18.3 IV. The “Rights Of Ownership” Vs. The “Regulatory Compact” Approaches

• Jurisdiction: New York

IV. THE “RIGHTS OF OWNERSHIP” VS. THE “REGULATORY COMPACT” APPROACHES

Historically, there have been two approaches to the question of who is entitled to (or responsibile for) the spread between RCNLD and OCLD values on the disposition of utility systems, whether through condemnation or otherwise. What might be termed the “rights of ownership” approach holds “that utility assets, though dedicated to the public service, remain the exclusive property of the utility’s investors, and that growth in value is an inseparable and inviolate incident of that property.”⁶⁶⁶ An alternative approach, which might be labeled the “regulatory compact”⁶⁶⁷ approach, holds that OCLD ratemaking has essentially transferred the risks and benefits of capital losses and gain typically associated with ownership from owners to the public. According to the regulatory compact approach, when government action removes assets from the protected environment of rate regulation, the public should bear the costs of theretofore unrecognized capital depreciation (or stranded costs), but enjoy the benefit of capital appreciation, particularly where the losses and gains result from circumstances outside the reasonable control of the owners.⁶⁶⁸

Under the rights-of-ownership approach, even if the prior ratemaking regime virtually insulated the utility owners from risk, the proper compensation upon condemnation should be RCNLD, regardless of whether this is more or less than OCLD. Under the regulatory compact approach, if rate-base has been OCLD, then the owner should recover OCLD upon condemnation, regardless of whether this is higher or lower than the system’s RCNLD. In the recent restructuring of the electric industry, both utility companies and regulators embraced the regulatory compact approach in concluding that ratepayers, not owners, should bear “stranded costs,” e.g., the losses associated with uneconomic power plants being removed from rate regulation and subjected to price competition.⁶⁶⁹

The leading case addressing the merits of the two approaches to the entitlement to gain on the disposition of utility property is Democratic Central Committee v. Washington Area Transit Commission.⁶⁷⁰ According to the Democratic Central Committee court, the “central idea” of modern rate regulation has been that the utility “investor’s legally protected interest resides in the capital he invests in the utility rather than in the items of property which that capital purchases for provision of utility...