April 18, 2012
Utility Rates

by Justice Paul E. Pfeifer

Most of us really don’t have a working understanding of how our electricity is supplied. We just know that we flick a switch in the room and, presto, a light comes on and illuminates the night. What happens behind the scenes to generate the electricity and get it from “out there” and it into our homes is not something we think too much about.

But it was this “behind the scenes” action that formed the basis of a case that we reviewed here – at the Supreme Court of Ohio. The case involved the Public Utilities Commission, which oversees power companies in Ohio, the American Electric Power operating companies (“AEP”), and a group known as Industrial Energy Users-Ohio (“IEU”).

Based on an order by the Commission, AEP had been providing service to a pair of manufacturing customers at discounted rates. The difference between what AEP would have collected from the manufacturing customers and what it actually collected, given the discount, is called “delta revenue.” AEP had been keeping track of this delta revenue and it intended to collect it through a rate mechanism called “the economic development cost recover rider.”

Eventually, AEP filed an application seeking permission to collect its delta revenue through the rider. It was actually the second time AEP had filed such an application; its first request had been granted only a month earlier. The quickly successive applications reflected the requirement that AEP “update and reconcile” the rider every six months.

When the Commission allowed AEP’s second application to recover the delta revenue from the discounted-rate arrangements, IEU opposed the application and filed an appeal with our court.

Actually, IEU had opposed both requests, raising the same objections each time. And the Commission rejected IEU’s arguments both times. After the second rejection, IEU’s appeal came before us for a final review. In its appeal, IEU initially raised four propositions of law, but later dismissed the first two, leaving us to consider only the third and fourth.

In its third proposition of law, IEU argued that the initial order from the Commission to AEP unlawfully exempted the rider from the maximum increases permitted in AEP’s electric-security-plan case. IEU was referring to the Commission’s decision in an earlier case to limit how much AEP could annually increase its customers’ bills. In making that decision, the Commission was acting under the section of Ohio law which permits the Commission to “authorize any just and reasonable phase-in” of certain electric rates.

IEU attacked the decision to exempt the rider from the rate-increase limits on two grounds: procedurally and substantively. On the procedural grounds, IEU asserted that the Commission departed from precedent. On the second, the substantive grounds, IEU argued that the Commission unreasonably increased rates. We found neither argument persuasive.

On the procedural argument – the Commission’s order to AEP did not violate the earlier, electric-security-plan order.  It is true, as IEU argued, that the earlier order did not exempt the rider from the rate-increase limits. But the Commission did not rule out further exemptions. And, as a general rule, the Commission has discretion to revisit earlier regulatory decisions and modify them prospectively.

IEU didn’t explain why the general rule shouldn’t apply here, and our court did not see any procedural error.

As to the other, substantive argument, IEU claimed that the Commission erred by allowing current rates to become too high. But that argument also lacked merit.

The decision that IEU objected to was a discretionary one. The pertinent law – which grants the Commission power to limit annual rate increases – allows the Commission to “authorize any just and reasonable phase-in” of electric-security plan rates “as the Commission considers necessary to ensure rate or price stability for consumers.”

Yes, the end product must be “just and reasonable,” but the important language is the phrase “as the Commission considers necessary.” That language entrusts the details of any phase-in – how much should be collected now, how much later – to the Commission’s discretion.

IEU had not shown an abuse of discretion. Its complaint concerned a pure matter of timing – should customers pay the rider now or later? If later, the law requires that carrying charges – a kind of financing charge – be added to deferred rates. IEU’s sense that current rates are high enough and its preference to pay the rider (plus carrying charges) later were not enough to upset the order.

In its fourth proposition of law, IEU argued that the Commission erred in allowing AEP to use a long-term debt rate – as opposed to a short-term rate – to calculate certain types of carrying charges. But once again, we concluded that IEU had not demonstrated reversible error.

IEU alleged that the Commission had “repeatedly failed to at least inquire as to whether a lower carrying cost rate could be utilized.” In support of this allegation IEU asserted that “customers deserve at least some analysis or other review” of the carrying-cost issue. That was the totality of IEU’s argument – that customers deserve at least some analysis or review.

Based on that, the Commission would have fully satisfied IEU’s concerns if it had simply “inquired” or provided “some analysis or other review” of the carrying-cost issue. But in fact, the Commission did “inquire” and provide “some analysis” of that issue, because it had reviewed that issue in the preceding rider case.

When it issued its order, the Commission explained that very fact in response to IEU’s objection. IEU did not reply with any additional challenges. In short, IEU argued only that the Commission needed to make an inquiry, and the Commission pointed out where it had, indeed, made that inquiry. The Commission fully answered IEU’s concerns.

We therefore concluded – by a seven-to-zero vote – to affirm the order of the Public Utilities Commission.

EDITOR'S NOTE: The case referred to is In re Application of Columbus S. Power Co., 129 Ohio St.3d 568, 2011-Ohio-4129. Case No. 2010-1073. Decided August 24, 2011. Majority opinion written by Justice Yvette McGee Brown.