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Court News Ohio

Regulator Must Reconsider Authority to Oversee Utility Resellers

The Public Utilities Commission of Ohio (PUCO) exceeded its authority when it made up a test, rather than follow state law, when determining that  a “submetering” company was operating as an unregulated public utility, the Ohio Supreme Court ruled today.

A Supreme Court majority noted that submetering, which involves the buying of natural gas, electricity, and other services from a public utility and reselling them, is now a “big business.” Writing for the Court, Justice R. Patrick DeWine stated that a test the PUCO devised and employed to determine whether it has authority to regulate a submetering business “has no connection” to the state law that determines the commission’s ability to oversee the companies.

“The General Assembly writes the laws determining the PUCO’s jurisdiction, not the PUCO,” Justice DeWine wrote.

The Court remanded to the PUCO the complaint of Cynthia Wingo, a central Ohio apartment complex tenant, who complained that Nationwide Energy Partners (NEP) was acting as a public utility and must follow the rules for public utilities. The PUCO had adopted NEP’s position that as a reseller of utilities, NEP was not subject to the commission’s jurisdiction.

Chief Justice Maureen O’Connor and Justices Sharon L. Kennedy, Judith L. French, and Melody J. Stewart joined Justice DeWine’s opinion. Justice Michael P. Donnelly concurred in judgment only.

Justice Patrick F. Fischer dissented without a written opinion.

Submetering Business Evolved
Justice DeWine explained that submetering was developed originally for an apartment or multi-residential complex owner to divide a common master bill so residents would pay their fair shares of utilities used. Today, submetering is a big business with resellers such as NEP providing submetering services for multiple properties and landlords. The resellers make their profit largely by purchasing the public utility service, such as natural gas and electricity, at the wholesale price, which is less than the resale price the companies charge to individual consumers in housing complexes.

Wingo filed a complaint with the PUCO in 2017, stating that as a condition of her apartment lease, she had to purchase water, sewer, and electric service from NEP. She asserted that while NEP claims to bill tenants at the same residential rates charged by the public utilities in her area, NEP does not offer other services she would receive if she directly purchased service from PUCO-regulated utilities.

She noted purchasing services from the regulated utilities would include such benefits as rebates on energy-efficiency measures, certain emergency-assistance programs for lower-income residents, protections against disconnection, and other consumer protections.

NEP asked the PUCO to dismiss  her complaint, arguing it was not a public utility. The PUCO agreed with NEP.  Wingo appealed the decision to the Supreme Court, which is required to hear appeals of PUCO decisions.

Supreme Court Analyzed Law and PUCO Test
The majority opinion stated the dispute turns on whether NEP meets the definition of “public utility” and whether a test developed by the PUCO claiming to interpret the state law defining a public utility is valid.

State lawmakers defined public utilities in R.C. 4905.03. Wingo’s complaint centers around the definitions of an “electric light company,” a “water-works company,” and a “sewage disposal company.” Those definitions require a company to be “engaged in the business of” supplying or providing electricity, water, or sewage disposal services.

The Court noted lawmakers have made little change to those definitions since they were enacted in the 1950s.

The PUCO was confronted with how to apply those laws when complaints arose about submetering. In 1992, the PUCO considered In re Complaint of Inscho v. Shroyer’s Mobile Homes. The residents of Shroyer’s trailer park complained the owner was acting as an unregulated utility by purchasing water from the city of Delaware and charging tenants for the water they used.

In order to determine whether the owners of the trailer park were operating as a public utility, the PUCO developed a three-part test. The Shroyer test gauged (1) whether the reseller intended to avail itself of the “special benefits” afforded public utilities, such as the use of eminent domain; (2) whether the reseller provided the service to the general public or just a specific class of residents, such as trailer park residents; and (3) whether the service was a side business to the reseller’s “primary business.”

The PUCO used the test for more than 20 years until the beginning of 2015 when the commission began to investigate whether it needed a new framework to regulate submetering.

Following an investigation, the commission modified the Shroyer test.  Under the modified test, a reseller is presumed to be a public utility if it charges a customer more than the customer would pay as a direct customer of the local public utility. But, a reseller can escape this presumption by showing it qualified for one of two “safe harbors.”  On safe harbor has the reseller showing it was passing on the costs charged by the local public utility.  The other has the reseller showing the amount charged to a customer was equal to what the customer would directly pay to the local public utility.

Test Not Connected to Law
The Court majority wrote the original Shroyer test bore some connection to the state laws defining  a public utility by attempting to ascertain whether a reseller such as the trailer park owner was “in the business of supplying” water to the tenants.

“In contrast, the PUCO modifications to the Shroyer test are remarkable for their almost complete disconnect from the statutory language,” the opinion stated.

The modified test focuses on how much profit the reseller makes, the Court stated, adding that the PUCO test’s makes a policy judgment about whom it wants to regulate.  Essentially, the Court explained, PUCO is saying to resellers: “As long as you don’t charge too much. . . we will leave you alone. We won’t even consider complaints filed against you. But cross that price line, and you are subject to our jurisdiction and our rules.”

The Court said the problem is that the PUCO’s jurisdiction is established by the General Assembly. The  PUCO cannot decide whether it has jurisdiction based on its own assessment of whether whether someone is “harmed, ” the opinion noted. That is a merit question that can only be answered once the PUCO determines it can regulate the activity, the Court concluded.

The Court noted it would “make sense for the General Assembly to directly address the question of whether entities who engage in submetering fall within the PUCO’s jurisdiction,” but until it does so the commission must apply the laws that are on the books.

The opinion stated that rather than have the Court determine whether NEP is a public utility, the matter is best left to the PUCO first to apply the law, particularly looking at the meaning of being “in the business of supplying” the covered services.

2019-0273. In re Complaint of Wingo v. Nationwide Energy Partners LLC, Slip Opinion No. 2020-Ohio-5583.

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