Duquesne Light Co. v. Barasch
1989 U.S. LEXIS 313, 109 S. Ct. 609, 488 U.S. 299 (1989)
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Rule of Law:
A state utility regulation scheme does not unconstitutionally "take" property under the Fifth and Fourteenth Amendments simply by disallowing recovery of capital investments that are not "used and useful in service to the public," as long as the overall effect of the rate order is not unjust or unreasonable and allows the utility to operate successfully, maintain financial integrity, and attract capital.
Facts:
- In 1967, Duquesne Light Company (Duquesne) and Pennsylvania Power Company (Penn Power) joined a venture (CAPCO) to build seven large nuclear generating units to meet projected electricity demand.
- By 1980, intervening events, including the Arab oil embargo and the Three Mile Island accident, significantly changed the outlook for electricity demand growth and the desirability of nuclear energy.
- The CAPCO participants canceled plans for the construction of four of the seven nuclear plants in 1980 due to these changed conditions.
- At the time of cancellation, Duquesne had invested approximately $34.7 million and Penn Power had invested approximately $9.6 million in preliminary construction costs for the four halted plants.
- A 1982 report by the Pennsylvania Public Utility Commission (PUC) found that the CAPCO decisions, from initiation to cancellation, were reasonable and prudent.
- In late 1982, Pennsylvania enacted Act No. 335, which amended the state's Utility Code to prohibit the inclusion of construction or expansion costs of electric utility facilities in the rate base or in rates until the facility is "used and useful in service to the public."
Procedural Posture:
- In 1980 and 1981, Duquesne Light Company sought permission from the Pennsylvania Public Utility Commission (PUC) to recoup its expenditures for the unbuilt plants over a 10-year period.
- In January 1983, the PUC issued a final order granting Duquesne a rate increase that included $3.5 million representing the first payment of the 10-year amortization of its CAPCO losses.
- The Pennsylvania Office of the Consumer Advocate moved the PUC for reconsideration in light of Act 335; the PUC affirmed its original rate order, interpreting Act 335 to exclude canceled plant costs from the rate base but not to prevent their recovery through amortization.
- The PUC also granted Penn Power authority for a rate increase that included amortized recovery of its CAPCO costs.
- The Consumer Advocate appealed both PUC decisions to the Commonwealth Court, which affirmed the PUC's construction of Act 335.
- The Consumer Advocate then appealed to the Supreme Court of Pennsylvania, which reversed, holding that Act 335 prohibited recovery of the costs either by inclusion in the rate base or by amortization, and rejected the utilities' constitutional challenge.
- Duquesne Light Company and Pennsylvania Power Company appealed to the Supreme Court of the United States, arguing the effect of Act 335 violated the Takings Clause of the Fifth Amendment.
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Issue:
Does a state law prohibiting electric utilities from recovering costs for prudently incurred but ultimately canceled power plant construction, when those facilities are not "used and useful in service to the public," constitute an unconstitutional "taking" of property under the Fifth and Fourteenth Amendments if the overall rate structure remains reasonable?
Opinions:
Majority - Chief Justice Rehnquist
Yes, a state law disallowing recovery of costs for canceled utility plants that are not "used and useful" does not constitute an unconstitutional taking as long as the overall rate order ensures a reasonable return. The Court reaffirmed the "end result" test from FPC v. Hope Natural Gas Co. (1944), stating that it is "not theory but the impact of the rate order which counts." The Constitution protects utilities from rates so "unjust" as to be confiscatory, meaning the total effect must allow the company to operate successfully, maintain financial integrity, attract capital, and compensate investors for risk. The Court noted that Pennsylvania determines rates under a modified historical cost/prudent investment system and found that the overall rates granted to Duquesne and Penn Power, even with the exclusion of CAPCO costs, were well within the constitutional range of reasonableness and did not jeopardize financial integrity or investor compensation. The Court rejected the argument that state legislatures cannot give specific instructions to utility commissions, emphasizing that rate-making is a legislative power. It also dismissed the challenge based on theoretical inconsistency in applying a "used and useful" requirement within a historical cost system, reiterating that inconsistencies in methodology have no constitutional effect if the overall impact on property is compensated by other factors. Finally, the Court declined to adopt the "prudent investment rule" as a single constitutional standard for rate-making, affirming that States have broad latitude to choose methodologies that balance utility and public interests.
Concurring - Justice Scalia
Yes, the Court is correct in affirming that the Constitution does not mandate a single ratemaking methodology but rather looks to the consequences of regulation. Justice Scalia concurred to emphasize that while "prudent investment" (capital reasonably expended to meet service obligations) need not be a mandated technique in ratemaking formulas, it may need to be considered when evaluating the constitutionality of the consequences produced by those formulas. To determine if payments constitute a fair return on investment and avoid confiscation, one must agree on what the relevant "investment" is, and for that purpose, all prudently incurred investment may need to be counted. However, he noted that this case challenges the ratemaking techniques rather than the consequences of the rates themselves.
Dissenting - Justice Blackmun
No, the Supreme Court lacks jurisdiction to hear this case because the judgment of the Pennsylvania Supreme Court was not a "final judgment" under 28 U.S.C. § 1257. Justice Blackmun argued that the case concerns rates, and since the Pennsylvania Supreme Court invalidated the prior rate orders and remanded for further ratemaking, there was no final rate order before the Court. He contended that the Court's application of the Cox Broadcasting Corp. exception for "preordained" outcomes was incorrect, as new rates would be set based on unknown factors, meaning the outcome was not definitively settled.
Analysis:
This decision significantly reaffirms the Supreme Court's commitment to the "end result" or "total effect" test established in Hope Natural Gas Co., granting state legislatures and utility commissions substantial flexibility in designing ratemaking methodologies. It clarifies that specific statutory directives to commissions, even if they introduce theoretical inconsistencies or selectively apply principles from different ratemaking approaches, are constitutionally permissible as long as the overall impact on the utility's financial health is not confiscatory. The case prevents utilities from challenging individual components or theoretical inconsistencies of a rate structure in isolation, reinforcing that the focus of constitutional review is on the bottom line: whether the utility can operate successfully and attract capital.
