The Public Utilities Commission of Ohio (PUCO) violated state law when it failed to explain why it allowed a regulated electric utility to offer competitive services, the Ohio Supreme Court ruled today.

The Supreme Court voted to require the PUCO to explain its reasons for allowing Duke Energy Ohio to engage in a new line of business by offering “nonelectric products and services,” such as household energy consumption analysis reports, through the regulated utility company and not through a separate affiliate set up to engage in competitive businesses.

Writing for the Court majority, Justice William M. O’Neill agreed with the contention of Interstate Gas Supply (IGS), a retail electric service provider in Duke’s service territory and elsewhere, that the commission must sufficiently explain why it authorized Duke to engage in this new competitive business.

In separate opinions that concurred and dissented in parts from the majority, Justices Terrence O’Donnell and Sharon L. Kennedy went a step further, maintaining Duke must use a separate affiliate to offer the nonelectric services.

New Rule Established for Electric Deregulation
Electric service is generally divided into three categories: generation, transmission, and distribution. In 1999, Ohio lawmakers restructured the state’s electric-utility industry to foster competition in the generation component of electric service. Generation became an unregulated, competitive service allowing customers to choose a supplier. However, distribution remained a regulated, noncompetitive service performed by electric utilities.

To ensure that a utility’s unbundling of these services created a fair marketplace, Ohio adopted laws to prevent revenues from the regulated portions of a utility’s business to subsidize its competitive businesses, and in turn, not allow its competitive businesses to subsidize its regulated, noncompetitive business. To meet the objective, R.C. 4928.17 required utility companies to file a “corporate separation plan” that detailed how a utility would offer competitive retail electric service or any nonelectric product and service through a fully separated affiliate. However, the law also allowed the PUCO to approve an alternative “functional” corporate separation plan for an interim amount of time that allowed a utility company to offer competitive and regulated services under limited circumstances.

Duke Requests Permission to Offer New Competitive Services
The former Cincinnati Gas & Electric Company, now Duke, first received PUCO approval of its corporate separation plan in 2000, and over the next 11 years received commission approval for a series of amendments to its plan. Those amendments mostly allowed Duke to maintain its electricity generation assets longer than expected, until the generation assets were eventually transferred. A fourth amended separation plan was filed in 2014, and among other things, Duke sought approval to offer a variety of competitive nonelectric products and services, which included installing and maintaining customer equipment, providing generators during construction, and offering whole-house surge protection.

IGS objected to Duke’s application, arguing that it and other companies already offered those nonelectric products and services in Duke’s territory, and that if Duke wanted to compete for the service, it must do it through a separate affiliate.

The PUCO approved Duke’s plan with a series of conditions aimed to prevent anticompetitive subsidies from flowing between Duke’s regulated and unregulated businesses. IGS appealed to the Supreme Court, which is required to hear appeals of PUCO decisions. The Court also granted Duke the right to intervene in the case to offer its own defense of the PUCO decision in its favor.

PUCO Required to Find Make Certain Findings to Approve Duke’s Plan
Justice O’Neill explained that the interplay of two statutes, R.C. 4928.17 and R.C. 4903.09, are at the center of the parties’ disagreement.

R.C. 4928.17(A) states the general rule prohibiting an electric utility from engaging in the business of supplying a regulated electric service and in the business of supplying competitive services unless the PUCO approved a corporation separation plan for the utility that required any competitive services to be offered through a fully separated affiliate. But R.C. 4928.17(C) provided an exception, Justice O’Neill wrote, that the PUCO may approve an alternative functional corporate separation plan for an interim period under limited circumstances, including a finding of “good cause” by the PUCO.

R.C. 4903.09 applies to all contested PUCO cases and requires the commission to file “findings of fact and written opinions setting forth the reasons prompting the decisions arrived at, based upon said findings of fact.” Justice O’Neill wrote the purpose of R.C. 4903.09 is to provide the Court with sufficient details to enable it to determine how the commission reached its decision.

IGS argued the PUCO approved Duke’s plan to offer the nonelectric products and services without approving a functional separation plan, and the commission violated R.C. 4903.09 by not fully explaining how Duke’s amended plan complied with the law’s requirements.

Justice O’Neill wrote that for IGS to prove its case, it has to show the commission failed to explain key matters in its decision, that IGS brought the failure to the PUCO’s attention, and that the commission still failed to explain itself after a request for a rehearing.

“In its finding and order, the commission acknowledged IGS’s argument but did not specifically address it,” he wrote. “The commission merely stated that there was ‘no substantiated reason, at this time, to find that the proposed revisions to the plan are not in compliance with state policy or the commission’s corporate separation rules.’”

Without more explanation, the PUCO’s decision does not demonstrate how Duke’s plan complied with R.C. 4928.17, Justice O’Neill concluded, and when the commission does not provide sufficient details in its order, the Supreme Court will set it aside.

For example, Justice O’Neill noted the commission argued on appeal that good cause existed to approve Duke’s plan because it imposed conditions that prevented any subsidy while the companies operated as one, “but nowhere in the commission’s orders does it identify those conditions as the ‘good cause’ for approving a ‘functional’ corporate separation plan.”

“Although we are admittedly skeptical as to how the commission could approve Duke’s amended plan under R.C. 4928.17(C) or (D) based on the record before us, we are also cognizant that the General Assembly has given the commission substantial discretion in approving an alternative functional corporate separation plan or an amended corporate separation plan under those provisions ,” he wrote.

Justice O’Neill indicated the majority was reluctant to resolve the meaning of disputed language in R.C. 4928.17 or to make findings under that statute when the issues were not first addressed by the PUCO.  The Court remanded the case to the PUCO to fully explain the basis for its decision.

Chief Justice Maureen O’Connor and Justices Judith Ann Lanzinger and Judith L. French joined Justice O’Neill’s opinion.

Dissent Concludes Separate Entity Required
Justice O’Donnell filed a concurring and dissenting opinion in which he indicated that he concurred with the majority that the PUCO violated R.C. 4903.09 because it failed to sufficiently explain the basis for its decision. Justice O’Donnell went on to examine the provisions of R.C. 4928.17(A) specifying that nonelectric products or services cannot be provided by the utility, but must be offered through a fully separated affiliate.

Justice O’Donnell concluded that even if the PUCO explained its decision, it cannot authorize the provision of nonelectric products or services other than through a fully separated affiliate because that is what is required by law.

Justice Kennedy wrote that while she agreed that the commission order could not be affirmed, she disagreed with the majority’s reasoning and with the terms of the majority’s remand to the commission. The PUCO’s approval of Duke’s amended functional separation plan in 2011 was to give the company until the end of 2014 to transfer its generation assets so that it could achieve the full legal corporate separation that had been contemplated years earlier. She concluded that Duke’s request in 2014 to amend its plan to offer new business violated R.C. 4928.17 and was inconsistent with the public policy expressed in R.C. 4928.02.

Justice Kennedy wrote that the General Assembly had recognized that the process of deregulation would take time. Accordingly, it was the General Assembly’s intention that the functional separation plan was to aid electric utilities through the transition to the deregulated market by providing a process for unbundling competitive and noncompetitive electric services over a limited amount of time.

“It was not the intention of the General Assembly to permit a business that supplies noncompetitive retail electric services to, in effect, ‘rebundle’ in order to provide new nonelectric products and services that are required to be offered through a fully separate affiliate,” she wrote.

She further maintained that Duke’s request to amend its plan to offer new business was inconsistent with the state’s public policies of ensuring the availability of unbundled electric service and to ensure effective competition by avoiding anticompetitive subsidies flowing from a noncompetitive electric service to a competitive electric service. She wrote the PUCO had authority to approve a temporary plan to use one company to provide all service while the transition period was taking place, and that phase has ended.

Justice Paul E. Pfeifer joined Justice Kennedy’s opinion.

2014-1651. In re Application of Duke Energy Ohio, Inc., for Approval of its Fourth Amended Corporate Separation Plan, Slip Opinion No. 2016-Ohio-7535.

View oral argument video of this case.

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.