In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 02-2618

ALLIANT ENERGY CORPORATION and

WISCONSIN POWER AND LIGHT COMPANY,

Plaintiffs-Appellants,

v.

AVE M. BIE, BURNEATTA BRIDGE and ROBERT M.

GARVIN, in their official capacities as Commissioners

of the Wisconsin Public Service Commission,

Defendants-Appellees.

____________

Appeal from the United States District Court

for the Western District of Wisconsin.

No. 00 C 0611—John C. Shabaz, Judge.

____________

ARGUED DECEMBER 4, 2002—DECIDED MAY 29, 2003

____________

Before FLAUM, Chief Judge, and COFFEY and WILLIAMS,

Circuit Judges.

FLAUM, Chief Judge. This case involves various statutes regulating public utilities and public utility holding

companies in Wisconsin. The plaintiffs challenge the

constitutionality of the statutes under the Commerce and

Equal Protection clauses of the United States Constitution.

The district court granted summary judgment in favor of

the defendants. The plaintiffs appeal. For the reasons

stated herein, we affirm in part and reverse in part.
2 No. 02-2618

1 For convenience, we will generally refer to the arguments as

belonging to Alliant.

I. Background

i. The Parties

The plaintiffs in this case are Alliant Energy Corporation

(“Alliant”) and its subsidiary, Wisconsin Power and Light

Company (“WPLC”).1

 Alliant is incorporated in Wisconsin

and functions as a Wisconsin public utility holding company. Under WIS. STAT. § 196.795 (1)(h)(1)(a) that means

that Alliant owns or controls more than 5%—in this case

100%—of the outstanding voting securities in a Wisconsin

public utility, namely WPLC, a Wisconsin corporation that

provides utility services in Wisconsin. Alliant has two

other subsidiaries: Interstate Power and Light Company,

which provides utility services in Iowa, Minnesota and

Illinois; and Alliant Energy Resources, Inc., which owns

Alliant’s nonutility holdings. Alliant is subject to regulation by the Minnesota Public Utilities Commission, the

Iowa Utilities Board, the Illinois Commerce Commission,

the Securities and Exchange Commission, and most relevantly the Wisconsin Public Service Commission (“PSC”).

WPLC is also regulated by the PSC.

This is a suit against the PSC (the named defendants

in this case, Ave Bie, Burneatta Bridge and Robert M.

Garvin, are sued in their official capacities as commissioners of the PSC).

ii. The Statutory Provisions

There are numerous provisions of Wisconsin law that are

challenged in this appeal, and two other provisions that,

though unchallenged, are relevant to our analysis. The

relevant unchallenged provisions are as follows:
No. 02-2618 3

2 All of the laws listed are Wisconsin statutes and so we list

only chapter or section number.

Ch. 180:2 This chapter provides the rules for incorporation within Wisconsin. Both Alliant and WPLC are

incorporated under ch. 180. Alliant is seeking to reincorporate in another state.

§ 196.795(2): This is the section specifically providing for and authorizing the formation of utility holding companies. It is by virtue of this provision that

Alliant is authorized to exercise ownership and control over WPLC; to put it another way, without this

provision Alliant would not exist at all as a holding

company.

The challenged provisions are as follows:

§ 196.53: “No license, permit or franchise to own, operate, manage or control any plant or equipment for

the production, transmission, delivery or furnishing of

heat, light, water or power may be granted or transferred to a foreign corporation [with some exceptions].”

§ 196.795(5)(L) (“in-state incorporation provision”): This provision requires that a public utility

holding company be incorporated in Wisconsin, under

WIS. STAT. CH. 180.

§ 196.795(3) (“the takeover provision”): This provision requires PSC approval before a person can

acquire more than 10% of the outstanding voting securities of a public utility holding company.

§ 196.795(6m)(b) (“the asset cap”): This provision

limits the extent to which a public utility holding company may invest in non-utility businesses.

§§ 196.195(5)(a) and (7)(a), 201.01(2), and 201.03(1)

(“the securities regulation provisions”): These
4 No. 02-2618

3 The definition is broad enough that the PSC might deem Alliant to be a “public service corporation.”

4 The district court originally dismissed the case for lack of

standing. In a prior appeal we reversed, holding that if Alliant

can show that they intended to make investment purchases

and sales in violation of the provisions and to reincorporate

outside of Wisconsin, they could establish standing to challenge

the provisions. Alliant Energy Corp. v. Bie, 277 F.3d 916 (7th

Cir. 2002). Alliant has done this and therefore standing is no

longer an issue.

provisions provide that PSC may regulate the issuance

of securities by “public service corporations.” The provisions also define the application of the term “public

service corporations.”3

The in-state incorporation provision, the takeover provision,

the asset cap, and the securities regulation provisions

are all part of the Wisconsin Utilities Holding Company

Act (WUHCA).

iii. The Challenge

Alliant and WPLC challenge the constitutionality of

the in-state incorporation provision, the takeover provision, the asset cap, and the securities regulation provisions as well as §196.53. Alliant argues that these provisions violate the Commerce and Equal Protection clauses

of the United States Constitution.4

 The district court found

that the provisions are not unconstitutional and alternatively that Alliant is estopped from challenging the provisions in the first place. Accordingly, the district court

granted summary judgment in favor of the defendants.
No. 02-2618 5

II. Discussion

Alliant presents its arguments generally as to all challenged provisions with few distinctions between them. The

issues of this case cannot be meaningfully analyzed in

such a manner. The provisions of the statute have very

different purposes and effects. We therefore deal with the

provisions in three distinct categories: the first category

is simply the in-state incorporation provision requiring

that a holding company be incorporated under Wisconsin

law; the second category is § 196.53, the provision requiring that licenses, permits and franchises for local utilities

not be granted or transferred to foreign corporations;

and the third category is made up of the remaining provisions, which regulate the financial structure and activities of the holding company (hereinafter “the structural

provisions”).

a. Constitutional Estoppel and Severability

The district court found that Alliant was estopped

from challenging the constitutionality of the Wisconsin

statutes. The district court reasoned that because Alliant

is authorized to exist as a holding company by virtue of

WUHCA, in provision § 196.795(2), it cannot then challenge the constitutionality of other parts of the act. The

district court based its holding on Fahey v. Mallonee, 332

U.S. 245 (1947). The Supreme Court in Fahey explained, “It

is an elementary rule of constitutional law that one may not

retain the benefits of the Act while attacking the constitutionality of one of its important conditions.” Id. at 255

(quotations and citations omitted). As elementary as the

rule may have been, the “doctrine has unquestionably been

applied unevenly in the past, and observed as often as not

in the breach.” Arnett v. Kennedy, 416 U.S. 134, 153 (1974);

accord Brockert v. Skornicka, 711 F.2d 1376, 1380 (7th Cir.

1983). We therefore view the rule as one to be applied on a
6 No. 02-2618

case-by-case basis. See Kadrmas v. Dickinson Pub. Sch., 487

U.S. 450, 456-57 (1988) (“[W]e doubt that plaintiffs are

generally forbidden to challenge a statute simply because

they are deriving some benefit from it.”). It is also important to recognize the close tie between the rule of estoppel

and the question of severability of statutory provisions. The

question of severability was essential to the decision in

Fahey:

In the name and right of the Association it is now being

asked that the Act under which it has its existence

be struck down in important particulars, hardly severable from those provisions which grant its right to

exist. Plaintiffs challenge the constitutional validity of

the only provision under which proceedings may be

taken to liquidate or conserve the Association for the

protection of its members and the public. If it can

hold the charter that it obtained under this Act and

strike down the provision for terminating its powers

or conserving its assets it may perpetually go on,

notwithstanding any abuses which its management may perpetuate.

Fahey, 332 U.S. at 255-56. As the challenged provision

was “hardly severable” from the provision that allowed

the plaintiffs in that case to exist, it made sense to estop

them from making the challenge. If the plaintiffs were

allowed to challenge a non-severable provision, the result would be strange indeed—a victorious plaintiff would

have litigated itself out of existence.

The defendants argue that the challenged provisions, as

part of WUHCA, are not severable from the other provisions of that act, especially WIS. STAT. § 196.795(2), the

provision under which Alliant is authorized to exist as a

holding company. In making this argument the plaintiffs

must overcome the presumption in Wisconsin of severability of statutory provisions. Wisconsin Statute § 990.001(11)

provides,
No. 02-2618 7

The provisions of the statutes are severable. The

provisions of any session law are severable. If any

provision of the statutes or of a session law is invalid,

or if the application of either to any person or circumstance is invalid, such invalidity shall not affect other

provisions or applications which can be given effect

without the invalid provision or application.

This presumption can only be overcome by showing that

the legislature, intending the statute to be effective only

as an entirety, would not have enacted the valid part of

the statute by itself. State v. Hezzie R., 219 Wis. 2d 848,

863-66 (1998).

The merit of the defendants’ argument that the provisions are not severable from § 196.795(2) is different for

each of the three categories of challenged provisions. For

the group we refer to as the structural provisions the

defendants have a strong argument. These provisions

were part of a larger legislative compromise. Wisconsin

clearly has an interest in policing its public utilities to

protect the welfare of ratepayers. The existence of a holding company creates the opportunity and incentive for

deceptive practices such as cross-subsidization from the

regulated public utility to a non-regulated subsidiary. It

is not surprising that when Wisconsin finally decided to

authorize the existence of public utility holding companies they accompanied that authorization with statutory provisions allowing for government control of the

financial structure and activities of such companies. It

is not at all clear that Wisconsin would have authorized

the formation of public utility holding companies had it

not been for these protective controls. It therefore appears improper to sever the structural provisions from

§ 196.795(2).

The fact that the structural provisions are probably not

severable from § 196.795(2) suggests that the reasoning
8 No. 02-2618

of Fahey would apply to estop Alliant here. On the other

hand, Alliant argues that if a holding company is not

allowed to challenge the provisions then they might go

unchallenged because prospective entrants to the holding company market would have difficulty establishing

standing to sue. Though we question whether Alliant’s

standing argument is persuasive, we need not resolve

the issue today, because, as discussed below, we conclude that even if Alliant can challenge the structural

provisions the challenge must fail.

As to the in-state incorporation provision, we conclude

that Alliant is not estopped. Again we begin with the

presumption of severability. The defendants have provided no rationale for why this provision should be inextricably tied to § 196.795(2). In fact, as will be shown later,

the defendants cannot provide any rationale for the existence of this statute. As the provision serves no valid

legislative purpose, it is difficult to see why Wisconsin

would have made its inclusion an integral condition in the

legislative compromise to allow public utility holding

companies. The defendants have shown no evidence that

Wisconsin would not have authorized the formation of

public utility holding companies in the absence of the instate incorporation provision, nor have they provided

any logical explanation for why a State would want to

condition the authorization of public holding companies

on an in-state incorporation requirement.

As far as we can tell, and as far as the defendants’

argument leads us, the provision was tacked on as an

insurance measure in case the structural provisions

could not stand on their own. Since those provisions can

stand on their own, the insurance measure is unnecessary. The result would be quite ironic if defendants were

right and the in-state incorporation provision was nonseverable: the non-severable provision, inserted to protect

the constitutionality of the statute, would threaten the
No. 02-2618 9

constitutionality of the entire statute, which otherwise

has no constitutional failings at all. We therefore hold

the in-state incorporation provision to be severable from

the rest of the statutory provisions. That being the case,

Alliant is not estopped from pursuing its challenge to

the constitutionality of the provision.

Finally, as to § 196.53, the defendants do not argue

that Alliant, or WPLC, is estopped from challenging

this provision. There is little or no connection between

that provision and the authorization of public utility

holding companies. § 196.53 prohibits the granting or

transferring of a public utility license, permit or franchise

to a foreign corporation. This deals with the actual provision of the utility and not the financial structure of the

utility holding company. Alliant is not estopped from

challenging § 196.53.

b. Commerce Clause Analysis

While the Commerce Clause, U.S. CONST. art. I § 8, cl. 3,

explicitly grants Congress the authority to regulate commerce among the States, it has long been understood that

it also directly limits the power of the States to discriminate against or burden interstate commerce. Gov’t Suppliers Consol. Servs., Inc. v. Bayh, 975 F.2d 1267, 1276

(7th Cir. 1992); Oregon Waste Sys., Inc. v. Dep’t of Envtl.

Quality of the State of Oregon, 511 U.S. 93, 98 (1994). This

“negative” aspect of the Commerce Clause is often referred

to as the “Dormant Commerce Clause” and is invoked to

invalidate overreaching provisions of state regulation of

commerce. If a party seeking to invalidate a statute cannot show any burden on interstate commerce, then the

Dormant Commerce Clause is not implicated and the

statute will not be invalidated. For those cases where

interstate commerce is burdened, the Supreme Court has

adopted “what amounts to a two-tiered approach” to
10 No. 02-2618

determining the validity of the statute. Brown-Forman

Distillers Corp. v. New York State Liquor Auth., 476 U.S.

573, 578 (1986). The first tier is often referred to as the

“virtual per se” rule. This rule is applied when a statute

“directly regulates or discriminates against interstate

commerce, or when its effect is to favor in-state economic

interests over out-of-state interests.” Id. at 579. In such

cases the Court has “generally struck down the statute

without further inquiry.” Id. The only thing that can

save a statute under this analysis is a showing by the

State that the law “advances a legitimate local purpose

that cannot adequately be served by reasonable nondiscriminatory alternatives.” Oregon Waste Sys., 511 U.S. at

100-01 (internal quotations and citations omitted). But

this showing must “pass the strictest scrutiny” and “[t]he

State’s burden of justification is so heavy that facial

discrimination by itself may be a fatal defect.” Id. (internal quotations and citations omitted).

The second tier is for cases where a statute “has only

indirect or incidental effects on interstate commerce and

regulates evenhandedly”; in such cases “the statute will

be upheld ‘unless the burden imposed on such commerce

is clearly excessive in relation to the putative local benefits.’ ” Gov’t Suppliers, 975 F.2d at 1277 (quoting Pike v.

Bruce Church, Inc., 397 U.S. 137, 142 (1970)). This test

has become known as the Pike balancing test. In determining which tier to apply, the rule of thumb is that

essentially any statute that facially discriminates against

out-of-state commerce will fall subject to the per se rule,

and all other statutes that have an effect on interstate

commerce will be analyzed under the Pike balancing test.

Nonetheless, the Court has “recognized that there is no

clear line separating the category of state regulation that

is virtually per se invalid under the Commerce Clause,

and the category subject to the Pike v. Bruce Church

balancing approach.” Brown-Forman Distillers, 476 U.S. at
No. 02-2618 11

5 Of course, if a utility were provided to Wisconsin users from

an out-of-state source—by this we mean that the generation

facilities are located out-of-state, not the corporate entity—that

would be interstate commerce. See Middle South Energy, Inc.

v. Arkansas Pub. Serv. Comm’n, 772 F.2d 404 (8th Cir. 1985).

Likewise, if a facility located in Wisconsin were providing a utility to users in other States, that too would be interstate commerce. See New England Power Co. v. New Hampshire, 455 U.S.

331 (1982). Such provision of utilities is controlled by federal

regulation and presumably exempted by the terms of § 196.53;

and in any event such scenarios are beyond the scope of this

appeal.

579. “In either situation the critical consideration is the

overall effect of the statute on both local and interstate

activity.” Id.

With this framework in mind we turn now to the three

categories of statutory provisions challenged by Alliant.

i. In-State Incorporation of Holding Company

It is important to understand that the requirement that

the holding company be incorporated in-state must be

analyzed separately and distinctly from the §196.53

requirement that a licence, permit or franchise to operate

as a utility company only be granted or transferred to a

Wisconsin corporation. The source of this distinction is

the difference in kind between the commerce being regulated by each provision. The provision of public utilities

within Wisconsin is intrastate commerce.5

 An investment opportunity in a Wisconsin utility is, on the other

hand, an article of interstate commerce. Cf. Lewis v. BT Inv.

Managers, Inc., 447 U.S. 27 (1980). If ownership of a

Wisconsin utility company must lie with a Wisconsin

Corporation, a potential article of interstate commerce, i.e.,

the investment in the utility, is stopped at the border.
12 No. 02-2618

Section 196.53 simply says that if you are going to produce

an article of commerce within Wisconsin and sell it within

Wisconsin then Wisconsin has the right to regulate your

activities, whereas the in-state incorporation provision

says that an article of commerce produced in Wisconsin is

prohibited from being sold anywhere other than Wisconsin.

This is a fundamental distinction. See Eli Lilly & Co. v.

Sav-On-Drugs Inc, 366 U.S. 276 (1961).

Not only is it clear that the in-state incorporation provision regulates interstate commerce, but that the burdens

produced by that regulation could be substantial. The

requirement that a holding company be incorporated in

Wisconsin requires that ultimate ownership lie in a Wisconsin corporation. To comply with this requirement a

corporation could not just create a subsidiary; instead it

would have to reincorporate the parent corporation in

Wisconsin. If every State adopted this rule there would

be no interstate investment in public utilities at all. No

holding company parent could own public utility companies in more than one State. Section 196.53 in contrast

does not create this balkanization between the States

because a foreign company that wants to get involved in

Wisconsin utility provision need only create a subsidiary

and incorporate it in Wisconsin.

Determining that the Wisconsin provision burdens

interstate commerce is only the beginning of the analysis.

We must then apply either the rule of virtual per se invalidity or the Pike balancing test. The parties disagree

about which tier of analysis should be applied to this

provision. We think that the provision falls under the per

se rule, but it is not necessary for us to make this determination as the provision is clearly invalid under the Pike

test. See Lewis, 447 U.S. at 42 (not deciding whether

legislation is per se invalid when the Court was convinced that the legislation was invalid under the balancing

test); Bendix Autolite Corp. v. Midwesco Enter., Inc., 486
No. 02-2618 13

U.S. 888, 891 (1988) (choosing to conduct a Pike balancing even where the statute “might have been held to be

a discrimination that invalidates without extended inquiry”).

The Supreme Court applied the Pike balancing test to

invalidate a nearly identical statute in Lewis. The only

difference in that case was the type of holding company.

There the statute prohibited out-of-state holding companies from owning companies in Florida that sold investment advisory services; here the statute prohibits out-ofstate holding companies from owning companies in Wisconsin that provide public utilities. The defendants argue

that this distinction is dispositive. They essentially argue

that the importance of local regulation of public utilities

creates an exemption from normal Commerce Clause

analysis. We do not question the importance of regulating public utilities and surely we should take the importance of public utilities into account in balancing the

burdens on interstate commerce against the local benefits

of the regulation; nonetheless, the importance of such

regulation does not trump Commerce Clause analysis. In

Lewis the Supreme Court noted the importance of local

regulation of investment practices: “[F]inancial practices

are essential to the health of any State’s economy and to

the well-being of its people.” Lewis, 447 U.S. at 38. Still

the Court conducted a full Commerce Clause inquiry. The

Court explained that just because local regulation is

important “it does not follow that these same activities

lack important interstate attributes.” Id. Important regulations that burden interstate activities are just as subject to Commerce Clause analysis as any other regulations.

As we apply the Pike balancing test, we note that the

defendants have given us no legitimate local benefits to

balance against the burden on interstate commerce. While

they have told us that regulating public utilities is important, they have failed to provide any argument to show that
14 No. 02-2618

the in-state incorporation provision contributes to any

meaningful regulatory scheme. The only rationale the

defendants provide to save the in-state incorporation

provision is the argument that in-state incorporation is

necessary to save the constitutionality of the structural

provisions. The defendants want us to assume that the

structural provisions, standing alone, are unconstitutional.

Of course, they attempt to refute this same proposition

later when arguing for the constitutionality of the structural provisions themselves; but for the meantime they

want us to accept the assumption. If the structural provisions are unconstitutional, the defendants argue, it is only

because without in-state incorporation they affect the

structure and financial activities of out-of-state holding

companies. Recognizing this assumed constitutional weakness, Wisconsin has circumvented the problem by requiring that all holding companies be incorporated in Wisconsin. The in-state incorporation requirement, the argument

goes, although otherwise unconstitutional is therefore

saved by the fact that it is itself necessary to save the

structural provisions, thus promoting regulation of the

financial activities and structure of local utilities. One

unconstitutional provision combines with another unconstitutional provision to create a constitutionally valid

scheme. We have serious reservations as to the merits

of this sort of constitutional bootstrapping. But the structural provisions, as we discuss below, are fully valid. And

beyond the above argument of the defendants, they have

provided no alternative rationale for us to consider. Given

the validity of the structural provisions, the stated purpose of the in-state incorporation provision is moot: there

is no need for an otherwise unconstitutional provision to

save the constitutionality of an otherwise constitutional

provision. This makes any balancing under Pike fairly

effortless: no legitimate local interest has been presented

to justify the burden the in-state incorporation provision

has on interstate commerce.
No. 02-2618 15

The fact that Wisconsin could have prohibited the

existence of any holding company outright does not

change the outcome. A State may prohibit the local production of certain commerce, but as soon as such commerce

is produced the State may not prevent it from crossing

state lines. The landfill cases provide an example. States

may choose not to zone land for dumping, but once the

land is opened up for trash it must be opened up for all

refuse, no matter where it originates. See, e.g., Oregon

Waste Sys., 511 U.S. 93; City of Philadelphia v. New Jersey,

437 U.S. 617 (1978). The same is true of all items of

commerce, including investment opportunities such as

ownership in a public utility company.

ii. Section 196.53

Alliant, through its subsidiary WPLC, challenges WIS.

STAT. § 196.53, which provides, in relevant part, as follows:

No license, permit or franchise to own, operate, manage

or control any plant or equipment for the production,

transmission, delivery or furnishing of heat, light,

water or power may be granted or transferred to a

foreign corporation.

It is not exactly clear what Alliant is challenging with

respect to this provision. A cite to the statutory provision

doesn’t even show up in their opening brief’s list of authorities, although it miraculously appears as one of the

most cited provisions in their reply brief. Alliant’s argument seems to be that whatever logic applies to the in-state

incorporation provision must also apply to § 196.53. That

cannot be the case. The in-state incorporation provision,

requiring that a holding company be incorporated in

Wisconsin, deals with interstate financial transactions

whereas § 196.53 deals with intrastate provision of public

utilities—this distinction was discussed more extensively

above. Other than this piggybacking of arguments, we glean
16 No. 02-2618

6 They would likely lack standing to directly challenge that

aspect of § 196.53.

from the briefs and the record that Alliant claims that

§ 196.53, in prohibiting the “transfer” of licenses, permits

or franchises to foreign corporations, precludes WPLC

from selling any of its utility assets to a foreign corporation. This result occurs because the assets are useless

without the license, permit or franchise to operate a public

utility within Wisconsin. Alliant is not challenging the

statutes prohibition on “granting” the licenses, permits

or franchises to a foreign corporation.6

 Nonetheless, a

holding that invalidates the prohibition on “transferring”

would render the prohibition on “granting” practically

meaningless—a foreign corporation seeking to provide public utilities within Wisconsin could simply enlist a Wisconsin corporation to transfer to it the permit, license or

franchise to provide the utility. Wisconsin’s purpose of

keeping public utilities incorporated in-state would be

unprotected and the only thing keeping foreign corporations

from providing the utility would be a relatively small

transaction. As such we must view Alliant’s challenge to

§196.53 as one to the entire provision—a challenge that

asks us to invalidate Wisconsin’s prohibition both on

granting and on transferring licenses, permits or franchises

for Wisconsin public utilities to foreign corporations.

The position is a dramatic one that would alter significantly the present law of utility regulation. For similar

and longstanding statutes see N.H. REV. STAT. ANN.

§ 374:24 and OHIO REV. CODE ANN. § 4905.62. One would

have expected a more comprehensive argument when a

party is asking a court to so conclude. We are unpersuaded by Alliant’s challenge. The provision of public

utilities that are generated, distributed, and consumed in
No. 02-2618 17

7 If Alliant is instead resting their challenge on the notion that

§196.53 is unconstitutional because it prohibits foreign corporations from using WPLC’s assets for interstate generation and

transmission of power—generating the power in Wisconsin and

shipping it out, or using WPLC’s distribution lines to bring

in power generated outside of Wisconsin—they have not presented this argument in their briefs. And it is not clear that

the statute even has such an affect, or that Alliant would have

standing to bring that challenge.

Wisconsin is an inherently local and intrastate business.7

It is well-established that a State is free to regulate commerce that is intrastate in nature. See Eli Lilly, 366 U.S.

276; Union Brokerage Co. v. Jensen, 322 U.S. 202, 211

(1944); Ry. Express Agency, Inc. v. Virginia, 282 U.S. 440

(1931); Kansas City Structural Steel Co. v. Arkansas, 269

U.S. 148 (1925). Furthermore, the fact that an entity is

involved both in intra- and interstate commerce does not

exempt that entity from compliance with the intrastate

regulations. Eli Lilly, 366 U.S. at 279 (“Lilly could not

escape state regulation merely because it is also engaged

in interstate commerce.”). Thus, even if WPLC provided

electricity both intrastate to Wisconsin users and interstate to foreign users, this would not constitutionally

exempt it from local regulation of its intrastate operations.

The Supreme Court has left unanswered the question

of whether this approach allows a State to require local

incorporation as a condition of doing business in local

markets. Lewis, 447 U.S. at 50-51; but see Railway Express,

282 U.S. at 444 (State may require a foreign corporation to

take out a local charter prior to being granted a permit

to conduct local business). In addressing this question

under the Pike balancing test we can assume, because

Alliant has not argued otherwise, that a local incorporation requirement has a minimal burden on interstate

commerce and serves a legitimate and important state
18 No. 02-2618

interest in regulating intrastate commerce. Cf. Eli Lilly,

366 U.S. at 279 (legitimate state interest served by requirement of certificate of authority to do business as a

prerequisite to participation in intrastate commerce); Union

Brokerage, 322 U.S. at 211 (same). At best Alliant’s implied

argument, if there is one, boils down to a claim that by

requiring local incorporation of intrastate business Wisconsin is burdening interstate commerce in the assets of

intrastate business. Such a position is not sustainable. If

a piece of equipment is only useful in providing a utility

in Wisconsin, the sale of the equipment is not an interstate transaction, even if the buyer is a foreign corporation. If WPLC sells a power plant located in and immoveable from Wisconsin to any buyer, that is an intrastate

transaction. No item of commerce crosses state-lines. The

sale of a piece of moveable equipment that might be useful

outside of Wisconsin is of course interstate commerce; but

Alliant has not argued that such a sale is affected by

§ 196.53. Ultimately, Alliant has shown no excessive burden

on interstate commerce and explained no reason why a

State cannot require local incorporation as a condition

of doing local business in local markets. Based on these

sparse arguments we cannot conclude that §196.53 violates the Constitution.

iii. Structural Provisions

The remaining provisions (the takeover provision, the

asset cap, and the securities regulations provisions) regulate the financial structure and activities of a holding

company that owns a Wisconsin utility. None of these

provisions discriminates on its face against out-of-state

economic interests. All three treat in-state activity equally

with out-of-state activity: the asset cap limits a utility

holding company’s ownership of non-utility assets regardless of where those assets are located; the takeover provi-
No. 02-2618 19

sion requires PSC approval prior to the sale of more than

10% of the holding company’s stock no matter where the

involved parties are located or incorporated; and the

securities regulation provisions likewise require approval

of the PSC prior to issuance of securities by a public service corporation without regard to whether the securities

are entering into interstate commerce. None of the provisions imposes a burden on interstate commerce that

they do not impose on intrastate commerce as well. But

these provisions do all have effects on interstate commerce. In fact, given the invalidation of the in-state incorporation provision, some transactions regulated by these

provisions may occur entirely outside of Wisconsin. For

example, an Illinois corporation that owns a Wisconsin

utility would be subject to Wisconsin regulation if it

wished to sell 10% of its stock to an Indiana corporation or

if it decided to diversify and purchase non-utility assets

located in various States that amounted to greater than

25% of its worth. Such transactions are no doubt interstate in nature. See Edgar v. Mite Corp., 457 U.S. 624

(1982).

Provisions like these, that are facially neutral but

indirectly burden interstate commerce, must be analyzed

under the Pike balancing test. Alliant argues that no

such balancing is necessary because the provisions burden extraterritorial commerce. We have no doubt that

the provisions do in fact impact extraterritorial commerce

(see our examples above); but we disagree with the proposition that this renders the provisions per se invalid. To

support its argument Alliant directs our attention to the

opinion of Justice White in Edgar v. Mite. In that case,

where the majority of the Court struck down an Illinois

statute requiring registration and approval of the Secretary of State of Illinois for any tender offer involving a

corporation in which Illinois residents own 10% of the

stock, Justice White wrote: “[I]f Illinois may impose such
20 No. 02-2618

8 Justice White delivered a five part opinion, with Part V

separated into V-A and V-B. The Justices split along many

different lines, and in the end only Parts I, II and V-B received

support from a majority of the Court—different majorities as

to each part.

regulations, so may other States; and interstate commerce

in securities transactions generated by tender offers

would be thoroughly stifled.” Id. at 642. Justice White

went on to note: “The Commerce Clause also precludes the

application of a state statute to commerce that takes

place wholly outside of the State’s borders, whether or

not the commerce has effects within the State.” Id. at 642-

43. This language, if controlling, would mean victory for

Alliant; the only problem is that the language, appearing

in part V-A of Justice White’s opinion, did not draw support from a majority of the Court and is therefore not

the opinion of the Court.8

In part V-B, which did garner the support of a majority

of the Court, Justice White applied the Pike test to the

Illinois statute, and therefore we do the same for the

Wisconsin provision in question here. Id. 643-46; see also

Southern Union Co. v. Missouri Pub. Serv. Comm’n, 289

F.3d 503 (8th Cir. 2002) (rejecting the plaintiffs per se

claim and applying the balancing test to provisions regulating the financial activities of public utilities). The burden

on one side is, as we have stated, the effect the statute

has on interstate financial transactions. This is no small

impact. Certain interstate financial transactions of nonWisconsin parties are subject to approval of the PSC

while other such transactions are banned outright. This

places a high, sometimes prohibitive, transactions cost

on these dealings. Cf. Mite, 457 U.S. at 643 (“The effects of

allowing the Illinois Secretary of State to block a nationwide tender offer are substantial.”). The benefit on the

other side is the regulation of local public utilities. This is
No. 02-2618 21

an important interest. Arkansas Elec. Coop. Corp. v.

Arkansas Pub. Serv. Comm’n, 461 U.S. 375, 377 (1983)

(“[T]he regulation of utilities is one of the most important

of the functions traditionally associated with the police

power of the States.”); accord Southern Union, 289 F.3d

at 509; Baltimore Gas & Elec. Co. v. Heintz, 760 F.2d

1408, 1424 (4th Cir. 1985). This interest is served well by

the structural provisions because they help to prevent

such abuses as cross-subsidization and deceptive reporting of cost allocation. Cross-subsidization occurs when a

firm uses the revenues from the sale of one product to

subsidize the sale of a another product. In a free-market

system cross-subsidizing is not profit-maximizing and

there are few incentives to do it. But regulation can distort

free market incentives. The cost allocation and crosssubsidy problem can be illustrated by the following example. A firm sells products X and Y, where the market for

X is regulated and the market for Y is unregulated. The

regulation on X provides that a firm can charge a price

that results in a fixed rate-of-return on its capital investment in X. Profits are dictated as a percentage of capital

investment. The larger the investment in X, the greater

profit the firm is authorized to collect. The price of Y is

determined by free-market forces and not directly affected by the cost of capital investments. The firm has an

incentive to allocate as much of its costs as possible as

capital investments in the production of X. A less-thanhonest firm may report certain costs attributable to product Y as investments in product X. Thus the consumers

of product X cross-subsidize product Y by paying—through

the regulated rate-of-return pricing—part of the costs in

producing Y. The more products a firm is responsible for,

the easier it is for the firm to misreport the allocation of its

costs. This danger can be tempered by limiting the public

utility holding company’s involvement with and ownership of businesses and assets unrelated to providing the

public utility. See, e.g., Southern Union, 289 F.3d at 507-08
22 No. 02-2618

(“Rate regulation is a complex process. A public utility’s

investments in other companies can affect its regulated

rate of return, if investment losses are allocated to the

regulated business.”).

In arguing that the balancing proves invalidity here,

Alliant again points to Edgar v. Mite—this time to part V-B

where the majority invalidated the statute in question

because Illinois had no interest in regulating the internal

affairs of foreign corporations and “[i]nsofar as the Illinois law burdens out-of-state transactions, there is nothing to be weighed in the balance to sustain the law.” 457

U.S. at 644. This was true because the law affected the

sale and purchase of stocks that might never involve any

Illinois shareholders. The Court also noted that where

the law did apply to transactions involving Illinois shareholders, the Court was “unconvinced that the Illinois

Act substantially enhances the shareholders’ positions.” Id.

The V-B analysis in Edgar v. Mite can be distinguished

from the instant case. Wisconsin has a strong interest—

namely the protection of the welfare of ratepayers—to be

weighed against the burden the statute places on interstate trade. The need to prevent abuses made possible

by the presence of a holding company is extremely important and imperative for the proper functioning of any

regulatory scheme. The dangers inherent in the mere

existence of utility holding companies render a great need

for structural regulation of those companies. A State is

entitled to regulate the financial structure and investments of companies that control utilities in that State;

otherwise it would lose considerable power to police the

rates charged for the provision of utility service. The burden on interstate commerce, however significant it may be,

is not enough to outweigh this interest.

We are not alone in this assessment. The Eighth and

Fourth Circuits have both found this interest to be of
No. 02-2618 23

sufficient importance to outweigh the burden similar

provisions placed on interstate commerce. The Eighth

Circuit in Southern Union, applied the Pike test and upheld a law that required approval by the Missouri Public

Service Commission before any utility doing business in

Missouri purchased stocks or bonds issued by another

utility because the importance of regulating utilities

and ratepayer welfare outweighed the burden placed on

extraterritorial interstate stock transactions. Southern

Union, 289 F.3d at 503. A similar analysis and outcome

were reached in the Fourth Circuit in Baltimore Gas &

Electric where the challenged statute prohibited nonpublic service corporations from acquiring more than 10%

of a Maryland public utility, and required that even public

service corporations seek approval before acquiring 10%

of a Maryland public utility. 760 F.2d 1408. The court

applied the Pike test and upheld the statute because of

the importance of preventing deceptive practices inherently available to utility holding companies. Id. In conducting the balancing test the court recognized that “[a]

necessary adjunct to ensuring the protection of consumers

is the authority to regulate the corporate structure of public utilities” and that

holding companies provide the occasion for deceptive

financing practices, nondisclosure of important corporate accounts, and the manipulation of various “service

charges” by the holding companies which increase

the utility’s costs and the ultimate charge to the consumer.

Id. at 1424-25.

Alliant also argues that these structural provisions are

invalid because they are redundant of other regulations.

These other regulations are laws that prohibit deceptive

practices. This argument must fail. A State is serving a

legitimate purpose when it passes structural regulations to
24 No. 02-2618

serve as a back up to prohibitions. The Fourth Circuit

explained in Baltimore Gas & Electric:

That the state has enacted a complex regulatory

structure with overlapping provisions, more than one

of which may serve ultimately to control suspect

activity, does not vitiate the state’s otherwise legitimate interest in curbing such suspect activity. The

state may regulate the rates utilities charge consumers either directly, by requiring commission approval of rate increase, or indirectly, by controlling

certain investments and attempts at diversification by

the utility. That is, the state may choose one or more

means to a particular end, and the legitimacy of the

end—the state interest served by the particular regulation—is not vitiated when the state chooses several

means of achieving that end.

760 F.2d at 1425.

We therefore conclude that the structural provisions in

question pass the Pike test.

c. Equal Protection Analysis

The Equal Protection question is obviously moot for the

in-state incorporation provision, which we have already

found unconstitutional under the Commerce Clause analysis. As for the other provisions, the Equal Protection

analysis would require a rational basis test. If Wisconsin

can show that the provisions are rationally related to a

legitimate state interest, then the provisions do not violate the Equal Protection Clause. In our Commerce Clause

analysis, we have already held that the provisions serve

a legitimate state interest. Therefore the Commerce

Clause analysis answers the Equal Protection question

as well. The structural provisions and § 196.53 do not violate the Equal Protection Clause.
No. 02-2618 25

III. Conclusion

For the foregoing reasons we conclude that WIS. STAT.

§ 196.795(5)(L), the in-state incorporation provision, violates the Commerce Clause of the Constitution; that

the arguments presented by Alliant regarding WIS. STAT.

§ 196.53, the provision prohibiting the transfers of licenses, permits and franchises to foreign corporations, do

not establish that § 196.53, as applied to WPLC, is unconstitutional; and finally that the remaining provisions—

§ 196.795(3) (the takeover provision), § 196.795(6m)(b) (the

asset cap), and §§ 196.195(5)(a) and (7)(a), 201.01(2),

and 201.03(1) (the securities regulation provisions)—do

not violate the Constitution. Accordingly, we REVERSE the

district court’s grant of the defendants’ motion for summary

judgment and denial of the plaintiff’s motion for summary

judgment with regard to WIS. STAT.§ 196.795(5)(L), and

AFFIRM the district court’s grant of the defendants’ motion for summary judgment and denial of the plaintiff’s

motion for summary judgment with regard to all other

challenged provisions and this case is REMANDED for further proceedings consistent with this opinion.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—5-29-03