Foundations of Wisconsin s Regulatory Role ZACH RAMIREZ, WISCONSIN LEGISLATIVE COUNCIL

Transcription

1 Foundations of Wisconsin s Regulatory Role ZACH RAMIREZ, WISCONSIN LEGISLATIVE COUNCIL

2 Core Concepts Public utilities in Wisconsin before 1907 Overview of Wisconsin s public utility regulatory system. Authority over rates rests with the Legislature What are the bounds of the Legislature s authority over rates? Why does the Takings Clause of the U.S. Constitution apply to ratemaking? What does the Takings Clause require with regard to rates?

3 Public utilities in WI before 1907 Municipal governments: granted public utilities franchises to operate within municipal boundaries Inspected public utility facilities Determined whether service was adequate Significant variation among municipal governments regarding: Whether franchises were exclusive or competition was permitted The duration of franchises Technical expertise Dissatisfaction regarding: Reliability (competition driving public utilities out of business) Rates (competition causing duplication and municipal politics causing discrimination)

4 Core Concepts Public utilities in Wisconsin before 1907 Overview of Wisconsin s public utility regulatory system. Authority over rates rests with the Legislature What are the bounds of the Legislature s authority over rates? Why does the Takings Clause of the U.S. Constitution apply to ratemaking? What does the Takings Clause require with regard to rates?

5 Overview of WI s Public Utility Regulatory System The Big Picture 1. A broad definition of public utility 2. Centralized regulatory authority vested in the Public Service Commission 3. Monopoly status for public utilities 4. Limitations on public utility ownership 5. Public utility authority to take private property, subject to state approval 6. Minimum service standards 7. State regulation of rates and other charges

6 A broad definition of public utility Includes both investor-owned and municipallyowned enterprises. Service is furnished either directly or indirectly to or for the public. Whether a service is furnished to or for the public : Not based on the number of consumers. Based on whether it is intended for and open to the use of all members of the public who may require it, rather than a restricted class. [Cawker v. Meyer (1911).] Excludes cooperatives (1937)

7 Centralized Authority Vested in the PSC The Railroad Commission was renamed the Public Service Commission in Headed by three commissioners who serve six-year terms, one of whom the Governor designates to serve as the chairperson. Commissioners are nominated by the Governor and appointed with Senate approval. Municipalities retain authority to regulate the quality and character of public utility service and all other terms and conditions for occupying the streets. Does not authorize municipalities to regulate items strictly in the jurisdiction of the PSC. [Milwaukee Electric Railway & Light Co. v. Railroad Commission.]

8 Monopoly Status for Public Utilities The 1907 law authorized public utilities to exchange a municipal franchise for an indeterminate permit issued by the state. Few public utilities chose to make the exchange, so the state mandated the exchange in 1911.

9 Monopoly status for public utilities An indeterminate permit: Authorizes a public utility to provide service Protects it from competition The PSC is prohibited from authorizing another public utility or a cooperative to provide service where a public utility with an indeterminate permit is providing a similar service. A municipality is prohibited from establishing a public utility if there is a public utility with an indeterminate permit in the municipality. Subjects it to regulation and termination by the state The PSC may authorize another public utility to provide competing service if the public convenience and necessity require. A municipality may, at its discretion, purchase a public utility for a price set by the PSC and thereby terminate the indeterminate permit.

10 Limitations on Public Utility Ownership The statutes prohibit: A foreign corporation from receiving authorization to own, operate, or control a public utility. Public utilities from merging without PSC approval. A public utility from issuing securities without PSC approval. A public utility from paying dividends if the PSC orders it to stop. Contracts between a public utility and an affiliated interests without PSC approval. The formation of a holding company without PSC approval. A holding company from exceeding certain limits on non-utility assets.

11 Public Utility Authority to Take Private Property Eminent domain or the authority to condemn private property for public use is based on the state s inherent power to act as the sovereign over the property within its borders. It is a governmental power not generally held by a private entity. Wisconsin has conferred this power upon public utilities and cooperatives for certain facilities.

12 Minimum Service Standards A public utility has the obligation to serve all who reasonably request service. This generally entails offering prospective customers the same type of service that the public utility already provides to customers located nearby. [ Milwaukee v. Public Service Comm.] A public utility must provide reasonably adequate service and facilities.

13 State Control of Rates What do the statutes say? Rates must be reasonable and just. A public utility must file its rates with the PSC, and it may not change them without PSC approval. If the PSC finds rates to be unjust, unreasonable, insufficient or unjustly discriminatory or preferential or otherwise unreasonable or unlawful the PSC must determine and order reasonable rates. What do the statutes require? In setting rates, the PSC is not required to use a specific formula or set of considerations. [WI Assoc. of Mfrs. & Commerce v. PSC.] Rates may not be so low as to be confiscatory nor so low as to be extortionate or excessive. [WI Telephone Co. v. PSC.]

14 Core Concepts Public utilities in Wisconsin before 1907 Overview of Wisconsin s public utility regulatory system. Authority over rates rests with the Legislature What are the bounds of the Legislature s authority over rates? Why does the Takings Clause of the U.S. Constitution apply to ratemaking? What does the Takings Clause require with regard to rates?

15 The Legislature s Authority over Rates It cannot seriously be contended that the Constitution prevents state legislatures from giving specific instructions to their utility commissions. We have never doubted that state legislatures are competent bodies to set utility rates. "The Commission is but an instrumentality of the state legislature for the performance of [ratemaking]") "The rate-making power is a legislative power and necessarily implies a range of legislative discretion"). [Duquesne Light Co. v. Barasch (1989).]

16 Core Concepts Public utilities in Wisconsin before 1907 Overview of Wisconsin s public utility regulatory system. Authority over rates rests with the Legislature What are the bounds of the Legislature s authority over rates? Why does the Takings Clause of the U.S. Constitution apply to ratemaking? What does the Takings Clause require with regard to rates?

17 Bounds of Legislative Authority The Takings Clause of the U.S. Constitution limits state authority over rates Nor shall private property be taken for public use, without just compensation. [5 th Amendment applied to the states through the 14 th Amendment.] The often repeated phrase clothed with a public interest is not particularly helpful for understanding the constitutional landscape. That phrase was invoked in early cases at a time when the courts only allowed property to be subjected to regulation if the property was clothed with a public interest. The current rule in this regard is that regulation is allowed if it has a reasonable relation to a proper legislative purpose and is neither arbitrary nor discriminatory. The need for compensation still exists because of the takings issue.

18 Core Concepts Public utilities in Wisconsin before 1907 Overview of Wisconsin s public utility regulatory system. Authority over rates rests with the Legislature What are the bounds of the Legislature s authority over rates? Why does the Takings Clause of the U.S. Constitution apply to ratemaking? What does the Takings Clause require with regard to rates?

19 Application of the Takings Clause to Ratemaking What is the taking? Confiscation may result from a taking of the use of property without compensation quite as well as from the taking of the title. [Chicago, Rock Island, & Pacific Railway v. United States (1931).] The use is taken by: (1) the requirement to furnish adequate service to the public; (2) the requirement to invest in facilities to meet demand and furnish adequate service; and (3) the prohibition against a public utility discontinuing service without state approval. What is the private property that is being taken? Shareholder investment in the public utility What is the just compensation? The revenue produced by the authorized rates. If the rate does not afford sufficient compensation, the State has taken the use of utility property without paying just compensation and so violated the Fifth and Fourteenth Amendments. [Duquesne]

20 Core Concepts Public utilities in Wisconsin before 1907 Overview of Wisconsin s public utility regulatory system. Authority over rates rests with the Legislature What are the bounds of the Legislature s authority over rates? Why does the Takings Clause of the U.S. Constitution apply to ratemaking? What does the Takings Clause require with regard to rates?

21 Requirements to Comply with the Takings Clause 1. Does not require the use of any particular formula. [FPC v. Hope Natural Gas.] 2. Constitutionality is judged based on the effect of the rate. [FPC v. Hope Natural Gas.] 3. A rate must enable a public utility to operate successfully, maintain its financial integrity, attract capital, and compensate investors for risk. [FPC v. Hope Natural Gas.] 4. The return must be commensurate with the return provided by other investments with the same level of risk and uncertainty. [Bluefield Water Works & Improvement Co. v. Public Service Commission of West Virginia.] 5. In certain situations, a public utility must be provided an opportunity for a hearing, and the facts provided at the hearing must be taken into account. [Jersey Central Power & Light Co. v. FERC.] 6. Rates are not required to eliminate financial risks faced by a public utility.