April 20, 2011
Ohio Supreme Court Reverses PUCO Order Approving AEP Power Generation Rates
A Green Strategies Bulletin
Full text of the Court's opinion
On April 19, 2011, the Ohio Supreme Court issued an opinion on AEP’s electric security plan (“ESP”) siding with the Ohio Consumers’ Counsel (“OCC”) on three major issues.
While OCC and Industrial Energy Users-Ohio (“IEU”) collectively raised 13 issues, the Court agreed with OCC on three issues discussed below.
First, the Court held that the Public Utilities Commission of Ohio (“PUCO” or “Commission”) violated the law by granting AEP a retroactive rate increase. AEP had requested that the PUCO issue an order authorizing its ESP rate increase to go into effect by January 1, 2009. However, the Commission did not issue an order until March 18, 2009. However, in its order, the PUCO authorized AEP to recover the amount of revenues it would have collected over 12 months had the PUCO issued an order by January 1, 2009, over the remaining nine months of the year. While the Court held that this retroactive ratemaking violated Ohio law, it did not require AEP to refund the $63 million of unlawfully collected revenues. The Court held that such a refund is also prohibited by Ohio law and that OCC should have posted the bond required for a stay of the PUCO’s unlawful order. The Court recognized that as a public agency, OCC was not capable of posting the bond given its dollar amount and the Court called upon the General Assembly to fix the inequity in the law legislatively.
Second, the Court held that in approving a provider-of-last-resort (“POLR”) charge, the Commission relied on a justification lacking any record support. The commission approved the recovery of roughly $500 million in POLR charges over the three years of the ESP. The Court held that while the PUCO described the POLR charge as cost-based, this characterization as cost-based lacks any record support as there is no evidence suggesting that AEP’s POLR charge is related to any costs it will incur. AEP derived its charge using a mathematical formula created to “price” exchange-traded options. The company analogized an option to buy and sell securities to the statutory right to shop for power, changed some variables, and applied the formula. This formula, called “the Black-Scholes model” is the only evidence AEP presented in support of its POLR charge. But, the Court held that this formula simply does not reveal “the cost to the Companies to be the POLR and carry the risks associated therewith.” The record shows that the model does not even purport to estimate costs, but instead tries to quantify “the value of the optionality [to shop for power] that is provided to customers under Senate Bill 221.” Value to customers (what the model shows) and cost to AEP (the purported basis of the order) are simply not the same thing. The Court also noted that other facts in the record further call into question the accuracy of AEP’s POLR theory. The record showed that AEP has had “virtually no” shopping in the last eight years, including no residential shoppers. No countervailing evidence predicted an uptick in shopping. No witness testified that more switching could be expected in the future, and AEP performed no “actual customer surveys” or “studies apart from the Black-Scholes model” to determine whether shopping was likely to increase. On the contrary, the commission’s own economist testified that “there are many reasons to think that substantial migration will not quickly occur, even if the market price falls below the SSO price.”
The Court remanded this issue to the Commission and stated that it expresses “no opinion on whether a formula-based POLR charge is per se unreasonable or unlawful, and the commission may consider on remand whether a non-cost-based POLR charge is reasonable and lawful. Alternatively, the commission may consider whether it is appropriate to allow AEP to present evidence of its actual POLR costs. However the commission chooses to proceed, it should explain its rationale, respond to contrary positions, and support its decision with appropriate evidence.”
Third, the Court held that the Commission erred in determining that ESPs may include items not specifically authorized by statute. Specifically, OCC argued that R.C. 4928.143(B)(2) does not permit AEP to recover certain carrying costs associated with environmental investments. The Court agreed. That section permits an ESP to “include, without limitation, any of the following,” and then lists nine categories of cost recovery. The Court stated that the section permits ESPs to include only listed items, but unlimited inclusion of listed items. On remand, the Commission must determine whether any of the listed categories authorize recovery of environmental carrying charges.
The Court agreed with AEP on each of the other issues raised by OCC and IEU including:
- IEU was incorrect that the Commission lost jurisdiction over the case when the 150-day approval deadline expired.
- IEU has not shown error in AEP’s acceptance and appeal of its ESP.
- The Commission adequately explained why it was not following prior decisions in allowing AEP to keep the proceeds of “off-system sales."
- IEU failed to show error concerning the approval of charges related to a pair of generation stations.
- IEU failed to show error in the approval of AEP’s vegetation-management and smart-grid programs.
- IEU has not demonstrated error in the Commission’s setting of AEP’s fuel-cost baseline.
- IEU failed to demonstrate any violation of R.C. 4903.09’s requirement of a reasoned explanation.
Importantly, in rejecting IEU’s claims regarding a reasoned explanation, the Court set forth a three-pronged test to prevail on a R.C. 4903.09 claim: first, that the Commission initially failed to explain a material matter; second, that IEU brought that failure to the Commission’s attention through an application for rehearing; and third, that the Commission still failed to explain itself.
The PUCO must now determine whether it will take additional evidence in the case on the issues remanded to it and issue a new order in accordance with the Court’s instructions. We will provide additional information on the PUCO’s process as soon as it becomes available.