Petition — City of Cleveland v. Public Utilities Commission of Ohio

Supreme Court brief1975

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‘Supreme Court, U. &

FILED

al 20 1975

MICHAEL RODAK, JR., C! ERK |

In the Supreme Court of the United States

xo, SO 447 |

THE CITY OF CLEVELAND, OHIO,

Petitioner,

vs.

PUBLIC UTILITIES COMMISSION OF OHIO,

and

CLEVELAND ELECTRIC ILLUMINATING COMPANY,

Respondents.

PETITION FOR WRIT OF CERTIORARI

To the Supreme Court of the State of Ohio

———————

JAMES B. Davis

Director of Law

Rosert D, Hart

First Assistant Director of Law

WILLIAM B. SCHATZ

Assistant Director of Law

JAMES L. HARKINS, JR.

Special Counsel

Room 213—City Hall

Cleveland, Ohio 44114

Attorneys for City of Cleveland

THE GATES LEGAL PUBLISHING CO... CLEVELAND, OHIO. TEL. (218) 491-5047

TABLE OF CONTENTS

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QUESTION PRESENTED ................cccccosososssesessssessesessesseeees

CONSTITUTIONAL PROVISION INVOLVED ............

STATEMENT OF THE CASE

The Interstate Commerce Issue ................c.c.cesseseseseeeeee

The Interstate Commerce Issue Was Timely Raised

REASONS FOR GRANTING THE WRIT

I. The Commission has acted contrary to the hold-

ings of this Court in The Minnesota Rate Cases,

230 U.S. 352 (1912), and Smith v. Illinois Bell

Telephone Company, 282 U.S. 133 (1930) ........

II. The question of whether or not trades of “inter-

change power” are interstate commerce and

should therefore be the subject of separations

as are sales is a matter of extreme national im-

portance which has never been decided by this

ITT Sntdbibcassatastsaenccdincnaceseitssarneneesennepenandahtensetetnanetiencsets

(COBNCLAISION ssessencsesesesessen 2 OO U,. EO

APPENDICES:

A. Opinion and Order of November 28, 1973, by the

Public Utilities Commission of Ohio ....................

B. Entry of January 18, 1974, by the Public Util-

ities Commission Of OhI0 .o............ccccescseseseeeseeeeeeees

C. Opinion of the Supreme Court of Ohio, Cleveland

Electric Illuminating Co. v. Public Utilities Com-

mission, (1975), 42 Ohio St. 2d 403 00000...

D. Unrelated Decision by the Public Utilities Com-

ee eee : 102

E. Judgment of the Supreme Court of Ohio in

Cleveland Electric Illuminating Co. v. Public

ae 112

F. Entry of the Supreme Court of Ohio Denying

I Gar TE cectenttceericnmestininiepiintionnten 113

G. Evidence of Cleveland Electric Illuminating

Company’s Interstate Commerce Introduced by

NEES ES .* : . 114

H. Example of How Cleveland Properly Raised the

Interstate Cormmerce Issue ...........cccccccceeeecceeeeeeceeees 136

TABLE OF AUTHORITIES

Cases

The Minnesota Rate Cases, 230 U.S, 352 (1912) ............ 4, 8,9

Public Utilities Commission of Rhode Island, et al.

v. Attleboro Steam & Electric Company, 273 U.S.

a aa aan ene 3,6

Smith v. Illinois Bell Telephone Company, 282 U.S.

Be CIID cieinnceneansesbibindiadtiliddiabidetailiadttghistenecinennel 4,5, 7, 8,9

Constitution and Statute

United States Constitution, Article I, Section 8, Clause

Ne IW ON Te AIRES EL Fee ee Oe OR 3,4

Er TD 3

- ~~

In the Supreme Court of the United States

October Term, 1975

UP Ciliteedeabecmeaticaes

THE CITY OF CLEVELAND, OHIO,

Petitioner,

vs.

PUBLIC UTILITIES COMMISSION OF OHIO,

and

CLEVELAND ELECTRIC ILLUMINATING COMPANY,

Respondents.

PETITION FOR WRIT OF CERTIORARI

To the Supreme Court of the State of Ohio

The petitioner prays that this Court issue a writ of

certiorari to review the judgment of the Supreme Court

of the State of Ohio rendered on the eleventh day of

June, 1975, in the case of The City of Cleveland, Appellant

v. Public Utilities Commission of Ohio, Appellee, and

Cleveland Electric Illuminating Company, Intervening Ap-

pellee, which was an appeal from the Public Utilities Com-

mission of Ohio (hereinafter referred to as “Commission”’).

OPINIONS BELOW

The Commission through its “Opinion and Order” of

November 28, 1973, in Case No. 71-634-Y, set the profit

which the Cleveland Electric Illuminating Company could

earn on both its intrastate and interstate electric energy

business. The Opinion and Order is attached hereto as

Appendix A. The Commission in its “Entry” of January

18, 1974, approved intrastate rate increases which yielded

the total profit allowed by the Opinion and Order. The

Entry is attached hereto as Appendix B.

The opinion of the Supreme Court of the State of

Ohio affirming the decision of the Commission relative

to the interstate Commerce issue raised by this petition

is attached hereto as Appendix C. The Court’s Opinion

was reported and cited as Cleveland Electric Illuminating

Co. v. Public Utilities Commission (1975), 42 Ohio St.

2d 403, 330 N.E. 2d 1.

The Supreme Court of Ohio did reverse the Commis-

sion on a number of matters unrelated to the one presented

herein. The decision of the Commission disposing of said

unrelated matters is attached hereto as Appendix D.

JURISDICTION

Petitioner seeks a review by this Court of the judgment

of the Supreme Court of Ohio of June 11, 1975, which

is attached hereto as Appendix E. The time of the entry

thereof was June 11, 1975. The City of Cleveland’s request

for a rehearing was denied by the Supreme Court of Ohio

on June 24, 1975; the denial is attached hereto as Ap-

pendix F.

The jurisdiction of this Court is invoked under 28

U.S.C. Sec. 1257(3). The Supreme Court of the United

States has rendered many decisions adjudicating the

powers of the various states relative to interstate com-

merce; this petition likewise invokes this Court’s jurisdic-

tion to determine the lawfulness of Ohio’s powers over

interstate commerce as stated below. The closest case

on the facts and issue raised herein is Public Utilities

Commission of Rhode Island, et al. v. Attleboro Steam

& Electric Company, 273 U.S. 83 (1927).

QUESTION PRESENTED

The fundamental question of extreme national im-

portance raised by this petition is:

Does a state regulatory body have the power to set

the profit which a public utility may earn on its sales

and trades of electric energy that are in interstate

commerce?

CONSTITUTIONAL PROVISION INVOLVED

No statutes are involved. The only Constitutional pro-

vision involved is Clause 3 of Section 8 of Article I of

the United States Constitution which gives Congress the

power

“To regulate Commerce with foreign Nations, and

among the several States, and with the Indian Tribes;”

STATEMENT OF THE CASE

The Interstate Commerce Issue

This case had its origin in an application by the Cleve-

land Electric Illuminating Company (hereinafter referred

to as “CEI”) before the Commission for an increase in

its intrastate electric rates. The Commission followed stan-

dard rate setting practices in allowing rate increases de-

signed to yield an approved overall rate of return upon

the Commission’s determination of the value of the rate

base.

The Commission erred in the application of said prac-

tices by failing to subtract from the rate base any of

the plant servicing CEI’s sales of electricity under Federal

Power Commission rate schedules to other electric utilities

operating both inside and outside of Ohio. The Commission

further erred by failing to separate out of the case the

revenues and expenses of this interstate commerce.

The necessity for such allocations has been explained

by this Court in numerous decisions interpreting the Com-

merce Clause (Clause 3 of Section 8 of Article I of the

United States Constitution). In many of those cases it

was held that such separations were required to prevent

a state from either imposing a burden upon interstate

commerce or causing intrastate business to subsidize inter-

state business. The leading cases in point are The Min-

nesota Rate Cases, 230 U.S. 352 (1912), and Smith v. II-

linois Bell Telephone Company, 282 U.S. 133 (1930). In

The Minnesota Rate Cases, supra, the United States Su-

preme Court at page 435 said:

“Where the business of the carrier is both interstate

and intrastate, the question whether a scheme of max-

ee a ee ee

it ithe se. ee

imum rates fixed by the State for intrastate trans-

portation affords a fair return, must be determined

by considering separately the value of the property

employed in the intrastate business and the compensa-

tion allowed in that business under the rates pre-

scribed. This was also ruled in the Smyth Case (id.,

p. 541). The reason, as there stated, is that the State

cannot justify umreasonably low rates for domestic

transportation, considered alone, upon the ground that

the carrier is earning large profits on its interstate

business, and, on the other hand, the carrier cannot

justify unreasonably high rates on domestic business

because only in that way is it able to meet losses

on its interstate business. (Emphasis added)

In the present cases, the necessity of this segregation

of the domestic business in determining values and

results of operation, was recognized by both parties. . .”

The Court at page 461 also held that:

“When rates are in controversy, it would seem neces-

sary to find a basis for division of the total value

of the property, independently of revenue, and this

must be found in the use that is made of the property.

That is, there should be assigned to each business,

that proportion of the total value of the property

which will correspond to the exten: of its employment

in that business. . .”

In Smith v. Illinois Bell Telephone Company, supra,

at page 148 the United States Supreme Court said that

an allocation between intrastate and interstate business

“« | is essential to the appropriate recognition of the

comparable government authority in each field of regula-

tion...”

Both the Commission and the Ohio Supreme Court

seem to have dismissed the necessity for allocations by

assuming that the relative size of CEI’s interstate com-

merce was insignificant. During the test year (1971) em-

ployed by the Commission about six percent of CEI’s total

deliveries of electricity were sales to other electric utilities

made pursuant to Federal Power Commission rate sched-

ules as listed below:

Percent of

Customer Total Deliveries

Cleveland Department of

Public Utilities 0.7

Privately-Owned Ohio

Electric Utilities 3.3

Pennsylvania, New Jersey, and

Maryland Electric Utilities 2.0

Total as % of total CEI deliveries 6.0%

——_————

It should be noted at this point that the Supreme

Court of the United States required allocations in Public

Utilities Commission of Rhode Island, et al. v. Attleboro

Steam & Electric Company, 273 U.S. 83 (1927), when

less than three percent of the company’s deliveries were

to another electric utility.

The Attleboro case, supra, also determined that sales

of electricity made by an electric utility in one state to

an electric utility in another state are in interstate com-

merce. That CEI’s sales to other Ohio electric utilities

are also in interstate commerce is established by their

being made under Federal Power Commission rate sched-

ules; in any event, these sales are regulated by federal

authority, which by this Court’s holding at page 148 of

Dette Mbds ween Je -trtenss

oe aa eee eae

Smith v. Illinois Bell, supra, precludes the exercise of

state authority over the earnings that may be made there-

on. The interstate nature of these sales has not been

disputed before or by either the Commission or the Su-

preme Court of the State of Ohio.

Another fourteen percent of CEI’s 1971 deliveries of

electricity were trades of power with other electric utilities

called “Interchange Power”. Under these barter arrange-

ments the recipient agrees to return back at some unfixed

time the same volume of electricity as he receives from

the sender. These trades of power occur both within

and over Ohio’s borders.

Cleveland contends that the Commerce Clause of the

United States Constitution extends to these trades of power

as it obviously does to sales of electricity made under

Federal Power Commission rate schedules. These barter

arrangements present a novel problem of great national

importance since most and possibly all of this nation’s

major electric utilities are interconnected and trade huge

volumes of electricity throughout the continental United

States on a daily basis.

The above mentioned sales and trades of power

amounted during 1971 to twenty percent of CEI’s total

deliveries of electricity. The data in support of this is

attached hereto as Appendix G.

The Interstate Commerce Issue Was Timely Raised

Cleveland introduced Appendix G into evidence during

the hearings before the Commission to demonstrate the

size of the Company’s interstate business and therefore

the necessity for allocations. Cleveland also extensively

argued the need for allocations before the Commission.

Appendix H is an example hereof.

y F

«1

E .

tr alate Be ull

The Commission on Page 1 of its Opinion and Order

(Appendix A) refused to either order or make the required

separations. The issue was properly raised before the

Supreme Court of Ohio as evidenced by that Court’s brief

discussion thereof at pages 423-4 of its Opinion (42 Ohio

St. 2d and Appendix C).

REASONS FOR GRANTING THE WRIT

I. THE COMMISSION HAS ACTED CONTRARY TO

THE HOLDINGS OF THIS COURT IN THE MIN-

NESOTA RATE CASES, 230 U.S. 352 (1912), AND

SMITH V. ILLINOIS BELL TELEPHONE COM.

PANY, 282 U.S. 133 (1930).

This Court in the above-mentioned cases determined

that in a utility rate case it is necessary to separate that

segment of business which is subject to federal authority

from that which properly falls under state control. The

Public Utilities Commission of Ohio has run afoul of this

Court’s holdings in said cases by refusing to make such

allocations.

The Commission in failing to follow this Court’s hold-

ings has in reality ousted the Federal Power Commission

from control over the profit which CEI could earn over

its sales to other electric utilities. The determination of

that profit is the sine qua non of the utility rate making

process as recognized by this Court in the above cases.

It follows as the night must succeed the day that when

the Public Utilites Commission of Ohio adds to or subtracts

from the profit set by the Federal Power Commission

for sales made by CEI to other electric utilities, it is

the Public Utilities Commission of Ohio and not the Federal

Power Commission which has set that profit.

or cag ene Be ln allt Sak align t TR vhas e ebsites

Pa tna hailey ks Bion

This Court should grant our petition in order to sustain

the federal authority under the Commerce Clause which

has been exercised by the Federal Power Commission.

If this “ourt refuses to do so then its holdings in The

Minnesota Rate Cases and Illinois Bell are without prac-

tical meaning in Ohio.

Il. THE QUESTION OF WHETHER OR NOT

TRADES OF “INTERCHANGE POWER” ARE

INTERSTATE COMMERCE AND SHOULD

THEREFORE BE THE SUBJECT OF SEPARA-

TIONS AS ARE SALES IS A MATTER OF EX-

TREME NATIONAL IMPORTANCE WHICH HAS

NEVER BEEN DECIDED BY THIS COURT.

The volume of trades of electricity between electric

utilities dwarfs the volume of their sales to each other.

In view of the magnitude of these trades and their grow-

ing importance it would be unwise to defer the question

of whether or not this Court’s holdings in The Minnesota

Rate Cases and Smith v. Illinois Bell Telephone Company

should be extended to cover said trades.

CONCLUSION

Wherefore, the petitioner prays that a writ of cer-

tiorari directed to the Supreme Court of the State of

Ohio be issued under the seal of this Honorable Court

in this cause and that upon such review the judgment

of the Supreme Court of Ohio, entered on the eleventh

day of June, 1975, be vacated, reversed, and set aside

and that this case be remanded to the Supreme Court

of Ohio with instructions to proceed in accordance with

the rulings of this Court.

Respectfully submitted,

JAMEs B. Davis

Director of Law

Rosert D. Hart

First Assistant Director of Law

WILLiaM B. SCHATZ

Assistant Director of Law

JaMes L. HARKINS, JR.

Special Counsel

Room 213—City Hall

Cleveland, Ohio 44114

(216) 694-2788

Attorneys for City of Cleveland

APPENDIX A

Opinion and Order of the Public Utilities Commission

of Ohio

(Dated November 28, 1973)

Case No. 71-634-Y

Before

THE PUBLIC UTILITIES COMMISSION OF OHIO

In THE MATTER OF THE APPLICATION OF THE CLEVELAND

ELectric ILLUMINATING COMPANY FOR AUTHORITY TO

AMEND AND TO INCREASE ITs FILED SCHEDULES FoR F'rx-

ING RATES AND CHARGES FoR ELEcTRIC SERVICE.

OPINION AND ORDER

The Commission, coming now to consider the above-

entitled application, the Secretary’s Report of Investiga-

tion issued pursuant to Section 4909.19 Revised Code; hav-

ing appointed its Attorney Examiner, Lewis Winarsky

pursuant to Section 4901.18 to assist Commissioner Sally

W. Bloomfield in conducting the public hearing; the tes-

timony and exhibits introduced at public hearings held

between June 26, 1973 and August 21, 1973; and being

otherwise fully advised in these premises; and in com-

pliance with Section 4903.09 Revised Code, hereby renders

its opinion and order.

HISTORY OF THE PROCEEDINGS:

Applicant, The Cleveland Electric Dluminating Com-

pany (herein CEI), is an Ohio public utility corporation

subject to the jurisdiction of the Commission under Sec-

tion 4905.03 Revised Code. It is engaged in the business of

generating and supplying electric energy primarily to the

counties of Cuyahoga, Lake, Ashtabula, Geauga, and Lorain

and to a limited extent in the counties of Summit, Turn-

ville, Medina, and Portage in the State of Ohio. The ap-

plicant has applied to amend all of the electric rate sched-

ules of the company by (a) increasing the rates under such

rate schedules; (b) elimination of six existing rate sched-

ules; (c) extension of the ceilings for general commercial

schedules from twenty kw to thirty kw; (d) modification

of seasonal rate schedules; and (e) increasing the base of

the fuel adjustment clause. Additionally, applicant re-

quested approval of its reorganization of its general rules

and regulations. All of the more of 660,000 customers of

the Cleveland Electric Illuminating Company are affected

by this proceeding.

The above-entitled application was filed on October

7, 1971, and amended on March 1, 1972 with appropriate

exhibits, and a motion (a) for approval of legal notice;

(b) for fixing June 30, 1971 as the date certain for valua-

tion; (c) for fixing the twelve months ending December

31, 1971 as the test year. On April 10, 1972, the Com-

mission approved the applicant’s motion.

On March 3, 1973, the staff filed the Secretary’s Re-

port of Investigation (herein S.R.); it was served upon the

mayors of the municipalities and the county prosecuting

attorneys in the area affected by this application. A num-

ber of parties have, upon request, been granted leave to

intervene in the proceeding.

The applicant and a number of intervenors having filed

objections within 30 days following the issuing of the Sec-

retary’s Report of Investigation, the Commission on May

. .—

7, 1973, issued an entry assigning this matter for public

hearing to begin on June 26, 1973, as provided by Section

4909.19 Revised Code.

APPEARANCES:

Messrs. Alan D. Wright and Harry G. Fitzgerald, Jr.,

1010 Euclid Avenue, Cleveland, Ohio, and Squire, Sanders

& Dempsey, by Messrs. John Lansdale, Jr., Alan P. Buch-

mann, and James H. Woodring, 1800 Union Commerce

Building, Cleveland, Ohio, on behalf of the Applicant.

Messrs. Robert D. Hart, James L. Harkins, Jr., and

William Schatz, 204 City Hall, Cleveland, Ohio, on behalf

of the City of Cleveland, Intervenor.

Mr. Lawrence V. Cox, Director of Law, 6161 Engle

Road, Brook Park, Ohio, on behalf of the City of Brook

Park, Intervenor.

Messrs. Weston, Hurd, Fallon, Sullivan & Paisley, by

Mr. Jerome S. Kalur, 25th Floor, Terminal Tower, Cleve-

land, Ohio, on behalf of the Sierra Club, Intervenor.

Messrs. Thompson, Hine & Flory, by Messrs. William

H. Wallace and Alan R. Lepene, Special Counsel, 1100

National City Bank Building, Cleveland, Ohio, on behalf

of the City of Rocky River, Intervenor.

Ms. Daisy G. Collins, 1404 East Ninth Street, Cleve-

land, Ohio, on behalf of The Greater Cleveland Welfare |

Rights Organization, Inc., Intervenor.

Mr. Patrick A. Gareau, Director of Law, 21330 Center

Ridge Drive, Rocky River, Ohio, and Mr. Gerald P. Wad-

kowski, Special Counsel, 85 East Gay Street, Columbus,

Ohio, on behalf of the Cities of Westlake and Strongsville,

Intervenors.

Honorable George E. Mastics, Ohio House of Repre-

sentatives, 1001 Terminal Tower, Cleveland, Ohio, on his

own behalf and on behalf of his electoral district, Inter-

venors.

Mr. William J. Brown, Attorney General of the State

of Ohio, by Mr. Walter E. Carson and Mrs. Cheryl H.

Keith, Assistant Attorneys General, 111 North High Street,

Columbus, Ohio, on behalf of the staff of the Public Util-

ities Commission of Ohio.

I. RATE BASE

The applicant, CEI, submitted exhibits and testimony

in support of its valuation of property actually used and

useful in the rendition of electric service within its ap-

plication area as of June 30, 1970. The reproduction cost

new less depreciation of such property as estimated by

the applicant may be summarized as follows (S.R. p. 19):

Reproduction Cost New $1,551,885,000

Less Existing Depreciation 356,990,000

(23 percent )

Reproduction Cost New $1,194,895,000

Less Depreciation

The following estimates of the value of applicant’s

property actually used and useful in the rendering of elec-

tric service within the area covered by this application

as of June 31, 1970 were obtained by the independent

investigation of the Commission’s staff (S.R. p. 19):

Reproduction Cost New $1,499,707,000

Less Existing Depreciation 368,212,000

(24 percent)

Reproduction Cost New $1,131,495,000

EeEeE—=

Less Depreciation

o- i a

;

The intervenor, City of Cleveland (herein Cleveland)

submitted testimony and an exhibit which estimated the

applicant’s reconstruction cost new less depreciation to

be $1,075,487,000.

The differences between the above valuations will be

discussed below under the appropriate subdivisions.

Land

The Commission staff's method of calculating the con-

tribution of land and land rights to the rate base differs

substantially from that proposed by the applicant and

Cleveland; therefore the parties estimated significantly dif-

ferent valuations:

Applicant $63,024,000

Staff 40,476,000

City of Cleveland 27,676,506

The Commission’s staff arrived at a value for land

held in fee by making reference to available tax appraisals

of all such land held by the applicant. The appraisal

figure was then divided by an appropriate translation fac-

tor, determined by the common level of assessment in

the county, in order to arrive at a market value as of

the end of the taxing year. A second adjustment was

made to allow consideration of the increase in value from

the year of tax appraisal to the date certain. Direct tes-

timony in support of the staff land value revealed that

the taxing authorities who originally appraised the parcels

were obligated to make their valuation in a manner con-

sistent with Section 4909.05(B) Revised Code (R. p. 1526).

The applicant instructed its real estate consultants

to make their appraisals subject to the following condi-

tions:

1. In making the appraisals, the value of each site

was to be compared with the value of contiguous

and neighboring parcels of land and lands of sim-

ilar character as to location and use, and these

values were to be used in establishing the fair

market value of the land and land rights of the

site property as of June 30, 1971.

2. In determining the fair market value of the lands

and land rights, title costs, site preparation and

other overheads ordinarily paid by the purchaser

of land were not to be included in the valuation.

The site property was to be appraised as vacant

land, ignoring buildings or other improvements lo-

cated on the parcels (R. p. 660; App. Ex. 27, p.

647).

Applicant’s appraisers gathered information about the

property, its location, its shape, the character of the neigh-

borhood, zoning, utilities, condition, type and similar real

estate factors. They then accumulated sales data from

courthouse records, interviews with buyers and sellers and

reference to Osterdorf-Morris Company records. An opin-

ion was then formulated, based on the compiled informa-

tion, as to the fair market value of the property (App.

Ex. 27, p. 9). Wherever possible, only sales made within

three years of the date certain were considered.

Cleveland estimated the value of lands held in fee

by making a sampling of CEI comparables. Inspections

were conducted of lands which the applicant’s appraisers

deemed to be similar to applicant’s sites and testimony

was submitted by Mr. Canitia stating that CEI’s estimation

of land contribution to rate base was overstated by 20%.

Cleveland, while contesting the implementation of the com-

parable sales approach on the part of the applicant, did

’

not challenge the propriety of the method used in making

rate base valuations of land (App. Ex. 35).

Considering the evidence before us (App. Ex. 4, Vols.

1-4), we find that the substantial data and testimony sub-

mitted by the applicant is the most convincing with the

exception given below. The testimony of both real estate

appraisers was not impeached in any material respect al-

though both were cross-examined extensively.

(a) Lake Shore

Applicant’s land valuation for Lake Shore property,

43.4787 (R. p. 673) was estimated at $3,700,000 (R. p.

677) approximately five acres of the total is artificially

filled land (CEI brief, p. 24). Applicant’s 1972 Annual

Report notes that “title to the artifically filled land...

is in the State of Ohio” (Cleve. Ex. 35, p. 38). Although

CEI’s exercise of its property rights is undisturbed under

this arrangement, CEI does not assert title as such. In

our opinion Section 4909.18 Revised Code does not permit

us to include land not owned by applicant for rate base

purposes. Therefore, the valuation for Lake Shore land

should be reduced by 11.3% or $418,000 making a total

valuation for Lake Shore land of $3,281,900.

(b) Seneca Plant

The briefs of the staff and Cleveland arguing that

the Seneca Plant should be excluded from the rate base

because it is not located in Ohio cite Section 4905.05 Re-

vised Code which gives the Commission jurisdiction over

public utilities with plant or property lying wholly within

the state. However, Section 4909.18 Revised Code permits

applicant to submit a valuation “of its property used and

useful in rendering the service referred to in such applica-

tion.” Employing the principle of construing statutes in

pari materiale, we can find that the Seneca Plant should

be included because indisputably it is used and useful

in rendering the service referred to in the application.

However, it is another question, not presented here,

whether the Commission would have authority to set safety

standards for a plant not located in Ohio pursuant to

its jurisdiction under Section 4905.05 Revised Code.

LAND RIGHTS

In dealing with valuation of land rights, the Commis-

sion’s staff simply evaluated the varying easements and

licenses held by applicant at their original cost, claiming

that no acceptable method is available to adjust the value

of the land rights either up or down. As noted in the

Secretary’s Report (p. 24), such a method has been found

proper in Case No. 3307 (Ohio Bell, reversed on other

grounds, 301 U.S. 292, 1934).

The applicant’s method of valuation for land rights

is similar to its appraisal for land held in fee, with an

additional aliocation being made to obtain the fair market

value of the easement vis a vis the serviant interest. Ap-

plicant claims such an allocation is based on the relative

use available to each party. Applicant’s consultants also

considered damages resulting from the taking by easement

expressed as the measure by which the full enjoyment

of one’s property is impaired by the presence of an attach-

ing interest. Because of the extensive nature of the rights-

of-ways involved, the applicant made random samplings

of the land rights rather than a full observation of all

the properties. Additionally, applicant computed a plot-

tage value; the increment of value resulting from the ac-

cumulation of two or more parcels of land measured by

the market activity of similar property (App. Ex. 26, 12).

The applicant suggested that the plottage value of its ease-

ments is generally 10% of the otherwise appraised values.

— ——

ade

Ce ee) = Se ee ee!

In intervenor Cleveland’s opinion the valuation of the

applicant’s properties should not include any amount for

damages and plottage, further, that easements and licenses

should not be valued (Cleve. brief, pp. 10-17). Cleveland

suggests that if any value for incorporal rights be included,

it be minimal; the intervenor argued that licenses should

be valued at original cost.

Witness Chisling employed the same cost trend tech-

nique (App. Ex. 26, p. 19) in this case as in Ohio Power

(Case No. 71-283-Y issued October 23, 1973; he chose this

method of applying trend factors to original cost because

“a parcel by parcel appraisal would be extremely costly

and time consuming (App. Ex. 26, p. 19). As we noted

in Ohio Power, supra, an argument exists as to whether

land rights are to be valued in the same manner as land

under the provisions of Section 4909.05 (A) (B) and (C).

Leaving that aside for the moment, and assuming market

value were an appropriate measure for valuing land rights,

two other problems remain. First, applicant’s trending

method clearly does not comply with the appraisal method

set forth in Section 4909.05(A) and especially (B) and

(C). Secondly, the method assumes that there is a market

value for the kinds of land rights held by applicant when

in fact there may be no actual or real market value since

there are very few if any buyers of this type of prop-

erty. Therefore, in the absence of a verifiable method

of assuring that there is a market value for applicant’s

rights-of-way and noting additionally that the trending

method does not comply with Section 4909.05 Revised Code,

the Commission finds that original cost of land rights is

proper method for this proceeding. The plottage issue

becomes moot by virtue of the discussion and determination

above.

In summary, we find for purposes of this proceeding

applicant’s land valuation of $20,503,500 (App. Ex. 10, p.

2) less the $418,100 or $20,085,400 plus the original cost

of rights of way of $17,003,781 or a total of $37,089,181

for land and land rights is the proper valuation.

ALL PHYSICAL PROPERTY OTHER THAN LAND

The applicant estimated reproduction cost new for

its properties by applying price trends to the actual cost

of surviving assets (App. Ex. 28, pp. iii). These cost

trends represent a mathematical method showing the varia-

tion in price for a given commodity or property over

a period of years. With the exception of the steam produc-

tion property, the staff accepted applicant's trends. In

adjusting applicant’s reproduction cost new figures, Cleve-

land also utilized applicant’s trends (Cleve. Ex. 32, Part

V, p. 2).

Applicant included local labor rates and local material

costs in formulating cost data. Data was also applied

in accordance with a hypothesis of single-impulse construc-

tion, whereby CEI experts made computations assuming

that repairs and improvements were made in a continuous

program utilizing modern trends under modern working

conditions over a relatively limited period of time, rather

than by means of a series of minor accretions. This was

done by the applicant in the belief that the use of that

single-impulse concept promotes economies within the pro-

duction system and results in a downward adjustment

to what would otherwise be the reproduction cost new.

A similar adjustment was made for excess stockhandling

(App. Ex. pp. 77-78).

Data used by the applicant to compute trends was

based where possible on the actual experience of CEI.

Where such material was not at hand information from

the Building Trade Employees Association was used, i.e.,

labor rates and construction materials. Finally, where

information was not otherwise available, Jensen, Bowen

and Farrell trends were used. These trends were used

in this case for the power plant, substation and general

equipment accounts, and material portions of the subcon-

tractors’ trends in the structures accounts.

The Commission’s staff adopted the applicant’s de-

veloped trend factors for all accounts except steam produc-

tion (S.R. p. 20). In explaining why the applicant’s trend

factors were not adopted for steam production, the staff

noted that production property work is generally done

on a contract basis while other work is generally done

with company labor. The staff felt that the Handy-Whit-

man electric labor index was more characteristic of con-

tract labor than was company generated indicies. Staff

witness Gill stated that unless proven wrong, the gen-

eralized trend should be used (R. 1600).

Applicant presented witness Gillett, an associate of

the firm which publishes the Handy-Whitman trends who

testified that the construction of applicant’s trends was

conducted in such a manner as to produce a more accurate

RCN than the generalized regional trends and specifically

that the Cleveland construction labor trend diverged

sharply from the labor index used for the North Central

region, and in his opinion the specialized trends were more

accurate (App. Ex. 39, pp. 4,9). This testimony remained

unimpeached after cross-examiaation. Cleveland’s witness

Marquart added an adjustment of $2,107,000 representing

a “computation of additional distribution plant investment

for new customers per sales level normalization” (Cleve.

Ex. 32, Part V, Sched. 1 and 7). However, the rationale

therefor was not clear (Part V, p. 5). Therefore, for

purposes of this case, we find that applicant’s RCN valua-

tion of $1,488,861,000 to be appropriate.

(a) Standby Equipment

Cleveland que*tioned witnesses at length as to the

standby nature of coal equipment held im various inventory

accounts. Basically they argued that standby coal equip-

ment should be excluded from the rate base as not being

“used and useful for the service and convenience of the

public.” The Commission takes administrative notice of

the conflicting federal policies with respect to coal fired

plants. On the one hand the Federal Environmental Pro-

tection Agency (EPA) has in effect ordered them out

of service. On the other hand, the President of the United

States has urged delay of changeovers from coal to oil

fired equipment and in fact federal legislation requiring

change back to coal during the energy crisis is currently

under active consideration by congress. In view of the

confused situation and in light of the very real probability

that coal operations may resume, we find the standby

equipment to be a proper item for the purposes of this

proceeding.

(b) Street Lighting Plant

Neither the Commission staff nor the applicant have

made allocations of costs or values of property associated

with street lighting services provided by the applicant.

Cleveland, however, in its first ubjection to the Secretary’s

Report claims the report understates the percentage of

sales revenues derived from street lighting activities and

claims that millions of dollars of company property are

properly allocable to street lighting and signal services

being provided to municipalities pursuant to contracts be-

tween the applicant and the respective cities.

However, both staff and applicant have adjusted for

the plant devoted to street lighting by including the reve-

nues therefrom (S.R. p. 18). The staff found that a sample

Pee ne eee ee ee oe ee eC ce

ecole” oli

% -"

| 23

allocation indicated no measurable effect upon the rate

of return and therefore an extended allocation was not

justified for street lighting sales and sales to other public

utilities (S.R. p. 23). While Cleveland disputed this judg-

ment, it presented no evidence to substantiate its first

objection. Therefore it is overruled.

Cleveland argues in its third objection to the Secre-

tary’s Report that costs associated with the production ~

of power transferred to CAPCO, as interstate entity should

be excluded from the rate base. It is argued that these

funds and additional costs interchange of power are under

the exclusive jurisdiction of the Federal Power Commis-

sion. It should be noted that Cleveland witness Marquart

did not include such an adjustment (Cleve. Ex. 32, Part V.

Sched. 1). The applicant asserts that CAPCO is not an

entity, neither interstate nor intrastate. As viewed by

CEI, CAPCO represents only certain agreements for the

interchange of electric power and the sharing of the owner-

ship of facilities, thus to exclude facilities because they

_are involved in interchange agreements would be concep-

tually incorrect (R. p. 2605). The Commission must draw

the same conclusion with respect to this contention as

it did for street lighting issue above and overrules Cleve-

land’s third objection.

(d) Seneca Plant

The contention is made by Cleveland in its fourth

objection to the Secretary’s Report, that the Commission

staff has erroneously included in rate base valuation

$52,930,000 attributable to the Seneca Plant located

in Pennsylvania. This issue has been discussed and deter-

mined under the caption “land” above.

DEPRECIATION

Applicant secured the consulting services of two ap-

praisers to calculate depreciation (App. Ex. 29, p. 1) who

testified that they took into account all factors relating

to the ultimate retirement of the property, i.e., mechanical

depreciation, age, obsolescence, lack of utility and require-

ments of public authority (App. Ex. 29, p. 1). CEI at-

tributed depreciation due to obsolescence upon the differ-

ence between the the condition of an existing item

of property with a new item of the same property. In

this way the applicant computed a “functional deprecia-

tion” to represent the value of each of the applicant’s

plants as a function of its operating efficiency and construc-

tion costs relative to a new and modern plant (App. Ex.

29, p. 16). To represent a new and modern plant, the

applicant chose a 325,000 KW net capacity unit because

it was considered the size most consistent with the CEI’s

production requirement alone (App. Ex. 29, p. 21).

‘To determine physical depreciation, applicant’s witness

Christensen inspected three units, reviewed the company

records and consulted with personnel. The applicant ex-

pressed the view that because the physical condition of

most elements of a power plant has a direct bearing on

its efficiency, the functional condition found by the study

would reflect without further adjustment the physical con-

dition of the operating elements of the plant in addition

to obsolescence (App. Ex. 29, pp. 26, 27). Inspection was

made of all other properties except when working with

the mass accounts or where such a method was imprac-

tical (ie, Account 362.30 Station Equipment—Customer

Locations). Observations were scaled by classification as

“excellent”, “good”, “fair”, etc., each classification having

a corresponding numerical value. The individual percent

conditions were then weighted according to the amount

of property in each classification, in order to arrive at

a weighted average percent condition for each structure,

each location for substation equipment and for each of

the mass accounts. Individual percent of conditions were

carried in a summary sheet and the percent condition

of the entire structure was obtained by weighting the

percentage of condition for each component in accordance

with its relationship to the whole structure. The appli-

cant assumed overall percentage conditions for the whole

unit in dealing with smaller items such as outlying dis-

tribution substations rather than making a detailed ap-

praisal. A further adjustment was subtracted from the

value of these assets for depreciation arising from ob-

solescence and other non-physical depreciation (App. Ex.

29, pp. 5-34).

Transformers, regulators and circuit breakers were

also depreciated by similar methods (App. Ex. 29, pp.

35-56).

The Secretary’s Report divided consideration of depre-

ciation into two areas of discussion: production equipment

and all other property.

In evaluating all of the company’s generating stations,

inspections were made to determine the amount of physical

deterioration. Percent conditions were established for the

various units inspected and calculated for the total ac-

counts. Additional depreciation was estimated for such

equipment by comparative analysis of the actual given

age, the system size and growth rate, and the unit installed

cost of the machinery used by the applicant with the

larger, more modern units in use at electric power gen-

erators installed in recent years. In making the assessment

of non-physical depreciation, a model of 510 MW units

was used. The Commission’s staff deemed this size appro-

priate due to growth of the electric production system

used by the applicant. Commission staff attributed ap-

proximately 70% of the depreciation suffered to the repro-

duction cost new value to these factors, the balance being

attributed to physical deterioration. The total condition

of the production accounts was estimated as the produce

of the condition as a result of obsolescence taken times

the condition as a result of mechanical deterioration.

The Commission’s staff made random sampling inspec-

tions to estimate the effects of mechanical deterioration

on property not used for generating electricity. The per-

cent condition of the random sample was deemed to be

an average for the system for a given account and was

applied to the system’s RCN values. In addition, the Com-

mission staff attempted to analyze other forms of deprecia-

tion which contribute to an overall shorter life than would

be the case if only mechanical deterioration was considered.

Where the life of property as given by the company is

considered consistent with a reasonable physical life no

adjustments were made (S.R. p. 22).

While the differences in depreciation between a Com-

mission staff and the applicant were relatively insubstan-

tial (R. p. 1497), Cleveland asserted that 1) condition rat-

ings attributed by the Commission’s staff to production

equipment is grossly overstated and 2) depreciation for

rate base should be determined by actuarial methods.

Cleveland submitted a depreciation valuation for produc-

tion plants $92,505,000 greater than that suggested by the

applicant (Cleve. Ex. 32, Part 5, p. 5).

However, actuarial methods do not necessarily conform

to the requirements of Section 4909.05(E) and in the instant

case, Cleveland did not present evidence to show that

its estimate did fulfill those requirements. Cleveland also

presented testimony to support its contention that a 650

MW unit was appropriate because applicant had one in

use during the test year (Avon #9) and planned to operate

four more of at least 650 MW capacity in conjunction

with CAPCO associates, countered that CEI’s choice of

two 325 MW models was predicated upon its assumption

that CEI should be viewed as an isolated system, ignoring

the advantages of interconnection with other utilities

(Cleve. brief, p. 39).

Testimony in support of the staff’s contention of its

510 MW model was not enlightening in explaining the

components of the model nor the reason underlying the

choice (R. pp. 1519-1522). The Commission basically

agrees with the contention of Cleveland that CEI’s system

should not be viewed in isolation and that any model

should approximate as nearly as possible CEI’s actual joint

operation with other utilities of large plants. However,

witness Parrott’s testimony was unconvincing with respect

to the proper depreciation. While we might prefer a 650

MW model, the applicant’s use of two 325 MW models

was not unreasonable and in view of all the testimony

in this case, is the best supported method on the record.

With respect to depreciation other than steam plant,

we find the staff’s estimate (S.R. pp. 28-30) to be appro-

priate for purposes of this proceeding.

WORKING CAPITAL

The Commission’s staff recommended that the allow-

ance for working capital should total $20,571,433, while

the applicant set forth its minimum working capital as

$39,064,472 (App. Ex. 1, p. 3). The City of Cleveland

suggested working capital of $2,798,000 (Cleve. Ex. 32,

Part V, Sched. 1).

The major differences between the calculations of the

applicant and the staff with respect to the allowance for

working capital arises from the treatment of 1) an allow-

ance for a materials and supplies inventory held for capital

accounts and 2) an allowance for working capital to main-

tain an adequate inventory of fuel. The staff opined that

materials and supplies held for capital accounts are not

an appropriate part of the rate base and therefore should

be excluded and therefore reduced the applicant's

$8,846,000 figure for materials and supplies to $1,858,000

(S.R. pp. 24, 25). The applicant argued that all of the

$8,845,651 of inventory should be included in computing

working capital. With respect to the allowance maintain-

ing an adequate inventory of fuel, the applicant’s value

of $14,280,150 is based on the amount on hand and in

transit on the date certain (App. Ex. 19, p. 5). The staff

looked to an estimate of the average fuel on hand during

the 12 month period, in recommending a supply valuation

of $10,753,000 (S.R. p. 25).

Cleveland agreed with the staff that adjustments to

working capital for coal inventory and materials and sup-

plies should be computed on a test year average basis.

Beginning with applicant’s book figures for cash allowance,

materials and supplies account and the fuel inventory of

$39,001,763 Cleveland deducted $34,346,000 (Cleve. Ex. 35,

Part 5, Sched. 6) representing an estimate of balances

as of the date certain, accruals for property and federal

income tax, accruals for possible deficiency tax payments,

accumulated deferred credits and customer contributions,

and adjustments to place coal inventory and materials

and supplies on an average test year basis (Cleve. Ex.

35, Part 5, pp. 3-5, Scheds. 3 and 4). Cleveland’s estimate

for working capital thus totalled $2,798,000 (Cleve. Ex.

5, Sched. 1).

While the Commission recognizes that working capital

may be computed in a variety of ways, under the evidence

presented in this case, we see no reason to deviate from

our established policy. A number of items which Cleve-

land has deducted from working capital have been con-

sidered by the staff and will be discussed below.

The applicant objects to the deduction of accrued taxes

as an offset to working capital. However, the Ohio Su-

preme Court in Cincinnati v. PUC, 161 Ohio St. 406, rea-

soned that since such advance payments are available for

current use until they become payable to the taxing au-

thorities, there is no need to allow earnings upon a cash

balance without regard to the accruals. If no offset is

made, a duplication in charges to the taxpayer will result.

The court stated (at p. 406):

“. .. customer contributions in the form of accruals... .

for the payment of taxes to be paid by the applicant

at future dates, which will be consistent with reason-

able certainty in the foreseeable future and which

are available for working capital and for investment

in materials and supplies, should be used to offset

the allowances for wo~king capital.”

Therefore the Commission’s staff, as noted above, excluded

approximately $7,000,000 from the working capital accounts

in materials held for capital accounts. The staff found

that 79% of applicant’s materials and supplies were prop-

erly classified as being within capital accounts (S.R. p.

25). The applicant contends that an exclusion of capital

accounts is improper. The Commission does not agree.

Exclusion of materials and supplies to be capitalized is

not only relevant and proper but necessary in any computa-

tion of working capital. (See discussion in Northern Ohio

Telephone Company, Case No. 71-439-Y issued August 2,

1973 citing Ohio Supreme Court decisions).

As indicated above, CEI and staff computed different

fuel allowances because the applicant based its computa-

tions upon the amount on hand and in transit on June

30, 1971, whereas the staff used the average on hand during

the 12 month test period (S.R. p. 25). The actual experi-

ence under normal circumstances of the applicant during

the test year is the most reasonable guide for the calcula-

tion of this working capital component. Therefore, we

find the staff allowance to be proper. The fact that the

applicant suffered a strike during the latter months of

the test year does not make the Commission staff's figure

any less reasonable.

The rate base as we have determined from the fore-

going is $1,175,870 as indicated by the table below:

Land and land rights $ 37,089 (000’s)

RCNLD of property 1,118,210

Working capital 20,571

Rate Base $1,175,870

In summary, the Commission is of the opinion and

so finds that the staff's computation of working capital

and its components is both reasonable and proper and

thereby overrules applicant’s objections related thereto.

II. REVENUES AND EXPENSES

The applicant submitted exhibits and testimony in

support of its revenues, expenses (including taxes) and

income available for fixed charges, dividends, and retained

earnings for the period, January 1, 1971 to December 31,

1971, the test period in this proceeding, adjusted to reflect

the full annual effect of changed conditions as follows

(App. Ex. 2, p. 1):

Total Operating Revenues $267,348 942

Operating Expenses

Operation and maintenance 134,105,361

Depreciation 25,100,907

Total Taxes 50,283,956

Total Expenses (209,490,224)

Return $ 57,858,718

————————————=

The staff investigation resulted in the following (S.R.

p. 8):

Total Operating Revenues $268 ,930,886

Operating Expenses

Operation and maintenance 136,564,705

Depreciation 25,127,015

Gain from property sale (59,656 )

Total Taxes 47,669,888

Total Expenses (209,301,952 )

Return $ 59,628,934

The above amounts reflect- numerous adjustments

made by the Commission’s staff regarding revenues, ex-

penses, and miscellaneous deductions from income (noted

on substitute amended p. 8, detailed on pp. 911 of the S.R.).

REVENUES

Cleveland suggests in its sixty-second objection to the

Secretary’s Report that the Commission’s staff has erred

in its projection of future revenues claiming that an adjust-

ment to test year results is necessary to provide a normal

balance of past revenues and costs for rate setting revenues.

Cleveland alleges a more reasonable projection would ad-

just for the low level of sales in 1971 by increasing the

projected sales for the following year by $10,000,000 per

year. The Commission staff found the total revenues from

electric service in recent years to be (S.R. p. 13):

1968 200,258,168

1969 214,867,157

1970 241,626,628

1971 266,574,886

1972 287,775,250

Cleveland selected for purposes of normalization of

revenues, the compound growth rate from 1960 through

1970 (R. p. 3359). The estimate of compound growth

rate was 6.4 percent, the same percentage reported in

the company’s annual report for 1971. Cleveland also al-

leges, that on the basis of having obtained from the Federal

Power Commission the applicant’s monthly reports, an in-

ference can be drawn that the rate of growth in fact

exceeds the 6.4 annual rate of growth level (R. p. 3362).

The issue of proper normalization was addressed by

the briefs of applicant, staff and Cleveland. Whereas the

intervenor’s brief focused upon the mechanics of the adjust-

ment to be made for the normalization of revenues in

the test year, the staff's and applicant’s briefs argued

against the theory of allowing any sort of adjustment

for normalization of revenues in the test year. The basic

argument relied upon by the staff and the applicant is

that, in setting rates, the Commission is to look at the

test year. Certain adjustments can be made to revenues

and expenses for the test year, as in the case of wage

increases which occurred during the test year. However,

both of these parties believed that an adjustment for lack

of growth due to poor economic conditions would be so

uncertain as to be undeserving of recognition. A wage

increase is a positive known fact. However, what might

have been, if economic conditions were different, is not

definitely known. Although past years can be referred

to, the information which these past years reveal cannot

be molded into a definite pattern for the future. Therefore

this Commission overrules Cleveland’s proposals for adjust-

ing for “growth rate.”

Approximately $116,000 has been included in the rev-

enues of CEI for funds received by the applicant during

the test year from insurance companies arising from pol-

icies held by CEI. The Commission’s staff suggests that

the receipt of insurance proceeds is a regular occurrence

from one year to the next and therefore the monies should

be included in the revenue of the year in which payment

is actually made by the insurer. The applicant contends

that the over one hundred thousand dollars in proceeds

bore no relevancy to the year 1971, except that the funds

were received during that year. CEI asserts that while

the collection of insurance proceeds was not an infrequent

activity such collections were not made on what it con-

sidered a consistent regular basis (R. p. 1884).

While we can agree that the amounts of insurance

proceeds may vary from year to year, these types of pay-

ments are regular enough to justify their inclusion as

a revenue item for rate case purposes. Implicit in the

testimony of Mr. Thurber is the motion that there is no

reasonable way of estimating the proceeds in a given year

(T. pp. 1800-01, 3031). In the absence of a letter method

for determining the amount of such proceeds for the test

year, we find the actual proceeds received during the

test year to be reasonable.

The Commission’s staff has included in its estimation

of revenue $59,656 as “Gain from Sale of Utility Property”

(S.R. p. 8). The applicant argues in its eleventh objection

to the Secretary’s Report that the sale of such property

was not of a nature proper for inclusion because it was

not revenue derived from service to the public and was

not recurring as a part of the company’s business opera-

tions.

However, the applicant’s witness Mr. Kemper implied

that the company regularly disposes of various parcels

of property as their utility to the company ceases. More-

over, this very property once constituted an item in the

rate base when it was used for the service of the public.

Therefore it is appropriate that the ratepayers benefit

from their sale and find this revenue item proper for

purposes of this proceeding.

EXPENSES

(a) Advertising

Both Cleveland and the Sierra Club raised objections

to expenditures for advertising and promotional activities

on the part of the applicant. The Secretary’s Report shows

such expenses as $1,149,190 for advertising and a total

selling expense of $6,381,526 (S.R. p. 16).

Mr. Rudolph, President of CEI, testified on behalf

of his company, m support of the applicant’s inclusion

of advertising and promotional expenses in its application.

Mr. Rudolph’s testimony addressed primarily the need to

have an effective advertising program in order to provide

controlled growth in the use of electricity and to sustain

a lower cost of service. He also discussed the applicant’s

efforts in using advertising as a means of balancing pat-

terns of load growth (commonly referred to as selective

selling).

The Sierra Club submitted the testimony of four wit-

nesses presenting its assertions relating to advertisement

expenditures. The Sierra Club suggested that while the

Commission may be unwilling to require the applicant

to undertake a negative advertising campaign, it would

be justified on economic grounds in requiring Cleveland

Electric Illuminating 1) to discontinue promotional adver-

tising, and 2) to redirect the five percent of its operation

and maintenance expenses which is currently devoted to

demonstrating, selling and advertising activities to activ-

ities with greater social purpose. Alternatively, it was

Suggeste the promotional expenses should be rebated. to

the consumers through lower rates (Sierra Club Ex. 2).

The Sierra Club, by its witnesses, brings into question

the effectiveness of the applicant’s advertising efforts in

achieving the goals to which Mr. Rudolph addressed his

testimony. Questions dealing with the environmental and

economic impact on the service area of such advertising

were also considered together with the propriety of allow-

ing a monopoly to advertise use of a product which is

such an essential part of the day to day life of Gs north-

east Ohio citizen.

In its fortieth objection to the Secretary’s Report,

Cleveland broadly claims the applicant’s advertising is de-

ceptive, excessive, and a violation of the anti-trust laws.

Additionally, Cleveland suggested the Commission ought

not compensate electric utilities for their promotional prac-

tices designed in part to take away business from the

natural gas industry.

This Commission is presently considering an action

brought by The Ohio Public Interest Action Group, Case

No. 72-757-E, directly addressed to general questions re-

lating to advertising and promotional expenses. The issues

and considerations discussed by the parties in this applica-

tion are similar to those raised in the complaint proceed-

ing consistent with our decision in Ohio Power, Case No.

71-283-Y, issued October 26, 1972, we defer a general policy

decision. At this time, the Commission will follow what

has been the practice up to this time and include the

aforementioned expenses on a cost of service.

(b) Charitable Contributions

Mr. Rudolph also testified on the charitable contribu-

tion expenditures made by the applicant. The witness

testified that the majority of the expenditures were contri-

butions to the Cleveland Electric Illuminating Foundation,

a nonprofit corporation established for the purpose of main-

taining and applying funds, donated to it by the company

for charitable, scientific or educational purposes. The re-

mainder of the charitable contributions were direct con-

tributions to other associations, including the Cleveland

Indians Baseball Organization (App. Ex. 24, p. 10). Funds

expended for this purpose totalled $636,149 during the

test year (App. Ex. 24, p. 11).

The inclusion of charitable contributions as an operat-

ing expense was explained by the witness in this way

(App. Ex. 24, p. 11, 12):

“These expenditures should be incorporated in the cost

of service in this rate hearing because it is the cus-

tomer, in the local area, who receives the benefits

of these contributions, not the shareholder, who may

reside anywhere. These contributions help to develop

a more productive citizenry within our service area.

If such contributions are not made, then it is the

general service area and this company that will be

less well off as a result. It is my judgment over

the years that the company’s program of support for

the community programs have contributed substan-

tially to the ability of the company to provide low

cost service to its customers.”

Staff cross-examination of Mr. Rudolph revealed that

funds are paid to the foundation on an annual basis. The

grants are irrevocable, however, there is no obligation

on the part of the foundation to distribute the entire

amount of the annual grant (R. p. 2914). The witness

admitted that such contributions do not improve the pro-

duction or transmission plant of the applicant in any direct

manner. While the customer was alleged to have no input

as to how the funds were distributed, it was suggested

that the control exercised by the shareholders was no

better than indirect.

Cleveland asserts in its fifty-fifth objection to the Sec-

retary’s Report, that the stockholder, rather than the rate

payer, should assume the burden of financing charitable

contributions. The contention is also made in the same

objection that the contributions made by the applicant

in the test period are excessive.

As noted in Telephone Service Company of Wa-

pakoneta, Ohio, Case No. 36,681, historically this Commis-

sion has not established a clear precedent as to the allow-

ance or disallowance of charitable contributions as an ap-

priate item of expense for rate making purposes. Such

donations were disallowed by this Commission as early

as 1934 in East Ohio Gas Company vs. City of Cleveland,

4 PUR (ns) 433 (1934); In Re The Springfield Gas Com-

pany, 19 PUR (ns) 1 (1937). Intervening and subsequent

Commission history reveals the recognition of such con-

tributions as allowable items of expense West Ohio Gas

Company v. PUCO, 6 PUR (ns) 449 (1935); Cleveland

Electric Illuminating Company vs. City of Cleveland, 67

PUR (ns) 65 (1947); Cincinnati Gas and Electric Company

vs. City of Cincinnati, 74 PUR (ns) 5 (1948); and Re Ohio

Bell Telephone Company, 82 PUR (ns) 341 (1949). Since

1950, this Commission, however, has permitted charitable

contributions as an offset to operating revenues only when

the evidence of record reveals that the expenditure was

reasonable, the purpose beneficial to the community and

the impact of the allowance on the ratepayer minimal.

Accordingly, the Commission finds that the charitable

contributions made by the applicant for purposes of this

rate proceeding only are to be disallowed to the extent

that it exceeds $300,000 during the test year. Moreover,

we hereby signal the industry that we are moving towards

a policy decision that charitable contributions should not

be included at all as an appropriate item for rate base

purposes. However, we deem it proper to permit some

amount to be included at the present time in this case

because we have not given notice to the public of this

policy change.

CEI has raised a number of other exceptions to the

Secretary’s Report relating to its claimed expenses per-

taining to legal and factual issues contested to varying

degrees during the hearing.

The second objection to the Secretary’s Report asserts

that the Commission’s staff has incorrectly reflected on

an annual basis the cost of wage increases granted during

the test year (R. p. 1879). CEI estimated the expense

by comparison of dollars paid immediately before and after

the wage adjustment and arrived at a figure of $1,229,000

(R. p. 1879). In estimating the increase the staff applied

the cents per hour increase to the hours worked on the

payroll immediately preceding the wage adjustment (S.R.

p. 5). The difference in estimates submitted by the ap-

plicant and Commission’s staff is $44,000. While the

methods used by the staff are reasonable under the cir-

cumstances as they knew them at the time of the investiga-

tion, we find the estimate of cost resulting from wage

increases as computed by the applicant to be based on

more complete information and therefore adopt CEI’s sug-

gested figure as the amount properly includable in the

rate base. Additionally, the Commission accepts the ob-

jection of the applicant relating to the pension costs arising

from the wage increase.

The applicant’s fourth objection to the Secretary’s Re-

port asserts 1) the Commission’s staff has incorrectly de-

termined the base amount for fees and expenses in connec-

tion with the rate increase proceedings, 2) the staff has

failed to include in applicant’s allowable expenses for the

test year any amounts for the amortization of rate case

expense during the test period, and 3) the staff’s recom-

mendation that such expenses be amortized over a five

year period is improper. A reading of the Secretary’s

Report discloses that the staff has, in fact, adopted the

estimate of cost submitted by the applicant and that $62,000

has been allocated to the year 1971 for such expenses.

Therefore, we overrule applicant’s first two objections.

We also deem the period of amortization of expenses relat-

ing to rate proceedings to be within the discretion of

this Commission and find the five year period suggested

by the staff to be reasonable, proper, and consistent with

recent practice. We therefore, direct such an amortization

to be made by the applicant.

CEI’s sixth, seventh, and eighth objections relate to

F.I.C.A. uncollectable accounts, and real and personal prop-

erty tax provisions of the Secretary’s Report. The ap-

plicant’s witness Mr. Thurber testified during the hearing

that CEI was willing to accept the position of the Com-

mission’s staff dealing with these issues (R. p. 1880).

Therefore, consideration of the initial objections need not

be made at this time.

The Commission’s staff based its estimates of federal

income tax expense on tax returns submitted by the ap-

plicant for the test year. CEI alleges that such a method

is improper under these circumstances (R. p. 2007). It

is the position of the applicant that because of its aggres-

sive tax posture the tax applicant charges to such expense

for the year adjusted for particular contingencies. The

applicant claims a book expense of $13,622,000 for the

test year, while the tax shown to be due in the tax filing

is somewhat less (R. p. 2010).

The applicant suggests that if the staff is to look

to its tax return as a basis for computing income tax

expense, an adjustment of one million dollars should be

made to reflect deficiency assessments which are probably

to become due (R. p. 2007). CEI has, during recent years,

established a reserve for such payments which arise from

tax audits. During the time period 1960-1969, deficiency

assessments averaged $481,000 per year and in the two

years last audited the additional amounts paid were over

one million dollars (R. p. 2014).

Cleveland asserts that the reserve established by CEI

has, in recent years, been larger than is needed and the

excess reserve should be amortized over a five-year period

in order to return such funds to the benefit of the rate

payers (R. p. 3342). Cleveland contends that in order

to accurately reflect the position of the applicant, income

accounts should be readjusted upward and expense ac-

counts should be lowered by $500,000 (R. p. 3345). Finally,

Cleveland suggested by way of oral testimony that an

amount of $1,460,000 was a reasonable reserve for settle-

ments in 1970 and 1971 (R. p. 3348). Nevertheless, Cleve-

land’s witness relating to this question does admit that

the proper figure for the reserve is a matter of specula-

tion and is indefinite (R. pp. 3351 and 2019).

The Commission finds the staff’s use of tax returns

submitted by the applicant as a basis for estimating federal

income tax expense to be proper. We agree with Cleve-

land’s witness that any figure for a deficiency reserve

would be a matter of speculation and conjective and there-

fore improper. Use of the attached tax return of the

applicant will avoid inclusion in the rate base of indefinite

amounts for this expense and will allow whatever defi-

ciency payments which may materialize to be included

in any future rate application which CEI may file. There-

fore, we conclude that the figure submitted by the Com-

mission’s staff is to be included as the federal income

tax expense. |

Tne applicant objects to the position taken by the

Commission’s staff in excluding expenses associated with

two production outages at the Seneca Plant. The Secre-

tary’s Report estimates a total expense attributable to these

outages of $215,000, while the testimony produced by the

applicant indicates an expense of $202,186 (R. p. 2131).

Applicant’s witness testified that the outages were caused

when tools were left in machines resulting in damages

to equipment and delaying continued plant operation (R.

p. 1795). The witness testified that similar outages oc-

curred twice in a four month period. It is the position

of the Commission’s staff that not only are these expenses

recoverable through insurance, but more importantly they

are of a nonrecurring nature and ideally such costs would

arise only with the greatest infrequency. Alternatively,

the applicant contends that human error is a recurring

experience and has been the direct cause of these outages.

CEI’s counsel (R. p. 2162) suggests that the fact that

the outages occurred twice in such a short period of time

proved that they were recurring and indicated that such

negligence-based expenses should be included in the ap-

plicant’s rate base. The Commission finds this view re-

grettable and shares the views expressed by the Commis-

sion’s staff. While it may be agreed as a general proposi-

tion that human error is a recurring condition, it is not

the policy of this Commission to reward any public utility

for careless or negligent conduct. Remissive work habits

as led to these outages are contrary to the interest of

the consumer public and allowance of expenses of this

nature would be inconsistent with the promotion of ef-

ficient and workmanlike operations. Therefore, expenses

related to the Seneca outages have been excluded from

the rate base of CEI.

(d) Depreciation Accrual Rates

Following a review of current rates of acrrual used

by the company for the determination of depreciation ex-

pense and the amount of money accumulated in the de-

preciation reserve as related to total depreciable book

‘value, the Commission’s staff recommended that the ap-

plicant’s provision for depreciation for 1971, as stated in

Applicant’s Exhibit 19, of $25,127,015 be accepted. The

Commission’s staff also recommended that CEI be required

to continue use in future years of the same accrual rates

as used during the test year.

The applicant, in its eighteenth objection to the Secre-

tary’s Report, asserts that for the Commission to deter-

mine depreciation rates would be inappropriate, unneces-

sary and impractical, arguing that appropriate depreciation

accrual rates have historically been considered to be a

management prerogative (Ex. 37, p. 24).

The staff, consistent with the Commission’s responsi-

bility under Section 4905.18 Revised Code, routinely ana-

lyzes depreciation rate accruals in making its investiga-

tion pursuant to Section 4909.19 Revised Code. Section

4905.18 Revised Code, provides “the Commission shall as-

certain, determine and prescribe what are proper and ade-

quate charges for depreciation of the several classes of

property of each public utility.”

The propriety of this Commission considering deprecia-

tion accrual rates in conjunction with the rate case applica-

tion has been fully discussed in two recent rate cases,

see Toledo Edison Company, Case No. 71-148-Y, issued

January 31, 1973 and Northern Ohio Telephone Company,

Case No. 71-439-Y, issued August 2, 1973. Therefore, the

Commission overrules the applicant’s eighteenth objection

and directs the applicant to use the depreciation accrual

rates recommended by the staff until further order of

the Commission.

SUMMARY

In summary the following table reflects the adjust-

ments discussed above:

REVENUE

Electric $268,930 ,886

EXPENSES

Operation and Maintenance ~

Labor 39,331,248

Other than Labor 25,705,740

Fuel 65,932,686

Purchased Power 5,008 882

Donations 300,000

TOTAL OPERATION AND $136,278, 556

MAINTENANCE

Provision for Depreciation $ 25,127,015

Gain from Sale of Utility Property (59,656)

Taxes

Taxes Other Than Income 34,658,749

Federal Income Tax 13,120,510

Future Federal Income Tax 27,981

TOTAL TAXES 47,807,240

TOTAL EXPENSES 209,153,155

RETURN $ 59,777,731

Ill. RATE OF RETURN

CEI has sought to increase its rate of return in order

to meet an increasing need to expand the facilities devoted

to public service (CEI estimates construction expenditures

of $129,000,000 during 1971 and expects to invest approxi-

mately $697,000,000 during the next 5 years. The appli-

cant argued that such an increase is needed to attract suf-

ficient capital to provide adequate service, in the light of

rising corporate expenses and a diminishing rate of return

on investments.

The income available for fixed charges now being

realized from the existing rates and charges in the amount

of $59,777,731 when applied to the rate base of $1,175,870,000

approved by Commission, resulting in a rate of return of

5.08%.

The two witnesses testifying as to a proper rate of re-

turn, 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 al-

lowance 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 capi-

tal structure results in a recommended rate of return of

9.05%.

Mr. Brooks arrived at substantially the same conclu-

sion 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” (App. Ex. 31, p. 20).

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 earn-

ings growth rate and an “evaluation” of earnings growth

rates to produce bond coverage ratios “barely sufficient to

preclude deterioration in band ratings .. .” (App. Ex. 31,

p. 31). Mr. Brooks recommended that a factor of 320 (re-

flecting investor expectation for growth in earnings) be

added to the earnings price ratio adjusted for underpric-

ing and commission cost, 8.55 to arrive at a current cost

of capital of 11.75% (App. Ex. 31, p. 23, Ex. 32, p. 7).

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. How-

ever, Mr. Rothey adjusted the 11% to eliminate the infla-

tion factor, a calculation which he believed necessary in

Ohio because the RCNLD rate base eliminates “the erod-

ing effect of inflation upon the value of an investment”

(Staff Ex. B, pp. 11, 12). The net result was an estimated

cost of common capital of 8.5. Mr. Rothey used the em-

bedded cost of debt as of the end of the test year which

was 6.5% (Staff Ex. Sched. 1). 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

(Staff Ex. B, p. 10).

In addition, Mr. Rothey computed as a part of capital

structure those amounts of funds representing the contri-

butions 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

to make permanent additions to the fixed plant and 3)

these funds represent in effect interest free loans, which

to be fair to the suppliers of the capital (the federal gov-

ernment and in reality tax paying consumers) should be

included in the capital structure to prevent a positive re-

turn from being earned on assets which the funds repre-

sent (Staff Ex. B, pp. 13-14).

The approaches of both witnesses are defensible; the

cost of common capital can only be estimated; that esti-

mation is supported only by “evaluations” and “judgments.”

The results can never be tested scientifically. The selec-

tion of our expert’s estimate does not imply that the other

is “wrong.” In the instant case, therefore, we find that

the staff approach appropriate for the purposes of this pro-

ceeding. Using Mr. Rothey’s computation, a rate of re-

turn of 7.05 results:

Percent of

Total Cost Weighted Cost

Common 38.7 8.5 032895

Preferred 6.5 7.4 .004810

Debt 50.5 6.5 032825

Deferred

Credits 4.3 0 .000000

100.0 .070530

IV. TARIFFS

As a part of its application, CEI presented existing and

proposed regulations governing electric service to its cus-

tomers (App. Substitute Ex. A and B). The Commission’s

staff received the proposed schedules and regulations and

made various comments and recommendations in the Sec-

retary’s Report (pp. 31-40). These recommendations gen-

erally refer to matters of a procedural nature dealing with

areas such as the propriety of requiring written applica-

tions for service, discontinuance of service, reconnection

charge, billing period, bill payment, access to premises, lia-

bility, distribution and service facilities and other addi-

tional recommendations.

The applicant has in its objections to the Secretary’s

Report asserted that the Commission lacks jurisdiction to

consider tariff provisions not put in issue by the applicant.

CEI contends that no change was proposed in many of its

tariffs other than renumbering and reordering the provi-

sions. Since these provisions do not affect the propriety

of a rate increase directly, CEI reasons that the Commis-

sion lacks jurisdiction in this proceeding to adopt the

staff's proposals. The position of the Commission’s staff

is that the applicant has not limited its application to in-

clude only changes in new regulations directly affecting

rates. The Commission’s staff views Exhibit B of the ap-

plication as setting forth an entirely new tariff and looks

to Section 4909.19 Revised Code to find a statutory obliga-

tion for the Commission to investigate and report all mat-

ters contained in the application and exhibits. The Com-

mission’s staff asserts that the general rules and regula-

tions contained in the applicant’s proposed tariff will have

a direct effect on the applicant’s service.

As was the case in Ohio Power Company, Case No.

71-283-Y, the contention of the applicant assumes that each

tariff provision is independent from another and should be

viewed by itself without consideration being given to its

impact or consistency with the tariff provisions taken as

a whole. The Commission cannot agree with such a prop-

osition. As was also stated in Ohio Power, such an agree-

ment by the applicant fails to acknowledge that the staff

is mandated by Section 4909.19 Revised Code to conduct

an investigation encompassing not only the application and

the exhibits attached thereto, but also, “‘of all matters con-

nected therewith.” Therefore, the Commission must con-

clude the scope of a general rate increase request cer-

tainly includes nearly all, if not all of the applicant’s rules

and regulations which in any manner could be applied in

charging the new rates.

Initially, in dealing with the tariff issues the Com-

mission must deal with placing the burden of proving in

an application, pursuant to Section 4909.18 Revised Code,

that proposed rate schedules will not be “unjustly dis-

criminating” under the terms of Section 4909.15 Revised

Code. It is the position of the Commission’s staff that

while Section 4909.15 and Section 4909.18 are silent on the

question of who has the burden of proof in establishing

whether a specific rate proposal is reasonable or unreason-

able, the rationale used in Commission motor carrier and

railroad cases can be used to place the burden on the util-

ity. In the interest of the public, the Commission’s staff

suggests the applicant should in an application to increase

rates, be required to prove that its rate schedules are not

in violation of the law. Such an approach, the Commis-

sion’s staff argues, would place the burden of proof on the

party who will most easily be able to provide the Com-

mission with the data it will need to make a proper deter-

mination. We find this argument to be compelling. This

is the policy that has been adopted by the Federal Power

Commission and the Federal Communications Commission

and by this Commission in Ohio Bell Telephone, Case No.

36,495 (December, 1972).

The applicant has taken issue, by way of its ninth

objection, to a number of specific recommendations made

by the staff (S.R. pp. 31-40). Following the initiation of

this proceeding, the applicant and the Commission's staff

joined together in reaching agreements relating to a nums

ber, but all of the specific areas of controversy. The agree-

ments are expressed in Exhibit 53 as submitted by the

applicant and are accepted by this Commission as a proper

resolution of such controversies.

(a) Construction of Underground Facilities

Intervenor Rocky River limited its participation to

the issue of the propriety of CEI’s proposed regulation to

assess consumers of a municipality the cost of special con-

struction of lines where said construction is required by

that municipality and not otherwise paid for. The staff op-

poses the regulation because it passes on the excess costs

of underground construction to the consumers without

regulatory review of a charge assessed by the utility. The

staff also opposes these rules because it believes that, by

including the costs in the residents’ electric bill, the mu-

nicipality would be, in effect, taxing its citizens for the con-

struction of the underground lines. The staff is not op-

posed to having the municipality bear the costs directly,

but the staff does not approve of the proposed way that

this theory is to be implemented by the applicant. The

problems which the staff sees in the proposed implementa-

tion are more fully developed in the brief filed by inter-

venor, Rocky River.

The brief of intervenor, Rocky River, addresses to the

generality and vagueness of the proposed rules. In addi-

tion intervenor believes that there are certain instances in

which the applicant should have to absorb the excess costs

of underground construction of lines. Specifically, the in-

tervenor believes that when it has been judicially or ad-

ministratively determined that overhead construction

would have an adverse effect upon the public interest, the

municipality and its citizens should not be required to

bear these excess costs. The intervenor states that “the

question to be resolved by this Commission is whether

residents of a municipality or the municipal government it-

self should be required to bear the excess costs of under-

ground construction of transmission or distribution lines

made necessary because overhead construction would ‘un-

reasonably’ affect the public welfare. Equity requires

that under such circumstances applicant absorb the excess

costs involved (brief p. 12).” What the intervenor does

not state is that if the applicant could not pass on the ex-

cess cost to the specific municipality, and citizens thereof

involved in the construction of underground lines, the ap-

plicant would not absorb the excess cost but would in-

stead pass them on across its entire service area.

The intervenor also objected to the proposed rules on

the basis that the applicant’s customers would be paying

EEE ee

twice for underground construction since the value of this

underground construction would be included in the rate

base of a later rate case.

In support of its contention that the proposed rules are

“indefinite, uncertain and incomplete,” Rocky River noted

that Rule 9(a) (3) applies to “special construction” while

Rule 9(a) (4) refers to “underground or other special con-

struction,” and that several of the terms used in these

rules are not defined. The intervenor also argued that the

rules offer no guidelines for deciding whether a flat charge,

proportional charge or surcharge would be assessed on the

electric service bills for the excess costs of this special con-

struction. Also, the intervenor objected to the lack of a

provision requiring applicant to obtain competitive bids

for the construction. Finally, the intervenor stressed that

if these rules are adopted they should only be enforced

prospectively.

The intervenors’ objections as to vagueness are well

taken as are its objections to the absence of guidelines for

assessing charges.

The basic issue to be decided is whether all of CEI’s

customers should bear the special construction costs or

only those consumers of the benefitting municipality.

As matter of policy this’ Commission believes that

where a judicial or quasi judicial determination has been

made by the proper authority that overhead construction

would have an adverse effect upon the public interest, CEI

directly should bear the additional cost as an expense of

doing business. Absent such determination, the consumers

in the affected areas who benefit from the underground

construction pay the additional costs. However when con-

sumers are assessed the additional costs, the company’s

books should not reflect the additional amount for rate

case purposes since it was directly reimbursed.

Therefore the applicant should submit to the Com-

mission for its approval an amended version of Rules 9

(a) (3) and 9(a)(4) which eliminate the vagueness, pro-

vide for a specific and verifiable manner of computing the

additional construction costs and which reflect the policy

enunciated above.

(b) Miscellaneous Provisions

Consideration of recommended tariffs has been nar-

rowed further by the parties to this proceeding, in that

the staff has chosen to withdraw Recommendation 15(B)

(1) dealing with transfer of right-of-way (R. p. 2796).

The applicant and staff have also agreed that Recommenda-

tion 11, relating to limitations on liability shall not be in

issue (R. p. 3530). Therefore, only points relating the

Recommendations 10(C), 14(C), and 15(B) (6) remain in

issue as between the staff and the applicant.

The applicant submitted a tariff provision under

which access to the customer’s premises is required “at any

reasonable time.” The Commission’s staff by way of Rec-

ommendation 10(C) suggests that the provision is vague

and subject to misinterpretation or abuse, and therefore the

applicant should further define the term “at any reason-

able time” to be “during the company’s normal working

hours.” Additionally, the applicant is requested to make

provision in its tariff for identification of an applicant’s

agent. CEI contends that its tariff as submitted, is reason-

able and any modification is impracticable. The Com-

mission deems it essential that notice be provided the

parties coming under this provision and at the same time,

it is in the interest of the public to maintain a low level of

expense for the applicant in carrying out activities within

this provision. The Commission is also aware of the fact

that “reasonable time” provisions have been allowed a rec-

ommendation of the staff in recent applications of the ap-

plicant.

The Commission’s staff recommendation 14(C) re-

lating to itemization of billing is challenged by the appli-

cant because such a recommendation, in the view of CEI,

would be impractical. CEI provided testimony indicating

that compliance with the Commission’s staff request would

increase overhead expense by 20% (T. p. 2829), however,

no actual cost data was presented in support of that con-

tention. Without such a provision requiring itemization,

no notice is given to the customers and for this reason the

Commission finds it is necessary to direct applicant to

comply with the recommendation.

By way of recommendation 15(B)(C) the Commis-

sion’s staff has requested service at normal voltages and

called for voltage deliveries at the service entrance to be

within the range of plus or minus 5% of the nominal volt-

age of service. The applicant objected to this recommenda-

tion but there is no testimony brought forth to support the

position of the applicant that such provisions are imprac-

tical and unnecessary.

Such a standard of service as would be established by

this recommendation has been accepted by the NARUC

and by commissions in other jurisdictions. The same Com-

mission staff's recommendation was found to be reasonable

and proper in Toledo Edison Company, Case No. 71-148-Y

and has been ordered in other recent applications coming

before this Commission. As a matter of sound public

policy, it is felt that applicant should be ordered to make

such a regulation as a part of its tariffs to be filed with

this Commission. ,

V. RATE STRUCTURE ANALYSIS

(a) Fuel Adjustment Clause

In pertinent part the fuel adjustment clause proposed

by applicant states:

“The cost of fuel used in ascertaining such weight aver-

age cost of fuel for electric generation shall include the

invoice cost; all taxes, assessments, or other costs im-

posed in the purchase, consumption or the content of

emissions, from any fuel burned; all transportation,

switching or demurrage trains; costs incurred in own-

ing or operating coal mines; drying or other costs in-

cident to coal pipelines; and all costs of owning, leas-

ing and operating oil or gas pipelines.”

The staff suggested the cost of the fuel shall include

only the cost of the fuel from those sources normally sup-

plying fuel at the date of issuance of this order plus the

cost of transporting such fuel from its source to the site

and grounds of the generating plant at which it is intended

that the fuel shall be used (S.R. p. 42). In addition to

limiting the items taken into account in determining the

cost of fuel the staff also recommends adoption of a pro-

vision which would impose upon the applicant the duty of

submitting changes in the source of supply of fuel to the

Commission for approval. CEI initially objected to both

provisions, however, the Commission’s staff and the appli-

cant have arrived at an agreement expressed in Applicant's

Exhibit No. 50, relating to the latter recommendation. Con-

sequently, the disagreement between the staff and the ap-

plicant now centers around the measurement of the cost

of fuel. The applicant contends that a recovery should be

allowed for such a difference between the quantum of en-

ergy brought into the applicant’s system for use in gen-

eration and the quantum of energy produced. The appli-

rr ee

cant bases its claim on the belief that it is beyond the

power of the applicant to prevent such losses; such losses

being a natural result of the mechanics of the central sta-

tion electric service. It is the applicant’s contention that

such a recovery by the utility has been allowed for a

number of years (T. p. 2451).

Further, the applicant contends that weighted average

cost of fuel should include taxes, assessments or other costs

imposed on the emissions from the fuel and that the fuel

clause should include the Ohio excise taxes which are in-

curred by the company as a result of the revenues derived

from the use of the clause. Alternatively, the Commis-

sion’s staff has asserted that the fuel cost adjustment clause

is intended to recover the cost of generating the energy

and nothing more (T. p. 2701). Mr. Bingham testified that

he did not know of any taxes, assessments imposed upon

the purchase, consumption, or content of emissions (T. p.

2452) and that the normal procedure of rate cases would

make adjustment for increases in the amounts of Ohio ex-

cise taxes periodically (T. p. 2460).

The Commission finds these issues to be clearly within

its scope of discretion and accepts the position of the Com-

mission’s staff relating to this matter. The Commission

recognizes that fuel adjustment clauses approved by the

Commission and the utility industry have varied consid-

erably until recently. Beginning with Toledo Edison Com-

' pany, Case No. 71-148-Y, issued January 31, 1973, however,

and all electric cases following it, the Commission has con-

sistently held that the conversion factor which translates

cost of fuel to rates (in cents) per kilowatt-hour be based

completely on the average net heat rate of applicant’s gen-

erating facilities and not include adjustments for transmis-

sion or distribution losses, company use (outside the

plants), excise tax provisions, or “unaccounted for” items.

See, for example, Ohio Edison Company, Case No. 71-233-Y

issued April 19, 1973, Dayton Power & Light, Case No.

71-740-Y issued September 14, 1973, and Case No. 71-730-Y

issued October 11, 1973, and Ohio Power Company, Case

No. 71-287-Y, issued October 26, 1973. Rather than set

forth a specific clause which the applicant must use, we

find it appropriate to require the applicant to formulate a

fuel adjustment clause that can be recommended by the

staff as well, in order that it may receive Commission ap-

proval.

(b) Water heater and space heating discount rates

The applicant presented testimony and an exhibit

(23 B) to support its contention that water heating and

space heating discounts were appropriate in its rate de-

sign. Applicant Exhibit 23 B demonstrates that the aver-

age residential space heating and water heating discounts

per kwh of annual use amounts to 66¢ per kwh (p. 4) and

37¢ per kwh (p. 2) respectively, relatively insubstantial

amounts. However, applicant’s proposal to retain water

and space heating discounts ignores the overwhelming ne-

cessity to promote conservation of energy. As we stated in

Dayton Power & Light, Case No. 71-730-Y issued October

11, 1973, these discounts may well have been justified by,

among other things, a consideration of gas company compe-

tition. However, this rationale is no longer applicable and

the considerations of energy conservation outweigh by far

the historical promotional goals. Therefore, the Commis-

sion directs the applicant to limit applicability of the pro-

posed discounts to present customers as of the date of this

order and to those commercial customers or potential com-

mercial customers who can show, to the satisfaction of

applicant, that they had entered into contracts for, had is-

sued purchase or orders for or had otherwise committed

themselves for, the purchase of space heating or water

57 4

heating equipment and/or its installation prior to the date

upon which this order is issued although such equipment

may not be placed in service until later.

For the same reasons indicated for the determination

of electric and space heating discounts, the Commission di-

rects applicant to limit the applicability of the proposed

schedule to present customers.

(d) Rate structure

For many years this Commission has considered it

proper and desirable that electric rates be so structured as

to provide declining unit prices as the customers’ usage

increased.

The principle may have been justifiable in periods

where promotion of electric energy usage reduced the ex-

cess capacity of the electric industry which might other-

wise have remained idle. Such is not the situation today

where all forms of energy are in short supply and conser-

vation of resources has become a national policy.

The Sierra Club presented testimony of Dr. Tybout

(Sierra Club Ex. 3) which explored various types of price

structuring and which concluded that a more or less flat

rate structure was the most desirable. While this

Commission cannot base its determination of proper rate

structure upon his testimony entirely as several of his as-

sumptions were disproven by applicant’s testimony the

record does support a conclusion that some modification

of applicant’s proposed schedule is in order.

Applicant is therefore directed to reduce its proposals

for minimum bills and initial energy blocks in the order of

20 percent and to make compensating increases in the higher

usage energy blocks.

(e) Contracts filed pursuant to Section 4905.30 Revised

Code

The Commission in its review of the within application

has looked into the “special agreement” contracts of appli-

cant that are on file with the Commission. It finds that in

all cases such contracts deal with the purchase and sale of

interruptible power and in some cases the purchase and

sale of firm power. The rates, charges, terms and condi-

tions of the sections of these contracts dealing with inter-

ruptible power appear to vary quite widely. The Commis-

sion believes that these contracts should be compatible with

the standard industrial rates as they shall be proposed

pursuant to this opinion and order. Applicant is there-

fore directed to prepare and submit to the Commission

not later than ninety (90) days from the date of this

order, a report showing in detail the conditions, consid-

erations, and cost justifications leading to determination

of the rates, charges, terms and conditions contained in

each contract heretofore entered into by applicant and

any proposed changes it would recommend pursuant to

such review.

VI. DISPOSITION OF MISCELLANEOUS MOTIONS

The Sierra Club has made a motion requesting the

Commission to order the staff and/or the applicant to

tender to the intervenor funds commensurate with its ex-

penses relating to this proceeding. The basis for this re-

quest is Sierra Club’s belief that the staff has failed to

represent the full interests of the public and its assump-

tion of those responsibilities as a “private attorney gen-

eral.” Relief is claimed pursuant to Section 4903.24

Revised Code. The Commission cannot agree that the

staff has failed to assume its responsibilities in this pro-

ceeding. Further, we can find no basis in the indicated

provision for affording the relief requested. The clear

intention of this provision is to provide the Commission

with a method of compensating itself for its costs when

a utility is found to be directly responsible for causing

needless expenses to be accrued by the Commission.

Therefore, Sierra Club’s motion. is denied.

Local 38 of the International Brotherhood of Electric

Workers has sought to intervene in this proceeding. The

petition to intervene was signed on September 26, 1973,

approximately three months after the hearing began and

one month after the end of the hearing. Due to the vague

nature of the Local 38 request and in light of compliance

of these proceedings with notice requirements and other

statutory provisions, the motions granted to the limited

extent that a copy of this opinion and order shall be served

upon counsel for Local 38.

FINDINGS OF FACT:

From evidence of record in this proceeding, the Com-

mission finds that:

1. The value of all of applicant’s electric property

used and useful for the service and convenience

of the public within the service area encompassed

by this application, as of the date certain of June

30, 1971, is not less than $1,155,299,000, that the

proper allowance for working capital is $20,571,000,

thus applicant’s rate base for this proceeding is

$1,175,870,000.

2. For the twelve month period ending December

31, 1971, the test period in this proceeding, the

revenues, expenses and income available for fixed

charges from the rates for electric service now

being charged and collected in the area involved

10.

11.

in this proceeding, are $268,930,886, $209,153,155

and $59,777,731 respectively.

This net annual compensation of $59,777,731 repre-

sents a 5.08 percent rate of return on a rate base

of $1,175,870,000.

A 5.08 percent rate of return is insufficient to

provide applicant with a reasonable compensation

for the electric service rendered to customers

served in the application area.

A rate of return of 7.05 percent is fair and reason-

able and is sufficient to provide applicant a just

compensation and return on the value of the prop-

erty used and useful in furnishing the service

described in the application.

A rate of return of 7.05 percent applied to a rate

base of $1,175,870,000 will result in allowable dol-

lar return in the amount of $82,898.836

The allowable annual expenses of applicant for

the purposes of this proceeding is $232,271,299.

The allowable gross annual revenue to which ap-

plicant is entitled for the purpose of this proceed-

ing is the sum of the amounts found in findings

(6) and (7) or $315,170,134.

Applicant’s present tariff provisions as may affect

this application should be withdrawn and can-

celled.

All objections to the Secretary’s Report filed by

the applicant have been ruled upon inthe discus-

sion portion of this opinion and order.

All objections to the Secretary’s Report or mo-

tions not specifically considered in the discussion

portion of this opinion and order should be over-

ruled.

12. The applicant should submit tariff schedules

consistent with this opinion and order.

CONCLUSIONS OF LAW:

The application herein is filed pursuant to, and

this Commission jurisdiction thereof, under the

provisions of Section 4909.17, 4909.18 and 4909.19

Revised Code; further the applicant has complied

with the requirements of the aforesaid sections.

The staff investigation has been conducted and

a report duly filed and served and public hearing

held herein and the written notice thereof have

complied with the requirements of Section 4909.19

Revised Code.

The existing rates and charges now being charged

and collected by the applicant for electric service

in the territory affected by this application are

insufficient to provide it with adequate net annual

compensation and return on its property actually

used and useful for the electric service furnished

its subscribers.

A rate of return of 7.05 percent is fair and rea-

sonable and is sufficient to provide applicant just

compensation and return on its property actually

used and useful for the electric service furnished

its subscribers.

The applicant should be authorized to cancel and

withdraw its presently effective tariff provisions

on file with this Commission and to file tariff

provisions consistent with the Commission’s dis-

cussions and findings set forth above.

6. The effective date of the new tariffs shall be

the second billing period after Commission ap-

proval of tariffs pursuant to this order. The appli-

cant shall notify each of its customers by an insert

in the first billing following said approval of the

new tariffs. The applicant shall submit the pro-

posed notice to the Commission when it files its

tariff for approval.

ORDER:

It is, therefore,

ORDERED, That the applicant be, and hereby is, au-

thorized to file tariffs consistent with the findings and

discussion set forth above and to cancel and withdraw

its present tariffs. It is, further,

ORDERED, That the tariff sheets authorized herein

and the proposed billing notice shall be submitted for

approval by this Commission. Upon receipt of two com-

plete copies of said tariff conforming to this opinion and

order, the Commission will review and approve same by

entry. Thereafter, customers shall be noticed one billing

period in advance of the effective date. It is, further,

ORDERED, That applicant file semi-annually com-

mencing with June 30, 1974 a balance sheet, income state-

ment and a cash flow statement in sufficient detail to

permit analysis contained therein and a separate computa-

tion showing the rate of return earned on an updated

RCNLD valuation as found in this proceeding. Such updat-

ing may be accomplished by adding the plant additions

during the period between the date certain, June 30, 1971

and June 30, 1974. It is, further,

ORDERED, That all objections to the Secretary’s Re- _

port or motions not specifically discussed within this opin-

ion and order be overruled. It is, further,

ORDERED, That applicant submit a report described

in the Rate Structure Analysis portion, relative to its con-

tracts filed pursuant to Section 4905.30 Revised Code with-

in ninety (90) days of the issuance of this opinion and

order. It is, further,

ORDERED, That a copy of this opinion and order

be served on all parties of record.

The Public Utilities Commission of

Ohio

EpmMuND J. TuRK

Chairman,

SALLY W. BLOOMFIELD

Commissioners

64 65

APPENDIX B 3. The Commission finds that to comply with the

above-described order the following shall be sub-

Entry of the Public Utilities Commission of Ohio stituted for Sections 9.a.(5), (6) and (7), and 9.b.

(2) (a) and (b):

9.a. General Distribution Facilities

(Dated January 18, 1974)

Case No. 71-634-Y (5) “Cost of special construction” and “cost of any

Before change” as used in Rules 9.a.(3) and (4), re-

THE PUBLIC UTILITIES COMMISSION OF OHIO spectively, shall be the actual cost to the com-

pany of such special construction or change

and the excess thereof over the cost of standard

construction. When a charge is to be based

on the excess cost, the company and local juris-

diction shall negotiate the amount thereof.

(6) For the purposes of Section 9.a.(3) and (4),

IN THE MATTER OF THE APPLICATION OF THE CLEVELAND ELEc-

TRIC ILLUMINATING COMPANY FOR AUTHORITY TO AMEND

AND TO INCREASE ITs FILED SCHEDULES FrxInGc Rates

AND CHARGES FOR ELECTRIC SERVICE.

ENTRY respectively, the municipality or other public

authority involved may elect whether it will

The Commission, coming now to consider the above- pay the cost of special construction or of any

entitled matter and being fully advised in the premises, change, as hereinbefore defined, or whether

finds: such costs shall be paid for by the consumers

1. The applicant in this proceeding, The Cleveland served within its jurisdiction and, in the event

Electric Illuminating Company, has proffered to of the latter, whether the same shall be paid

the Commission for filing certain tariff documents by flat charge, proportional charge ed =

and this Commission is satisfied that they meet charge. In the event that any such municipal-

all requirements of the Commission’s order of No- ity of other public authority fails to make such

election and to notify the company thereof

recat itae prior to completion of construction of such fa-

2. Such tariff documents having been reviewed by cility, the same shall be paid for by the said

the Commission and its staff, it is found that certain consumers by surcharge on electric service

elements of the order with regard to modifications bills.

' ve not

- _ paca by - te ba (7) In the event that it shall be finally determined

by a court of competent jurisdiction or by the

Ohio Power Siting Commission or by the Pub-

lic Utilities Commission of Ohio, that construc-

although all requirements of the order with regard

to rate schdules are found to be in compliance

therewith.

66 67

tion of the company’s standard facilities would

have an unreasonably adverse effect upon the

interest of the general public in the municipal-

ity or municipalities traversed by the proposed to him any underrun. A reasonable ex-

line, Rule 9.a.(3) and 9.a.(4) shall be inappli- planation of overruns shall be supplied if

cable to such construction. such shall occur.

The company may bill the customer for

any excess of actual cost over the estimate

originally furnished to him or shall refund

9.b. Service Facilities It is, therefore,

(2) Furnished at Consumer Cost ORDERED, That the proffered tariff documents except

(a) When construction, reconstruction or relo- for those sections of the rules and regulations ennumerated

cation work is to be performed by the

company for a customer at the request

of the customer and it is expected that

the customer shall bear the cost of the

work, the company will furnish to the cus-

tomer before work is commenced an esti-

mate of the cost of performing the re-

quested work. The customer may be re-

quired to deposit with the company in ad-

vance a sum equal to such estimate as

a guarantee of payment for the work.

Such estimate may be made in terms of

the unit costs used by the company in

estimating construction costs for its other

purposes. When the work has been com-

pleted actual cost will be determined and

an itemized bill rendered to the customer.

This bill will show separately the cost of

each major item of material, as a lump

sum the cost of all minor material iteras,

including number of man hours worked

and average pay rate for those men and

as a percentage of the above the company’s

standard charge for truck and equipment

use and for general overhead.

in Finding No. 3 shall be and the same hereby are approved.

It is, further

ORDERED, That revised copies of the appropriate

sheets of the rules and regulations sections of the tariff

documents be revised in accordance with Finding No. 3

and the same hereby are approved. It is, further

ORDERED, That all tariff documents approved as

above shall be made effective by the company on a date

subsequent to the date upon which two (2) complete

printed copies of all such tariff documents are tendered

to the Commission’s Tariff Department for filing. The

documents so tendered are to be printed and to have

the effective date thereof in an appropriate place thereon.

It is, further

ORDERED, That the company shall file quarterly re-

ports, commencing no later than April 30, 1974, contain-

ing the following information:

(1) Total revenue from sale of electric power.

(2) Revenue generated by each rate schedule ap-

proved by this entry.

(3) Average number of customers served under each

rate schedule.

(4) Total number of kilowatt hours sold under each

approved rate schedule.

The amounts reported shall separately indicate any reve-

nue generated by action of the fuel adjustment rider.

These reports shall include the comparable numbers

and/or amounts experienced during the test period of

Case No. 71-634-Y. It is, further

_ ORDERED, That nothing herein contained shall be

deemed to be binding upon this Commission in any sub-

sequent investigation or proceeding involving the justness

or reasonableness of any rate, charge, rule or regulation.

The Public Utilities Commission of

Ohio

Cart R. JOHNSON

SALLY W. BLOOMFIELD

Commissioners

While I am not in agreement with the Opinion and

Order in this case dated November 28, 1973, that Opinion

and Order is the official disposition of the case by a ma-

jority of this Commission and the company is entitled

to the implementation of that decision without undue delay

I have signed the Tariff Order to accomplish that result

only.

Car. R. JOHNSON

Commissioner

APPENDIX C

Opinion of the Supreme Court of Ohio

(Decided June 11, 1975)

THE SUPREME COURT OF OHIO

THE STATE or Onto, Crry or CoLumsus

THE CLEVELAND ELecrric ILLUMINATING Co., __)

Appellant,

vs. 1 74-276

Pusuic UTILit1es CoMMISSION oF OHIO,

Appellee. :

Crry or CLEVELAND, }

Appellant,

vs. . 74-272

Pus.ic UTILITIES COMMISSION OF OHIO ET AL.,

Appellees. ;

Srerra Cvs, Inc., 7

Appellant,

vs. > 74-156

Pus.ic UTILITIES COMMISSION OF OHIO ET AL.,

; Appellees. :

Corrican, J. The appeal of The Cleveland Electric I-

luminating Company will be considered first, followed by

the appeals of the city of Cleveland and the Sierra Club.

The Cleveland Electric Lluminating Company will be re-

ferred to as the Company, the city of Cleveland as the

City, the Sierra Club, Inc., as Sierra, and the Public Utili-

ties Commission as the Commission.

IA.

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, expressed in paragraph

five of the syllabus therein, which reads:

“What will represent a reasonable annual compensa-

tion 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 own-

ing 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” repre-

senting 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 ren-

dered 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 conclu-

sion 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 iecommended 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 aver-

age rate of growth in earnings of comparable electric utili-

ties with the dividend yield to obtain an estimate of 11%

as a proper investor discount rate for common stock. How-

ever, Mr. Rothey adjusted the 11% to eliminate the infla-

tion 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 com-

mon 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 contribu-

tions in aid of construction account and the deferred cred-

its 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 to make permanent additions to the fixed plant and

3) these funds represent in effect interest free loans, which

to be fair to the suppliers of the capital (the federal

government and in reality tax paying consumers) should

be included in the capital structure to prevent a positive

return from being earned on assets which the funds repre-

sent es 4

“The approaches of both witnesses are defensible; the

cost of common capital can only be estimated; that estima-

tion is supported only by ‘evaluations’ and ‘judgments.’

The results can never be tested scientifically. The selec-

tion of our expert’s estimate does not imply that the other

is ‘wrong.’ In the instant case, therefore, we find that

the staff approach appropriate for the purposes of this

proceeding. Using Mr. Rothey’s computation, a rate of

return of 7.05 results:

“Percent of

Total Cost Weighted Cost

“Common 38.7 8.5 032895

“Preferred 6.5 7.4 004810

“Debt 50.5 6.5 032825

“Deferred

Credits 43 0 .000000

100.0 .070530”

In respect to the rate of return on the equity portion

of the rate base, the Commission adopted the recommenda-

tion of 8.5 percent made by its chief economist, Mr. Rothey,

even though Rothey, himself, estimated 11 percent before

making the adjustment he felt was required “because the

RCNLD rate base eliminates ‘the eroding effect of inflation

upon the value of an investment.’” Relative to Rothey’s

testimony concerning the adjustment, the record contains

the following:

“Q. Pardon me, Mr. Rothey, I thought having defined

our terms I could ask the questions without repeating

them in every question, but I will start again. The subject

of this interrogation, Mr. Rothey, is the appropriate rate

of return on the equity portion of the rate base of a public

utility, and my understanding is your testimony is that

from market evidences you reach the opinion a fair rate of

return on the equity portion of the rate base of a public

utility, electric utility, comparable to The Cleveland Elec-

tric Illuminating Company, except that they are in other

States, is 11 percent, and that because of special considera-

tions relating to the Ohio method of regulation you reached

a conclusion that in Ohio and for the Illuminating Com-

pany this figure becomes more appropriately nine percent.

Have I correctly stated your opinions as expressed in your

testimony?

“A. Yes, sir.

“Q. All right, now this 11 percent and this 9 percent

corresponding figure relates as a basis for their determina-

tion by you to the market price of the shares of stock

in the first instance, do they not?

“A. Yes.

“Q. Then you expressed the opinion that in order

to determine what is a fair rate of return for the utility

to earn upon its rate base that this is the fair rate of

return which should be earned upon the rate base, do

you not?

“A. 11 percent.

“Q. 11 percent in one case and then with respect

to the Illuminating Company 9 percent, right?

“A. Correct.

“Q. Now, as I understand it the purpose of your

Exhibit 14 is to support the opinion that so far as investors

generally in the market are concerned their demand of

11 percent on a market value of their shares is in respect

of utilities that are earning approximately 11 percent on

the book value of the utility shares, do I correctly express

the thrust of your Exhibit 14?

“A. I would like that question again.”

(Previous question read. )

“A. I don’t believe so. What I was sttempting to

do with this Exhibit 14, if I understood your question

correctly, I would say no—what I was attempting to do

with this Exhibit 14 was to observe what a rate of return

on book value would do to the market to book ratio of

the shares of the Company. I observed something around

11 percent rate of return on the book value would produce

a market ratio sufficiently appropriate to allow the Com-

pany to issue new stock without diluting the ownership

of the present owners.

“Q. And does that express your opinion as to the

fair rate of return on the equity portion 'of the rate base?

“A. Yes, it does.

“Q. And you endeavored in this case to express an

opinion as to a fair rate of return on the equity portion

of the rate base which will produce such a market to

book ratio?

“A. Yes sir.

“Q. All right, and it is your opinion then that the

9 percent return on rate base for The Cleveland Electric

Illuminating Company will produce in the neighborhood

of slightly above an 11 percent return on its book equity?

“A. Yes, sir.”

The 8.5 percent rate of return for the equity portion

of the rate base adopted by the Commission is thus based

upon the opinion of its staff which, in turn, was based

upon “* * * what a rate of return on book value would

do to the market to book ratio of the shares of the Com-

pany.”

In Cleveland v. Pub. Util. Comm. (1956), 164 Ohio

St. 442, the court said, at page 444:

“Many of appellants’ arguments represent attempts

to circumvent the statutes of this state and the uniform

decisions of this court with respect to the statutory rate

base. For example, it is argued that the dollar amount

of return should be based upon the public utility’s actual

‘earnings requirements’; and that, after this is done, the

rate of return should be found by determining the per-

centage of the statutory rate base which such dollar amount

of return represents. Further, it is argued that the 5.94

per cent return on the statutory rate base approved by

the commission would, if 45 per cent of its capital were

replaced by debt, represent 9.26 per cent earnings on ‘total

capitalization’ and a 9 per cent return on the ‘ret invest-

ment’ in this public utility. However, under the Ohio

statutes and the decisions of this court, the percentage

return is to be related not to the ‘total capitalization’

or to the ‘net investment’ but to the statutory rate base

(reconstruction cost new less depreciation) so that neither

the actual capital or net investment in this public utility

nor its actual earnings requirements are really material

in a proceeding of this kind. Any such method of de-

termining or testing the dollar amount of return as that

which is advanced by appellants would eliminate any need

at all for determining the statutory rate base. The reasons

advanced in support of such arguments have previously

been considered and rejected as unsound by this court.

See East Ohio Gas Co. v. Public Utilities Commission,

supra (133 Ohio St., 212), 218, 219.”

Basing the rate of return for equity upon “what a

rate of return on book value would do to the market to

book ratio of the shares of the Company” goes beyond

the “* * * statutes and the decisions of this court”

which require the rate of return to be related to the

statutory rate base. Therefore, the Commission erred in

finding “the staff approach appropriate” in determining

the 8.5 percent rate of return for the equity portion of

the rate base.

I B.

RATE OF RETURN CALCULATION WHICH INCLUDes

“ZERO COMPONENT” REPRESENTING

DEFERRED CREDITS.

The Company next claims that the Coromission erred

in including in the rate of return calculation a “zero com-

ponent” representing deferred credits.

In its brief, the Company states that: “* * * As

of the date certain, the Company had on its books approxi-

mately $32 million of deferred credits representing income

taxes deferred under the Internal Revenue laws relating

to investment credits and amortization of pollution abate-

ment facilities.”

As noted in the opinion and order of the Commis-

sion, “* * * Mr. Rothey computed as a part of capital

structure those amounts of funds representing the contribu-

tions in aid of construction account and the deferred credits

account comprised of deferred investment credit and ac-

cumulated deferred income taxes.” The Commission

adopted Rothey’s recommendation by including as part

of the capital structure 4.3 percent for deferred credits

upon which no return was allowed. As the Company

suggests in its reply brief, the inclusion of this “zero com-

ponent” in the capital structure is similar to the “hypo-

thetical company” concept which was rejected in General

Telephone Co. v. Pub. Util. Comm. (1963), 174 Ohio St.

575.

As did the creation of the “hypothetical company,”

the “zero component” for deferred credits apparently

“* * * has as its ultimate purpose the reduction of

the statutory rate base, which is a circumvention of the

law of Ohio.” Ib., 174 Ohio St., at 579. Therefore, the

Commission erred in including in the rate of return calcula-

tion a “zero component” representing deferred credits.

Interestingly, the Commission, itself, since issuing

its opinion and order in this case, has changed its position

on this question. The Commission, in case No. 72-415-Y,

in In re Application of the Cincinnati Gas & Electric Co.

(September 16, 1974), stated in its opinion and order:

“Mr. Rothey’s analysis of applicant’s capital structure

also differed from Mr. Melnyk’s approach in that Mr.

Rothey included as a part of the capital structure the

contributions in aid of construction account and the de-

ferred credits account which is comprised of deferred in-

vestment tax credits and accumulated deferred income

taxes. Mr. Rothey assigned these elements a zero cost

of capital. Upon further consideration of the propriety

of the inclusion of deferred credits in the capital structure,

the Commission finds that this treatment is inconsistent

with the legislative intent to extend the advantages of

the deferred investment tax credits at [sic] accumulated

deferred taxes to the industry.”

IC.

COST OF BOND PORTION OF RATE OF RETURN.

The next contention of the Company to be considered

is the claim that the Commission erred in finding the

cost of the bond portion of the rate of return to be 6.5

percent. That finding resulted from the Commission’s

adoption of Mr. Rothey’s 6.5 percent calculation. On cross-

examination, Mr. Rothey admitted that long term capital

could not have been raised at 6.5 percent during the test

year. In response to a question whether “it would have

cost the Illuminating Company substantially more than

64%4 percent * * * to have raised a substantial amount

of debt capital, at or about the date certain,” Mr. Rothey

replied, “It would have cost them somewhere around 8

percent.”

In view of the facts that the Company’s witness testi-

fied that 7.35 percent was the current cost for bond money

and the Commission’s expert indicated that it was more

than 6.5 percent, the Commission’s finding of 6.5 percent

is “manifestly against the weight of the evidence” (Akron

v. Pub. Util. Comm. [1966], 5 Ohio St. 2d 237, 242) and,

therefore, is unreasonable and unlawful.

ID (1).

VALUE OF RIGHT-OF-WAY USED AND USEFUL.

The Company raises two issues concerning land rights:

(1) “Right-of-way used and useful in the rendition of

electric service must be included in the rate base of a

utility at its value as of the date certain,” and (2) “land

rights owned beneficially are.a lawful part of a utility’s

rate base in a rate proceeding.”

Regarding the value of land rights, rights-of-way, in-

cluding easements and licenses, the Commission’s opinion

and order reads, in part:

“In dealing with valuation of land rights, the Com-

mission’s staff simply evaluated the varying easements

and licenses held by applicant at their original cost, claim-

ing that no acceptable method is available to adjust the

value of the land rights either up or down. * * *

“Witness Chisling [for the Company] employed the

* * * method of applying trend factors to original cost

because ‘a parcel by parcel appraisal would be extremely

costly and time consuming.’ ”

Chisling described the “cost trend method” as a method

of “appraising the value of property by application of

trend factors to the original cost, thus restating that orig-

inal cost in terms of values at the date certain.”

The Commission, stating that “in the absence of a

verifiable method of assuring that there is a market value

for applicant’s rights-of-way” and “that the trending

method does not comply with Section 4909.05, Revised

Code,” found the original cost of land rights to be the

proper method of valuation.

As to the foregoing finding, the Company argues:

“In addition to the rejection of trending as unlawful,

an apparent ground for refusing to find value for appel-

lant’s right-of-way * * * was that there is no ‘verifiable

method of assuring that there is a market value’ for right-

of-way easements. Since the trending method was used

for less than 5 percent in value of the right-of-way and

the values for the balance of the right-of-way was found

by a witness and by methods specifically approved by

the Commission, we must conclude that the Commission

held that absent a showing that right-of-way easements

- are the subject of an established market they have no

value for rate case purposes. This is a very disturbing

holding because the statute, and the cases, permit the

Company to earn only on the ‘value’ of the property used

and useful in the public service. Original cost is in many

instances used as value either because it is the best evi-

dence thereof or because it is plainly less and by common

consent is used as establishing a figure not less than value

where the parties for some reason do not desire to expend

the time or money required for an appraisal. However,

here we had an appraisal for 95 percent of the right-

of-way by methods specifically approved by the Commis-

sion. We do not believe that the Commission was saying

that there is no method by which to value an easement.

As the evidence shows—and it is common knowledg:: —

such valuations are daily made for a variety of reasons.

If the Commission is right, that it cannot accept value

in the absence of a showing that there is a market in

easements, then this is a holding that in such case an

easement has no value at all and there is no basis under

the statute for including it in the rate base at all. We

believe that we have reason to be fearful that unless

this court reverses the Commission on this point, the com-

plete elimimation of right-of-way from the rate base will

be the next step.”

Contrary to the Company’s argument that the Com-

mission held that right-of-way easements “have no value

for rate case purposes,” the Commission did value such

land rights. Thus, the only issue before this court on

the question is the propriety of the Commission’s refusal

to accept the land right values recommended by the wit-

ness, Chisling. This is fundamentally a question of evi-

dence. As to evidentiary matters, in appeals from the

Commission, this court “* * * will not substitute its

judgment for that of the commission as to conclusions

drawn * * * unless the findings and order of the com-

mission are manifestly against the weight of the evidence

or there is no evidence.” Akron v. Pub. Util. Comm.,

supra (5 Ohio St. 2d 237), at 242; Kenton v. Pub. Util.

Comm. (1965), 3 Ohio St. 2d 71, 73. Further

a “* * * finding and order by the 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.” Cleveland v. Pub. Util. Comm. (1965),

3 Ohio St. 2d 82, 84. In our opinion, the record supports

the conclusions of the Commission regarding valuation of

the Company’s rights-of-way.

I D(2).

“LAND RIGHTS OWNED BENEFICIALLY”

AS PART OF RATE BASE

The “land rights owned beneficially” which the Com-

pany claims should be included in its rate base is filled

land upon which a part of the Company’s Lakeshore Power

Plant is situated. Title to that land is in the state of

Ohio but the Company has used the property since 1911.

The Commission, in its opinion and order, concluded that

this land, not being owned by the Company, could not

be included as part of Company property for rate base

purposes.

The Company points out that this identical question

was at issue in proceedings before the Commission in 1918

and in 1947. In both instances the Commission included

the value of the filled land in the Company’s rate base.

The Commission’s order of 1918 was appealed to this court,

and the issue, as the Company observes, was “fully briefed

and argued before this court.” In that appeal, this court

modified the order of the Commission but did not disturb

the Commission’s conclusion to include the filled land in

the Company’s rate base. Cleveland v. Pub. Util. Comm.

(1918), 98 Ohio St. 462.

We are not inclined to now reexamine or overrule

the foregoing holding. The Commission’s conclusion not

to include the filled land in the Company’s rate base is

not in conformity with that decision and therefore is un-

reasonable and unlawful.

IE.

EXCLUSION FROM RATE BASE OF CERTAIN

MATERIALS AND SUPPLIES.

The next proposition advanced by the Company reads:

“Materials and supplies kept on hand and reasonably

mecessary for the operation of the Company’s business

should be included in the rate base whether or not, when

used, they are expensed or capitalized.”

In respect to this contention, the opinion and order

of the Commission reads:

“* * * The staff opined that materials and supplies

held for capital accounts are not an appropriate part of

the rate base and therefore should be excluded and there-

fore reduced the applicant’s $8,846,000 figure for materials

and supplies to $1,858,000 * * *.

“see

“Therefore the Commissjon’s staff * * * excluded

approximately $7,000,000 from the working capital accounts

in materials held for capital accounts. The staff found

that 79% of applicant’s materials and supplies were prop-

erly classified as being within capital accounts. * * *

The applicant contends that an exclusion of capital accounts

is improper. The Commission does not agree. Exclusion

of materials and supplies to be capitalized is not only

relevant and proper but necessary in any computation

of working capital.”

As to materials and supplies, the staff report states:

“The engineers have reviewed the applicant’s pro-

posal for inclusion of $8,845,651 in the total company rate

base as a working capital allowance for a material and

supplies inventory. The engineers are of the opinion that

materials and supplies inventory held for capital accounts

are not an appropriate part of the rate base and have

therefore excluded that portion of those inventories. This

amount was determined by the company, by analyzing

issues, to be 79% of the total.

“Average Material & Supplies

Inventory $8,846,000

“Less Amount to Capital Construction

(79%) $6,988,000

“Materials & Supplies $1,858,000”

ai | la

In Cincinnati v. Pub. Util. Comm. (1954), 161 Ohio

St. 395, 406, 407, the following discussion .is found concern-

ing materials and supplies:

“It is proper to include in the rate-base structure

a reasonable sum to cover the company’s investment in

materials and supplies for the normal operations of the

company and for maintenance and repair purposes. But

we know of no valid reason why an allowance should

be made in the rate-base structure for imvestments in

materials and supplies for new construction, extensions

and additions, as distinguished from normal operations

and plant maintenance and repair. The cost of materials

and supplies held for new construction, extensions and

additions may be capitalized in the rate-base structure,

when such materials and supplies are in actual use. Prior

to such actual use such property can not be considered

as being ‘used and useful for the service and convenience

of the public,’ as required by Section 499-9, General Code.”

A Company witness, Mr. Loshing, was asked: “To

what extent * * * does the material for this construction

program come from materials and supplies account which

you have assigned for working capital?”

The witness replied: “Very little goes through this

materials and supplies account. * * * A good portion

of the materials that are needed for what are prosaic

construction, power plants, transmission subs, and high

lines, is purchased directly on job orders for specific proj-

ects and delivered directly to the site.” +

Since the evidence indicated that “very little” of the

construction funds of the Company passed through the

“materials and supplies account,” it was error for the Com-

mission to reduce the amount allowed for materials and

supplies by 79 percent for the reason that “79% of appli-

~ —

cant’s materials and supplies were * * * classified as

being within capital accounts” under the Company’s ac-

counting system.

The Company includes in its brief an excerpt from

the opinion and order of the Commission in subsequent

proceedings before the Commission, In re Application of

East Ohio Gas Co., No. 72-378-Y, wherein the Commission

retreated from the position taken on the allowance for

materials and supplies herein and rejected “* * * staff's

apg that accounting treatment should be control-

; ***¢)

IF,

MATTERS NOT IN ISSUE UNDER APPLICATION.

The final issue presented by the Company is stated

by it as follows:

“In a proceeding upon an application for an increase

in rates filed by a public utility under Revised Code Sec-

tion 4909.18, the Public Utilities Commission may not re-

quire the utility to assume the burden of supporting tariffs

and regulations not placed in issue by the application

before the commission.”

To support this issue, that the Commission erroneously

considered “changes in tariffs not put in issue by the

application,” the Company argues:

“* * * Over objection, the Commission required

changes in regulations respecting time of access to customer

premises, and itemization of charges for special construc-

tion ‘and the establishment of a new regulation respecting

voltage variations. * * *

“Of more consequence are the changes required

* * * to eliminate from the fuel adjustment clause the

reflection of fuel costs respecting the generation of the

6 percent of the energy which is lost in the process

of distribution and the elimination of existing tariff dis-

counts reflecting lower costs for certain heating usages.

We are not here attempting to argue the intrinsic merit

of any of these matters. We contend that the Commis-

sion may not require changes in these matters without

affirmative proof, and a finding on the basis thereof that

they are required.”

The Company contends further that “* * * under

the statutes, the Commission is empowered to require

changes in existing rates and practices only after a com-

plaint in writing about them (Section 4905.26), and an

affirmative finding upon proof after hearing that existing

practices are unreasonable (Section 4905.37) .”

In its opinion and order, the Commission stated that

its “* * * staff is mandated by Section 4909.19, Revised

Code, to conduct an investigation encompassing not only

the application and the exhibits attached thereto, but also,

‘of all matters connected therewith.’ Therefore, the Com-

mission must conclude the scope of a general rate increase

certainly imcludes nearly all, if not all of the applicant’s

rules and regulations which in any manner could be applied

in charging the new rates.”

It is elemental that the “* * * commission is a

creature of statute and has only those powers given to

it by statute.” Ohio Bell Telephone Co. v. Pub. Util.

Comm. (1969), 17 Ohio St. 2d 45, 47. R. C. 4909.19 pro-

vides, in part:

“Upon the filing of any application for increase pro-

vided for by Section 4909.18 of the Revised Code * * * the

commission shall at once cause an investigation to be made

of the facts set forth in the application and the exhibits

attached thereto, and of the matters connected therewith.”

We agree with the Commission’s conclusion that R. C.

4909.19 permits it to review any of an applicant’s “rules

and regulations which in any manner could be applied

in charging the new rates,” but the Commission’s authority

ends there. The scope of the Commission’s inquiry does

not extend to matters not put in issue by the applicant

and not related to the rates which are the subject of

the application. |

Therefore, the Commission erred in extending its or-

der to those matters not put in issue by the application

for rate increase or not related to the rates.

Inasmuch as the Company does not “argue the in-

trinsic merit of any of these matters” in this appeal, we

will not attempt to delineate which of the issues fall within

the realm of the Company’s application or have an effect

upon the rates.

II A.

PROPERTY USED AND USEFUL AS PART OF

RATE BASE.

In case No. 74-272, in which the city of Cleveland

is the appellant, the first proposition of law reads: “Plant

located outside of Ohio is beyond the scope of the Commis-

sion’s jurisdiction as defined by Section 4905.05 of the

Ohio Revised Code and therefore cannot be included within

the statutory rate base.”

R. C. 4905.05 provides:

“The jurisdiction, supervision, powers, and duties of

the Public Utilities Commission extend to every public

utility and railroad, the plant or property of which lies

wholly within this state and when the property of a public

utility or railroad lies partly within and partly without

this state to that part of such plant or property which

lies within this state, and to the persons or companies

owning, leasing, or operating such public utilities and rail-

roads, and to the records and accounts of the business

thereof done within this state.”

It is the City’s position that R. C. 4905.05 limits the

authority of the Commission to applicant’s properly located

“wholly within this state” and that the Commission “erred

by including within the rate base the applicant’s interest

in the Seneca production plant which is situated in

Pennsylvania.”

The Commission, in its opinion and order, observed

that “* * * Section 4909.18, Revised Code, permits appli-

cant to submit a valuation ‘of its property used and use-

ful in rendering the service referred to in such applica-

tion’ ” and found that “the Seneca Plant should be included

because indisputably it is used and useful in rendering

the service referred to in the application.”

The City contends that R. C. 4909.18 is not concerned

with the jurisdiction of the Commission but with “what

should be contained in a rate application by a utility.”

Thus, the City would confine the jurisdiction of the Com-

mission in determining a rate base to only the property

of the utility within Ohio, even though the property lo-

cated outside the state is used and useful in rendering

the utility’s service.

R. C. Chapter 4905 is concerned with the general pow-

ers of the commission, whereas R. C. Chapter 4909 regulates

the fixation of rates. R. C. 4909.04, 4909.05 and 4909.18

all mention property “used and useful” by utilities in

rendering service and do not limit such property to the

boundaries of the state. The test then under the statutes

regulating fixation of rates is whether the property is

“used and useful” in rendering the utility’s service and

not the location of the property. :

Considering the foregoing statutes together, we per-

ceive no intention on the part of the General Assembly

to deprive a utility of the right of inclusion in its rate

base of property used and useful in rendering service

where such property is located outside the state.

To so hold would deprive the utility “* * * of the

right to earn a reasonable return upon the * * * value

of its property used and useful in the operation of its intra-

state business in this state in violation of the fundamental

legal principle that a utility is entitled to earn a reasonable

return upon * * * its property devoted to public service.”

United Fuel Gas Co. v. Public Service Comm. (1957), 143

W. Va. 33, 51, 99 S. E. 2d 1. See, also, Lone Star Gas Co.

v. Texas (1938), 304 U. S. 224; Petition of Fryeburg Water

Co. (1955), 99 N. H. 487, 491, 115 A. 2d 420.

II B.

ALLOCATION FOR STREET LIGHTING.

The City’s next contention is that the “plant, reve-

nues, and costs related to * * * ordinance contract

sales must be removed from the rate base, revenue, and

cost totals utilized by the Commission to set new rates

for other classes of customer.”

In support of this contention, the City refers to the

fact that the Company “during the test year had over

$5,000,000 in revenues from street lighting and signal sys-

tems sales made pursuant to ordinance contracts entered

into between the company and the affected municipalities.”

Essentially, the City’s position is that the Commission

should have made an allocation of property, costs and

revenues connected with street lighting services provided

to municipalities under municipal contracts.

On this subject, the Commission stated, in its opinion

and order: “* * * [BJoth staff and applicant have

adjusted for the plant devoted to street lighting by includ-

ing the revenues therefrom * * *. The staff found

that a sample allocation indicated no measurable effect

upon the rate of return and therefore an extended allo-

cation was not justified for street lighting sales and sales

to other public utilities * * *.”

The record shows that, although the Commission made

no allocation for street lighting and signal system sales,

it included the revenues from those sources. The record

contains the following discussion in the staff report

concerning this allocation:

“This proceeding involves al! types of sales except

those for street lighting and to other utilities. An alloca-

tion, less detailed but with sufficient accuracy to form

a judgment, indicated mo measurable effect on the rate

of return by going to an extended allocation. For this

reason, and because street lighting is less than 1% of

the total sales and because it is for the benefit of all

customers, no formal alloeation was made for this case.”

Thus, it does not appear from the record that the

finding of the Commission as to allocation for street light-

ing and signal system sales is “manifestly against the

weight of the evidence and so clearly unsupported by

the record as to show misapprehension or mistake or will-

ful disregard of duty.” Cleveland v. Pub. Util. Comm.,

supra (3 Ohio St. 2d 82), at 84, and Delphos v. Pub.

Util. Comm. (1940), 137 Ohio St. 422, at 424.

a eee se

II C,

ALLOCATION FOR INTERSTATE EXCHANGES.

The City’s next contention is that the Commission

should have separated “plant, revenues and costs” of the

Company’s “interstate sales and deliveries of electric

energy from those allocable to its intrastate operations.”

This contention is directed to the Company’s exchanges

of electricity with utility companies in other states.

The Commission reached the same conclusion on this

claimed need for allocation as it did on the asserted need

for allocation of street lighting and signal system sales.

For the test year, 1971, the interchanges of electricity

between the Company and others in interstate exchanges

nearly balanced. The Commission’s staff engineer testi-

fied as to the interstate exchanges:

“* * * As you know, I am concerned with the

rate base and when I first got on the stand I explained

our position as far as interchange of power and sales

to other utilities was concerned. As long as these sales

did not result in an amount of production facility or other

facilities that were not required to service the utility’s ulti-

mate customer, then it was perfectly proper, and in our

opinion—not only that, but somewhat profitable to the

ultimate customers, in that if you could make sales with

the somewhat underpowered production plant, and the

facilities that you have that are needed for the ultimate

customer, if you can make sales out of that equipment

and the profits of such sales, whatever they are, or losses

go to the ultimate customer, then the amount of production

facilities is reasonable. But, if the amount of production

facilities, for instance, is not reasonable, then you judge

that sale to other utilities was a major business of the

Company. But, in this case it seemed like it—while it hap-

pened that they were forced to rely on other means or

other older equipment, they were still able to do it.

“So, as long as the production facilities are a reason-

able amount for the ultimate customer, I don’t see how

we can make any correction in the rate base. And we

didn’t, for that reason.”

As in the case of allocation of street lighting and

signal system sales, the finding of The Commission

is neither manifestly against the weight of the evidence

nor unsupported by the record. Therefore, the City’s claim

that allocation was required for interstate exchanges is

not persuasive.

II D.

FEDERAL INCOME TAX ACCRUALS.

The City’s fourth proposition of law reads:

“All customer contributions in the form of accruals

for the payment of federal, state, and local taxes to be

paid by the applicant at future dates, which will be con-

stant with reasonable certainty in the foreseeable future

and which are available for working capital and for invest-

ment in materials and supplies, should be used to offset

the allowances for working capital.”

The foregoing proposition of law closely parallels para-

graph five of the syllabus in Cincinnati v. Pub. Util. Comm.,

supra (161 Ohio St. 395). The City argues that the

“* * * Commission has manifestly incorrectly applied

the law to the facts of the instant case by failing to

apply any of the federal income tax accruals as an offset

to the Company’s working capital allowances.”

The record shows that in computing working capital

the Commission’s staff did not take into account the federal

income tax accruals of the Company. The Commission

points out that “* * * staff of the Commission has

developed a formula which attempts to arrive at a reason-

able estimate of a company’s working capital requirements”

and that the “* * * formula does not attempt to take

into account all tax accruals * * *.” The Commission,

in its brief, quotes from an opinion and order of the Com-

mission in another rate case (In re Application of East

Ohio Gas Co., supra) its rationale for the exclusion of fed-

eral income tax accruals:

“* * * The tax accrual offset recommended by

the staff is the result of the staff’s formula which has

been refined over the years and which results in a reason-

ably accurate estimate of the benefit accruing to the appel-

lant. The formula has the advantages of being relatively

easy to understand and use, and its consistent application

assures equal treatment among rate applicants. The staff’s

formula properly excludes federal income tax accruals be-

cause federal income taxes are now generally paid on

a relatively current basis. The Commission has repeatedly

and consistently accepted the staff formula as representing

a reasonable estimate for the tax accrual offset.”

Paragraph five of the syllabus in Cincinnati v. Pub.

Util. Comm., supra (161 Ohio St. 395), reads in part:

“* * * 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 allow-

ance for working capital * * *.”

The record shows that there were some accruals for

federal income tax payments and that the evidence as

to the amount was conflicting. There is nothing in the

i ee iiaeatea eine

record to support a conclusion that these accruals were

not available due to their payment “on a relatively current

basis.” Since there were some federal income tax accruals

and the Commission made no allowance for them in the

formula used for determining working capital require-

ments, it follows that the Commission failed to properly

apply the holding in Cincinnati v. Pub. Util. Comm., supra,

in computing the allowance for working capital.

IT E.

ALLOCATIONS BETWEEN RATE CLASSES OF

CUSTOMERS.

The final contention of the City is that the Commission

“* * * has a duty to fix and determine just and reason-

able rates which cannot be discharged in the total absence

of cost of service evidence by major rate class” and that

the Commission “cannot blindly set rates when the only

cost of service evidence for any of the major rate classes

discloses the existence of unreasonable discrimination.” It

is the City’s position that the evidence “showed that both

the large industrial rates that were then in effect and

the proposed large industrial rates produced a much lower

rate of return than the overall rate or return enjoyed

by the applicant upon all of its electric operation” and

that therefore “the large industrial customer has been

and is now being subsidized by the other ratepayers.”

As the Company observes in its brief, the City here

“seeks to have an allocation made of all of the Company’s

property and income account between all of its various

classes of customers.”

- We will address ourselves to this issue under Part

III B below.

III A,

VALIDITY OF SIERRA APPEAL.

Similar issues are raised in case No. 74-156, wherein

the appellant, Sierra Club, Inc., a California nonprofit cor-

poration interested in conservation of natural resources

with members in the service area of the Company, proffers

two propositions of law, which read:

“1. Rate schedules that on their face discriminate

between and among customer classes must be justified

on the basis of cost of service. A failure by the utility

applicant to justify such rates by reliable and probative

evidence before the Public Utilities Commission requires

that the proposed rates be held to be unjustly preferential

and unjustly discriminatory and therefore in violation of

Section 4909.15 of the Revised Code and the equal protec-

tion clause of the Fourteenth Amendment to the Constitu-

tion of the United States.

“2. When the only expert testimony presented before

the Public Utilities Commission supports the proposition

that proposed utility rate structures are not cost of service

related, but are in fact based upon a subsidization of one

customer class by another and that subsidization is not

based upon valid considerations of economic and public

interest justification, the Public Utilities Commission is

prohibited from approving the submitted rates.”

The Commission argues that this court should refuse

to consider Sierra’s appeal, for the reasons that the notice

of appeal “fails to specify the errors in the Commission’s

order” and that Sierra has no standing. The Company,

as intervening appellee, advances the procedural argument

that Sierra, in its notice of appeal, “designates the order

appealed from as the Commission’s entry of January 28,

1974” when, in fact, the appeal relates to the order of

the Commission made on November 28, 1973. The Com-

pany notes also that no application for rehearing was filed

by Sierra to the order dated January 28, 1974.

Although the foregoing factors all present serious ques-

tions as to the validity of the Sierra appeal, the issues

raised by Sierra are similar in character to those raised

by the City in its final contention in case No. 74-272,

and this court will, therefore, consider them.

III B.

RATE DIFFERENCES BETWEEN CUSTOMER

CLASSES.

R. C. 4909.04 provides:

“The Public Utilities Commission, for the purpose of

ascertaining the reasonableness and justice of rates and

charges for the service rendered by public utilities or

railroads, or for any other purpose authorized by law,

may investigate and ascertain the value of the property

of any public utility or railroad in this state used or use‘ul

for the service and convenience of the public. At the

request of the legislative authority of any municipal corpo-

ration, the commission after hearing and determining that

such a valuation is necessary may also investigate and

ascertain the value of the property of any public utility

used and useful for the service and convenience of the

public utility where the whole or major portion of such

public utility is situated in such municipal corporation.”

This section was interpreted in Toledo Edison Co. v.

Pub. Util. Comm. (1954), 161 Ohio St. 221, wherein the

court said, at page 229:

“This section [actually R. C. 4909.04 but incorrectly

reported as R. C. 4904.04], as formerly enacted [General

Code 499-8], contained the word, ‘shall,’ where it now

contains the word, ‘may,’ and it would seem that the valua-

tion of the property of a public utility or railroad, in

reference to rate fixing, is now, within proper bounds,

discretionary with the Public Utilities Commission.”

The court in that case, also stated, at page 234:

“* * * the Public Utilities Commission has discre-

tion, in the fixing of a single freight rate, to base that

rate upon matters other than the valuation of the property

of the railroad and the actual cost of operation, although

it has full authority to require such evidence of valuation

if in its opinion such findings are necessary to a proper

determination of rates. * * *”

Thus, the Commission was not required to make the

cost of service allocation for classes of customers as con-

tended by the City.

Rate differences for various classes of customers are

permissible. As stated in Buckeye Lake Chamber of Com-

merce v. Pub. Util. Comm. (1954), 161 Ohio St. 306, 311,

the “general rule is that * * * ‘a utility may, without

being guilty of unlawful discrimination, classify its cus-

tomers on any reasonable basis and make separate rates

for each class.’ * * *”

R. C. 4905.31 authorizes utilities to make classifications

of services with varied charges. It reads, in part:

“Chapters 4901, 4903, 4905, 4907, 4909, 4921, 4923, and

4925 of the Revised Code do not prohibit a public utility

from filing a schedule or entering into any reasonable

arrangement with another public utility or with its cus-

tomers, consumers, or

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.