The Ohio Supreme Court today unanimously upheld an order from the Public Utilities Commission of Ohio that determined how much Ohio Power Company could collect in fuel costs for providing electric generation service to customers in 2009. The PUCO had limited the amount of fuel costs Ohio Power could collect from customers that chose to buy generation service from the company rather than from a competitive electric service provider.

Writing for the court, Chief Justice Maureen O’Connor noted that before 2009 the American Electric Power Companies – Ohio Power and Columbus Southern Power – were operating under a “rate stabilization plan.” The PUCO approved the rate stabilization plan in 2005, and it was in effect from 2006 through 2008. Under this plan, Ohio Power and Columbus Southern Power recovered their fuel costs though fixed rates that included automatic increases in 2007 and 2008. However, if the cost of fuel to the companies was more than the amount collected in rates, AEP bore the risk of any losses.

For the next three-year period (2009-2011), the AEP companies operated under an electric security plan (ESP), approved by the PUCO in March of 2009. The ESP included a fuel adjustment clause (FAC), which is a rate mechanism that operates as a separate charge from the base generation rate charged to customers. The FAC charge is designed to automatically go up or down depending on the costs of fuel used by the companies to generate electricity. Chief Justice O’Connor noted that with the FAC in place, AEP no longer faced the risk of losing money should fuel costs rise above the level collected in rates. Customers would also be protected because they would be paying only for fuel costs actually incurred by the companies in generating electricity.

The PUCO required the AEP companies to undergo yearly audits of the FAC to make sure that the companies were collecting only actual fuel costs. The first audit found that Ohio Power had failed to collect $297 million in fuel costs from its customers.

The PUCO found that one of the main reasons that Ohio Power had not recovered its 2009 fuel costs was that, in 2008, Ohio Power had agreed to terminate a 20-year supply contract with one of its major coal suppliers, Peabody Development Company. In 2007, the price of coal under this contract was significantly below the market price for coal. But after a dispute arose between Ohio Power and Peabody over the contract, Ohio Power agreed to allow Peabody to buy out the contract to resolve the dispute. Under the terms of the settlement, Ohio Power agreed to terminate the Peabody contract at the end of 2008, which was three years before it would have expired under its terms. In exchange for getting out of the contract early, Peabody paid Ohio Power $71.6 million. Peabody paid Ohio Power $30 million of the settlement proceeds in cash. Peabody also transferred ownership to Ohio Power of a coal reserve, which was then valued at $41.6 million.

The early termination of the low-priced Peabody contract led Ohio Power to have to purchase replacement coal in 2009 at the higher market price. Rather than passing these higher fuel costs on to customers, the PUCO determined that all $71.6 million from the Peabody settlement proceeds should be credited to ratepayers. In doing so, the commission rejected Ohio Power’s claim that only $13.3 million of the settlement should be credited against fuel costs in 2009 and 2010, and that the company should be able to retain the remaining $58.3 million as a credit against 2008 fuel costs.

At a rehearing, the PUCO agreed with Ohio Power that the Peabody settlement not only impacted Ohio Power’s retail customers, but also its wholesale and non-Ohio retail customers. The commission allowed Ohio Power to keep part of the $71.6 million to cover the costs for supplying power to these other customers.

On appeal, Ohio Power challenged the commission’s order on three main grounds: the PUCO engaged in improper retroactive ratemaking by crediting the settlement against the 2009 costs; customers are not entitled to proceeds from the coal reserve offered to Ohio Power as part of the settlement; and the commission lacked jurisdiction to modify the 2009 commission order that approved Ohio Power’s electric security plan. The Industrial Energy Users-Ohio (IEU), an association of Ohio manufacturers, filed a cross-appeal, arguing that the entire $71.6 million of the settlement proceeds should have been allocated to Ohio retail customers, and not divided among Ohio retail, wholesale, and non-Ohio retail customers.

The court rejected on jurisdictional grounds many of arguments made in Ohio Power’s appeal and all of arguments in the cross-appeal from IEU. Chief Justice O’Connor repeatedly cited instances where the parties failed to raise their concerns with the PUCO through the rehearing process, noting that the court is barred by statute from ruling on issues that the parties did not present to the commission on rehearing.

As to whether the PUCO unlawfully limited Ohio Power’s ability to apply the Peabody settlement proceeds against 2009 fuel costs, Chief Justice O’Connor saw no abuse of discretion in the PUCO’s order. “The critical flaw in Ohio Power’s arguments is that it wants the commission (and now this court) to consider the 2008 settlement agreement in isolation, looking solely at the date it was executed and not at whether the agreement had any effect on 2009 fuel costs,” she wrote. “In short, Ohio Power ignores the impact of the settlement agreement on 2009 FAC costs.”

2012-1484. In re Fuel Adjustment Clauses for Columbus S. Power Co and Ohio Power Co., Slip Opinion No. 2014-Ohio-3764.

View oral argument video of this case.

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