The Supreme Court of Ohio held today that the Public Utilities Commission of Ohio (PUCO) improperly excluded revenue recovered from a “grid modernization” charge to Ohio Edison customers when conducting the company’s annual earnings review.

The Court’s lead opinion by Justice Melody J. Stewart found that the PUCO’s decision excluding the revenue was not authorized by state law, and the commission must consider those earnings to determine if customers are owed a refund.

A distribution modernization rider (DMR) authorized the FirstEnergy companies, which includes Ohio Edison, to collect an additional $168 million to $204 million annually from customers. The DMR constituted a “change in rates” that must be considered when evaluating the company’s 2017 earnings, the opinion stated.

Justice Stewart noted that in June 2019, the Supreme Court had found the DMR was improperly authorized and had ordered the PUCO to remove the charge from customer bills. (See First Energy Electric Grid Modernization Charge Improperly Imposed.) Under consideration in this appeal was the revenue that Ohio Edison collected from the charge in 2017, before the court found the DMR unlawful.

Chief Justice Maureen O’Connor and Justice Michael P. Donnelly joined Justice Stewart’s opinion.

Justice R. Patrick DeWine concurred in judgment only, stating that the lead opinion correctly concluded that the PUCO could not exclude the DMR revenue, but that he disagreed with the lead opinion’s decision to grant deference to the PUCO’s interpretation of the law.

In a partially concurring and partially dissenting opinion, Justice Sharon L. Kennedy agreed that the PUCO failed to follow the law when determining Ohio Edison’s earnings. However, she wrote, the matter should be remanded to the commission for it to explain its reasoning for excluding the DMR charges rather than being to include them. Justice Judith L. French joined Justice Kennedy’s opinion.

Justice Patrick F. Fischer dissented without a written opinion.

PUCO Conducts Required Excessive Rate Examination
Under Ohio’s deregulated electric utility system, electric-distribution utilities such as Ohio Edison, can offer a “standard service offer” to customers or provide service under an “electric security plan.” If the company offers the electric security plan, it must undergo an annual earnings review by the PUCO that is prescribed in state law R.C. 4928.143(F).

If the commission finds the plan resulted in “significantly excessive earnings” when compared with the earnings of other similar publicly traded companies, then the utility must return the excess to customers.

The Ohio Consumers’ Counsel objected to the PUCO’s review of Ohio Edison’s 2017 earnings, which the commission ruled were not significantly excessive. The consumers’ counsel disagreed with the PUCO’s decision to exclude the DMR revenues from the 2017 test. The commission ruled that when it approved Ohio Edison’s electric security plan, it agreed that the DMR would not be included in the earnings review.

The PUCO explained that the DMR was approved as an incentive to help FirstEnergy companies modernize their electric distribution grids for the northern Ohio territories they serve. The companies were to use the funds received to improve their financial positions so they could borrow money for modernization at lower interest rates. The commission said including the revenues in the earnings test would “introduce an unnecessary element of risk” and undermine the purpose for providing credit support to the FirstEnergy companies.

The consumers’ counsel appealed the decision in July 2019 to the Supreme Court, which is required to review appeals of PUCO rulings.

Supreme Court Analyzes Law
The lead opinion explained the Court will reverse, vacate, or modify a PUCO order if it is found to be unlawful or unreasonable. The PUCO maintained it followed R.C. 4928.143(F) and that it is reasonable for the Court to defer to the commission’s judgment on how to interpret the utility law.

Justice Stewart wrote the Court will only defer to the commission if its interpretation is reasonable, and in this case found it was not.

Under R.C. 4928.143(F), the commission is to consider whether the earnings are comparable to other publicly traded companies, including other electric utilities, that “face comparable business and financial risk.” The law allows for “such adjustments for capital structure as may be appropriate” and requires the PUCO to consider the utility’s capital requirements for future committed investments in Ohio.

Ohio Edison and the commission argued that the revenue from the rider were properly excluded as appropriate adjustments under R.C. 4928.143(F).

The Court found the PUCO failed to cite R.C. 4928.143(F), let alone explain how that provision allows the commission to exclude the DMR revenue from the earnings review. The Court also found that the commission did not exclude the revenue based on an adjustment that was expressly authorized by statute. The Court ordered the commission to conduct a new earnings test on remand that includes the DMR revenue, but it allowed the commission to consider whether the revenue can be excluded as an appropriate adjustment under R.C. 4928.143(F).

Court Not Obligated to Consider Commission’s Interpretation, Concurrence Stated
Justice DeWine agreed with the lead opinion’s conclusion that the PUCO’s actions were not authorized, but warned that the Court took the wrong path to decide the case. He wrote that he is skeptical about the lead opinion’s choice to defer to an executive agency’s interpretation of the law.

Justice DeWine wrote that judicial deference to an agency’s legal interpretation raises separation of powers concerns because it “forces the judiciary to abandon its independent judgment in favor of an agency’s construction. “ Under Ohio law, R.C. 1.49, the only time a Court is even permitted to defer to an agency’s interpretation is when a law is ambiguous. He wrote that because the law is clear, the lead opinion should not have deferred to the PUCO’s interpretation.

The concurrence stated that the law’s text only allows for “adjustments” to company’s earnings that are for “capital structure.” Justice DeWine reasoned removal of the DMR revenues did not count as an adjustment for capital structure “under any plausible understanding of the phrase.” Because the PUCO did not follow the law, he wrote, it lacked the authority to remove the DMR from the excessive earnings test.

Partial Concurrence Would Require Agency to Explain Its Actions
Justice Kennedy agreed with the lead opinion’s determination that the PUCO failed to follow R.C. 4928.143(F). However, she noted that Ohio Edison has made potentially valid arguments that excluding the DMR revenues is permitted under the law, so that the PUCO should now expressly address those arguments.

The concurring and dissenting opinion stated that R.C. 4903.09 requires the commission’s orders to contain specific findings and reasons to help the Court determine if the commission’s decisions are lawful and reasonable. Because it failed to explain its reasoning, the PUCO should reconsider the matter, review the arguments of the company and the opponents, and explain its decision, the opinion stated.

This concurring and dissenting opinion concluded that the Court acted prematurely in determining that the DMR revenues need to be excluded and would “save review of the merits for another day.”

2019-0961. In re Determination of the Existence of Significantly Excessive Earnings for 2017 Under the Elec. Sec. Plan of Ohio Edison Co., Slip Opinion No. 2020-Ohio-5450.

View oral argument video of this case.

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