On May 7, 1998, the Commonwealth Court of Pennsylvania (the "Court") ruled that the provision in the Pennsylvanias "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.
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 utilitys 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 utilitys entitlements to receive future CTC payments into a fully vested property right that may be pledged or sold through the issuance of transition bonds.
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 PUCs 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.
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 Pennsylvanias 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.
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.
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.