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PENNSYLVANIA ELECTRIC COMPANY v. PENNSYLVANIA PUBLIC UTILITY COMMISSION (12/09/85)

decided: December 9, 1985.

PENNSYLVANIA ELECTRIC COMPANY, APPELLANT,
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION, APPELLEE, OFFICE OF CONSUMER ADVOCATE, ET AL., INTERVENORS. METROPOLITAN EDISON COMPANY, APPELLANT, V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, APPELLEE, OFFICE OF CONSUMER ADVOCATE, ET AL., INTERVENORS



Appeals from the order of the Commonwealth Court at Nos. 2018 C.D. 1981 and 2019 C.D. 1981 which affirmed the final order of the Pennsylvania Public Utility Commission at R-80051196 and R-80051197. 78 Pa. Commw.Ct. 402, Nix, C.j., and Larsen, Flaherty, McDermott, Zappala and Papadakos, JJ. Hutchinson, J., did not participate in the consideration or decision of this case. Papadakos, J., concurs in the result.

Author: Flaherty

[ 509 Pa. Page 326]

OPINION OF THE COURT

This is an appeal from an order of the Commonwealth Court which affirmed orders of the Pennsylvania Public Utility Commission (PUC) in certain electric utility rate-setting cases. Pennsylvania Electric Co. v. Pennsylvania Public Utility Commission, 78 Pa. Commw.Ct. 402, 467 A.2d 1367 (1983). The cases arose as repercussions of the 1979 accident at the Three Mile Island nuclear generating station near Harrisburg, Pennsylvania. The accident involved the near melt-down of a nuclear reactor, and was the most serious in the history of nuclear power generating facilities in the United States. The Three Mile Island incident has had nationwide implications, not only with respect to the future of nuclear power generation in the United States, but also in relation to the resultingly imperiled financial viability of some of our nation's largest public utility companies. It is with this latter aspect of the incident, as regards the diminished financial viability of the companies that own the Three Mile Island station, that the instant appeal is concerned.

The appellants, Metropolitan Edison Company and Pennsylvania Electric Company, own 50% and 25% interests, respectively, in the Three Mile Island station. In 1979, shortly after the nuclear accident, the PUC set reduced permanent rates for these companies, and these new rates reflected the removal from the rate base of all costs associated with Unit 2, the unit involved in the accident, on the basis that Unit 2 had been so severely damaged as to render it no longer useful in the public service. This action was in accord with well-established principles that rates charged the public for utility services are to provide a return upon only such property of the utility as is used and useful in the public service. See 66 Pa.C.S.A. § 1310(d) (utility entitled to "fair return upon the fair value of the property of such

[ 509 Pa. Page 327]

    public utility, used and useful in its public service . . . ."); Scranton v. Scranton Steam Heat Co., 405 Pa. 397, 401, 176 A.2d 86, 88 (1961). See also Denver Union Stock Yard Co. v. United States, 304 U.S. 470, 475, 58 S.Ct. 990, 994, 82 L.Ed. 1469, 1475-1476 (1938) (Under the due process clause of the Fifth Amendment, a regulated utility "is entitled to rates, not per se excessive and extortionate, sufficient to yield a reasonable rate of return upon the value of property used, at the time it is being used, to render the services. But it is not entitled to have included any property not used and useful for that purpose." (citations omitted)).

At the time of the accident at Unit 2, another nuclear reactor at Three Mile Island, Unit 1, had been shut down for refueling. Following the accident at Unit 2, Unit 1 remained shut down by order of the Federal Nuclear Regulatory Commission. Shortly after ordering reduced rates based on the lack of continued usefulness of Unit 2, the PUC, in 1980, made a determination that Unit 1 was likewise no longer useful in the public service, because its return to service was not "imminent" or "certain," and, accordingly, the PUC established temporary reduced rates, reflecting the exclusion of all costs associated with Unit 1 from the companies' rate bases. These temporary reduced rates for Metropolitan Edison and Pennsylvania Electric were, on an annual basis, $26.9 million and $11.7 million less, respectively, than their existing rates. The companies filed complaints alleging that these new rates were unjust and unreasonable, and filed tariffs seeking substantial rate increases. In these tariffs, the companies sought to include in their rate bases costs and investments related to Unit 1, but the companies have not sought in this case to do the same with respect to the damaged reactor, Unit 2. Hearings were held before an Administrative Law Judge, and the decisions recommended by the Administrative Law Judge were adopted, with only minor modifications, by the PUC in 1981. The final PUC orders allowed Metropolitan Edison a rate increase, over and above the challenged temporary rates, of nearly $52 million (including $11 million

[ 509 Pa. Page 328]

    covering Unit 1 restart costs). Pennsylvania Electric was awarded an increase, over and above the temporary rates, of approximately $55.5 million (including $5.5 million covering Unit 1 restart costs). Metropolitan Edison and Pennsylvania Electric had sought larger rate increases, of $76.4 million and $67.4 million respectively. Appeals were taken to the Commonwealth Court, where the orders of the PUC were affirmed. The instant appeal ensued.

The issue presented in this appeal is a narrow one, namely whether the decision of the United States Supreme Court in Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944) established a requirement, of constitutional dimension, that utility rates set by regulatory authorities be set at sufficiently high levels as to guarantee, irrespective of countervailing consumer interests, the continued financial integrity of the utilities concerned. In Hope, the United States Supreme Court addressed the considerations to be taken into account by the Federal Power Commission in setting "just and reasonable" rates for natural gas companies, as required under § 4(a) of the Natural Gas Act, 15 U.S.C. § 717. The Court noted that there were no applicable constitutional requirements more exacting than the requirement of "just and reasonable" rates set forth in the Act. 320 U.S. at 607, 64 S.Ct. at 290, 88 L.Ed. at 347. Indeed, in the Court's subsequent decision in Permian Basin Area Rate Cases, 390 U.S. 747, 770, 88 S.Ct. 1344, 1361, 20 L.Ed.2d 312, 338 (1968), reh. den. 392 U.S. 917, 88 S.Ct. 2050, 20 L.Ed.2d 1379 (1968), it was held that "the just and reasonable standard of the Natural Gas Act ' coincides ' with the applicable constitutional standards. . . and any rate selected by the Commission from the broad zone of reasonableness permitted by the Act cannot properly be attacked as confiscatory." (emphasis added) (citation omitted). See also Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 585-586, 62 S.Ct. 736, 742-43, 86 L.Ed. 1037, 1049 (1942). It is to be noted that the constitutionally based requirement of "just and reasonable" rates, under the Fifth

[ 509 Pa. Page 329]

    and Fourteenth Amendments, is in effect embodied in terminology found in the Pennsylvania Public Utility Law, which governs the rates being challenged in the instant appeal. Indeed, in Pennsylvania Public Utility Commission v. Pennsylvania Gas and Water Co., 492 Pa. 326, 337, 424 A.2d 1213, 1219 (1980), cert. den. 454 U.S. 824, 102 S.Ct. 112, 70 L.Ed.2d 97 (1981), we stated that the requirement of "just and reasonable" rates set forth in the Public Utility Law, 66 P.S. § 1141 (repealed 1978; reenacted at 66 Pa.C.S.A. § 1301), "confer[s] upon the regulatory body the power to make and apply policy concerning the appropriate balance between prices charged to utility customers and returns on capital to utility investors consonant with constitutional protections applicable to both." (emphasis added).

In discussing the considerations to be taken into account in applying the standard requiring "just and reasonable" rates, the Court, in Hope, emphasized that the focus of inquiry is properly upon the end result or "total effect" of the rate order, rather than upon the rate-setting method employed. 320 U.S. at 602, 64 S.Ct. at 287, 88 L.Ed. at 345. Describing the rate-setting process as a balancing process, involving the ...


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