Duke Energy of Ohio can recover $55.5 million from its customers to pay for cleaning up pollution at two long-closed manufactured gas plant (MGP) sites near downtown Cincinnati, the Ohio Supreme Court ruled today.

The funds are to be recovered through a rider added to customer bills.

In a 4-3 decision, the Supreme Court affirmed a Public Utilities Commission of Ohio (PUCO) decision to allow Duke to recover the costs of environmental remediation of two sites, one of which was selected to be in the pathway of a new Ohio-Kentucky interstate highway bridge.

Writing for the Court majority, Justice Judith L. French ruled state law allows the company to recover the expense as a “necessary and current cost of doing business” because it voluntarily agreed to clean up pollution that under federal law it was responsible for containing.

In a dissenting opinion, Justice Terrence O’Donnell wrote that the law only permits charging natural gas customers for the property that was “used and useful” when providing service. The PUCO’s staff determined that of the $62.8 million Duke spent on the sites, only $6.34 million should be passed through to current customers for costs of the sites that were used or useful.

Plants Closed More than 50 Years Ago
The Office of the Consumers’ Counsel, Ohio Manufacturers’ Association, Ohio Partners for Affordable Energy, and Kroger Company appealed the PUCO decision to the Supreme Court. The Court is required to consider appeals of PUCO decisions.

From the mid-1800s to the mid-1900s, manufactured gas plants were common in the United States. MGPs burned coal, oil, and other fossil fuels to produce gas for lighting, heating, and cooking. The process created polluting byproducts such as coal tar, sulfur, and ammonia. At the time of their operations, the accepted industry practice was to bury the waste at the plant sites. By 1970, nearly all MGPs became obsolete due to the availability of natural gas. Former MGP sites became a concern because of their environmental problems, mainly soil and groundwater contamination.

Duke inherited the two MGPs from former utilities serving southwestern Ohio, and those sites included Cincinnati’s East End and West End MGPs. The East End closed in 1928 and the West End in 1963. Both contained hazardous waste. Duke became liable for any release of contamination under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

The sites currently contain some infrastructure and facilities that Duke uses to provide utility services to customers, and Duke was aware of the clean-up obligations since 1988.

Cleanup was considered a low priority because there was limited public access to the sites, the groundwater was not a drinking water source, and the waste was capped with asphalt, concrete, and soil. But the risk the MGPs pollution posed changed in 2006 and again in 2009 when two new construction projects were planned. Property adjacent to the East End plant was purchased by a land developer for a residential development, and Ohio and Kentucky jointly announced a plan for a new bridge that would cross the West End site.

Duke began to clean up the properties by entering the Ohio Environmental Protection Agency’s Voluntary Action Plan, and applied to the PUCO to defer charging for the cost until it completed the work. The PUCO agreed to allow the company to keep an account of what it was paying for the remediation but would not determine what amount could be passed on to customers until Duke filed a separate case that defined what costs should be covered.

Duke Files for Cost Reimbursement
Duke filed to recover its incurred costs through December 2012. In November 2013, the commission ruled that under R.C. 4909.15(A)(4), Duke demonstrated that its cleanup expenses were a necessary and current cost of doing business because, under CERCLA, it was strictly liable for any pollution the MGPs could have released. The PUCO rejected arguments from consumer groups that claimed R.C. 4909.15(A)(1) allows costs to be recovered only with respect to property that is “used and useful” in rendering utility service, and since the plants closed decades before Duke spent the money to clean them up it is the company’s shareholders that are responsible for paying the expense.

To determine expenses to service customers, the PUCO sets a 12-month “test period” to monitor the utility’s costs. The commission generally sets rates based on the expenses a company can expect to incur using the test period as a model.

The commission permitted Duke to use a “rider” to recover $55.5 million, billing customers about $925,000 a month for five years. The commission determined shareholders should pay the remaining clean-up costs.

“Used and Useful” Clause Not Applicable, Majority Concludes
Justice French explained the Court first analyzed R.C. 4909.15(A), which sets out the formula used by the PUCO to set rates, and noted that R.C. 4909.15(A)(1) instructs the PUCO to determine “The valuation as of the date certain of the property of the public utility used and useful [...] in rendering the public utility service for which rates are to be fixed and determined [...].”

The second provision of the statute requires the commission to determine a “fair and reasonable rate of return” on the company’s investment. The third factor used for setting rates is in R.C. 4909.15(A)(4), which, the opinion stated, requires factoring in expenses such as labor, fuel, and taxes, for “rendering public utility service” during the test period. The Court stated the challengers improperly combined the first provision, the value of the used and useful property, with the third provision of costs to provide services.

The Court explained the first provision would include the capital investment costs that Duke has invested in the MGP properties. Only investment for property that is used and useful in delivering services can be included, the Court noted. It found Duke is not trying to recover its investment costs in the properties, but rather is trying to recover for the reasonable expense of complying with a federal regulation.

“R.C. 4909.15(A)(4) contains neither the phrase ‘used and useful’ nor any other language that ties recoverable costs to property that is used and useful. Rather, under Ohio’s ratemaking statutes, operating expenses are recoverable if they were incurred in rendering service during the test period and are prudent,” the opinion stated.

Duke’s Circumstance Different than Others before PUCO
The opponents argued the PUCO contradicted its past rulings by allowing Duke to pass on the costs, and noted that in two cases from 1990 and 2009 involving Ohio Edison, the commission rejected attempts to recover costs tied to property that it deemed was not “used or useful in rendering utility service.”

The Court wrote that in the Ohio Edison cases, the company was using its own discretion to maintain older, unused facilities. It noted the PUCO stated that, unlike Ohio Edison, Duke was under a mandate to clean up the MGP sites, and because Duke had ongoing utility operations at the sites, Duke had an obligation to remediate the land as part of its operating expenses.

The opponents also argued there was no link between the old closed plants and the current facilities used by Duke to provide service. The PUCO sided with Duke’s argument that pipelines and some facilities on the two sites are used in the current service provision, which makes cleaning up the entire sites in compliance with federal law necessary.

“It found that Duke was currently using the MGP sites for gas distribution operations and that remediation was necessary for Duke to continue operations at the properties,” the Court wrote.

The opinion explained that the Court will only change a PUCO decision if it finds the commission order was “unlawful or unreasonable.”  The Court determined the opponents did not demonstrate that the PUCO’s decision was unlawful or unreasonable.

Chief Justice Maureen O’Connor and Justices Patrick F. Fischer and R. Patrick DeWine joined the majority opinion.

Not All Business Costs Recoverable, Dissent Argues
In his dissent, Justice O’Donnell asserted that the PUCO failed to consider whether the cleanup costs were spent on property that was used or useful in rendering services during the test period.

He explained that “not all business costs are recoverable pursuant to R.C. 4909.15(A)(4); only costs incurred in ‘rendering the public utility service for the test period’ are recoverable.” Justice O’Donnell concluded that if property is not used and useful for purposes of R.C. 4909.15(A)(1) “such that the utility may recover a fair and reasonable rate of return on its investment in the property from its customers in accordance with R.C. 4909.15(A)(2), the cost associated with the environmental remediation of the unused, useless property necessarily is not a cost incurred in ‘rendering the public utility service for the test period’ such that the utility may recover the cost from its customers pursuant to R.C. 4909.15(A)(4).”  

He urged that the Ohio Edison precedent should be followed and the company’s motives for incurring the expense do not determine if it was used for providing utility service.

Justice O’Donnell would reverse the PUCO’s decision and remand the case to the PUCO to consider if all, part, or none of the remediation costs were spent on property that was used or useful in providing service during the test period.

Justices Sharon L. Kennedy and William M. O’Neill joined Justice O’Donnell’s dissent.

2014-0328. In re Application of Duke Energy Ohio Inc., Slip Opinion No. 2017-Ohio-5536.

View oral argument video of this case.

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