Energy Update

Remand of Duke Energy Ohio’s Rate Stabilization Plan
Case No. 03-93-EL-ATA

The remand proceeding has an immediate impact on a series of pending dockets involving the various riders that have their origin in the RSP case, and which were due for adjustment on January 1, 2007. The OCC requested that the RSP riders be abated while the matter was on remand. Instead, the Commission issued an Entry that either froze the rider amounts, suspended the rider, or allowed the rider to expire. The PUCO found as follow with respect to the riders:

1. Annually Adjusted Rider (AAC), which had been set at a specific rate through 2006, is continued at the same rate through 2007 subject to a true-up, until such time as the PUCO approves a change.

2. System Reliability Tracker (SRT): DE – Ohio proposed a new rate for 2007 subject to a true-up. OCC argued that DE – Ohio had substantially overstated its costs for 2006 such that the SRT had been providing a credit. The PUCO decided that it would allow the SRT to expire by its own terms on December 31, 2006.

3. Fuel and Purchased Power Rider (FPP): This rider is adjusted quarterly and is intended to recover actual costs. The PUCO allowed DE – Ohio to reflect the congestion costs and losses from the transmission cost rider to the FPP. The PUCO allowed the continuation of the quarterly adjustments to the FPP subject to subsequent audit and true-up (including the congestion costs).

4. Infrastructure Maintenance Fee (IMF): The PUCO did not stay the IMF but noted that it was subject to true-up “depending on the Commission’s ultimate determination” [this is an issue that the Ohio Supreme Court remanded to the PUCO due to lack of an adequate record].

By entry dated February 1, 2007, the Attorney Examiners assigned to the case set a consolidated procedural schedule for by the remanded RSP case as well as the various other pending cases involving the Commission’s review of the RSP-related riders. This entry divided the case into Phase 1, dealing with the issues on remand, and Phase 2, addressing the other, RSP rider-related issues.

Evidentiary hearings were held in Phase 1 of the proceeding beginning on March 19, 2007. Phase 2 hearings commenced on April 10, 2007. Initial and reply briefs are completed for Phase 1. The briefing on Phase 2 is pending.

Appointment of PUCO Commissioners

On February 23, 2007, Governor Ted Strickland appointed energy consultant and former Ohio Consumers' Counsel Attorney Paul Centolella to fill the vacancy left by Commissioner Judy Jones.

During the first week in April, Ohio Attorney General Marc Dann threatened legal action to remove from office PUCO Chairman Schriber and commissioners Fergus and Lemmie because the PUCO's Nominating Council violated the law when it voted in private to forward names to the former Governor Taft for consideration. Mr. Dann stated that the recent appointment of Paul Centolella was also "invalid and void." If the commissioners did not resign, Mr. Dann threatened to file a writ essentially invalidating the appointments of Chairman Alan Schriber and commissioners Ronda Hartman Fergus and Valerie Lemmie. Mr. Dann did not seek the resignation of Commissioner Don Mason because his nomination and appointment fell outside of an applicable three-year look-back period. On April 6, 2007, Commissioners Schriber, Fergus and Lemmie all tendered their resignations effective April 15, 2007.

On April 9, 2007, the Nominating Council held a special meeting wherein Chairman Alan Schriber, commissioners Ronda Hartman Fergus and Valerie Lemmie and commissioner-designee Paul Centolella were all re-nominated. While some called for full-scale changes in PUCO membership, Governor Strickland re-appointed all the commissioners, including the newly appointed Paul Centollela.

EP Service Distribution Reliability
06-222-EL-SLF

The filing of AEP’s “self-complaint,” Case No. 06-222-EL-SLF, requires the background of the case that preceded it, Case No. 03-2570-EL-UNC, which pertains to a settlement reached between Columbus Southern Power and Ohio Power (collectively “AEP”) and the PUCO Staff regarding distribution service to certain rural areas of the state. AEP agreed to make improvements to their 25% worst performing circuits in order to reduce the average outage time by 40%, and to maintain three other circuit quartiles at levels that would not worsen from their 2002 levels.

In January 2006, AEP filed its final report pursuant to the stipulation. While the performance goals for the 25% lowest performance circuits were exceeded, AEP stated that the baseline system average interruption duration index was not maintained for the remaining three circuit quartiles. AEP also filed an application requesting the PUCO to implement a process whereby AEP would present enhanced service reliability programs for PUCO approval, and if approved, AEP would be authorized to recover those costs through an increase in distribution rates.

Thereafter, the PUCO directed Staff to review and file a report on AEP’s performance during the course of the stipulation and recommend what consequences should be taken for its failure to fulfill the terms of the stipulation, and to determine what areas of distribution service quality require improvement in order for AEP to provide reliable distribution service. On April 17, 2006, Staff filed its report finding that for the years 2001 through 2005, the system-wide reliability performance of both Columbus Southern Power and Ohio Power “has been getting worse on all measures, even after their efforts during the past two years.” Staff recommended that the PUCO order AEP to submit a comprehensive plan to improve its service reliability.

The PUCO issued an entry in May 2006 directing AEP to begin developing a plan to enhance its service reliability, and to file a response to Staff’s recommended consequences for its failure to maintain system-wide performance for the second, third and fourth quartiles. AEP filed its response arguing that the PUCO should not impose any consequences for its failure not to meet all the terms of the stipulation. AEP offered to commit $5 million to further improving its system reliability, and agreed not to request recovery from its customers any of the $5 million. However, in late July 2006, the PUCO found that the $5 million proposed by AEP was not adequate to address its failure to meet the terms of the stipulation. Therefore, the PUCO fined AEP $10 million, and stated that AEP would not be permitted to recover the fine from ratepayers. On October 6, 2006, AEP filed its Enhanced Distribution Service Reliability Plan along with supporting testimony. AEP indicated the scope of the cost that would be passed through as a distribution service enhanced reliability rider for a five-year period. It alleged that over a five-year period it needed an additional $637.4 million beyond what its distribution revenues would provide.

A number of parties, including the OMA, were granted intervention. The party playing the most active in the case is the Office of the Ohio Consumers’ Counsel (OCC). Also intervening have been the Ohio Partners for Affordable Energy and Appalachian People’s Action, Direct Energy, Industrial Energy Users – Ohio and Lifestyle Communities, Inc.

Six local public hearings were scheduled; Peggy Claytor testified at the January 11, 2007 hearing in Canton, Ohio. Subsequent to the local public hearings, the OCC requested parties to attend a settlement conference where discussions ensued regarding the scope of the plan and cost recovery. The OCC and the Staff at several sessions suggested approaches to settle the case. OMA participated and proposed a variation of one of the approaches. Ultimately, because all of the intervenors (notably OCC) could not agree to the hybrid Staff/OMA approach, AEP proposed to withdraw the self-complaint.

A joint motion to withdraw the application, which OMA was a signatory, was filed on April 18, 2007. The parties also requested that the PUCO direct AEP to spend the $10 million, which had been earmarked for service reliability, to be spent on additional vegetation management efforts consistent with AEP’s Plan. By Attorney Examiner Entry issued April 27, 2007, the procedural schedule was held in abeyance pending the PUCO’s consideration of the motion to withdraw the self-complaint.

Columbia Gas of Ohio: New Stakeholder Process

The market structure, as well as the underlying cost structure of Columbia Gas of Ohio (“COH”) has reached a significant turning point. In all probability, COH will be filing a general rate case, the first in over 15 years, within the next several months. In the meantime, COH is convening a new stakeholder process to discuss proposals for forward looking changes to the way in which COH conducts both its customer choice program and its gas transportation program as well. The interests of stakeholders not represented during this process are likely to have their interests compromised.

COH has not had a general rate case since the very early 1990s. Since 1994, COH’s distribution rates have been kept static, and its gas transportation support service rates (banking, balancing and related tariff terms and conditions) have been governed through a collaborative process that negotiated and filed a variety of stipulations as an alternative to litigated cases. The cornerstone of the collaborative process has been COH’s CHOICE program and the treatment of the revenues derived from the GCR portfolio of capacity and commodity resources made available as a result of the CHOICE program. Essentially, COH has used revenues generated from the off-system sale of these resources as a means of avoiding the need for tariff rate increases. The resources used to provide banking and balancing services for GTS customers are implicated by this same portfolio of resources.

The current Stipulation, dated October 8, 2003, in Case No. 94-987-GA-AIR, et al (“2003 Stipulation”) was approved by the Public Utilities Commission of Ohio (“PUCO” or “Commission”) on March 11, 2004 with substantial modifications. One such substantial modification was the Commission’s refusal to accept as reasonable Columbia’s GCR portfolio management though October 31, 2010, as called for by the 2003 Stipulation. The treatment of Columbia’s portfolio of gas commodity contracts and firm pipeline capacity contracts is at the heart of the 2003 Stipulation, and consequently, the 2003 Stipulation contains key provisions that could be affected in COH’s gas cost recovery (“GCR”) proceeding.

During the course of the GCR hearing, COH agreed to convene a “stakeholder” meeting to discuss the post-2008 environment. Ostensibly, this new “stakeholder” process will serve as a revamped collaborative process. The current stipulation expires on December 31, 2008. COH has indicated that 2007 is the opportunity to provide meaningful input into the Post 2008 operation of its system. The first meeting of this group was held on April 11, 2007. The next meeting is scheduled for this month.

OMA took advantage of the brief window of opportunity to join and participate in the discussions that will, no doubt, have a significant impact on the cost structure and rate design issues that affect transportation customers on the COH system. The importance of this stakeholder process is amplified due to the serious implications of the issues now pending before the Commission in the GCR litigation.

Environmental Update

Toxic Release Inventory (TRI) Report

On May 22, 2007, Ohio EPA released the 19th annual Toxic Release Inventory (TRI) report, which is required as part of the federal Emergency Planning and Community Right-to-Know Act (EPCRA). Total releases for the calendar year 2005 amounted to more than 310 million pounds, a 4.3% increase from the 297 million pounds reported in 2004. Releases of toxic chemicals to water and air both declined in 2005 (down 1.1 million pounds and 872,000 pounds, respectively), but were more than offset by increases for “land on site” releases, which increased by 12.8 million pounds.

Ohio Receives Brownfields Grants

On April 15, 2007, the Ohio Department of Development (ODOD) announced that its Urban Development Division has been awarded $2.0 million from U.S. EPA for brownfield revitalization. Ohio received the largest grant awarded to a state. ODOD will utilize the EPA grant though the Brownfield Revolving Loan Fund.

Ohio EPA Air Rules

1. Ohio EPA Air Toxic Rule
   (OAC 3745-114-01)

   This rule, which became effective December 1, 2006, contains a list of toxic air contaminants promulgated in response to requirements in Senate Bill 265. The original draft list included 639 compounds. OMA submitted written comments to Ohio EPA on August 21, 2006 opposing portions of the rule. Ohio EPA then re-issued the draft list of toxic air contaminants, reducing the list to 303 compounds. A public hearing on the draft rule was held on October 23, 2006, and OMA submitted comments in support of the revised proposed rule, which was adopted and became effective on December 1, 2006. The Sierra Club, Ohio Citizen Action, Ohio Academy of Trial Lawyers, Environmental Community Organization and the Buckeye Environmental Network have appealed portions of the rule to the Ohio Environmental Review Appeals Commission (ERAC). OMA and other business trade groups have intervened in this appeal to protect the rule as adopted.

2. Permit-to-Install and Operate (PTIO) Program
   (OAC 3745-31 and -35)

   On March 14, 2007, Ohio EPA released draft rules to implement a combined air permit-to-install (PTI) and permit-to-operate (PTO) program, which was approved in concept by former Director Jones in February 2004. Rather than requiring a source to apply for a PTI, which is issued with both installation and operation terms, and then apply for a PTO within a year of construction, the new program will require one application for both a PTI and PTO, and both installation and operation requirements will be issued under one document. The public comment period closed on April 30, 2007.

3. Nitrogen Oxides - Reasonably Available Control Technology
   (NOx RACT) Rules (OAC 3745-110)

   These rules will regulate nitrogen oxide emissions from existing stationary combustion sources (e.g., industrial boilers, combustion turbines) and will apply to existing sources in the eight “moderate” non-attainment counties (Cleveland/Akron area) and state-wide to new or modified sources. The rules were originally released to interested parties in July 2006. OMA and others submitted comments on the initial rule package. Based on some of these comments, the rule package has been revised and is now out for public comment. A public hearing has been scheduled for June 8, 2007, and Ohio EPA is accepting written comments on the proposed rules through June 8, 2007.

4. Architectural and Industrial Maintenance (AIM) Coatings
   (OAC Chapter 3745-113)

   These rules cover coatings applied to interior and exterior of homes and offices, factory floors, bridges, stop signs, roofs, swimming pools, driveways, etc. Rules will provide emission reductions to assist in attaining and maintaining NAAQS 8-hour ozone standard, especially directed to assist attainment in Northeast Ohio. A public hearing was held on May 7, 2007. Ohio EPA has not yet acted on this draft rule package.

5. “Consumer Products” Rule
   (OAC Chapter 3745-112)

   On December 28, 2006, Ohio EPA released these new rules aimed at reducing VOC’s from consumer products (e.g., adhesive, air fresheners, aerosols, carpet cleaners, etc.) for interested party comment. The rules are intended to assist the state in achieving and/or maintaining the national 8-hour ground level ozone standard. The draft rule applies to “any person who sells, supplies, offers for sale, or manufactures consumer products on or after January 1, 2008 for use in the state of Ohio”. It exempts a manufacturer or distributor who sells, supplies or offers for sale in the state of Ohio a consumer product that does not meet the VOC standards as long as the manufacturer or distributor can demonstrate both that the consumer product is intended for shipment and use outside of the state of Ohio and the manufacturer or distributor has taken reasonable prudent precautions to assure that the consumer product is not distributed in the state of Ohio. Therefore, it applies to a consumer product sold in Ohio regardless of place of manufacture. A public hearing on the proposed rule package is scheduled for June 12, 2007.

6. Clean Air Mercury Rule (CAMR)
   (OAC 3745-108)

   Ohio has proposed rules to implement federal rules known as the Clean Air Mercury Rules (CAMR), published by U.S. EPA in May 2005. The rules establish a cap and trade program for emissions of mercury and set a total mercury emissions ceiling for Ohio. Ohio EPA predicts that, when fully implemented, these rules would reduce mercury emissions from Ohio-based utilities by 86%. A public hearing on the proposed rules was held on January 29, 2007. After minor revisions, Ohio EPA adopted these rules, which became effective on May 11, 2007.

7. Clean Air Interstate Rules (CAIR)
   (OAC 3745-109)

   These proposed rules have been developed to comply with the federal CAIR rule requiring reductions in emissions of nitrogen oxides (NOx) and sulfur dioxides (SO2). These rules will establish CAIR NOx and CAIR SO2 trading programs. These rules were originally released for interested party comments on June 24, 2006. A public hearing on the rule package was held on May 17, 2007. Ohio EPA has not yet acted on this rule package.

8. Particulate Matter (PM) Rules
   (OAC 3745-17)

   These draft amended rules relate to the control of fugitive dust and particulate emissions from various types of stationary sources as a result of the 5-year rule review process. OMA, other business trade groups, and the automobile manufacturers submitted comments on a portion of the rule package regarding the “process weight rule” as it related to spray paint booths (OAC 3745-17-11). A public hearing was held on May 11, 2007. Ohio EPA has not yet acted on this rule package.

Taxation

Administrative Actions

Information Release ST 1995-05 “Price” for Calculating Sales or Use Tax (Issued March 1995, Rev. Jan. 2007) explains that federal and state excise taxes imposed directly on a consumer are not part of the “price” for sales tax purposes, but that such taxes imposed on the manufacturer, wholesaler, retailer, or others, are included in the “price”, even if separately stated on the customer’s invoice.

Information Release ST 1993-08- EMPLOYMENT SERVICE (Issued Sept. 1993; last Rev. Feb. 2007), is revised to explain that “employment service” does not include transactions where the personnel provided to a purchaser are subsequently supplied by the purchaser to a third party; however, the transaction between the purchaser and the third party is an employment service. This explains an amendment effective January 1, 2007.

Information Release ST 2007-02 – Sales and Use Tax: “Delivery Charges” a Part of the “Price” of a Sale (Issued May 2007), explains a change in the law effective August 1, 2003, that included delivery charges in the “price” on which sales and use tax is computed, whether the charge is separately stated to the customer or not. In addition, with respect to refunds of sales tax on returned merchandise, unless the delivery charge is also refunded, the sales tax will not be refunded; O.A.C. 5703-9-11(B) provides that a refund of sales tax will be made only if the entire price paid is refunded.

Information Release IT 1996-01 – Personal Income Tax: Federal Law Preempting State Taxation of Retirement Plan Income (Issued March 1996, Rev., May 2007), explains in detail and provides examples of when payments of retirement benefits will, and will not, be subject to withholding by an employer in Ohio.

Legislative Actions

The budget bill being contemplated, House Bill 119, contains relatively few tax provisions; even fewer of the provisions are of direct interest to manufacturers. Major tax provisions include:

• Revising the sales tax exemption for nonresident purchasers of motor vehicles

• Expansion of the real property tax homestead exemption to all persons aged 65 or older or disabled and increasing the exemption amount to $25,000 of fair market value from $13,000.

• Revises sources of revenue for local government support funds

• Reduces the portion of the kilowatt hour tax on self-assessors based on purchase price from 4% to 3.5%.

• Creates a franchise and personal income tax exemption for dealers of E85 ethanol and biodiesel fuels.

• In an uncodified section of law, expresses the intent to visit the NOL carry-forward credit against the CAT with a view to expanding the credit to additional taxpayers.

There are no serious efforts to contract the CAT base or to reverse any of the major provisions of tax reform. However, manufacturers must remain alert to efforts to create carve-outs or exemptions from the tax base, and must also remain alert to efforts to increase spending for various programs, as these events will likely lead to an increase in the rate of the CAT.

Judicial Actions

1. United States Supreme Court

   Review by the Supreme Court has been requested in two appeals addressing the question of whether economic presence is sufficient to trigger nexus for state business tax purposes. FIA Card Services, N.A. v. Tax Commissioner of West Virginia, Sup. Ct. No. 06-1228 and Lanco, Inc. v. Director, Division of Taxation, Sup. Ct. No. 06-1236. In both cases, state courts held that a taxpayer’s physical presence was not required for the states to impose their general business tax obligations upon the petitioner taxpayers; rather, it was sufficient if the taxpayers had a substantial economic presence within the states. The cases squarely present the issue left unresolved after the Court’s decision in Quill v. North Dakota (1992), 504 U.S. 298, in which the Court held that for sales tax collection purposes, a vendor had to have a substantial physical presence before it could be required to collect the tax.

2. Ohio Supreme Court

   None issued.

3. Ohio Board of Tax Appeals

   In Inverness Club v. Wilkins (May 11, 2007), BTA No. 2004-R-338, the Board ruled that reconstructing a golf course was a construction contract, not a landscaping service, such that the owner was not liable for sales tax on the transaction. The importance of the decision is the Board’s discussion of the difference between a fixture, which is real property, and a business fixture, which is personal property.

   In Rent-Way, Inc. v. Wilkins (April 13, 2007), BTA No. 2004-A-331, the Board rejected the taxpayer’s argument that a disposal study demonstrated the value of its personal property should be lower than that determined under the Tax Commissioner’s 302 Computation. The primary defect in the study was the fact that the expert who performed it did so on a contingent fee basis, thus compromising his impartiality.

   In MCI Metro Access Transmission Services, LLC v. Wilkins (April 13, 2007), BTA No. 2004-K-749 & 750, the BTA ruled the taxpayer failed to demonstrate the existence of excessive obsolescence in determining the value of its taxable property. The claim was based upon the impairment recorded out of bankruptcy by the taxpayer’s owner, MCI Worldcom. The Board rejected the claim because the impairment had not been “pushed down” to the taxpayer’s books and there was no evidence to suggest that a pro rata reduction was appropriate.

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   Workers' Compensation Update

   Administrative Actions

   Since the last meeting, the Governor named Marsha Ryan, formerly an executive with American Electric Power, as Administrator of the Bureau of Workers’ Compensation. Her nomination was approved by the Senate, where she currently serves.

   House Bill 100, as amended by the Senate, was passed with little opposition and was signed by the Governor. The legislation does away with the Oversight Commission, which is replaced by an expanded Board of Directors. In addition, the Legislature created a legislative council that will oversee Bureau actions.

   Supreme Court Activity

   Groch v. General Motors Corp., Ohio Supreme Court Case No. 2006-1914. The OMA has joined the Ohio Chamber of Commerce, the Ohio Self-Insurers Association and the National Federation of Independent Business in filing an amicus brief in support of the constitutionality of the Ohio Workers’ Compensation subrogation statute. The issues concerning the constitutionality were certified by the District Court, Northern District of Ohio, Western Division.

   State ex rel. OmniSource Corp. v. Industrial Commission (2007), 113 Ohio St.3d 303, 2007-Ohio-1951. On May 9, 2007, the Ohio Supreme Court found that an employer who had discharged an employee that could not perform the essential functions of his job, was required to pay temporary total disability benefits.

   The employee injured his left knee in a work-related accident which gave rise to the allowance of a workers’ compensation claim. The injured worker worked several months, after which time his attending physician certified him as being temporarily and totally disabled in an anticipation of knee surgery. The knee surgery was completed and the employer continued to pay temporary total disability benefits from the date when the physician took the injured worker off work through the period following his knee surgery.

   Subsequently, the injured worker was charged with driving his automobile under the influence of alcohol. His driver’s license was suspended, but he pleaded not guilty and was granted occupational driving privileges. All throughout this period of time, he was continually receiving workers’ compensation benefits for temporary total disability. Thereafter, his doctor released him to light duty. Not long after, he was re-injured and was placed back on temporary total disability. While he was on this period of temporary total disability, his commercial driver’s license expired of its own accord. He was then convicted of driving under the influence of alcohol and was sentenced to thirty days of incarceration with all but five days suspended. He served those five days and was placed on a year’s probation and had his driver’s license concurrently suspended. Just prior to the injured worker’s incarceration, the employer had continued paying temporary total disability compensation. After learning of his conviction and subsequent incarceration, the employer informed the injured worker that unless he was able to provide a valid driver’s license within two business days, he would be fired. He could not and was thus terminated. In addition, the employer discontinued paying temporary total disability benefits.

   The injured worker sought an order from the Industrial Commission of Ohio to compel the employer to resume payment of temporary total disability compensation. The motion was rejected administratively by the Industrial Commission, which found that his discharge did not constitute a voluntary abandonment of employment because he was already temporarily and totally disabled when fired and could not have voluntarily relinquished his former position of employment.

   The employer then filed a complaint in the Court of Appeals which ultimately agreed with the Industrial Commission and the case was appealed to the Supreme Court of Ohio. The Court, citing two previous cases, stated that a claimant can abandon a former position from the work force only if he or she has the physical capability for employment at the time of the abandonment or removal. Whether or not another intervening event created an inability to work, it does not eliminate the causal relationship between the work-related injury suffered and his or her absence from the work force.

   This case serves as a demonstration that an employer should not assume that terminating an employee because of one form of misconduct or other warrants terminates that employee’s temporary total disability benefits. In order to make certain that one is properly terminating temporary total disability benefits, an employer should seek counsel.