Justices Vote 8-1 Against Utilities in Rates Dispute : Find No Right to Pass On Tab to Consumers for Canceled Nuclear Plants

WASHINGTON —  The Supreme Court, in a victory for consumers and state regulators, ruled Wednesday that a utility has no constitutional right to pass along to ratepayers the cost of canceled nuclear power plants.

The justices, on an 8-1 vote, gave states broad leeway to set utility rates so long as power companies are not deprived of a reasonable return when all of their investments are taken into account.

The decision reaffirms a longstanding Supreme Court doctrine of refusing to closely examine utility rate decisions. It comes as a blow to businesses that had hoped a more conservative high court would be more willing to intercede to protect private property rights.

Had the ruling gone the other way, consumers could have been forced to pick up the full cost of billions of dollars in abandoned or troubled nuclear facilities. Instead, the court said that it is up to state public utility commissions to find a rate formula that is fair to both consumers and the utility companies.

California does not allow utilities to begin charging customers for a power plant until the plant is in operation, said deputy director Bruce DeBerry of the Public Utilities Commission’s division of ratepayer advocates.

The state recently settled the last of several disputes over who should pay for cost overruns at nuclear plants. The Public Utility Commission and Pacific Gas & Electric Co. reached a settlement that allocates the costs of the plant at Diablo Canyon near San Luis Obispo. Edward O’Neill, a PUC staff attorney, said that the utility likely will recover only about $3.5 billion of the plant’s $5.5-billion construction cost.

“If this case had gone the other way, it could have been bad news for the ratepayers,” O’Neill said, because PG&E; could have demanded that consumers pay the entire $5.5-billion cost.

In the case before the high court, Duquesne Light Co. in western Pennsylvania was blocked by the state from recouping a $35-million investment in four nuclear plants. Begun in 1967 as a joint venture with four other companies, the plants were abandoned in 1980 after the accident at Three Mile Island.

Taking Broader View

In its appeal to the Supreme Court, Duquesne said the state law giving it no return on that $35-million investment violated the Fifth Amendment’s guarantee that “private property (shall not) be taken for public use without just compensation.”

But Chief Justice William H. Rehnquist, writing for the majority, said that the courts must consider the utility’s entire financial picture, not just return on one investment. The $35 million spent on the nuclear plants amounted to less than 2% of the total value of Duquesne’s generating equipment. And, despite the loss on the nuclear facility, the utility still was receiving an 11.6% return on its entire investment.

This overall rate of return did not “jeopardize the financial integrity” of the company nor was it “inadequate to compensate” the shareholders for their investments, he said.

“We therefore hold that (this) limited effect on the rate order at issue does not result in a constitutionally impermissible rate,” Rehnquist concluded in the case (Duquesne Light Co. vs. Barash, 87-1160). “The Constitution is not designed to arbitrate these economic niceties.”

Scott Hempling, a lawyer who filed a brief for the Consumer Federation of America, said the court ruling could spare consumers in New York and New England from paying the full cost of nuclear plants on Long Island and in New Hampshire that are not operating.

“In a sense, though, that era (of nuclear facilities being canceled) is now past,” Hempling said. “I think the real significance of this ruling will be in the future, because it means utilities are going to have to live with the risks of the market. They won’t be able to assign the full cost of their management errors to captive consumers.”

Edison Electric Institute, an association of electric companies, issued a statement calling the ruling “disappointing” but added that the outcome seemed to have been dictated by the relatively small losses suffered by Duquesne Light.

Staff writer Donald Woutat contributed to this story.