Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Com'n

Decision Date16 February 1988
Docket NumberNo. 87-5052,87-5052
Citation837 F.2d 600
Parties, 92 P.U.R.4th 542 KENTUCKY WEST VIRGINIA GAS COMPANY, Equitable Gas Company, a division of Equitable Resources, Inc., American Gas Association (Amicus Curiae Intervenor), v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Taliaferro, Linda C., Commissioner, Pa. Public Utility Commission, Fischl, Frank, Commissioner, Pa. Public Utility Commission, Shane, Bill, Commissioner. Appeal of KENTUCKY WEST VIRGINIA GAS COMPANY and Equitable Gas Company, a division of Equitable Resources, Inc.
CourtU.S. Court of Appeals — Third Circuit

William A. Mogel (argued), Randall C. Smith, William R. Mapes, Jr., Ross, Marsh & Foster, Washington, D.C., Carroll E. Purdy, Charles E. Thomas, Jr., Thomas & Thomas, Harrisburg, Pa., for appellants.

Philip McClellan (argued), H. Kay Dailey, Robert P. Haynes, III, Asst. Consumer Advocates, and David M. Barasch, Consumer Advocate, Harrisburg, Pa., for appellee Pennsylvania Office of Consumer Advocate.

Leroy S. Zimmerman, Atty. Gen., Michael A. Finio, Deputy Atty. Gen., Antitrust Section, Eugene F. Waye, Deputy Atty. Gen., Chief, Antitrust Section, Kathleen Misturak-Gingrich (argued), Office of Atty. Gen., Antitrust Section, Harrisburg, Pa., for appellee Com. of Pa., Office of Atty. Gen.

David J. Muchow, Gen. Counsel, Eric N. Wise, American Gas Ass'n, Arlington, Va., for amicus curiae American Gas Ass'n.

Alphonso Arnold, Jr. (argued), Asst. Counsel, John F. Povilaitis, Deputy Chief Counsel, Daniel P. Delaney, Chief Counsel, Pennsylvania Public Utility Com'n, Harrisburg, Pa., for appellee Pennsylvania Public Utility Com'n.

Jerome M. Feit (argued), Solicitor, Catherine C. Cook, General Counsel, John N. Estes, III and Joanne Leveque, F.E.R.C., Washington, D.C., for appellee F.E.R.C.

Before SEITZ, MANSMANN and GREENBERG, Circuit Judges.

OPINION OF THE COURT

MANSMANN, Circuit Judge.

This is an appeal from an order of the district court which denied the plaintiff utility company's ("Equitable") request for injunctive and declaratory relief from an Order issued by the defendant Pennsylvania Public Utility Commission ("PUC"), applying Pennsylvania Act of May 31, 1984, No. 1984-74, 66 Pa.C.S.A. Secs. 1307(f), 1317-18 (West Supp.1987), ("Act 74"), a statute enacted regarding utility rate regulation, 650 F.Supp. 659.

The principal questions we consider are whether the supremacy clause, the commerce clause, and the due process clause of the United States Constitution prevent a state regulatory agency from determining the prudence of a gas company's choice to buy gas from one source rather than another before permitting the utility a "pass-through" to consumers of the cost of power purchased at wholesale rates approved by the Federal Energy Regulatory Commission ("FERC").

We concur with the district court's decision that a facial supremacy clause violation was not proven. Act 74 and the PUC Order implementing its provisions operate in an area exclusively reserved for state regulation; thus, principles of federal pre-emption are not involved. Although the district court did not address expressly the supremacy clause argument that the statute is unconstitutional as applied, we find no constitutional violation in this regard. We also approve the district court's conclusion that the action of the PUC was not in violation of the commerce clause because Act 74's impact upon the flow of interstate commerce is incidental in light of the legitimate local interest of consumer protection. We find no taking of property without due process. We also agree with the district court's determination that the plaintiff's right to counsel has not been abridged by the Order of the PUC. Finally, we decide that the district court did not abuse its discretion in limiting Equitable's request for discovery of communications between certain state agencies and members of the state legislature. We will affirm.

I. The Historical Facts

Equitable Gas, a division of Equitable Resources, Inc., is a Pennsylvania corporation engaged in the production, transportation, storage, distribution and sale of natural gas. The bulk of the gas necessary to serve Equitable's approximately 240,000 residential retail customers in Southwestern Pennsylvania is obtained from three sources, Tennessee Pipeline, Texas Eastern, and Kentucky West Virginia Gas, all interstate pipeline suppliers. Purchases of gas by Equitable from these pipeline sources are governed by tariffs set and approved by FERC. Equitable obtains the remainder of its gas either from its own wells in West Virginia and Pennsylvania or from independent producers.

Kentucky West Virginia Gas Company, also a plaintiff herein, ("Kentucky West"), is a wholly owned subsidiary of Equitable Resources, Inc. and sells to Equitable approximately 70% of the gas it produces.

On July 30, 1984, the Pennsylvania legislature enacted Act 74, dictating the mechanism by which natural gas distribution companies must establish retail rates for sales of gas to Pennsylvania consumers. Act 74 guidelines applicable to Equitable provide: "Natural gas distributors with gross intrastate operating revenues in excess of 40 million dollars may file tariffs reflecting increases or decreases in natural gas costs ..., but no such natural gas utilities shall voluntarily file more than one such tariff in a twelve month period...." Sec. 1307(f)(1).

Once a tariff is filed, the PUC is then authorized to conduct an investigation to determine the reasonableness of the proposed rates. Secs. 1307(f)(2), 1318. A proposed tariff will not become effective nor will it be deemed "just and reasonable" unless the PUC determines that the utility is pursuing a "least cost fuel procurement policy" consistent with its obligation to provide safe, adequate, and reliable service to its customers. 1 Sec. 1318(a). Particularly applicable to the Equitable-Kentucky West situation is the statutory direction that, if a utility purchases all or part of its natural gas from an affiliated interest, the PUC is required to make the following specific findings regarding the justness and reasonableness of gas purchases from the affiliate:

(1) That the utility has fully and vigorously attempted to obtain less costly gas supplies on both short-term and long-term bases from nonaffiliated interests.

(2) That each contract for the purchase of gas from its affiliated interest is consistent with a least cost fuel procurement policy.

(3) That neither the utility nor its affiliated interest has withheld from the market any gas supplies which should have been utilized as part of a least cost fuel procurement policy.

Sec. 1318(b).

Finally, when the PUC seeks to render a "just and reasonable" determination under Act 74, Sec. 1318(d) cautions that the fact that a FERC-approved contract or rate has been established for interstate purposes will not serve as per se satisfaction of the utility's burden of proof that the gas prices and volumes associated with FERC approval are just and reasonable for purposes of evaluating if a least cost fuel procurement policy has been followed.

On March 1, 1985, in conformity with Sec. 1307(f) of Act 74, Equitable filed its "Annual Purchase Gas Adjustment" for the period of July 1983 through June 1984 in which it proposed a rate increase based upon wholesale costs incurred when procuring natural gas from its suppliers.

In response to Equitable's proposal of retail rates, the PUC initiated its Act 74 compliance inquiry, i.e., whether Equitable had demonstrated pursuit of a least cost fuel procurement policy in obtaining the wholesale gas.

After a hearing by an Administrative Law Judge, the PUC found that Equitable had purchased gas from its affiliate, Kentucky West, when less expensive gas had been available from other sources and concluded that Equitable had not met its Pennsylvania statutory "just and reasonable" burden evidencing compliance with a least cost fuel procurement policy. Accordingly, the PUC denied Equitable the opportunity to pass through to consumers approximately $14.3 million of Equitable's proposed rate increase, reflecting the amount paid for gas which the PUC found Equitable had imprudently overpaid for the gas purchased from Kentucky West. The PUC ordered additionally that Equitable employ counsel separate and independent from Kentucky West in future proceedings before FERC. Equitable sought review of this PUC Order before the Commonwealth Court of Pennsylvania. 2

Equitable and Kentucky West also filed suit in federal district court challenging the constitutionality of Act 74. Equitable sought to enjoin the Commission from inquiring into its purchasing choices of natural gas from among competing gas suppliers. The rationale for this request was that FERC had approved the price of Kentucky West gas as "just and reasonable" 3 for purposes of federal law, and, therefore, the PUC did not possess the authority to disregard the federal approval in the state rate-setting proceeding. Equitable also sought a declaratory judgment that Act 74, enabling the PUC to disallow Equitable's purchased gas costs, was unconstitutional in light of the supremacy and commerce clauses and also that the PUC's Order represented an infringement upon other constitutionally-guaranteed rights.

A hearing on the appropriateness of preliminary injunctive relief was held, but the district court chose to abstain from exercising its jurisdiction. We reversed that determination, 791 F.2d 1111 (3d Cir.1986), and remanded the case to the district court for disposition on the merits. In December of 1986, after a hearing, the district court entered judgment in favor of the defendants. The district court found no constitutional violation in Act 74 on its face but did not address the argument that Act 74 was unconstitutional as applied to Equitable and Kentucky West by the PUC Order. The court...

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