Columbus Southern Power Co. v. Pub. Util. Comm.

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Columbus Southern Power Company, Appellant, v. Public Utilities

Commission of Ohio et al., Appellees.

[Cite as Columbus Southern Power Co. v. Pub. Util. Comm.

(1993), Ohio St.3d .]

Public Utilities Commission -- Conversion of nuclear power

plant to coal-fired facility -- Application for rate

increase -- Review of commission order by Supreme Court

governed by R.C. 4903.13.

(No. 92-1773 -- Submitted June 2, 1993 -- Decided

November 4, 1993.)

Appeal from the Public Utilities Commission of Ohio, No.

91-418-EL-AIR.

In 1969, appellant, Columbus Southern Power Company

("CSP") (formerly Columbus & Southern Ohio Electric Company),

Cincinnati Gas & Electric Company, and Dayton Power & Light

Company entered into a joint venture to construct the William

H. Zimmer Nuclear Power Station ("Zimmer"). Zimmer was to

begin operating in 1975. In November 1982, after numerous

construction delays, the Nuclear Regulatory Commission

suspended all safety-related construction at the site. By

agreement dated January 20, 1984, the joint venturers canceled

the Zimmer project as a nuclear plant and agreed to use their

best efforts to convert Zimmer to a coal-fired facility.

On October 23, 1984, appellee, Public Utilities Commission

of Ohio ("PUCO"), initiated In the Matter of the Restatement of

the Accounts and Records of The Cincinnati Gas & Electric

Company, The Dayton Power & Light Company, and Columbus &

Southern Ohio Electric Company, PUCO No. 84-1187-EL-UNC, to

determine the portion of the capital invested in the Zimmer

project "which may not be used and useful in a converted

coal-fired" plant. On October 1, 1985, the parties to that

proceeding, with the exception of the city of Cincinnati and

the Board of Commissioners of Hamilton County, entered into a

stipulation resolving that issue. The stipulation prohibited

the owner utilities from including a total of $861 million in

existing Zimmer investment in future rate applications. The

city of Cincinnati filed objections to the agreement. After

conducting hearings on the city's objections, the PUCO approved

the stipulation by order of November 26, 1985. No appeal was

taken from that order.

Zimmer was converted to a coal-fired generating unit and

was placed in service beginning March 30, 1991. On April 2,

1991, the owner utilities each filed an application to increase

electric rates in their respective service territories. The

utilities' primary purpose was to receive a return on their

Zimmer investment, which totaled $3.069 billion, exclusive of

the $861 million disallowed by the stipulation. CSP's

jurisdictional share was $845,653,000.

In its application, CSP sought a gross annual revenue

increase of $202,137,000. After making adjustments related to

the Zimmer rate-base valuation, the rate of return, and

rate-case expenses, the PUCO, on May 12, 1992, approved a

revenue increase of $123,022,000, with the portion attributable

to the Zimmer investment phased in over a period of three

years.

On July 2, 1992, the PUCO denied CSP's application for

rehearing on the issues raised in this appeal. The cause is

now before this court upon an appeal as of right.

Marvin I. Resnik, Kevin F. Duffy, James R. Bacha, James L.

Reeves and F. Mitchell Dutton, for appellant.

Lee I. Fisher, Attorney General, James B. Gainer, Duane W.

Luckey, Thomas W. McNamee, William L. Wright, Jeffrey D. Van

Niel and Paul A. Colbert, Assistant Attorneys General, for

appellee.

Vicki Miller, Acting Consumers' Counsel, Michael McCord,

Thomas W. Atzberger, Evelyn R. Robinson-McGriff, Richard W.

Pace, Sr., and Barry Cohen, Associate Consumers' Counsel for

intervening appellee Office of Consumers' Counsel.

Emens, Kegler, Brown, Hill & Ritter, Samuel C. Randazzo

and Richard P. Rosenberry, for intervening appellee Industrial

Energy Consumers.

Chester, Hoffman, Willcox & Saxbe and John W. Bentine, for

intervening appellee Ohio Council of Retail Merchants.

Per Curiam. R.C. 4903.13 governs our review of PUCO

orders. It provides in pertinent part:

"A final order made by the public utilities commission

shall be reversed, vacated, or modified by the supreme court on

appeal, if, upon consideration of the record, such court is of

the opinion that such order was unlawful or unreasonable. ***"

In MCI Telecommunications Corp. v. Pub. Util. Comm.

(1988), 38 Ohio St.3d 266, 268-269, 527 N.E.2d 777, 780, we

interpreted this standard of review:

"Under the 'unlawful or unreasonable' standard specified

in R.C. 4903.13, this court will not reverse or modify a PUCO

decision as to questions of fact where the record contains

sufficient probative evidence to show that the PUCO's

determination is not manifestly against the weight of the

evidence and is not so clearly unsupported by the record as to

show misapprehension, mistake, or willful disregard of duty.

Dayton Power & Light Co. v. Pub. Util. Comm. (1983), 4 Ohio

St.3d 91, 4 OBR 341, 447 N.E.2d 733; Columbus v. Pub. Util.

Comm. (1979), 58 Ohio St.2d 103, 12 O.O.3d 112, 388 N.E.2d

1237. This court does, however, have complete and independent

power of review as to questions of law. Legal issues are,

therefore, subjected to a more intensive examination than are

factual questions. Consumers' Counsel v. Pub. Util. Comm.

(1983), 4 Ohio St.3d 111, 4 OBR 358, 447 N.E.2d 749."

We consider and resolve the six errors alleged by CSP with

these standards in mind.

I. THE PHASE-IN PLAN

It is axiomatic that the PUCO, as a creature of statute,

may exercise only that jurisdiction conferred upon it by the

General Assembly. Dayton Communications Corp. v. Pub. Util.

Comm. (1980), 64 Ohio St.2d 302, 18 O.O.3d 478, 414 N.E.2d

1051; Pike Natural Gas Co.v. Pub. Util. Comm. (1981), 68 Ohio

St.2d 181, 22 O.O.3d 410, 429 N.E.2d 444; Consumers' Counsel v.

Pub. Util. Comm. (1981), 67 Ohio St.2d 153, 21 O.O.3d 96, 423

N.E.2d 820; Werlin Corp. v. Pub. Util. Comm. (1978), 53 Ohio

St.2d 76, 7 O.O.3d 152, 372 N.E.2d 592; Ohio Pub. Interest

Action Group, Inc. v. Pub. Util. Comm. (1975), 43 Ohio St.2d

175, 72 O.O.2d 98, 331 N.E.2d 730.

While the General Assembly has delegated authority to the

PUCO to set just and reasonable rates for public utilities

under its jurisdiction, it has done so by providing a detailed,

comprehensive and, as construed by this court, mandatory

ratemaking formula under R.C. 4909.15. See Gen. Motors Corp.

v. Pub. Util. Comm. (1976), 47 Ohio St.2d 58, 1 O.O.3d 35, 351

N.E.2d 183.

R.C. 4909.15(A) requires the PUCO to make a series of

determinations -- the valuation of the utility's property in

service as of date certain (R.C. 4909.15[A][1]), a fair and

reasonable rate of return on that investment (R.C.

4909.15[A][2]), and the expenses incurred in providing service

during the test year (R.C. 4909.15[A][4]). Once those

determinations are made, the PUCO is required to "compute the

gross annual revenues to which the utility is entitled"

(emphasis added) under division (B) by adding the dollar return

on the company's investment (R.C. 4909.15[A][3]) to the

utility's test year expenses. If the charges under the

utility's existing tariff are insufficient to generate those

revenues, the PUCO is required to fix new rates that will raise

the necessary revenue. R.C. 4909.15(D) provides in part:

"When the public utilities commission is of the opinion,

after hearing and after making the determinations under

divisions (A) and (B) of this section, that any rate *** is, or

will be, unjust, unreasonable *** or that the maximum rates ***

chargeable by any such public utility are insufficient to yield

reasonable compensation for the service rendered, and are

unjust and unreasonable, the commission shall:

"***

"(2) With due regard to all such other matters as are

proper, according to the facts of each case,

"***

"(b) *** fix and determine the just and reasonable rate

*** that will provide the public utility the allowable gross

annual revenues under division (B) of this section, and order

such just and reasonable rate *** to be substituted for the

existing one." (Emphasis added.)

In this case, the PUCO made the determinations required by

division (A) and computed the gross annual revenues in

accordance with division (B). It then found that such revenues

exceeded the revenues generated under CSP's present rate

schedule (by $123,022,000) and, noting the magnitude of the

increase, ordered a three year phase-in of the gross annual

revenue increase associated with the converted Zimmer facility

($117,517,000). Further, the PUCO authorized recovery of the

deferrals created in years one and two of the phase-in over a

ten-year period, with carrying charges.

CSP initially argues that the PUCO ordered phase-in of its

revenue increase violates the statutory formula by denying it

the gross annual revenues to which it has otherwise been found

entitled under R.C. 4909.15(B). The PUCO argues that the "all

such other matters as are proper" language of R.C.

4909.15(D)(2) provides the PUCO with broad discretion to

consider a variety of matters in setting rates, including, as

here, the reasonableness of the magnitude of a one-time

increase.

In the leading case of Consumers' Counsel v. Pub. Util.

Comm. (1981), 67 Ohio St.2d 153, 166, 21 O.O.3d 96, 104, 423

N.E.2d 820, 828, we construed "all such other matters as are

proper" more narrowly: "It is our view that R.C.

4909.15(D)(2)(b) is designed to allow the commission [PUCO] to

make minor adjustments to rates ascertained by the statutory

formula when the criteria upon which the rates are based are

skewed for one reason or another. Thus, under R.C.

4909.15(D)(2)(b), the commission may smooth out anomalies in

the ratemaking equation that tend to make the test year data

unrepresentative for ratemaking purposes."

We have applied this exception to the mandatory ratemaking

formula sparingly, stating in Dayton Power & Light Co. v. Pub.

Util. Comm. (1983), 4 Ohio St.3d 91, 95, 4 OBR 341, 344, 447

N.E.2d 733, 736, that such "ad hoc tinkering with the statutory

formula is [to remain the exception and] not to become the

rule." See, also, Consumers' Counsel v. Pub. Util. Comm.

(1981), 67 Ohio St.2d 372, 21 O.O.3d 234, 424 N.E.2d 300; Ohio

Water Service Co. v. Pub. Util. Comm. (1983), 3 Ohio St.3d 1, 3

OBR 300, 444 N.E.2d 1025 (refusal to find an anomaly); Columbus

v. Pub. Util. Comm. (1984), 10 Ohio St.3d 23, 10 OBR 175, 460

N.E.2d 1117 (the matter precipitating the adjustment had no

basis in the underlying ratemaking statutes). Moreover, we

have applied the exception only to permit recovery of

out-of-test-year expenses in appropriate circumstances, see

Montgomery Cty. Bd. of Commrs. v. Pub. Util. Comm. (1982), 1

Ohio St.3d 125, 1 OBR 163, 438 N.E.2d 111, and Consumers'

Counsel v. Pub. Util. Comm. (1983), 6 Ohio St.3d 412, 6 OBR

459, 453 N.E.2d 590), and have not applied it to adjust the

date certain valuation of rate base items, see Consumers'

Counsel v. Pub. Util. Comm. (1979), 58 Ohio St.2d 449, 12

O.O.3d 378, 391 N.E.2d 311, Consumers' Counsel v. Pub. Util.

Comm. (1981), 67 Ohio St.2d 372, 21 O.O.3d 234, 424 N.E.2d 300,

and Ohio Edison Co. v. Pub. Util. Comm. (1992), 63 Ohio St.3d

555, 589 N.E.2d 1292.

It cannot be seriously argued that the phase-in of CSP's

rates, precipitated by the inclusion of the Zimmer facility in

rate base, falls within the revenue adjustments contemplated by

our 1981 Consumers' Counsel decision at 67 Ohio St.2d 153, 21

O.O.3d 96, 423 N.E.2d 820. Clearly, the PUCO did not order the

"adjustment" (or phase-in) because the Zimmer valuation under

R.C. 4909.15(A)(1) was unrepresentative. Rather, it believed

the result of the computation required under R.C. 4909.15(B) to

be unreasonable on its face. Thus, the lawfulness of the

PUCO's phase-in plan hinges on whether the PUCO has the

authority to reduce, or phase-in, the gross annual revenues

computed under R.C. 4909.15(B) in the absence of anomalies in

the underlying ratemaking criteria.

The PUCO and intervening appellees, Industrial Energy

Consumers et al., argue that such authority is provided by our

decision in Industrial Energy Consumers v. Pub. Util. Comm.

(1991), 62 Ohio St.3d 440, 584 N.E.2d 653. We disagree. In

that case, Columbia Gas of Ohio, Inc. filed an application to

increase the rates of its general service class. Pursuant to a

separate investigation initiated under R.C. 4905.26, the PUCO

determined that the rates of another customer class, special

contract customers (R.C. 4905.31), were generating an earned

rate of return for the company of 44.85 percent. The PUCO

combined its investigation of special contract rates with

Columbia's rate cases (bringing all of the company's revenues

before it) and, in setting rates under R.C. 4909.15(D),

credited the "excess special contract revenues" to the general

service revenue requirement, yielding a rate of return found

appropriate for the company as a whole. The PUCO's use of the

excess special contract revenues to satisfy a portion of the

general service revenue requirement did not reduce, or cause to

be phased in, the annual revenues to which the company was

found entitled under R.C. 4909.15(B) and was required to be

provided under R.C. 4909.15(D)(2)(b). Rather, its order

affected only the source from which those revenues would be

derived and our decision to affirm was consistent with the wide

discretion we have afforded the PUCO on other rate design

issues. See Gen. Motors Corp. v. Pub. Util. Comm., supra (47

Ohio St.2d 58, 1 O.O.3d 35, 351 N.E.2d 183).

The PUCO also argues that it has the authority to order

the phase-in of the company's annual revenue increase under

R.C. 4901.02(A), which provides that "[t]he commission shall

possess the powers and duties specified in, as well as all

powers necessary and proper to carry out the purposes of

Chapters *** 4905., [and] *** 4909. *** of the Revised Code."

The PUCO contends that the purpose of R.C. Chapters 4905 and

4909 is to set just and reasonable rates and that, having

determined the size of the rate increase under the statutory

ratemaking formula to be unreasonable, R.C. 4901.02(A) permits

it to implement rates which will be reasonable.

The comprehensive ratemaking formula provided by the

General Assembly is meant to protect and balance the interests

of the public utilities and their ratepayers alike. Dayton

Power & Light Co. v. Pub. Util. Comm., supra (4 Ohio St.3d 91,

4 OBR 341, 447 N.E.2d 733). We cannot conclude that it was the

General Assembly's intent under the above enabling statute,

R.C. 4901.02(A), to permit the PUCO to disregard that very

formula in instances in which it simply did not agree with the

result. Cf. Consumers' Counsel, supra, 67 Ohio St.3d at 165,

21 O.O.3d at 104, 423 N.E.2d at 828 ("the General Assembly

undoubtedly did not intend to build into its recently revised

[1976] ratemaking formula a means by which the PUCO may

effortlessly abrogate that very formula"). Moreover,

considering the detail with which the General Assembly has

legislated in this area, we find that if it had intended to

grant the PUCO authority to phase-in a utility's annual revenue

increase, it would have specifically provided such a

mechanism. If the PUCO now seeks such authority, its recourse

is through the legislature, and not this court. See Pike

Natural Gas Co., supra (68 Ohio St.2d 181, 22 O.O.3d 410, 429

N.E.2d 244).

We find that pursuant to R.C. 4909.15(B), the PUCO is

required to "compute the gross annual revenues to which the

utility is entitled" under the statutory formula, with limited

exceptions not applicable here, and fix rates under R.C.

4909.15(D)(2)(b) that will "provide" the utility with those

annual revenues. The phase-in plan ordered by the PUCO

deprives CSP of the annual revenues to which it is entitled

during the first two years it is in effect,1 and exceeds the

PUCO's statutory authority. Accordingly, we reverse the PUCO's

determination on this issue.2

We must also consider CSP's request that this court

instruct the PUCO on remand to provide a mechanism to recover

the gross annual revenues already deferred. Intervening

appellees Industrial Energy Consumers et al. argue that such

recovery is prohibited under Keco Industries, Inc. v.

Cincinnati & Suburban Bell Tel. Co. (1957), 166 Ohio St. 254, 2

O.O.2d 85, 141 N.E.2d 465.

In Keco, a consumer brought an action for restitution

after this court's reversal of a PUCO order resulted in lower

rates being set on remand. We held that such action would not

lie because a "utility must collect the rates set by the

commission." Id., 166 Ohio St. at 257, 2 O.O.2d at 86-87, 141

N.E.2d at 468. See R.C. 4905.32. Here, Industrial Electric

Consumers et al. seek to extend that holding to situations

where reversal results in higher rates being set, in order to

prevent utilities from recovering revenues not collected during

the pendency of an appeal. This argument ignores that the

PUCO's initial order in this proceeding specifically authorized

recovery of the deferred revenues in question and, thus, those

revenues constitute a portion of the rates to which CSP is

entitled. Keco is clearly not controlling. Further, CSP's

recovery of the deferred revenues, having been authorized by

the PUCO's initial order, would not violate the proscription

against retroactive ratemaking. See Ohio Edison Co. v. Pub.

Util. Comm. (1978), 56 Ohio St.2d 419, 424-425, 10 O.O.3d 523,

526-527, 384 N.E.2d 283, 286.

Accordingly, we instruct the PUCO to fix rates that

provide CSP the gross annual revenues determined in accordance

with R.C. 4909.15(B) and (D)(2)(b), consistent with this

decision. The PUCO also must provide a mechanism by which CSP

is able to recover those revenues deferred to the time the

order on remand is issued.

II. THE SETTLEMENT

CSP next argues that the rate-base disallowances by the

PUCO related to nuclear fuel, nuclear wind-down costs, and

allowance for funds used during construction violated the terms

of the 1985 stipulation which it had approved. The stipulation

provided in pertinent part:

"15. The [commission's] Staff and the parties to this

proceeding did engage in extensive settlement discussions with

the Owners and, as a consequence, the following agreements have

been reached by the Owners and the other parties hereto

[except, as relevant to this case, the city of Cincinnati],

which they recommend that the PUCO adopt as the final

resolution of the above captioned proceeding.

"A. The sum of $861,000,000.00 and any Allowance for

Funds Used During Construction accrued on such sum since

January 31, 1984, (the 'Disallowed Amount') shall be disallowed

[i.e., not included in future rate requests].

"***

"F. In the event that the Owners determine to go forward

with the construction of the converted 1300 MW coal-fired

Zimmer facility and the same is completed and brought into

service, there is agreement that the sunk costs remaining as of

January 31, 1984 after the total Disallowed Amount (including

AFUDC properly accrued thereon subsequent to January 31, 1984)

will not be challenged by any of the parties hereto as being:

(1) the result of mismanagement and/or (2) not being used and

useful in the converted Zimmer facility.

"G. In addition, it is understood and agreed that all of

the non-Owner parties hereto, while expressing no position with

respect to the prudence of the Owners' decisions to use their

best efforts to convert Zimmer to a 1300 MW coal-fired plant,

reserve the right to challenge the reasonableness of any

decision made subsequent to the decision to cancel Zimmer as a

nuclear facility in any future proceedings before the

commission."

A. Allowance For Funds Used During Construction ("AFUDC")3

In its application to increase electric rates, CSP sought

recovery of AFUDC on the remaining Zimmer sunk costs(costs

remaining after the disallowance) from February 1, 1984, to the

plant's completion in March 1991. Several intervenors, who

were signatories to the 1985 stipulation, argued that under

paragraph 15(F) of the stipulation, AFUDC was not "properly

accrued" from February 1984 through February 1987 because

construction of the converted Zimmer facility was "interrupted"

during that period, pending receipt of a construction permit

from the U.S. Army Corps of Engineers (issued March 17, 1987).

The PUCO agreed in part with the intervenors and deducted from

CSP's proposed rate base valuation the AFUDC accrued from

February 1984 until March 1986, the point at which the PUCO

decided sufficient construction activity had commenced. In

reaching this decision the PUCO relied on FERC (Federal Energy

Regulatory Commission) Accounting Release AR-5 (Revised),

effective January 1, 1968, which provides in part:

"Interest during construction may be capitalized starting

from the date that construction costs are continuously incurred

on a planned progressive basis. *** No interest should be

accrued during period [sic] of interrupted construction unless

the company can justify the interruption as being reasonable

under the circumstances." (Emphasis added.)

CSP argues that the AFUDC accrued from February 1984 to

the plant's completion is not subject to challenge in this

proceeding. It reasons that the intent of the parties in

entering the 1985 stipulation was to resolve all issues related

to the nuclear Zimmer facility; that paragraph 15(F)

specifically permits AFUDC on the sunk costs remaining as of

January 31, 1984; and that the PUCO recognized as much in its

order of November 26, 1985 approving the stipulation when it

stated that the "settlement represents an opportunity to put

nuclear Zimmer behind us" and "closes the chapter on nuclear

Zimmer." (Case No. 84-1187-EL-UNC.) As such, CSP argues that

the "properly accrued" language in the 1985 stipulation should

be construed as permitting challenges only to the mathematical

accuracy of the accrual calculations.

We find no basis to construe the stipulation so narrowly.

While it is true that the stipulation and order approving it

intended to put to rest nuclear valuation issues, they did so

as of a specific point in time, January 31, 1984. While the

stipulation clearly permits recovery of AFUDC on the sunk costs

remaining as of that date, it just as clearly conditions such

recovery upon their subsequent proper accrual. We construe

that language to mean that the PUCO must review the accruals

pursuant to applicable accounting conventions, and not simply

for mathematical accuracy. To hold otherwise would be contrary

to the general intent of the stipulation that costs incurred

after January 31, 1984 are subject to challenge in succeeding

PUCO proceedings.

We now turn to the question of whether the AFUDC accruals

between February 1984 and March 1986 were proper under FERC

AR-5. There is little doubt that construction of the Zimmer

facility was interrupted when the Nuclear Regulatory Commission

("NRC") halted safety-related construction in November 1982.

As much is confirmed by an internal American Electric Power

Service Corporation memorandum, dated December 19, 1983, which

states that "[a]t Zimmer, the NRC ordered virtually all

construction stopped pending a determination as to the work

necessary to complete the plant properly."

Finding first that CSP did not carry its burden of showing

the 1982 interruption to be reasonable,4 the PUCO then

determined that construction did not commence on the converted

Zimmer facility on a "planned progressive basis" until major

construction contracts were awarded in February 1986. CSP

argues that construction was occurring on a planned progressive

basis at the facility during the period from February 1984

through February 1987, and points to its witness's testimony

that construction activities during that timeframe consisted of

project planning and scheduling, engineering, design and

procurement, site investigation, licensing and permitting, site

construction activities, and existing facility modifications

and maintenance.

In its order, the PUCO discounted these activities,

finding that many were not construction specific or had

occurred after February 1986. Further, the PUCO noted that the

owner utilities announced on January 20, 1984 their decision to

abandon Zimmer as a nuclear facility, and that they made only a

qualified decision to convert the facility to a coal-fired

plant on August 1, 1984, contingent upon satisfying financial,

regulatory, and environmental concerns. Moreover, the record

reflects that at the time the 1985 stipulation was approved,

the owners had not yet decided to go forward with the

construction of the converted Zimmer facility.

The point at which construction of the converted facility

began on a planned and progressive basis is a question of

fact. The PUCO's determination that construction had not

commenced sufficiently to warrant the accrual of AFUDC until

March 1986, was not "manifestly against the weight of the

evidence and is not so clearly unsupported by the record as to

show misapprehension, mistake, or willful disregard of duty."

MCI Telecommunications, supra (38 Ohio St.3d 266, 527 N.E.2d

777). Accordingly, we affirm the PUCO on this issue.

B. Nuclear Fuel Expense and Nuclear Wind-down Costs

The PUCO also reduced CSP's proposed rate-base valuation

by amounts related to nuclear fuel expense and "nuclear

wind-down costs" (costs incurred after January 31, 1984 for

obligations related to the construction of Zimmer as a nuclear

facility). As above, CSP argues that the intent of the 1985

stipulation was to resolve all nuclear-related issues and

contends that these disallowances were written off as a part of

the $861 million disallowance provided for in paragraph 15(A)

of the stipulation. We disagree.

We have already found that the stipulation was

crafted with regard to the specific date of January 31,

1984. The record shows that neither the nuclear fuel

nor the nuclear wind-down costs were included in the Zimmer

investment considered as of that date by the parties.

Accordingly, we agree with the PUCO and ascribe no intent

to the parties that these amounts were to be disallowed

under paragraph 15(A) or included in the sunk cost not

subject to challenge in paragraph 15(F). Because these

items cannot be regarded as used and useful in a converted

Zimmer facility, the PUCO properly excluded them from rate

base in this case.

III. CONFISCATION

CSP also argues that the PUCO's order resulted in a

confiscation of its property in violation of the Fifth and

Fourteenth Amendments to the United States Constitution. It

bases its claim upon the revenues it will be deprived of as a

result of the phase-in plan and its inability to earn a return

on the rate-base items (AFUDC, nuclear fuel, and nuclear

wind-down costs) disallowed by the PUCO. Our reversal of the

PUCO's phase-in plan renders CSP's claim of confiscation on

that basis moot. Further, because the rate-base items were

properly excluded under the statutory ratemaking formula and,

therefore, CSP is not entitled to any return on these items,

the PUCO's ruling was not confiscatory. See Dayton Power &

Light Co. v. Pub. Util. Comm. (1983), 4 Ohio St.3d 91, 4 OBR

341, 447 N.E.2d 733.

IV. ELECTRIC POWER RESEARCH INSTITUTE DUES

In its application, CSP sought recovery of $2,727,583 in

estimated membership dues associated with its proposal to join

the Electric Power Research Institute ("EPRI") in the future.

To support its request, CSP presented a witness who generally

extolled the benefits of membership, acknowledging that it

would enhance CSP's research and development efforts to the

benefit of the utility and its consumers alike. The witness

further testified that CSP had been considering joining EPRI

for a number of years, but could not explain why it had not

done so in 1990, just prior to the test year, recognizing that

PUCO precedent permitted recovery of the membership dues.

The PUCO denied CSP's request as an improper

out-of-test-year expense. See Columbus v. Pub. Util. Comm.

(1984), 10 Ohio St.3d 23, 25, 10 OBR 175, 177, 460 N.E.2d 1117,

1120 (There is a "strong presumption that only expenses

incurred during the test year may be included in awarding a

rate increase."). The PUCO further found, considering CSP's

evidence regarding the benefits of membership, that the failure

to join EPRI constituted an unreasonable practice and, as a

result, made an unquantified downward adjustment to CSP's

return on equity. The PUCO stated that it "strongly

encourages" and "expects" CSP to join EPRI. It also ordered

CSP "to demonstrate in its next long-term forecast filing that

it has joined EPRI. If the company does not do so, then the

Commission will use its authority pursuant to Section 4909.154,

Revised Code, to remedy the company's unreasonable practice."

CSP does not contest the PUCO's disallowance of this

proposed post-test-year expense. Instead, it characterizes the

PUCO's above statements as an "order" that it join EPRI and

argues that such an order unlawfully interferes with CSP's

managerial discretion. See Elyria Tel. Co. v. Pub. Util. Comm.

(1953), 158 Ohio St. 441, 448, 49 O.O. 391, 394, 110 N.E.2d 59,

63 ("The Public Utilities Commission is a creature of statute.

*** Its powers do not include the right to manage utilities or

dictate their policies."). See, also, R.C. 4909.154

(commission may only recommend management policies on

management practices to the public utility).

We agree that the PUCO is without power to order CSP to

join EPRI. Id. However, we refuse to characterize the

language used by the PUCO in this instance as an "order".

Rather, it is more properly construed as a warning that if CSP

does not join EPRI, it will be subject to possible

disallowances in future rate proceedings. The decision whether

to join EPRI or suffer the possible consequences rests squarely

with CSP. Having so found, we need not address CSP's

alternative argument that, if the "order" is deemed lawful, the

PUCO must allow CSP's recovery of the estimated membership dues.

CSP also argues that R.C. 4909.154 provides the only means

by which the PUCO may make adjustments for imprudent management

decisions and that the downward adjustment to its return on

equity constitutes an unlawful circumvention of the ratemaking

statutes. We disagree.

It is fundamental that a utility's management practices be

considered when setting its authorized rate of return. See,

e.g, Bluefield Water Works & Improvement Co. v. Pub. Serv.

Comm. of W.Va. (1923), 262 U.S. 679, 693, 43 S.Ct. 675, 679, 67

L.Ed. 1176, 1183 ("The return should be reasonably sufficient

to assure confidence in the financial soundness of the utility

and should be adequate, under efficient and economical

management, to maintain and support its credit and enable it to

raise the money necessary for the proper discharge of its

public duties."). As such, the PUCO's broad authority to fix a

fair and reasonable rate of return under R.C. 4909.15(A)(2)

provides an independent source of authority for the PUCO to

consider a utility's management practices. Cf. Babbit v. Pub.

Util. Comm. (1979), 59 Ohio St.2d 81, 13 O.O.3d 67, 391 N.E.2d

1376.

Customarily, as here, the PUCO employs the discounted cash

flow methodology in calculating a utility's cost of common

equity. Recognizing the inherent imprecision in fixing a

return on equity, a range is developed (here, 11.63 to 12.74

percent) and any point therein is considered reasonable -- a

principle which CSP does not contest. It is when considering

what point within the range should be adopted that the PUCO

considers the company's management practices, as well as other

matters. See Cincinnati Bell Tel. Co. v. Pub. Util. Comm.

(1984), 12 Ohio St.3d 280, 12 OBR 356, 466 N.E.2d 848. In this

case, the PUCO considered several of CSP's management practices

that supported selection of a return above the midpoint of the

range, and several factors (specifically, CSP's failure to join

EPRI and lack of commitment to demand side management) that

supported the adoption of a return below the midpoint.

Considering all of these factors, and without quantifying the

effects of any, the PUCO selected a return on equity at the

third quartile of the range (12.46 percent). Because we do not

find unlawful the PUCO's determination that CSP's failure to

join EPRI constituted an unreasonable management practice, we

likewise cannot find the PUCO's cost of equity adjustment to be

unreasonable.

V. RATE CASE EXPENSE

Finally, CSP contends that the PUCO erred by disallowing

the legal fees CSP incurred in defending its right to place its

proposed rates in effect under R.C. 4909.42. We agree.

R.C. 4909.42 provides that if the PUCO does not issue an

order in a utility's rate case within two hundred seventy-five

days of its filing of the application to increase rates, the

utility may, as an interim measure, place in effect the rates

proposed in its application without the PUCO's approval. In

this proceeding, the two-hundred seventy-five day limit expired

before the PUCO had begun hearings on CSP's rate application

and CSP notified the PUCO on December 9, 1991 of its intent to

place its proposed rates in effect. In an accounting order,

the PUCO, sua sponte, attempted to avert CSP's action by

authorizing it to defer certain current expenses for recovery

in its next rate case, finding that such deferrals were all

that was "necessary" to compensate shareholders until the PUCO

issued its order in this proceeding. Nevertheless, CSP elected

to pursue its rights under R.C. 4909.42. Various intervenors

subsequently filed suit in the Franklin County Court of Common

Pleas seeking a declaratory judgment that R.C. 4909.42 is

unconstitutional and a permanent injunction preventing CSP from

charging the interim rates. See State ex rel. Columbus So.

Power Co. v. Sheward (1992), 63 Ohio St.3d 78, 585 N.E.2d 380;

O'Brien v. Columbus So. Power Co. (1992), 73 Ohio App.3d 355,

597 N.E.2d 188.

The PUCO authorized, as "ordinary and necessary" operating

expenses, CSP's recovery of legal fees associated with the

prosecution of this case before the PUCO and recovery of the

legal fees associated with an unsuccessful alternative dispute

resolution process conducted by an independent private entity

prior to hearing. However, the PUCO denied recovery of the

legal fees CSP incurred in defending its right to place its

proposed rates in effect under R.C. 4909.42, reasoning that it

had already found such action "unnecessary" in its previous

accounting order.

We find the PUCO's focus on whether it was necessary for

CSP to place its proposed rates in effect to be misplaced. The

General Assembly has granted utilities the unequivocal right to

do so under R.C. 4909.42 without the PUCO's consent or

interference. See Sheward, supra, at 80, 585 N.E.2d at 382,

fn. 3. The appropriate inquiry is whether legal fees are

ordinary and necessary expenses in obtaining rate relief as

provided by law. On this basis, we have upheld the PUCO's

inclusion of this expense on many occasions and have generally

deferred to its discretion in quantifying the level of the

expense when unclear on the record. See, e.g.,Cincinnati v.

Pub. Util. Comm. (1950), 153 Ohio St. 56, 41 O.O. 129, 90

N.E.2d 681; Cleveland v. Pub. Util. Comm. (1980), 63 Ohio St.2d

62, 17 O.O. 3d 37, 406 N.E.2d 1370; Canton v. Pub. Util. Comm.

(1980), 63 Ohio St.2d 76, 17 O.O.3d 46, 407 N.E.2d 9. Here,

however, there is no dispute as to whether the amount of the

legal fees was reasonable. Having allowed recovery of legal

expenses incurred to obtain rate relief in proceedings before

the PUCO and to obtain rate relief through the alternative

dispute resolution process (even though unsuccessful), we find

it unreasonable to deny recovery of the expenses incurred to

obtain timely rate relief through R.C. 4909.42. Accordingly,

the PUCO's determination on this issue is reversed.

Order affirmed in part,

reversed in part, and cause

remanded to the PUCO for

further action in accordance

with this opinion.

Moyer, C.J., A.W. Sweeney and Wright, JJ., concur.

Douglas, J., concurs separately.

Resnick, F.E. Sweeney and Pfeifer, JJ., dissent.

FOOTNOTES

1 So finding, we reject the PUCO's argument that CSP has

not been prejudiced by the phase-in plan because of its ability

to defer on its books and ultimately collect the revenues

foregone in the first two years of the plan, with carrying

charges. Cf. Alabama Power Co. v. Alabama Pub. Serv. Comm.

(Ala. 1980), 390 So. 2d 1017, 1027 ("There is no authority

found in the statutes that permits the Commission to phase in a

rate increase. *** If the Commission determines a utility has a

rate deficiency, it has a duty to remedy that deficiency. The

fact that the Commission's order will eventually remedy an

existing deficiency does not validate the order." [Emphasis

sic.])

2 Having found that the PUCO is without authority to

order the phase-in of a utility's annual revenues, we need not

address CSP's alternative proposition of law that this

particular phase-in plan is unlawful in that it authorizes a

post-date-certain reduction to the established Zimmer

valuation.

3 AFUDC is an accounting mechanism by which utilities

recognize the capital costs associated with financing

construction. These costs include interest on borrowed funds

as well as the cost of equity capital, and are booked as part

of the value of the asset during construction, and are

subsequently recognized in rates when the asset is included in

rate base. See Consumers' Counsel v. Pub. Util. Comm. (1983),

6 Ohio St.3d 377, 6 OBR 428, 453 N.E.2d 673.

4 On appeal, CSP does not contest the PUCO's finding that

it has failed in its burden. However, Cincinnati Gas &

Electric Co., in its companion appeal decided this date,

Cincinnati Gas & Electric Co. v. Pub. Util. Comm. (1993),

Ohio St.3d , N.E.2d , argues that the interruption

was reasonable because it was ordered by the NRC. The PUCO did

not accept this justification in either CSP's or CG&E's cases

below. Certainly, the NRC order precipitated the interruption

and it was reasonable for the companies to obey that order; but

that does not, in and of itself, justify an interruption of

meaningful construction for a period of over three years.

Indeed, there is nothing in the record before us to refute that

the continued interruption resulted from nothing more than the

companies' indecision on whether to convert the facility.

Accordingly, we affirm the PUCO's finding.

Douglas, J., concurring. I concur. I write separately

to express my concerns over the continued unchallenged validity

and the majority's reference to the so-called proscription

against retroactive ratemaking. The majority says that "* * *

CSP's recovery of the deferred revenues, having been authorized

by the PUCO's initial order, would not violate the proscription

against retroactive ratemaking." This is, of course, flexuous

reasoning -- at best.

Retroactive ratemaking is a long-recognized rule of public

utility regulation. This rule, court recognized, in general

restricts the right or ability of the Public Utilities

Commission to permit a public utility to recover past losses

through future rates and, also prevents refunds to consumers of

profits of a utility which are subsequently found to have been

excessive. Thus, when the commission hears and determines a

rate case, the commission may only look to the future in

determining appropriate utility rates. This is because of the

so-called rule against retroactive ratemaking.

Through the procedures used, the ratemaking process is

prospective in nature. Utilities file with the commission

proposed new rates and the commission enters an order fixing

the rates to be charged in future years. Then, more often than

not, an appeal (by some principal or intervening party) is

taken and if this court reverses the rate order, the case is

remanded to the commission to again set the rates and this,

again, is prospective in nature. Oftentimes, this process goes

on for years (the case at bar commenced in 1984), and,

regardless of the eventual outcome, the cost to all parties is

enormous.

A number of courts across the country (including this

court in today's decision), while paying lipservice to the

rule, have found ways to create necessary exceptions to the

rule to compensate for utility costs created by (1) utility

commissions' changes in accounting methodology; (2) rate orders

containing mistakes; (3) losses occasioned by emergency weather

conditions (ice storms and other storms like the recent one in

Cleveland); (4) revenue loss during periods of rate

proceedings, appeals and remands for new orders after court

review; and (5) nuclear plant cancellation. Apparent slavish

adherence to the rule, making it an absolute of ratemaking, has

been something less than that in practice as courts continue to

create exceptions to the rule. These exceptions are

necessitated by the demands of modern-day utility regulation

operating under very old (and maybe archaic) laws, rules and

regulations. A product of all this is regulatory lag and

seemingly continuous and endless rate proceedings.

Since there seem to be no specific sections of the Revised

Code which prohibit the commission from retroactive ratemaking,

the genesis of the rule is obviously judicial rather than

legislative. I write now only to suggest that perhaps the time

has come for the General Assembly, the commission and/or this

court to meet modern-day utility regulation with new and

innovative thinking. This is not to say that the ratemaking

process should be ever in a state of flux. Reliability is not

only desirable -- it is essential in our ratemaking system.

However, the rule that utility rates must be permanent and can

only be changed prospectively may not provide the flexibility

we need to meet the modern needs of both consumers and

utilities.

I only suggest herein that maybe the time has come for us

not to apply the retroactive ratemaking rule so absolutely. It

is fair that both the commission and this court apply the rule

with a presumption that it is valid in a given case, but we

should review the facts of each case to determine whether the

presumption should apply or has, for good reason, been

effectively rebutted. Applying the rule only as a presumption

would afford the commission and this court the flexibility of

allowing retroactive relief for any number of reasons,

including the period of time while a case is on appeal and

during the remand period after reversal, as here, of a rate

order.

"That court best serves the law which recognizes that the

rules of law which grew up in a remote generation may in the

fullness of experience be found to serve another generation

badly, and which discards the old rule when it finds that

another rule of law represents what should be according to the

established and settled judgment of society, and no

considerable property rights have become vested in reliance

upon the old rule. It is thus great writers upon the common

law have discovered the source and method of its growth, and in

its growth found its health and life. It is not and it should

not be stationary. * * *" Dwy v. Connecticut Co. (1915), 89

Conn. 74, 99, 92 A. 883, 891 (Wheeler, J, concurring).

The results of today's decision will be devastating to

many. Unfortunately, that is sometimes the case when the

result, as here, is driven and dictated by the law. Must it

always be so in public utility rate cases? There must be a

better way! However, I submit, we do not seek possible new and

better ways when we remain totally satisfied with what has gone

on before and by rote say we are not ignoring the rule against

retroactive ratemaking -- while doing just that.

While I concur in the judgment of the majority, I do so

with the hope that this suggestion, with regard to the rule

against retroactive ratemaking, will promote legislative and

commission inquiry, scholarly academic writing and discussion,

and generally enlightened dialogue. Meanwhile, for us to say

we are not violating the rule against retroactive ratemaking,

when in fact we really are, does a disservice, I believe, to

consumers, utilities, the Public Utilities Commission, the

bench and the bar.

Pfeifer, J., dissenting. I would read the "all such

other matters as are proper" clause in R.C. 4909.15(D)(2) as

being broad enough in its scope to authorize the action

undertaken by the Public Utilities Commission of Ohio ("PUCO")

to implement a three-year staggered rate increase. The record

indicates ample evidence supporting the compelling public

policy reasons for the approach taken by the PUCO. Rate shock

can be disastrous not only for the family budget, but also for

Ohio's business climate.

The PUCO, however, has no statutory authority to revoke its

own prior stipulations when they are retrospectively

regretted. The PUCO's own words in its November 26, 1985 order

are unquivocal: "[The] settlement represents an opportunity to

put nuclear Zimmer behind us***[and] closes the chapter on

nuclear Zimmer." (PUCO case No. 84-1187-EL-UNC, 11-12.) These

words memorialize a promise by the PUCO not to further contest

the inclusion in the ratebase of accrued AFUDC, nuclear fuel

expenses, and for nuclear wind-down costs.

A deal's a deal. It is regrettable that a state agency,

which entered into this agreement on behalf of the public in an

effort to encourage utility companies to build new, safer, more

efficient generating facilities, now exhibits bad faith by

renouncing its covenant not to contest once the project was

completed.