Ohio Supreme Court Remand of the FirstEnergy Rate Certainty Plan

FirstEnergy filed an application in May 2005 for authority to recover from all customers its increased fuel costs for 2006 through 2009 through a Generation Charge Adjustment Rider (“GCAR”). The FirstEnergy companies then filed an application for approval of a Rate Certainty Plan (“RCP”) and submitted a stipulation and supplemental stipulation as to the terms of the plan. The RCP was intended to

• Mitigate the effects of FirstEnergy’s recovery of increased fuel costs from 2006 through 2008;

• Maintain level distribution rates through 2008; and

• Defer a portion of FirstEnergy’s expenditures for system infrastructure and improvements in reliability.

The PUCO approved the RCP thereby allowing FirstEnergy to defer recovery of up to $150 million in expenses related to its distribution system in each year the RCP is in effect. The PUCO also authorized FirstEnergy to partially recover increased fuel costs during the RCP through a fuel recovery mechanism that would allow FirstEnergy to recover from all Ohio Edison and Toledo Edison distribution and transmission customers fuel costs. The fuel recovery mechanism is offset by a reduction in the regulatory transition charge. Increase fuel costs incurred by CEI would be deferred during the RCP for later recovery.

Elyria Foundry Company (“Elyria”) and WPS Energy Services, Inc. (“WPS”) both appealed the PUCO’s decision to the Ohio Supreme Court. On August 29, 2007, by a vote of 6-1, the Ohio Supreme Court reversed in part the PUCO’s approval of the RCP.

The court affirmed the PUCO’s decision and rejected the arguments raised by Elyria. However, the court did note that the PUCO did not have the authority to allow FirstEnergy to capitalize and defer distribution expenses for infrastructure improvements in violation of Ohio Revised Code (“R.C.”) 4903.09 because there was no factual basis supporting the PUCO’s decision to deviate from standard practices in granting the distribution deferral. R.C. 4903.09 requires that a PUCO order must provide sufficient detail of the record upon which the decision is based. While the court found that the PUCO violated R.C. 4903.09, the court rejected Elyria’s argument because it failed to demonstrate prejudice or harm. On dissent, Justice Pfeifer stated that capitalizing current expenses, particularly fuel costs, is a “bad practice.” Justice Pfeifer also stated that “providing rate certainty today does not justify the commission’s decision to allow costs to be deferred.”

WPS argued that the PUCO approval authorizing FirstEnergy to defer fuel costs and other expense items was unlawful and in violation of R.C. 4928.02, which prohibits unlawful subsidies flowing from a noncompetitive retail electric service to a competitive electric service. The court affirmed that the PUCO violated R.C. 4928.02 when it authorized FirstEnergy to collect deferred increased fuel costs through future distribution rate cases or to use excess fuel cost recovery to reduce deferred distribution related expenses. The court reversed the PUCO’s decision on this issue and remanded the decision to the PUCO to modify the RCP to remedy the statutory violation. The court rejected the remainder of WPS’ arguments.

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

Ohio Edison Company (“Ohio Edison”), Cleveland Electric Illuminating Company (“CEI”) and Toledo Edison Company (“Toledo Edison”) (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, and the Ohio Energy Group, have filed to intervene in the case. OMA moved to intervene in the proceeding on August 28, 2007.

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

On July 10, 2007, FirstEnergy filed an application for approval of a competitive bidding process (“CBP”) designed to procure supply for the provision of Standard Service Offer (“SSO”) electric generation service to retail electric customers who do not purchase electric generation service from a competitive retail electric service provider beginning January 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 November 1, 2007.

Several parties, 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, have filed to intervene in the case. OMA moved to intervene on August 27, 2007.

Comments on FirstEnergy’s application and alternate methodologies to the application were filed on September 5, 2007. Staff comments are due by September 14, 2007, with reply comments due by October 5, 2007.

Columbia Gas of Ohio: New Stakeholder Process

In May 2007, Columbia Gas of Ohio invited a broad array of stakeholders to discuss the future of its operational structure, including its Gas Cost Recovery (“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 October 31, 2008. GTS customers on the Columbia system have benefited from Columbia’s banking and balancing services, as well as improved Operational Flow Order (“OFO”) and Operational Matching Order (“OMO”) 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 re-alignment 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 Proceeding
PUCO Case Nos. 07-589-GA-AIR, 07-590-GA-ALT and 07-591-GA-AAM

Duke Energy Ohio (“Duke”) filed an application 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.

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

In late July, East Ohio Gas Company d/b/a Dominion East Ohio (“DEO”) filed a notice of intent announcing that—for the first time since 1994—it will file an application 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.

Ohio Supreme Court Partial Remand of the Dayton Power & Light Company’s Rate Stabilization Plan

Dayton Power & Light Company (“DP&L”) filed an application in 2002 to extend its market development period through December 31, 2005. In 2003 the PUCO approved a stipulation which extended the market development period, and the PUCO approved a three-year rate stabilization period to begin immediately begin following the end of the market development period and ending December 31, 2008. DP&L was also permitted, upon PUCO approval, to collect a rate stabilization surcharge of up to 11 percent for generation related cost increases for fuel, environmental and tax law compliance, and for physical security and cyber security at plants.

DP&L filed an application for authority to increase rates through the rate stabilization surcharge. The PUCO approved a stipulation, which extended the rate stabilization period through December 31, 2010. The PUCO authorized DP&L to implement an 11 percent unavoidable rate stabilization surcharge rider to be collected through its distribution tariff, and a 5.4% percent environmental investment rider that would increase 5.4% each year of the rate stabilization period.

OCC filed a notice of appeal to the Ohio Supreme Court arguing, among other things, that the PUCO erred when it authorized DP&L to collect the 11 percent rate stabilization surcharge rider through its distribution tariff for costs that are generation service costs. On September 5, 2007, the Ohio Supreme Court issued a decision affirming the PUCO’s decision in part and reversing in part. The court remanded the case to the PUCO to issue an order directing DP&L to transfer the 11 percent rate stabilization surcharge rider to be collected through its generation service tariff. The court also noted that “as we continue to see the rate-stabilization plans appealed from the commission, we presume that the commission is sharing its evaluations and reports on the effectiveness with the legislation by R.C. 4928.06(C), so that it can continue to evaluate the need for further legislative action.”