Justice Powell's proposed language was included in Justice O'Connor's opinion of the Court (467 U.S. at 243-44) but is completely overwhelmed by the broad language in the rest of the opinion. The memo is striking in part because Justice Powell seemed cognizant of the risk presented by the broad language of the opinion, but proposed changes that were remarkably ineffective in mitigating this risk.O'Connor dissented in Kelo rather forcefully. It seemed odd, considering that she wrote such a broad majority opinion in Midkiff that went the other way.
I think that this was an incident of O'Connor shifting her opinion based on the circumstances. Broad use of the police power was fine with her in the situation of Midkiff (where property on the Hawaiian islands was in the hands of a small number of owners, inflating land prices and other bad stuff), but it was not fine with her in the Kelo facts. It is also possible that she just changed her mind over the course of 22 years. Stranger things have happened.