In re Application of Ohio Edison Company, Cleveland Electric Illuminating Company, and Toledo Edison Company for Authority to Provide for a Standard Service Offer Pursuant to R.C. 4928.143 in the Form of an Electric Security Plan; Sierra Club et al., Appellants; Public Utilities Commission, Appellee; Ohio Edison Company et al., Intervening Appellees.
Submitted January 9, 2019
from the Public Utilities Commission, No. 14-1297-EL-SSO.
Haverfield, L.L.P., and Mark I. Wallach; and Shannon Fisk,
for appellant Sierra Club.
J. Weston, Consumers' Counsel, Maureen R. Willis and
William Michael, Assistant Consumers' Counsel, for
appellant Ohio Consumers' Counsel.
R. Hays, Leslie Kovacik, and John Borell, for appellants
Northwest Ohio Aggregation Coalition, City of Maumee, City of
Northwood, City of Oregon, City of Perrysburg, City of
Toledo, City of Waterville, Lake Township Board of Trustees,
Lucas County Board of Commissioners, Perrysburg Township
Board of Trustees, Village of Holland, and Village of Ottawa
Bricker & Eckler, L.L.P., Glenn S. Krassen, and Dane
Stinson, for appellant Northeast Ohio Public Energy Council.
Carpenter Lipps & Leland, L.L.P., and Kimberly W. Bojko,
for appellant Ohio Manufacturers' Association Energy
Wessler, P.L.L.C., and Rachel Bloomekatz, for appellants Ohio
Environmental Council, Environmental Defense Fund, and
Environmental Law & Policy Center.
Finnigan, for appellant Environmental Defense Fund.
Dougherty and Miranda Leppla, for appellant Ohio
Madeline Fleisher, for appellant Environmental Law &
Yost, Attorney General, Thomas W. McNamee, William L. Wright,
Thomas G. Lindgren, and Steven L. Beeler, Assistant Attorneys
General, for appellee, Public Utilities Commission of Ohio.
Calfee, Halter & Griswold, L.L.P., James F. Lang, and N.
Trevor Alexander; Jones Day, and Yvette McGee Brown; and
Scott J. Castro, for intervening appellees Ohio Edison
Company, Cleveland Electric Illuminating Company, and Toledo
Kurtz & Lowry, Michael L. Kurtz, and Jody Kyler Cohn, for
intervening appellee Ohio Energy Group.
1} This cause originates from an order of the Public
Utilities Commission of Ohio ("commission" or
"PUCO") that modified and approved an
electric-security plan ("ESP") for the FirstEnergy
Companies (Ohio Edison Company, The Cleveland Electric
Illuminating Company, and The Toledo Edison Company)
(collectively "FirstEnergy" or the
"companies"). The central issue before this court
is the commission's modification of the ESP to add a
distribution modernization rider ("DMR") that was
not part of the original application and allows the companies
to collect what they estimate to be $168 to 204 million in
extra revenue per year. The commission concluded that the DMR
was valid under R.C. 4928.143(B)(2)(h) because the revenue it
generated would purportedly serve as an incentive for the
companies to modernize their distribution systems. Nineteen
parties appealed,  challenging the addition of the DMR and
other aspects of the commission's order approving the
2} For the reasons that follow, we affirm the
commission's order in part, reverse it in part as it
relates to the DMR, and remand with instruction to remove the
DMR from FirstEnergy's ESP.
Facts and Procedural History
3} R.C. 4928.141(A) requires electric-distribution
utilities to make a "standard service offer" of
generation service to consumers in one of two ways: through a
"market rate offer" (under R.C. 4928.142) or an ESP
(under R.C. 4928.143). In early 2016, the commission approved
the fourth ESP of the companies. In re Application of
Ohio Edison Company, Pub. Util. Comm. No. 14-1297-EL-SSO
(March 31, 2016) ("ESP Order"). As part of the ESP,
the commission authorized a Retail Rate Stability Rider
("Rider RRS"). Rider RRS was proposed as a
generation charge that was intended to protect ratepayers
from price volatility. Specifically, it was designed to
stabilize retail customer rates by providing a financial
hedge-a type of insurance-against fluctuating wholesale power
4} Less than a month after the commission issued the
ESP Order, the Federal Energy Regulatory Commission
("FERC") rescinded a waiver on affiliate
power-sales restrictions previously granted to FirstEnergy
Solutions, an affiliate of the companies. Elec. Power
Supply Assn. v. FirstEnergy Solutions Corp., 155 FERC
¶ 61, 101 (April 27, 2016). As a result, several parties
filed applications for rehearing in the ESP case requesting
the commission to, among other things, consider the impact of
the FERC order on Rider RRS. See R.C. 4903.10. The
commission granted rehearing.
5} On June 29, 2016, the commission's staff
proposed that the commission adopt the DMR as an alternative
to Rider RRS. The commission's staff was concerned that
Rider RRS could be construed as an unlawful transition charge
and could also conflict with FERC's authority over
wholesale power markets. In addition, staff believed that the
DMR would serve as an incentive for the companies to upgrade
and modernize their distribution systems.
6} By October 12, 2016, the commission had issued
its fifth rehearing entry, which eliminated Rider RRS from
the ESP. In its place, the commission authorized the
companies to implement the DMR. The commission initially
authorized the companies to collect $132.5 million annually
for three years under the DMR. The commission then ordered
that the DMR be adjusted upward to account for federal
corporate income taxes, which raised the annual recovery to
approximately $204 million. With the passage of the Tax Cuts
and Jobs Act of 2017-which reduced the federal corporate
income tax rate from 35 percent to 21 percent-this amount was
ultimately lowered to an estimated $168 million for 2018 and
2019. In re Application of Ohio Edison Co., Pub.
Util. Comm. No. 17-2280-EL-RDR, 2018 Ohio PUC LEXIS 203 (Feb.
7} After four more rounds of rehearing, the
commission issued a final, appealable order on October 11,
2017. Appellants then filed these appeals, challenging the
commission's decision to approve the ESP. FirstEnergy and
Ohio Energy Group have intervened as appellees in support of
the commission's decision.
Standard of Review
8} "R.C. 4903.13 provides that a PUCO order
shall be reversed, vacated, or modified by this court only
when, upon consideration of the record, the court finds the
order to be unlawful or unreasonable." Constellation
NewEnergy, Inc. v. Pub. Util. Comm., 104 Ohio St.3d 530,
2004-Ohio-6767, 820 N.E.2d 885, ¶ 50. We will not
reverse or modify a PUCO decision as to questions of fact
when the record contains sufficient probative evidence to
show that the commission's decision was not manifestly
against the weight of the evidence and was not so clearly
unsupported by the record as to show misapprehension,
mistake, or willful disregard of duty. Monongahela Power
Co. v. Pub. Util. Comm., 104 Ohio St.3d 571,
2004-Ohio-6896, 820 N.E.2d 921, ¶ 29. The
"appellant bears the burden of demonstrating that the
commission's decision is against the manifest weight of
the evidence or is clearly unsupported by the record."
9} Although the court has "complete and
independent power of review as to all questions of law"
in appeals from the PUCO, Ohio Edison Co. v. Pub. Util.
Comm., 78 Ohio St.3d 466, 469, 678 N.E.2d 922 (1997), we
may rely on the expertise of a state agency in interpreting a
law when "highly specialized issues" are involved
and when "agency expertise would, therefore, be of
assistance in discerning the presumed intent of our General
Assembly," Consumers' Counsel v. Pub. Util.
Comm., 58 Ohio St.2d 108, 110, 388 N.E.2d 1370 (1979).
10} Together, appellants raise 25 propositions of
law. The main challenges are to the DMR, so we address them
Whether the commission erred in approving the DMR under R.C.
4928.143(B)(2)(h): Sierra Propositions of Law Nos. 1-3;
Environmental Groups Propositions of Law Nos. 1-3; OCC
Proposition of Law No. 1; OMAEG Proposition of Law No. 4;
NOPEC Propositions of Law Nos. 1-2
11} As noted, during the rehearing process, the
commission's staff proposed the DMR as an alternative to
Rider RRS. The staff intended the DMR to provide FirstEnergy
Corporation, through the companies, with funds to improve its
credit rating and assure continued access to credit on
reasonable terms, which would then allow FirstEnergy
Corporation to borrow adequate capital to support the
companies' grid-modernization initiatives. According to
its staff, the commission could approve the DMR under R.C.
4928.143(B)(2)(h), which allows for:
Provisions regarding the utility's distribution service,
including, without limitation and notwithstanding any
provision of Title XLIX of the Revised Code to the contrary,
* * * provisions regarding distribution infrastructure and
modernization incentives for the electric distribution
12} The commission agreed with its staff and found
that this section authorized the DMR as a "provision
regarding distribution infrastructure and modernization
incentives for the electric distribution utility." Pub.
Util. Comm. No. 14-1297-EL-SSO, Fifth rehearing entry, ¶
127 (Oct. 12, 2016). The commission found that the
"testimony demonstrates that Staff intends for Rider DMR
to jump start the Companies' grid modernization
efforts." Id. at ¶ 190. According to the
commission, "the record demonstrates that Rider DMR is
intended to stimulate the Companies to focus their innovation
and resources on modernizing their distribution
13} Appellants collectively raise several challenges
to the commission's determination that the DMR is a
lawful component of an ESP under R.C. 4928.143(B)(2)(h). The
following two of appellants' arguments are well-taken.
The DMR does not qualify as an incentive under R.C.
14} Appellants argue that the DMR does not qualify
as a proper incentive under R.C. 4928.143(B)(2)(h) because it
does not require the companies to take any action in exchange
for receiving the DMR funds. According to appellants, the DMR
does not jump-start the companies' grid-modernization
efforts because it does not compensate the companies for
investing in distribution-modernization projects, require
them to undertake any modernization projects, or require them
to complete any such projects within a specified time period.
After review, we find that the DMR does not serve as an
incentive within the meaning of the statute.
15} The commission relied on a dictionary definition
of" 'incentive, '" as" 'something
that stimulates one to take action, work harder, etc.;
stimulus; encouragement.'" Pub. Util. Comm. No.
14-1297-EL-SSO, Fifth rehearing entry, ¶ 190 (Oct. 12,
2016), quoting Webster's New World Dictionary
682 (3d College Ed.1988). The commission found that under its
preferred definition, the DMR qualified as an incentive under
R.C. 4928.143(B)(2)(h) because the rider "is intended to
stimulate the Companies to focus their innovation and
resources on modernizing their distribution systems."
Id. at ¶ 190.
16} Although the commission defined incentive, it
did not explain how the DMR operates as an incentive. An
incentive generally serves to induce someone to take some
action that otherwise would not be taken but for the
incentive. Moreover, the DMR is a financial incentive and
"it is inherent in an incentive payment that the
recipient must do something to be paid." Len Stoler,
Inc. v. Volkswagen Group of America, Inc., 232 F.Supp.3d
813, 822 (E.D.Va.2017). That is, the payment of a monetary
incentive is generally conditioned upon completion of a
17} In the context of public-utility regulation,
cost-based ratemaking already ensures that the utility will
recover its prudently incurred costs of providing service
plus a fair rate of return on its capital investments (such
as power plants or distribution systems). R.C. 4909.15(A);
Babbit v. Pub. Util. Comm., 59 Ohio St.2d 81, 90,
391 N.E.2d 1376 (1979). In contrast, incentive ratemaking
uses rewards and penalties that link utility revenues to
various standards or goals. For instance, in the ESP Order,
the commission had originally approved a 50-basis-point adder
to the return on equity in another rider, the Advanced
Metering Infrastructure Rider ("Rider AMI"). The
commission approved Rider AMI as the mechanism through which
FirstEnergy would recover capital expenditures and other
distribution-infrastructure investments. The 50-basis-point
adder would have provided additional recovery above the
companies' incurred costs as an incentive for any
investments made for grid modernization in Ohio. The
commission also required each company to include a timeline
for when it would achieve full smart-meter installation as
part of its grid-modernization efforts.
18} On rehearing, the commission replaced the
50-point adder with the DMR. As noted, the DMR was designed
to provide credit support for the FirstEnergy
Corporation-through the companies-so it could borrow capital
on more reasonable terms in order to support its
grid-modernization initiatives. In finding that the DMR is an
incentive, the commission relied solely on its staffs intent
"for Rider DMR to jump start the Companies' grid
modernization efforts." But the commission pointed to
nothing in the record that demonstrates how this cash
infusion incentivizes FirstEnergy to accomplish that goal.
The companies will already recover the costs of any future
grid-modernization projects under Rider AMI, so the DMR would
provide additional revenue beyond what the companies would
recover for modernizing their distribution systems. The
critical problem is that the companies are not
required to make any investments to modernize the
distribution grid in exchange for DMR revenues. Unlike the
50-point adder, the DMR includes no directives or timelines
regarding specific distribution-modernization projects. And
in fact, the commission made it clear that there are no plans
for FirstEnergy to take on any modernization projects in the
immediate future. Nor did the commission place any effective
condition or penalty on the companies' receipt of
revenues if the DMR funds did not serve the intended purpose.
The commission simply authorized the companies to receive DMR
funds up front before any infrastructure-improvement projects
were undertaken or completed, removing any effective
incentive for FirstEnergy to use the DMR funds to modernize
19} We generally defer to the commission's
interpretations on rate-related statutory provisions, but
only if they are reasonable. In re Application of
Columbus S. Power Co., 138 Ohio St.3d 448,
2014-Ohio-462, 8 N.E.3d 863, ¶ 29. The commission's
finding that the DMR operates as an incentive under R.C.
4928.143(B)(2)(h) is both unlawful and unreasonable because
it lacks evidence and sound reasoning. The commission relied
solely on rehearing testimony demonstrating that its staff
intends for the DMR to jump-start the companies'
grid-modernization efforts. But the PUCO staff s intent does
not explain how the DMR will encourage the companies to
invest in distribution modernization. Utility companies can
be expected to respond to financial motivations, but not if
the commission awards them money up front with no meaningful
conditions attached. Although the DMR may make it possible
for FirstEnergy to obtain capital for future infrastructure
investment on more favorable credit terms, the evidence cited
does not support the commission's finding that the DMR
qualifies as an incentive under R.C. 4928.143(B)(2)(h). The
PUCO staffs wishful thinking cannot take the place of real
requirements, restrictions, or conditions imposed by the
commission for the use of DMR funds.
The conditions placed on the recovery of DMR revenue are not
sufficient to protect ratepayers
20} The commission conditioned recovery of DMR
revenue on (1) FirstEnergy Corporation keeping its corporate
headquarters and nexus of operations in Akron, (2) no change
in the "control" of the companies as that term is
defined in R.C. 4905.402(A)(1), and (3) a demonstration of
sufficient progress in implementing and deploying
grid-modernization programs approved by the commission.
21} Appellants challenge those conditions as
meaningless and failing to protect ratepayers. FirstEnergy
counters that the conditions placed on the receipt and use of
DMR revenue ensure that it will be used to jump-start
distribution-grid-modernization initiatives. As FirstEnergy
sees it, these conditions ensure that the DMR operates as an
incentive and not a gift to the companies.
22} We agree with appellants that there are no
discernable consequences or repercussions if FirstEnergy
fails to comply with the conditions imposed for receiving DMR
funds. Ostensibly, FirstEnergy would forfeit the DMR if it
failed to comply with any of the conditions. But FirstEnergy
has been recovering DMR revenue since January 1, 2017, and
the commission did not make the DMR subject to refund if
FirstEnergy does not meet the required conditions.
23} Moreover, despite our finding that the DMR is
unlawful, no refund is available to ratepayers for money
already recovered under the rider. R.C. 4905.32 bars any
refund of recovered rates unless the tariff applicable to
those rates sets forth a refund mechanism. In re Rev. of
Alternative Energy Rider Contained in Tariffs of Ohio Edison
Co., 153 Ohio St.3d 289, 2018-Ohio-229, 106 N.E.3d 1,
¶ 15-20. FirstEnergy's tariffs for the DMR, however,
contain no refund mechanism.
The commission's audit review of DMR ...