Since 2017, FirstEnergy Companies’ customers have been paying an extra $168 million to $204 million per year through a rider intended to incentivize the companies to modernize their energy-distribution systems. Today, the Ohio Supreme Court ruled that the Public Utilities Commission of Ohio (PUCO) improperly authorized those charges and ordered them to be removed.

A Supreme Court majority ruled that the PUCO characterized the distribution modernization rider (DMR) as an incentive to “jump start the Companies’ grid modernization efforts,’” but failed to place any conditions on the additional funds that would allow the rider to act as an incentive.

In the Court’s lead opinion, Justice Michael P. Donnelly stated that the critical problem is that the companies are not required to make any investments to modernize the distribution grid in exchange for the DMR revenues.

“And in fact, the commission made it clear that there are no plans for FirstEnergy to take on any modernization projects in the immediate future,” he wrote.

Justice Donnelly also noted that the commission failed to place any effective conditions on the DMR that would protect ratepayers in the event that the DMR money was not used for its intended purpose.

Justices Judith L. French and Melody J. Stewart joined Justice Donnelly’s opinion.

Justice R. Patrick DeWine concurred in judgment only. In a separate opinion, he concluded that the PUCO’s definition of an “incentive” is not consistent with the commonly understood meaning of the word because it does not guide the utility to a particular course of action. Because the rider placed no conditions of the receipt of the money, it was not an incentive.

Justice Sharon L. Kennedy dissented, stating the rider meets the definition of “incentive” under R.C. 4928.143(B)(2)(h). Despite the lead opinion’s contention, nothing in the statute indicates an incentive “has to be conditioned or restricted or even related to the action being encouraged,” she wrote.

Justice Patrick F. Fischer dissented in an opinion joined by Chief Justice Maureen O’Connor. Justice Fischer wrote the rider relates to the utility’s distribution service, and because it is designed to foster modernization of Ohio’s electric grid, “it is an incentive for modernization.”

Business, Consumer, Environmental Groups Oppose Charge
The FirstEnergy Companies — Ohio Edison, Toledo Edison, and the Cleveland Electric Illuminating Company — proposed a three-year electric-security plan in 2016. The plan set FirstEnergy’s rates for generation service to its northern Ohio customers.

Staff members of the PUCO suggested adding the DMR to the electric-security plan to provide FirstEnergy Corporation with funds to improve its credit rating. The staff indicated that the rider, which is an additional, temporary charge that is separate from the basic monthly rate, could serve as an incentive for the companies to upgrade and modernize FirstEnergy’s power distribution systems.

The PUCO adopted the DMR proposal and authorized FirstEnergy to collect $132.5 million annually from ratepayers for three years. The commission adjusted this amount to account for federal corporate income taxes, raising it to $204 million in 2017. After the federal corporate income tax rate was reduced in 2017, the amount was lowered to $168 million for 2018 and 2019.

Several groups opposing the rate plan appealed to the Supreme Court, including the Ohio Consumers’ Counsel, the Ohio Manufacturers’ Association Energy Group, and the Sierra Club.

Justice Donnelly noted the 19 organizations appealing to Court raised 25 legal arguments regarding the rate plan, with most centered on the DMR.

Court Examines Incentive Law
The opinion noted that R.C. 4928.143(B)(2)(h) permits the PUCO to include “provisions regarding distribution infrastructure and modernization incentives for the electric distribution utility” in an electric-security plan. In finding that the DMR operates as an “incentive” under the statute, the commission relied on the Webster’s New World Dictionary definition of “incentive” as “something that stimulates one to take action, work harder, etc.; stimulus; encouragement.”

On appeal, the opponents argued that the DMR does not constitute an incentive under R.C. 4928.143(B)(2)(h) because it does not require the FirstEnergy companies to take any action to modernize the distribution grid in exchange for DMR funds. A majority of the court agreed and rejected the commission’s preferred definition of incentive. 

The Court’s lead opinion stated that while the PUCO defined incentive, it did not explain how the rider operates as an incentive. The lead opinion noted that the DMR was designed to provide the companies with funds to improve their credit rating and ensure continued access to credit on reasonable terms. It also noted that the DMR money was conditioned on the company agreeing to keep its corporate headquarters and key operation facilities in Akron, to not change the control of the company, to demonstrate sufficient progress in grid-modernization projects, and to allow its use of the DMR funds to be reviewed by an independent auditor.

The Court found that the conditions on the DMR funds did not adequately protect ratepayers against the unauthorized use of DMR revenue. The Court stated there are “no discernable consequences or repercussions if FirstEnergy fails to comply with the conditions imposed for receiving the DMR funds.” It noted that FirstEnergy was not required to refund any DMR money already collected, even if it failed to comply with the order and even if the DMR were found unlawful on appeal.

Justice Donnelly explained that the rider may make it possible for FirstEnergy to obtain the funds for future infrastructure investment on more favorable credit terms, but the evidence cited does not support the PUCO’s conclusion that it qualifies as an incentive because there is nothing that requires the company to use the DMR funds to modernize its infrastructure.

“The PUCO’s staff’s wishful thinking cannot take the place of real requirements, restrictions, or conditions by the commission for the use of DMR funds,” he wrote.

Concurrence Finds Rider is Not Incentive
In his concurring opinion, Justice DeWine explained that because “incentive” is not specifically defined in R.C. 4928.143(B)(2)(h), the word is defined by its “plain and ordinary meaning.” He wrote that the PUCO selected one of several definitions for “incentive” that equated it with “stimulus.” But, he concluded, an incentive cannot be anything that might stimulate an outcome, but rather must direct and motivate a party toward that outcome.

“Sunlight might stimulate plant growth, but we would not say sunlight is an incentive for plant growth,” he wrote.

The concurrence stated that giving the utility more money without directing the money toward a particular use is not an incentive.

“In contrast, if the money had conditions — if the company had to pay it back if it were not used for grid modernization or if the company only got the money after it started a modernization project — then the DMR would count as an incentive,” the concurring opinion stated.

Conditions Not Required, Dissent Stated
In her dissenting opinion, Justice Kennedy noted the Court found the rider was not an incentive because it lacked requirements, restrictions, or conditions. She wrote those requirements do not appear in the law, and the justices may not read words into the statute that lawmakers could have written.

“After all, the judiciary’s function is to say what the law is, not what it should be,” the dissent stated.

Justice Kennedy wrote that the lead opinion cited a case from a federal district court in Virginia that determined the word “incentive” required restrictions or conditions. She stated that “incentive” is a broader word and that the PUCO found the rider advanced the policy of the state to encourage the implementation of smart grid programs and other ways to make providing electric service more cost-efficient.

The dissent noted FirstEnergy raised the concern that without the rider it could face a credit downgrade, making it difficult to finance future grid improvements. The opinion concluded that the PUCO made a reasonable determination that customers could be protected against higher rates in the future by using the rider to ensure financing was available to pay for improvements.

Dissent Finds Rider Induced Action
Justice Fischer wrote in his dissenting opinion that the “incentive” has the “common-sense meaning of inducing action.” He stated the commission found that the rider encouraged innovation and modernization to the grid system, and the PUCO “made a determination, supported by evidence, that the DMR induces an action.”

“Based on the language of R.C. 4928.143(B)(2)(h), the commission’s findings are neither unlawful nor unreasonable,” the dissent concluded.

2017-1444 and 2017-1664.In re Application of Ohio Edison Co., Slip Opinion No. 2019-Ohio-2401.

View oral argument video of this case.

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