Cleveland Elec. Illuminating Co. v. Public Utilities Commission of Ohio

• Decision Date: 11 June 1975
• Docket Number: 74-272 and 74-156,Nos. 74-276,s. 74-276
• Citation: 330 N.E.2d 1,42 Ohio St.2d 403,71 O.O.2d 393
• Parties: , 71 O.O.2d 393 The CLEVELAND ELECTRIC ILLUMINATING CO., Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO, Appellee. CITY OF CLEVELAND, Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO et al., Appellees. SIERRA CLUB, INC., Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO et al., Appellees.
• Court: Ohio Supreme Court

Page 403

42 Ohio St.2d 403

330 N.E.2d 1, 71 O.O.2d 393

The CLEVELAND ELECTRIC ILLUMINATING CO., Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO, Appellee.

CITY OF CLEVELAND, Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO et al., Appellees.

SIERRA CLUB, INC., Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO et al., Appellees.

Nos. 74-276, 74-272 and 74-156.

Supreme Court of Ohio.

June 11, 1975.

Syllabus by the Court

1. Basing a rate of return on the equity portion of the rate base of a public utility upon 'what a rate of return on book value would do to the market to book ratio of the shares of the company' contravenes the statutes and the decisions of this court which require the rate of return to be related to the statutory rate base.

2. Inclusion of a 'zero component' representing deferred credits in the capital structure of a public utility constitutes an unlawful reduction of the statutory rate base of the utility.

3. A finding of the Public Utilities Commission which is manifestly against the weight of the evidence is unreasonable and unlawful. (Cleveland v. Pub. Util. Comm., 3 Ohio St.2d 82, 209 N.E.2d 424, approved and followed.)

4. As to evidentiary matters in appeals from the Public Utilities Commission, this court will not substitute its judgment for that of the commission concerning conclusions drawn unless the findings and order are manifestly against the weight of the evidence or there is no evidence.

5. In calculating the sum to be included in the rate base structure of a public utility to cover its investment in materials and supplies maintained for normal operations, maintenance and repair purposes, the Public Utilities Commission is not required to base its determination upon the accounting classifications used by the company concerning such investment.

6. When considering an application for a rate increase filed by a public utility, the Public Utilities Commission may not extend its inquiry to matters not put in issue by the applicant and not related to the rates which are the subject of the application.

7. Property used and useful by a utility in rendering its service is includable in its rate base whether located within the state or out of the state.

8. A finding and order by the Public Utilities Commission will not be disturbed unless it appears from the record that such finding and order are manifestly against the weight of the evidence and are so clearly unsupported by the record as to show misapprehension or mistake or willful disregard of duty. (Delphos v. Pub. Util. Comm., 137 Ohio St. 422, at 424, 30 N.E.2d 688, and Cleveland v. Pub. Util. Comm., 3 Ohio St.2d 82, at 84, 209 N.E.2d 424, approved and followed.)

9. Customers' contributions in the form of accruals for the payment of taxes which will be constant with reasonable certainty and which are available for investments in materials and supplies or for use as working capital should be used as an offset on the allowance for working capital. (Cincinnati v. Pub. Util. Comm., 161 Ohio St. 395, 119 N.E.2d 619 approved and followed.)

10. Different rates for various classes of customers may be charged by a utility where the classifications are based upon the quantity used, the time when used, the purpose for which used, the duration of use, and other reasonable considerations which essentially distinguish the service required to meet the various demands.

The Cleveland Electric Illuminating Company filed, on October 7, 1971, an application with the Public Utilities Commission of Ohio for an increase in its electric service rates. During the course of the proceedings before the commission, the city of Cleveland and the Sierra Club, Inc., were granted leave to intervene.

The commission entered its opinion and order on November 28, 1973, finding: (1) That, during the twelve-month test period ending December 31, 1971, applicant's net annual compensation of $59,777,731 represented a 5.08 percent rate of return on a rate base of $1,175,870,000; (2) that the 5.08 percent rate of return is insufficient to provide applicant with a reasonable compensation for the electric service rendered its customers; and (3) that a rate of return of 7.05 percent is fair and reasonable and is sufficient to provide applicant a just compensation and return on the value of the property used and useful in furnishing the service described in the application.

Three appeals were filed in this court from the order of the commission: Case No. 74-276, by The Cleveland Electric Illuminating Company; case No. 74-272 by the city of Cleveland; and case No. 74-156, by the Sierra Club, Inc. All three appeals were consolidated herein for the purpose of reviewing the findings and order of the commission.

Squire, Sanders & Dempsey, John Lansdale, Alan P. Buchmann, James H. Woodring, Alan D. Wright, and Harry G. Fitzgerald, Jr., Cleveland, for the Cleveland Electric Illuminating Co.

Herbert R. Whiting, director of law, Robert D. Hart, William B. Schatz and James L. Harkins, Jr., Cleveland, for the city of Cleveland.

Weston, Hurd, Fallon, Sullivan & Paisley, Jerome S. Kalur, Benesch, Friedlander, Mendelson & Coplan and Michael T. Honohan, Cleveland, for Sierra Club, Inc.

William J. Brown, Atty. Gen., Keith F. Henley, Walter E. Carson, and Cheryl H. Keith, Columbus, for appellee.

J. J. P. CORRIGAN, Justice.

The appeal of The Cleveland Electric Illuminating Company will be considered first, followed by the appeals of the city of Cleveland and the Sierra Club. The Cleveland Electric Illuminating Company will be referred to as the Company, the city of Cleveland as the City, the Sierra Club, Inc., as Sierra, and the Public Utilities Commission as the Commission.

I A.

REQUIRED RETURN FOR EQUITY PORTION OF RATE BASE.

In its first argument, the Company contends that the Commission, in determining the rate of return, failed to follow the holding in Ohio Edison Co. v. Pub. Util. Comm. (1962), 173 Ohio St. 478, 184 N.E.2d 70 expressed in paragraph five of the syllabus therein, which reads:

'What will represent a reasonable annual compensation for the use of the property included in the rate base of a public utility will be the amount per year of income therefrom that would be required to induce investors to provide an amount equal to the rate base for the securities (such as bonds and shares of stock) of a corporation owning the property included in the rate base and engaged in the business of providing the public utility services being rendered by that property.'

The Company asserts that the '* * * Commission did not state or even suggest in its Opinion and Order herein that the 7.05% return allowed * * * is the amount required to induce investors to provide an amount equal to the rate base for the securities (such as bonds and shares of stock) of a corporation owning the property included in the rate base of * * * (the Company).' Specifically, the Company contends that the Commission erred: (1) In its determination of the required return for the equity portion of the rate base; (2) in including in the rate of return calculation a 'zero component' representing deferred credits; and (3) in finding that the cost of the bond portion of the rate of return should be 6.5 percent.

As pertinent to the foregoing issues, the Commission's opinion and order reads:

'The two witnesses testifying as to a proper rate of return, in recommending rates of return higher than 5.08%, implied that said rate was insufficient to provide CEI with reasonable compensation for the electric service rendered and this Commission so finds.

'The applicant's witness, Mr. Brooks, recommended allowance of a current cost of debt, as of the date certain of 7.35%, a current cost of preferred equity, at the same date, of 7.90%, and an allowance of 11.75% as return on common equity. Applying these allowances to CEI's capital structure results in a recommended rate of return of 9.05%.

'Mr. Brooks arrived at substantially the same conclusion by employing three separate approaches, all of which involved an 'estimate' of the cost of common capital which in turn included a factor for 'investor expectation of growth in earnings' * * *.

'In utilizing a rather complex formula, Mr. Brooks made a basic 'judgment' of percentage of earnings growth rate arrived at by an 'evaluation' of the historic electric earnings growth rate and an 'evaluation' of earnings growth rates to produce bond coverage ratios 'barely sufficient to preclude deterioration in bond ratings * * *.' * * * Mr. Brooks recommended that a factor of 320 (reflecting investor expectation for growth in earnings) be added to the earnings price ratio adjusted for underpricing and commission cost, 8.55 to arrive at a current cost of capital of 11.75% * * *.

'Mr. Rothey, on the other hand, combined the average rate of growth in earnings of comparable electric utilities with the dividend yield to obtain an estimate of 11% as a proper investor discount rate for common stock. However, Mr. Rothey adjusted the 11% to eliminate the inflation factor, a calculation which he believed necessary in Ohio because the RCNLD rate base eliminates 'the eroding effect of inflation upon the value of an investment' * * *. The net result was an estimated cost of common capital of 8.5(%). Mr. Rothey used the embedded cost of debt as of the end of the test year which was 6.5% * * *. The cost for the preferred stock of 7.4% represents the actual amount on the $50,000,000 issue which occurred within the test year * * *.

'In addition, Mr. Rothey computed as a part of capital structure those amounts of funds representing the contributions in aid of construction account and the deferred credits account comprised of deferred investment credit and accumulated deferred income taxes. He predicated his theory upon the facts that 1) such funds are truly as much a part of a company's financing as funds generated from sale of stocks and bonds and 2) these funds are used...