The Ohio Supreme Court today rejected arguments from an industrial association and a consumer advocacy group disputing and seeking refunds of hundreds of millions of dollars in electric charges collected by an Ohio power company.

Writing for the court’s majority, Justice Judith Ann Lanzinger concluded that the two parties on appeal did not show that the Public Utilities Commission of Ohio (PUCO) erred in denying a refund of $368 million in charges that had been collected by the operating companies of American Electric Power (AEP) from April 2009 through May 2011. Justice Lanzinger explained that certain utility charges were reversed by the court on April 19, 2011, in a previous case.  On remand (return), the commission ordered that provider-of-last -resort (POLR) charges not yet collected would be subject to refund as of the first billing cycle of June 2011. The commission’s order was not unlawful because the rule against retroactive ratemaking says that present rates cannot make up for utility revenues lost due to regulatory delay, the court held.

Justice Lanzinger wrote that any unfairness could have been avoided if the parties that appealed had pursued a stay of the PUCO orders before the amounts were collected. The 5-2 decision affirms the commission’s orders.

In March 2009, the PUCO approved a plan for AEP to provide retail electric services from 2009 to 2011. The Industrial Energy Users-Ohio (IEU) and the Office of the Ohio Consumers’ Counsel (OCC) appealed the commission’s decision to the Ohio Supreme Court.

The court remanded the case to the PUCO to review two issues. First, the court determined that the commission did not cite proper statutory authority to find that AEP could recover costs associated with environmental investments it had made. Second, the court held that AEP’s calculation of POLR charges, which compensate the company for certain risks it assumes in providing this service, was not supported by the evidence.

In October 2011, the commission found that the environmental investment costs were allowed by statute. On the second issue, however, it found that AEP did not submit evidence to support the POLR costs. The commission ordered the utility to remove the charge from its tariffs and to refund customers the amounts they were charged between June 2011 and October 2011 during the remand proceedings. The $368 million in POLR charges collected from April 2009 to May 2011 were unaffected.

The IEU and the OCC appealed the rulings to the Supreme Court.

In today’s opinion, the court upheld the commission’s ruling on costs AEP recovered for environmental investments. Specifically, Justice Lanzinger reasoned that the relevant statute does not require AEP to prove that the environmental investment charges were “necessary,” as IEU asserted. In addition, Justice Lanzinger wrote that testimony presented to the commission demonstrated that recovering the environmental investment costs was permissible because the costs compensate the company for upkeep of its generating plants, which results in lower-cost power and cheaper prices for customers.

The court then examined the background related to the requested refund of the POLR charges. The PUCO authorized AEP to phase in its rates between 2009 and 2011 and then recover part of its annual fuel costs after 2011, the end of the service plan period. Both the IEU and the OCC asserted that the commission should have reduced those deferred fuel costs by $368 million – the amount of POLR charges collected by AEP between April 2009 and May 2011.

Justice Lanzinger followed cases that state R.C. Chapter 49 does not permit any right of action for refund of excessive utility charges that have already been collected.

“Moreover, the court has consistently applied Keco [Industries, Inc. v. Cincinnati & Suburban Bell Tel. Co. (1957)] and refused to grant refunds in appeals from commission orders,” she wrote. “There is no basis … for appellants to claim that the POLR charges that were collected from April 2009 to May 2011 were ‘unlawful.’ Keco holds that rates set by the commission are lawful until such time as this court later finds that the commission erred in setting that particular rate. … Moreover, a remand order of this court does not automatically render the existing rates unlawful ….”

“The fact that the deferred fuel costs may provide a mechanism to adjust rates prospectively does not alter the nature of appellants’ requested remedy,” Justice Lanzinger continued. “The appellants are seeking to recover—through an adjustment to current rates—POLR charges that already have been collected from customers and later were found to be unjustified. The rule against retroactive ratemaking, however, is clear: present rates may not make up for revenues lost due to regulatory delay.”

She added: “AEP collected $368 million in POLR charges during the [electric security plan], without any evidence that would justify the cost recovery. But under Keco’s no-refund rule, AEP is permitted to keep it, resulting in a windfall for AEP. While we recognize that this particular outcome is unfair, … any unfairness must be viewed in the context of the larger legislative scheme ….”

She noted that neither the OCC nor the IEU requested a stay from the court, as permitted by statute, in their first appeal, the time during which a majority of the POLR charges were being collected.

Justice Lanzinger’s opinion was joined by Chief Justice Maureen O’Connor and Justices Terrence O’Donnell, Sharon L. Kennedy, and Judith L. French. Justice Paul E. Pfeifer dissented in an opinion joined by Justice William M. O’Neill.

In his dissent, Justice Pfeifer stated that the court should overturn Keco.

“It is unconscionable that a public utility should be able to retain $368 million that it collected from consumers based on assumptions that are unjustified,” he wrote. “The problem stems from this court’s 1957 decision, which determined that ‘[w]here the charges collected by a public utility are based upon rates which have been established by an order of the Public Utilities Commission of Ohio, the fact that such order is subsequently found to be unreasonable or unlawful on appeal to the Supreme Court of Ohio, in the absence of a statute providing therefor, affords no right of action for restitution of the increase in charges collected during the pendency of the appeal.’”  

“Charges that are approved by the PUCO but that do not withstand challenge in this court ought to be subject to restitution,” Justice Pfeifer continued. “A public utility ought not to receive unjust enrichment based on charges that in the context of this case as determined by the PUCO, clearly should not have been approved. R.C. 4905.32 states that utilities cannot refund a rate that has been charged pursuant to the rate schedule filed with the PUCO. It does not say that this court cannot compel a utility to provide restitution for charges that it has unjustifiably collected.”

2012-0187. In re Application of Columbus S. Power Co., Slip Opinion No. 2014-Ohio-462.

View oral argument video of this case.

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