Cleveland Public Power (CPP) can sell electricity generated from a suburban solar farm, but only if it can prove that it did not purchase the power solely to sell it outside of the city limits, the Ohio Supreme Court ruled today.

A divided Supreme Court rejected arguments from Cleveland Electric Illuminating Company (CEI) that the municipal power company was creating an “artificial surplus” of electricity for the sole purpose of selling the power outside of Cleveland at a discounted rate.

In the Court’s lead opinion, Justice Melody J. Stewart wrote that under the Ohio Constitution, a municipal utility cannot acquire surplus product for the sole purpose of selling it outside of its boundaries, but may acquire excess capacity for other purposes, such as lowering costs, and then sell the excess product.

The decision affirmed an Eighth District Appeals Court decision, which ruled that CPP did not have to purchase only the exact amount of power it needs to serve territorial customers. The Supreme Court upheld the Eighth District’s determination that CPP has not yet demonstrated that its purchase of power from a solar array built over a former municipal landfill in Brooklyn, Ohio, is for any other purpose than selling it back to the city of Brooklyn.

The case was remanded to Cuyahoga County Common Pleas Court for further proceedings.

Chief Justice Maureen O’Connor joined Justice Stewart’s opinion. Justice Michael P. Donnelly concurred in judgment only without a written opinion.

In a decision partly concurring and partly dissenting with the lead opinion, Justice R. Patrick DeWine maintained that while the state constitution allows a municipality to sell up to 50 percent of its surplus outside of its boundaries, that provision only applies to products generated by the municipality. He wrote CPP does not have the right to buy power elsewhere and sell it outside of the city limits.

Justice Patrick F. Fischer joined Justice DeWine’s opinion.

In separate dissenting opinions, Justices Sharon L. Kennedy and Jennifer Brunner concluded that the case did not need to return to the trial court and that CPP had the right to sell the power.

Justice Kennedy wrote that the plain language of Article XVIII, Section 6 of the constitution gives CPP the right to sell up to 50 percent of its surplus power outside of its boundaries. The parties agreed that CPP is not selling more than 4 percent of its electricity outside of the city and the sale is expressly authorized by the constitution.

Justice Brunner maintained the lead opinion points to no facts that indicate CPP bought the solar-powered electricity solely to sell to Brooklyn, and there is no need for additional fact-finding to determine that the city is within its rights to sell the power.

Competition for Customers Sparked Dispute
CEI, a subsidiary of FirstEnergy Corp., provides electricity transmission and distribution to the northeast Ohio region. As an investor-owned utility company, CEI is regulated by the Public Utilities Commission of Ohio (PUC0). CPP is owned by the city of Cleveland and is authorized to operate under the city’s charter and Article XVIII, Section 4, of the Ohio Constitution.

Under Ohio’s deregulated electricity generation market, both CPP and CEI purchase the electricity they sell to customers through the wholesale electricity market. PJM Interconnection is the organization that runs the wholesale electricity market in Ohio and other midwestern and eastern states. The companies can buy power through PJM to meet expected customer demand.

CPP also has a financial interest in several electricity-generation plants through its membership in American Municipal Power, a nonprofit power supplier to municipalities in Ohio and other states. Some of CPP’s interest in the plants require long-term purchases.

In 2017, the city of Cleveland agreed to buy all the electricity generated at the Brooklyn solar farm. The city planned to use the solar power to serve buildings in its territory owned by Cuyahoga County. It also signed a 10-year contract to be the exclusive electricity supplier to several municipal buildings in Brooklyn.

CEI sought a declaratory judgment from Cuyahoga County Common Pleas Court to declare the agreement between CPP and Brooklyn unlawful. CEI claimed that CPP agreed to sell Brooklyn electricity at a rate 5% below the PUCO-set rate CEI could charge. CEI claimed CPP extended distribution lines from the solar farm to its power grid solely to poach CEI customers.

Electricity Needs Debated
CEI argued CPP did not need the solar project’s electricity because it can receive all the power it needs to serve its own customers through purchases from the wholesale market operated by PJM. Any power purchased to serve Brooklyn customers or anyone outside the city limits is derived from creating an “artificial surplus,” which leads to CPP acting as a power broker, the utility argued. Cities are banned by the state constitution from acting as a broker, the company asserted.

The trial court determined the solar power would serve 12 county properties as well as customers in Brooklyn. Since the surplus of electricity CPP sold outside of Cleveland amounts to a very small percentage, CPP was within its constitutional rights to sell the power to Brooklyn. The trial court granted summary judgment to CPP, and CEI appealed to the Eighth District.

The Eighth District disagreed with CEI’s argument that any surplus created by the city was an artificial surplus, but the appellate court also disagreed with granting summary judgment in the city’s favor. The Eighth District concluded the only way CPP could ensure it has a sufficient supply of electricity to fulfil its 10-year agreement to serve Brooklyn was if it intentionally purchased some electricity for the sole purpose of selling it to Brooklyn. It directed the trial court to conduct further proceedings.

Both CEI and CPP appealed the Eighth District’s opinion, and the Supreme Court agreed to hear the case.

Supreme Court Examines Constitutional Reforms
Ohioans amended the state constitution through a constitutional convention in 1912. Justice Stewart explained the framers of the amended constitution established municipal “home rule” and added two specific provisions to the state constitution authorizing municipalities to operate utilities.

Article XVIII, Section 4, allows a municipality to “acquire, construct, own, lease, and operate” a public utility to provide products and services to the municipality and its inhabitants, and allows the government to contract with others for any product or service. Article XVIII, Section 6, states that any municipality “owning or operating a public utility for the purpose of supplying service or product” may sell or deliver product or services outside of the city in an amount not exceeding 50% of the service or product supplied within the municipality.

Citing the Supreme Court’s 2000 Toledo Edison Co. v Bryan decision, the lead opinion stated the two sections read in harmony “allow a municipality to purchase electricity primarily for the purpose of supplying its residents and reselling only surplus electricity from that purchase to entities outside the municipality.”

In Toledo Edison, four municipalities jointly agreed to buy surplus electricity to sell to a large commercial customer beyond their municipal boundaries. The Court ruled the local governments were acting as electricity power brokers who were buying power to create a surplus for the sole purpose of selling it to the commercial customer.

CEI maintained that any kilowatt of electricity that CPP buys beyond the immediate needs of its territorial customers is by definition a surplus product, and as indicated by the Toledo Edison decision, a municipal utility is not constitutionally authorized to buy or resell extra energy.

Municipality Can Purchase Extra Power for Several Reasons
The lead opinion stated that Toledo Edison forbids the purchase of electricity “solely” for the purpose of selling “the entire amount” to a customer outside the municipal limits. The Court noted the Eighth District listed several reasons why CPP might purchase surplus electricity, including cost, risk mitigation, economies of scale, environmental impact, and reliability. The Court noted the price of electricity sold through PJM on the wholesale market varies, and CPP also committed to long-term purchases to protect itself against price spikes and low supply.

The lead opinion noted the Eighth District’s concern with CPP’s long-term contract to supply Brooklyn with power. At the trial court, the city claimed it obtains electricity through various sources, and must purchase power that exceeds the daily needs of its territorial customers. It uses that extra power to supply Brooklyn, CPP argued.

The lead opinion indicates the “record does not show the amount of electricity CPP has in surplus at any given time and how much surplus is used to satisfy its commitment to Brooklyn.” The trial court must consider CEI’s argument of whether CPP uses an “artificial surplus” to supply Brooklyn with electricity, the Court concluded.

Municipality Can Sell Only Produced Power, Concurrence Stated
In his partially concurring and dissenting opinion, Justice DeWine stated that on remand the trial court should rule that CPP does not have the right to sell Brooklyn the solar-powered electricity.

Justice DeWine maintained the Court wrongly interpreted Article XVIII, Sections 4 and 6, of the constitution when it issued the Toledo Edison opinion. He wrote that Section 4 gives municipalities the right to purchase the electricity needed to serve the government and its inhabitants, and it can buy surplus power to meet that need.

But Section 6 only allows the sale of “surplus product” generated from the operation of the municipality own’s utility. In other words, the Ohio Constitution does not permit a municipality to act as a power broker, he wrote. CPP cannot buy power from another source and sell it to Brooklyn, he noted, and it can sell only the power that it generates.

“This is because the resale of electricity purchased by the municipality isn’t authorized at all,” the concurring and dissenting opinion stated.

Case Wrongly Limited Municipal Power, Dissent Maintained
Justice Kennedy noted that the Court in Toledo Edison and this case both addressed whether a municipal utility could sell a surplus created by purchasing electricity. The Court should adhere to precedent in deciding cases with the same question of law, she wrote, but not when it compels the Court “to follow an incorrect interpretation of the Constitution.”

Toledo Edison should be overruled, the dissenting opinion explained, because it had incorrectly construed Article XVIII, Sections 4 and 6, as limiting municipal home rule when those provisions granted power to municipalities to operate utilities that the General Assembly could not override.

When Ohio voters adopted Article XVIII in 1912, the term “surplus” was defined simply as “having more than enough,” she pointed out. There was no distinction between a surplus being “natural or artificial, or purposeful or accidental,” the dissenting opinion stated.

Section 6 expressly empowers a city to sell its surplus electricity so long as the needs of the residents are satisfied first and the sales to the nonresidents do not exceed 50 percent of the total electricity supplied within the municipality. Since CPP is only selling about 4 percent of its electricity outside of city limits and there is no indication the sale prevents the utility from meeting the demand of Cleveland residents, the state constitution authorizes the CPP’s sales to nonresidents, Justice Kennedy concluded.

Solar Farm Power Not Solely for Outside Sales, Dissent Asserted
The Court’s decision in Toledo Edison related to an attempt by four municipalities to act as a broker by purchasing excess power solely for the use of selling it outside of the municipal boundaries, Justice Brunner noted, which is a narrow issue that does not apply to the issue between CPP and CEI.

Justice Brunner wrote that today’s lead opinion and CEI do not identify any facts that indicate CPP entered into a specific power-purchase agreement to provide electricity to Brooklyn. CEI’s argument is that the purchase of any additional electricity by CPP is unlawful, the dissent noted. Justice Brunner maintained, though, that since CEI has not identified any fact that would lead a reasonable juror to believe CPP bought the power solely to resell to Brooklyn, she would affirm the trial court’s grant of summary judgment to the city.

2020-0277. Cleveland Elec. Illum. Co. v. Cleveland, Slip Opinion No. 2021-Ohio-4463.

View oral argument video of this case.

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