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<title>Pennsylvania: Court Rules Recovery of Stranded Cost Does Not Violate U.S.
Constitution</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<td width="70%" valign="top"><img src="../images/statelin.gif" alt="STATELINE by Robert Olson" border="0" WIDTH="375" HEIGHT="75"><p><b><u>
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<p><b><u>June 1998</u><br>
<font face="Arial"><big><big><big>Pennsylvania: Court Rules Recovery Of
Stranded Cost Does Not Violate US Constitution<br>
</big></big></big></font></b><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
05/98</em>)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">On May 7, 1998, the Commonwealth Court of
Pennsylvania (the "Court") ruled that the provision in the Pennsylvania’s
"Electricity Generating Customer Choice and Competition Act" (the
"Act") permitting utilities to recover stranded costs did not violate the
Commerce Clause of the United States Constitution. The Court stated that the practical
effect of the Competition Act was to promote interstate commerce and that the provision
permitting recovery of stranded costs represents a permitted, identifiable and limited
reimbursement to the utilities.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The Act permits all Pennsylvania residents to
purchase energy from competitive power suppliers after a brief phase-in period. The Act
also permits utilities to recover their stranded costs through a competitive transition
charge ("CTC"). The CTC is imposed on all retail customers within a
utility’s service territory. The Act also authorized utilities to apply to the PUC
for a qualified rate order to "securitized" future CTC payments. This process
essentially converts a utility’s entitlements to receive future CTC payments into a
fully vested property right that may be pledged or sold through the issuance of transition
bonds.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">After passage of the Act, PECO Energy Company
("PECO") applied for a qualified rate order and requested authorization to issue
transition bonds in the amount of $3.8 billion. After due consideration, the Pennsylvania
Public Utility Commission ("PUC") permitted PECO to securitize approximately
$1.1 billion of its stranded costs. Indianapolis Power & Light Company
("IPL") appealed the PUC’s decision to the Court, asserting that permitting
PECO to recover its stranded costs violated the Commerce Clause of the United States
Constitution. Specifically, IPL asserted that by permitting recovery of stranded costs,
Pennsylvania is providing PECO with a substantial financial advantage in the emerging
electric generation market to the detriment of out-of-state electric utilities. IPL
characterized this recovery as a huge subsidy that PECO could use to artificially lower
its energy price.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">On May 7, 1998, the Court ruled that the Act and its
stranded costs provisions do not violate the Commerce Clause. In making this
determination, the Court noted that the Act does not discriminate against interstate
commerce because the practical effect of the Act is to promote competition in an industry
that was previously a regulated monopoly. The Court also stated that the Act is unlike
other state statutes that have been found to violate the Commerce Clause because those
cases involved state statutes that attempted to protect local business at the expense of
interstate commerce. In addition, the court stated that the stranded cost provisions of
the Act allow for an equitable transition to a competitive energy market. The Court noted
that provisions of the Act permitting stranded cost recovery did not constitute gratuitous
gifts from the Commonwealth to PECO but rather represented identifiable and limited
reimbursements to which PECO was entitled. The Court also reasoned that the provisions of
the Act permitting the recovery of stranded costs do not violate the Commerce Clause
because permitting such recovery is consistent with the traditional powers of states to
regulate retail energy sales. The Court noted that Pennsylvania has authority to regulate
the rates charged by the utilities and that the CTC is nothing more than a different
manifestation of the previously regulated rates. In addition, the Court noted that had
Pennsylvania continued to regulate energy sales then the PUC would have allowed PECO to
recover its "stranded costs" through the rates PECO charged for bundled service.
The Court noted that the Act was not intended to diminish Pennsylvania’s power to
regulate local utility rates and that the stranded costs provisions specifically rely on
continued PUC oversight to establish "just and reasonable" electricity rates to
facilitate the move towards competition.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The Court also noted that the Federal Energy
Regulatory Commission, in its Order 888, determined that recovery of stranded costs was
necessary while simultaneously requiring the utilities to provide open access to the
transmission system.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The Court concluded that the Act does not violate
the Commerce Clause and that, read in its entirety, the Act is the antithesis of a statute
that violates the Commerce Clause because the Act invites out-of-state competition in an
area where states have traditionally excluded such competition.</font></p>
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<blockquote>
<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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