgment of the Commonwealth
Court of Pennsylvania in this case.
OPINIONS BELOW
The opinion of the Commonwealth Court, set forth in the Appendix
(“App.”) at 1a-37a, is reported at 711 A.2d 1071. The underlying Opinion
and Qualified Rate Order (“Order”) of the Pennsylvania Public Utility
Commission (App. 39a-144a) is reported at 177 Pub. Util. Rep. 4th 417
STATEMENT OF JURISDICTION
The judgment of the Commonwealth Court was entered on May 7
1998. App. 38a. IPL timely filed with the Supreme Court of Pennsylvania
on June 4, 1998 a Petition for Allowance of Appeal pursuant to Pa. R
App. P. 1112, which was denied by order dated September 29, 1998 and
filed on October 1, 1998 (App. 145a). The jurisdiction of this Court 1s
invoked under 28 U.S.C. § 1257(a).
CONSTITUTIONAL PROVISION
AND STATUTE INVOLVED
The Commerce Clause, U.S. Const. art. I, § 8, cl. 3, provides
The Congress shall have Power . . . To regulate Commerce
with foreign Nations, and among the several States, and with
the indian Tribes.
This case also involves Pennsylvania's Electricity Generation Customer
Choice and Competition Act, 66 Pa. Cons. Stat. §§ 2801 to -12
(“Electricity Generation Act” or “Act”’), the text of which 1s set forth at
App. 146a-23 1a.
STATEMENT OF THE CASE
A. Pennsylvania’s Electricity Generation Act.
The context of Pennsylvania's Electricity Generation Act is rapidly
emerging competitive interstate markets for a product formerly viewed
as a “natural monopoly” — retail electricity. Pennsylvania 1s one o!
several States that, in various ways, have already responded to these new
markets. The Pennsylvania response includes the challenged provisions
’
(14), 2804(2), 2806. To accomplish this, incumbent utilities must “provide
open access over their transmission and distribution systems to allow
competitive suppliers to generate and sell electricity directly to consumers
in this Commonwealth.” Jd. § 2802(14).
A confluence of factors led Pennsylvania to shift from “natural
monopoly” regulation (id. § 2802(1)) to a competitive market for
generation. First, “advances in electric generation technology” and
“Federal initiatives” in the wholesale electric market have made a
competitive retail market possible. /d. § 2802(3). Second, “[rJates for
electricity in this Commonwealth are on average higher than the national
average, and significant differences exist among the rates of Pennsylvania
electric utilities.” Jd. § 2802(4). Third, “[c]ompetitive market forces
are more effective than economic regulation in controlling the cost of
generating electricity.” /d. § 2802(S5).
The State also decided, however, to protect high-cost Pennsylvania
producers in the new competitive market. The in-state utilities are allowed
to recover from all consumers so-called “[t]ransition or stranded costs,”
generally defined in the Act as generation costs the utility (1) could have
recovered under traditional monopoly regulation, but (2) cannot recover
at competitive market prices. /d. § 2803 (definition). The incumbent
utility recovers these competitively unrecoverable generation costs
through charges imposed on all consumers in its service area, regardless
of the producer who generates their electricity. /d. §§ 2808(a), 2812(g)
(definition of “[i]ntangible transition charges”). Thus, even consumers
who buy electricity generated by an out-of-state producer must stil! pay
this surcharge that subsidizes the competing, high-cost Pennsylvania
producer for its own costs of generation — a product those consumers
are not purchasing from that in-state utility.’
2. The Act prescribes two mechanisms for Pennsylvania uulities to recover
their competitively unrecoverable generation costs. One, called the “compettive
transition charge,” 1s recovered by the utility from all consumers in its service
area (“certificated territory”) over a period of years. 66 Pa. Cons. Stat. § 2808
The second, called the “intangible transition charge,” involves so-called
“securitization” — under which the Commission makes the consumer charges
irrevocable, the utility then issues bonds against the guarantee of those charges;
and the charges, when collected, are used to repay bondholders. /d. § 2812. In
the court below, the parties agreed there is no significant difference for Commerce
Clause purposes between these alternative mechanisms.
4
B. Proceedings And Decisions Below.
Respondent PECO Energy Company (“PECO”), the incumbent
Philadelphia-area electric utility, brought this case before the Pennsylvania
Commission under § 2812 of the new Act. PECO sought an ordet
requiring consumers in its service area to pay, and allowing PECO to
securitize and receive, about $3.6 billion of an estimated $6.75 billion of
generation costs — i.e., its costs of producing electricity — that PECO
would not be able to recover in the new competitive market for electricity
RR. 206a-207a.* PECO said it would seek to recover the remainder of
these “stranded” generation costs in its separate restructuring case under
§ 2806 of the Act. RR. 324a. The bulk of PECO’s stranded costs related
to the uneconomic costs of its generating plants. RR. 209a.
IPL intervened before the Commission and presented evidence that,
inter alia, requiring consumers to pay these stranded generation cost
charges to PECO would disadvantage competing producers in the market
for electric generation. E.g., App. 259a-260a. IPL timely raised and
argued, in its Brief of Intervenor, App. 232a-247a, and its Exceptions,
RR. 230a, that imposing stranded cost charges on consumers, to benefit
a high-cost Pennsyivania producer in competition with out-of-state
producers of electricity, discriminates against interstate commerce and
violates the Commerce Clause.*
The Commission’s Order authorized PECO to recover and securitize
$1.076 billion of stranded generation costs in this case, and postponed
the remainder of PECO’s request to the separate restructuring case. App
76a, 122a-123a; see p. 6 n.6, infra. Citing Pennsylvania case law that
constitutional determinations are not an administrative agency function,
the Commission said it would not rule on constitutional challenges to
the Act, App. 57a-58a, and never addressed IPL’s Commerce Clause
argument. Later in its Order, however, the Commission summarily
rejected a Commerce Clause challenge by certain other intervenors called
“the Environmentalists.” App. 63a.
3. “RR.” refers to the Reproduced Record submitted to the Commonwealth
Court pursuani to Pa. R. App. P. 2151 et seg.
4. Pa. R. App. P. 1551(a)(1) provides that questions involving the validity of
a Statute need not be raised before an agency as a prerequisite for judicial review
IPL nonetheless specifically raised the Commerce Clause issue before the
Commission
= ll
IPL petitioned the Commonwealth Court of Pennsylvania for review,
again presenting the issue that the Act’s stranded cost provisions, and
the Commission’s Order authorizing imposition of stranded cost charges
for PECO, violate the Commerce Clause. The court rejected the
Commerce Clause claim on the merits, giving many reasons.°
Most significantly, the Commonwealth Court held that the stranded
cost provisions do “not implicate” or “involve” the Commerce Clause at
all. App. 9a-10a & n.7, 16a, 23a, 27a. This is so, the court said, because ei
the Act “as a whole” promotes interstate commerce, allowing out-of-
state competitors into an area where all competition previously was
excluded. App. 10a-16a. It further said the stranded cost provisions are
“consistent” with “traditional” state regulation of retail electric rates, an
area of utility regulation Congress “specifically apportioned” to the States.
App. 10a, 16a-22a. The court also relied on the fact that the Federal
Energy Regulatory Commission (“FERC”) has granted stranded cost
recovery in restructuring the gas and electric industries at the federal
jurisdictional (i.e., wholesale) level. App. 10a, 24a-25a.
The Commonwealth Court held in the alternative that the stranded
cost provisions do not violate traditional Commerce Clause standards.
App. 28a-33a. It said the Supreme Court’s strict scrutiny test under the
Commerce Clause did not apply, because the “true purpose” of the Act
“as a whole” is not to discriminate against interstate commerce but rather
to promote competition, and the stranded cost charges for high-cost
Pennsylvania producers “have no discriminatory effect on interstate
commerce because the recoveries are purely intrastate concerns and afford
no unfair advantage to local utilities.” App. 29a. The court stated that
stranded cost charges are “levied only on Pennsylvania residents,” are
limited in “duration” and “amount,” and are “restitution intended to place
PECO where it would have been had regulation continued, rather than
.. . Subsidies intended to place PECO at an advantage.” App. |3a-14a,
15a-16a, 21a. It further said that invalidating stranded cost recovery for
PECO would give IPL a “competitive advantage.” App. 23a.
The Commonwealth Court then held that stranded generation cost
charges for in-state producers serve Pennsylvania's interests in
5. The Commerce Clause issue was the primary (and, other than the
contingent severability question, the only) issue IPL raised on appeal. See App
248a-253a.
Se eae ee a ee ——
6
maintaining financially viable “transmission and distribution” utilities
ane assuring decommissioning of “nuclear power plants.” App. 30
. It said stranded cost charges would keep “electric generation
ie ‘and “energy companies” in Pennsylvania. App. 29a-30a n.16,
31a. It rejected as unreasonable the alternative of accomplishing these
interests by conditioning stranded cost recovery on divestiture of the
incumbent utility’s generating business, saying this would “raise the issue
of an unconstitutional taking” and “could [leave Pennsylvania] . . . with
little or no local electric generation capacity.”” App. 29a-30a n. 16.
IPL petitioned the Supreme Court of Pennsylvania for allowance of
appeal, again raising the Commerce Clause issue. S$ e App. 254a-258a.
The Pennsylvania Supreme Court denied the sation thus precluding
any further review in the State’s courts. App. 145a.'
REASONS FOR GRANTING THE WRIT
As in the airline and trucking industries some years ago, and like
the telephone and gas utility industries today, technological change and
abandonment or modification of traditional public utility regulation are
making the electric industry increasingly competitive. Both the Federal
Government and States throughout the Union are now taking or
contemplating actions that will set the legal framework in which the
urgeoning interstate markets for electricity will function. In addition to
federal regulatory changes affecting the wholesale e} lectricity market, ;
least 18 States have already taken or are actively considering statutory or
regulatory steps (or both) to de velop competitive markets for retail
electricity sales.
6. In PECO’s separate restructuring case under § 2806 of the Act, IPL and
PECO stipulated that the record for the Commerce Clause issue would be the
Same as the record in this case; that IPL’s appeal in the restructuring case would
raise Only that issue; and that disposition of the Commerce Clause Issue in this
case will control its resolution in the restructuring case. On May 14, 1998, the
Commission entered its final order in the restructuring Case, granting PECO total
stranded cost recovery of $5.26 billion. IPL timely filed in the Commonwealth
Court a petition for review of that order. Based on the parties’ stipulation, the
Commonwealth Court has stayed IPL’s appeal in the restructuring case pending
final resolution of this case
See Basheda, et al.. The FERC, Stranded Cost Recove ry, and
"7
Municipalization, 19 ENerGy L.J. 351, 378-82 (1998) (chart summarizing pending
(Cont'd)
7
Pennsylvania’s Electricity Generation Act, and the decision below
that its challenged provisions are exempt from Commerce Clause scrutiny,
are at the cutting edge of this development. This case presents the issue
whether the States, when they respond to economic and technological
change by undertaking deregulation and permitting competitive markets
where none previously existed, may do so free of the constitutional
strictures the Commerce Clause otherwise places on state regulation of
interstate commerce. Pennsylvania’s appellate court said “yes.” That
constitutional question and answer, which will determine if individual
States may favor their own domestic participants in interstate markets of
soon-to-be Nationwide scope, merit the review and guidance of this Court.
I. The Pennsylvania Act’s “Stranded Cost” Provisions Violate
Established Commerce Clause Standards By Imposing A
Surcharge That Subsidizes Pennsylvania Producers And
Handicaps Their Out-Of-State Competitors — Actions That
Invite ‘Economic Balkanization” And Retaliation By Other States
In The Developing Interstate Markets For Retail Electricity Sales.
While the Commerce Clause is phrased as a grant of power to
Congress, this Court has held for more than 150 years that it also
constitutionally limits state economic regulation that impedes “the free
flow of commerce across state lines... .” West Lynn Creamery, Inc. v.
Healy, 512 U.S. 186, 206 (1994). In this case, Pennsylvania’s scheme of
mandated surcharges to subsidize its in-state utilities in competition with
out-of-state electricity generators is the precise analogue, in the newly
emerging interstate markets for retail electricity sales, of the
Massachusetts scheme to subsidize in-state dairy farmers that this Court
invalidated in West Lynn Creamery.
As the court below correctly noted, the “paradigmatic example” of
a State law that violates the Commerce Clause ““‘is the protective tariff
(Cont'd)
or completed statutory and regulatory action by various States involving
competitive interstate sales of retail electricity). The principal federal response at
the wholesale level is FERC Order No. 888, Promoting Wholesale Competition
Through Open Access Non-Discriminatory Transmission Service by Public
Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities,
61 Fed. Reg. 21,540 (1996), and related orders (collectively, “Order 888"), which
requires “unbundling” by wholesale generation suppliers that are subject to FERC
jurisdiction.
or customs duty, which taxes goods imported from other States, but does
not tax similar products produced in State.’ App. 8a, quoting West Lynn
Creamery, 512 U.S. at 193. Such a tariff “violates the principle of the
unitary national market by handicapping out-of-state competitors, thus
artificially encouraging in-state production even when the same goods
could be produced at lower cost in other States.’ West Lynn Creamery,
512 U.S. at 193 (emphasis added)
The lower court was also correct that the Commerce Clause bars
state laws that “attempt ‘to reap some of the benefits of tariffs by other
means.’ App. 8a, again quoting West Lynn Creamery, 512 U.S. at 193.
Specifically, States may not use discriminatory laws to try “‘to neutralize
advantages belonging to the place of origin’ — including “the advantage
possessed by lower cost out-of-state producers. . . ”” West Lynn Creamery,
512 U.S. at 194 (emphasis added), quoting Baldwin v. G.A.F. Seelig,
Inc., 294 U.S. 511, 527 (1935). See also e.g., Westinghouse Elec. Corp.
v. Tully, 466 U.S. 388, 406 (1984) (State may not use discriminatory
measures “in an attempt to ‘induce business operations to be performed
in the home State that could more efficiently be performed elsewhere’”’),
quoting Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 336
(1977).
The “stranded cost” provisions of the Pennsylvania Act violate this
constitutional rule. The Act opens the retail electric generation market
in Pennsylvania to competition. The stranded cost provisions, however,
impose surcharges by which all customers must subsidize the generation
and sale of electricity in that competitive market by high-cost
Pennsylvania producers. Through the “competitive transition charge”
and “intangible transition charge,” these in-state producers receive huge
sums of money they are unable to earn in competition with out-of-state
electric generation producers. The in-state producers are allowed to keep
ownership of their generating plants; to use those facilities to compete in
an open generation market, and to cover their competitive losses through
charges for their own generation costs, which are imposed by state law
on consumers who buy electricity generated by out-of-state producers.
These state-mandated surcharges flatly discriminate in favor of high-
cost Pennsylvania producers and handicap their lower-cost, out-of-state
competitors. In economic substance, the Pennsylvania Act’s “stranded
cost” mechanisms to benefit in-state producers are indistinguishable from
the Massachusetts “premium payment” device to benefit in-state dairy
farmers struck down in West Lynn Creamery. There, Massachusetts
required in-state milk dealers to pay into a “Dairy Equalization Fund” a
“premium payment” on all milk they sold in the State. While the
“premium payments” were imposed regardless where the milk had been
produced, the proceeds were given to in-state milk producers to enable
them to compete with out-of-state producers. 512 U.S. at 190-91, 194.
This Court analogized the “premium payments” to a tax. Though the
“tax” was evenhanded in that it applied to all milk whether produced in-
state or out-of-state, see id. at 194-96, the scheme was invalid because
the “tax” proceeds were paid exclusively to the in-state farmers to
subsidize their ability to compete — thus “neutralizing the advantage
possessed by lower cost out-of-state producers,” id. at 194. Hence, it
was “clearly unconstitutional,” since its “purpose and its undisputed effect
[were] to enable higher cost Massachusetts dairy farmers to compete
with lower cost dairy farmers in other States.” /d.
Pennsylvania’s “stranded cost” surcharges have the identical effect,
for the identical purpose, in the retail electricity market. Though the
surcharges are imposed on all consumers — regardless of which
electricity generator they choose and whether that generator is an in-
state or out-of-state producer — surcharge revenues are used exclusively
to benefit high-cost Pennsylvania producers. As in West Lynn Creamery,
the purpose and effect are “to enable higher cost [Pennsylvania producers]
to compete with lower cost [producers] in other States,” and “neutraliz{e]
the advantage possessed by lower cost out-of-state producers . . . ..” Under
the established Commerce Clause standards applied in West Lynn
Creamery, this is a “clearly unconstitutional” discrimination against
interstate commerce.
Allowing the Pennsylvania court’s erroneous contrary
pronouncement to stand would threaten the core purposes of this Court's
dormant Commerce Clause jurisprudence in rapidly developing interstate
markets of enormous import. This will have impact on everyone who
uses electricity — namely, every American consumer. The contours of
these growing interstate markets for retail electricity are now being shaped
by state legislatures and utility commissions across the Nation. The
challenged provisions of the Pennsylvania Act posit that one feature of
such interstate markets can be state-mandated surcharges to subsidize
in-state electric generators to the detriment of out-of-state producers.
10
The Pennsylvania appellate court proclaims this is exempt from
Commerce Clause strictures. If those statutory provisions and the reported
appellate decision blessing them survive, they will be a landmark other
States are sure to note and follow.
“Avoiding this sort of ‘economic Balkanization,’ and the retaliatory
acts of other States that may follow, is one of the central purposes of
(this Court’s] negative Commerce Clause jurisprudence.” Camps
Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 577 (1997),
quoting Hughes v. Oklahoma, 441 U.S. 322, 325 (1979). This Court has
therefore been vigilant in barring state action discriminating in favor of
in-state competitors — even when, as in C & A Carbone, Inc. v.
Clarkstown, 511 U.S. 383, 389, 391 (1994), a regulation favors but a
single company in a local area and handicaps all other in-state (as well
as all out-of-state) competitors.
Exercise of that vigilance is far more vital here, where the scope
and impact of the discrimination are far broader than in cases such as
Camps Newfound/Owatonna and C & A Carbone. A high-cost
Pennsylvania producer receiving stranded cost surcharges may use that
advantage in competing to sell electricity not only in its own service
area, but also throughout both (a) the competitive Pennsylvania retail
generation market, and (b) the market for retail electricity in every other
State that has already abandoned monopoly provision of retail electricity
for a competitive marketplace or later decides to do so. Such States will
not be blind to the discriminatory advantages the Pennsylvania Act confers
on high-cost Pennsylvania producers, nor deaf to the responsive entreaties
of their own high-cost generators.
The result, if the Pennsylvania model is allowed to stand, will be
new interstate markets characterized by a patchwork of competing and
retaliatory surcharge and other discriminatory devices, each designed to
give the adopting State’s generators a leg-up on their out-of-state
counterparts. Even the prospect of such an outcome has never been
countenanced by this Court, whose negative Commerce Clause
jurisprudence exists to prevent it.
1]
Il. The Need For Review Is Heightened By The Pennsylvania Court’s
Wrong And Unprecedented Reasoning That The Commerce
Clause Does Not Even Apply.
The Commonwealth Court’s primary ground for upholding the
Pennsylvania Act’s “stranded cost” provisions was its conclusion that
the Commerce Clause does not apply at all to state regulation of retail
electricity sales. The court gave “three reasons” for its view that the
Commerce Clause is “not implicate[d]” here. App. 10a. Each “reason”
conflicts, directly or in principle, with this Court’s precedents. This
contravention of established constitutional jurisprudence, in service of
the state court’s exempting a major area of interstate commerce from
Commerce Clause strictures, highlights the need for this Court’s review.
A. The Thesis That The Commerce Clause Is Not “Implicated”’
Or “Involved” When States Deregulate Economic Activity
Conflicts With The Purpose Of The Clause And This Court’s
Precedents, Is Sweeping In Its Breadth, And Independently
Warrants Review.
The Commonwealth Court’s central rationale for holding that the
Commerce Clause is “not implicate{d]” or “involve{d]” was that the
“purpose” and “practical effect” of the Pennsylvania Act “as a whole”’
are not to discriminate against but rather to facilitate interstate commerce.
The Act allows competition in the Pennsylvania market for retail
electricity, a commodity previously provided only as a regulated
monopoly service. In the eyes of the court below, since the net effect
was more interstate commerce than before, the State was free of
Commerce Clause restrictions in imposing conditions on that new
competition. See App. 10a-16a.
This analysis jettisons the Commerce Clause whenever a State
engages in economic deregulation (however discriminatory) if the effect
of the State’s action “as a whole” can be said to lead to “more” interstate
commerce than before. Thus, in deregulating economic activity (or, for
that matter, doing anything else whose net overall impact is “more”
interstate trade) a State could impose any discriminatory restrictions it
wished on out-of-state competitors — whether by placing import tariffs
or quotas on their products, picking and choosing which out-of-state
companies will be allowed to compete, or imposing any other protectionist
device. The sweep of this thesis, and the straitjacket it places on this
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Clause. Wyoming v. Oklahoma, 502 U.S. at 457-58, New England Power
Co. v. New Hampshire, 455 U.S. 331, 341 (1982)
Ignoring both the prerequisites for congressional “authorization
and this Court's holdings in Wyoming v. Oklahoma and New England
ower, the court below apparently believed its reasoning ts supported by
Tracy. See App. 17a, 20a-21a. This is equally wrong, and improper!)
treats this Court’s only Commerce Clause precedent involving utlity
deregulation as a blank check, in fact never drawn by this Court, for the
States to discriminate as they please tn this area
;
Tracy involved Ohio's exemption from tts sales and use taxes of
natural gas sales by local distribution companies (“LDCs”) — regulated
public utilities providing monopoly service to most retail customers. 519
U.S. at 282. However, due to changes in the natural gas industry similar
to those in the electric industry, some industrial customers could instead
purchase “unbundled” gas from natural gas producers ot independent
marketers. /d. at 283-85. Because (1) LDCs were in-state companies
and (2) retail gas sales to industrial customers by non-LDC sellers did
not receive the tax exemption, the exemption was claimed to discriminate
against out-of-state non-LDC sellers and v late the Commerce Clause
rhis Court disagreed, relying on circumstances in marked contrast
to those presented here. The LDCs and non-LDCs in Jracy were notin
competition for the bulk of the retail market; rather, the LDCs provided
302. While
there was some competition between LDCs and non-LDCs for gas sales
WO 7
regulated, monopoly service to most customers. /d. at 2
to industrial customers, Commerce Clause precedent dictated no cleat
answer to this “dual market” situation. Tracy found no Commerce Claus
violation because (1) public utility regulation in the natural monopoly
context had traditionally been upheld under the Commerce Ciause, and
11. In contrast, the Federal Power Act case on which the court below re
Connecticut Light & Power Co. v. FPC, 324 U.S. SIS (1945), see Apy
20a — concerns only Congress's statutory division of regulatory authority betwee
the States and the Federal Power Commission (now FERC), and nor congresst
authorization for States to engage in electric utility regulation tree of dormant
Commerce Clause limits. This Court has long forsaken the view that th
between “wholesale” and “retail” regulation demarks any Commerce
boundary. See Arkansas Elec. Coop. v. Arkansas Pub. Serv, Comm_n, 4
375, 377-80, 389-93 (1983); Tracy, 519 U.S. at 291 1.8
at 607, as “proffering that 7racy creates a ‘public utilities’ exception to
the dormant Commerce Clause.” App. 21a. From this emerges the lowe!
court’s conclusion: “Had Pennsylvania continued its previous regulatory
scheme, it would have undoubtedly permitted the recovery of stranded
costs through regulated rates, and there is no justification for disallowing
these recoveries in a new competitive market.” App. 21a
This mangles the majority opinion Justice Scalia joined in Tracy, a
well as his Camps Newfound/Owatonna dissent. The point of the 7ra:
footnote is not that “all state regulation is not immune” from the dormant
Commerce Clause (with the implicit suggestion that “some 1s”). Rather
it is that state regulation of retail utility sales is specifically not
categorically exempt absent which there would have been no need
for the Court’s careful analysis of why regulation in the “dual market
context of Tracy did not run afoul of the Clause. Further, even wer
majority of the Court to embrace the view that /racy “effectively create
what might be called a ‘public utilities’ exception to the negats
Commerce Clause,’ Camps Newfound/Owatonna, 520 U.S. at 60
Scalia, J., dissenting), the critical word (penned by one who attend
diction) 1s “public.” If Zracy yields any Commerce Clause “exceptior
itis precisely in the area of trad. sonal regulation of monopoly or (a
j
[Tracy's “dual market” context) quasi-monopoly “public” utilitie
14. This is illuminated by the fuller discussion of Tra
( amps New found/Owatonna dissent
Such [domestic public utility] entities, we conclude, are tf
ituated” to other fuel distributors; their insulation from out
ompetution does not violate the negative Commerce Clause be
“serves important interests in health and safety.” The ¢
Tracy paints a compelling image of people shivering tn their !
in the dead of winter without the assured service thal compet
sheltered public utilities provide
U.S. at 602 (citations omitted) Here, the
jiscriminatory advantage by the Pennsylvania Act are not, with respect t
neration, monopoly or quasi-monopoly public entities with obligations evok
interests in health and safety” that could “exempt’ such discrimination
|
mmerce Clause scrutuny. See also infra at p. 27 (describing separate pr
t the Pennsylvania Act that directly serve “interests” of the sort noted [
Scalia in describing the Tracy holding). Cf. Nynex Corp. v. Discon, I
1998 U.S. Lexis 8080 [*1], [*16] (Dec. 14, 1998) (recognizing dif!
J
;
imposes of antitrust laws of “competitive market situations
irket power that is lawfully in the Nand la
18
Hence, the lower court’s conclusion from its misreading both of
fracy and of Justice Scalia’s later comments in Camps Newfound/
Owatonna 1s 180 degrees off-the-mark. “Had Pennsylvania continued
its previous [monopoly] regulatory scheme,” it might indeed “have
permitted the recovery of stranded costs through regulated rates” for
that monopoly service and not involving out-of-state competition. But
this does not mean — and Tracy (even as later described by Justice Scalia)
does not suggest — that a State therefore has a free hand to permit such
“recovery” via discriminatory surcharges that favor its domestic producers
and handicap out-of-state competitors “in a new competitive market”
lor retail electricity not served by monopoly public utilities. This
mangling of the Court’s only precedent involving utility deregulation
whose Commerce Clause analysis in fact turned on the dispositive extent
to which monopoly deregulation had not occurred in that case
independently justifies review.
This is all the more so given this Court’s proper reluctance to exempt
tate regulation of entire fields of interstate economic activity from
Commerce Clause scrutiny. See Camps Newfound/Owatonna, 520 U.S
at 572-75 (rejecting theories seeking to make dormant Commerce Clause
inapplicable” to particular activities); City of Philadelphia v. New Jersey,
+37 U.S. 617, 621-22 (1978) (rebuffing any “two-tiered definition of
commerce,” and holding that “[aJll objects of interstate trade merit
Commerce Clause protection”). The “object of interstate trade” here is
retail sales of electricity. No congressional authorization exempts that
activity from Commerce Clause protection against state discrimination
Nor is any such exemption conferred by Tracy. The Pennsy|vania court's
contrary pronouncements pave a discriminatory path that neither Congress
nor this Court has opened.
C. No Statute Or Precedent Supports The State Court’s
Apparent Theory That FERC’s Allowance Of Stranded Cost
Recovery At The Federal Level Renders Discriminatory
Stranded Cost Regulation By The States Exempt From The
Commerce Clause.
The Commonwealth Court's third reason for finding the Commerce
Clause “not implicate[d]” is that “other forums” have allow ed stranded
-ostrecovery. App. 10a, 22a-23a. In particular, it noted that FERC has
granted stranded cost recovery in restructuring the gas and electric utility
industries at the wholesale level. App. 24a-25a
19
The obvious flaw in this reasoning is that FERC is a federal
administrative agency. As such, it obviously is not subject to the restraints
on state regulation of interstate commerce imposed by the dormant
Commerce Clause. Unlike regulation by individual States, regulation of
interstate commerce by the Federal Government at least makes possible
uniform rules for all competitors — which is what the Framers had in
mind in giving Congress the commerce power. See, e.g., H.P. Hood &
Sons, Inc. v. Du Mond, 336 U.S. 525, 533-34 (1949).
Equally wrong is any implication by the lower court that FERC
action at the wholesale level somehow authorizes States to act at the
retail level free of the limitations imposed by the dormant Commerce
Clause.’ First, no statute provides and no case holds that an
administrative agency may authorize States to violate the dormant
Commerce Clause. Rather, the “rule requir[es] a clear expression of
approval by Congress. . . ”’ South-Central Timber Dev., Inc. v. Wunnicke,
467 U.S. 82, 92 (1984) (“The fact that the state policy in this case appears
to be consistent with federal policy ... is an insufficient indicium of
congressional intent’) (emphases added). Second, FERC’s Order 888
could not — and does not purport to — authorize States to impose retail
stranded cost recovery. FERC has no jurisdiction over retail electricity
sales. See 16 U.S.C. § 824(b)(1) (limiting FERC’s jurisdiction to
wholesale power transactions and transmission in interstate commerce).
On a related front, this and other parts of the lower court’s opinion
suggest that stranded cost recovery does not “implicate” the Commerce
Clause because the incumbent Pennsylvania producer’s uneconomic
generation costs become unrecoverable as a result of a change in
regulation — specifically, the Act’s opening of the retail generation market
to competition. See App. 14a, 1Sa-16a, 23a, 25a-26a. This, too, conflicts
with Commerce Clause precedent applying this Court’s standards. In
Alliance for Clean Coal v. Miller, 44 F.3d 591 (7th Cir. 1995). a case
similar to this one in several respects, federal Clean Air Act amendments
made it less economic for electric utilities to burn high-sulfur Illinois
coal in generating electricity. In response, Illinois enacted a statute that
inter alia encouraged utilities to install scrubbers (allowing air quality
15. The Pennsylvania Commission so argued, emphasizing the portion of
FERC’s Order 888 restructuring the wholesale electric industry that “encouraged”
States to provide stranded cost recovery if they provide for retail unbundling and
competiton. Definitive Form Bnef for Respondent Commission at 13-14
21
Ill. The State Court’s Alternative Theories That There Is No
Discrimination A gainst Interstate Commerce, And That Various
‘State Interests” Justify The Act’s Stranded Cost Provisions,
Directly Contravene This Court’s Precedents.
A. The Stranded Cost Provisions Subsidizing In-State
Producers Unquestionably Discriminate Against Interstate
Commerce.
After its extensive analysis that the Commerce Clause does not apply
at all, the State court alternatively held that the stranded cost provisions
do not violate traditional Commerce Clause standards. App. 28a-33a.
However, it declined to apply this Court’s strict scrutiny Commerce Clause
test for state laws that discriminate against interstate commerce. '®
The lower court refused to do so because — based on its previous
analysis — it found the “Act as a whole does not discriminate in purpose
or effect.” App. 29a (emphasis added). This just repeats the erroneous
theory that the Commerce Clause does not apply to state laws deregulating
economic activity or otherwise yielding a “net overall increase” in the
amount of trade.
Also based on its prior analysis, the Pennsylvania court said that
“the stranded cost recoveries have no discriminatory effect on interstate
commerce because the recoveries are purely intrastate concerns and afford
no unfair advantage to local utilities.” App. 29a. On these points, the
court had previously said that stranded cost recoveries for Pennsylvania
utilities are “limit[ed]” as to both “amount” and the “time period” over
which they are recovered; “are paid strictly by the citizens of the
Commonwealth of Pennsylvania”; and are “restitution intended to place
PECO where it would have been had regulation continued,” rather than
“subsidies intended to place PECO at an advantage.” App. 13a-14a, 15a.
16. As the lower court acknowledged, a state law that discriminates against
interstate Commerce “Is ‘per se invalid, save in a narrow class of cases in which
the [state] can demonstrate, under rigorous scrutiny, that it has no other means to
advance a legitimate local interest.’” App. 28a, quoting C & A Carbone, 511 US.
at 392. Later, the court in essence acknowledged that the challenged provisions
could not survive this constitutional standard. See App. 34a (“it is... safe to
assume that we would be required to strike down the stranded cost provision[s] as
unconstitutional” if those “provisions are purposely and/or effectively
discriminatory”).
7 i
23
both the Commonwealth Court and the Pennsylvania Supreme Court
that the purpose of the stranded cost provisions 1s to “level[ | the playing
field” so that high-cost Pennsylvania generators “can compete in an open
market for generation.” Definitive Form Brief for Respondent
Commission at 15; Commission’s Brief in Opposition to Petition for
Allowance of Appeal at 18.
The lower court’s repeated refrain that there is no discrimination
against interstate commerce because stranded cost charges are paid only
“by the citizens of the Commonwealth” (App. 15a; see also App. 21a,
22a, 29a) also directly contravenes this Court’s precedents. The identical
argument was made in West Lynn Creamery — 1.e., that there was no
economic “protectionism” because the burden of the premium payments
fell on “only in-state consumers... .” 512 U.S. at 203 (emphasis
original). This Court said:
The idea that a discriminatory tax does not interfere with
interstate commerce “merely because the burden of the tax
was borne by consumers” in the taxing State was thoroughly
repudiated in Bacchus Imports, Ltd v. Dias, 468 U.S. at 272
512 U.S. at 203. As this Court noted, the burden of a tariff — the
“paradigmatic Commerce Clause violation” — also falls on in-state
consumers. This Court reiterated that such discriminatory measures also
benefit in-state producers to the detriment of out-of-state producers, and
that, because they “discriminate against out-of-state products, they are
unconstitutional.” Jd.'’
The Pennsylvania court’s theory that there is no discrimination
against interstate commerce because stranded cost charges are “limited”
17. The lower court also frequently says the stranded cost charges are paid
by Pennsylvania consumers “in relation to transmission and distribution networks”
in Pennsylvania. E.g., App 22a. But it is undisputed — indeed, established by
the Act's very definition of “[t
ransition or stranded costs’’ — that such charges
exclusively involve the incumbent Pennsylvania utilities’ “generation-related
costs... .” 66 Pa. Cons. Stat. § 2803 (emphasis added). The “relation” to tt
“transmission and distribution network” ts that payment of the competitively
unrecoverable generation charges is assured because the incumbent utility 1s made
by law the monopoly supplier of distribution service to retail consumers. /d
§ 2802(16). Thus, consumers have to employ PECO and other incumbent
Pennsylvania utilities to deliver electricity to them, but they cannot do so without
paying the charges for the incumbent’s uneconomic generation costs
in amount and duration likewise directly contravenes this Court’s
precedents. This Court has repeatedly held that the “extent” or “amount”
of the discrimination is irrelevant — the issue is whether there is
“differential” treatment, not the “degree” of the difference. Oregon Waste
Sys., 511 U.S. at 100 n.4. Accord, e.g., Bacchus Imports, 468 U.S. at
269. “[T]here is no ‘de minimis’ defense’”’ for laws that discriminate
against interstate commerce. Camps Newfound/Owatonna, 520 U:S. at
581 n.15, quoting Fulton Corp. v. Faulkner, 516 U.S. 325, 333 n.3 (1996).
Furthermore, the impact of the discrimination here is not “de
minimis” by any standard. PECO is awarded more than a billion dollars
just by the instant Commission Order. The Commission found that
allowing PECO simply to have the use of a few days “float” on that
money would give it an advantage over competitors. App. 11 1a (emphasis
added). Such “float income” and the corresponding effect on competition
are minuscule compared to the massive subsidy payments PECO receives
from the stranded cost recovery itself.
B. Pennsylvania Has Reasonable And Less Discriminatory
Means To Accomplish Any Legitimate State Interests.
The court below characterized stranded cost charges as “restitution”
and, in discussing the States’ traditional power to regulate public utility
rates in the monopoly context, called stranded cost charges a
“continuation” of this authority to “ensure fair rates . . . and a reasonable
turn on investment for the utilities.’ App. 14a, 22a. Later, the court
said that stranded cost charges ensure the financial ability of incumbent
uulities to provide transmission and distribution (which remain monopoly
services); to decommission nuclear plants; and to fulfill responsibilities
“to serve low-income segments of Pennsylvania’s population” and “‘as
the provider of last resort to bridge the gap when out-of-state suppliers
io not have enough electricity to service Pennsylvania consumers.” App
All these rationalizations suffer the same core defect. A State may
liscriminate against interstate commerce only where “it has no othe?
means to advance a legitimate local interest’ — an issue on which the
party defending the discrimination bears the burden of proof. C & A
f-.
Vewfound/Owatonna, 520 U.S. at 581-82; Oregon Waste Sys., 511 U.S.
at 100-01; New Energy, 486 U.S. at 278. Here, Pennsylvania has less
Carbone, 511 U.S. at 392 (emphasis added). Accord, e.g Camps
a ————
DI — nie
NO
wa
discriminatory means to achieve any conceivably legitimate state interest
served by stranded cost recovery. All it need do is require in-state utilities
who receive stranded cost subsidies to divest electric generation assets
and refrain from the generation business.
Under divestiture, electric utilities may recover stranded costs, but
must sell or spin off generation assets to unaffiliated entities. This
eliminates the discriminatory and anti-competitive impact of stranded
cost charges, which incumbents could otherwise use both to discourage
entry by out-of-state (and other) competitors into the generation market,
and to compete with a government-mandated advantage against those
who do enter. In this case, for example (as IPL witness Brehm testified),
conditioning stranded cost recovery on divestiture would
establish a real current market price for PECO’s assets while
simultaneously avoiding the anti-competitive effects of
allowing PECO to both receive the massive stranded cost
cash flows and simultaneously to compete in the power sale
market.
RR. 267a-268a (emphasis original)."*
Here, however, the lower court began by erroneously placing the
burden on IPL to show “a reasonable alternative to the stranded-cost
recoveries that would impact interstate commerce less.” App. 29a. It
then relegated divestiture to a footnote rife with constitutional error. First,
it said that requiring divestiture would “raise the issue of an
unconstitutional taking... .” App. 29a-30a n.16. This is untenable.
The Constitution does not forbid “takings” per se, but rather taking of
property without just compensation. First English Evangelical Lutheran
Church v. County of Los Angeles, 482 U.S. 304, 314-15 (1987). As in
18. According to Basheda, et al., supra n.7, 19 ENerGy L.J. at 378-80, States
that do or plan to condition stranded cost recovery on full or substantial divestiture
of generation assets include Arizona, Connecticut, Maine, Massachusetts and New
Hampshire. New England Electric System, a holding company with electric
utilities in Massachusetts, Rhode Island and New Hampshire, agreed to divest its
generating facilities in return for stranded cost recovery, and that divestiture 1s
already occurring. See NEES Agrees To Sell Generating Assets In Return For
Stranded Cost Recovery, Electric Utility Week (Oct. 7, 1996) at 1; PG&E Unit To
Pay $1.6 Billion For NEES Generating Assets, The Energy Daily (Aug. 6, 1997)
at |
a
27
utilities . . . serv[ing] as the supplier of last resort to bridge the gap when
out-of-state suppliers do not have enough electricity to service
Pennsylvania customers,” and “serv[ing] low-income segments of
Pennsylvania’s population,” App. 3la- 32a, citing 66 Pa. Cons. Stat.
§ 2802(10), (16).
Furthermore, as justifications for the stranded cost provisions, these
last “state interests” are makeweights. Under the Act, the incumbent
Pennsylvania utilities receive amounts necessary to provide service to
low-income persons (“universal service”), and also for other social
objectives such as conservation programs, through a different and
additional charge imposed on all consumers. Jd. §§ 2804(8)-(9), 2806(e)
(App. 167a-168a, 177a-178a]. These matters have nothing to do with
recovery of stranded costs for uneconomic generation assets. See id. As
to “provider of last resort” responsibilities, the Act states on its face that
the Commission may choose a supplier other than the incumbent
Pennsylvania utility to perform this function. /d. §§ 2802(16), 2807(e)(3)
(App. 150a, 186a]. Nor is there any requirement that the “provider of
last resort” — whether the incumbent utility or a competitive supplier
chosen by the Commission — must be a generator of electric power. To
the contrary, the Act states on its face that this provider may “acquire”
the necessary electric power (and do so “at prevailing market prices’’).
Id. § 2807(e)(2)-(3) [App. 186a] (emphasis added).
Finally, this sort of justification for discriminating against interstate
commerce — 1.e., keeping in-state companies in business so they could
supply if there were a shortage — has been repeatedly rejected by this
Court. So, too has the further contention, implicit in the lower court’s
theory, that the State could require that competitive commodities produced
in-state be kept for in-state consumption in a time of shortage. E.g., H.P
Hood & Sons, 336 U.S. at 535-39 (collecting cases); Wyoming v.
Oklahoma, 502 U.S. at 456.
C. Pennsylvania May Not Discriminate To “Offset Advantages”
Out-Of-State Competitors Supposedly Receive From
Regulation In Their Home States.
The Pennsylvania court also said that invalidating the stranded cost
provisions would give IPL an improper “competitive advantage” over
PECO, on the theory that IPL “would be able to continue recovering
similar costs under Indiana's regulatory scheme.” App. 23a & n.11.
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lodgepodge of conflicting and pr
nomic impact will be difficult to unrave
take corrective steps This is the case, and 1
to vindicate the core Commerce ¢
arena of interstate cor
Counsel of Recor
DANIEL W. McGII
PETER J. RUSTHOV!]
BARNES & THORNB
uth Meridia
ALTER W. COHI
J,DREW J. GIOR
IBERMAYER REI
& HIPPEL LI
tate ty
ALC ul
APPENDIX
APPENDIX TABLE OF CONTENTS
Appendix A Opinion of the Commonwealth Court
of Pennsylvania, dated and filed May 7, 1998
Appendix B — Order of the Commonwealth Court
of Pennsylvania, dated and entered May 7, 1998
Appendix C — Opinion and Qualified Rate Order
of the Pennsylvania Public Utility Commission
dated May 22, 1997
Appendix D — Order of the Supreme Court of
Pennsylvania, Middle District, Denying Petition
for Allowance of Appeal, dated Sept. 29, 1998
and filed Oct. 1, 1998
Appendix E — Pennsylvania Electricity Generation
Customer Choice and Competition Act.
66 Pa. Cons. Stat. §§ 2801 to -12
§ 2801. Short title of chapter
Declaration of policy
. Definitions
Standards for restructuring of electric
industry
Regionalism and reciprocity
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APPENDIX A — OPINION OF THE COMMONWEALTH
COURT OF PENNSYLVANIA DATED AND
FILED MAY 7, 1998
IN THE COMMONWEALTH COURT
OF PENNSYLVANIA
No. 1597 C.D. 1997
Argued: December 10, 1997
INDIANAPOLIS POWER & LIGHT COMPANY,
Petitioner
vi
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Respondent
BEFORE: HONORABLE JAMES GARDNER COLINS.
President Judge
HONORABLE BERNARD L. McGINLEY, Judge
HONORABLE DORIS A. SMITH, Judge
HONORABLE ROCHELLE S. FRIEDMAN, Judge
HONORABLE JAMES R. KELLEY, Judge
HONORABLE JIM FLAHERTY, Judge
HONORABLE BONNIE BRIGANCE LEADBETTER,
Judge
OPINION BY
PRESIDENT JUDGE COLINS FILED: May 7, 1998
Before this Court is the appeal of Indianapolis Power &
Light Company (IPL) from the decision of the Pennsylvania
Public Utility Commission (PUC) granting PECO Energy’s
(PECO) application for the?Ssuance of a qualified rate order to
j
Appendix A
recover stranded-costs pursuant to the Electricity Generation
Customer Choice and Competition Act (Competition Act), 66
Pa. C.S. §§2801-12. This case presents an issue of first
impression: whether the provisions of the Competition Act
allowing the recovery of stranded-costs violate the Commerce
Clause of the United States Constitution. We hold that they do
not
Historically, the functions of electric utilities fell into three
broad categories: generation (creating electricity), transmission
(moving electricity from the generating source to other areas
of a utility’s service area), and distribution (delivering
electricity to consumers). These three functions were performed
by a single, local utility in what was termed a “bundled” fashion
rhe local utility maintained a highly regulated monopoly ove:
a designated service area, and consumers were charged rates
set by a state regulatory agency for these “bundled” services.’
[his system of regulated monopolies providing “bundled”
services developed because of the inability of a
competition-driven market to serve the public welfare at the
inception of the electric industry.’
1. We may reverse a PUC decision where petitioner demonstrates
1 violation of constitutional nghts, an error of law or lack of substantia!
evidence to support the PUC’s findings of fact. W.C. McQuaide, Inc. \
Pennsylvania Pub. Util. Comm'n, 585 A.2d 1151, 1154 (Pa. Cmwlth
1991)
2. “[The] retail sale of electricity 1s provided generally by public
utilities under bundled rates regulated by the commission.” 66 Pa. C.S
§2802(13)
3. See General Motors Corp. v. Tracy, U.S ware re oe
811, 819 (1997) (discussing development of single, local franchises in
(Cont'd)
A i
>
As
Appendix A
Recognizing the modern day feasibility of a competition-
driven electric generation market, Governor Ridge signed the
Competition Act at the end of 1996. The Competition Act
“unbundled” the three traditional functions of electric utilities
in Pennsylvania in order to stimulate competition in the area of
generation. Following a brief phase-in period, all Pennsylvania
residents will be able to purchase their electricity from various
in-state and out-of-state power companies licensed by the
Commonwealth. At the same time, local utilities will remain
responsible for transmitting and distributing electricity
generated by themselves and all other licensed electric
companies. Transmission and distribution will remain highly
regulated.
Moving from a highly regulated industry to a market-driven
industry will undoubtedly occasion some problems due to local
(Cont'd)
gas industry and stating that electric industry suffered through “same
evolution”). In discussing the development of the gas industry, which
was analogous to the development of the electric industry, the
[racy-court notes that
It seemed virtually an economic necessity for States to
provide a single, jocal franchise with a business opportunity
free of competition from any source, within or without the
State, so long as the creation of exclusive franchises under
state law could be balanced by regulation and the imposition
of obligations to the consuming public upon the franchised
retailers
U.S. at , 117 S. Ct. at 820; see also United Distribution Cos. \
FERC, 88 F.3d 1005, 1122 n.4 (D.C. Cir. 1996) (discussing formation
of natural monopolies in gas industry occasioned by high ratio of fixed
costs to variable costs and how lack of competition allowed “a single
firm [to] supply the service more cheaply than two firms could’)
Appendix A
utilities’ reliance on the continuation of regulated rates. Most
notably, the former monopolies will be unable to recover
substantial expenses and capital costs through market-
determined prices. In anticipation of these transitional problems,
the General Assembly included pro. isions in the Competition
Act that allow the local electric utilities to recover their
“stranded-costs.” In essence, “stranded-costs” are the costs
prudently incurred by the local utilities that will not be
recoverable through market-determined prices, and that result
from the utilities’ reliance on the previous regulatory structure.‘
I'he Act provides two basic mechanisms for utilities to
recover stranded-costs. First, after PUC approval, utilities may
4
4. The Commission found that the existing utility cost structure
ontained four categories of costs that could become stranded. They
Regulatory assets (deferred taxes, post-retirement
employee benefits, etc.);
Non-utility generation contracts (which could include
ontracts to purchase electricity from qualifying
facilities under the Public Utilities Regulatory Policies
Act of 1978)
Utility generation assets (primarily nuclear power!
r
plants); and
4) Nuclear decommissioning costs
Pennsylvania Public Utility Commission, Report and Recommendation
to the Governor and General Assembly on Electric Competition
(Competition Report), Docket No. 1-940032, p. 14 (July 3, 1996). See
also 66 Pa C.S. §2803 (defining “transition or stranded-costs”’)
Sa
A
Appendix A
recover stranded-costs through a “competition transition
charge” that is paid by “every customer accessing the
transmission or distribution network ... to the electric
distribution company in whose certificated territory that
customer 1s located.” 66 Pa. C.S. §2808(a). In other words, PUC
will determine the amount of stranded-costs a utility is entitled
to, and then this amount will be recouped over the course of
several years by surcharging the residents of the area in which
the utility transmits and delivers electricity (i.e., those living
in the area where the utility previously maintained a monopoly
over generation). Second, utilities may apply to PUC for a
qualified rate order, whereby all or a portion of these future
competition transition charges can be “securitized.” 66 Pa. C.S.
§2812. This process converts the utility’s entitlement to receive
future transition charges from its customers into a current, fully
vested property right that may be pledged or sold as security
for the issuance of transition bonds.
Pursuant to the Competition Act, PECO applied for a
qualified rate order, requesting authorization to issue transition
bonds in the amount of approximately $3.8 billion. After
reviewing the evidence, PUC issued a qualified rate order
5. Competitive transition charge 1s defined as
A nonbypassable charge applied to the bill of every
customer accessing the transmission or distribution network
which (charge) 1s designed to recover an electric utility's
transition or stranded-costs as determined by the
commission under Sections 2804 (relating to standards for
restructuring of electric industry) and 2808 (relating to
competitive transition charge)
66 Pa. C.S. §2803
allowing PECO to securitize approximately $1.1 billion of its
future competition transition charges. IPL, an Indiana electric
company, then filed a petition for review with this Court in
which it claims that permitting PECO to recover its
stranded-costs violates the Commerce Clause of the United
States Constitution
[he Commerce Clause 1s an affirmative grant of power to
ongress allowing it “[t]o regulate Commerce with foreign
Nations, and among the several States.” U.S. Const. art. 1, §
3. The effect that the Commerce Clause has on state powers
is seen in the negative or dormant aspects of Congress’s
Commerce Clause power. “The negative or dormant implication
of the Commerce Clause prohibits state taxation or regulation
that discriminates against or unduly burdens interstate
commerce and thereby ‘impedes free private trade in the
national market place.’ General Motors Corp. v. Tracy,
U.S ,__, 117 S. Ct. 811, 818 (1997) (quoting Reeves, Jn
Stake, 447 U.S. 429, 437 (1980)) (citations omitted). In sum,
nce Congress has plenary power to regulate commerce among
he states, states are prohibited from passing laws that
riminate against interstate commerce
Conversely, the Commerce Clause permits Congre:
mpower states with the authority to act in a manner that absent
permission would violate the Commerce Clause. “It 1s indeed
vell settled that Congress may use its power under the
mmerce Clause to ‘[confer] upon the States an ability to
strict the flow of interstate commerce that they would not
russe _a ay ** — l ~ 7 Das ; aT 4
’ ise enioy ven Envianad I Owe? ( OU. yen Hampshire
C ; ir 19029 ra m7
4 A 20, ) , Qn anne , ‘ ,
a \ i 4 wu hii} i,€ we . Li Afi
Ta
Appendix A
Managers, Inc., 477 U.S. 27, 44 (1980)). For example, Congress
could empower the states to regulate utilities in a manner that
would discriminate against out-of-state energy companies.
Supreme Court Commerce Clause precedent is abundant,
but there is no bright-line test to determine whether a statute
violates the Commerce Clause. See generally Tracy, _ U.S. at
__n.8,117S. Ct. at 820 n.8 (1997) (citing Arkansas Elec. Coop.
Corp. v. Arkansas Pub. Serv. Comm'n, 461 U.S. 375 (1983)
and discussing Court’s departure from bright-line test in
Commerce Clause examinations of cases dealing with electric
utilities). Modem Commerce Clause jurisprudence, therefore,
involves a case-by-case examination of whether the statute
discriminates against interstate commerce.® Thus, we are
admonished by the Supreme Court to examine the provisions
of the Competition Act at issue here with both deference to
Commerce Clause precedent and sensitivity to the unique
factual circumstances surrounding the Competition Act.
IT].
IPL seeks to have the stranded-cost provisions invalidated
as unconstitutional, while permitting the rest of the statute to
6. Our Commerce Clause jurisprudence is not so ngid as
to be controlled by the form by which a State erects
barriers to commerce. Rather our cases have eschewed
formalism for a sensitive, case-by-case analysis of
purposes and effects. As the Court declared over 50
years ago: The commerce clause forbids discrimination,
whether forthright or ingenious. In each case it 1s our
duty to determine whether the statute under attack,
whatever its name may be, will in its practical operation
work discrimination against interstate commerce
Vest Lynn Creamery v. Healy, 512 U.S. 186, 201 (1994)
efiect. IPL’s theory is that by permitting PECO to
ver its stranded-costs, the Commonwealth is giving the
mpany a huge financial advantage in the new electri
eneration market to the detriment of out-of-state ele: tric
tilities. To this end, IPL makes a bevy of arguments that these
isions violate the Commerce Clause’s prohibition against
ite laws that discriminate against interstate commerce. Also
argues that these provisions are severable from the
mpetition Act as a whole and that competition may proceed
i¢ stranded-cost provisions. We believe that IPI.’s
iment 1s fraught with contradiction and find that IPI. has
’
0 Carry the difficult burden of prov ing that the stranded
provisions violate the Commerce Clause of the United
stitution. /n re Petition to Re. all Reese 54? Pa. 114
1, 2d 16, 1164 (1995)
starting point in any examination of an alleged
i the Commerce Clause is Supreme Court precedent
e guidelines therein. The most obvious violation of the
til
mm erce Clause 1s a tax On Out-of-state products and good
ne purpose of favoring local industry. “The paradigmati
e of iw discriminating against interstate commerce
protective tariff or customs duty, which taxes good
‘e¢ Irom other states, but does not tax similar products i1
rest Lynn Creamery v. Healy, 512 U.S. 186. 193 (1994
ese protective tariffs are obviously unconstitutional]
cree \ lause precedent has been focused more on state
! rreptitiously attempt “to reap some of the benef
: } rike dow!
AA
vi
assac husetts assessment Statute Decau
effect tax making out-of-state milk more exper
Waste Management, Inc. v. Hunt, 504 U.S. 334(199 strik
down Alabama statute that imposed additional fee for di
of hazardous waste generated outside state); Bacchus Im;
Ltd. v. Dias, 468 U.S. 263 (1984) (voiding Hawaii ta> mpt
for liquor products uniquely indigenous to state
i?
Washington State Apple Advertising Comm'n. 43: .
(1977) (nullifying North Carolina shipping requirement |
protected local industry from competition from suy
out-of-state product); Polar Ice Cream & Cre
Andrews, 375 U.S. 361 (1964) (determining that Fl:
requiring Company to purchase milk from local produ
unconstitutional); Joomer v. Witsell. 334
voiding South Carolina law requiring shrimp boat |
local port and unload, pack and stamp fish caught off stat
oast); Baldwin v. G. A. F. Selig, Inc.. 294
c ia ."
invalidating New York regulation imposed on milk d
to shield local producers from effects of out
ompetition); Guy v. Baltimore, 100 U.S. 434 (1880) (null
2
yr é
Baltimore wharfage tax that exempted Marvland produ
Velton v. Missouri, 91 U.S. 275 (1876) (stil ing down M
icense requirement that only applied to persons de
it-Of-state goods). However, in surveving Sunpr
" > » | we ; an aa? .
cedent we have found ni ise tha seaks d
iP nre . te | ha th > inctrant nne \, ePiarthnea
suc presented in tne instan avUDCd! YC, tis
We \I cour reaiize tnat
ai to the present case
Ompetition Act does not plate
wever, highly illustrative of the novelty of Pen
7
ihe determining factor for (
p< Dut the ac
1Oa
Appendix A
discovered that in deciding these cases the Supreme Court has
developed a modem Commerce Clause approach that focuses
primarily on whether the state law would “in its practical
operation work discrimination against interstate commerce.”
West Lynn Creamery, 512 U.S. at 20]
After thoroughly reviewing Supreme Court Commerce
Clause precedent, we conclude that the Competition Act does
not implicate the Commerce Clause for three reasons. First.
the Competition Act does not discriminate against interstate
commerce and is unlike the state statutes that have been
previously examined under the Commerce Clause by the
Supreme Court. Second, the provisions of the Competition Act
that are questioned as discriminatory (those that allow for the
recovery of stranded-costs) are consistent with the traditional
ability of states to regulate the retail sales of electricity and do
not trigger the dormant aspects of the Commerce Clause. Third.
the need for stranded-cost recovery 1s evidenced by their
acceptance in other forums moving toward competition and the
Commerce Clause should not be used as an impediment to
Pennsylvania’s experiment with competition
A
fr
The Competition Act. and specifically, the stranded-cost
Provisions contained in the act. do not implicate the Commerce
(Cont'd)
trough local favoritism in then currently competitive markets. The
Competition Act, read in whole, invites competition into an industry
that has been historically limited to State-regulated monopolies, and as
such, it 1s so distinct from Commerce Clause precedent that we must
lind that it does not involve the (¢ ommerce Clause. To hold otherwise
would expand Supreme Court precedent, which this Court has neither
the power nor desire to do
lla
Appendix A
Clause because they do not discriminate against interstate
commerce and are strikingly unlike laws invalidated in prior
Supreme Court decisions addressing the Commerce Clause.
Traditional Commerce Clause inquiries involved state statutes
that protected local commerce by burdening interstate
commerce. The Competition Act is significantly unique because
its practical effect is the promotion of competition in an industry
that heretofore had none, and the stranded-cost provisions are
merely an element of this planned move toward competition.
In actuality, the Competition Act is the antithesis of a statute
that discriminates against interstate commerce and does not
touch on Commerce Clause concerns. We, therefore, believe
that allowing the Competition Act to remain in its present form
is consistent with the Supreme Court’s Commerce Clause
jurisprudence because the practical effect of the stranded-cost
provisions, and of the Competition Act as a whole, is to facilitate
interstate commerce.
IPL argues that the stranded-cost provisions are a
surreptitious attempt to discriminate against interstate
commerce because, although the Competition Act allows
competition, the stranded-cost recovery will give PECO an
unfair advantage in the newly formed electric generation
market. According to IPL, stranded-cost recovery is tantamount
to a huge subsidy that PECO can use to artificially lower its
rates for generated electricity to the detriment of out-of-state
electric companies.” To buttress its argument, IPL analogizes
¢
8. The characterization of the stranded-cost recoveries as subsidies
may present us with another ground for disposing of this case, which
we choose not to pursue here. Although, the Supreme Court has not
directly addressed the issue of the constitutionality of state subsidies, it
has “noted that ‘direct subsidization of domestic industry does not
(Cont'd)
12a
Appendix A
the present case to the Supreme Court’s decision in West Lynn
Creamery. For IPL to prevail on its Commerce Clause
challenge, it first would have to establish that the Commerce
Clause is implicated in this matter. To do so, IPL must show
that the Competition Act and the stranded-cost provisions
discriminate against interstate commerce by affording utilities
like PECO an advantage in this newly competitive market. Since
[PL has not convinced us that the Competition Act or the
stranded-cost provisions afford any such advantage, we fail to
see how the Competition Act has any detrimental effect on
interstate commerce.
IPL attempts to establish discrimination against interstate
commerce by improperly focusing solely on the stranded-cost
provisions without according any significance to the
Competition Act as a whole. In addition, IPL goes further by
mischaracterizing the nature of stranded-cost recovery to
support its alleged violation of the Commerce Clause. When
this argument is examined Closely, there are two Striking
problems that undermine IPL’s contention: first, the practical
(Cont'd)
ordinarily run afoul’ of the negative Commerce Clause.” West Lynn
Creamery, 512 U.S. at 199 n. 15 (quoting New Energy Co. of Indiana \
Limbach, 486 U.S. 269, 278 (1976): see also West Lynn Creamery, 512
U.S. at 211 (stating “I would therefore allow a State to subsidize its
domestic industry so long as it does so from nondiscriminatory taxes
that go into the State’s general revenue fund”) (Scalia, J, concurring)
The only difference between the Stranded-cost recoveries and a direct
subsidy is that the state does not involve itself in the collection process
It does, however, involve itself in the process of determining how much
the utilities receive. This appears to be a minimal administrative
difference that may make the stranded-cost recoveries permissible
subsidies. Nevertheless, there are stronger justifications to uphold these
provisions
13a
Appendix A
effect of the Competition Act is undeniably the promotion of
interstate commerce; and second, the stranded-cost recoveries
are not a fortuitous gift from the Commonwealth to PECO as
IPL argues; they represent identifiable and limited
reimbursements to which PECO is entitled.
The purpose of the Competition Act is clear: to relinquish
the local utilities’ monopoly contro! over the generation of
electricity and to invite competition in an effort to lower electric
generation rates for the citizens of this Commonwealth. See
generally 66 Pa. C.S. §2802 (detailing impetus for, and
objectives of, Competition Act). The act mandates the creation
of “direct access by retail customers to the competitive market
for the generation of electricity.” 66 Pa. C.S. §2802(12). In
addition, the act “requires electric utilities to unbundle their
rates and services and to provide open access over their
transmission and distribution systems to allow competitive
suppliers to generate and sell electricity directly to consumers.”
66 Pa. C.S. §2802(14). The Competition Act, therefore, seeks
to foster interstate commerce. Any attempt to read the
stranded-cost provisions in isolation plainly distorts this avowed
goal.
Even assuming that our examination could focus solely on
the stranded-cost provisions with no concern for the purpose
of the act as a whole, IPL would still fail because its argument
erroneously hinges on a convoluted mischaracterization of the
Stranded-cost provisions. IPL erroneously characterizes
stranded-costs as nothing more than “subsidies to high cost
Pennsylvania utilities.” This is untrue. The stranded-cost
provisions allow for an equitable transition into a competitive
electric market, and the recovery of stranded-costs is governed
by strict guidelines. These guidelines limit both the amount of
l4a
Appendix A
recovery and the time period in which the costs may be
recovered. 66 Pa. C.S. §2808(b), (c). Moreover, the recoveries
are limited to costs “which traditionally would be recoverable
under a regulated environment” and are subject to PUC’s
determination that it is “just and reasonable to recover [these
costs] from ratepayers.” 66 Pa. C.S. §§2803, 2804(13). In sum.
even if we looked no further than the Stranded-cost provisions,
we would find nothing to implicate the Commerce Clause. The
stranded-cost recoveries are better characterized as restitution
intended to place PECO where it would have been had
regulation continued, rather than as subsidies intended to place
PECO at an advantage.
It is further illustrative of the lack of the applicability of
the Commerce Clause to our examination here that the precedent
most heavily relied on by IPL is factually dissimilar from the
case at bar. IPL relies on West Lynn Creamery as the Supreme
Court precedent most analogous to the issue presented in this
appeal, but we are not convinced that Wesr Lynn Creamery is
dispositive. West Lynn Creamery involved a Massachusetts
pricing order, the admitted purpose of which was to preserve
the local dairy industry. The pricing order subjected all fluid
milk sold by dealers to Massachusetts retailers to an assessment.
Although about two thirds of the milk was produced by out-of-
state dairy farmers, the entire assessment was distributed to
Massachusetts dairy farmers. The Supreme Court held that the
pricing order violated the Commerce Clause “because its
avowed purpose and its undisputed effect are to enable higher
cost Massachusetts dairy farmers to compete with lower cost
dairy farmers in other states.” West Lynn Creamery, 512 U.S.
at 194 (emphasis added).
West Lynn Creamery is distinguishable from the present
case On many grounds, the most obvious of which is the
Ps kt i ancl
1Sa
Appendix A
differences between the purpose of Massachusetts pricing order
and the purpose of the Competition Act. The pricing order’s
sole objective was to save the financially distressed local dairy
industry by shielding it from the ngors of interstate competition.
In West Lynn Creamery, the Court concluded that this was “the
hallmark of the economic protectionism that the Commerce
Clause prohibits.” /d. at 205. Conversely, the Competition Act’s
avowed purpose is to promote competition and interstate
commerce by opening the electric generation market. In this
regard, it is difficult for us to comprehend how the stranded-cost
provisions, which facilitate this move toward more interstate
commerce, are like the pricing order in West Lynn Creamery
Moreover, the pricing order in West Lynn Creamery and
the Competition Act are notably different in other aspects as
well. The proceeds from premium payments in West Lynn
Creamery were collected from both out-of-state and in-state
retailers and dealers. Also, the premium payments were not
limited in their duration, nor were they in any way related to a
history of state regulation of the dairy industry. They were
nothing more than gratuitous payments to assist a failing
industry, which in effect discriminated against interstate
commerce.
In the present case, the stranded-cost provisions of the
Competition Act represent a careful and detailed part of
Pennsylvania’s move toward a competitive electric generation
market. As stated previously, these stranded-costs must be
recovered within a certain time frame, and they are limited to
the sums local utilities spent prudently in reliance on the
continuation of a regulated market. See 66 Pa. C.S. §2808(b),
(c). They are paid strictly by the citizens of the Commonwealth
of Pennsylvania to Pennsylvania utilities, and have no direct
iOa
ippe ndin \
fect on Out-of-state entities. In addition... these payments
ituitous, but represent Compensation for the inve
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18a
Appendix A
gas sales violated the Commerce Clause. See generally Missouri
v. Kansas Gas Co., 265 U.S. 298 (1924) (holding that attempt
by state to fix rates chargeable in sale of natural gas to
distributor in another state is direct burden on interstate
commerce); Pub. Util. Comm'n for Kansas v. Landon, 249 U.S.
236 (1919) (finding that piping natural gas from one state to
another is interstate commerce, but retail sale of same natural
gas is not); cf. Pennsylvania Gas Co. v. Pub. Serv. Comm'n of
New York, 252 U.S. 23 (1920) (deciding that even though natural
gas sold from company in one state directly to consumers in
another state is interstate commerce, state can regulate these
sales in absence of contrary Congressional regulation). The
Supreme Court proceeded with the notion that wholesale
transactions of natural gas had a direct effect on interstate
commerce, whereas retail sales had only an indirect effect on
interstate commerce. Arkansas, 461 U.S. at 378. As a result. a
general rule emerged that state regulation involving wholesale
transactions of natural gas violated the Commerce Clause, while
state regulation of retail sales did not. Jd.
The wholesale-retail distinction was adopted in the context
of the electric industry by the Supreme Court’s decision in Pub.
Util. Comm'n of Rhode Island v. Attleboro Steam & Elec.
Lighting Co., 273 U.S. 83 (1927). In Attleboro, the Supreme
Court addressed the issue of whether a state regulatory
commission could regulate the rates that a local utility charged
in selling its electric current to an out-of-state distributor. The
Court held that the state’s attempt to regulate the wholesale
transaction “imposed a ‘direct’ rather than an ‘indirect’ burden
on interstate commerce, and as such, the regulation violated
the Commerce Clause.” Arkansas, 461 U.S. at 378-79.°
9. The Arkansas Court noted that the wholesale-retail distinction
was no longer workable and applied a test more in line with the general
(Cont'd)
19a
Appendix A
The Attleboro decision sparked the creation by Congress
of what is today the Federal Energy Regulatory Commission
(FERC) and the establishment of federal regulations over
wholesale transactions of gas and electricity. Arkansas, 46}
U.S. at 378-79. These regulations were first seen in the Federal
Power Act of 1935 (FPA), 16 U.S.C. §§791a-828c, and
subsequently in the Natural Gas Act of 1938 (NGA), 15 U.S.C
§§717-717z (1997). Arkansas, 461 U.S. at 378-79. “[T]he main
purpose of this legislation was to ‘fill the gap’ created by
Attleboro and its predecessors” in setting guidelines for federal
and state regulation of electric and natural gas utilities. /d. at
379. Congress assumed some regulatory authority through this
legislation, but in no way impinged on the states’ authority to
regulate utilities at the local level. In fact, Congress was careful
to leave intact the states’ ability to regulate the most local
aspects of the industry, which would necessarily include setting
rates for local consumers.
The Supreme Court had occasion to discuss the care that
Congress took not to disturb the state regulation of electric
utilities at the local level in Connecticut Light & Power v. Fed
Power Comm'n, 324 U7S~S5S15 (1945). Connecticut Light
involved an order by the Federal Power Commission (FPC),
the predecessor of the FERC, requiring a Connecticut electric
utility to use accounting procedures mandated by the FPA
despite the fact that the company’s business was completely
(Cont'd)
trend in the Court’s modern Commerce Clause jurisprudence. The Court
stated that this modern approach looked “in every case to the nature of
the state regulation involved, the objective of the state, and the effect ot
the regulation upon the national interest in the commerce.” 46! U-S. at
390 (1983) (citing //linois Natural Gas Co. v. Cent. Illinois Pub. Ser
314 U.S. 498, 505 (1942))
20a
Appendix A
local in nature. The Court closely examined the provisions of
the FPA empowering the FPC and found that the FPC
overstepped its bounds by ordering the use of certain accounting
procedures. The Court stated that through the FPA “Congress
. Was trying to reconcile the claims of federal and of loca!
authorities and to apportion federal and state jurisdiction over
the industry.” Connecticut Light, 324 U.S. at 531. Additionally,
the Court was especially cognizant of the legislative history of
the FPA in which Congress communicated its belief that the
FPA did not give the FPC “jurisdiction over local rates.” /d. at
525-28. The Court also cited a House of Representatives report
which stated that “no jurisdiction is given over local distribution
of electric energy, and the authority of States to fix local rates
1s not disturbed even in those cases where the energy is brought
in from another state.” Jd. at 527 (citing H.R. Rep. No. 1318.
74" Cong., 1* Sess. 7, 8, 27 (1935)): cf. Panhandle Eastern
Pipeline Co. v. Pub. Serv. Comm'n of Indiana, 332 U.S. 507
(1947) (holding NGA extended federal regulation only to area
which Supreme Court had held state could not reach and did
not usurp state authority)
With this background in mind, we believe that the
Sstranded-cost provisions are consistent with traditional state
regulation of the local effects of state utilities for two reasons
First, the competitive transition charges are completely
intrastate and have no real effect on interstate commerce. These
charges are collected from consumers within the state by
utilities located within the state. and they are tied to the
transmission and distribution network wholly within this
Commonwealth. Second, states continue to maintain the
traditional police power to fix reasonable charges for the sale
of electricity at the local level despite Congress’s assumption
ol some regulatory authority over utilities Cf Tracy, US
21a
Appendix A
at__—sn.8, 117 S. Ct. at 820 n.8 (discussing how all state
regulation is not immune from Commerce Clause
jurisprudence); see also Camps Newfound/Owatonna v. Town
of Harrison, _U.S. __, _, 1178S. Ct. 1590, 1614 (1997)
(proffering that Tracy creates a “public utilities” exception to
the dormant commerce clause) (Scalia, J., dissenting). Had
Pennsylvania continued its previous regulatory scheme, it would
have undoubtedly permitted the recovery of stranded-costs
through regulated rates, and there is no justification for
disallowing these recoveries in a new competitive market.
The competitive transition charges are completely intrastate
in nature, and any alleged effect on interstate commerce is
completely illusory. The language of the statute detailing the
assessment of these charges gives credence to this position:
“every customer accessing the transmission or distribution
network shall pay a competitive transition charge to the electric
distribution company in whose certificated territory that
customer is located.” 66 Pa. C.S. §2808(a). Thus, it is
inescapably apparent that the charges are levied only on
Pennsylvania residents and are directly connected to an
undeniably intrastate concern (i.e., local electricity transmission
and distribution networks). It escapes our collective logic that
these charges could be deemed anything other than completely
intrastate in nature.
Furthermore, the stranded-cost provisions are consistent
with Pennsylvania’s historical regulation of local utility rates,
a power that appears to have been specifically apportioned to
it by Congress. In this vein, the General Assembly of
Pennsylvania has empowered the PUC to set “just and
reasonable” rates for electricity and to generally oversee electric
utilities in the interest of the public welfare. See 66 Pa. C.S.
T*} r P ‘ 7, | no I 2 + 1
i4¢. ihis Court has stated. and the Pennsylvan
ei
nreme f owY9Y?
—OUl
reme nas agreed, that “the Commission has an
ngoing duty to protect the public from unreasonable rates while
suring that utility companies are permitted to charge rates
utlicient to cover their costs and provide a reasonable rate of
turn.” Pennsylvania Pub. Util. Comm'n y. Philadelphia Elec.
522 Pa. 338, 343-44, 561 A.2d 1224. 1226 ( 1989) (citing
letropolitan Edison v. Pennsylvania Pub. Util. Comm n, 437
-d 76 (1981)) (citation omitted): see also Popowsky \
vivania Pub. Util. Comm'n. 683 A.2d 958, 961 (Pa
th. 1996) (“PUC has broad discretion in determining
‘Iner rates are reasonable’). The Competition Act in no w ay
i to diminish Pennsylvania’s power to regulate local
rates to ensure fair rates for the public and a reasonable
on Investment for the utilities. In fact, the stranded-cost
pecifically rely on a continuation of PUJ¢ oversigh
; . 2 ’ |
I ind reasonabvDile electricity rates te Tac
CLILIVe Marke
|
l pri I atfrec
’ y y t} , *
i re nsistent with Pennsylvanj
t reo e ti} ' T¢ Ja ’ vilwar . . } eT
‘O Tepulate 10Cal utility rates. Pennsylvania consums
rt Vania utilities in relation to transmissi¢
T new?rw T ‘ ‘ ) ,\ eal, Beal Der r ‘ lurvar "
VJ iw tt Y*¥ Ain S AU IUSIVCIY if) rennsviva |
ed | OnS rely on the tradit
i
+
Appendix
compelling evidence that the Commerce Clause should 1
used to hinder Pennsylvania’s experiment with competit
electric generation. The move toward competitive utilit
markets is a national trend,'’ and the recovery of stranded-«
is by no means isolated to the Competition Act. Tho
regulatory bodies, both federal and local, whose expertise ha
been relied on to facilitate the move toward open markets, seen
to agree that the need for these recoveries is essential. As suc!
we are compelled to defer to PUC’s decision to mod
Pennsylvania’s move toward competition after these ot!
forums, and we see no justification for implicating
Commerce Clause in derailing this ambitious endeav:
There is a hint of disingenuousness in IPL’s atte
implicate the Commerce Clause in this matter. The Comms
Clause was intended to serve as a shield against provincial
sO as to promote a national economy. In the present case, IP]
alleged constitutional violation uses the Commerce Clau
1 sword to attack the stranded-cost provisions in order t
its own competitive advantage.'' To accept IPL’s po
10. It is worth noting that Pennsylva
leregulation of its gas utilities. See Rich He
ould Be Ne xi for Pa S$ ( nisumer P
section E, at
11. IPL is asking us to strike d
cause it believes the provisions confer a benefit
triment of IPL. The stranded-cost recoveries represent
> costs to which PECO and other Pennsylvania utilit
been entitled had regulation continued. IPL is recovering 1
costs from its monopoly franchise in Indiana. Disallowing PI
tranded-cost recovery would surely benefit IPL in that PE!
s1t110n would be compromised. |
ei
r r
epi o!l stranded-cost rex rPYUIY UCvan 1n | \ lid
concept in Order 636,'* which required natur:
s to open up their transportation services t
10 purchasec
wwner. The
|
|
\
rder wa imtende t y} r4
; \ Va AAELWVTIUIOCU LUO PUdIiad}li
;
their gas from a supplier other tha
’
nfpes
:
|
25a
Appendix A
there were equal interstate transportation services for all gas
suppliers to allow for the “unbundling” of interstate natural
gas sales. FERC was aware that that this “unbundling”
procedure would burden the pipelines with stranded-costs."? As
a result, FERC allowed for the recovery of “prudently incurred
costs” through a process of petitioning FERC. See 57 Fed. Reg.
13,267, 13,309 (April 16, 1992); see also United Distribution
Companies, 88 F.3d 1105 (D.C. Cir. 1996) (rejecting challenge
to FERC procedure for recovery of stranded-costs).
In turn, FERC also included stranded-cost recoveries in
the context of the interstate electric industry in Order 888."
Order 888 required all utilities that owned, controlled, or
operated facilities used in transmitting electricity in intrastate
commerce to provide open access to their facilities to other
utilities. The order was intended to facilitate the move from a
“monopoly-regulated industry to one in which all sellers [could]
compete on a fair basis and in which electricity [was] more
competitively priced.” 61 Fed. Reg. 21,540, 21,542 (May 10,
1996). FERC addressed stranded-costs in Order 888 and
determined that it was necessary to allow “utilities to recover
their legitimate, prudent and verifiable stranded-costs
simultaneously with. . . requiring open access of transmission.”
Id. at 21,629.
In the present case, the Competition Act was the result of
a year-long study by PUC into the viability of competitive
Order 636 describes stranded-costs as “costs now incurred bv
pipelines in connection with their bundled sales services that cannot be
lirectly allocated to customers of unbundled services.” 57 Fed Reg. at
26a
Appendix A
electric generation. At the conclusion of this study, PUC
presented to the governor a report detailing its proposed
guidelines for opening electric generation to competition. In
this report, PUC noted that “[dJealing with stranded-costs is
one of the most difficult issues to be resolved in our efforts to
a competitive electric industry.” Pennsylvania Public Utility
Commission, Report and Recommendation to the Governor and
General Assembly on Electric Competition, Docket No
1-940032, p. 14 (July 3, 1996). PUC was understandably
concerned with this aspect of the move toward competition,
and it devoted a great deal of its report in setting guidelines for
stranded-cost recovery. See id. p. 14-25.
[tis not beyond peradventure to assume that PUC was well
aware of the mechanisms being used in other forums to deal
with the problems of stranded-costs. PUC’s decision to
recommend stranded-cost recoveries as part of the Competition
Act was on all accounts a prudent and necessary element of the
move toward competition, and at least one other state utility
commission has come to the same conclusion."* As reflected in
the Competition Act, the stranded-cost provisions are equitable
and allow for a fair transition toward a competitive generation
market. As reflected in the qualified rate order that is the subject
of this appeal, we must defer to PUC’s determination that these
recoveries are warranted and just. W.C. McQuaide, Inc. \
Pennsylvania Pub. Util. Comm'n, 585 A.2d 1151, 1154 (Pa
Cmwlth. 1991) (“We defer to the PUC on matters within its
See Cal. Pub. Util. Code §330(s) (West 1996) (stating that
proper to allow electrical corporations an opportunity to continue to
recover, over a reasonable transition period, those costs that may
ot be recoverable in market prices in a competitive generation market)
ee also Cal. Pub. Code §§840-44 (West 1996) (relating to financing of
iNnSiItlor OStS)
27a
Appendix A
administrative expertise’). This Court lacks the expertise and
resources to delve into the mechanics of PUC’s order, and we
have been presented no reason to believe that the order is
improper.
In any event, we do not believe that the Commerce Clause
was intended to be used to strike down endeavors like the one
on which Pennsylvania has embarked. The words of Justice
Brandeis are worth repeating to underscore this point
To stay experimentation in things social and
economic 1s a grave responsibility. Denial of the
right to experiment may be frought [sic] with serious
consequences to the Nation. It is one of the happy
incidents of the federal system that a single
courageous State may, if its citizens choose, serve
as a laboratory; and try novel social and economic
experiments without risk to the rest of the country
West Lynn Creamery, 512 U.S. at 216 (Rehnquist, C.J.,
dissenting) (quoting New State Ice Co. v. Liebmann, 285 U.S
262, 311 (1932) (Brandeis, J., dissenting)); see also Connecticut
Light, 324 U.S. at 530, (stating that “‘insulated chambers of
the states are still laboratories where many lessons in regulation
may be learned by trial and error on a small scale without
involving a whole national industry in every experiment”). We
need not go into great detail to emphasize the resources that
have already been expended in pursuit of this endeavor, nor do
we need to highlight all that would be lost if we were to accept
IPL’s argument. Suffice it to say, we believe that this
experiment must proceed
in summation, we find that the Competition Act does not
implicate the Commerce Clause. The Competition Act, read in
23a
Appendix A
its entirety, is the antithesis of a statute that violates the
Commerce Clause because it actually invites out-of-state
competition in an area where states have been traditionally
permitted to exclude such competition. This same tradition has
allowed states to freely set local utility rates, and the
stranded-cost provisions are consistent with this tradition. In
addition, the need for stranded-cost recovery has been evidenced
in other forums moving toward competition, and we feel that
the Commerce Clause should not be used as an impediment to
Pennsylvania’s ambitious experiment with competition
IV
We now briefly turn to addressing IPL’s other argument
for the sake cf thoroughness and tc emphasize the implausibility
of severing the stranded-cost provisions from the Competition
Act as IPL desires. If we were to assume that the Competition
Act implicates the Commerce Clause, the act must be viewed
against a two-tiered test established by the United States
Supreme Court. In this two-tiered test, a determination must
first be made whether the act, either on its face or in its effect,
discriminates against interstate commerce. If so, the act 1s “per
se invalid, save in a narrow class of cases 1n which the [state]
can demonstrate, under rigorous scrutiny, that it has no other
means to advance a legitimate local interest.” C&A Carbone
Inc., v. Clarkstown, 511 U.S. 383, 392 (1994). In the absence
of direct discrimination, a determination must then be made
whether the act has an incidentai effect on interstate commerce
f there 1s an incidental effect on interstate commerce, then the
Statute 1s constitutional unless the “burden imposed on interstate
commerce is clearly excessive in relation to the putative loca!
benefits.” Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)
We believe that the act would still survive if subjected to this
two-tiered test
29a
Appendix A
A
We will begin by examining the stranded-cost provisions
in relation to the second tier of the Constitutional test because
we are convinced that the Competition Act as a whole does not
discriminate in purpose or effect. The basis for our belief wa:
set out in detail above, but is worth repeating. We believe that
the true purpose of the act is to promote competition. We also
believe that the stranded-cost provisions are an integral part of
this move toward competition and are in no way a surreptitious
attempt to discriminate against interstate commerce. Moreover,
the Competition Act and the stranded-cost recoveries have no
discriminatory effect on interstate commerce because the
recoveries are purely intrastate concerns and afford no unfair
advantage to local utilities. Therefore, we believe that, at most,
the Competition Act and the stranded-cost provisions have an
incidental effect on interstate commerce, and that they are
constitutional unless the “burden imposed on interstate
commerce 1s clearly excessive in relation to the putative local
benefits.” Jd.
IPL contends that by allowing local utilities to recover these
stranded-costs, Pennsylvania has placed a burden on interstate
commerce that is clearly excessive in relation to the putative
local benefit. In addition, IPL argues that these local interests
>ould be promoted as well with a lesser impact on interstate
commerce. We disagree. The local concerns encompassed by
the stranded-cost recoveries are profound and clearly outweigh
any alleged burden on interstate commerce. IPL has also failed
to present this Court with a reasonable alternative to the
stranded-cost recoveries that would impact interstate commerce
6. The only alternative that IPL presents this Court is to require
PECO to divest itself of all its generating facilities in exchange for
(Cont'd)
4Qa
Appendix A
We believe that Pennsylvania's interest in regulating the
retail sales of electric utilities, as discussed in section III. B
above, is enough to uphold the stranded-cost provisions under
the Commerce Clause. However, there are many other local
interests that are sufficient, independently, to uphold the act
An exhaustive examination of all the other local concerns that
support the constitutionality of the stranded-cost provisions 1s
unnecessary, as we believe that highlighting a handful of these
concerns is sufficient to illustrate the shortcomings of IPL ‘s
argument
To begin, we believe that the need to insure the future
viability of Pennsylvania electric utilities in the period of
transition toward competition is of preeminent local concern
PECO will be entitled to recover over $5 billion in
stranded-costs during the transition toward competition. These
sums would have been recovered under the prior regulated
cheme to afford PECO a fair return on its investments. Without
these recoveries there is no guarantee that PECO will remain a
viable entity. There can be no doubt that in general there 1s a
strong need for viable local electric utilities. With respect to
the present case, there are two needs which are of particular
importance: first, the need to maintain the transmission and
jistribution networks located in Pennsylvania, and second, the
overy of its stranded-costs. Requinng utilities to divest themselves
their generating facilities would not only raise the issue of an
onstitutiona! taking, but would also jeopardize Pennsylvania's electric
service for the same reasons discussed in Section III. B. above. It
reseeable that many local electnc utilities in Pennsylvania will be
entitled to stranded-cost recovenes. If they were all required to divest
hemselves of their generating facilities, Pennsylvania could be left wit!
Ca! electric generation Capacity This is hardly a reasonable
31a
Appendix A
need to have reliable service for all Pennsylvania consumers at
all times.
As part of the move toward competition, the Genera]
Assembly believed that “the electric industry restructuring
should ensure the reliability of the interconnected electric
system by maintaining the efficiency of the transmission and
distribution system.” 66 Pa. C.S. 2808(2). To this end, the
General Assembly included language in the Competition Act
that directly relates the recovery of stranded-costs to this
transmission and distribution system. See 66 Pa. C.S. 2808(2)
Without stranded-cost recoveries the transmission and
distribution networks maintained by PECO would be placed in
peril. At the end of the day, there may not be any network for
[IPL to use in competing with PECO and other utilities if
stranded-cost recoveries were disallowed. In this event, any
benefit IPL could gain from competition would be completely
undermined. More important, electric service in Pennsylvania
altogether could be jeopardized. These stranded-cost recoveries
are essential to insuring that Pennsylvania has local utilities
that can maintain the transmission and distribution networks
so electricity, including that generated by IPL, can reach
Pennsylvania consumers and so competition can proceed
Another related concern is the need to insure that
Pennsylvania consumers have viable energy companies in the
event that out-of-state electric generation companies cannot
supply all the energy needs of all classes of Pennsylvania
consumers. Pennsylvania utilities wiil still serve as the provider
of last resort to bridge the gap when out-of-state suppliers do
not have enough electricity to service Pennsylvania consumer:
1
66 Pa. C.S. §2802(16). In addition. local utilities will stil]
have a responsibility to serve low-income segments of
Appendix A
Pennsylvania's population, which obviously 1s not as profitable
as servicing the population at large. 66 Pa. C.S. §2802(10). On
the other hand, out-of-state utilities, like IPL, enter the state
under their own volition and they can just as easily leave to
sell their energy somewhere more profitable. The additional!
responsibilities placed on PECO, like the stranded-cost
recoveries, are a by-product of past regulation and are a
continuing local concern in the new competitive market.
rhe need for viable local utilities 1s vital for the future of
the Commonwealth of Pennsylvania, and any burden placed
on interstate commerce by the recoveries needed to insure the
continuation of these local utilities is not clearly excessive.
[he success of the transition toward competition is highly
dependent on solid transmission and distribution networks,
which must be maintained by local utilities. In addition, these
local utilities are burdened with obligations not shared with
out-of-state competitors to serve as the guarantor of universal
electric service. We cannot envision many more important local
concerns than the need for viable local electric companies, and
we fail to see how IPL’s alleged burden is clearly excessive in
relation to the need for viable local utilities."’
Another local concern that cannot be denied is the need to
suarantee that electric utilities have the necessary funds to
decommission nuclear power plants and to remove spent
radioactive fuel from these plants. Previously, these costs were
Without going into prolonged discussion we would like to note
that we believe that this local concer 1s of such a profound magnitude
that 1t could possibly survive the per se unconstitutional test of Carbone
We believe that any purported “discrimination 1s demonstrably justified
a valid factor unrelated to economic protectionism.” New Energy,
“A
486 U.S. at 274
33a
Appendix A
collected in rates over the life of the plant so that all ratepayers
paid an equa! share, but this will be impossible in an open
market. These expenses are just one example of costs that will
become stranded in the move toward competition that was of
concern to the General Assembly. See 66 Pa. C.S. §2808(c)(1).
It goes without saying that Pennsylvania has an important local
interest in insuring that local utilities are financially able to
decommission plants and to remove the radioactive materials
stored there. Again, we are not convinced that IPL has been
subjected to a burden in clear excess of this local concern.
A last local concern is seen in Pennsylvania’s obligation
to “resolve certain transitional issues in a manner that is fair to
electric utilities, investors, and the employees of electric
utilities.” 66 Pa. C.S. §2802(8). We need not elaborate in great
detail what we perceive as the devastating repercussions that
utilities, their stockholders, and their employees will suffer if
utilities are denied stranded-cost recoveries. Denying PECO
over $5 billion, to which it is entitled, will surely place the
company in a compromised financial position at the very time
when it becomes subject to competition. In sum, Pennsylvania
has an obligation to be fair in its experiment with competition,
and any burden caused by the Commonwealth’s desire to foster
this local concern is not clearly excessive.
B
Finally, we turn to addressing IPL’s arguments that the
provision are on their face and in effect discriminatory, and
that the provisions are severable from the act as a whole. We
chose to address these arguments together because we feel that
if we were to accept IPL’s position that the stranded-cost
provisions are in purpose and/or effect discmminatory, we would
en
34a
Appendix A
inevitably conclude that the entire Competition Act would have
to be struck down. We feel that it is implausible to sever the
stranded-cost provisions from the act as whole because the
General Assembly never envisioned competition on the terms
that IPL is suggesting. As such, examining these arguments
together brings to the fore the contradictory nature of IPL’s
position because it would lead us to eradicate the very thing
that gives IPL standing lvefore this Court.
Accepting IPL’s argument that the stranded-cost provisions
are discriminatory in purpose and effect, despite the compelling
evidence otherwise, is outcome determinative. The provisions
would be per se invalid unless the state can demonstrate, under
rigorous scrutiny, that it has no other means to advance a
legitimate local interest. C&A Carbone, 511 U.S. 383. The
burden that this would place on the state would be very difficult
to overcome, and we do not think for our purposes here that
it would be productive to discuss whether the state has other
means to advance its local interest. Therefore, if we assume
that the provisions are purposely and/or effectively
discriminatory, it is also safe to assume that we would be
required to strike down the stranded-cost provision as
unconstitutional.
IPL would then have us sever the stranded-cost provisions.
IPL bases its severability argument on the severability clause
contained in the act, See Act of Dec. 3, 1996, P.L. 802, No.
138, §5, and the public policy favoring severability.
Commonwealth, Dept. of Education v. First School, 471 Pa.
471, 370 A.2d 702, (1977). In addition, IPL argues that the
issue of severability is a matter of statutory construction and
legislative intent. Although we agree with the way IPL has
framed the issue, we believe that severing the stranded-cost
sania
35a
Appendix A
provisions would mutilate the Competition Act and would be
contrary to the intent of the General Assembly. Severing the
provisions would also jeopardize the transition toward
competition to everyone’s detriment and would place
Pennsylvania’s local utilities in a precarious and unfair financial
position.
Even when a statute contains a severability clause, this
Court is empowered to nullify an entire statute when severing
the challenged provisions would result in a departure from the
legislative intent of the statute or when the challenged provision
are integral to the statute as a whole.'* We believe this case
presents a situation where the provisions are not severable for
both reasons. Dealing with stranded-cost recoveries was
regarded as one of the most difficult tasks in moving toward
competition by PUC. In addition, the General Assembly
recognized the difficulty and importance of stranded-cost
recoveries and empowered PUC “to determine the level of
18. The Statutory Construction Act provides that provisions of a
Statute shall be severable unless:
[T}he court finds that the valid provisions of the statute are
essentially and inseparably connected with, and so depended
upon, the void provision or application, that it cannot be
presumed the General Assembly would have enacted the
remaining valid provisions without the void one; or unless
the court finds that the remaining valid provisions, standing
alone are incomplete and are incapable of being executed
in accordance with the legislative intent
| Pa.C.S. §1925; see also West Shore School Dist. v Pennsylvania Labor
Relations Bd., 570 A.2d 1354, 1359 (Pa. Cmwilth. 1990), aff'd, 534 Pa
164, 626 A.2d 1131 (1993) (discussing deference to severability clause
unless legislative intent is destroyed or provisions are integral)
ippendix A
transition or stranded-cost for each utility” and to allow
‘recovery of an appropriate amount of such costs in accordance
with the standards established” under the act. 66 Pa C.S
§2802(16). Moreover, the General Assembly went to great
lengths to set certain guidelines for the recovery of
stranded-costs, and it tied stranded-cost recoveries to the local
utilities’ continuing obligation to maintain transmission and
distribution networks. 66 Pa. C.S. §2808. Severing these
provisions 1s in our minds implausible since they were regarded
as So essential to the transition toward competition envisioned
by the General Assembly and are so interwoven with the local
utilities’ continuing obligation to maintain transmission and
distribution networks.
lhe General Assembly was aware that the Competition Act
was an experiment that would occasion some transitional!
problems. To address these problems, the General Assembly
included provisions in that act that would insure that those local!
concerns discussed above (i.e., viable electric companies,
1uclear decommissioning costs, and fairness) were protected
We are certain that the General Assembly would not have
chosen to proceed with the move toward competition if it would
have jeopardized electric service in Pennsylvania as IPL would
have us do
in conclusion, we hold that the Competition Act does not
involve the Commerce Clause because the act promotes
competition on equitable terms and because the stranded-cost
provisions are consistent with traditional state regulation of
local electric rates. Also, the use of stranded-cost recovery is
part of the national trend toward competitive utility markets,
and the Commerce Clause should not serve as a detriment to
Pennsylvania’s ambitious experiment. In addition. the
|
|
ympetition A
transd /
Lica IUACK
in application of the Supreme ¢
urisprudence because any effect t
interstate commerce is incidenta
not compelling, local concern
APPENDIX B — ORDER OF THE COMMONWEALTH
COURT OF PENNSYLVANIA DATED AND
ENTERED MAY 7, 1998
IN THE COMMONWEALTH COURT
OF PENNSYLVANIA
No. 1597 C.D. 1997
INDIANAPOLIS POWER & LIGHT COMPANY
Petitioner
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Respondent
ORDER
AND NOW, this 7th day of May, 1998, the order of the
Pennsylvania Public Utility Commission in the above-captioned
matter 1s affirmed
s/ James Gardner Colins
JAMES GARDNER COLINS.,
President Judge
ree Te
39a
APPENDIX C — OPINION AND QUALIFIED RATE
ORDER OF THE PENNSYLVANIA PUBLIC UTILITY
COMMISSION DATED MAY 22, 1997
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Commissioners Present: Public Meeting held May 22, 1997
John M. Quain, Chairman, Statement attached
Robert K. Bloom, Vice Chairman
John Hanger, Statement attached
David W. Rolka, Dissenting in part — Opinion attached
Nora Mead Brownell
Docket Nos.
R-00973877
R-00973877C0001
R-00973877C0002
Application of PECO Energy Company For Issuance Of A
Qualified Rate Order Under Sections 2808 and 2812 Of The
Public Utility Code
Pennsylvania Public Utility Commission, Office of Consumer
Advocate, The Environmentalists, Office of Trial Staff, Office
of Small Business Advocate and Consumers’ Education and
Protective Association, et a/., Honorable Vincent J. Fumo,
Senator, Honorable Angel L. Ortiz, Councilman, Allegheny
Power, Indianapolis Power and Light Company, Enron Capital
and Trade Resources, Pennsylvania Power and Light Company,
Minority Energy Coalition, GPU Energy, Lance Haver, and
Philadelphia Area Industrial Energy Users Group,
Intervenors
v.
PECO Energy Company
40a
Appendix C
. OPINION AND QUALIFIED RATE ORDER
May 22, 1997
l. Introduction and Overview
On December 3, 1996, Governor Thomas J. Ridge signed
into law Act 138 entitled “the Electricity Generation Customer
Choice and Competition Act” (the Act). The Act is reduced to
law in the Public Utility Code (the Code), at 66 Pa. C.S. §2801,
et seq. The Act provides a detailed legislative scheme for the
restructuring of the Pennsylvania electric industry by, in part,
allowing retail customers the opportunity to choose their
generation supplier beginning January 1, 1999. (66 Pa. C\S.
§2806).
A provision of the Act at 66 Pa. C.S. §2806(d) requires
that each electric utility in the Commonwealth submit to the
Commission a restructuring plan between April 1, 1997 and
September 30, 1997. The plan will, in effect, restructure the
rates, rules, regulations and practices of each jurisdictional
electric utility in accordance with the intention of the Act and
meet the new market structure. The ultimate goal of the
restructure 1s to deregulate the generation function of electric
SEIVICe.
In connection with the restructuring of the electric utilities,
the Commission 1s authorized to issue a Qualified Rate Order'
(QRO) to facilitate the recovery or financing of qualified
1. A Qualified Rate Order 1s an Order of the Commission adopted
in accordance with Section 2812 of the Competition Act, authonzing
the imposition and collection of intangible transition charges. 66 Pa C.S
§2812ig)
4la
Appendix C
transition expenses of an electric utility or assignee. Subsequent
to the effective date of the Act, an electric utility may file an
application for a QRO concurrently with, prior to, during or
following the filing of its restructuring plan under Section 2806
(66 Pa. C.S. §2812(a)(2)(11)).
Moreover, a utility has the option to request expedited
review by the Commission of its request for a QRO, in which
case, the Commission must render its final determination on
the request within 120 days after the request for expedited
review. (66 Pa. C.S. §2812(b)). Applications for QROs must
contain the following elements:
(1) acomplete accounting of the utility’s transition
or stranded costs;
(11) detailed information regarding the utility’s
proposal for the sale of intangible transition
property or the issuance of transition bonds,
and
(111) information regarding the clectric utility’s
planned use of the proceeds.
66 Pa. C.S. §2812(a)(2)(1).
After notice and opportunity to be heard, the Commission
may issue a final ORO for all or a portion of the amount of the
transition or stranded costs that it determines to be just and
reasonable for the utility to recover from ratepayers under
Section 2804 (concerning standards) and 2808 (concerning the
Competitive Transition Charge). The Commission is authorized
42a
Appendix C
to issue a final QRO only for the amounts which it finds to be
in the public interest.’ (66 Pa. C.S. §2812(a)(2)(i1i)).
Il. History of the Proceeding
PECO Energy Company (PECO or Company) proffered
the following history of its Application for Issuance
(Application) of a QRO:
PECO filed its Application for a Qualified Rate
Order on January 22, 1997 and concurrently served
copies of its filing on the Offices of Trial Staff
(OTS), Consumer Advocate (OCA) and Small
Business Advocate (OSBA) and on the Philadelphia
Area Industrial Energy Users Group (PAIEUG). The
Company [PECO] also provided immediate notice
of its Application to all of the other parties which
actively participated in its last electric base rate case,
among other interested parties, and began including
bill inserts commencing with all bills issued on the
date of the filing. In addition, PECO published
notice of the Application in all newspapers of
general circulation in its service territory and
proposed that notice be published promptly in the
Pennsylvania Bulletin, which it was on February |,
1997
(PECO M.B., p. 5). (Footnotes omitted.)
2. The Commission must complete its review of the Application
and issue its final determination by no later than nine (9) months from
the filing, unless the utility requests expedited treatment under 66 Pa
CS §2812(b), or 15 days after the utility has filed its restructuring plan
pursuant to 66 Pa. C.S. §§2806, 2812(a)(2)(n)
43a
Appendix C
Formal Complaints in this proceeding were filed by the
OCA and an ad hoc group which includes: Delaware Valley
Citizens’ Council for Clean Air, Citizen Action, NESIP,
Pennsylvania Public Interest Research Group, Philadelphia
Solar Energy Association, Sierra Club and Trout Unlimited -
Pennsylvania Council (collectively referred to as
Environmentalists).
The following parties were designated as intervenors:
Action Alliance of Senior Citizens, Tenant Action Group, John
W. Long, Jr., Consumers’ Education and Protective Association
(the preceding parties were all represented by the same attorney
and will be referred to as CEPA). Senator Vincent J. Fumo
(Senator Fumo), Councilman Angel L. Ortiz, West Penn Power
Company t/a Allegheny Power, Indianapolis Power & Light
Company (IP&L). Enron Capital & Trade Resources (Enron),
Pennsylvania Power & Light Company (PP&L), Minority
Energy Coalition (the Coalition included the Greater
Philadelphia Urban Affairs Coalition, the Hispanic Association
of Contractors and Enterprises, Intercultural Family Services,
Inc., the Urban League of Philadelphia, and the Partnership
CDC.), Metropolitan Edison Company and Pennsylvania
Electric Company (individually and collectively trading as GPU
Energy) (GPU), Lance Haver and the Philade!phia Area
Industrial Energy Users Group (PAIEUG). PAIEUG included
Air Liquide America Corporation, Allied Signal, Inc. — Fibers
Division, Boeing Defense & Space Group — Helicopters
Division, The Budd Company, Ford Motor Company, Lukens
Inc., Merck & Co. Inc., Nabisco Inc., Occidental Chemical
Corporation, Rohm and Haas Company, Smith Kline Beecham
Pharmaceuticals, Sun Company, Inc., Temple University,
l'homas Jefferson University, U.S. Steel — A Unit of USX
Corporation. The OTS and the OSBA participated as active
parties in this proceeding.
444
Appendix C
Prehearing conferences were held on January 27, 1997, and
March 4, 1997. Two public participation hearings were held
on March 6, 1997, in Philadelphia. Seven days of hearings were
held from March 10, 1997 through March 18, 1997, for the
cross-examination of expert witnesses. Two additional public
participation hearings were held on March 19, 1997, one in
Media and one 1n Norristown.
The Administrative Law Judge’s (ALJ) Recommended
Decision was issued April 14, 1997. Whereupon, the following
parties filed Exceptions: PECO, Senator Fumo,
Environmentalists, CEPA, OCA, IP&L, and PAIEUG. Reply
Exceptions were filed by the following parties: PECO, Senator
Fumo, Environmentalists, CEPA, OCA, PAIEUG, OTS, OSBA,
IP&L and Enron.
A. Procedural Matters’
1. Standing of Indianapolis Power and Light
PECO contends in its Reply Exceptions that IP&L lacks
standing in its proceeding. PECO asserts that IP&L is not a
“customer” and therefore, lacks the requisite direct, substantia!
and immediate interest to possess standing. The issue of
standing should have been raised by PECO in its Exceptions
and not in the Reply Exceptions. Procedurally, we conclude
that PECO has waived its right to object to the ALJ's ruling.
3. On Apnil 14, 1997, Senator Fumo, CEPA, et al., filed a Motion
for Consolidation and Temporary Stay cf Proceedings. Subsequently,
on May 12, 1997, Senator Fumo, CEPA, et al., filed an Application for
Leave to Withdraw the Motion which has been considered and 1s, hereby,
granted.
45a
Appendix C
Furthermore, the Act requires this Commission to foster a
competitive retail generation market. Therefore, any participant
in this future market has a direct interest in the structure and—
rules of that market. As the owner of generation resources which
it may sell in the Commonwealth, IP&L has a direct interest in
this proceeding.
2. Allegheny Power Settlement
By Letter dated February 27, 1997, Allegheny Power
submitted a Settlement Agreement between itself and PECO.
The Settlement represents that Allegheny Power’s primary
concern with this proceeding was the intended use of the
proceeds of the sale of the Intangible Transition Property (ITP).
The Settlement also states that Allegheny Power is satisfied
with the additional commitments made by PECO regarding the
use of any proceeds. We find this Settlement Agreement to be
reasonable and in the public interest and, as a result, it is
approved.
III. Primary Recommendation
A. Expedited Qualified Rate Order Procedure
PECO requested an expedited review of its Application
for a QRO* pursuant to Section 2812(b)(1)(i) of the Code, 66
Pa. C.S. §2812(b)(1)(i). PECO asserted that the aforecited
Section of the Code expressly authorizes the issuance of a QRO
in advance of the final approval of a utility’s restructuring plan
to facilitate the securitization of stranded costs. PECO’s
Application seeks to utilize Section 2812 of the Act to pass the
4. PECO seeks a QRO which will permit it to recover Qualified
Transition Expenses totalling $3.773 billion.
46a
Appendix C
benefits of securitization on to its customers at the earliest
possible date. PECO anticipated that the net effect of the
securitization process would be an annual rate reduction of
approximately $111 million or about $1.1 billion over the next
ten years. (PECO M.B., p. 1).
The ALJ’s primary recommendation in this matter was to
dismiss the filing and refer the entire matter to PECO’s
restructuring proceeding. (R.D., p. 17). In large part, the ALJ
reached that determination based upon his theory that an
expedited application for a QRO must limit itself to
“uncontroversial” claims for stranded investment. In his
discussion regarding PECO’s Application, the ALJ stated that
“Expedited QRO cases can only be completed in 120 days if
the assets which are subject to the securitization are
uncontroversial.” (R.D., p. 17). The ALJ concluded that a fully
litigated proceeding could not be concluded within that time
frame given the number of standards. Accordingly, the ALJ
determined that the Act could only have meant that an
application for an expedited QRO must be “so clearly
uncontroversial that it will allow review in the minimum time
(120 days) permitted (and preferably, without a hearing).”
(R.D., p. 11).
PECO filed am exception to the ALJ’s determination that
an expedited QRO must be limited to clearly uncontroversial
assets. PECO asserts that a denial based upon the controversial
nature of the claims at issue would “simply emasculate the
statute.” PECO contends that a rule that would require the
Commission to side-step controversial issues would have the
practical effect of conveying upon every intervenor veto power
over a utility’s securitization request. (PECO Exc., p. 9).
47a
Appendix C
PECO also points out that although parties to this matter
argued over various elements of the claim, not all parties
contested the same elements or even agreed upon the
adjustments advanced for a particular element. PECO suggests
that given an issue of first impression under these
circumstances, there is little hope of ever filing an application
that would meet the ALJ’s noncontroversial test. (PECO Exc..,
pp. 8-10).
PECO also argues that mere opposition to an issue does
not require that the application be deferred in its entirety. Yet
that is precisely what the ALJ would require, according to
PECO. PECO asserts that it is up to the Commission to
determine whether the alleged controversy is legitimate and, if
so, whether interested parties have been provided an adequate
opportunity to present their case. (PECO Exc., p. 10).
The Environmentalists responded by arguing, as the ALJ
found, that the Act must have envisioned a noncontroversial
application because of the brief time frame. They assert that
the state of the record and the arguments now being made are
clear indications that the Act envisioned a noncontroversial
filing. (Environmentalist R.E., pp. 2-6).
In its Reply Exceptions, the OCA submits that the ALJ
correctly determined that expedited securitization pursuant to
the Act should be utilized ior less controversial claims which
can be known and measured with reasonable certainty, and
whose recovery is reasonably assured under the Act. The OCA
submits that it is the size, scope, complexity and significance
of PECO’s request, which, when adjudicated in such an
expedited fashion, is not capable of a fair and proper resolution
given the allegedly insufficient record produced. The OCA
48a
Appendix C
urges the Commission not to make irrevocable decisions in this
expedited proceeding, which could later prove unwise, givena
more fully developed record, just to begin a securitization
process a few months earlier than would otherwise be permitted.
(OCA RE., p. 8).
We reject, as unpersuasive, both the ALJ’s recommendation
end the parties’ arguments which suggest a noncontroversial
standard. PECO is correct in stating that such a standard renders
impossible any expedited QRO filing. Controversy will exist
over these matters. However, these matters are within the
specific expertise of this Commission and we will fulfill our
responsibilities under the Act.
We reiterate that nothing in the Act provides that an
expedited QRO must limit itself to noncontroversial matters
and we decline to graft such a requirement on the process here.
The Act clearly states that applications for expedited
securitization may be filed. Also, the Act does not limit the
amount of securitization for which a utility may seek expedited
review. Further, the Act plainly contemplates that there will be
some contest in an expedited securitization proceeding. Section
2812(b)(1)(i) of the Act, 66 Pa. C.S. §2812(b)(1)(1), expressly
provides for a determination of an expedited securitization
application “[a]fter notice and an opportunity to be heard.”
Based upon the foregoing, we reject the ALJ's determination
regarding a threshold requirement of “noncontroversial”
stranded investment claims and grant PECO’s Exception.
Senator Fumo, in his Exceptions, argues that the ALJ
incorrectly implied that a QRO may be tendered prior to the
Commission’s consideration and evaluation of a utility's
comprehensive restructuring plan. It is the position of Senator
I A A TA AL AT a a
49a
Appendix C
Fumo that the implication of the Recommended Decision is
contrary to the plain language of the Act’s definition of
“transition or stranded costs.” Senator Fumo argues that, by
definition, stranded costs may only be determined as part of a
utility’s restructuring plan. Senator Fumo asserts that it is clear
that a utility may file an application for a QRO prior to its
restructuring plan, but it does not necessarily follow that a utility
may receive a QRO in advance of the Commission’s
consideration of a utility’s comprehensive restructuring plan.
(Senator Fumo Exc., p. 3). Senator Fumo also excepts to the
ALJ's finding that the 120-day statutory period for review of
PECO’s QRO mandates a resolution during the 120-day time
frame.
We disagree with Senator Fumo’s argument that, by
definition, stranded costs are only to be determined as part ofa
utility’s restructuring plan. We find that this assertion is
incongruent with the expressed language of the Act. Pursuant
to Section 2812 of the Act, expedited requests for securitization
must be decided within 120 days. This is the time frame
approved by the General Assembly of Pennsylvania. We do
not consider it within our purview to question the propriety of
this time frame. Accordingly, the Exception of Senator Fumo
regarding the propriety of the Expedited QRO review is denied.
B. PECO’s Securitization Request and Mitigation Efforts
PECO asserted that the approval of its securitization
proposal in this case would act to significantly mitigate its
stranded costs. PECO added that the mitigation initiatives it
has taken to date have enabled PECO to avoid filing for a
general rate increase since 1989 and wiil save custumers
hundreds of millions of dollars in terms of avoided stranded
50a
Appendix C
costs. Furthermore, PECO noted that its mitigation efforts were
launched well before the Act became law, and not in response
to it. (PECO M.B., pp. 58-59).
The ALJ found that PECO did not meet its burden of
proving that it made a reasonable effort to mitigate its stranded
or transition costs pursuant to Section 2806(c)(4)(i)-/vi) of the
Act. (R.D., p. 16). The ALJ concluded, based upon his review,
evaluation and analysis of the record that PECO failed to make
a reasonable effort to mitigate its stranded costs in the totality
of the circumstances. (R.D., p. 17).
PECO, by way of Exception, contends that the ALJ
disregarded substantial record evidence, and misconstrued the
requirements imposed by the Act. PECO contends that the
ALJ's criticisms are clearly misplaced. PECO disagrees with
the ALJ’s interpretation of the Act contending that the various
mitigation measures enumerated in Section 2808(c)(4) do not
constitute affirmative obligations with which each electric
utility must comply, but instead represents a list of examples.
PECO points out that the term “list of examples” was a term
actually used by the ALJ in his discussion of the issue. (PECO
Exc., p. 12).
In its Reply Exceptions, the OCA argues that the ALJ raised
many serious concerms regarding the timeliness and adequacy
of PECO’s mitigation efforts. The OCA urges the Commission
to ensure that all parties have the right to thoroughly address
this issue in PECO’s restructuring proceeding where the
timeliness and adequacy of PECO’s mitigation efforts can be
completely reviewed. (OCA R.E., p. 8).
Sla
Appendix (
In their Reply Exceptions, the Environmentalists
characterize PECO’s actions as an effort to improve its
profitability. The Environmentalists opine that PECO offers a
circular view of mitigation wherein the securitization. which it
must justify by proving it has mitigated, is itself a mitigation
measure. (Environmentalists R.E., p. 7).
We interpret the provisions of Section 2808(c) of the Act
as elements to be considered in setting a Competitive Transition
Charge (CTC) and, by reference to Section 2808 within Section
2812, in ruling ona request for a QRO. We fir that the failure
of an electric utility to reasonably mitigate its stranded costs is
not a reason, in and of itself, to dismiss a request for a ORO or
a CTC. We are of the opinion that mitigation efforts may be
considered in the process of determining the appropriate level
of the QRO or CTC, but is not a threshold evidentiary standard
for the establishment of a QRO or CTC.
Our reading of Section 2808 of the Act. leads us to conclude
that the list of items contained in Section 2808(c)(4)(i)-(iv) of
the Act are examples of mitigation expenses, and are not
required actions pursuant to the Act. While PECO has
undertaken some mitigation efforts, and no party has challenged
its mitigation efforts to date, we believe that it is appropriate
and in the public interest that this issue be further scrutinized
in the restructuring proceeding.
Accordingly, we shall grant the Exception of PECO on this
issue to the extent that it is consistent with the foregoing
discussion. We shall reject the ALJ’s finding and
recommendation regarding PECO’s mitigation efforts made
pursuant to Section 2808(c)(4)(i) through (iv)
S2a
Appendix C
IV. Alternate Recommendation
A. Introduction
The ALJ made it clear that his primary recommendation
in this matter is to deny PECO’s request for an expedited QRO
in its entirety, and to incorporate the record from this proceeding
into the record of PECO’s Application for Approval of its
Restructuring Plan. Recognizing, however, that the Commission
may not accept that recommendation, the ALJ provided an
alternate recommendation. This alternative, if adopted, would
grant PECO’s request to the limited extent that 1t be permitted
to securitize assets and issue transition bonds in the amount of
$328.078 million
A number of legal and technical issues have been raised
by the various parties concerning the alternate recommendation
B. Legal Issues
During the course of this proceeding, various parties raised
issues regarding the burden of proof, the irrevocable nature of
all or a portion of the QRO, the constitutionality of the Act and
the process employed in this particular proceeding, antitrust
implications, the Rate Cap provided in Section 2804 of the Act
and the “regulatory compact” which PECO has asserted exists
between itself and the Commonwealth of Pennsylvania. We
will address these matters seriatim
1. Requirements of the Act
a. Burden of Proof
As the proponent of its Application and the QRO sought
therein, PECO 1s the party with the burden proof. 66 Pa. C.S
53a
Appendix (
§3332(a). Historically, a party which has the burden of proof
before this Commission is required to Carry that burden by
proving its case by a preponderance of the evidence. Samuel J
Lansbury, Inc. v. Pennsylvania Public Utility Commission, 572
A.2d 600 (Pa. Commonwealth Ct. 1990), petition for allowance
of appeal denied 529 Pa. 654, 602 A.2d 863 (1992): See also
North American Coal Corporation vy. Air Pollution Commission,
279 A.2d 356 (Pa. Commonwealth Ct. 197] ) (burden of proof
before administrative tribunals is the same as most civil
proceedings, a preponderance of the ev idence). A
preponderance of the evidence means that one party has
provided evidence which is more convincing, by even the
smallest amount, than that submitted by its opponents. Se-Ling
Hosiery v. Margulies, 364 Pa. 45.70 A 2d 854 (1954)
Before the ALJ, several parties argued that PECO must be
held to a higher standard of proof than a preponderance of the
evidence. For example, Senator Fumo argued that PECO must
demonstrate “a clear right to relief. free from all doubt, and
further show that some irreparable immediate harm wil! result
if such relief is not provided.” (Fumo MB. p. 22). CEPA argued
that PECO “must demonstrate that it has clear right to relief.
that the need for relief 1s immediate. that the applicant would
suffer irreparable injury if not granted relief, and that the relret
requested 1s not injurious to the public interest.” (CEPA MB
p. 5). PECO asserted that its burden is the historica!
preponderance of the evidence standard (PECO Reply
Memorandum of Law. p. 9)
At Page 18 of the Recommended Decision. the ALJ
determined that PECO is required to prove its case by a
preponderance of the credible evidence
S4a
Appendix C
The Environmentalists, and others, have excepted to the
ALJ's determination that PECO’s burden here is a
preponderance of the evidence standard. The Environmentalists
argue that an expedited QRO “is an extraordinary remedy,
within the context of an extraordinary statute
(Environmentalists Exc., p. 6). ‘Based upon this view, the
Environmentalists argue that PECO must meet its burden “with
compelling evidence.” (/d.). Similarly, Senator Fumo and CEPA
argue that PECO must meet its burden by showing that it has a
“clear nght” to a QRO. (Fumo Exc., p. 5). (CEPA Exc., pp.
4-5). PECO responds that all three parties which filed
exceptions on this issue misconstrue the nature of the Act’s
securitization provisions. (PECO R.E., pp. 4-5).
We have reviewed the Act in depth and can find no support
for the conclusion that a higher burden of proof should be
required in this action than has been historically demanded of
a party before this Commission. Senator Fumo’s and CEPA’s
arguments and authority are grounded in case law which
addresses injunctive relief proceedings. Injunctive relief actions
have historically imposed extremely high burdens of proof on
parties seeking that form of remedy. Here, the Act provides
particular standards which PECO must address in the course of
its case, such as the “known and measurable” standard for
stranded costs set forth in Section 2803 of the Act. However,
the burden of proof by which PECO establishes those standards
is a preponderance of the evidence as that term is defined by
Se-Ling Hosiery. Lansbury, supra. We approach this issue with
a focus on the fact that the potential irrevocability of the
Commission’s QRO compels us to be assured that the
substantial record evidence is credible.
Therefore, the Exceptions of the Environmentalists, et al.,
on this issue are denied.
SSa
Appendix C
b. Standards
As we have noted above, PECO has the burden of proving,
by a preponderance of the evidence, that the relief it seeks here
should be awarded. In this matter, PECO must establish that
its Application for securitization of $3.77 billion of expenses
is warranted. In reviewing PECO’s Application, we must ensure
that our findings and determinations are supported by
substantial evidence of record.
We are mindful as we review PECO’s Application that we
are also making a determination that a portion of PECO’s
asserted stranded investment qualifies for recovery as stranded
or transition costs as those terms are defined in the Act.
Accordingly, we are guided by the Act’s standards which
provide that any amount of stranded investment that is allowed
for recovery must be (1) known and measurable: (2) calculated
at the net present value; (3) just and reasonable: and (4) in the
public interest. 66 Pa. C.S. §§2804, 2812.
The term “just and reasonable” has been a guidepost in
traditional ratemaking. The Pennsylvania Supreme Court has
Stated:
the term “just and reasonable” was not intended to
confine the ambit of regulatory discretion to an
absolute or mathematical formulation but rather to
confer upon the regulatory body the power to make
and apply policy concerning the appropriate balance
between prices charged to utility consumers and
retums on capital to utility investors consonant with
constitutional protections applicable to both.
Pennsylvania Public Utility Commission v. Pennsylvania Gas
and Water Co., 492 Pa. 326, 337: 424 A.2d 1213, 1219 (1980),
_ eee 0 am
S6a
Appendix C
certiori denied 454 U.S. 824, 102 S.Ct. 112, 70 L.Ed.2d 97. In
the context of the Act, we deem the essence of “just and
reasonable” to require the balancing of the interests of
shareholders, ratepayers, and new entrants to the market as we
move to a competitive electric generation market. Similarly,
as we approach this proceeding with a view to the “public
interest,” the “public” includes the ratepayers, the utility and
its shareholders as well as participants in the emerging electric
generation market.
In its Application, PECO has requested that any QRO which
is issued in this proceeding be declared to be irrevocable,
(Application, { 23, p. 14). The Act expressly provides for our
authority to provide that all, or a portion, of a QRO shall be
irrevocable:
Notwithstanding any other provision of law, the
Commission has the power to specify that all or a
portion of a Qualified Rate Order shall be
irrevocable. To the extent so specified, neither the
order nor the intangible transition charges
authorized to be imposed and collected under the
order shall be subject to reduction, postponement,
impairment or termination by any subsequent action
of the Commission. Nothing in this paragraph 1s
intended to supersede the right of any party to
judicial review of the Qualified Rate Order.
66 Pa. C.S. §2812(b)(3).
The determination of whether to provide that all or a portion
of a QRO is irrevocable is to be made separately from the
determination of whether to grant the QRO in the first instance
OP OT aa
S7a
Appendix C
66 Pa. C.S. §2812(b)(3). Although the Act does not expressly
provide standards for approval of irrevocable status within that
Section, we find that this determination should be made based
upon a just and reasonable standard and whether, based upon
all the evidence, a grant of irrevocable status is in the public
interest. See 66 Pa. C.S. §§1301, 2812.
In making the determination of whether or not approval of
irrevocable status is just and reasonable and in the public
interest, we must determine whether such a grant will produce
net benefits, considering the risks, overa revocable QRO. This
determination must be made from the perspective of the
ratepayers who will be obligated to finance the ful] costs of
such bonds. As we have noted, PECO must establish that
irrevocable status is warranted by a preponderance of the
evidence and our determination must be supported by
substantial evidence. Lansbury. Our determination of the
irrevocable status of the QRO and the evidentiary discussion
of that determination is provided infra.
2. Constitutional Issues
a. Statute
Various parties in this proceeding (e.g. CEPA, Senator
Fumo, the Environmentalists) have raised issues regarding the
constitutionality of the statute and the manner of its enactment.
PECO asserted that this Commission does not have authority
to make constitutional determinations relating to our governing
statute. The ALJ agreed with PECO and declined to rule on
these constitutional issues. The Environmentalists filed
Exceptions relating to the constitutionality of the statute. but
generally agreed with the ALJ’s position. (Environmentalist
Exc., pp. 10-12)
58a
Appendix C
In Borough of Green Tree v. Board of Property
Assessments, 459 Pa. 262, 328 A.2d 819 (1974), the
Pennsylvania Supreme Court stated:
Our opinions in the past have generally shown an
awareness that the more direct the attack on the
statute, the more likely it is that exercise of equitable
jurisdiction will not damage the role of the
administrative agency charged with enforcement of
the act, nor require, for informed adjudication, the
factual fabric which might develop at the agency
level. The reason, we believe, is that the
determination of the constitutionality of enabling
legislation is not a function of the administrative
agencies thus enabled. See Philadelphia Life
Insurance Company v. Commonwealth, 410 Pa. 571,
190 A.2d 111 (1963). The more clearly it appears
that the question raised goes directly to the statute
the less need exists for the agency involved to throw
light on the issue through exercise of its specialized
fact-finding function or application of its
administrative expertise.
(459 Pa. at 291; 328 A.2d at 825).
Based upon the foregoing, we affirm the ALJ’s ruling and will
not rule on the constitutional challenges to the statute based
upon allegations regarding its enactment or its provisions
regarding the ability of this Commission to provide for an
irrevocable QRO. With regard to our determination of the
irrevocable nature of the QRO, we will apply the standards of
the Act as set forth above.°
5. We note that both PECO and the Environmentalists cite to United
States v. Winstar Corp., 116 S.Ct. 2432 (1996), in support of arguments
(Cont'd)
vO
59a
Appendix C
Therefore, the Exceptions of Senator Fumo, et al.. on this
issue are denied.
b. Due Process
Several of the parties argued that the process involved in
this matter was so abbreviated as to violate the parties’ rights
to due process. For example, the Environmentalists argued that
although hearings were provided, they were denied the benefit
of hearings due to the compressed time schedule.
(Environmentalists M.B., pp. 52-53). The ALJ agreed with the
Environmentalists with regard to the compressed time frame.
(R.D., p. 17).
The Environmentalists filed Exceptions to the ALJ’s
alternative recommendation and reiterate, almost verbatim, their
briefing position on the procedure in this proceeding.
(Environmentalists Exc., pp. 7-9). PECO excepted to the ALJ’s
primary recommendation, asserting that the time frame was
established by the Act. PECO argued that the parties conducted
extensive discovery, submitted testimony and exhibits and had
seven hearing days in which to cross examine PECO’s
witnesses. PECO also noted that four separate days of public
(Cont'd)
in this matter. The Environmentalists argue that Winstar provides that
an irrevocable QRO would bind future General Assemblies and,
therefore, violates the Pennsylvania Constitution. Article II, Section |
(relating to powers of the General Assembly). (Environmentalists Exc..
pp. 11-12). PECO argues that Winstar requires recognition of a
“regulatory compact” and recovery of stranded investment. (PECO M.B.,
pp. 16-10. PECO R.E., pp. 10-11). As noted in this Opinion and Order,
we will not determine constitutional challenges here, nor is it necessary
to resolve PECO’s regulatory compact arguments in the context of this
proceeding.
60a
Appendix C
input hearings were provided. (PECO Exc., pp. 4-5). In view
of the discovery and actual hearing opportunities, PECO argues
that due process has been observed in the context of this
proceeding.
As PECO points out, the time frame within which to decide
this matter is provided in the Act: 120 days. 66 Pa. C.S.
§2812(b)(1)(i). Also, there is no dispute that both evidentiary
and public input hearings were provided in this matter.® In
Barasch v. Pennsylvania Public Utility Commission, 546 A.2d
1296 (Pa. Commonwealth Ct. 1988), petition for allowance of
appeal denied 523 Pa. 652, 567 A.2d 655 (1989), the
Pennsylvania Commonwealth Court provided an extensive
discussion of procedural due process requirements in
Commission proceedings. In that case, the Commonwealth
Court followed Conestoga National Bank of Lancaster v.
Patterson, 442 Pa. 289, 275 A.2d 6 (1971), and provided that
due process is required in administrative actions which are
adjudicatory in nature and involve substantial property rights.
In the case before us, we agree with the Environmentalists that
the matter is adjudicative in nature. To a limited extent, we
also note that the ratepayers of PECO have substantial property
rights at issue analogous to the Commonwealth Court’s analysis
of the ratepayer rights in Barasch. 546 A.2d at 1305. Although
this case represents the determination of a rate decrease, it does
involve the securitization of assets which PECO’s ratepayers
will be obligated to fund.
6. The Environmentalists make the argument that PECO’s notice
of its Application was deficient. (Environmentalists Exc.. p. 9). However,
as noted by PECO, the Environmentalists received actual notice of these
proceedings and fully participated therein. Accordingly, they lack
standing to raise this issue. Barasch v. Public Utility Commission, 546
A.2d 1296, 1302, n. 7 (Pa. Commonwealth Ct. 1988). In any event. PECO
clearly provided notice as required.
6la
Appendix C
Having determined that this proceeding is adjudicatory in
nature and does involve substantial property interests, what then
does due process require? “[T]he essential elements of due
process are notice of governmental action and an opportunity
to be heard to challenge that action, although the timing of
provision of these safeguards may vary depending on the
circumstances.” Barasch, 546 A.2d at 1305. Our review of the
schedule of this proceeding, and the evidence adduced at
hearing, leads us to conclude that the parties were afforded
adequate notice and a meaningful opportunity to be heard at an
appropriate stage of the proceeding. A meaningful opportunity
to be heard includes reasonable examination and cross
examination. AT&T Communications of Pennsylvania, Inc. v.
Pennsylvania Public Utility Commission, 570 A.2d 613 (Pa.
Commonwealth Ct. 1990).
There is no doubt that the 120 day time schedule provided
by the Act required that all parties exercise diligence in the
conduct of their respective cases. That, however, is not to say
that four months was too brief a period to permit meaningful
record development. We agree with PECO that the process in
this case, which provided for extensive discovery and seven
days of evidentiary hearings, as well as four separate days of
public input hearings, provided the requisite due process
protections. Our review of the schedule and the record in this
matter leads us to conclude that all parties were provided with
adequate notice and a reasonable opportunity to appear and be
heard on the issues in this case. As we will discuss below with
regard to specific elements of this case, we find that the record
as developed in this proceeding is more than sufficient to enable
us to reach deliberate and reasoned determinations of these
issues.
Environmentalists
that there is nothing in the record to support a conclusion
1 federa!i antitrust iaw
1)
,
Ja
evidence. Lansbury, supra
y
'
factual basis upon which they base their claim of
‘
}. Antitrust and Commerce Clause Issues
I ny! It irgued vpetiore tf
sted relief “may violate state common law of antit
4
(Environmentalists M.B., pp. 53-54
statement is footnoted with citations to several antitru
‘ h " ve. sje l lewe!l 4 , " ~¢ ‘
es at the state and federal level. No other argument 1s mad
: lid 1 address this issue in his Recommend
the Environmentalists repeat, verbatin
In their Exception
sentence which was in their Main Briet
ingle footnoted
Exc., pp. 13-14). PECO responds by noting
ere 18 a violation of state or federa! antitrust provision
Vit. i
ECO R.E., pp. 1/-18)
A sre ‘ an } . —.. (2 ‘ " + * + ~ Cy h rier
a Wad disc UsovLU aDdove In} tne section reiaiinyg tO OUTQCC
proof, our determinations in this proceeding must be
ipported by substantial evidence and the part advancing
rticular proposition must prevail by a preponderance of the
The basic premis
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