# Petition for Writ of Certiorari — Indianapolis Power & Light Co. v. Pennsylvania Public Utility Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386018_1084%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1999 - **Citation:** 526 U.S. 1005 ## Text 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 | } 4 yi \frande ad { l 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 ' ’ ' ’ ’ e | TY " " f | ‘ , ite law, the Commerce la requ ’ nr ' } ‘ ; : ‘ t } ' | i ; 1¥ ‘ sus | : ’ ’ } ' ' " ’ ' r f | ; r : A r | i vu ‘ j I } : nn . th i riir . 1} J ’ A / pip fers in | " | } if } r ? ' : Fal ; ‘ , ; m , aT ’ ’ , 4 ( ‘ . ¢} } ‘ i j m 12 t? ’ yr ? r | j iD i i | i i i ' . rr that inforn t} rr nt : j : ; si} ‘ ‘ ; | : ' ’ } T raft ‘ ' TY nier : " : , aa y \ ‘ ‘ A Don 7 . . ; . . | ts 9 ’ } , , , , , , , ' ; 7 7 ; ; ) i ) i j ‘ . x id be A , , . ‘ ; rT { f & ‘ ' . J with ve C ah ' ' Wi ik i i ’ ’ , ; \ i ‘ AF, f df it 1} \ wena Ol lic! tit! cl l | Mand other truits of human invenuity terstat HLT in unpredictable future. Implication 1 | (hil nport warrant this Court (tention is the State Court's Theory That “Stranded Cost” Provisions ikscape 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 Precedents. | r ' ' i i { | | ’ if . aa’ \ ' ' \} 1) ae Lebie | ‘ j Cadacnl | [ ( ‘ , \f { ; } ‘?} \ ; VA ‘ ¢} WIS¢ t¢ ‘ ; | \ rihha Wp re’ Se \ s ir icde if GI | 1) | ul ry ‘ el | \\ 4 ’ ‘ \ f I ( ¢ } i COr | i t | ‘ 4 \ y ; ; ‘ , if . \ ‘ Pal aul i i¢ i ( } } i Powe \( ' t} o C ——————— lll _kt:t~é=~*S 1S 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. ' ' t th +} - re ] ‘ ‘ ' | ‘ . 7s Au ’ a j +25 ( | ‘ ' : ' ( >} . ah ’ P f rimninat ’ nrer tof . ' T { \ | ti t ~ f ! ’ ' ; i h4ai ) i a ‘ j , 4 As f ; ‘ ' ‘ ‘ , j 4 j + ‘ (NG ricig)? i H ‘ rT) | ) if \ . af sf fr ’ , ts y , ’ | ‘ . } ry} ‘ , A i \ ; if " ‘ ) if \ - rf \ bLa ( Ab?) ere J i i i | | id] , j e | ¢} f i ‘ J j { f ' 4 ’ . ‘ ‘ | » | ' ’ ’ i] ‘ . ‘ t. ‘ ‘ if iT if Kk ¢ 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 r y r r = ¥ [ mance-basea ra ' t+? | rs? 2 r ’ } ré 4 | rs 7 7 y | ’ T I \ rm ? - a * > , Excerpts of Brief of | ' ’ moi D> ry of TY) f T A} } rt VC cx i ont Compan [ "a , Disk! | \¢ ? . iVanlia FUDIIC UlLITY COmmISSIO ' " ’ ry ' ; Pots ndix G Excerpts of Brie yf Pe . | > - . ; IGianapotll —_ - — —~ od ~ _ 7 5 + ~ —~ » “4 c je — — be - e eS wee Y f. —.- ~ Cc ~ me = _ =¢ 4 i} } t~ +? mmre . ' Dan . . etore Supreme Court of Pennsylvania | Y ’ pendix | Excerpt of Testimony of John R. Brehr Danr YT 1>,)} T \¢ r —, . ge Yaliid IY WLillt Jiil VU la 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 y y irned re ign a) te » & ’ nNnoudci a ; ey r . y Ther aa , t t re ' f A re rover some ?wner ar ; ’ mpiity oulatlior; Vig t) rré ry c ery er act ? > We ' ne Tate f } \ ia t) a. } , {) ri¢ } Fif ) y " ; ; > “ - . ‘ ) iT} . } appear®r ona -> ADDOT oned te ‘ ’ rr? T¢ ré y té ThHece | . recrnye +7 | ) s j } 1? “ } f) ’ } ‘4 y ‘ - 4 ~~“ | +o ‘ . | j i ) D ) 1s nN Ono np até f mormant acne f »T y , yLISS , Ice , r Te , j ! f [ : ? ? j 7 iC] c CG " : v ' ’ ; | ‘ ‘ : | j } j y 1 , , ) i j TiC)? . ’ P ) " ’ rae ’ he ‘ ‘ ts ‘ ‘ 2 d 4 ; ” ) A ° ‘ 4 dl A _ _ a7 > y , ‘ b- " ‘ } , lid | ; I 1LIOT > er 4 7 ? \e {pp e J ; | I a ( i iit a 7 ~ r=) 7 > + ; | 4 ii a A 3 i | ii I > " . ; ~~ |. " " 9 | 2 | | su | A | i | Vii Lailv ~UiatliVi i ait a | ay : akhaateh a : . intend the mmer r - “a ~i ‘ caiwu ea* i A . at -_ ’ > ay > me mT TY 4 AK iv 4} 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 subm [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386018_1084%3A1. Public record. Not legal advice.