In re Fuel Adjustment Clauses for Columbus S. Power Co. & Ohio Power Co. (Slip Opinion) , 140 Ohio St. 3d 352 ( 2014 )

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as In
re Fuel Adjustment Clauses for Columbus S. Power Co. & Ohio Power Co., Slip Opinion No.
2014-Ohio-3764.]
NOTICE
This slip opinion is subject to formal revision before it is published in
an advance sheet of the Ohio Official Reports. Readers are requested
to promptly notify the Reporter of Decisions, Supreme Court of Ohio,
65 South Front Street, Columbus, Ohio 43215, of any typographical or
other formal errors in the opinion, in order that corrections may be
made before the opinion is published.
SLIP OPINION NO. 2014-OHIO-3764
IN RE FUEL ADJUSTMENT CLAUSES FOR COLUMBUS SOUTHERN POWER
COMPANY AND OHIO POWER COMPANY;
OHIO POWER COMPANY, APPELLANT AND CROSS-APPELLEE;
INDUSTRIAL ENERGY USERS-OHIO, APPELLEE AND CROSS-APPELLANT;
PUBLIC UTILITIES COMMISSION, APPELLEE AND CROSS-APPELLEE.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as In re Fuel Adjustment Clauses for Columbus S. Power Co. &
Ohio Power Co., Slip Opinion No. 2014-Ohio-3764.]
Public utilities—Electric security plan—Fuel adjustment clause—Adjustment for
cancellation of contract and settlement agreement with coal supplier.
(No. 2012-1484—Submitted March 12, 2014—Decided September 3, 2014.)
APPEAL AND CROSS-APPEAL from the Public Utilities Commission,
Nos. 09-872-EL-FAC and 09-873-EL-FAC.
____________________
O’CONNOR, C.J.
SUMMARY
{¶ 1} In 2009, the commission approved the first electric security plan
(“ESP”) for the American Electric Power operating companies, Columbus
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Southern Power and Ohio Power Company (hereafter referred to jointly as “AEP”
or the “companies”). This ESP was in effect from 2009 through 2011.
{¶ 2} As part of the ESP, the commission approved a fuel-adjustment
clause (“FAC”), which allowed the companies to recover fuel costs for providing
generation service as those costs were incurred, without having to file a new rate
case. The FAC operates as a separate charge from the base generation rate. The
FAC automatically goes up and down with the cost of fuel, while the base rate
stays the same.
{¶ 3} The commission also required that the FAC be subjected to quarterly
updates and annual prudency and accounting reviews to reconcile the rates
collected with the actual fuel costs incurred. The updates and annual reviews
were designed to ensure that AEP was recovering only the true cost of fuel from
ratepayers.
{¶ 4} This appeal stems from the commission’s first annual review of
AEP’s FAC mechanism, covering the time period from January 1 to December
31, 2009. In the case below, an auditor found that both Ohio Power and
Columbus Southern Power had underrecovered fuel costs through the FAC in
2009.1 The auditor recommended that the commission review whether any
proceeds that AEP had received from a 2008 contract settlement agreement with a
coal supplier should be credited against Ohio Power’s underrecovered fuel costs
for 2009, given that the settlement agreement resulted in Ohio Power having to
purchase a portion of its coal at a higher price starting in 2009. After review, the
commission found that all of the proceeds from this settlement agreement should
be offset against Ohio Power’s FAC underrecovery. On rehearing, the
commission clarified that only the share of the settlement proceeds allocable to
Ohio retail customers must be credited.
1
Columbus Southern Power’s underrecovery is not at issue in this case.
2
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{¶ 5} Ohio Power appealed, challenging the commission’s decision to
credit the proceeds from the 2008 settlement against the underrecovered 2009 fuel
costs. Industrial Energy Users–Ohio (“IEU”) filed a cross-appeal, arguing that
the commission erred on rehearing when it limited the amount of the credit to
only those proceeds allocable to Ohio retail customers.
{¶ 6} For the reasons discussed in detail below, we affirm the
commission’s orders.
FACTS AND PROCEDURAL BACKGROUND
{¶ 7} Ohio requires electric-distribution utilities to provide consumers
with “a standard service offer of all competitive retail electric services necessary
to maintain essential electric service to consumers, including a firm supply of
electric generation service.” R.C. 4928.141(A). The standard-service offer is
applicable to customers who receive generation service from the incumbent
distribution utility instead of buying it on the market from a provider of
competitive retail electric service. “The utility may provide the offer in one of
two ways: through a ‘market-rate offer’ under R.C. 4928.142 or through an
‘electric security plan’ under R.C. 4928.143.” In re Application of Columbus S.
Power Co., 128 Ohio St. 3d 512, 2011-Ohio-1788, 947 N.E.2d 655, ¶ 5. AEP
chose to provide standard service under an electric security plan.
{¶ 8} On March 18, 2009, the commission issued an opinion and order
approving AEP’s first ESP, to be in effect from 2009 to 2011. In re Application
of Columbus S. Power Co. and Ohio Power Co. for Approval of an Electric
Security Plan, Pub. Util. Comm. Nos. 08-917-EL-SSO and 08-918-EL-SSO
(March 18, 2009) (the “ESP Order”).2 In the ESP Order, the commission
2
We first reviewed the commission’s approval of the electric security plan in 2011. In re
Application of Columbus S. Power Co., 128 Ohio St. 3d 512, 2011-Ohio-1788, 947 N.E.2d 655. In
that case, we found that the commission committed reversible error on three issues, and remanded
for further consideration. The commission’s remand order was appealed. We affirmed the
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authorized a FAC mechanism for the companies to recover costs associated with
fuel, purchased power, and environmental compliance. The commission did so
under R.C. 4928.143(B)(2)(a), which provides for the “[a]utomatic recovery” of
“the cost of fuel used to generate the electricity supplied under the [standard
service] offer,” “provided the cost is prudently incurred.” In order to reconcile
the rates collected under the FAC with the actual fuel costs incurred by the
companies to provide generation service, the commission established quarterly
FAC adjustments and an annual audit to review the prudence of the fuel-
procurement decisions and the appropriateness of the accounting of the FAC
costs.
{¶ 9} In the ESP Order, the commission also established caps on how
much AEP could increase its rates each year of the plan. See R.C. 4928.144
(authorizing “any just and reasonable phase-in of any electric distribution utility
rate * * * as the commission considers necessary to ensure rate or price stability
for consumers”). Under the rate caps, AEP could increase rates only by a set
percentage each year. During the term of the ESP, AEP deferred for future
collection a portion of the annual incremental fuel costs recovered under the FAC
that exceeded the rate caps. Amounts earned but not collected each year would
go into a deferral account and, as required by R.C. 4928.144, accrue carrying
charges.
{¶ 10} Prior to the 2009 ESP, the companies were operating under a Rate
Stabilization Plan (“RSP”), which the commission approved in 2005 to be in
effect from 2006 through 2008. In re Application of Columbus S. Power Co. and
Ohio Power Co. for Approval of a Post-Market Development Period Rate
Stabilization Plan, Pub. Util. Comm. Nos. 04-169-EL-UNC (Jan. 26, 2005)
(hereafter the “RSP Order”). Among other things, the RSP provided AEP with
remand order on February 13, 2014. In re Application of Columbus S. Power Co., 138 Ohio St. 3d
448, 2014-Ohio-462, 8 N.E.3d 863.
4
January Term, 2014
automatic, fixed increases in generation rates for the three years of the plan.
Unlike the ESP, the generation rates under the RSP were bundled, meaning that
there was no separate FAC mechanism to recover fuel costs above the levels set in
rates. In sum, AEP was guaranteed to recover the fixed level of fuel costs
embedded in its generation rates, but AEP bore the risk of loss if costs rose above
the amount collected in rates. Thus, once the terms of the ESP replaced those of
the RSP in 2009, AEP no longer bore the same risk of loss from rising fuel costs.
{¶ 11} Before and during the effective period of the RSP, Ohio Power
regularly purchased coal from one of its suppliers, Peabody Development
Company, at a fixed price under the terms of a 20-year coal-supply contract.3 The
contract was effective through 2012, but by mid-2007, the price of coal under the
contract was significantly below the market price for coal. A dispute over the
contract arose that Ohio Power decided to resolve to avoid litigation.
{¶ 12} Under the settlement agreement, Ohio Power and Peabody agreed
to terminate the 1992 contract as of the end of 2008. Thus, in 2009, Ohio Power
had to begin purchasing replacement coal to fuel its generation plants at much
higher market prices. In exchange for agreeing to the early termination, Ohio
Power received total proceeds of $71.6 million. Specifically, Peabody paid Ohio
Power $30 million in cash. Peabody also transferred a West Virginia coal reserve
to Ohio Power, which the company valued at $41.6 million.
{¶ 13} This case began when the commission initiated an audit proceeding
to review the companies’ FAC for 2009. See In re Fuel Adjustment Clauses for
Columbus S. Power Co. and Ohio Power Co., Pub. Util. Comm. Nos. 09-872-EL-
FAC and 09-873-EL-FAC (Nov. 18, 2009). In January 2010, the commission
3
The agreement was between American Electric Power Service Corporation, a subsidiary of
American Electric Power Company, and Peabody. Because this case involves only Ohio Power’s
fuel costs, we refer solely to Ohio Power as the party of interest.
5
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appointed Energy Ventures Analysis, Inc. to perform a management/performance
audit and a financial audit.
{¶ 14} Energy Ventures Analysis filed its audit report with the
commission in May 2010. The audit report noted that AEP’s fuel supply is
largely coal-based, and coal-procurement costs are by far the largest component
of the FAC. The report found that at the end of the first year (2009) of the FAC,
AEP experienced a large underrecovery of fuel costs. The underrecovery
amounts totaled $297.6 million for Ohio Power and $37.5 million for Columbus
Southern Power. According to the auditor, many components contributed to the
underrecovery, but two coal-contract events alone explained more than half of it.
{¶ 15} The auditor made no recommendation regarding the first coal
contract event. But the auditor recommended that the commission review
whether any proceeds that Ohio Power had received from the second contract
event—the 2008 settlement agreement with Peabody—should be credited against
Ohio Power’s underrecovered fuel costs for 2009.
{¶ 16} In its opinion and order, the commission determined that all
proceeds from the settlement agreement should be credited against Ohio Power’s
FAC underrecovery for 2009. In re Fuel Adjustment Clauses for Columbus S.
Power Co. and Ohio Power Co., Pub. Util. Comm. Nos. 09-872-EL-FAC and 09-
873-EL-FAC (Jan. 23, 2012) (the “FAC Order”). Ohio Power had previously
booked $13.3 million of the settlement proceeds as a credit against the FAC
underrecovery for 2009 and 2010, with the remaining $58.3 million credited to
2008 fuel expenses. The commission, however, required Ohio Power to credit the
$58.3 million to offset underrecovered fuel costs for 2009.
{¶ 17} The commission recognized that this situation was unique because
Ohio Power’s fuel costs were not regulated in 2008 when the settlement
agreement occurred and Ohio Power had recorded the benefits of that agreement
on its books of account. But the commission found that Ohio Power ratepayers
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January Term, 2014
were paying significantly more for coal in 2009 than they would have paid had
Ohio Power not entered into the settlement agreement. The commission reasoned
that the price of coal under the Peabody supply contract was significantly below
market in 2008 and absent the settlement agreement Ohio Power would have
continued to receive shipments of low-priced coal under the contract through the
ESP period (2009 through 2011). And because the Peabody contract was
terminated at the end of 2008, Ohio Power had to purchase replacement coal to
fuel its generation plants at significantly higher prices in 2009. Therefore, the
commission held that “in order to determine the real economic cost of coal used
during the [2009] audit period, more of the value realized by [Ohio Power] for
entering into the Settlement Agreement should flow through to [Ohio Power]
ratepayers through a credit to [Ohio Power]’s under-recovery and deferrals.”
{¶ 18} In addition, the commission noted that the true value of the coal
reserve was not yet known and that Ohio Power had planned to begin the
permitting process to mine the coal, which would enhance the value of the
reserve. Therefore, the commission directed Ohio Power to hire an auditor to
examine the value of the coal reserve and to make a recommendation to the
commission as to whether the increased value—if any—above the $41.6 million
already required to be credited should also be credited to Ohio Power’s
ratepayers.
{¶ 19} On rehearing, the commission reduced the amount of the settlement
proceeds to be credited against Ohio Power’s underrecovery for 2009. The
commission recognized that Ohio Power’s fuel expenses are allocated between
Ohio retail expenses, non-Ohio retail expenses, and wholesale expenses and that
the same is true regarding the allocation of revenues. The commission therefore
determined that only the share of the settlement proceeds allocable to Ohio retail
customers of Ohio Power was required to be credited against the 2009 FAC
underrecovery.
7
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{¶ 20} During the next round of rehearings, IEU challenged this
determination, arguing that the settlement proceeds should be allocated fully to
Ohio retail jurisdiction customers. The commission rejected IEU’s claim.
{¶ 21} Ohio Power then filed this appeal, and IEU followed with a cross-
appeal. After review, we find that neither party has demonstrated reversible error.
STANDARD OF REVIEW
{¶ 22} “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 where 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-6869, 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.
{¶ 23} Although we have “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 where “highly specialized issues”
are involved and “where 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).
8
January Term, 2014
DISCUSSION
Ohio Power’s Appeal
{¶ 24} Ohio Power challenges the commission’s orders on three primary
grounds: (1) the commission engaged in unlawful retroactive ratemaking when it
credited the settlement proceeds against 2009 FAC costs, (2) ratepayers have no
valid claim to the proceeds associated with the coal reserve, and (3) the
commission lacked jurisdiction to modify the ESP Order. None of these
arguments compels reversal.
I. Ohio Power’s Proposition of Law No. I: The commission
engaged in unlawful retroactive ratemaking and violated the
prohibition against retroactive application of laws
{¶ 25} In its first proposition of law, Ohio Power contends that the
commission’s decision constitutes unlawful retroactive ratemaking. In addition,
Ohio Power argues that the commission’s orders applied 2008 Am.Sub.S.B. No.
221 retroactively in violation of Section 28, Article II of the Ohio Constitution
and R.C. 1.48.
{¶ 26} The gravamen of Ohio Power’s retroactivity arguments is that the
commission has reached back into the prior RSP rate plan to review a fuel
transaction that occurred in 2008, which is outside the FAC audit period under
review in this case.
A. Ohio Power presented no evidence that supported
its retroactive-ratemaking argument
{¶ 27} Ohio Power’s primary argument under its first proposition of law is
that the commission engaged in unlawful retroactive ratemaking when it applied
the proceeds from the 2008 settlement agreement to offset 2009 fuel costs, instead
of applying those proceeds against 2008 fuel costs. But Ohio Power has provided
no evidence that the underlying order affected the rates charged in 2008 under the
RSP. Nor has Ohio Power demonstrated that the commission’s decision to apply
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proceeds from the 2008 settlement agreement against 2009 fuel costs was
unreasonable.
{¶ 28} Ohio Power’s theory centers on the filed-rate doctrine. Under this
doctrine, a utility may charge only the rates fixed by its current, commission-
approved tariff. See R.C. 4905.32; Keco Industries, Inv. v. Cincinnati &
Suburban Bell Tel. Co., 166 Ohio St. 254, 257, 141 N.E.2d 465 (1957). Keco and
its progeny also hold that present rates may not make up for excessive rate
charges due to regulatory delay. Green Cove Resort I Owners’ Assn. v. Pub. Util.
Comm., 103 Ohio St. 3d 125, 2004-Ohio-4774, 814 N.E.2d 829, ¶ 27 (“Neither the
commission nor this court can order a refund of previously approved rates,
however, based on the doctrine set forth in Keco * * *”). And though the
commission has the power to invalidate a rate schedule and fix new rates, this
ratemaking power is prospective only. See Ohio Util. Co. v. Pub. Util. Comm., 58
Ohio St. 2d 153, 157-158, 389 N.E.2d 483 (1979).
{¶ 29} Ohio Power maintains that the commission violated the filed-rate
doctrine because the “financial impact” of the commission’s FAC Order is to
retroactively reduce commission-approved rates charged in 2008 under the RSP.
Ohio Power states that because a fixed level of fuel costs was embedded in rates
charged under the RSP, it bore the entire risk for unrecovered fuel costs during
the RSP period if fuel costs rose above the amounts collected in rates. Ohio
Power asserts that in the underlying order the commission increased the
company’s 2008 fuel costs by taking proceeds from the settlement agreement that
should have been applied against 2008 fuel costs and applying them to offset
2009 fuel costs. According to Ohio Power, the effect of the order was to
retroactively reduce the RSP generation rates (by increasing the cost of fuel used
to provide power in 2008 above the level charged in rates under the RSP), thereby
causing a loss in revenue to the company.
10
January Term, 2014
{¶ 30} Whether the commission’s FAC order reduced Ohio Power’s RSP
rates, in effect or explicitly, is a question of fact. Indeed, two essential premises
of Ohio Power’s argument here are factual: (1) that crediting proceeds from the
2008 settlement agreement against 2009 fuel costs increased Ohio Power’s cost of
fuel used to generate power in 2008 and (2) that the guaranteed rate increases
built into the RSP did not recover fuel costs incurred by the company in 2008.
Yet Ohio Power provides only a single citation to the record to support its claim.
That citation, however, is not helpful.
{¶ 31} The pertinent section of Ohio Power’s initial brief contains a single
citation to the record: the Audit Report at 2-23 and 2-24. In this part of its brief,
Ohio Power challenges the commission’s finding that ratepayers had paid
significantly more for coal beginning in 2009 than they otherwise would have
absent the 2008 settlement agreement. According to Ohio Power, this section of
the Audit Report proves the opposite: that “[t]he evidence confirms that the
probable result, absent the 2008 Buyout Agreement, was that the supplier for the
underlying coal contract would have defaulted and AEP Ohio would have had to
procure replacement coal at higher prices” in 2009. But the section of the Audit
Report cited has nothing to do with the 2008 settlement agreement. Rather, the
report refers to an agreement that Ohio Power had entered into with a different
coal supplier.
{¶ 32} Moreover, a review of the record confirms the commission’s
finding that ratepayers paid more in 2009 fuel costs as a result of the 2008
settlement agreement. The record reflects that the 2008 settlement agreement
terminated a 20-year coal-supply contract entered into by Ohio Power and
Peabody in 1992. Under the terms of the settlement agreement, Ohio Power was
to continue to receive coal from Peabody at the 1992 contract price—which was
significantly below market at the time of the settlement—through the end of 2008.
The Audit Report determined that absent the buyout of the contract, shipments of
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coal would have continued at the below-market contract price through the ESP
period. According to the audit, the early termination of the Peabody contract at
the end of 2008 forced Ohio Power to purchase replacement coal at market prices
beginning in 2009. This evidence affirmatively supports what the commission
found: that the 2008 settlement agreement increased the cost of fuel that Ohio
Power used to provide electricity in 2009, thereby justifying the decision to apply
proceeds from the agreement to offset 2009 fuel costs. But the 2008 settlement
agreement did not affect 2008 fuel costs under the RSP since under the terms of
the settlement, Ohio Power was to continue to pay the same price for fuel under
the Peabody contract until the contract terminated at the end of 2008.4
{¶ 33} Ohio Power bears the burden as the appellant to show that the
commission’s decision is against the manifest weight of the evidence or is clearly
unsupported by the record. AK Steel Corp. v. Pub. Util. Comm., 95 Ohio St. 3d
81, 86, 765 N.E.2d 862 (2002). In the end, Ohio Power has pointed to nothing in
the record that rates or fuel costs under the RSP were affected by the
commission’s order. Ohio Power cannot expect the court simply to take counsel’s
word on questions of fact, but that is what its merit brief effectively does.
B. Ohio Power’s regulatory-accounting argument
also lacks record support
{¶ 34} Ohio Power’s retroactive-ratemaking argument also hinges, in part,
on its claim that the company had booked the 2008 settlement agreement under
proper regulatory accounting principles.5 Ohio Power asserts that the true cost of
4
Ohio Power subsequently agreed to release Peabody from delivering coal under the 1992
contract for the remainder of 2008. Under this buyout—referred to as the delivery-shortfall
agreement—Ohio Power received a cash payment in return for terminating Peabody’s remaining
obligations under the 1992 contact. Audit Report at 2-21. The commission did not order Ohio
Power to credit any of the proceeds from the delivery-shortfall agreement to customers during the
2009 audit.
5
Ohio Power also argues that there was no evidence to rebut the presumption that 2009 fuel costs
were prudently incurred. Any arguments regarding the prudence review of Ohio Power’s fuel
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fuel incurred to provide power is measured by the amounts recorded on Ohio
Power’s books of account. Ohio Power maintains that the evidence confirms that
the 2008 settlement agreement was properly booked in 2008 and 2009 to offset
fuel costs incurred in those years. Ohio Power therefore contends that the
commission had no legal or record basis to retroactively seize the settlement
proceeds. These arguments lack merit for the following reasons.
{¶ 35} First, Ohio Power ignores that “the commission has express
statutory authority under R.C. 4905.13 to prescribe the manner in which a utility
must keep its books of account.” Consumers’ Counsel v. Pub. Util. Comm., 4
Ohio St. 3d 111, 115, 447 N.E.2d 749 (1983). That is, the commission determines
whether revenues and expenses are properly booked, not the utility.
{¶ 36} Second, Ohio Power has again failed to marshal any evidence in its
first merit brief to support its appellate arguments. Ohio Power’s failure to offer
relevant citations to the record to support its appellate arguments is a fatal flaw.
Allnet Communications Serv., Inc. v. Pub. Util. Comm., 70 Ohio St. 3d 202, 206,
638 N.E.2d 516 (1994) (rejecting argument where appellant provided no “record
citations to support” it); State ex rel. Davis v. Pub. Emps. Retirement Bd., 120
Ohio St. 3d 386, 2008-Ohio-6254, 899 N.E.2d 975, ¶ 40; State ex rel. Physicians
Commt. for Responsible Medicine v. Ohio State Univ. Bd. of Trustees, 108 Ohio
St.3d 288, 2006-Ohio-903, 843 N.E.2d 174, ¶ 13, quoting Day v. N. Indiana Pub.
Serv. Corp, 164 F.3d 382, 384 (7th Cir.1999) (“Appellate attorneys should not
expect the court to ‘peruse the record without the help of pinpoint citations’ to the
record”).
purchases miss the mark because the prudence of Ohio Power’s fuel transactions had no bearing
on the commission’s determination.
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{¶ 37} Ohio Power does offer evidence and additional arguments to
support this claim in its reply brief.6 Ohio Power, however, is barred from raising
new arguments and offering evidence for the first time on reply. See Util. Serv.
Partners, Inc. v. Pub. Util. Comm., 124 Ohio St. 3d 284, 2009-Ohio-6764, 921
N.E.2d 1038, ¶ 54.
{¶ 38} For the foregoing reasons, we reject Ohio Power’s retroactive-
ratemaking argument.
C. Ohio Power failed to develop its argument on
retroactive application of the law
{¶ 39} Ohio Power also contends in support of the first proposition of law
that the approach taken by the commission in its opinion and order “amounts to
the retroactive application of SB 221 in violation of the Ohio Constitution and
Ohio Revised Code.” See Article II, Section 28 of the Ohio Constitution (“The
general assembly shall have no power to pass retroactive laws * * * ”) and R.C.
1.48 (statutes are presumed to apply only prospectively unless specifically made
retroactive). According to Ohio Power, the FAC cannot be applied retroactively
to encompass transactions occurring in 2008 because (1) the FAC did not become
effective under SB 221 until 2009 and (2) fuel costs under the RSP were not
regulated in 2008.
{¶ 40} Ohio Power, however, fails to carry its burden here. At no point
does Ohio Power cite a specific legal authority that prohibits the FAC from being
applied to fuel transactions in 2008. Ohio Power makes general references to “SB
221” and its effective date, but this alone does not prove that the commission
lacked authority to apply the FAC to 2008 fuel transactions.
6
Specifically, Ohio Power claims that customers were made whole for 2009 fuel costs because it
properly booked $13.3 million of the proceeds from the 2008 settlement agreement as a credit
against fuel costs incurred in 2009 and 2010, with the remaining $58.3 million credited against
2008 fuel expenses.
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January Term, 2014
{¶ 41} Moreover, to determine whether a statute may be retroactively
applied, we first ask whether the General Assembly expressly made the statute
retroactive. Hyle v. Porter, 117 Ohio St. 3d 165, 2008-Ohio-542, 882 N.E.2d 899,
¶ 8-10 (applying R.C. 1.48 and Article II, Section 28, Ohio Constitution as a two-
part test to determine whether a statute may be applied retroactively). The FAC
mechanism was authorized under R.C. 4928.143(B)(2)(a). Yet Ohio Power does
not cite this provision, let alone offer an argument as to its construction. Ohio
Power cannot expect to prevail on a claim of retroactive application of law when
it does not even identify the law at issue.
{¶ 42} A party who challenges a final order of the commission has the
burden on appeal under R.C. 4903.13 of showing that the order is unlawful or
unreasonable. AT&T Communications of Ohio, Inc. v. Pub. Util. Comm., 51 Ohio
St.3d 150, 154, 555 N.E.2d 288 (1990); Columbus v. Pub. Util. Comm., 170 Ohio
St. 105, 163 N.E.2d 167 (1959), paragraph two of the syllabus. Ohio Power’s
argument is inadequately developed, and we reject it on that basis. See In re
Application of Columbus S. Power Co., 128 Ohio St. 3d 512, 2011-Ohio-1788,
947 N.E.2d 655, ¶ 56-57.
D. Ohio Power has forfeited the alternative argument
raised in the first proposition of law
{¶ 43} Ohio Power’s first proposition of law contains an alternative
argument to its retroactive-ratemaking claim. Ohio Power asserts that the
commission’s order is arbitrary, unreasonable, and against the manifest weight of
the evidence because it singles out the 2008 settlement agreement to reduce its
2009 fuel-cost recovery while ignoring another 2008 agreement with a different
coal supplier that allowed Ohio Power to avoid paying higher fuel costs in 2008
and beyond. Ohio Power refers to this other agreement as the 2008 Production
Bonus Agreement. Under that agreement, Ohio Power paid the supplier a
production bonus of $28.6 million to ensure that the supplier remained in business
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and was able to continue to supply coal to Ohio Power at below-market contract
prices. Ohio Power would like to recover the $28.6 million through 2009 FAC
rates on the theory that customers paid less in 2009 fuel costs than they would
have if the supplier had defaulted on the supply contracts.
{¶ 44} Ohio Power did not seek to recover the $28.6 million production
bonus until it filed an application for rehearing on the commission’s order on
February 23, 2012. In its April 11, 2012 rehearing entry, the commission refused
to consider the impact of the production bonus agreement against 2009 fuel costs.
Before this court, Ohio Power now claims that the commission failed to provide
record support and a valid rationale for its decision on rehearing.
{¶ 45} It is true that the commission must explain its decisions. R.C.
4903.09 requires the commission to set forth the reasons supporting the decisions
arrived at and prohibits summary rulings and conclusions that do not develop the
supporting rationale or record. MCI Telecommunications Corp. v. Pub. Util.
Comm., 32 Ohio St. 3d 306, 312, 513 N.E.2d 337 (1987). See also Indus. Energy
Users–Ohio v. Pub. Util. Comm., 117 Ohio St. 3d 486, 2008-Ohio-990, 885
N.E.2d 195, ¶ 30. But the critical problem for Ohio Power is that it never filed a
second application for rehearing alleging error in the commission’s evidence and
analysis in the first entry on rehearing. R.C. 4903.10 requires the commission’s
ruling on any particular issue to be challenged through an application for
rehearing before that issue can be appealed. Ohio Power cannot argue for the first
time in this court that the commission’s rehearing entry lacked adequate record
support and reasoning. It must first raise the issue with the commission, giving
the commission an opportunity to correct the alleged errors. See Parma v. Pub.
Util. Comm., 86 Ohio St. 3d 144, 148, 712 N.E.2d 724 (1999) (we do not accept
objections when appellant has “deprived the commission of an opportunity to
redress any injury or prejudice that may have occurred”). Because Ohio Power
did not file a second application that sought rehearing on these grounds, we lack
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jurisdiction to consider the arguments now. Discount Cellular, Inc. v. Pub. Util.
Comm., 112 Ohio St. 3d 360, 2007-Ohio-53, 859 N.E.2d 957, ¶ 66 (failure to file a
second rehearing application challenging new grounds in first rehearing entry
jurisdictionally bars this court’s review).
II. Ohio Power’s Proposition of Law No. II: The commission’s
decision to apply the book value of the coal reserve to
offset 2009 fuel costs is unlawful and unreasonable
{¶ 46} In proposition of law No. II, Ohio Power claims that the
commission erred when it applied the book value of the coal reserve (a
component of the 2008 settlement agreement) to offset 2009 fuel costs. Ohio
Power offers two separate arguments, but has forfeited both.
A. Ohio Power has forfeited its claim that ratepayers have no entitlement to
the value of the coal reserve acquired in the 2008 settlement agreement
{¶ 47} Ohio Power first claims that there is no legal basis for the
commission to apply the value of the coal reserve against 2009 fuel costs.
According to Ohio Power, ratepayers have no valid claim to the value of the coal
reserve because the commission has long held that ratepayers have no ownership
interest in utility assets.
{¶ 48} The commission first addressed Ohio Power’s ownership argument
on rehearing. In its April 11, 2012 rehearing entry, the commission agreed with
Ohio Power that ratepayers had no ownership interest in the coal reserve. The
commission went on to explain that an ownership interest in utility assets “is not
necessary for the Commission to order, as it did in the FAC order, the alignment
of fuel costs with the benefits of AEP-Ohio’s fuel contracts.”
{¶ 49} Ohio Power now inexplicably argues that the commission “gave
scant reason for rejecting its long-held” precedent “that ratepayers do not have an
ownership [interest] in utility assets.” But Ohio Power never argued on rehearing
that the commission erred in failing to follow precedent. That failure
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jurisdictionally bars the court from considering the claim. See R.C. 4903.10;
Consumers’ Counsel v. Pub. Util. Comm., 70 Ohio St. 3d 244, 247, 638 N.E.2d
550 (1994) (“setting forth specific grounds for rehearing is a jurisdictional
prerequisite for our review”).7
{¶ 50} Apparently recognizing the futility of continuing to argue that the
commission failed to follow precedent, Ohio Power changes course and asserts
that “[n]o fair label can be given to that transaction [offsetting 2009 fuel costs
with the value of the coal reserve] other than a transfer of ownership.” Although
it is not entirely clear, Ohio Power’s point seems to be that the commission in
effect transferred ownership of the coal reserve from Ohio Power to ratepayers
when it credited the coal reserve value against 2009 fuel costs, and the
commission erred in failing to recognize its order in those terms.
{¶ 51} As noted, the commission first addressed the ownership issue in the
first rehearing entry. Ohio Power has forfeited this claim as well by failing to
present it to the commission in a second application for rehearing. We therefore
lack jurisdiction over this claim. Discount Cellular, Inc. v. Pub. Util. Comm., 112
Ohio St. 3d 360, 2007-Ohio-53, 859 N.E.2d 957, ¶ 66.
B. Ohio Power has also forfeited its claim that the record
did not support the valuation
{¶ 52} Ohio Power’s second argument is that the record does not support
the $41 million valuation given to the coal reserve. Ohio Power, however, failed
to include this argument in its notice of appeal. R.C. 4903.13 establishes that the
procedure to seek reversal of a commission order is through a notice of appeal
“setting forth the order appealed from and the errors complained of.” We lack
jurisdiction to consider arguments not included in a notice of appeal. Cincinnati
7
Even if the issue had been preserved for appeal, Ohio Power has not demonstrated error. As we
explained, the commission never rejected this precedent; rather it agreed with Ohio Power’s
position that ratepayers had no ownership interest in utility assets.
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January Term, 2014
Gas & Elec. Co. v. Pub. Util. Comm., 103 Ohio St. 3d 398, 2004-Ohio-5466, 816
N.E.2d 238, ¶ 21; Ohio Partners for Affordable Energy v. Pub. Util. Comm., 115
Ohio St. 3d 208, 2007-Ohio-4790, 874 N.E.2d 764, ¶ 16.
III. Ohio Power’s Proposition of Law No. III: The commission
lacks jurisdiction to modify its prior adjudicative decisions and
may exercise continuing jurisdiction only to enforce final orders
{¶ 53} Ohio Power claims in its final proposition of law that the
commission was barred by the doctrines of res judicata and collateral estoppel
from revisiting issues in the FAC proceedings that were decided in the first ESP
proceedings. “These doctrines operate to preclude the relitigation of a point of
law or fact that was at issue in a former action between the same parties and was
passed upon by a court of competent jurisdiction.” Consumers’ Counsel v. Pub.
Util. Comm., 16 Ohio St. 3d 9, 10, 475 N.E.2d 782 (1985). And these doctrines
apply to quasi-judicial administrative proceedings. State ex rel. Schachter v. Ohio
Pub. Emps. Retirement Bd., 121 Ohio St. 3d 526, 2009-Ohio-1704, 905 N.E.2d
1210 ¶ 29; Superior’s Brand Meats, Inc. v. Lindley, 62 Ohio St. 2d 133, 403
N.E.2d 996 (1980).
A. Ohio Power has not shown that the FAC Order modified the 2009 FAC
audit period or applied the FAC to fuel costs incurred outside the ESP period
{¶ 54} Ohio Power asserts that the commission’s FAC Order modified two
key issues that were decided in the first ESP case: (1) the FAC mechanism would
be limited to the ESP period (2009 through 2011) and (2) the 2009 FAC audit
proceeding was limited to a review of fuel costs that were incurred from January
1, 2009, through December 31, 2009. According to Ohio Power, the commission
modified these components of the ESP Order when it reviewed fuel procurement
activities outside the specific audit period under review and outside the ESP term.
{¶ 55} The commission found that it had not altered the scope of the audit
or the audit period under review in this case. The commission specifically
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rejected Ohio Power’s contention that the ESP Order limited its annual review of
the FAC to 2009 procurement activities. After review, we find that Ohio Power
has not shown that the commission relitigated any point of law or fact in this case
that was decided in the ESP proceedings.
{¶ 56} First, Ohio Power contends that the commission failed to follow its
“prior adjudicatory decision” in the ESP Order regarding the ESP period and
annual audit review period. Ohio Power cites the ESP Order and testimony from
the ESP proceedings to support its claim that the audit and ESP periods were
altered by the FAC Order. But none of these references expressly limit the
commission’s FAC audit to procurement activities occurring only during the ESP
period.
{¶ 57} Second, Ohio Power’s arguments fail to undermine the
commission’s rationale for finding that the 2008 settlement agreement was subject
to review. The FAC audit was designed to examine the prudence and accounting
accuracy of Ohio Power’s fuel transactions. The purpose of the FAC audit was to
determine the true costs of fuel so that customers paid no more than what was
reasonable. The commission recognized that the 2008 settlement agreement was
executed before the audit period under review and the start of the ESP. Even so,
the commission found it subject to review because the proceeds received from the
agreement affected Ohio Power’s costs to provide electricity during 2009.
{¶ 58} The critical flaw in Ohio Power’s arguments is that it wants the
commission (and now this court) to consider the 2008 settlement agreement in
isolation, looking solely at the date it was executed and not at whether the
agreement had any effect on 2009 fuel costs. Under the terms of the agreement,
Ohio Power agreed to terminate prematurely the long-term Peabody coal-supply
contract at the end of 2008. Without this early buyout of this contract, Ohio
Power would have continued to receive shipments of coal at the below-market
contract price through the ESP period (2009-2011). And because the Peabody
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January Term, 2014
contract terminated at the end of 2008, Ohio Power had to purchase replacement
coal beginning in 2009 at higher prices, which in turn resulted in ratepayers
paying more for electricity at the beginning of the ESP period. In short, Ohio
Power ignores the impact of the settlement agreement on 2009 FAC costs.
B. Ohio Power has not shown that the FAC baseline
was altered by the FAC Order
{¶ 59} Ohio Power also asserts that the commission modified the FAC
baseline when it applied proceeds from the 2008 settlement agreement against
2009 FAC costs. While we find no merit to this claim, resolving it requires an
understanding of the FAC baseline.
1. Background on the FAC Baseline
{¶ 60} As noted above, the FAC is a separate charge from the base rate
that will automatically go up and down with the cost of fuel. In order to
determine whether fuel costs had gone up beyond the amount already recovered in
the base rate, it was necessary to set a baseline. The base rate was to include 2009
fuel costs, but the ESP hearing ended in 2008 and the actual 2009 costs were not
known at that time. So the commission needed to estimate. IEU had proposed
reopening the record to use 2008 costs as a proxy for 2009. AEP had proposed a
different estimation method altogether. The commission, following the staff’s
recommendation, chose 2007 fuel costs as the FAC baseline.
{¶ 61} The setting of the FAC baseline also had an impact on setting the
base generation rate of the ESP. The ESP separated Ohio Power’s bundled
generation rate under the RSP into the FAC and non-FAC components. The non-
FAC components were determined by subtracting the FAC baseline from the total
generation rate. This meant that if the FAC baseline were set low, the base
portion of the generation rate (the non-FAC portion) would be higher, and vice
versa. The FAC baseline adopted by the commission was lower than the baseline
advocated by IEU, resulting in a higher non-FAC generation rate.
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SUPREME COURT OF OHIO
2. Ohio Power has not carried its burden of demonstrating error
{¶ 62} Ohio Power’s theory is that when the commission applied the
proceeds from the 2008 settlement agreement against the 2009 FAC costs, it
modified the FAC baseline to a higher value, and thereby reduced “2009 fuel
adjustment clause-related increase in rates.” Although Ohio Power’s brief is not
entirely clear, Ohio Power is apparently claiming that the decision to reduce the
recovery of FAC costs for 2009 by the amount of the 2008 settlement proceeds
also reduced Ohio Power’s non-FAC generation rate recovery.
{¶ 63} Ohio Power, however, offers no evidence to support its theory that
the FAC Order had an impact on the base generation rate set by the ESP Order.
And Ohio Power does not even assert, much less demonstrate, that its base
generation rate under the ESP was insufficient to cover its non-FAC costs. Ohio
Power’s failure to support its appellate arguments with relevant citations to the
record is alone grounds to reject it. Allnet Communications Serv., Inc. v. Pub.
Util. Comm., 70 Ohio St. 3d 202, 206, 638 N.E.2d 516 (1994) (rejecting argument
when appellant “provided no further reasoning or record citations to support” it).
{¶ 64} In the end, Ohio Power has not demonstrated that the commission
violated the doctrines of res judicata or collateral estoppel. Therefore, we reject
proposition of law No. III.
IEU’s Cross-Appeal
IEU Proposition of Law No. IV: The commission’s FAC Order is unlawful
and unreasonable because on rehearing, the commission failed to allocate 100
percent of the credit for the buyout to Ohio retail jurisdictional customers
{¶ 65} IEU argues on cross-appeal that the commission erred on rehearing
when it reduced the amount of the settlement proceeds to be credited against Ohio
Power’s underrecovered FAC costs. The commission found that only the portion
of the settlement proceeds allocable to Ohio retail jurisdictional customers should
be credited against the 2009 FAC costs. IEU maintains that the commission’s
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January Term, 2014
decision is unlawful and unreasonable on three grounds: (1) the commission’s
rehearing entries—dated April 11, 2012, and July 2, 2012—are not supported by
the record, (2) the July 2 rehearing entry is contradicted by the record, and (3) the
July 2 entry conflicts with Ohio Adm.Code 4901:1-35-03(C)(9)(a)(ii).
{¶ 66} We agree with IEU that the commission failed to cite any evidence
in these rehearing entries, in violation of R.C. 4903.09. See Tongren v. Pub. Util.
Comm., 85 Ohio St. 3d 87, 89, 706 N.E.2d 1255 (1999) (strict compliance with
R.C. 4903.09 is not required, but the commission abuses its discretion if it renders
an opinion on an issue without record support). IEU, however, has forfeited these
arguments by failing to preserve them on rehearing.
A. The April 11, 2012 Rehearing Entry
{¶ 67} The commission’s opinion and order determined that all of the
proceeds from the 2008 settlement agreement should be used to offset the higher
fuel costs charged to ratepayers in 2009. Ohio Power filed an application for
rehearing, arguing that the order overstated the amount of the offset because only
a portion of the settlement proceeds should have been allocated to Ohio retail
customers.
{¶ 68} On rehearing, the commission agreed. The commission found that
Ohio Power’s fuel expenses are allocated between Ohio retail expenses, non-Ohio
retail expenses, and wholesale expenses. The commission found that the same
was true with regard to the allocation of revenues. Therefore, the commission
clarified that only the share of the settlement proceeds allocable to Ohio retail
customers must be credited against 2009 fuel costs.
{¶ 69} On cross-appeal, IEU argues that the commission failed to identify
any evidence in its April 11 entry to support this conclusion. IEU, however, did
not argue in its May 11, 2012 application for rehearing that the commission failed
to support its order with record evidence. Setting forth specific grounds for
rehearing is a jurisdictional prerequisite for this court’s review. Ohio Partners for
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SUPREME COURT OF OHIO
Affordable Energy v. Pub. Util. Comm., 115 Ohio St. 3d 208, 2007-Ohio-4790,
874 N.E.2d 764, ¶ 15.
{¶ 70} IEU counters that it preserved this issue with the following
statement: “OP has failed to provide any proof that Ohio consumers should be
deprived of the full amount of the benefits received by OP in exchange for the
higher costs of fuel paid by Ohio customers.” But claiming that Ohio Power
failed to provide proof to support an argument is not the same thing as claiming
that the commission failed to identify record evidence to support its order. And
even if this statement were sufficient to preserve the issue for review, none of the
arguments or evidence in IEU’s brief on this issue was set forth in its rehearing
application. “[W]hen an appellant’s grounds for rehearing fail to specifically
allege in what respect the PUCO’s order was unreasonable or unlawful, the
requirements of R.C. 4903.10 have not been met.” Discount Cellular, 112 Ohio
St.3d 360, 2007-Ohio-53, 859 N.E.2d 957, ¶ 59 (cases cited). Indeed, we have
strictly construed the specificity test set forth in R.C. 4903.10. Id. See also
Cincinnati v. Pub. Util. Comm., 151 Ohio St. 353, 378, 86 N.E.2d 10 (1949) (by
using the language set forth in R.C. 4903.10, “the General Assembly indicated
clearly its intention to deny the right to raise a question on appeal where the
appellant’s application for rehearing used a shotgun instead of a rifle to hit that
question”). So regardless of what appears in IEU’s brief on cross-appeal, the only
arguments properly before the court are those also set forth in IEU’s application
for rehearing in the case below.
B. The July 2, 2012 Rehearing Entry
{¶ 71} The commission rejected IEU’s May 11 rehearing application in an
entry dated July 2, 2012. IEU asserts on cross-appeal that the commission failed
to identify any evidence to support this entry. But IEU never filed an application
for rehearing that alleged that the July 2 entry lacked record evidence. That
means that IEU never sought rehearing on these grounds, so the court lacks
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January Term, 2014
jurisdiction to consider the arguments now. Ohio Partners for Affordable Energy
v. Pub. Util. Comm., 115 Ohio St. 3d 208, 2007-Ohio-4790, 874 N.E.2d 764, ¶ 15;
In re Application of Am. Transm. Sys., Inc., 125 Ohio St. 3d 333, 2010-Ohio-1841,
928 N.E.2d 427, ¶ 31.
{¶ 72} In addition to claiming that the commission failed to support its
rehearing entry with record evidence, IEU argues that the record contradicts the
commission’s determination. IEU refers here to the commission’s rejection of
IEU’s least-cost-allocation claim. IEU had argued in its May 11 rehearing
application that the Peabody contract was the “lowest cost fuel source.” Because
the ESP required Ohio Power to allocate the least costly fuel to its standard-
service-offer customers, IEU argued that Ohio Power was required to allocate all
of the settlement proceeds from the buyout of the Peabody contract to these
customers. The commission rejected IEU’s claim, finding that the allocation of
fuel on a least-cost basis was determined by the average dispatch cost associated
with a specific generation plant, rather than on any one particular supply contract,
as IEU alleged.
{¶ 73} On cross-appeal, IEU abandons its argument that the Peabody
contract was the “lowest cost fuel source,” in favor of an entirely new argument.
IEU’s new theory is that the electricity produced at the Mitchell generating station
would have been the least-cost-generating output in Ohio Power’s fleet if the
settlement agreement had not occurred. According to IEU, if the coal from the
Peabody contract had been burned at the Mitchell plant, then all proceeds to buy
out that contract should have been allocated to Ohio Power’s standard-service-
offer customers. But in addition to being speculative and supported by evidence
outside the record, IEU’s Mitchell theory was not presented to the commission on
rehearing. Therefore, IEU has forfeited this claim.
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SUPREME COURT OF OHIO
{¶ 74} Finally, IEU argues that the commission’s July 2 rehearing entry
conflicts with OhioAdm.Code 4901:1-35-03(C)(9)(a)(ii). IEU has also forfeited
this claim by failing to present it to the commission on rehearing.
CONCLUSION
{¶ 75} In sum, Ohio Power and IEU have not carried their burden of
showing reversible error in the commission’s orders. R.C. 4903.13; AT&T
Communications of Ohio, Inc. v. Pub. Util. Comm., 51 Ohio St. 3d 150, 154, 555
N.E.2d 288 (1990). Therefore, we affirm.
Orders affirmed.
PFEIFER, O’DONNELL, LANZINGER, and O’NEILL, JJ., concur.
KENNEDY and FRENCH, JJ., concur in judgment only.
____________________
Steven T. Nourse and Matthew J. Satterwhite, and Porter, Wright, Morris
& Arthur, Kathleen M. Trafford, and Daniel R. Conway, for appellant and cross-
appellee, Ohio Power Company.
Mike DeWine, Attorney General, William L. Wright, Thomas W.
McNamee, and Devin D. Parram, Assistant Attorneys General, for appellee and
cross-appellee, Public Utilities Commission of Ohio.
McNees, Wallace & Nurick, Samuel C. Randazzo, Frank P. Darr, and
Matthew R. Pritchard, for appellee and cross-appellant, Industrial Energy Users–
Ohio.
_________________________
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