Consumer's Counsel v. Public Utilities Com'n of Ohio, 82-1004

• Decision Date: 13 April 1983
• Docket Number: No. 82-1004,82-1004
• Citation: 4 Ohio St.3d 111,447 N.E.2d 749,4 OBR 358
• Parties: , 4 O.B.R. 358 CONSUMERS' COUNSEL, Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO et al., Appellees.
• Court: Ohio Supreme Court

Page 111

4 Ohio St.3d 111

447 N.E.2d 749, 4 O.B.R. 358

CONSUMERS' COUNSEL, Appellant, v. PUBLIC UTILITIES COMMISSION OF OHIO et al., Appellees.

No. 82-1004.

Supreme Court of Ohio.

April 13, 1983.

William A. Spratley, consumers' counsel, Deborah A. Ballam and Martin J. Marz, Columbus, for appellant.

Anthony J. Celebrezze, Jr., Atty. Gen., Marvin I. Resnik and Harris S. Leven, Columbus, for appellee.

Squire, Sanders & Dempsey, Alan P. Buchmann and Richard W. McLaren, Jr., Cleveland, for intervening appellee.

On January 30, 1981, Cleveland Electric Illuminating Company (company) notified the Public Utilities Commission of Ohio (commission) of its intent to file an application for an increase in rates, and of its intent to use the twelve months ending December 31, 1982 as the test period and March 31, 1981 as the date certain. The commission approved the proposed date certain, but directed the company to file its application and supporting exhibits on the basis of a test period with the approved date certain as the mid-point, as well as on the basis of the fully projected test year ending December 31, 1982.

On May 5, 1981, the company formally applied to the commission for the authority to increase its rates and charges for electric service to its customers. Depending on whether the 1980-1981 or 1982 test year is used, the company sought additional gross annual revenues of $134,834,473 or $135,293,271. The commission, by order dated May 27, 1981 accepted the application, assigned this rate case number 81-146-EL-AIR, and on June 17, 1981 granted appellant, Office of Consumers' Counsel the right to intervene. Briefing and hearings followed in due course.

In its opinion and order dated March 17, 1982, the commission approved a rate increase based on the fully projected test year. It allowed the company a return on common equity of 17.30 percent, and further found an overall rate of return of 12.25 percent, upon a rate base of $1,900,527,000, to be fair and reasonable. The new rates would generate approximately $1,166,292,000 in gross annual operating revenues, an increase of $106,977,000.

The cause is now before this court upon an appeal as of right. ¹

PER CURIAM.

R.C. Chapter 4909 requires the commission to determine just and reasonable rates for services rendered by our state's public utilities. Consumers' Counsel raises questions of law and fact in this appeal from the commission's order, claiming the rate increase allowed therein to be unlawful and unreasonable. We consider these claimed errors under our bifurcated standard of review well-stated by Justice Paul Brown:

"As to questions of fact, this court has repeatedly enunciated the rule that orders of the commission will not be reversed unless they are manifestly against the weight of the evidence or are so clearly unsupported by the record as to show misapprehension, mistake or willful disregard of duty. [Citations omitted.]

"As to questions of law, however, this court has complete, independent power of review. Legal issues are accordingly subjected to more intensive examination than are factual questions." Consumers' Counsel v. Pub. Util. Comm. (1979), 58 Ohio St.2d 108, 110, 388 N.E.2d 1370 .

We address the contentions of Consumers' Counsel in the order in which they arise in the calculation of the rate increase.

As with every application for an increase in rates, the commission first determined the appropriate rate base valuation as of the date certain. R.C. 4909.15(A). Consumers' Counsel challenges the calculation of the rate base, contending the commission as a matter of law improperly failed to deduct from working capital an amount equal to the company's accrued nuclear fuel disposal account balance. At the date certain in this rate case, the accumulated balance was $3,126,000.

Since the granting of the company's 1978 application for a rate increase, the commission has allowed the inclusion in current operating expenses of deferred costs for the disposal of spent nuclear fuel used at the Davis-Besse Nuclear Power Plant. The spent fuel is presently being accumulated and stored at a temporary site, with ultimate disposal method and cost yet to be determined. It is expected that permanent disposal will occur in the late 1980's, but this future expense is allowed to be included in current operating expenses on the principle that the cost will be incurred due to the present operations of Davis-Besse. The amounts included in operating expenses are based on estimates prepared by the United States Department of Energy and these customer contributions are kept in a reserve fund by the company, available for investment. Revenues from investment of the fund are returned to the general fund.

In Cincinnati v. Pub. Util. Comm. (1954), 161 Ohio St. 395, 119 N.E.2d 619 , paragraph five of the syllabus, this court held:

"In fixing telephone rates, customers' contributions in the form of accurals [sic] for the payment of taxes, deposits to secure payment of customers' bills for service or as advances on installation charges, and collections of rents to be paid at future dates, which will be constant with reasonable certainty in the foreseeable future 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, including investments in materials and supplies necessary for the normal operations of the company and for plant maintenance and repair." (Emphasis added.)

The principle underlying this holding is that investors in public utilities should be permitted to earn a return only on that property for which they have supplied funds, not on funds contributed by customers. Consumers' Counsel, supra, 58 Ohio St.2d at 115, 388 N.E.2d 1370. By deducting such deposits from working capital, the company's cash flow generated by the customer-supplied account is offset by the hypothetically equivalent reduction in revenues caused by the smaller rate base.

Since Cincinnati, this court has consistently applied the principle that a utility may not earn a return on customer-supplied funds which are "constant with reasonable certainty and available for investments." Consumers' Counsel, supra; Cleveland Elec. Illum. Co. v. Pub. Util. Comm. (1975), 42 Ohio St.2d 403, 330 N.E.2d 1 , paragraph nine of the syllabus. Conversely, when such an account is not "constant with reasonable certainty," as with customer deposits in the form of budget billing balances, no offset against working capital and concomitant reduction in rate base are required. Cleveland v. Pub. Util. Comm. (1982), 70 Ohio St.2d 290, 294, 436 N.E.2d 1366 .

In the instant case, the commission justified permitting the company to earn interest on the accrued nuclear fuel disposal account without a compensating rate base deduction by stating its intent that the monies earned be used to pay the higher costs expected when actual disposal occurs in the future. The commission speculates that the amounts charged to current customers will be insufficient to cover actual disposal costs and further speculates that the return earned on the account will be available to offset this additional expense.

We note the inherent uncertainty of the estimated cost of permanent disposal and the possibility that such costs may in fact be less than expected. We also note the inability of the commission or company to track precisely the funds earned by this account. Given these facts, we are not persuaded that an exception to the general rule of law should apply. It is uncontroverted that the customer-supplied funds in this account are constant with reasonable certainty and are available for investments. Accordingly, working capital should be offset in the amount of the accrued nuclear fuel disposal account, thereby reducing the rate base. This, in effect, will deny the company a return on accrued customer-supplied funds. By failing to order such an offset, the commission erred as a matter of law and its decision must be reversed.

Having determined the appropriate rate base and operating expenses, the commission next considered capital structure, fixing the relative percentage of debt, preferred stock and common equity. It then determined what it believed to be the correct cost for each of these components. After the commission ascertained the cost of capital components, it assigned rates of return which must be "fair and reasonable." From these rates, an overall cost of capital is derived, which is equated with the fair rate of return, and when applied to the rate base, together with expenses, results in the permissible rates to be charged the customer.

Consumers' Counsel disputes the calculation of cost of common equity. It contends the adjustment of the baseline cost of equity to account for flotation costs ² improperly included an increased risk to investors as a result of this court's decision in Consumers' Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.2d 153, 423 N.E.2d 820 (hereinafter "CEI "). In that case, this court disallowed the recovery of the costs of four cancelled nuclear plants. Consumers' Counsel here does not dispute that some adjustment was appropriate for flotation costs, but argues that the commission has misused the concept in order to guarantee a return of invested capital in the terminated units.

Whether the figure derived by the commission to reflect flotation costs is correct is a question of fact, there being no dispute that some adjustment for flotation costs is appropriate. Although Consumers' Counsel proposed a different amount, there was sufficient evidence in the record to support the commission's decision to adopt its staff's proposal. In fact, the same range for flotation costs was upheld by this court in Consumers' Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.2d 303, 310, 423 N.E.2d 1082 . Moreover, nothing in the record evidences any improper considerations underlying the...