Energy Update

Duke Energy – Ohio RSP Remand
Case No. 03-93-EL-ATA, et. al.

In late 2006, the Ohio Supreme Court unanimously affirmed in part and reversed in part the PUCO’s Order on Rehearing of September 29, 2004, in Case No. 03-93-EL-ATA, et al. This case established Duke Energy Ohio’s (f/k/a CG&E) (“DE-Ohio”) rate stabilization plan (“RSP”). The court remanded the case back to the Commission for the limited purpose of addressing the errors found by the Court. The appeal was filed by the Ohio Consumers’ Counsel (“OCC”). In its appeal, the OCC had raised seven arguments against the RSP as adopted by the Commission, of which the Court upheld two.

In the 7-0 decision authored by Justice Pfeifer, the Court affirmed OCC’s objections that (1) the Commission erred in allowing DE-Ohio to incorporate supplemental charges into a previously approved rate plan without making on-the-record findings of fact or citing evidence that supported its decision, and (2) the Commission abused its discretion when it denied motions by the OCC to compel discovery of undisclosed side agreements between DE-Ohio and non-residential customer groups that were entered into before those parties agreed to the stipulated terms of the RSP. On remand, the commission is required to thoroughly explain its conclusion that the modifications on rehearing are reasonable and identify the evidence it considered to support its findings.

With respect to the second point concerning the undisclosed side agreements between DE-Ohio and others, the Court said “[t]he commission found that ‘serious bargaining did occur, among capable, knowledgeable parties and that ‘[m]ultiple bargaining sessions, open to all parties, took place before the commencement of the hearings.’” 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. 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.

Remand of Cincinnati Gas & Electric Company’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 had 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].

An Entry was issued the first of February 2007 finding that the hearing should be held in two phases. The first phase was scheduled for March 19, 2007 to consider the Ohio Supreme Court’s remand of the RSP proceedings. The second phase will be scheduled at a later time, and will address all issues related to the various riders.

Appointment of New PUCO Commissioner

The PUCO has five commissioners, each appointed to a five-year term. The terms begin and end in April of each year. Commissioner July Jones’ term expires on April 10, 2007 and she has indicated that she will not seek reappointment. The Commission may not have more than a majority of one political party. Currently, including Commissioner Jones, there are three Republicans (Commissioners Don Mason and Valerie Lemmie) and two Independents (Chairman Alan Schriber and Commissioner Ronda Fergus). Appointments require Senate confirmation.

On February 23, 2007 Governor Ted Strickland announced the appointment of Paul Centolella to fill the vacancy. Paul Centolella, of Worthington, Ohio, is a senior economist with Science Applications International Corporation, and was formerly an attorney with the Ohio Consumers’ Counsel. Mr. Centolella is expected to begin his term in April.

Governor Creates Energy Advisor Post

Governor Strickland signed an executive order, which established the post of “energy advisor to the governor,” and appointed Mark Shanahan, executive director of the Ohio Air Quality Development Authority, to the new advisory position. The energy advisor will work directly with agencies to secure maximum efficiency, coordination and consistency across state government, and will keep energy a state priority while creating a better environment and boosting economic development in energy and manufacturing sectors. Under the executive order, the energy advisor will coordinate energy policy and work with liaisons to be designated by each state agency.

Environmental Update

New Ohio EPA Director and Director Staff

Governor Strickland appointed Christopher Korleski as the Director of Ohio EPA, effective February 1, 2007. Director Korleski is an attorney, most recently as in-house environmental counsel to OMA member Honda of America Mfg., Inc. Prior to joining Honda, Director Korleski was an attorney in the Ohio Attorney General’s Office’s Environmental Enforcement Section, where he specialized in air pollution control cases. Director Korleski participated in Ohio EPA’s Permit Processing Efficiency Committee (PPEC) in the early 2000’s, which was a joint initiative between Ohio EPA and business trade groups (including OMA) to evaluate and suggest changes to Ohio EPA’s permitting process to increase efficiency. Director Korleski is quite familiar with the environmental regulatory challenges facing industry and has been an advocate for permit processing efficiency. Director Korleski’s appointment is applauded by OMA and we look forward to working with Director Korleski in meeting the upcoming challenges.

Ohio EPA also recently announced that Laura Powell will continue in her role as Ohio EPA Assistant Director. Ms. Powell joined Ohio EPA in 1991 as a legislative liaison and became chief of Ohio EPA’s Office of Legislative Affairs in 1999. The OMA has a strong working relationship with Ms. Powell and looks forward to continuing that relationship.

Drew Bergman has been named Ohio EPA Deputy Director of Legal Affairs. Mr. Bergman was formerly an environmental attorney at Porter Wright Morris and Arthur and previously served as an assistant attorney general in the Environmental Enforcement Section. Mr. Bergman is also very familiar with the environmental regulatory challenges facing industry and participated in OMA programs and initiatives (e.g., PPEC). OMA looks forward to continuing its strong working relationship with Mr. Bergman.

Regulatory Reform Initiative

On February 27, 2007, Governor Strickland unveiled Advantage Ohio, a regulatory reform initiative to address unnecessary regulatory burdens faced by Ohio businesses. Governor Strickland named Columbus lawyer Scott North to head up this initiative, which will evaluate the practices and regulations imposed on doing business in Ohio and target those which are unnecessary, redundant or contradictory.

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 are considering the possibility of intervening in the appeal to protect the rule as adopted. Regardless of whether intervention is attempted or granted by ERAC, OMA will continue to monitor this appeal, which could have a significant impact on industry.

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. Public comments are being accepted until April 13, 2007. OMA will be submitting comments on the draft rules.

3. Acid Rain Operating Permits
   (OAC Chapter 3745-103)

   Primarily “housekeeping” changes generated as part of the five-year rule review. Public hearing was held on November 13, 2006, and public comments were due November 13, 2006. Ohio EPA received no public comments, and the rules were issued on December 29, 2006, effective January 12, 2007.

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

   Covers 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. Public comments were due by December 11, 2006. Ohio EPA has not yet acted on this draft rule package.

5. Stack Height Design
   (OAC 3745-16-01 and 3745-16-02)

   Rules address good engineering practice for stack height design. Public hearing was held on November 8, 2006. Ohio EPA received no public comments on the rule, which was adopted and became effective January 2, 2007.

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

   On December 28, 2006, Ohio EPA proposed new rules aimed at reducing VOC’s from consumer products (e.g., adhesive, air fresheners, aerosols, carpet cleaners, etc.). 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. Public comments were due on January 29, 2007.

7. 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 and written public comments were due by January 27, 2007. Ohio EPA has not yet acted upon these rules.

8. Nuisance “Odor” Rule and Malfunction Rule
   (OAC 3745-15)

   As part of the 5-year rule review requirement, Ohio EPA proposed various revisions to the “General Provisions on Air Pollution Control” rules. This rule package included a revision to the rule requiring the reporting of malfunctions and a clarification that public nuisance conditions consisting of odors caused solely by the emissions of odorous substances are not subject to Ohio EPA’s rules and jurisdiction. These rules were TBR’ed (pulled from the JCARR process for reconsideration and refiling at a later date) on January 9, 2007 shortly after Governor Strickland took office. Ohio EPA extended the public comment period to February 8, 2007. OMA along with other business trade groups submitted comments on the proposed revisions to the malfunction reporting rule on February 8, 2007. Ohio EPA has not yet acted upon these rules.

Ohio EPA Water and Solid Waste Rules

1. Ohio EPA Proposed Industrial Waste Rules
   (OAC Chapter 3745-525)

   On August 1, 2006, Ohio EPA unveiled a new strategy for the regulation of industrial waste, including new proposed rules for the siting and design of disposal facilities for such waste. A comprehensive summary of the proposed rules was included in previous OMA Counsel Reports. On November 1, 2006, OMA submitted comments opposing portions of the draft rule package. Ohio EPA has yet to act on the proposed rule package.

2. Proposed Beneficial Use Rules
   (OAC 3745-525-801 through -811)

   On November 8, 2006, Ohio EPA released its draft Beneficial Use Rules package. OMA submitted comments on the proposed rule package on February 6, 2007. OMA supports the general concept behind the rules, but some of the particular provisions either did not comport with real-world conditions or did not provide adequate options for the beneficial use of these industrial by-products. Ohio EPA has yet to act on this draft rule package.

3. Wastewater Discharge Permits
   (OAC 3745-33-07)

   This rule clarifies requirements for obtaining variances to wastewater discharge permits and revises mercury variance procedures. A public hearing was held on November 16, 2006, and the rule was adopted on December 22, 2006, effective on April 1, 2007.

4. Water Quality Trading Program
   (OAC Chapter 3745-5)

   Rules provide requirements of a voluntary water quality-trading program in Ohio. Program would allow a NPDES permit holder to meet its regulatory obligations by using pollutant reductions generated by another wastewater point source or nonpoint source. These rules were adopted on December 22, 2006 and became effective on January 1, 2007.

5. Draft General Isolated Wetland Permit Renewal
   (ORC 6111.021)

   On January 16, 2007, Ohio EPA issued a public notice of a draft renewal of the general permit that regulates the filling of isolated wetlands of the state.

   The draft general permit covers the filling of Category 1 and Category 2 isolated wetlands where the combined impacts for a proposed project are 0.5 acres or less. A public hearing on the draft permit will be held on March 1, 2007, and Ohio EPA will accept public comments on the draft permit until March 8, 2007.

1. Mercury Product Ban (H.B. 443)

   New legislation bans certain mercury-containing devices. Starting April 6, 2007, Ohio’s schools will not be permitted to buy mercury or mercury-added measuring devices for the classroom. On October 6, 2007, the sale and distribution of mercury-containing thermometers and novelty items will be prohibited in Ohio. Finally, on April 6, 2008, a ban on the sale and reinstallation of mercury-containing thermostats will go into effect. Exceptions include thermostats used in a manufacturing process to sense and control temperature.

2. Great Lakes Water Compact (SB 78-Sen. Grendell)

   SB 78 was introduced in the Senate to create a task force to study the need for the Great Lakes Water Compact and recommend whether or not Ohio should adopt the compact’s model language. The bill is currently in the Senate Energy and Environment Committee.

3. Global Warming Bill (not yet introduced)

   The Democratic House caucus has announced that it will introduce legislation to limit emissions of greenhouse gases. OMA will closely monitor this legislation, if introduced.

Tax Update

Administrative Actions

Information Release CAT 2007-01 “Rule Estimation and Statutory Estimation Procedures Compared ” (Issued Jan. 2007) explains and compares the method for estimating taxable gross receipts set forth in law with the method prescribed by administrative rule. The statutory method has a narrow safe harbor range to avoid penalties, but requires only a single true-up at the end of the year. The rule method provides for a true-up each quarter but has broader safe-harbor levels. A copy of the release is appended to this report.

Three new rules relating to the CAT that were the subject of prior information releases have been finalized:

• O.A.C. 5703-29-19 – “Changes in Ownership” effective January 2007

• O.A.C. 5703-29-18 – “Record Retention” effective January 2007

• O.A.C. 5703-29-20 – “Situsing Receipts From Periodic Payments for Mobile Property” effective January 2007.

Ohio Supreme Court

In Strongsville Bd. of Educ. v. Cuyahoga Cty. Bd. of Rev., 112 Ohio St. 3d 309, 2007-Ohio-6, the Supreme Court ruled that the price paid for an office building in a sale and lease-back transaction was not evidence of the value of the building. The taxpayer provided enough information to support a finding the transaction was the subject of duress and, so, was not an arm’s-length transaction. Those factors included an impending balloon payment for which the owner had insufficient cash and a pressing time frame to prevent the interruption of the owner’s business.

Ohio Board of Tax Appeals

In Safeway Tire Company, Inc. v. Wilkins, BTA No. 2006-B-284 (Jan. 5, 2007), the BTA ruled that an application for final assessment (refund) of personal property taxes that was mailed before the state the statute of limitations expired, but received after that date, was not timely. This decision reaffirms the general rule that documents and payments must actually be received by the appropriate authority within the prescribed period; mailing, except by certified mail, generally is not sufficient.

In Smink Electric, Inc. v Wilkins, BTA No. 2005-B-1277 (Jan. 19, 2007), the BTA ruled that it was an abuse of discretion for the tax commissioner to fail to remit the entire penalty imposed on a use tax assessment. The BTA cited the taxpayer’s “exceptional good faith” and noted the “unusual nature” of the case. In addition, the assessment was issued during a time in which a general taxpayer amnesty was in effect. However, there is no discussion as to what caused the BTA to rule as it did.

In Polaris Amphitheater Concerts, Inc. v. Delaware Cty. Bd. of Rev., BTA No. 2004-V-1294 (Jan. 26, 2007), the BTA ruled that an outdoor amphitheatre, including the related support buildings, were real property for tax purposes. It rejected the taxpayer’s argument that all the structures were business fixtures because they were constructed and used solely for the benefit of the specific business (i.e., outdoor concerts and entertainment) conducted on the property. It appears the BTA may have been influenced by the aggressive position taken by the taxpayer and the lack of detail regarding the improvements and their use.

In Ameritech Publishing, Inc. v. Wilkins, BTA No. 2005-M-238 (March 2, 2007), the BTA ruled that use tax was properly assessed on the distribution of telephone directories that were produced outside Ohio and transported into Ohio and distributed free of charge by a third party. The BTA also ruled the tax was properly based upon the cost of the paper and printing services that were incurred outside Ohio; these costs merely represented the basis on which the tax was computed and were not, themselves, the object of the tax.

Please note several items recently from Gongwer’s News Service regarding the administration’s emphasis on reviewing tax exemptions and credits. In addition, the administration has stated its intention to fight additional exemptions or exclusions from the CAT.

Workers' Compensation Update

Administrative Actions

Governor Strickland has yet to name a successor to Ohio Bureau of Workers’ Compensation Administrator William Mabe. Tina Kielmeyer is once again acting as Administrator until such time as a permanent replacement is named. It would appear that the Governor is seeking to constitute a committee to present names of potential administrators to him before appointing such an administrator. As has been reported by Mr. Augsburger, the Governor seeks to eliminate the Oversight Commission as it is currently constituted and replace it with a fifteen-member board of directors. The Governor also seeks the creation of the position of Deputy Inspector General for the Bureau of Workers’ Compensation and Industrial Commission. The Deputy Inspector General would serve as the internal investigator and would be appointed by and answer to the Ohio Inspector General.

As reported at the last meeting of the Committee, administrative rules were filed by the Bureau of Workers’ Compensation for implementation of Senate Bill 7 regarding the payment of attorneys fees in situations where the claimant is subject to child support orders and for the payment of medical services where the injury occurred before June 30, 2006. To date, no rules have been promulgated for implementation of other provisions contained in Senate Bill 7 including Ohio Revised Code Section 4123.54, which discusses preexisting conditions that are aggravated by a compensable injury.

Judicial Actions

Cleveland Bar Association v. CompManagement, Inc. (2006), 111 Ohio St.3d 444, 2006-Ohio-6108. Approximately one week after this Committee’s last meeting, the Ohio Supreme Court handed down its decision in the above-captioned cause in which the Ohio Manufacturers Association filed an amicus brief in support of CompManagement’s position. Important in that decision was the syllabus, paragraph 2, which stated that a third-party administrator may make actuarial determinations regarding settlement, act as a messenger for the employer in regard to settlement, and file settlement applications without conducting the unauthorized practice of law, as these activities do not require the specialized training and skill of an attorney and are permitted by Resolution No. R0-1-01. This is precisely the position that the Ohio Manufacturers Association took in supporting the position of CompManagement.

State ex rel. Moorehead v. Industrial Commission (2006), 112 Ohio St.3d 27, 2006-Ohio-6364. This case is one where Mr. Morehead fell approximately 15-20 feet, head first, onto the concrete floor while working on a raised platform at his job site. He suffered severe spinal cord and other injuries, never regained consciousness, and died ninety minutes after the fall. His widow applied for death benefits and for scheduled loss compensation based on his loss of use of both arms and legs. The application for scheduled loss compensation was denied administratively and the widow sought a writ of mandamus in the Court of Appeals for Franklin County. The Franklin County Court of Appeals denied her petition which was appealed to the Supreme Court. The Court of Appeals had stated that loss of use does not occur when an injured worker “survives an industrial injury in an unconscious state for only a brief period and never actually experiences the disabling effects of the injury.” The Supreme Court disagreed and stated that the Industrial Commission’s interpretation was not accurate. Chief Justice Moyer, writing for the Court, stated that the statute “provides that compensation is payable to an employee when the employee loses a body part that is listed on a schedule set forth in the statute,” and that the statute makes no reference to a workers’ duration of survival after an injury or cognizance of his injuries. Obviously, this is not a good decision for Ohio employers although its application is rarely found.

Groch v. General Motors Corp., Ohio Supreme Court Case No. 2006-1914. In late December the Ohio Supreme Court agreed to answer nine questions challenging the constitutionality of Senate Bill 80 and Ohio’s workers’ compensation subrogation statute based upon a certification from the Northern District of Ohio, Western Division, in the referenced case. Eight of the questions relate to the workers’ compensation subrogation statute and the statute of repose for products. The final question certified relates to the entirety of Senate Bill 80.

This certification provides a potential opportunity for amicus briefing and the various business associations are currently considering whether to proceed with amicus briefs in support of the constitutionality of all the questions certified. There is some thought that the questions arising under Senate Bill 80 and the questions arising under the subrogation statute should be briefed separately. Briefs, if filed, must be filed on or before March 25, 2007, unless an extension is taken.

State ex rel. Gross v. Indus. Com., Ohio Supreme Court Case No. 05-1689. The Ohio Manufacturers Association has joined the Ohio Chamber of Commerce, the Ohio Self-Insurers Association, the National Federation of Independent Business and the Ohio Council of Retail Merchants in filing an amicus brief to oppose reconsideration of the decision rendered by the Ohio Supreme Court in the referenced case. The Gross decision, which was handed down on December 27, 2006, involved a workers’ compensation injury sustained by Mr. Gross, who was working for a Kentucky Fried Chicken franchisee. From the record, it would appear that Mr. Gross ignored safety warnings against pouring water into a pressure cooker to clean it and closing the lid. He ignored the warnings and when he opened the cooker he was burned along with two others. The claim was allowed but after an investigation completed several months after the injury in February, 2004, the company fired him for violation of work rules. The Supreme Court determined that temporary total disability benefits should be discontinued as Mr. Gross voluntarily abandoned his employment as a result of his violation of work rules. The decision in Louisiana-Pacific was specifically cited in support of its decision. Ohio trial lawyers vociferously opposed the decision and urged in an amicus brief the court’s reconsideration of the decision. Briefs have been filed. No decision has been received, as yet.