Disentangling Deregulatory Takings
62 Pages Posted: 12 Aug 2004
Constitutional takings protections, such as those in the Fifth Amendment of the United States Constitution, create a potential for state liability for changes in regulatory policy by governments. This Article critiques takings jurisprudence in the context of two infrastructure investment issues: the stranded cost problem facing United States utility industries, which has given rise to claims of compensation for deregulatory takings; and the development of standards to protect direct foreign investment in developing countries. In both contexts, traditional legal doctrines do not adequately provide for the type of remedy sought so courts are in need of standards to assist them in determining when a change in government regulation warrants recovery for investors.
After addressing the current state of United States takings jurisprudence, this Article outlines a constitutional takings doctrine that can be applied to these infrastructure investment issues both within and outside of the American context. Under the doctrine advanced in this Article, the government would be required to pay compensation whenever it takes resources as part of the process of producing public goods and services. This Article's analysis, however, supports a rebuttable presumption against compensation for losses connected with the overall implementation of a public policy. Property rights protection will not aid growth - nor will it sustain historical investment levels - if it encourages inefficient levels and types of investment.
In the American context, federal court review of public utility deregulatory takings claims should not entertain the strong property rights notions that some advance for purposes of encouraging infrastructure investment. Instead, this Article concludes that there is no reason for courts to depart from the distinct line of cases addressing public utility price regulation, in which courts routinely defer to regulators' decisions regarding compensation. The courts should treat the deregulation of public utilities as an exercise of government policymaking authority that generally does not require compensation of stranded costs under the United States Constitution. In a similar manner, officials in developing countries who are eager for foreign investment need to look far enough ahead to ask if the generous terms they are offering to investors will backfire in the future when citizens perceive the costs they must bear. Developing countries should be wary of incorporating too sweeping a set of property rights protections into constitutions, individual contracts, or investment treaties, especially if they are still in the process of developing effective state institutions.
Note: Formerly titled "Takings Law and Infrastructure Investment: Certainty, Flexibility and Compensation"
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