Court found AEP is not improperly subsidizing its electricity generation business through rates charged for distributing electricity.

Court found AEP is not improperly subsidizing its electricity generation business through rates charged for distributing electricity.

The Supreme Court of Ohio today upheld a state utility regulator’s finding that AEP Ohio is not recovering through its distribution rates the costs it incurs to provide generation service. The high court rejected an appeal by a competing electricity generator of the Public Utility Commission of Ohio's (PUCO) decision to approve AEP's rate plan, because the competitor did not show that the PUCO acted unreasonably. 
 
The challenge to the rate plan was based on the allegation that AEP was subsidizing its own competitive electric generation services with money paid by non-generation customers in its service territory. In a unanimous decision, the Supreme Court rejected an argument from Interstate Gas Supply (IGS), a competitor generation supplier in AEP Ohio’s service territory, that the PUCO hindered competition in the electricity generation market when it approved AEP’s 2020 rate plan for distributing electricity to customers

Writing for the Court, Justice Jennifer Brunner explained that when IGS appealed the PUCO-approved rates, the burden was on IGS to show the “rates and charges are unjust, unreasonable, or unlawful.” She noted that IGS offered as evidence a study by AEP staff that $4.7 million in money collected for electricity distribution was possibly used to offset costs for AEP customers who did not take advantage of designating competing electricity generation suppliers other than AEP Ohio.

During PUCO proceedings, IGS was one of several parties that had argued the AEP study was unreliable, Justice Brunner noted. The Court concluded that IGS could not later use the previously disputed study to try to prove AEP’s rates were unjustified based on any known and quantifiable generation costs realized through its distribution rates.  

Chief Justice Sharon L. Kennedy and Justices Patrick F. Fischer, R. Patrick DeWine, Michael P. Donnelly, and Melody Stewart joined the opinion. First District Court of Appeals Judge Robert C. Winkler, sitting for Justice Joseph T. Deters, also joined the opinion.

Commission Attempts to Prevent Subsidization
Ohio lawmakers restructured the electric utility industry in 1999. The law required utilities to separate electricity’s three main components — generation, transmission, and distribution. Generation became an unregulated service, open to competition, while distribution and transmission remained regulated. Before competition, utilities bundled all three services together and charged customers a PUCO-approved rate.

When the services were separated, lawmakers prohibited utility companies from subsidizing the costs of competitive generation services with money collected for distributing electricity.

The Ohio Power Company, which does business as AEP Ohio, asked the PUCO to approve a generation service rate plan extending from 2018 to 2024. As a condition for the PUCO approving the generation rates, AEP agreed to file for approval of new distribution rates by 2020.

Because of concerns raised about subsidization, AEP was directed to determine what costs it paid to serve customers who “shopped” and chose an alternate electric supplier and what it cost to service those who did not shop and selected the standard offer AEP provided to customers.

AEP then proposed two “riders” to place on electric bills. The company suggested that, if it found that some of the distribution costs collected from its customers in its service territory had been used to subsidize costs for customers who did not choose an alternate electricity generation company other than AEP, it would use the riders to adjust costs. The effect of the two riders was to raise distribution costs for the nonshopping customers and lower distribution costs for shopping customers.

The PUCO found a lack of evidence that AEP was using its distribution rates to subsidize rates paid by customers who did not shop for electricity generated by an AEP competitor. The commission ordered AEP to conduct an extensive study and to address the outcome when the company proposed its new distribution rate in 2020. The riders were created, but the PUCO assigned no charges or discounts to the riders, stating it would revisit the matter once the study was completed.

Distribution Study Finds No Subsidization
When AEP filed its distribution plan in 2020, it provided a study by one of its pricing directors. The study identified $4.7 million collected from distributing electricity that could possibly be used to pay for costs incurred for serving its nonshopping generation customers.

The PUCO staff and other parties to the proposed distribution plan, including IGS, objected to the study, arguing it was flawed. The PUCO staff noted that some of the difficulties in determining the costs were attributed to how AEP’s accounting and internal tracking systems work. The staff argued the riders should stay unfunded until more studies were completed.

IGS objected to the delay. It contested the $4.7 million figure as being too low. IGS provided its own consultant’s study that found about $64 million in distribution costs were collected from AEP customers who chose competing generation companies and that money should be returned. IGS argued for the riders to be funded so that costs could be reduced for shopping customers.

The PUCO determined that the IGS consultant did not follow the commission’s directions for assessing subsidization, and it rejected the IGS consultant’s report. The PUCO finally approved AEP’s distribution rates in 2023. IGS appealed the decision to the Supreme Court, which is required to consider the appeal.

Supreme Court Analyzed PUCO Decision
IGS raised several legal challenges to the commission’s approval of the AEP distribution rates. After having argued that AEP’s study was unreliable, IGS called it “uncontroverted evidence” that AEP was using at least $4.7 million through distribution charges paid by shopping customers to serve its nonshopping customers. The PUCO and AEP argued the data was insufficient to prove any subsidization.

Justice Brunner noted the $4.7 million figure from the AEP study did not contain the detailed costs of service to differentiate what AEP spends to serve shopping versus nonshopping customers. Additionally, the IGS study, which concluded that $64 million was unfairly collected from customers who shopped for their generated electricity, did not account for AEP’s costs in serving them. IGS was required to prove in its appeal to the Court that the PUCO had acted unreasonably in approving AEP’s rate scheme.  The Court held it did not do this and affirmed the decision of the PUCO.

2023-0464. In re Application of Ohio Power Co., Slip Opinion No. 2024-Ohio-2890.

View oral argument video of this case.

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