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In re Application of Ohio Edison Co.

Supreme Court of Ohio

June 19, 2019

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

          Appeal from the Public Utilities Commission, No. 14-1297-EL-SSO.

          Walter Haverfield, L.L.P., and Mark I. Wallach; and Shannon Fisk, for appellant Sierra Club.

          Bruce J. Weston, Consumers' Counsel, Maureen R. Willis and William Michael, Assistant Consumers' Counsel, for appellant Ohio Consumers' Counsel.

          Thomas 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 Hills.

          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 Group.

          Gupta Wessler, P.L.L.C., and Rachel Bloomekatz, for appellants Ohio Environmental Council, Environmental Defense Fund, and Environmental Law & Policy Center.

          John Finnigan, for appellant Environmental Defense Fund.

          Trent Dougherty and Miranda Leppla, for appellant Ohio Environmental Council.

          Madeline Fleisher, for appellant Environmental Law & Policy Center.

          Dave 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 Edison Company.

          Boehm, Kurtz & Lowry, Michael L. Kurtz, and Jody Kyler Cohn, for intervening appellee Ohio Energy Group.

          DONNELLY, J.

         {¶ 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[1] ("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, [2] challenging the addition of the DMR and other aspects of the commission's order approving the ESP.

         {¶ 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.

         I. 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 prices.

         {¶ 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. 28, 2018).

         {¶ 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.

         II. 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." Id.

         {¶ 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).

         III. Analysis

         {¶ 10} Together, appellants raise 25 propositions of law. The main challenges are to the DMR, so we address them first.

         A. 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 utility.

         {¶ 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 systems." Id.

         {¶ 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.

         1. The DMR does not qualify as an incentive under R.C. 4928.143(B)(2)(h)

         {¶ 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 particular action.

         {¶ 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 its infrastructure.

         {¶ 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.

         2. 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.

         a. The commission's audit review of DMR ...

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