Ohio Power Co. v. Cross (In re Fuel Adjustment Clauses for Columbus S. Power Co.)

Decision Date03 September 2014
Docket NumberNo. 2012–1484.,2012–1484.
Citation18 N.E.3d 1157,140 Ohio St.3d 352,2014 Ohio 3764
CourtOhio Supreme Court
Parties In re FUEL ADJUSTMENT CLAUSES FOR COLUMBUS SOUTHERN POWER COMPANY AND OHIO POWER COMPANY; Ohio Power Company, Appellant and Cross–Appellee; Industrial Energy Users–Ohio, Appellee and Cross–Appellant; Public Utilities Commission, Appellee and Cross–Appellee.

Steven T. Nourse and Matthew J. Satterwhite ; and Porter, Wright, Morris & Arthur, Kathleen M. Trafford, and Daniel R. Conway, Columbus, for appellant and cross-appellee, Ohio Power Company.

Mike DeWine, Attorney General, William L. Wright, Thomas W. McNamee, and Devin D. Parram, Assistant Attorneys General, for appellee and cross-appellee, Public Utilities Commission of Ohio.

McNees, Wallace & Nurick, Samuel C. Randazzo, Frank P. Darr, and Matthew R. Pritchard, Columbus, for appellee and cross-appellant, Industrial Energy Users–Ohio.

O'CONNOR, C.J.

SUMMARY

{¶ 1} In 2009, the Public Utilities Commission approved the first electric security plan ("ESP") for the American Electric Power operating companies, Columbus Southern Power Company and Ohio Power Company (hereafter referred to jointly as "AEP" or the "companies"). This ESP was in effect from 2009 through 2011.

{¶ 2} As part of the ESP, the commission approved a fuel-adjustment clause ("FAC"), which allowed the companies to recover fuel costs for providing generation service as those costs were incurred, without having to file a new rate case. The FAC operates as a separate charge from the base generation rate. The FAC automatically goes up and down with the cost of fuel, while the base rate stays the same.

{¶ 3} The commission also required that the FAC be subjected to quarterly updates and annual prudency and accounting reviews to reconcile the rates collected with the actual fuel costs incurred. The updates and annual reviews were designed to ensure that AEP was recovering only the true cost of fuel from ratepayers.

{¶ 4} This appeal stems from the commission's first annual review of AEP's FAC mechanism, covering the time period from January 1 to December 31, 2009. In the case below, an auditor found that both Ohio Power and Columbus Southern Power had underrecovered fuel costs through the FAC in 2009.1 The auditor recommended that the commission review whether any proceeds that AEP had received from a 2008 contract settlement agreement with a coal supplier should be credited against Ohio Power's underrecovered fuel costs for 2009, given that the settlement agreement resulted in Ohio Power having to purchase a portion of its coal at a higher price starting in 2009. After review, the commission found that all of the proceeds from this settlement agreement should be offset against Ohio Power's FAC underrecovery. On rehearing, the commission clarified that only the share of the settlement proceeds allocable to Ohio retail customers must be credited.

{¶ 5} Ohio Power appealed, challenging the commission's decision to credit the proceeds from the 2008 settlement against the underrecovered 2009 fuel costs. Industrial Energy Users–Ohio ("IEU") filed a cross-appeal, arguing that the commission erred on rehearing when it limited the amount of the credit to only those proceeds allocable to Ohio retail customers.

{¶ 6} For the reasons discussed in detail below, we affirm the commission's orders.

FACTS AND PROCEDURAL BACKGROUND

{¶ 7} Ohio requires electric-distribution utilities to provide consumers with "a standard service offer of all competitive retail electric services necessary to maintain essential electric service to consumers, including a firm supply of electric generation service." R.C. 4928.141(A). The standard-service offer is applicable to customers who receive generation service from the incumbent distribution utility instead of buying it on the market from a provider of competitive retail electric service. "The utility may provide the offer in one of two ways: through a ‘market-rate offer’ under R.C. 4928.142 or through an ‘electric security plan’ under R.C. 4928.143." In re Application of Columbus S. Power Co., 128 Ohio St.3d 512, 2011-Ohio-1788, 947 N.E.2d 655, ¶ 5. AEP chose to provide standard service under an electric security plan.

{¶ 8} On March 18, 2009, the commission issued an opinion and order approving AEP's first ESP, to be in effect from 2009 to 2011. In re Application of Columbus S. Power Co. & Ohio Power Co. for Approval of an Electric Security Plan, Pub. Util. Comm. Nos. 08–917–EL–SSO and 08–918–EL–SSO (March 18, 2009) (the "ESP Order").2 In the ESP Order, the commission authorized a FAC mechanism for the companies to recover costs associated with fuel, purchased power, and environmental compliance. The commission did so under R.C. 4928.143(B)(2)(a), which provides for the "[a]utomatic recovery" of "the cost of fuel used to generate the electricity supplied under the [standard service] offer," "provided the cost is prudently incurred." In order to reconcile the rates collected under the FAC with the actual fuel costs incurred by the companies to provide generation service, the commission established quarterly FAC adjustments and an annual audit to review the prudence of the fuel-procurement decisions and the appropriateness of the accounting of the FAC costs.

{¶ 9} In the ESP Order, the commission also established caps on how much AEP could increase its rates each year of the plan. See R.C. 4928.144 (authorizing "any just and reasonable phase-in of any electric distribution utility rate * * * as the commission considers necessary to ensure rate or price stability for consumers"). Under the rate caps, AEP could increase rates only by a set percentage each year. During the term of the ESP, AEP deferred for future collection a portion of the annual incremental fuel costs recovered under the FAC that exceeded the rate caps. Amounts earned but not collected each year would go into a deferral account and, as required by R.C. 4928.144, accrue carrying charges.

{¶ 10} Prior to the 2009 ESP, the companies were operating under a Rate Stabilization Plan ("RSP"), which the commission approved in 2005 to be in effect from 2006 through 2008. In re Application of Columbus S. Power Co. & Ohio Power Co. for Approval of a Post–Market Development Period Rate Stabilization Plan, Pub. Util. Comm. Nos. 04–169–EL–UNC (Jan. 26, 2005) (hereafter the "RSP Order"). Among other things, the RSP provided AEP with automatic, fixed increases in generation rates for the three years of the plan. Unlike the ESP, the generation rates under the RSP were bundled, meaning that there was no separate FAC mechanism to recover fuel costs above the levels set in rates. In sum, AEP was guaranteed to recover the fixed level of fuel costs embedded in its generation rates, but AEP bore the risk of loss if costs rose above the amount collected in rates. Thus, once the terms of the ESP replaced those of the RSP in 2009, AEP no longer bore the same risk of loss from rising fuel costs.

{¶ 11} Before and during the effective period of the RSP, Ohio Power regularly purchased coal from one of its suppliers, Peabody Development Company, at a fixed price under the terms of a 20–year coal-supply contract.3 The contract was effective through 2012, but by mid–2007, the price of coal under the contract was significantly below the market price for coal. A dispute over the contract arose that Ohio Power decided to resolve to avoid litigation.

{¶ 12} Under the settlement agreement, Ohio Power and Peabody agreed to terminate the 1992 contract as of the end of 2008. Thus, in 2009, Ohio Power had to begin purchasing replacement coal to fuel its generation plants at much higher market prices. In exchange for agreeing to the early termination, Ohio Power received total proceeds of $71.6 million. Specifically, Peabody paid Ohio Power $30 million in cash. Peabody also transferred a West Virginia coal reserve to Ohio Power, which the company valued at $41.6 million.

{¶ 13} This case began when the commission initiated an audit proceeding to review the companies' FAC for 2009. See In re Fuel Adjustment Clauses for Columbus S. Power Co. & Ohio Power Co., Pub. Util. Comm. Nos. 09–872–EL–FAC and 09–873–EL–FAC (Nov. 18, 2009). In January 2010, the commission appointed Energy Ventures Analysis, Inc., to perform a management/performance audit and a financial audit.

{¶ 14} Energy Ventures Analysis filed its audit report with the commission in May 2010. The audit report noted that AEP's fuel supply is largely coal-based, and coal-procurement costs are by far the largest component of the FAC. The report found that at the end of the first year (2009) of the FAC, AEP experienced a large underrecovery of fuel costs. The underrecovery amounts totaled $297.6 million for Ohio Power and $37.5 million for Columbus Southern Power. According to the auditor, many components contributed to the underrecovery, but two coal-contract events alone explained more than half of it.

{¶ 15} The auditor made no recommendation regarding the first coal-contract event. But the auditor recommended that the commission review whether any proceeds that Ohio Power had received from the second contract event—the 2008 settlement agreement with Peabody—should be credited against Ohio Power's underrecovered fuel costs for 2009.

{¶ 16} In its opinion and order, the commission determined that all proceeds from the settlement agreement should be credited against Ohio Power's FAC underrecovery for 2009. In re Fuel Adjustment Clauses for Columbus S. Power Co. & Ohio Power Co., Pub. Util. Comm. Nos. 09–872–EL–FAC and 09–873–EL–FAC (Jan. 23, 2012) (the "FAC Order"). Ohio Power had previously booked $13.3 million of the settlement proceeds as a credit against the FAC underrecovery for 2009 and 2010, with the remaining $58.3 million credited to 2008 fuel expenses. The commission, however, required Ohio Power to credit the $58.3 million to offset underrecovered fuel costs for 2009.

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