Constitutional Limitations on the Ability of States to Rehabilitate Their Failed Electric Utility Restructuring Plans

This Article will review the constitutional limitations that come into play when a state seeks to rehabilitate its failed electric utility restructuring plan. Under the Constitution, utilities are entitled to earn a reasonable return on the assets devoted to public service. A situation in which retail rates are frozen may result in denial of a compensatory return if the electric utility is incurring higher costs to generate or procure its power supply. This is the traditional "takings" argument based on the Fifth Amendment to the Constitution, as applied to the states under the Fourteenth Amendment.

Apart from this commonly asserted argument, however, a different constitutional issue arises in the context of proposed rate freezes. As a matter of procedural due process, a regulated utility cannot be deprived of its opportunity to demonstrate a need for rate relief to achieve the level of profitability that satisfies constitutional requirements. These procedural due process rights are imperiled when, for example, a state simply extends a rate freeze period and thereby denies the electric utility a hearing in which the utility would have an opportunity to make its case for higher rates.