The Public Utilities Commission of Ohio (PUCO) cannot order the FirstEnergy power companies to refund $43 million to customers for the “imprudent” purchase of renewable energy credits made in 2010, the Ohio Supreme Court ruled today.

A Supreme Court majority determined the order violated the rule against “retroactive ratemaking” because the power companies sought and received PUCO approval each quarter to add the charges to customer bills. Writing the lead opinion, Justice William M. O’Neill stated the state’s “no-refund rule” may be perceived as unfair or sometimes results in a windfall for the that utility company, but “it is the statutory scheme that requires this result,” and only the Ohio General Assembly, not the Court, can change it.

During the contentious process of selecting and awarding bids to provide renewable energy, FirstEnergy requested the information about the participants and the amounts paid to be sealed. The PUCO granted the request, which was opposed by consumer and environmental organizations. The Court ruled today the commission did not provide adequate justification for granting trade secret status to the information, and remanded the matter to the commission to either provide more specific reasoning for sealing the information or to make it public.

Chief Justice Maureen O’Connor and Justice Patrick F. Fischer joined Justice O’Neill’s opinion.

In a concurring opinion, Justice Sharon L. Kennedy agreed with the portion of the lead opinion that remanded the trade secret issue to the PUCO, but separately stated that R.C. 4905.32 does not allow the PUCO to order a refund. However, had the PUCO added language to FirstEnergy power companies’ rate plan, it could have sought refunds, she wrote. Her opinion was joined by Justices Terrence O’Donnell and R. Patrick DeWine.

Justice Judith L. French dissented, stating that FirstEnergy agreed to allow the PUCO to reduce charges to customers for energy credits that were not prudently purchased as part of an overall three-year rate plan. She wrote that the PUCO was entitled to audit the purchases at a later date to determine if refunds were justified.

Green Energy Law Initiates Power Purchases
Ohio lawmakers enacted laws to require electric-distribution companies to provide that a portion of the electricity delivered to customers must come from renewable-energy resources, such as wind or solar power. FirstEnergy companies — Ohio Edison Co., Cleveland Electric Illuminating Co., and Toledo Edison Co. — filed an electric security plan (ESP) with the PUCO in 2009 that would set its rates for about three years. As part of the ESP, the PUCO approved FirstEnergy’s plan to procure renewable energy from in-state and out-of-state suppliers from January 2009 through May 2011.

Once electricity from a renewable resource is delivered to a power grid, it becomes indistinguishable from electricity generated from traditional power sources. For energy providers to document compliance with state law, utilities purchase a renewable energy certificate (REC) that can be tracked.

FirstEnergy agreed to purchase the amounts of RECs needed to meet the law, but filed for a “Alternative Energy Resource Rider” to cover the costs of buying the electricity that it could pass on to customers. Under the ESP terms, the commission allowed FirstEnergy to recover “the prudently incurred costs” for its REC purchases from its customers. To implement the program, FirstEnergy filed a tariff with the PUCO that requested quarterly approval of the charges it collected through the rider. Once the PUCO approved a quarterly tariff request, the rate would go into effect the following month.

PUCO Audits Purchases
In late 2011, the PUCO hired Exeter Associates Inc. to audit the REC purchases, and the firm reported that FirstEnergy failed to act prudently in some of the REC purchases from in-state companies. Based on the audit, the PUCO ordered FirstEnergy to return about $43 million to customers within 60 days.

FirstEnergy appealed the decision to the Supreme Court, which is required to hear the case. In addition, the Office of the Ohio Consumers’ Counsel and the Environmental Law and Policy Center appealed provisions of the PUCO order that sealed information about the purchase and payments of the RECs, which FirstEnergy claimed were trade secrets.

Court Examines Application of Refund Rule
FirstEnergy argued that under R.C. 4905.32 a utility must charge its customers the rate “filed” with the PUCO at the time, and that the PUCO cannot alter the rate once it is approved. The PUCO can invalidate a rate if it determines it is unfair, and set a new rate. But the new rate can only apply to future customers’ charges. The law prohibits adjusting the rate to force a company to return money already collected from customers.

The lead opinion noted that FirstEnergy filed a quarterly tariff sheet with the PUCO that factored in the costs it incurred for purchasing RECs through a bidding process, and asked the PUCO to approve the rate on a quarterly basis. The opinion stated that step constituted a “filed” rate, and the law prohibits the PUCO from altering it.

“Notwithstanding that FirstEnergy was entitled to recover only ‘prudently incurred costs” there can be no remedy in this case because the costs were already recovered,” the opinion stated.

The Court rejected PUCO arguments that it relied on the Court’s 1982 River Gas Co. v. Pub. Util. Comm. decision to determine that ordering refunds of the rider was permissible. The Court also rejected the argument that FirstEnergy, in negotiations with the PUCO and several other interested parties representing customers, stipulated that it would agree to only recover the prudently incurred costs.

In her concurring opinion, Justice Kennedy explained that River Gas did not apply to this case because that case dealt with the right of natural gas providers to pass on to customers the discounts they received from their suppliers when gas prices dropped. She noted state law specifically allowed for refunds on those transactions, while no state law specified refunds for renewable energy credits.

The concurring opinion also indicated the stipulated terms of FirstEnergy’s ESP did limit recovery to only prudent REC purchase costs, but the PUCO’s final order approving the ESP agreement did not include a provision stating the imprudent purchases were refundable to customers.

“All the commission had to do was require a refund clause be part of the tariff pursuant to R.C. 4905.32,” the opinion stated. “Because the tariff at issue here did not specify a refund, the commission’s order of a refund of REC costs was unlawful retroactive ratemaking.”

Dissent Argues Rate Approval Process Does Not Exclude Refunds
In her dissent, Justice French argues the majority is wrong to conclude that the PUCO quarterly review process resulted in a final approved rate.

She disagreed with the Court siding with FirstEnergy’s argument that the PUCO must have determined the charges were prudent because the PUCO did not delay or reject any of the quarterly tariffs filed. She wrote the Court accepted the argument without any proof that the PUCO could assess from the quarterly filings if the purchases were prudent or even if the PUCO had time to make those decisions.

She maintained that FirstEnergy agreed to have its REC purchases reviewed as part of its ESP and was aware that the commission would determine whether costs were prudently incurred during a later audit. The dissent explained that the commission initiated the review in 2011 and, after Executer filed its report in 2012, the company and several other parties debated the findings before the commission for two years. By the time the PUCO issued an order that refunds were necessary, FirstEnergy collected nearly all the money from the REC purchases from customers.

“The majority’s decision here reduces the entire audit review of FirstEnergy’s REC purchases to an exercise in futility,” Justice French wrote. “In effect, the commission and the parties needlessly went through more than two years of litigation at the commission when everyone involved should somehow have realized from the outset that FirstEnergy would be entitled to keep virtually all its REC costs, whether prudently incurred or not.”

Court Unanimous on Revealing Records
All three opinions agreed that the PUCO failed to adequately state why FirstEnergy was allowed to invoke trade secret protection to prevent the release of the REC suppliers, the bids they submitted, and the outcome of the auctions.

The PUCO had approved the submission of a public copy of the Executor audit that redacted specific information about in-state REC suppliers and their bids. The commission did release from the audit the finding that the First Energy Solutions, an affiliate of FirstEnergy, was a successful bidder, but did not specify the quantity or price of the REC bids or even acknowledge if FirstEnergy accepted the bid and paid the affiliate for the energy credits.

FirstEnergy argued that under R.C. 1333.61(D) the information could be considered a trade secret and that, if the information was made public, it would discourage energy suppliers for bidding in future auctions and that would harm both FirstEnergy and the suppliers.

The Consumers’ Counsel and Environmental Law Policy Center countered that the information was too old and the changes in market conditions made it impossible for the information to have the economic value required to be a trade secret.

The Court ruled FirstEnergy never supplied any evidence to back up its claim that it could be harmed and the PUCO did not make any specific findings that supported its ruling. The lead opinion stated that the PUCO must either cite evidence and explain its order or publicly disclose the information.

2013-2026. In re Review of Alternative Energy Rider Contained in Tariffs of Ohio Edison Co., Slip Opinion No. 2018-Ohio-229.

View oral argument video of this case.

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