Indianapolis Power & Light Co. v. Pennsylvania Public Utility Com'n

• Decision Date: 07 May 1998
• Court: Pennsylvania Commonwealth Court
• Parties: , Util. L. Rep. P 26,662 INDIANAPOLIS POWER & LIGHT COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.

Page 1071

711 A.2d 1071

185 P.U.R.4th 175, Util. L. Rep. P 26,662

INDIANAPOLIS POWER & LIGHT COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.

Commonwealth Court of Pennsylvania.

Argued Dec. 10, 1997.

Decided May 7, 1998.

Walter Cohen, Harrisburg and Stanley Fickle, Indianapolis, IN, for petitioner.

Lawrence Barth, Harrisburg, for respondent.

Gregory Harvey and Thomas Gardsden, Philadelphia, for intervenor.

Before COLINS, President Judge, and McGINLEY, SMITH, FRIEDMAN, KELLEY, FLAHERTY and LEADBETTER, JJ.

COLINS, President Judge.

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 issuance of a qualified rate order to 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. ¹

I.

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. The local utility maintained a highly regulated monopoly over a designated service area, and consumers were charged rates set by a state regulatory agency for these "bundled" services. ² This 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. ³

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 the local 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 provisions 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. ⁴

The Act provides two basic mechanisms for utilities to recover stranded-costs. First, after PUC approval, utilities may recover stranded-costs through a "competition transition charge" ⁵ that is paid by "every customer accessing the transmission or distribution network ... to the electric distribution company in whose certificated territory that customer is 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 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.

II.

The Commerce Clause is an affirmative grant of power to Congress allowing it "[t]o regulate Commerce with foreign Nations, and among the several States." U.S. Const. art. I, § 8, cl. 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, 519 U.S. 278, ----, 117 S.Ct. 811, 818, 136 L.Ed.2d 761 (1997) (quoting Reeves, Inc. v. Stake, 447 U.S. 429, 437, 100 S.Ct. 2271, 65 L.Ed.2d 244 (1980)) (citations omitted). In sum, since Congress has plenary power to regulate commerce among the states, states are prohibited from passing laws that discriminate against interstate commerce.

Conversely, the Commerce Clause permits Congress to empower states with the authority to act in a manner that absent its permission would violate the Commerce Clause. "It is indeed well settled that Congress may use its power under the Commerce Clause to '[confer] upon the States an ability to restrict the flow of interstate commerce that they would not otherwise enjoy.' " New England Power Co. v. New Hampshire, 455 U.S. 331, 339-40, 102 S.Ct. 1096, 71 L.Ed.2d 188 (1982) (quoting Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 44, 100 S.Ct. 2009, 64 L.Ed.2d 702 (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, 519 U.S. at ---- n. 8, 117 S.Ct. at 820 n. 8 (1997) (citing Arkansas Elec. Coop. Corp. v. Arkansas Pub. Serv. Comm'n, 461 U.S. 375, 103 S.Ct. 1905, 76 L.Ed.2d 1 (1983) and discussing Court's departure from bright-line test in Commerce Clause examinations of cases dealing with electric utilities). Modern Commerce Clause jurisprudence, therefore, involves a case-by-case examination of whether the statute discriminates against interstate commerce. ⁶ 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.

III.

IPL seeks to have the stranded-cost provisions invalidated as unconstitutional, while permitting the rest of the statute to remain in effect. IPL's theory is that by permitting PECO to recover its stranded-costs, the Commonwealth is giving the company a huge financial advantage in the new electric generation market to the detriment of out-of-state electric utilities. To this end, IPL makes a bevy of arguments that these provisions violate the Commerce Clause's prohibition against state laws that discriminate against interstate commerce. Also, IPL argues that these provisions are severable from the Competition Act as a whole and that competition may proceed absent the stranded-cost provisions. We believe that IPL's argument is fraught with contradiction and find that IPL has failed to carry the difficult burden of proving that the stranded-cost provisions violate the Commerce Clause of the United States Constitution. In re Petition to Recall Reese, 542 Pa. 114, 119, 665 A.2d 1162, 1164 (1995).

The logical starting point in any examination of an alleged violation of the Commerce Clause is Supreme Court precedent and the guidelines therein. The most obvious violation of the Commerce Clause is a tax on out-of-state products and goods for the purpose of favoring local industry. "The paradigmatic example of a law discriminating against interstate commerce is the protective tariff or customs duty, which taxes goods imported from other states, but does not tax similar products in State." West Lynn Creamery v. Healy, 512 U.S. 186, 193, 114 S.Ct. 2205, 129 L.Ed.2d 157 (1994). Since these protective tariffs are obviously unconstitutional, Commerce Clause precedent has been focused more on state statutes that surreptitiously attempt "to reap some of the benefits of tariffs by other means." Id.

The Supreme Court has been quick to strike down all classes of state statutes that discriminate against interstate commerce through surreptitious means. See id. (invalidating Massachusetts assessment statute because assessment was, in effect, tax making out-of-state milk more expensive); Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334, 112 S.Ct. 2009, 119 L.Ed.2d 121 (1992) (striking down Alabama statute that imposed additional fee for disposal of hazardous waste generated outside state); Bacchus Imports,...