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Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Commission

filed: January 19, 1988.

KENTUCKY WEST VIRGINIA GAS COMPANY, EQUITABLE GAS COMPANY, A DIVISION OF EQUITABLE RESOURCES, INC., AMERICAN GAS ASSOCIATION [AMICUS CURIA INTERVENOR]
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION, TALIAFERRO, LINDA C., COMMISSIONER, PA. PUBLIC UTILITY COMMISSION, FISCHL, FRANK, COMMISSIONER, PA. PUBLIC UTILITY COMMISSION, SHANE, BILL, COMMISSIONER, KENTUCKY WEST VIRGINIA GAS COMPANY AND EQUITABLE GAS COMPANY, A DIVISION OF EQUITABLE RESOURCES, INC., APPELLANTS



Appeal from the United States District Court for the Middle District of Pennsylvania (Scranton), D.C. Civil No. 85-1514.

Seitz, Mansmann, and Greenberg, Circuit Judges.

Author: Mansmann

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. §§ 1307(f), 1317-18 (West Supp. 1987), ("Act 74"), a statute enacted regarding utility rate regulation.

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 6 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 . . ." § 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. §§ 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.*fn1 § 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.

§ 1318(b).

Finally, when the PUC seeks to render a "just and reasonable" determination under Act 74, § 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 § 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 9 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.*fn2

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"*fn3 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 also left unanswered the question of whether the PUC Order would abridge the plaintiffs' right to counsel in future proceedings before FERC, impliedly finding that the issue was not ripe for judicial disposition. This appeal followed.*fn4 May 20, 1987, before argument of this appeal, the Pennsylvania Commonwealth Court rendered its decision affirming the PUC Order.

On appeal, Kentucky West and Equitable argue that Act 74 violates the supremacy clause of the United States Constitution. They argue that, because of pervasive federal regulation of wholesale pricing in the natural gas industry, Pennsylvania has no authority to compel Equitable to select the least expensive fuel available to it but must permit the utility to recover wholesale costs incurred at filed tariff rates. Equitable also argues that Act 74 is unconstitutional as applied by the PUC Order because it ignores Equitable's unavoidable, federally-approved, minimum bill obligation to Kentucky West. Equitable asserts that Pennsylvania's protection of its local interests, by permitting a pass-through only of the cost of the lowest priced gas, will indirectly and impermissibly affect the price of gas in other states in violation of the commerce clause. Equitable also alleges that the retroactive nature of the PUC's Order is a taking of property without due process. The plaintiffs also renew their contention that the PUC Order violates its right to counsel of their choice. Finally, the plaintiffs object to an order of the district court limiting the scope of their discovery of communications by members of the Pennsylvania legislature regarding their purpose in enacting Act 74.

Our review of the district court's findings of fact is governed by the clearly erroneous standard, while the conclusions of law based upon these facts are subject to our plenary review. The district court's decision limiting the content of Equitable's discovery involves an exercise of discretion and our review is then confined to whether there has been an abuse of that discretion. We have jurisdiction pursuant to 28 U.S.C. § 1291.

II.

A. Preemption Generally

We begin with Equitable's contention that the preemptive effect of the supremacy clause and the restraint of the commerce clause prevent a state regulatory agency from inquiring into the prudence of 12 Equitable's choices among suppliers of gas. We preface our analysis of Equitable's arguments by outlining fundamental principles of preemption generally and as applied to retail and wholesale ratemaking.

The supremacy clause invalidates all state laws that conflict or interfere with an act of Congress.*fn5 Rose v. Arkansas State Police, 479 U.S. 1, 107 S. Ct. 334, 93 L. Ed. 2d 183 (1986). Administrative regulations promulgated pursuant to Congressional authorization have the same preemptive effect as federal statutes. Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 81 L. Ed. 2d 580, 104 S. Ct. 2694 (1984).

Under the supremacy clause, federal law may preempt state law in any of three ways; first, when in enacting federal law, Congress explicitly defines the extent to which it intends to preempt state law; second, when even in the absence of express preemptive language, Congress indicates an intent to occupy an entire field of regulation and has left no room for states to supplement the federal law; and, finally, when compliance with both state and federal law is impossible or when state law stands as an obstacle to accomplishment and execution of the full purposes and objectives of Congress. Michigan Canners and Freezers Association, Inc. v. Agricultural Marketing and Bargaining Board, 467 U.S. 461, 81 L. Ed. 2d 399, 104 S. Ct. 2518 (1984); Capital Cities Cable, Inc. v. Crisp, id.

Even in the absence of preemptive legislation, the commerce clause bars state regulation that unduly burdens interstate commerce. The commerce clause acts as an implied restraint on state regulatory powers, which must give way before the superior authority of Congress to legislate on, or leave unregulated, matters involving interstate commerce. United Building and Construction Trades Council of Camden County and Vicinity v. Mayor and Council of City of Camden, 465 U.S. 208, 79 L. Ed. 2d 249, 104 S. Ct. 1020 (1984).

Prior to the enactment of the Natural Gas Act, 15 U.S.C. § 717, et seq. (1934) ("NGA") and the Federal Power Act, 16 U.S.C. § 791a et seq. (1935) ("FPA"), a series of decisions by the Supreme Court concerning the commerce clause outlined those areas of the utility industry in which the states were precluded from exercising regulatory authority. Congress subsequently expressed concern over the absence of state authority in wholesale sales when it became apparent that exploitative wholesale rates were being passed through to retail customers in the form of retail rates. Arkansas Electric Coop. v. Arkansas Public Service Commission, 461 U.S. 375, 76 L. Ed. 2d 1, 103 S. Ct. 1905 (1983). To close this gap in regulatory control, Congress enacted legislation tailored to supplement, not limit, the reach of state regulation. Federal Power Commission v. Panhandle Eastern Pipe Line Co., 337 U.S. 498, 93 L. Ed. 1499, 69 S. Ct. 1251 (1949).

In Montana-Dakota Utilities, Inc. v. Northwestern Public Service Company, 341 U.S. 246, 95 L. Ed. 912, 71 S. Ct. 692 (1951), the Supreme Court established what has since become known as the filed rate doctrine, i.e., the rate filed with and approved by the Federal Power Commission (FERC's predecessor), is the only legitimate rate. The purchaser's right to a reasonable wholesale rate is the right to the rate which the Commission files or fixes. Except for a narrow review of the Commission's orders, the court can assure no right to a different rate on the ground that, in its opinion, another rate is the only or more reasonable one. Thereafter, in Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 69 L. Ed. 2d 856, 101 S. Ct. 2925 (1981), the doctrine was transformed into a rule of preemption under which state courts must recognize the inviolability of wholesale rates on file with or approved by FERC. Most recently, the Supreme Court in Nantahala Power & Light Company v. Thornburg, 476 U.S. 953, 90 L. Ed. 2d 943, 106 S. Ct. 2349 (1986), set the current parameters of the filed rate doctrine by affirming a line of state court cases, exemplified by Narragansett Electric Company v. Burke, 119 R.I. 559, 381 A.2d 1358 (1977), cert. denied, 435 U.S. 972, 56 L. Ed. 2d 63, 98 S. Ct. 1614 (1978), which held that state regulatory commissions must allow a retailer to recover at retail rates the cost incurred as a result of paying the FERC-determined wholesale price. Under these principles, states are preempted from questioning or altering the wholesale rates set by FERC. Hobelman, The Narragansett Decision and Its Aftermath, 6 Energy L.J. 33 (1985).

B. The Supremacy Clause

Given supremacy clause considerations, Equitable challenges the constitutionality of Act 74 both facially and as applied. Equitable alleges first that Act 74 and the PUC's Order enforcing it are preempted by the all-encompassing federal regulation of the natural gas industry.

Equitable does not challenge the Commonwealth's authority to set retail rates for intrastate suppliers. It argues that Congress' regulation of wholesale rates is exclusive and that Act 74, under the guise of regulating the local distribution, intrudes upon that jurisdiction by indirectly affecting wholesale natural gas rates.

Section 1318(d) of Act 74 provides:

The fact that a contract or rate has been approved by a Federal regulatory agency for interstate ratemaking purposes shall not, in and of itself, be adequate to satisfy the utility's burden of proof that gas prices and volumes associated with such contract or rate are just and reasonable for purposes of this section.

Equitable argues primarily that § 1318(d) of Act 74 is unconstitutional because it permits the PUC to disregard a lawful rate for interstate natural gas sales previously determined to be just and reasonable by FERC pursuant to its rate-setting authority established by federal statutes, the NGA, and the Natural Gas Policy Act, 15 U.S.C. § 3301, et seq. (1978), ("NGPA"). Equitable claims that, by its plain language, § 1318(d) violates the filed rate doctrine and unlawfully intrudes into the wholesale rate-making function exclusively within the jurisdiction of the federal government. It further alleges that the PUC Order applying Act 74 far exceeded Pennsylvania's jurisdiction over intrastate distribution and that the effect of denying the $14.3 million pass-through unlawfully invaded the wholesale natural gas rate-making function, exclusively vested in the federal government. Equitable argues that the amount disallowed was incurred pursuant to the filed rate of its interstate pipeline supplier and prices established by the NGPA.

To the contrary, the PUC argues that preemption cannot be invoked because § 1318(d) is not an unconstitutional intrusion into the occupied field. It agrees that § 1318(d) does not permit the PUC to alter the filed rate, but asserts that it allows the PUC to compare actual gas purchases to available alternatives. The PUC challenges the applicability of the Narragansett doctrine here. Interpreting Narragansett to establish that a state authority has no jurisdiction to inquire into the reasonableness of the wholesale rate, the PUC counters that it did not alter, change, amend or review the reasonableness of any wholesale filed rate; rather, it only reviewed whether Equitable's choice among available wholesale rates demonstrated pursuit of a least cost policy. In the PUC's view, § 1318(d) does not permit it to analyze whether the wholesale rate itself is reasonable; § 1318(d) only allows a determination as to whether purchases are reasonable. If the volumes purchased were unreasonable in light of available alternatives, Act 74 forbids the excessive costs to be borne by Pennsylvania rate payers. The PUC thereby concludes that its inquiry does not invade or threaten federal jurisdiction because it does not affect the wholesale filed rate.

Both sides cite the recent Supreme Court decision in Nantahala Power & Light Company v. Thornburg, id., as support for their respective positions. In Nantahala, FERC was required to determine the state utility's entitlement to power and the Supreme Court determined that the North Carolina State Commission had ...


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