Summary
In Consumers' Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 469 ("Quarto One"), I indicated in my dissent that compelling the ratepayers to absorb unnecessary costs, derived from a project that was "not a completely arm's-length transaction," id. at 474, was analogous to passing on the cost of cancelled nuclear plants to consumers — a position which this court refused to adopt in Consumers' Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.2d 153 [21 O.O.3d 96].
Summary of this case from Consumers' Counsel v. Pub. Util. CommOpinion
No. 82-1622
Decided September 7, 1983.
Public Utilities Commission — Semiannual review of fuel component on rate schedules — R.C. 4905.301 — Rates must be readjusted, when — R.C. 4909.191.
APPEAL from the Public Utilities Commission of Ohio.
This is an appeal from a proceeding before the appellee, Public Utilities Commission of Ohio ("commission"), in case No. 81-305-EL-EFC (Subfile A). The proceeding was the semiannual review of the electric fuel component of intervening appellee, Ohio Edison Company ("Ohio Edison"). In its decision, announced July 30, 1982, the commission modified the recovery mechanism for Quarto coal costs that had previously been established in Ohio Edison (Dec. 23, 1980), case No. 80-235-EL-FAC, and permitted certain acquisition and delivery costs associated with Quarto coal to be passed through to Ohio Edison's consumers by the fuel component of its rate schedule.
The issues before the commission and, parenthetically, those before this court, arise out of Ohio Edison's purchase of Quarto coal. Consequently, the genesis of the Quarto Mining Company ("Quarto"), its relationship with Ohio Edison, and the commission's previous treatment of coal purchased from Quarto must be discussed.
In 1967, intervening appellee Cleveland Electric Illuminating Company, Ohio Edison, intervening appellee Toledo Edison Company, Duquesne Light Company, and Pennsylvania Power Company, formed the Central Area Power Coordination Group ("CAPCO"). CAPCO was formed for the purpose, in part, of coordinating the construction of generating capacity so that each of the companies would have a reliable source of bulk power supply through maintenance of adequate reserve capacity levels, and to take advantage of economies of scale. To achieve these goals, the CAPCO companies committed to build five coal-fired units.
The units were: Sammis No. 7, Eastlake No. 5 and Mansfield Nos. 1, 2 and 3.
The Quarto mining project was undertaken to supply coal for the generating units to be built by CAPCO. In 1969, three of the CAPCO companies, Ohio Edison, Penn Power and Duquesne Light, entered into contractual arrangements with North American Coal Company ("NACCO") to develop and operate a mine. This contract was later assigned to Quarto, a subsidiary of NACCO. In 1971, CAPCO entered into a second contract with Quarto to develop and operate two additional mines.
Financing the development of these mines became a problem since neither NACCO nor its subsidiary Quarto had the necessary capital. Therefore, a financing arrangement was evolved whereby the CAPCO companies guaranteed mortgage bonds of Quarto as well as Quarto's lease payments for certain mining equipment. The commission authorized these arrangements in case Nos. 73-710-F and 78-958-EL-AIS. Under these financing arrangements, Quarto is the party obligated to pay interest and principal on the bonds and the lease costs. CAPCO is merely given an opportunity to pay any amounts due, but unpaid, in order to avoid a default.
After reviewing all of the evidence presented, concerning the initial decisions made by Ohio Edison, as agent for CAPCO, regarding the Quarto project, the commission, in its order of July 9, 1980, in case No. 79-227-EL-FAC (Subfile A), reached the following conclusions:
"The evidence in this case shows that Ohio Edison's initial decisions surrounding the early stages of the Quarto project were prudently and carefully made, and there is nothing in the record to suggest otherwise. The Commission believes that further speculation regarding whether other coal reserves might have been chosen or whether a different financial arrangement might have provided different results is unwarranted."
During the development stage of the Quarto mines, it was agreed that the CAPCO companies would purchase Quarto coal at the generally prevailing market price, and that development costs would be carried by Quarto and amortized over the life of the mines. Also during this period, it became apparent that development costs for the Quarto mines would exceed the original estimates. The commission ordered the auditing firm of Deloitte, Haskins Sells to conduct a review of these development costs and to identify the factors which resulted in those increased costs.
This order was made in case No. 79-227-EL-FAC (Subfile A).
In Ohio Edison (July 31, 1981), case No. 81-5-EL-EFC, the commission, in summarizing the auditor's findings which they adopted, stated:
"* * * The Auditors found that the Company [Ohio Edison] acted prudently with respect to factors within their control during the development period of the Quarto mines. The report indicated that the major increases in costs were due to higher labor cost, strikes which cut back productivity, Federal EPA and governmental regulations effecting [ sic] working conditions and rules, UMWA contract changes affecting crew sizes, inflation and the Federal Mine Health and Safety Act."
From the outset, the CAPCO companies were contractually obligated to pay the actual costs of Quarto coal. However, the commission did not allow Ohio Edison to recover more than the average market cost of coal. By entry dated July 25, 1980, in case No. 79-227-EL-FAC (Subfile A), the commission approved an accounting procedure that permitted Ohio Edison to defer on its books the costs of Quarto coal which were in excess of the generally prevailing market price. That procedure continued in effect up until the commission's decision in this case.
With respect to the recovery of all costs associated with Quarto coal, the commission articulated in Ohio Edison (Dec. 23, 1980), case No. 80-235-EL-FAC, what has become known as the "125% rule." This rule provides that, "* * * when the weighted average price of Quarto coal for six consecutive months approaches the level of 25% above the generally prevailing market price of comparable coal, the commission will permit Ohio Edison to recover its actual Quarto costs including the company's deferred costs."
The genesis of this rule was the commission's perception that it was inequitable to require present consumers to pay charges which reflect above market coal costs for the benefit of future electricity users.
In the present case, appellant, Office of Consumers' Counsel ("appellant"), argued that the "125% rule" should be maintained. On the other hand, Ohio Edison argued that it should be allowed to recover the actual Quarto costs, and the accumulated deferred costs over a twenty-four month period.
The commission rejected both of these positions. It adopted, based upon staff recommendations, a "modified 115% method." Under that rule, Ohio Edison would be allowed to recover actual costs for Quarto coal, including deferred costs, as long as the cost of all coal being used at Mansfield does not exceed 115 percent of the average market price. Additionally, the recovery of actual Quarto costs is limited to 125 percent of the generally prevailing market price for similar coal.
Quarto coal is now being used solely at the Mansfield units where it is only a portion of all the coal used.
Appellant filed an application for rehearing, challenging the commission's decision to substitute the "modified 115% method" for the "125% rule." Rehearing was denied.
This cause is now before the court upon an appeal as of right.
Mr. William A. Spratley, consumers' counsel, Mr. Richard P. Rosenberry, Mr. Martin J. Marz and Mr. Richard Ganulin, for appellant.
Mr. Anthony J. Celebrezze, Jr., attorney general, Mr. Robert S. Tongren and Mr. James R. Bacha, for appellee Public Utilities Commission.
Mr. Russell J. Spetrino, Mr. Anthony J. Alexander and Mr. Michael A. Gribler, for intervening appellee Ohio Edison Co.
Messrs. Squire, Sanders Dempsey, Mr. James H. Woodring, Mr. Alan P. Buchmann, Mr. Alan D. Wright and Mr. Craig I. Smith, for intervening appellee Cleveland Electric Illuminating Co.
Messrs. Fuller Henry, Mr. Paul M. Smart and Mr. Fred J. Lange, Jr., for intervening appellee Toledo Edison Co.
R.C. 4905.301 mandates a semiannual hearing to review the fuel component of public utility rate schedules. R.C. 4909.191 (C) requires the utility to demonstrate at the hearing that its acquisition costs and delivery costs were fair, just and reasonable. Conversely, R.C. 4909.191 (D) requires the commission to readjust its rates when the commission finds that a utility has engaged in imprudent fuel procurement practices.
R.C. 4909.191 (C) provides:
"The electric light company shall demonstrate at the hearing on its fuel component that its acquisition and delivery costs were fair, just, and reasonable. The public utilities commission shall consider, to the extent applicable, at each hearing on a fuel component:
"(1) The efficiency of the electric light company's fuel procurement practices and policies;
"(2) The results of financial audits;
"(3) The results of performance audits;
"(4) Compliance by the company with previous commission performance recommendations;
"(5) Such other factors as the commission considers appropriate. The requirements of divisions (C)(2) and (3) of this section shall not apply to an expedited hearing held pursuant to division (E) of this section."
R.C. 4905.01 (F) defines "acquisition cost" as "the cost to an electric light company of acquiring fuel for generation of electricity."
"Delivery costs" is defined by R.C. 4905.01 (E) as, "the cost of delivery of fuel, to be used for the generation of electricity, from the site of production directly to the site of an electric generating facility."
R.C. 4909.191 (D) provides:
"The public utilities commission shall readjust the rates of the electric light company or order the company to refund any charges it has collected under its fuel component which the commission finds to have resulted from:
"(1) Errors or erroneous reporting;
"(2) Imprudent or unreasonable fuel procurement policies and practices;
"(3) Errors in the estimation of kilowatt hours sold;
"(4) Such other practices, policies, and factors as the commission considers appropriate."
The appellant argues that the commission's order, substituting the "modified 115% method" for the "125% rule," was not based upon a demonstration that Ohio Edison's acquisition costs were fair, just and reasonable, but, rather, that these costs result from imprudent and unreasonable acquisition policies. The appellant does not argue that the commission was without jurisdiction to enter the present order. Rather, appellant argues that to do so was against the manifest weight of the evidence before the commission. We disagree.
In the recent case of Consumers' Counsel v. Pub. Util. Comm. (1983), 4 Ohio St.3d 35, we discussed our role in reviewing the commission's factual determinations made in R.C. 4905.301 proceedings. At pages 36-37, we said:
"This court may disturb factual conclusions only when they are unreasonable or unlawful. R.C. 4903.13. In Consumers' Counsel v. Pub. Util. Comm. (1979), 58 Ohio St.2d 449, 453 [12 O.O.3d 378], the court said:
"`* * * Upon review of * * * factual conclusions, a finding of the commission will not be reversed unless it appears from the record that it is manifestly against the weight of the evidence or is so clearly unsupported by the record as to show misapprehension, mistake, or a willful disregard of duty.'" See, also, Cleveland Electric Illuminating Co. v. Pub. Util. Comm. (1975), 42 Ohio St.2d 403 [71 O.O.2d 393].
Here, the commission's factual conclusion is not "so clearly unsupported by the record as to show misapprehension, mistake, or a willful disregard of duty."
The commission based its decision to replace the "125% rule" with the "modified 115% method" on staff testimony. The staff recommended the "modified 115% method" should be adopted because circumstances had changed since the adoption of the "125% rule." First, less Quarto coal was being used at the Mansfield units. Therefore, Quarto and other coal would be used at the Mansfield units. Because other than Quarto coal is used at Mansfield, the "modified 115% method" will provide Ohio Edison and the other CAPCO companies with an incentive to secure inexpensive coal so that actual Quarto costs can be recovered. Second, the staff testified, and the commission held, that the further accumulation of deferred costs would overly burden future ratepayers. Lastly, it was recognized that the ability of Ohio Edison to enter capital markets was becoming impaired as a result of the increasing deferred costs it was carrying.
It should be noted that the "125% rule" was not designed to preclude the recovery of actual costs incurred in the acquisition of Quarto coal. Its purpose was to defer the recovery of these costs until Quarto coal was being produced at below market costs. The appellant's expert witness agreed that the "125% rule" was reasonable.
The projected use was reduced to 3.3 million tons annually from 4.7 million tons annually.
Based on these factors and that the commission has had an extensive history of overseeing the Quarto project, we are unwilling to say that its decision was unreasonable.
In the alternative, appellant argues that the commission's order must be reversed because it violates R.C. 4905.01 (F). In pertinent part, R.C. 4905.01 (F) provides:
"* * * In the case of a coal supply owned or controlled in whole or in part by the company such term shall not exceed a price that is, in the judgment of the public utilities commission, reasonable when compared to the average cost per million British thermal units of similar quality coal purchased from all independent like mining operations under similar term contracts during the same period."
The appellant argues that because of the relationship between the development of the Quarto mines and CAPCO, Quarto coal was controlled, in part, by Ohio Edison. Hence, the commission erred in allowing Ohio Edison to recover more than the cost of similar, i.e., average, market price.
We disagree. As the commission stated in its opinion, even assuming CAPCO controlled Quarto, in part, R.C. 4905.01 (F) was not necessarily violated. In this case, we agree with the commission's analysis of R.C. 4905.01 (F), that:
"* * * Section 4905.01(F) does not reduce the comparison to a simple dollar comparison but rather includes other considerations such as long-term trends, long-term dependability, and long-term cost and supply interests. These matters have all been considered in the Commission's determination to permit the CAPCO companies to pass through certain portions of Quarto coal costs and accumulated deferrals."
Based on the foregoing, we affirm the order of the commission.
Order affirmed.
CELEBREZZE, C.J., W. BROWN, SWEENEY, HOLMES, C. BROWN and J.P. CELEBREZZE, JJ., concur.
LOCHER, J., dissents.
Once again a majority of this court confirms a company-oriented assault on the test-year concept. See, e.g., Consumers' Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 405, 410 (No. 83-1428) (Locher, J., dissenting); Consumers' Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 412, 415 (No. 82-1461) (Locher, J., dissenting). Therefore, I must dissent.
In Consumers' Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.2d 153, we refused to allow the utility to pass on the cost of cancelled nuclear plants to consumers. "It is our opinion that R.C. 4909.15 (A)(4) is designed to take into account the normal, recurring expenses incurred by utilities in the course of rendering service to the public for the test period. * * *
"The extraordinary loss sustained by CEI in connection with the terminated nuclear plants cannot be transformed into an ordinary operating expense pursuant to R.C. 4909.15 (A)(4) by commission fiat. The commission's statement that `[c]ancellation does not create a past loss, but gives rise to a current cost' is unpersuasive. Under this rationale we question whether there could ever be a `past loss' the return of which would not be recoverable in future ratemaking proceedings notwithstanding the commission's assertion to the contrary." 67 Ohio St. 2d, at 164.
Quarto resembles those cancelled nuclear plants in many ways. CAPCO invested heavily in a power source which was intended to yield lower rates in the future, but the market changed. Furthermore, the regulatory environment changed. Now, CAPCO wants to amortize that excessive past cost over market by charging current and future ratepayers.
CAPCO also exacerbated the situation by agreeing to provisions in the mining contract which encouraged sub-optimal production. This should be no surprise in that the facts, as summarized by the majority, leave little doubt that the entire Quarto project was not a completely arm's-length transaction.
For these reasons, the imposition of past losses on current and future ratepayers is not "fair, just, and reasonable." R.C. 4909.191 (C). Likewise, CAPCO has exhibited "imprudent * * * [and] unreasonable fuel procurement policies and practices." R.C. 4909.191 (D)(2). Although the commission is empowered to require electric power suppliers to meet the market, it refuses to do so.
Accordingly, I would reverse the order of the commission.