Energy Update

FirstEnergy Electric Distribution Rate Case
PUCO Case No. 07-551-EL-AIR

Ohio Edison Company, Cleveland Electric Illuminating Company and Toledo Edison Company (collectively “FirstEnergy”) filed an application for authority to increase its electric distribution rates by $340 million.

Several parties, including the Ohio Schools Council, the City of Cleveland, Industrial Energy Users-Ohio, Utility Workers Union of America, Ohio Partners for Affordable Energy, the Office of the Ohio Consumers’ Counsel, Ohio Home Builders Association, the communities in the Northwest Ohio Aggregation Coalition, the Kroger Company, the Ohio Energy Group, OMA (Aug. 25, 2007), Nucor Steel Marion, Inc., and Constellation NewEnergy have filed to intervene in the case.

It is rumored that the Staff Report will be issued in a matter of weeks if not days.

FirstEnergy Competitive Bid Process
PUCO Case No. 07-796-EL-ATA and 07-797-EL-AAM

PUCO Staff filed comments on Sept. 21, 2007, recommending that the Commission reject FirstEnergy’s application for approval of a competitive bidding process (“CBP”). The CBP would be designed to procure supply for the provision of Standard Service Offer electric generation service to retail electric customers who do not purchase electric generation service from a competitive retail electric service provider beginning Jan. 1, 2009. FirstEnergy also seeks approval of accounting modifications to implement a proposed reconciliation mechanism and tariffs for generation service. FirstEnergy requested that a decision be issued by Nov. 1. However, no decision had been made yet.

Along with the OMA, numerous companies filed to intervene in the case, including Constellation New Energy, Citizen Power, American Electric Power, the Northeast Ohio Public Energy Council, the Cleveland Foundation, Industrial Energy Users-Ohio, Utility Workers Union of America, Ohio Partners for Affordable Energy, Ohio Hospital Association, the Office of the Ohio Consumers’ Counsel, the communities in the Northwest Ohio Aggregation Coalition and the Ohio Energy Group.

Again, PUCO Staff filed its comments on Sept. 21, 2007, recommending that the Commission reject FirstEnergy’s application. The Staff's comments were highly critical of the present condition of the electric marketplace, both retail and wholesale. The following excerpts from the Staff’s comments provide an accurate summary of its position with respect to FirstEnergy's filing:

• The restructuring of Ohio’s electric generation business has thus far failed to produce an efficient, competitive retail market that can meet the needs of the state’s economy in an affordable, reliable and sustainable manner. Likewise, the PUCO Staff questions the fairness and efficiency of the wholesale market that should support and enable retail competition and customer choice.

• Neither retail nor wholesale electricity markets have developed sufficiently to warrant confidence in a CBP that relies on fairness or efficiency of those markets. Accordingly, the staff recommends that the Commission reject the CBP as a means of establishing the price of a standard service offer for its customers.

OMA filed reply comments on Oct. 12, 2007 in support of the Staff’s recommendations. Although FirstEnergy requested that a decision be issued by Nov. 1, no decision had been made yet.

Columbia Gas of Ohio New Stakeholder Process

Because Columbia has made the settlement of the Gas Cost Recovery (“GCR”) litigation a precondition of a settlement of the post-2008 operating environment, the parties have been attempting to settle the case over the past several weeks. While these discussions are currently ongoing and highly confidential, significant progress has been made by the parties and a settlement, though to be impossible this past spring, now appears to be achievable.

If a settlement is reached in the next several days, then the larger stakeholder process to discuss the post-2008 operating environment will begin again. A major topic of discussion will be the costs and operation of Columbia’s banking and balancing services that its transportation customers have enjoyed under the 2003 stipulation.

The background of this case dates back to May 2007, when Columbia Gas of Ohio invited a broad array of stakeholders to discuss the future of its operational structure, including its GCR supply portfolio, its CHOICE program and its General Transportation Services (“GTS”). The need for this discussion is driven by the fact that the current structure of these programs is based on a 2003 stipulation that expires Oct. 31, 2008. GTS customers on the Columbia system have benefited from Columbia’s banking and balancing services, as well as improved Operational Flow Order and Operational Matching Order rules, all of which were developed during the governance of the current stipulation. These stakeholder discussions will impact these important features of Columbia’s transportation services for years into the future beyond the expiration of the current stipulation.

Columbia has proposed a high-level outline for a settlement structure that would essentially extend the current level of service for GTS customers through 2010 while a discussion of an overall realignment of its gas supply portfolio takes place among the stakeholders. The proposal includes a base rate case filing in February 2008, a settlement of the issues in Columbia’s hotly-contested GCR review proceeding, Case Nos. 04-221-GA-GCR and 05-221-GA-GCR, and a possible settlement of Columbia’s current riser/service line replacement program.

Each of the issues that Columbia has included for discussion in its outline has the potential to negatively impact the cost of gas transportation services currently enjoyed by OMA members. Columbia’s proposal brings a significant measure of orderliness to the discussion of these issues. Consequently, the OMA has gone on record in these discussions as supporting Columbia’s settlement structure proposal and intends on remaining active in these discussions as they move forward in order to protect the well-functioning gas transportation program that currently exists on the Columbia system.

Duke Energy Ohio Rate Stabilization Plan Remand from the Ohio Supreme Court
PUCO Case Nos. 03-93-EL-ATA, et al

1. Ohio Supreme Court Decision

   On Nov. 22, 2006 the Ohio Supreme Court unanimously affirmed in part and reversed in part the PUCO’s Order on Rehearing of Sept. 29, 2004, in Case No. 03-93-EL-ATA, et al. This case established Duke Energy – Ohio’s (f/k/a CG&E) (“Duke”) rate stabilization plan (“RSP”). The court remanded this matter to the Commission for further clarification of all modifications made in the first rehearing entry to the order approving the stipulation. On remand, the Commission was required to thoroughly explain its conclusion that the modifications on rehearing are reasonable and identify the evidence it considered to support its findings.

   The Court determined that the Commission could not rely merely on the terms of stipulation but must determine if there was sufficient evidence that stipulation was in fact the product of serious bargaining. Therefore, the Court concluded that the Commission had “abused its discretion” in barring discovery of side agreements and remanded the matter to the Commission with directions to compel disclosure.

2. PUCO Proceeding on Remand

   The remand proceeding had 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 Jan. 1, 2007. The OCC had requested that the RSP riders be abated while the matter was on remand. Instead, the Commission issued an entry on Dec. 20, 2006, that either froze the rider amounts, suspended the rider, or allowed the rider to expire.

   By entry dated Feb. 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.

3. PUCO Order on Remand

   On Oct. 24, 2007, the Commission issued an order on remand finding the stipulation should not have been approved, and affirming the RSP, as modified in the Commission’s initial entry on rehearing, which Duke has been operating under for the past couple of years. However, this time the Commission set forth the reasons for the modifications. The Commission also found that side agreements and documents discussing such side agreements shall be maintained on a confidential basis and kept under seal for 18 months from March 19, 2007.

   By order issued Nov. 20, 2007, the Commission approved a stipulation signed by Duke, the Commission staff, Ohio Energy Group, Ohio Hospital Association, City of Cincinnati, and People Working Cooperatively resolving the RSP rider-related issues. The Commission directed Duke to work with staff to determine a reasonable period over which the amounts of the various riders should be trued-up and collected.

AEP Application to Increase Rates
PUCO Case No. 07-1132-EL-UNC

On Feb. 9, 2004, Columbus Southern Power Company (“CSP”) and Ohio Power Company (“OP”) (collectively “AEP”) filed an application for approval of a post-Market Development Rate Stabilization Plan (“RSP”) (Case No. 04-169-EL-UNC). AEP proposed to substitute its plan for a post-market development period market-based standard service offer and to eliminate a competitive bidding process from 2006 through 2008. On Jan. 26, 2006, PUCO issued an order approving a RSP, which resulted in a 3 percent generation rate increase for CSP worth $77 million annually by 2008, and a 7 percent increase for Ohio Power worth $194 million annually. The Commission also authorized AEP to adjust their generation rates and related riders to their Standard Service Offer (“SSO”) schedules beyond the generation rate increases to account for changes in rules and regulations related to environmental requirement, security, taxes, and any new generation-related regulatory requirement.

On Oct. 24, 2007, AEP filed an application seeking authority to implement riders to recover additional generation-related revenues of $35,167,037 for CSP and $11,944,953 for OP beginning the first billing cycle of January 2008 through the final billing cycle of December 2008. Since many of the issues involved in this application have been resolved through Case No. 07-63-EL-UNC, AEP is requesting the Commission to promptly convene a prehearing conference to allow Staff and interested parties to discuss the matter and a procedural schedule.

Natural Gas Distribution Rate Cases and Alternate Regulation Plans

1. Duke Energy Ohio
   PUCO Case Nos. 07-589-GA-AIR, 07-590-GA-ALT, 07-591-GA-AAM

   Duke Energy Ohio filed an application in July 2007 seeking to increase its natural gas distribution rates by $34.1 million, or 5.7 percent overall. The increase would be effective in early- to mid-2008 and is the first general rate filing since 2001. Duke will seek to gradually establish rates for all customers that reflect the actual cost of providing service. The company has requested authority to continue annual rate updates for its accelerated main replacement program under a tracking mechanism approved by PUCO in 2002. This program is designed to replace cast iron and bare steel pipe in Ohio. The company has replaced approximately 560 miles, or about 47 percent, of the old mains in its system, and approximately 45,000 service lines. Duke is proposing a new metering system to save operating costs and facilitate the company's and customers' access to metering data. Duke has requested to make annual rate updates to recover the cost of the new equipment.

   Duke also seeks approval of an alternative rate plan for its gas distribution service, and approval to change its accounting methods. The PUCO Staff is in the initial stages of its investigation of the application. The PUCO has selected Blue Ridge Consulting Services to assist Staff in its investigation. OCC, Interstate Gas Supply, the Kroger Company, City of Cincinnati, Ohio Energy Group, Stand Energy Corporation, and the Ohio Partners for Affordable Energy have moved to intervene.

2. East Ohio Gas Company d/b/a Dominion East Ohio Rate Proceeding
   PUCO Case Nos. 07-829-GA-AIR, 07-830-GA-ALT, 07-831-GA-AAM

   On Aug. 30, 2007, East Ohio Gas Company d/b/a Dominion East Ohio (“DEO”) filed an application—for the first time since 1994—for authority to increase its gas distribution rates by approximately $73 million for its entire service area (including the area served by the West Ohio Gas Company). DEO expects the new rates to go into effect the second quarter of 2008. DEO also seeks approval of an alternative rate plan for its gas distribution service, and approval to change its accounting methods. Only Ohio Energy Group, Neighborhood Environmental Coalition, the Empowerment Center of Greater Cleveland, Cleveland Housing Network and the Consumers for Fair Utility Rates, Ohio Partners for Affordable Energy, Interstate Gas Supply has so far moved to intervene.

   By entry issued Sept. 12, 2007, the PUCO direct its Staff to issue a request for proposal for an independent auditor to assist the Staff in its review of the application for an increase in gas distribution rates, approval of alternative rate plan and for approval to change accounting methods.

3. Vectren Energy Delivery of Ohio, Inc.
   PUCO Case Nos. 07-1080-GA-AIR, 07-1081-GA-ALT

   On Sept. 28, 2007, Vectren Energy Delivery of Ohio, Inc. (“VEDO”) filed an application for authority to increase its gas distribution rates by approximately $29 million. VEDO also seeks approval of an alternative rate plan, which would include:

   • Distribution Replacement Rider (“DRR”) that would allow VEDO to recover (1) a return on incremental annual costs incurred under a 20-year program for the accelerated replacement of cast iron mains, and (2) individual riser replacements. The DRR would be allocated to customer classes based on distribution mains/service lines as determined by VEDO’s cost of service study. VEDO estimated the average annual amount of the DRR increase as follows: 1.4 percent for large general sales service; 1.9% for dual fuel sales service; and 1.6 percent for large volume transportation service.

   • Sales Reconciliation Rider (“SRR-B”) for the recovery of deferred amounts of the difference between the actual and approved base rate revenues.

   • System Integrity and Reliability Programs which would include:

     • Gas Distribution System Maintenance Program

     • Rights-of-Way Clearance Program

     • Aging Workforce Program

   A technical conference was held on Nov. 13, 2007 to allow interested parties to discuss VEDO’s proposed alternate rate plan.

Environmental Update

Ohio EPA 2006 Enforcement Report

In August 2007, Ohio EPA released its annual Enforcement Report summarizing the enforcement activities of Ohio EPA and the Ohio Attorney General’s office and comparing those results against the “goals” set for 2006. Some of the highlights of the Report include:

• Ohio EPA issued 195 administrative enforcement orders in 2006, surpassing its goal of 153 orders.

• The Agency assessed $3,523,386 in administrative penalties, an increase of 21 percent from 2005.

• Civil penalties awarded in court judgments or secured in consent decrees by the Attorney General’s Office in 2006 totaled $2,652,940, plus the recovery of $4,472,811 in other response costs.

• The Division of Surface Water issued 50 orders, the highest of all divisions. These efforts resulted in administrative penalties of $616,907.

• The Division of Air Pollution Control secured $1,248,917 in administrative penalties, the highest penalty amount of all divisions, and issued 41 orders.

• The Division of Hazardous Waste Management issued 43 orders, an increase of 72 percent over 2005.

• The Division of Solid and Infectious Waste Management issued 32 orders, exceeding its goal of 20.

USEPA National Priorities for Enforcement and Compliance Assurance

On Oct. 12, 2007, USEPA announced its enforcement priorities for fiscal years 2008, 2009, and 2010. Some of these priorities are summarized as follows:

1. Clean Air Act: Air Toxics

   Reducing public exposure to toxic air emissions by ensuring compliance through directed monitoring and enforcement of the Maximum Achievable Control Technology (MACT) standards.

2. Clean Air Act/Prevention of Significant Deterioration and New Source Review

   Ensuring that New Source Review (NSR) and Prevention Of Significant Deterioration (PSD) requirements of the Clean Air Act (CAA) are implemented. Failure to comply with NSR/PSD requirements may lead to the inadequate control of emissions resulting in the release of thousands of tons of pollution to the air each year, particularly of nitrogen oxides, volatile organic compounds, and particulate matter.

3. Clean Water Act: Wet Weather

   Ensuring compliance with Clean Water Act requirements by addressing four (listed below) environmental challenges that are exacerbated by wet weather. Wet weather discharges contain bacteria, pathogens and other pollutants that can cause illnesses in humans, lead to water quality impairment, including beach and shellfish bed closures and harm our nation's water resources.

   1. Concentrated Animal Feeding Operations: The major environmental problem associated with CAFOs is the large volume of animal waste generated in concentrated areas.

   2. Combined Sewer Overflows: Combined sewer systems are designed to collect rainwater runoff, domestic sewage and industrial wastewater in the same pipe. During periods of rainfall or snow melt, the wastewater volume in a combined sewer system can exceed the capacity of the system or treatment plant.

   3. Sanitary Sewer Overflows: The main pollutants in raw sewage from SSOs are bacteria, pathogens, nutrients, untreated industrial wastes, toxic pollutants, such as oil and pesticides, and wastewater solids and debris.

   4. Storm Water: Storm water runoff from urban areas can include a variety of pollutants, such as sediment, bacteria, organic nutrients, hydrocarbons, metals, oil and grease.

4. Reducing Conservation and Recovery Act: Mineral Processing

   Reducing risk to health and the environment by achieving increased compliance rates throughout the mineral processing and mining sectors and by ensuring that harm is being appropriately addressed through compliance assistance and enforcement.

Air Permitting Issues

Rule-Based Approach for Determining BAT: Effective Aug. 3, 2009, Ohio EPA will shift from a case-by-case determination of BAT to a rule-based approach for all NAAQS pollutants. On Aug. 3, 2006, SB 256 was passed amending ORC 3704.03(T), which governs regulation of BAT. Ohio EPA notified interested parties on Oct. 17, 2007, and is forming a stakeholder group to participate in forming BAT rules for priority air pollution source categories. Ohio EPA has proposed to complete research and development for top BAT categories by September 2008, develop rule language for top BAT categories by November 2008, provide interested parties with proposed language by December 2008, and complete BAT rules by August 2009. Information regarding how to participate in this rulemaking process was distributed to the OMA Environment Committee members on Oct. 26, 2007.

2007 Title V Emissions Fee: The Title V Emissions Fee for calendar year 2007 is $41.96/ton.

Permit-to-Install and Operate (PTIO) Program (OAC 3745-31 and -35): On July 3, 2007, Ohio EPA released revised 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. OMA and other business trade groups submitted comments on the proposed rules on Aug. 10, 2007, Aug. 24, 2007, and Nov. 14, 2007.

Air Regulations

Proposed Emission Reports 2008 Filing Extensions: Proposed Amendments have been submitted to the Joint Committee on Agency Rule Review (JCARR) for OAC 3745-24-03 “Deadlines for the Submission of Emission Reports” and OAC 3745-78-02 “Fee Emissions Reports” to minimize hardship related to implementation of the new electronic reporting system currently being developed by the Division of Air Pollution Control (DAPC). The proposed rule would change the current emission reporting due date for 2008 from April 15 to June 6, but would only apply to the year 2008. Submissions must occur through the new electronic system by midnight of June 6th. Public comments are due by Jan. 7, 2008, and a public hearing will be held at Ohio EPA offices on Jan. 7, 2008.

Toxic Chemical Release Reporting: Amendments to existing rules in OAC chapter 3745-100 have been proposed as a result of two new Toxic Release Inventory (TRI) rules finalized by USEPA in 2006. The proposed amendments will change reporting requirements for TRI facilities to include using North American Industry Classification (NAICS) Codes instead of Standard Industrial (SIC) Codes and using Form A certification statement in lieu of more detailed Form R. Public comments are being accepted through Dec. 10, 2007.

Clean Air Interstate Rules (CAIR) (OAC Chap. 3745-109): Effective September 21, 2007, Ohio’s CAIR rule establishes a cap-and-trade program for annual and seasonal emissions of nitrogen oxides and a discounting method for sulfur dioxide from EGUs and non-EGUs to achieve emissions reductions. This rule is intended to assist Ohio in complying with USEPA’s federal CAIR rule.

Emission Reduction Credit Bank (OAC Chap. 3745-111): On Sept. 13, 2007, OEPA issued draft language for chapter 3745-111 governing the “ERC Trade and Banking Program”. The purpose of the program is to create an official method for Ohio companies to register creditable ERC’s into an Ohio EPA “ERC Bank” for future internal use or to trade for the purpose of offsets. OMA and other trade groups submitted comments that were considered in the draft language. The public comment period ended Nov. 15, 2007.

Miscellaneous: The following draft rules have been covered in previous OMA Counsel Reports and will not be set forth again in detail, but updated information is supplied below:

1. Control of Emissions of Organic Materials from Stationary Sources (OAC 3745-21-07): Re-filed with JCARR on Nov. 20, 2007 after addressing comments made during the public comment period.

2. Nitrogen Oxides - Reasonable Available Control Technology (NOx RACT) Rules (OAC 3745-110): On Oct. 23, 2007 these rules were re-filed after most recent public comment and hearing period ending on June 8, 2007.

3. Particulate Matter Standards (OAC 3745-17): Proposed amended rules submitted to JCARR after public comment period ended and hearing occurred on Oct. 19, 2007.

4. Architectural and Industrial Maintenance (AIM) Coatings (OAC Chap. 3745-113): Effective Sept. 21, 2007, the Director adopted AIM Coating Standards to specifically assist with NAAQS attainment in the eight-county Cleveland/Akron area by regulating the use of AIM coatings, which are a source of VOCs.

5. “Consumer Products” Rule (OAC Chap. 3745-112): Effective Sept. 15, 2007, the Director adopted Consumer Products Rules to assist with NAAQS attainment by setting specific standards for the amount of VOCs used in consumer products sold in the State of Ohio.

Water Regulations

Permit to Install (OAC 3745-42-02): On Nov. 14, 2007, Ohio EPA filed proposed revisions addressing the applicability of permits to install and procedures. The proposed changes primarily relate to the enactment of ORC 6111.451, which exempts certain pre-construction and site preparation activities from needing a permit to install. Public comments are due by Dec. 18, 2007.

Water Quality Standards (OAC 3745-1): On Nov. 7, 2007, Ohio EPA issued proposed revisions to designation rules for beneficial use designations for specific bodies of water throughout the State. Public comments are due by Dec. 14, 2007.

Storm Water Rule (OAC 3745-39-04): On Oct. 22, 2007, Ohio EPA adopted this section governing NPDES requirements for industries and large and medium municipal separate storm sewer systems (MS4s). Under this section, discharges from industries and large and medium MS4s require a NPDES permit.

Taxation

Administrative Actions

ST 2007-05 – Sales and Use Tax: Origin Sourcing of Delivery Sales (October 2007)

The Tax Commissioner notified vendors in Ohio that the anticipated requirement to change to destination sourcing for delivery sales as of Jan. 1, 2008, will not go into effect. As a result, all vendors currently permitted to source delivery sales may continue to do so. Vendors must continue to use destination sourcing if they 1) have previously elected destination sourcing or 2) were forced to switch to destination sourcing because their 2005 delivery sales exceeded $30 million dollars. Any vendor wishing to elect destination sourcing should do so at the beginning of its tax return period. A vendor’s election of destination sourcing is irrevocable.

The ODT is currently seeking public comment on proposed rules 5703-7-18 (W-2) and 5703-7-19 (IT 942). The ODT will not implement the final rules prior to January 2009. The new rules would apply only to employers that are required by statute to remit employee withholdings through electronic funds transfer. The new rules would require affected employers to electronically file the reports and returns described in R.C. 5747.07(E)-(F). These reports and returns include the employee’s name, address, Social Security number, compensation, amount of tax, and quarterly and annual returns showing actual and required amounts of withholding during the relevant period. Employers would electronically file the reports and returns through the “Ohio Business Gateway”.

Judicial Actions

1. Ohio Supreme Court

   Newman v. Levin, No. 2007-1054, 2007-Ohio-5507. The Supreme Court held that the Tax Commissioner did not have standing to appeal the decision of the BTA in so far as it upheld the final determination of the Tax Commissioner. The County Auditor appealed the Tax Commissioner’s grant of thermal efficiency improvement certificates (resulting in a tax reduction) to taxpayers. During the appeal, the Tax Commissioner changed his mind about the certificates upon learning new information about the facilities and urged the certificates be denied. The BTA denied the grant, in part, and affirmed, in part. All parties appealed to the Supreme Court of Ohio. R.C. 5717.04 authorizes aggrieved persons to appeal a BTA decision to the Supreme Court. The Court held that the Tax Commissioner had no standing to appeal affirmation of the grants because insofar as the grants were affirmed, the decision did not aggrieve the Tax Commissioner.

   A. Schulman, Inc. v. Levin, No. 2006-1944, 2007-Ohio-5585. The Supreme Court reversed the BTA decision that held “barrel and screw devices” (i.e., extruders) were exempt from property tax under R.C. 5701.03(A). The BTA concluded that the extruders fell within the definition of “die” and were exempt from property tax. The Court cited cases where it “confined the definition of “die” to “those parts” of a machine that have “specially designed surfaces” for “imprinting or impressing special designs … upon material placed in such a machine.” The Court concluded that “barrel and screw devices” are akin to the machine, “but they are not themselves “parts” of that machine that are entitled to the tax exemption that Ohio accords to “dies”.

2. Ohio Court of Appeals

   Mosser Construction v. City of Toledo, Lucas App. No. L-07-1060, 2007-Ohio-4910. The Lucas County Court of Appeals affirmed the trial court’s grant of summary judgment to taxpayer that the commercial activity tax (“CAT”) was in reality a sales tax. Prior to enactment of the CAT, taxpayer and appellant, the City contracted to have taxpayer construct a water treatment plant. The contract’s provisions allowed the taxpayer to shift the costs of “sales, consumer, use, and other similar taxes related to the Work, and for which contractor is liable” to the City. The contract did not allow “other overhead and general expense costs” to be shifted from the taxpayer to the City. The City argued that the costs of the CAT could not be shifted because it is not a transactional tax (i.e., not similar to sales, consumer or use taxes). The city also argued that the CAT is akin to overhead costs because it taxes the privilege of doing business in the State of Ohio. The Court held that the CAT owed “is tied to the amount of a business’s gross receipts” and is “similar to a sale or consumer tax” and not an overhead tax.

3. Common Pleas Court

   Ohio Grocers Association v. Wilkins, No. 06CVH02-2278 (Franklin Cty. Comm. Pleas, August 17, 2007). Judge Bessey issued a decision that upheld the validity of the CAT against a challenge that it violated the Ohio Constitution’s proscription of an excise tax on the sale of food. The Ohio Constitution prohibits imposing a tax directly on the sale of food, packaging for food, and various food ingredients. The plaintiffs complained the CAT was a direct tax on the sale of such items; alternatively, they argued that the tax was, in effect, a sales tax that violated the constitution. The Court recognized the tax was imposed upon the privilege of doing business in Ohio; as such, it was a franchise tax on that activity, and was not imposed on the activity of selling food. It noted the tax was not a sales tax because the legal incidence of the tax was on the seller, not on the consumer, and was imposed upon activity over a period of time, and not on individual transactions.

   Mosser and Ohio Grocer decisions compared. Not surprisingly, the decisions in Mosser and Ohio Grocers reach directly opposite results. The decision in Ohio Grocers contains the more thorough reasoning. However, the disparate results simply bear evidence to the controversial nature of the CAT. The decisions have implications not only in the context of the Ohio constitution or construction contracts, but the ultimate decision on the issue will have to be resolved in order to answer questions whether the “bright line presence” test, a test of economic nexus, can withstand scrutiny under the federal Commerce Clause.

   The Ohio Grocers decision is expected to be appealed. Any appeal of the Mosser decision to the Supreme Court is a matter of discretion. In the meantime, agreements and documents with tax provisions should be reviewed carefully to see how the CAT may be treated. Where terms are still flexible, parties should consider whether changes or specific reference to the CAT are necessary.

4. Ohio Board of Tax Appeals

   In Armbruster v. Wilkins (Ohio BTA, Sept. 14, 2007), No. 2006-T-29, the BTA affirmed the Tax Commissioner’s final determination that the taxpayer “was a person liable for” the unpaid motor fuel tax of Armbruster Energy Enterprises LLC (“Armbruster Energy”). R.C. Chapter 5735 imposes taxes on motor fuel dealers’ receipt of fuel within the state. R.C. 5735.35 contains derivative liability provisions that make “persons who have a specific connection with the preparation and filing of reports and remittance of the tax” liable for their business entity’s unpaid motor fuel tax. The BTA found that the taxpayer was among the class of persons contemplated by R.C. 5735.35 because 1) he was one of only two members of Armbruster Energy; 2) he held himself out as the president, CEO and managing partner of Armbruster Energy during the relevant period; and 3) he signed the monthly motor fuel tax reports.

   In Weissman v. Wilkins (Ohio BTA, Nov. 2, 2007), No. 2006-H-262, the BTA affirmed the Tax Commissioner’s denial of taxpayer’s request for remission of penalty and interest assessed as a result of unpaid sales tax over a four year period. The taxpayer argued that neither he nor his financial advisor knew he owed sales tax and that the state auditors could not initially determine whether sales tax was owed. The Tax Commissioner refused to cancel the penalty because the taxpayer had no vendor’s license during the period in question and the violations occurred over a considerable period of time. The BTA rejected the contention that the Tax Commissioner abused his discretion because the record did not indicate that his decision was “unreasonable, arbitrary, or unconscionable.”

   In KCO Enterprises, Inc. v. Wilkins (Ohio BTA, Nov. 9, 2007), No. 2006-B-466. the BTA affirmed the Tax Commissioner’s final determination that affirmed an estimated franchise tax assessment totaling $2,955.09, including interest and penalty. The taxpayer never filed a franchise tax report for 2003; although it was inactive for the year, it was qualified to do business. The taxpayer argued that it should not be required to file a franchise tax report for the 2003 tax year because it had no assets and was inactive for that year. Further, the taxpayer argued that the franchise tax assessment of $2955.09 was “heavy handed and oppressive taxation” given that the minimum tax of $50 would have been due. The BTA disagreed. The statutory transcript indicated that the Ohio Department of Taxation contacted the taxpayer several times offering to reduce the assessment to less than $120 if the taxpayer would file the franchise tax report in a timely manner. The taxpayer never filed the franchise tax report.

   In HealthSouth Corporation v. Wilkins (Ohio BTA, Nov. 9, 2007), No. 2005-A-1386, the BTA reversed the Tax Commissioner’s denial of the taxpayer’s refund request and granted the refund. The taxpayer’s 2002 return included assets that the taxpayer later realized it did not own during the 2002 tax year. The taxpayer requested a refund of the 2002 personal property tax related to the non-existent assets. The Ohio Department of Taxation denied the refund request because it determined that insofar as the taxpayer did not prove that the non-existent assets had “in fact been written off the books” there was a “sufficient lack of evidence to establish that (the non-existent assets) have fully been removed.” The BTA held that the taxpayer’s “bag and tag inventory count” of its personal property sufficiently proved which assets were and/or were not owned during the 2002 tax year. The Ohio Department of Taxation denied a refund solely because it did not receive the evidence in its preferred form. The BTA determined that taxpayer provided sufficient evidence of all assets owned during the relevant period.

   In (Ohio BTA, Nov. 9, 2007), No. 2003-T-2111, the BTA affirmed the Tax Commissioner’s assessment of the taxpayer’s personal property. The taxpayer argued that due to “special and unusual circumstances” the statutory valuation method used by the Tax Commissioner should be abandoned for a method that accounts for functional and economic obsolescence through an accelerated rate of depreciation. In order to obtain relief, a taxpayer must demonstrate the existence of special and unusual circumstances, or that the results of the Tax Commissioner’s prescribed valuation method were unjust or unreasonable. Here, the taxpayer’s evidence was based on assumption and supposition, lacked historical data, and was insufficiently probative.

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   Workers' Compensation Update

   Administrative Actions

   On Nov. 21, 2007, the Board of Directors of the Bureau of Workers' Compensation voted unanimously to reduce the premium discount provided to employers participating in group rating programs. The reduction will take effect on July 1, 2008. The current maximum 90 percent discount rate was reduced to 85 percent after much discussion on the size of the reduction and what additional steps the Bureau should take to address related issues.

   It was estimated that the discount will provide a 2.5 percent reduction in average base rates for all employers, and will reduce what non-group rating employers pay to support group rating employers from approximately $200,000,000 to $150,000,000, according to the Bureau. Certainly, other issues remain but the Bureau looks at this as a step in the right direction.

   Judicial Actions

   State ex rel. Gross v. Indus. Com. of Ohio (2007), Ohio-4916

   On Sept.19, 2007, the Ohio Supreme Court issued its decision on motion for reconsideration in the case. The Court abandoned its decision issued in the previous Gross case and found Mr. Gross' motion for reconsideration to be well taken.

   The Court at some great length discussed the voluntary abandonment rule set forth in a number of previous cases, including State ex rel. Louisiana-Pacific Corp. v. Industrial Commission (1995), 72 Ohio St. 3d 401. The Court in its previous Gross decision agreed with the Industrial Commission which deemed Mr. Gross' discharge to be voluntary and terminated his temporary total disability benefits.

   In its reconsideration, the Court stated that the decision in the first Gross case was not intended to expand the voluntary abandonment doctrine. "Until the present case, the doctrine had been applied only in post-injury circumstances in which the claimant by his or her own volition severed the causal connection between the injury and loss of earnings that justified his or her temporary total disability benefits."

   The Court ultimately concluded that if an employee's departure from the workplace is causally related to his injury and is not voluntary, it should not preclude the employee's ability to receive temporary total disability benefits. The Court said that although the employer appeared to be justified in firing Mr. Gross for violation of workplace rules, the letter that terminated him established that his discharge was related to his industrial injury. Mr. Gross’ violation of the same rules on prior occasions was excused because the Court found that his violation of the rules had not given rise to disciplinary action.

   The reading of this case gives rise to the presumption that each and every voluntary abandonment case must rely on its own facts. That the injury gave rise to the termination as set forth by the Court does not appear to affect the voluntary abandonment doctrine, when work rules are violated and when the violation does not give rise to the injury.