THE SUPREME COURT has placed takings cases into three categories. In declining order of judicial solicitude given the property owner, the categories are physical invasions of property, confiscatory public utility rates, and regulatory takings. Breach of the regulatory contract does not fit automatically into any one of those categories because, being unprecedented, it necessarily is a case of first impression under the Takings Clause. That is true even with respect to the precedents addressing public utility regulation. Although arguments can be made for and against recovery of stranded costs, ultimately the Supreme Court (and its counterpart in other nations) will have to rely on first principles of legal and economic theory to decide whether to recognize a deregulatory taking as an event necessitating the state's payment of just compensation. Those principles, we argue here, support such payment. We then examine the Court's reasoning under each of its three doctrinal branches of takings jurisprudence to determine the extent to which a deregulatory taking can be analogized to cases decided under those doctrines. We conclude that under all three branches of existing takings jurisprudence the regulator's abrogation of the regulatory contract is a compensable confiscation of the property of the regulated firm.

ECONOMIC RATIONALES FOR PROPERTY PROTECTIONS

It is difficult to imagine a market economy without legal protections for private property. The definition and enforcement of property rights are the legal foundation of a market economy. The economic functions of property rights are several.

Completeness, Exclusivity, and Transferability As Prerequisites of Allocative Efficiency

Clearly defined property rights are necessary for the exchange of goods and services between individuals.