January 16, 2013
Storm Damage Cost Recovery

by Justice Paul E. Pfeifer

In September 2008, powerful winds unleashed by Hurricane Ike swept north across the Midwest. The storm left almost two million Ohioans without power and inflicted major damage on the electrical infrastructure of Duke Energy Ohio, Inc. and its affiliates in Kentucky and Indiana.

It took nine days for Duke to restore power to all of its customers. Employees of the three effected Duke companies (Ohio, Indiana, and Kentucky) performed restoration work in all three jurisdictions, along with employees of Duke’s corporate service company and independent contractors.

In the aftermath of the storm, the Public Utilities Commission of Ohio permitted Duke to compile its storm costs and file an application to recover those costs. Duke filed a cost-recovery application, asking for reimbursement of roughly $30.7 million.

The Commission approved about half that amount, finding that several of Duke’s requests lacked adequate supporting evidence. After the Commission’s decision, Duke filed an appeal with us – the Supreme Court of Ohio.

In its appeal, Duke raised five propositions of law, all variations on the theme that the Commission’s order lacked support based on the record. We were not persuaded. Duke seemed to generally misapprehend a basic point of procedure in the case – namely, that it, Duke, bore the burden of proving that its expenses were reasonable.

Thus, Duke had to prove a positive point: that its expenses had been prudently incurred. The Commission did not have to find the negative: that the expenses were imprudent. Accordingly, if the evidence was inconclusive or questionable, the Commission could justifiably reduce or disallow cost recovery.

On appeal, Duke showed, at best, that other involved parties did not conclusively prove that the claimed expenses were unreasonable or imprudent – but that the claim was irrelevant because those parties did not bear the burden of proof. Duke had not been given a blank check, but an opportunity to prove to the Commission that it had reasonably and prudently incurred the costs it sought to recover. In certain respects, Duke failed to make the most of that opportunity.

In its first proposition of law, Duke argued that the Commission erred by “precluding recovery of supplemental compensation for salaried employees.” Normally, salaried employees don’t receive extra pay for extra hours of work, but Duke requested about $3.2 million to compensate itself for making supplemental payments to salaried workers.

The Commission denied recovery, finding that Duke had “failed to show a reasonable basis on which the supplemental compensation was determined.” We concluded that Duke did not show error in this decision by the Commission. Duke’s arguments did not refute the Commission’s finding that Duke failed to explain its bonus-pay decisions.

The company argued that salaried employees played “a key role” in restoring service and that by having its salaried employees do extra work, the company reduced the need to use expensive contractors. Therefore, it argued, the employees deserved extra pay. That argument may support the general decision to use salaried employees, but it didn’t address the Commission’s concern that Duke did not explain specifically how it had determined the amount of the bonuses.

Duke never pointed to evidence that contradicted the Commission’s finding that Duke failed to show a reasonable basis on which the supplemental compensation was determined. On the contrary, the only witness Duke cited in support of its bonus-pay decisions had no personal knowledge of why any particular employee received a particular bonus.

In its second proposition of law, Duke challenged the Commission’s decision to disallow over $370,000 on the grounds that it reflected “salaries ... already recovered in Duke’s base rates.” Duke argued that this sum didn’t represent salaries but instead represented the costs associated with the time that certain employees allocated to the power-restoration efforts.

Duke did incur certain costs which were costs related to the cleanup effort, and Duke’s current base rates do not already recover those costs. But these factual assertions were unsupported by citations to its own record. Duke’s failure to support essential factual assertions with citations to the record was fatal to its argument.

In its third proposition of law, Duke argued that the Commission unreasonably disallowed recovery for approximately $2 million in “labor loaders and supervision costs.” (“Labor loaders” refers to “such items as the cost of fringe benefits and payroll taxes” associated with labor costs.) But this disallowance was tied to the reductions discussed in the first and second propositions of law.

Duke’s fourth proposition concerned its attempt to recover the labor costs it paid for employees of its Indiana and Kentucky affiliates who performed restoration work in Ohio. But the Office of the Ohio Consumers’ Counsel (“OCC”) raised the concern that Ohio ratepayers might be “charged for work performed by employees of Duke affiliates” who “are paid already by ratepayers” in the other states.

The Commission found that Duke “did not sustain its burden to prove that all of the affiliate-related costs ... should be recovered.” Thus, it reduced Duke’s recovery by the amount OCC recommended by using publicly available information to estimate how much Duke had been paid by the affiliates.

In its final proposition, Duke argued that the Commission erred in reducing its recovery of payments to contractors.  Duke asked for approximately $13 million for payments to contractors, but its supporting data suggested that some of the work by those contractors had been done in other states.

Based on these “discrepancies in the documentation for contractor expenses,” the Commission found that Duke had “failed to substantiate what its actual contractor costs” were. Accordingly, it permitted Duke to recover only a portion of those costs, about $3.5 million.

Duke argued against the reductions, but did not show that the evidence of discrepancies was faulty or that the weight of the evidence unquestionably compelled a decision in its favor. For all the foregoing reasons we rejected – by a five-to-two vote – all of Duke’s propositions of law and affirmed the Commission’s order.

EDITOR'S NOTE: The case referred to is In re Application of Duke Energy Ohio, Inc., 131 Ohio St.3d 487, 2012-Ohio-1509. Case No. 2011-0767. Decided April 5, 2012. Majority opinion written by Justice Paul E. Pfeifer.