Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989)

Duquesne Light Co. v. Barasch

No. 87-1160

Argued November 7, 1988
Decided January 11, 1989
488 U.S. 299

APPEAL FROM THE SUPREME COURT OF PENNSYLVANIA

Syllabus

In 1967, appellant Pennsylvania electric utilities joined a venture to construct seven nuclear generating units. But in 1980, because of intervening events, including the Arab oil embargo and the accident at Three Mile Island, the participants canceled plans for construction of four of the plants. Thereafter appellant Duquesne Light Co. applied to the Pennsylvania Public Utility Commission (PUC) to obtain a rate increase and to amortize its expenditures on the canceled plants over 10 years. The PUC granted a rate increase that included an amount representing the first payment of the 10-year amortized recovery of Duquesne’s costs in the aborted plants. Shortly before the close of the rate proceeding, a state law (Act 335) was enacted that provided that an electric utility’s cost of construction of a generating facility shall not be made part of a ratebase nor otherwise included in rates charged until such time as the facility "is used and useful in service to the public." The State Office of the Consumer Advocate moved the PUC to reconsider in light of this law, but the PUC, on reconsideration, affirmed its original rate order, reading the new law as excluding the costs of canceled plants from the ratebase, but not as preventing their recovery through amortization. Meanwhile, the PUC similarly granted appellant Pennsylvania Power Co. a rate increase, and authorized it to amortize its share of the canceled plants over a 10-year period. The Consumer Advocate appealed both PUC decisions to the Pennsylvania Commonwealth Court, which held that the PUC had correctly construed Act 336. The Pennsylvania Supreme Court reversed, holding that Act 336 prohibited recovery of the costs in question either by inclusion in the ratebase or by amortization, and that the statute did not take appellants’ property in violation of the Takings Clause of the Fifth Amendment, applicable to the States under the Fourteenth Amendment. The court remanded the case to the PUC for further proceedings to correct its rate orders, giving effect to the exclusion required by Act 336.

Held:

1. This Court has jurisdiction to decide the case under 28 U.S.C. § 1267(2), which authorizes the Court to review by appeal

[f]inal judgments . . . rendered by the highest court of a State in which a decision could be had . . . where is drawn in question the validity of a statute of any state on the ground of its being repugnant to the Constitution . . . and the decision is in favor of its validity.

Although the Pennsylvania Supreme Court remanded the case for further proceedings to revise the rate orders, that court’s judgment is final for purposes of this Court’s appellate jurisdiction. The state court’s last word on Act 336’s constitutionality has been presented, and all that remains is the straightforward application of its clear directive to otherwise complete rate orders. Pp. 306-307.

2. A state scheme of utility regulation, such as is involved here, does not "take" property simply because it disallows recovery of capital investments that are not "used and useful in service to the public." Pp. 307-316.

(a) Under the "prudent investment" or "historical cost" rule, a utility is compensated for all prudent investments at their actual cost when made (their "historical" cost), irrespective of whether individual investments are deemed necessary or beneficial in hindsight. It was ruled in FPC v. Hope Natural Gas Co., 320 U.S. 591, that historical cost was a valid basis on which to calculate utility compensation. Pp. 307-312.

(b) The Constitution does not require that subsidiary aspects of Pennsylvania’s ratemaking methodology be examined piecemeal, as appellants argue. State legislatures are competent bodies to set utility rates, and the PUC is essentially an administrative arm of the legislature. Similarly, an otherwise reasonable rate is not subject to constitutional attack by questioning the theoretical consistency of the method that produced it, as appellants do here by noting Act 335’s theoretical inconsistency in suddenly and selectively applying the "used and useful requirement," normally associated with the fair value method of ratesetting, in the context of Pennsylvania’s system based on historical costs. Pp. 313-314.

(c) In this case, at all relevant times, Pennsylvania’s rate system has been predominantly, but not entirely, based on historical costs, and it has not been shown that the rate orders in question, as modified by Act 335, failed to give a reasonable rate of return on equity given the risk under such a regime. Therefore, Act 335’s limited effect on those rate orders does not result in constitutionally impermissible rates. Pp. 314-315.

(d) But adoption of the "prudent investment" rule as the single constitutional standard of valuation would be inconsistent with the view of the Constitution that this Court has taken since Hope Natural Gas, and would unnecessarily foreclose alternatives that could benefit both consumers and investors. The Constitution, within broad limits, leaves the States free to decide what ratesetting methodology best meets their needs in balancing the interests of the utility and the public. Pp. 315-316.

516 Pa. 142, 532 A.2d 325, affirmed.

REHNQUIST, C.J., delivered the opinion of the Court, in which BRENNAN, WHITE, MARSHALL, STEVENS, O’CONNOR, SCALIA, and KENNEDY, JJ., joined. SCALIA, J., filed a concurring opinion, in which WHITE and O’CONNOR, JJ., joined, post, p. 317. BLACKMUN, J., filed a dissenting opinion, post, p. 317.