Appendix — Cleveland Electric Illuminating Co. v. Public Utilities Commission

pout

Se ~¢04 OCT 25 1982

Case No, ALEXANDER L. STEVAS.

— a

In the Supreme Court of the United States

October Term, 1982

THE CLEVELAND ELECTRIC ILLUMINATING

COMPANY,

Appellant,

vs.

THE PUBLIC UTILITIES COMMISSION OF OHIO,

and

OFFICE OF CONSUMERS’ COUNSEL,

Appellees.

On APPEAL FROM THE SUPREME CourRT OF OHIO

APPENDIX

ALAN P. BUCHMANN

Of Counsel: Counsel of Record

RicHarp W. McLaren, Jr.

ALan D. Waricut Squire, Sanders & Dempsey

Vice President-Public —_ 1800 Union Commerce

Affairs and Legal Building

Craic I. SmitH Cleveland, Ohio 44115

The Cleveland Electric (216) 687-8500

Illuminating Company

55 Public Square Attorneys for Appellant,

Cleveland, Ohio 44113 The Cleveland Electric

Illuminating Company

TABLE OF CONTENTS OF

APPENDIX

Appellant's Notice of Appeal To The Supreme Court of

the United States (filed October 15, 1982) —..._-__

Journal Entry of Ohio Supreme Court Denying Rehear-

ing in Case No. 82-165 (filed July 29, 1982)

Journal Entry and Mandate of Ohio Supreme Court

— Appeal in Case No. 82-165 (filed July 7,

1982) - OR LER

Entry on Rehearing of the Public Utilities Commission

of Ohio in Case No. 81-1096-EL-COI (filed December

i IIE wniicteneeneidionslbicenntemataieaiiiadiiaaania

Opinion and Order of the Public Utilities Commission

of Ohio in Case No. 81-1096-EL-COI (filed October 21,

giaalteearimesesperse:

Journal Entry of Ohio Supreme Court Denying Motion

for Stay in Case No. 80-1480 (filed September 11, 1981)

Journal Entries of Ohio Supreme Court Denying Re-

hearing in Case Nos. 80-1547, 80-1528, and 80-1480

(filed September 1, 1981)

Consumers’ Counsel v. Pub. Util. Comm. (CEI), 67 Ohio

St.2d 153, 423 N.E. 2d 820 (1981)

Rehearing Entry of the Public Utilities Commission in

Case No. 79-537-EL-AIR (filed September 3, 1980) ___.

Opinion and Order in Case No. 79-537-EL-AIR of the

Public Utilities Commission of Ohio (filed July 10, 1980)

Ohio Statutes: Ohio Revised Code §§ 4905.13, 4905.18,

4905.20, 4905.22, 4909.15; Ohio Administrative Code

§ 4901:1-9-05 ___

C-1

D-1

J-1

K-1

IN THE SUPREME COURT OF OHIO

CASE NO. 82-165

THE CLEVELAND ELECTRIC

ILLUMINATING COMPANY,

Appellant,

v.

THE PUBLIC UTILITIES COMMISSION OF OHIO,

and

OFFICE OF CONSUMERS’ COUNSEL,

Appellees.

Appeal From the Public Utilities Commission of Ohio

Case No. 81-1096-EL-COI

In the Matter of the Investigation of the Rates of

The Cleveland Electric Illuminating Company.

A-2

Wiu1aM J. Brown, ALAN P. BuCHMANN

Ohio Attorney General Ricuarp W. McLaren, Jr.

Marvin I. Resnik Soume, SANvEeRs & Dempsey

Marsa Rockey ScHeERMER 1800 Union Commerce

Assistant Attorneys Building

General Cleveland, Ohio 44115

Public Utilities Commission (216) 687-8500

ar ALAN D. Waricut

Columbus, Ohio 4321s -—~-‘Wice President ~ Public

‘ Affairs and Legal

Attorneys for Appellee, Craic I. Smrrn,

The Public Utilities Senior Counsel

Commission of Ohio The Cleveland Electric

Illuminating Company

Wit A. SPRATLEY, 55 Public Square

Ohio Consumers’ Counsel Cleveland, Ohio 44113

Martin J. Marz (216) 622-9800

me Attorneys for Appellant

ans The Cleveland Electric

Gut Illuminating Company

137 East State Street

Columbus, Ohio 43215

Attorneys for Intervening

Appellee, Office of

Consumers’ Counsel

A-3

IN THE SUPREME COURT OF OHIO

CASE NO. 82-165

THE CLEVELAND ELECTRIC

ILLUMINATING COMPANY,

Appellant,

Vv.

THE PUBLIC UTILITIES COMMISSION OF OHIO,

and

OFFICE OF CONSUMERS’ COUNSEL,

Appellees.

Appeal From the Public Utilities Commission of Ohio

Case No. 81-1096-EL-COI

In the Matter of the Investigation of the Rates of

The Cleveland Electric Wuminating Company.

NOTICE OF APPEAL

TO THE SUPREME COURT

OF THE UNITED STATES

Notice is hereby given that The Cleveland Electric

Illuminating Company, Appellant before the Ohio Su-

preme Court, hereby appeals to the Supreme Court of the

United States from the final judgment of the Supreme

Court of the State of Ohio entered into these proceedings

on July 7, 1982, rehearing having been denied on July 29,

1982, which granted the motion to dismiss Appellant's

appeal filed by the Office of Consumers’ Counsel, thereby

affirming the October 21, 1981 Opinion and Order of the

Public Utilities Commission of Ohio in Case No. 81-1096-

EL-COI.

AA

This appeal is taken pursuant to 28 U.S.C. § 1257(2).

Of Counsel:

ALAN D. Waricar,

Vice President — Public

Affairs and Legal

Craic I. Smrra,

Senior Counsel

The Cleveland Electric

Illuminating Company

55 Public Square

Cleveland, Ohio 44113

(216) 622-9800

ALAN P. BuCHMANN,

Counsel of Record

Ricuarp W. McLaren, Jr.

Soume, SANDERS & DEMPSEY

1800 Union Commerce

Building

Cleveland, Ohio 44115

(216) 687-8500

Attorneys for The

Cleveland Electric

Illuminating Company

CERTIFICATE OF SERVICE

I hereby certify that true copies of the foregoing

Notice of Appeal were served on all parties of record by

United States Mail, first-class, postage prepaid, to their

last known addresses, this 15th day of October, 1982, as

follows:

WiLuuaM J. Brown,

Ohio Attorney General

Marvin I. Resnik

Wut A. SPRATLEY,

Ohio Consumers’ Counsel

Martin J. Marz

STEVEN M. SHERMAN

GretTCHEN J. HUMMEL

Associate Consumers’

Counsel

137 East State Street

Columbus, Ohio 43215

Attorneys for Intervening

Appellee, Office of

Consumers’ Counsel

ALAN P. BuCHMANN,

Counsel of Record for

Appellant,

The Cleveland

Illuminating Company

B-1

THE SUPREME COURT OF THE STATE OF OHIO

THE STATE OF OHIO, 1982 Term

Crry or Co.umsvs. To wit: July 29, 1982

CLEVELAND ELECTRIC _ |

ILLUMINATING CO.,

Appellant, No. 82-165

vs. + REHEARING

PUBLIC UTILITIES

COMMISSION OF OHIO,

Appellee.

It is ordered by the court that rehearing in this case

is denied.

I, THOMAS L. STARTZMAN, Clerk of the Supreme

Court of the State of Ohio, do hereby certify that the fore-

going entry was correctly copied from the records of said

Court, to wit, from Journal No. _... Page —.....

IN WITNESS WHEREOF, I have hereunto sub-

scribed my name and affixed the seal of the Supreme Court

this 29th day of July, 1982.

Tuomas L. STARTZMAN,

Clerk.

By

Deputy.

C-1

APPENDIX C

THE SUPREME COURT OF THE STATE OF OHIO

THE STATE OF OHIO, 1982 Term

Crry or Cotumsvs. To wit: July 7, 1982

CLEVELAND ELECTRIC No. 82-165

ILLUMINATING CO., out oe

Appellant, THE

| PUBLIC UTILITIES

ae COMMISSION

PUBLIC UTILITIES OF OHIO

COMMISSION OF OHIO, ON MOTION

Appellee. J TO DISMISS

This cause, here on appeal from the PUBLIC UTIL-

ITIES COMMISSION, was heard in the manner prescribed

by law. On consideration thereof, the motion to dismiss

is sustained and cause dismissed.

It is ordered that a mandate issue to the PUBLIC

UTILITIES COMMISSION OF OHIO to carry this judg-

ment into execution.

I, THOMAS L. STARTZMAN, Clerk of the Supreme

Court of Ohio, certify that the foregoing entry was cor-

rectly copied from the Journal of this Court.

Witness my hand and the seal of the Court this

day of % WE

Clerk

Deputy

C-2

THE SUPREME COURT OF THE STATE OF OHIO

THE STATE OF OHIO, 1982 Term

Gave a Came. To wit: July 7, 1982

CLEVELAND ELECTRIC |

ILLUMINATING CO.,

Appellant,

No. 82-165

= - ~——s MANDATE

PUBLIC UTILITIES

COMMISSION OF OHIO,

Appellee. J

To the Honorable PUBLIC UTILITIES COMMIS-

SION OF OHIO, Within and for the County of Franklin,

Ohio, Greeting:

The Supreme Court of Ohio commands you to proceed

without delay to carry the following judgment in this

cause into execution:

Motion to dismiss sustained and appeal dismissed.

THoMas STARTZMAN,

Clerk

, 19...

RECORD OF COSTS

Docket Fee .._ $20.00 Paid by Squire, Sanders & Dempsey

D-1

APPENDIX D

BEFORE

THE PUBLIC UTILITIES COMMISSION OF OHIO

IN THE MATTER OF THE ’

INVESTIGATION OF THE

RATES OF THE

CLEVELAND ELECTRIC

ILLUMINATING COMPANY. |

Case No.

r 81-1096-EL-COI

ENTRY ON REHEARING

The Commission, coming now to consider the above-

entitled matter, and specifically its Opinion and Order in

this case issued October 21, 1981, the application for re-

hearing filed by the Cleveland Electric Illuminating Com-

pany (CEI) on November 18, 1981, and the memorandum

contra filed by the Office of Consumers’ Counsel (OCC)

on November 30, 1981, hereby issues the following entry

on rehearing.

Commission Review and Discussion

In the two most recent rate proceedings involving

CEI, Case No. 79-537-EL-AIR, Opinion and Order July

10, 1980 and Case No. 80-376-EL-AIR, Opinion and Order

May 4, 1981, we have included in CEI’s allowable test

year expenses the amortization of CEI’s share of the costs

associated with the cancellation of four nuclear plants.

On appeal of the decision in Case No. 79-537-EL-AIR,

the Ohio Supreme Court found that the inclusion of those

costs was unreas nable and unlawful. Consumers’ Counsel

v. Public Utilities Commission, 67 Ohio St. 2d 153 (1981).

In order to implement the directives of the Supreme Court

in that decision we initiated this investigation, pursuant to

Section 4905.26, Revised Code, and by Order dated Oc-

D-2

tober 21, 1981, directed CEI to remove these costs from

its current rates.

On November 18, 1981 CEI filed an application for

rehearing setting forth nine areas of alleged error. OCC

filed a memorandum contra on November 30, 1981. In

part, CEI contends that these proceedings were initiated,

conducted and determined without authority of law. In

addition, CEI claims that it was improper for this hearing

to be conducted without the taking of evidence, and that

such procedure has deprived CEI of its statutory and

constitutional rights. The company also submits that the

Commission deviated from prior Ohio law by eliminating

a single item from expenses without taking into considera-

tion all aspects of the company’s current condition. In sum,

CEI contends:

[t]he said Opinion and Order, by its failure to recog-

nize and allow recovery of prudent expenditures made

in the interest of providing public service and as

mandated by statute, contravenes the public policy of

the State of Ohio, unlawfully imperils the future ren-

dition of reliable utility service, unlawfully deprives

respondent of its property, and unreasonably impinges

on the financial security of all Ohio utilities and hence

upon the cost and reliability of utility service rendered

to Ohio consumers. (Application p. 4)

We are not unmindful of the position taken by CEI

and the uniqueness of the situation that is before us.

However, we believe that the intent of the Supreme Court

was that positive steps be taken to grant CEI consumers

rate relief as a result of its decision. As we stated previously

in our Opinion and Order, we are of the opinion that the

best method of implementing the intent of the Supreme

Court's decision in Consumers’ Counsel v. Public Utilities

Commission, supra, is the method we have chosen. In

light of that decision, the objections raised by CEI must be

overruled and rehearing denied.

D-3

It is, therefore,

ORDERED, That the rehearing application filed

November 18, 1981 by The Cleveland Electric Illuminat-

ing Company be denied. It is, further,

ORDERED, That copies of this Entry on Rehearing

be served on all parties of record.

THE PUBLIC UTILITIES

COMMISSION OF OHIO

/s/ Joun Ketiy

(Chairman )

/s/ Dennis Pines

/s/ Micwaet DELBANE

(Commissioners )

Entered in the Journal

December 9, 1981

A True Copy

Davin M. PoLk

David M. Polk

Secretary

E-1

APPENDIX E

BEFORE

THE PUBLIC UTILITIES COMMISSION OF OHIO

IN THE MATTER OF THE ’

INVESTIGATION OF THE ae

RATES OF THE | Case

CLEVELAND ELECTRIC 81-1096-EL-COI

ILLUMINATING COMPANY.

OPINION AND ORDER

The Commission, coming now to consider the above-

entitled matter, having reviewed the arguments intro-

duced at public hearing and the briefs of the parties, and

being fully advised of the facts and issues in this case,

hereby issues its Opinion and Order.

Appearances:

Mr. Alan D. Wright, General Counsel, and Mr. Craig

I. Smith, Senior Counsel, 55 Public Square, Cleveland,

Ohio, and Messrs. Squire, Sanders & Dempsey, by Mr.

Alan P. Buchmann, 1800 Union Commerce Building,

Cleveland, Ohio, on behalf of the Applicant, The Cleve-

land Electric Iuminating Company.

Mr. William J. Brown, Attorney General of Ohio, by

Mr. Marvin I. Resnik, Mrs. Marsha Rockey Schermer and

Mr. Jonathan L. Heller, Assistant Attorneys General, 375

South High Street, Columbus, Ohio, on behalf of the Staff

of the Public Utilities Commission of Ohio.

Mr. William A. Spratley, Consumers’ Counsel, by Ms.

Gretchen J. Hummel, Mr. Martin J. Marz and Mr. Steven

M. Sherman, Associate Consumers’ Counsel, 137 East

State Street, Columbus, Ohio, on behalf of the residential

customers of The Cleveland Electric Illuminating Com-

pany.

E-2

Opinion and Order, PUCO Case No. 81-1096-EL-COI

Mr. Thomas E. Wagner, Director of Law, and Mr.

Craig Glazer, Assistant Director of Law, Cleveland City

Hall, 601 Lakeside Avenue, Cleveland, Ohio, on behalf of

the City of Cleveland, Ohio.

Messrs. Bell & Clevenger, L.P.A., by Messrs. Langdon

D. Bell and Samuel C. Randazzo, 21 East State Street,

Columbus, Ohio, on behalf of the Industrial Electricity

Consumers.

History of the Proceedings:

In its Opinion and Order of July 10, 1980 in Case No.

79-537-EL-AIR, and in the May 4, 1981 Opinion and

Order in Case No. 80-376-EL-AIR, the last two rate pro-

ceedings involving The Cleveland Electric Illuminating

Company (CEI), the Commission authorized the inclusion

in allowable expenses of the amortization of CEI’s share of

the costs associated with the cancellation of four nuclear

plants. On appeal of the decision in Case No. 79-537-EL-

AIR, the Ohio Supreme Court found that the inclusion of

those costs was unreasonable and unlawful. Consumers’

Counsel v. Public Utilities Commission, 67 Ohio St. 2d 153

(1981). In light of that decision, the Commission initiated

this investigation of CEI’s rates, pursuant to Section

4905.26, Revised Code, by Entry dated September 16,

1981.

The decision of the Supreme Court of Ohio in Con-

sumers Counsel v. Public Utilities Commission, supra, was

reported on July 19, 1981. Issuance of the Court's man-

date, however, was stayed, pursuant to Supreme Court

Rule IX, Section 2, by the filing of an application for

rehearing by CEI. The application for rehearing was de-

nied by Supreme Court Entry dated September 1, 1981,

and the Court issued its mandate. Promptly, CEI tiled a

motion for a stay of the mandate which was denied by the

Supreme Court of Ohio on Septerrber 11, 1981. On Sep-

tember 2, 1981, CEI filed with the Supreme Court of Ohio

a notice of appeal to the United States Supreme Court and

E-3

Opinion and Order, PUCO Case No. 81-1096-EL-COI

on September 22, 1981, CEI applied to the United States

Supreme Court for a stay of the execution of the mandate

of the Ohio Supreme Court. The application for a stay to

the United States Supreme Court was denied on October

13, 1981.

Pursuant to the Commission Entry of September 16,

1981 a prehearing conference was held in this matter on

September 23, 1981. At that time it was decided that

briefs would be submitted by the parties and that the

hearing scheduled for October 13, 1981 would be limited

to oral argument on the briefs. The hearing was conducted

on October 13, 1981 and the record certified to this Com-

mission for appropriate action.

The parties hereto are The Cleveland Electric Illumi-

nating Company (CEI or Company), the Office of the

Consumers’ Counsel (OCC), the City of Cleveland (City)

and the Industrial Electric Consumers (IEC), the latter

three having been granted leave to intervene by entry or

ruling at the hearing held on October 13, 1981. A petition

to intervene filed by Senior Citizens, et al. was denied by

the attorney examiner by entry of October 8, 1981, and

no appeal to the Commission has been taken.

Commission Review and Discussion:

The issue before the Commission at this time is the

selection of an appropriate method for implementing the

mandate issued by the Supreme Court of Ohio on Sep-

tember 1, 1981. This issue is clouded, however, by com-

plexities that are beyond the control of this Commission or

any of the parties appearing before it. The mandate issued

by the Supreme Court of Ohio was issued in Commission

Case No. 79-537-EL-AIR, Opinion and Order issued July

10, 1979. The rates for electric service authorized and

established in Case No. 79-537-EL-AIR were found to be

unreasonable and, therefore were, supplanted by those

rates established by the Commission in Case No. 80-376-

EL-AIR, Opinion and Order issued May 4, 1981. In Case

E-4

Opinion and Order, PUCO Case No. 81-1096-EL-COI

No. 80-376-EL-AIR the Commission also allowed the

annual amortization of the costs associated with the can-

celled nuclear plants as part of operating expenses for rate

making purposes. No appeals from that aspect of the Com-

mission’s decision are pending.’ In addition, the Company

has another rate case pending in Case No. 81-146-EL-AIR,

based upon a more current test year, which should com-

mence hearings in late 1981 or early 1982. Thus, although

the mandate issued by the Court is clear in its intent, the

intent of the Court as to how it is to be implemented may

not be.

As noted, the Commission could implement the

Court's decision in one of several ways. First of all it could

conduct an investigation of the rates established in Case

No. 79-537-EL-AIR, although clearly this would be a

meaningless exercise. The Commission could simply re-

duce the rates currently in effect by virtue of Case No.

80-376-EL-AIR by an amount equal to the amortization

adjustment; this would ignore, however, all other changes

in circumstance that have occurred since the implementa-

tion of those rates. Or the Commission could apply the

mandate of the Supreme Court on a prospective basis in

Case No. 81-146-EL-AIR, which will commence hearings

in a few months. The Commission, however, has chosen

to implement the Supreme Court’s mandate through the

initiation of this proceeding. We believe that this is the

best method to effectuate the Supreme Court’s mandate

in the most expedient fashion.

The Office of Consumers’ Counsel (OCC) and the

City of Cleveland both contend that the remand of the

Supreme Court of Ohio requires that this Commission

immediately redetermine CEI’s allowable operating ex-

~~ Jt should be noted that intervenor Senior Citizens, et al.,

noticed an appeal, which appeal is presently pending, which did

raise the issue of the lawfulness of the inclusion of the amortization

in allowable expenses. By letter dated September 3, 1981, Senior

Citizens, et al., notified the Court that it would not pursue that

issue.

E-5

Opinion and Order, PUCO Case No. 81-1096-EL-COI

penses excluding therefrom the expenditures attributable

to the cancelled nuclear facilities and reduce CEI's cur-

rent rates accordingly. OCC and the City of Cleveland

contend that the order of the Supreme Court was spe-

cifically directed to a single issue and that changes that

may have taken place in other items since the establish-

ment of these rates need not be considered. The City of

Cleveland aad OCC contend that the adjustment can be

made on the data available to the Commission in the most

recent rate proceeding. In essence, these parties contend

that this Commission should apply the remand of Case No.

79-537-EL-AIR to Case No. 80-376-EL-AIR in a simplistic

fashion. The problem, of course, is that CEI’s present

rates were fixed not in Case No. 79-537-EL-AIR, but in

Case No. 80-376-EL-AIR, and there is no remand or man-

date in the latter.

The Company contends that the rates established in

Case No. 80-376-EL-AIR are presumptively just and rea-

sonable pursuant to Section 4909.15, Revised Code, and

the Supreme Court's decision in the prior rate case does

not change this presumption. The Company contends that

the decision of the Supreme Court should not result in an

automatic adjustment of previously-established rates.

In the alternative, the Company contends that if the

Supreme Court decision is deemed a sufficient basis for

the institution of an investigation into the current rates,

such an investigation must consider more than a single

item subtracted from the Company’s allowable expenses.

The Company points out that the test period in Case No.

80-376-EL-AIR was the calendar year 1980, and that we

are currently through most of 1981 and a great number

of the circumstances have changed. The Company con-

tends that in order to make a determination that CEI's

rates should be reduced, this Commission must consider

more than the one expense item dealt with by the Supreme

Court. The Company points out that the theories behind

rate making and the test year concept do not provide for

E-6

Opinion and Order, PUCO Case No. 81-1096-EL-COI

an item by item guaranteed dollar-for-dollar recovery, but

rather the establishment of a reasonable allowance for a

normal and necessary utility function. The Company

argues that although the Supreme Court has stated that

the abandonment loss can no longer be considered in

establishing this “reasonable allowance”, it does not neces-

sarily follow that it must be removed from a reasonable

allowance established in the past, without considering all

of the elements that make up that allowance.

A further complicating factor is that we are not con-

cerned solely with the inclusion in rates of this expense,

but with the impact of the disallowance of the same, re-

quiring careful consideration of all of the implications of

such disallowance on the accumulated deferred balances

being amortized. Some of those implications were dis-

cussed in the Commission’s Opinion in Case No. 79-537-

EL-AIR and their significance was indicated in Ohio

Edison, Case No. 81-898-EL-AEM. The potential influence

on the cost of capital and the financial standing of CEI

should not be overlooked.

The Commission, thus, is confronted with a series of

involved and inter-related problems. In the first instance,

it cannot meaningfully act directly on the remand, because

the remand is in a case which has since been superseded.

Similarly, we must reject OCC’s request (OCC Brief p. 5)

that we calculate CEI’s allowable expenses “based upon

the test year data in the remand proceeding,” which is

the 1979 data while CEI’s present rates are based on a

1980 test year. On the other hand, CEI’s argument that

we must, in effect, conduct a new rate case now seems

impracticable in view of the fact that hearings should be

conducted in the relatively near future in Case No. 81-146-

EL-AIR in which the adequacy of CEI’s present rates

may be fully explored. The Commission does not mean to

say that it is appropriate or, even for that matter, lawful,

generally speaking, to adjust rates by a single item because

of events occurring after its decision nor, conversely, that

E-7

Opinion and Order, PUCO Case No. 81-1096-EL-COI

the technical status of a case or series of cases should be

employed to promote form over substance. We believe

that a practicable solution is required and that the basic

thrust of the Ohio Supreme Court's decision in Consumers’

Counsel v. Public Utilities Commission, supra, can be

implemented in these circumstances, while preserving the

legal rights of the utility. In a sense, the fact that the rates

set in Case No. 79-537-EL-AIR have been superseded in

Case No. 80-376-EL-AIR is, as a practical matter, counter-

balanced by the fact that rates set in Case No. 80-376-EL-

AIR will, presumably, soon be superseded in Case No.

81-146-EL-AIR.

The Commission concludes, therefore, that CEI should

be directed to file tariffs which reduce its present rates.

The Commission is mindful, however, that CEI’s appeal

to the United States Supreme Court ‘s still pending and

that CEI has stated that it intends to pursue that appeal

vigorously. In order to obviate any future questions with

respect to the amount foregoing through this rate reduc-

tion, therefore, CEI is authorized and directed to maintain

the same in the appropriate deferred reserves. Such re-

serves, including this presently foregone amortization,

should be maintained by CEI pending a final decision on

the lawfulness of the inclusion of these costs in allowable

expenses for rate-making purposes or such action as the

Comunission may take after a full review of all aspects of

this question in CEI’s pending electric rate case. Obviously,

if CEI should eventually prevail on its appeal to the United

States Supreme Court, this will do no more than tempo-

rarily postpone the recovery of these costs while, in the

meantime, CEI consumers will receive the present rate

relief which we believe the Ohio Supreme Court expected

and which the intervening parties have requested. The

Commission will also be able in the context of a full rate

case, to consider all of the implications of the Ohio Su-

preme Court's decision and take such pertinent action as

it may deem appropriate.

E-8

Opinion and Order, PUCO Case No. 81-1096-EL-COI

ORDER:

It is, therefore,

ORDERED, That The Cleveland Electric Illuminat-

ing Company submit tariffs for the approval of this Com-

mission, reducing its present rates by an amount equal to

the revenue requirements attributable to the cancelled

nuclear facilities included therein. It is, further,

ORDERED, That The Cleveland Electric Illuminat-

ing Company submit three (3) complete copies of the

tariffs by October 26, 1981, to be reviewed by the Com-

mission and approved by subsequent entry. It is, further,

ORDERED, That The Cleveland Electric Iluminat-

ing Company continue to defer the accumulated amounts,

including the amounts which would have been amortized

but for this rate reduction, on its books, as part of the

presently accrued deferred reserves with respect to such

costs, pending further direction from this Commission and

that, at the time it submits the tariffs required by the

preceding paragraph of this order, it submit to the Com-

mission's accounting staff the details of the accounting

procedures by which it intends to maintain such deferral.

It is, further,

ORDERED, That a copy of this Opinion and Order

be served on all parties of record in this proceeding.

THE PUBLIC UTILITIES COMMISSION OF OHIO

/s/ Joun Ketiy

Entered in the Journal

Oct. 21, 1981

A True

Davi M.

David M. Polk

Secretary

F-1

APPENDIX F

THE STATE OF OHIO, 1982 Term

Crry or Co_umsBus. To wit: September 11, 1981

Office of Consumers’ Counsel ,

Senior Citizens Coalition et al.,

City of Cleveland,

Appellants No. 80-1480

- > No. 80-1528

No. 80-1547

Public Utilities Commission

of Ohio,

Appellees. J

Upon consideration of the motion for stay of execu-

tion of mandate, it is ordered by the court that this motion

be, and the same hereby is, denied.

I, THOMAS L. STARTZMAN, Clerk of the Supreme

Court of the State of Ohio, do hereby certify that the

foregoing entry was correctly copied from the records of

said Court, to wit, from Journal No. __.__. Page _____..

IN WITNESS WHEREOF, I have hereunto sub-

scribed my name and affixed the seal of the Supreme

Court this _____. day of , 19

:

:

G-l

APPENDIX G-1

DECISIONS OF THE SUPREME COURT OF OHIO

DENYING REHEARING

(Filed September 1, 1981)

THE SUPREME COURT OF THE STATE OF OHIO

THE STATE OF OHIO, 1981 Term

Crry or CoLumsus. To wit: September 1, 1981

CITY OF CLEVELAND, )

Appellant,

vs.

r = No. 80-1547

PUBLIC UTILITIES REHEARING

COMMISSION OF OHIO et al.,

Appellees. ,

It is ordered by the court that rehearing in this case

is denied.

I, THOMAS L. STARTZMAN, Clerk of the Supreme

Court of the State of Ohio, do hereby certify that the

foregoing entry was correctly copied from the records of

said Court, to wit, from Journal No. _. Page _..

IN WITNESS WHEREOF, I have hereunto sub-

scribed my name and affixed the seal of the Supreme Court

this Ist day of September, 1981.

Tuomas L. STARTZMAN,

Clerk.

By

Deputy.

G-2

APPENDIX G-2

DECISIONS OF THE SUPREME COURT OF OHIO

DENYING REHEARING

(Filed September 1, 1981)

THE SUPREME COURT OF THE STATE OF OHIO

THE STATE OF OHIO, 1981 Term

—— To wit: September 1, 1981

SENIOR CITIZENS COALITION )

et al.,

Appellants,

vs.

PUBLIC UTILITIES

COMMISSION OF OHIO et al.,

Appellees. J

It is ordered by the court that rehearing in this case

is denied.

I, THOMAS L. STARTZMAN, Clerk of the Supreme

Court of the State of Ohio, do hereby certify that the

foregoing entry was correctly copied from the records of

said Court, to wit, from Journal No. _.. Page _...

No. 80-1528

REHEARING

IN WITNESS WHEREOF, I have hereunto sub-

scribed my name and affixed the seal of the Supreme Court

this lst day of September, 1981.

Tuomas L. STARTZMAN,

Clerk.

a

Deputy.

G-3

APPENDIX G-3

DECISIONS OF THE SUPREME COURT OF OHIO

DENYING REHEARING

(Filed September 1, 1981)

THE SUPREME COURT OF THE STATE OF OHIO

THE STATE OF OHIO, 1981 Term

Crry or CoLumsws. To wit: September 1, 1981

OFFICE OF CONSUMERS’ )

COUNSEL,

Appellant,

vs.

PUBLIC UTILITIES

COMMISSION OF OHIO et al.,

Appellees. :

It is ordered by the court that rehearing in this case

is denied.

No. 80-1480

REHEARING

I, THOMAS L. STARTZMAN, Clerk of the Supreme

Court of the State of Ohio, do hereby certify that the

foregoing entry was correctly copied from the records of

said Court, to wit, from Journal No. _. Page _...

IN WITNESS WHEREOF, I have hereunto sub-

scribed my name and affixed the seal of the Supreme Court

this lst day of September, 1981.

Tuomas L. STARTZMAN,

Clerk.

By . a

Deputy.

H-1

APPENDIX H

DECISION AND OPINION OF

THE SUPREME COURT OF OHIO

(Filed July 15, 1981)

Statement of the Case.

Orrice or Consumers CouNsEL, APPELLANT, 0.

Pusiic Utitities CoMMISSION OF OHIO ET AL., APPELLEES.

Sentor Crrizens COALITION ET AL., APPELLANTS, 0.

Pusiic Utiuities CoMMISSION OF OHIO ET AL., APPELLEES.

Crry or CLEVELAND, APPELLANT, 0.

Pusiic Utmiries CoMMISSION OF OHIO ET AL., APPELLEES.

[Cite as Consumers’ Counsel v. Pub. Util. Comm. (1981),

67 Ohio St. 2d 153.]

Public Utilities Commission—Electric companies—Rate in-

crease—Allowable operating expenses—Amortization of

cost of terminated nuclear facilities, unlawful.

The Public Utilities Commission’s treatment of a utility's in-

vestment in terminated nuclear generating stations as

amortizable costs to be recovered from the utility's

ratepayers is inconsistent with the ratemaking formula

contained in R. C. 4909.15 and is unreasonable and

unlawful.

(Nos. 80-1480, 80-1528 & 80-1547—

Decided July 15, 1981.)

Apprats from the Public Utilities Commission of Ohio.

These three cases are appeals taken from an order of

appellee, Public Utilities Commission of Ohio (hereinafter

“commission” ), granting intervening appellee, the Cleve-

land Electric Illuminating Company (hereinafter “CEI”),

a rate increase of approximately $69.6 million. The commis-

H-2

Consumers’ Counsel vy. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Statement of the Case.

sion order further provided for the amortization over a ten-

year period of CEI’s substantial investment in four termi-

nated nuclear power plants.’

The commission’s order dealt with two cases that had

been consolidated. Case No. 79-537-EL-AIR involved

CEI’s application to increase rates. Case No. 79-744-EL-

CMR concerned a complaint and appeal taken by CEI

from a 1979 rate setting ordinance passed by the City of

Cleveland.

Inasmuch as these three appeals primarily concern

issues relating to the nuclear power plant cancellations, we

shall briefly reprise the history of these now terminated

facilities. In 1967, CEI joined with four other electric com-

panies to form the Central Area Power Coordination Group

(CAPCO). The CAPCO companies sought to achieve

economies of scale and greater service reliability by jointly

planning, constructing, and operating electrical generating

facilities. In 1973, the CAPCO group committed itself to

build the four nuclear plants at issue herein based on fore-

casts that predicted a substantially increased demand for

electricity by the CAPCO companies’ customers during the

1970's and 1980's. These forecasts subsequently had to be

revised downward when increasing energy costs spurred

conservation efforts and significantly softened the demand

for electricity. Moreover, the 1979 accident at Three Mile

Island prompted the Nuclear Regulatory Commission to

issue stringent and costly new standards for nuclear power

plants, requiring major design changes in the Babcock and

Wilcox units that CAPCO planned to construct and oper-

1 Davis-Besse Units 2 and 3 and Erie Units 1 and 2 are the

cancelled facilities at issue.

2In addition to CEI the CAPCO group consists of Toledo

Edison, Ohio Edison, and two Pennsylvania utilities, Duquesne

Light Co. and Pennsylvania Power Co.

H-3

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Statement of the Case.

ate. After much study and redesign the CAPCO companies

decided to terminate the four units on January 23, 1980.

When the decision to cancel the plants was announced,

CAPCO had already invested considerable sums in the

projects. Preliminary expenses included expenditures for

engineering, siting, environmental, geological, and seismic

studies, and for obtaining state and federal licenses. More-

over, to comply with detailed regulatory requirements and

complete all the necessary documents, certain plant com-

ponents had to be purchased at a fairly early stage in the

planning process. CEI's share of the total CAPCO invest-

ments in the four cancelled plants amounted to approxi-

mately $56,400,000 as of the date of termination.

The instant CEI rate case was pending before the

commission when the plant terminations were announced.’

The commission had accepted CEI’s application for a rate

increase as of September 17, 1979, and had established

calendar year 1979 as the test year and June 30, 1979, as

the date certain. The commission staff conducted an in-

vestigation and issued its initial report in March 1980. This

report did not make reference to the terminated nuclear

plants because CEI did not officially inform the commis-

sion of the plant cancellations until February 1980. The

commission staff, at appellants’ request, then conducted a

supplemental investigation to consider the effect of the

terminated plant expenditures on CEI's rate application.

The staff completed its investigation of the cancelled

nuclear facilities and filed revised schedules in mid-April.

The staff recommended that the investment in the four

nuclear plants should be amortized over a ten-year period

as CEI had requested.

8 The rates established by the commission order in the instant

ratemaking case have recently been superseded by new rates set

by order on May 4, 1981 in case No. 80-376-EL-AIR.

H-4

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

Public hearings on the rate increase application began

on April 2, 1980, and continued for 32 days. Staff witnesses

appeared and testified at the hearings in regard to the

cancelled nuclear plants and other matters contained in

the application. Appellants were represented at, and par-

ticipated fully in, these public hearings.

The commission issued its order on July 10, 1980. Ap-

pellants timely filed for a rehearing which the commission

denied as to the issues raised in the present appeal.

These causes are now before this court upon appeals

as of right.

Mr. William A. Spratley, consumers’ counsel, Mr. Gary

M. Petroff and Ms. Gretchen J. Hummel, for appellant

Consumers’ Counsel.

Mr. Joser P. Meissner, for appellants Senior Citizens

Coalition et al.

Mr. Thomas E. Wagner, director of law, and Mr. Craig

A. Glazer, for appellent City of Cleveland.

Mr. William J. Brown, attorney general, Mr. Marvin I.

Resnik and Mr. David M. Neubauer, for appellee Public

Utilities Commission.

Mr. Alan D. Wright, Mr. Craig I. Smith, Messrs.

Squire, Sanders & Dempsey, Mr. Alan P. Buchmann, Mr.

Lowell L. Garrett, Mr. William C. Donahue and Mr. Rich-

ard W. McLaren, Jr., for intervenor-appellee The Cleveland

Electric Iluminating Co.

SwEENEY, J. The scope of this court's re siew of com-

mission orders is set forth in R. C. 4903.13, which states in

pertinent part:

“A final order made by the public utilities commission

shall be reversed, vacated, or modified by the supreme

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

H-5

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

court is of the opinion that such order was unlawful or un-

reasonable.”

“Under the ‘unlawful or unreasonable’ standard

specified in R. C. 4903.13, this court will not reverse or

modify an opinion and order of the Public Utilities Com-

mission where the record contains sufficient probative evi-

dence to show that the commission’s determination is not

manifestly against the weight of the evidence and is not so

clearly unsupported by the record as to show misappre-

hension, mistake or willful disregard of duty,” Columbus

v. Pub. Util. Comm. (1979), 58 Ohio St. 2d 103, 104. See,

also, Consumers’ Counsel v. Pub. Util. Comm. (1979), 58

Ohio St. 2d 108, 110; Ohio Utilities Co. v. Pub. Util. Comm.

(1979), 58 Ohio St. 2d 153, 164; Duff v. Pub. Util. Comm.

(1978), 56 Ohio St. 2d 367, 370; General Motors Corp. v.

Pub. Util. Comm. (1976), 47 Ohio St. 2d 58, paragraph

two of the syllabus; Cleveland Electric Illuminating Co. v.

Pub. Util. Comm. (1975), 42 Ohio St. 2d 403, paragraph

eight of the syllabus. We assess the appellants’ objections

with this standard of review in mind.

I A.

In its order the commission allowed approximately $91

million to be included in the rate base for construction

work in progress (CWIP) pursuant to R. C. 4909.15(A) (1)

and 4909.15(E). R. C. 4909.15(A)(1) states in relevant

“°°°The commission may, in its discretion, permit a

reasonable allowance for construction work in progress but,

in no event, may any allowance for construction work in

progress be made by the commission until it is determined,

after a physical inspection, that the particular construction

project is a least seventy-five per cent complete.”

R. C. 4909.15(E) imposes the following limitation on

allowable CWIP:

H-6

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

“In no event shall an allowance for construction

work in progress under division (A)(1) of this section

exceed twenty per cent of the total valuation as stated in

such division, not including such allowance.”

Some $90 million of the CWIP allowance was directly

attributable to the Bruce Mansfield coal-fired generating

station, which came on line several months after the new

rates became effective. It is unquestioned that Bruce

Mansfield met the 75 percent completion criterion for rate

base eligibility pursuant to R. C. 4909.15(A)(1). More-

over, it is uncontroverted that inclusion of the Bruce Mans-

field-related CWIP did not exceed the 20 percent of total

valuation limitation imposed by R. C. 4909.15(E).

I A(i).

Appellants Senior Citizens Coalition et al. ( hereinafter

“SCC”), in case No. 80-1528, challenge the commission's

allowance for CWIP in this case on the basis that the CWIP

provisions contained in R. C. 4909.15(A)(1) represent an

unconstitutional delegation of legislative power. Specifi-

cally, SCC contends that the statute “*°°establishes no

definite policy nor provides any standard for the exercise

of PUCO discretion in permitting an allowance for con-

struction work in progress and°**therefore the PUCO

should be prohibited from granting any such allowance.° °°”

We find no merit in SCC’s constitutional challenge to

the CWIP provisions because the commission's discretion

is sufficiently circumscribed by the specific eligibility cri-

teria enumerated in the statute. As we stated in Consumers’

Counsel v. Pub. Util. Comm., supra (58 Ohio St. 2d 108),

at page 113:

“®*°We believe these limitations adequately confine

commission discretion. Further restriction would conceiv-

ably hinder the flexibility necessary to enable the com-

H-7

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

mission to carry out legislative will. For these reasons, this

court holds that the discretion granted the commission

under R. C. 4909.15 to authorize a reasonable allowance

for construction work in progress in a utility’s rate base

constitutes a lawful delegation of the state’s police power

by the General Assembly.”

We expressed the same view of the CWIP provisions

of R. C. 4909.15( A) (1) in Cleveland v. Public Util. Comm.

(1980), 63 Ohio St. 2d 62, 68. In the case at bar we decline

to strike down the CWIP statute as an unconstitutional

delegation of legislative authority.

I A(ii)

Both SCC and appellant City of Cleveland, in case No.

80-1547, contend that the inclusion of a CWIP allowance

in this case constituted an abuse of commission discretion.

As previously noted, the Bruce Mansfield generating sta-

tion, which accounted for virtually all of the CWIP at issue,

met the 75 percent completion criterion and came on line

several months after the new rates went into effect. Under

these circumstances, we cannot say that the commission’s

decision was either manifestly against the weight of the

evidence or unsupported by the record. Columbus vs. Pub.

Util. Comm., supra. Therefore, we refuse to disturb the

commission's findings on the propriety of including a CWIP

allowance in CEI's rate base. Accordingly, we reject appel-

lants’ assertions that the commission abused its discretion

in granting the CWIP allowance.

Il.

SCC alleges that the commission did not adequately

investigate CEI’s generating capacity to determine whether

the utility had excess capacity. The commission staff in-

vestigated CEI's generating capacity and determined that

H-8

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

the reserve capacity was adequate but not excessive.‘ Staff

and CEI witnesses testified to the same effect at the hear-

ings before the commission wherein they explained the

methodology by which they reached their conclusions.

We have in a previous case acknowledged the diffi-

culties the commission and utilities face on the excess ca-

ty issue.

“°**Since utilities must anticipate load growth years

in advance to maintain adequate capacity to ensure reliable

service, it is unrealistic to expect a utility to have only the

precise amount of capacity needed at a given time.” Cleve-

land v. Pub. Util. Comm., supra, at 65. To paraphrase what

we stated in Consumers’ Counsel v. Pub. Util. Comm.

(1980), 64 Ohio St. 2d 71, 79: Limited judicial review of

an excess capacity determination is sound for the reason

that while excess capacity analyses have an aura of pre-

cision about them, they are fraught with judgments and

assumptions. Given the inherent problems of accurately

projecting load growth, we are satisfied that the commis-

sion’s excess capacity methodology is reasonable and that

the factual findings are supported by the record. SCC’s

challenge on the question of excess capacity is, therefore,

without merit.

Ill A.

Before proceeding to the merits « ppellants’ conten-

tions on the question of whether the commission lawfully

and reasonably treated the four cancelled nuclear power

plants as amortizable costs, we must first consider two pro-

cedural issues raised by appellant Cleveland in case No.

80-1547. Cleveland first contends that CEI violated the

* The record indicates that CEI had available 3,469

(MW) of capacity. The 1979 peak load was 3,097 MW and the

forecasted 1980 peak load was 3,450 MW.

H-9

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

notice provisions of R. C. 4909.18 and 4909.19, R. C.

4909.18(E) requires that “[a] proposed notice for news-

paper publication fully disclosing the substance of the

application” must accompany the rate increase application.

R. C. 4909.19 requires the applicant to publish in news-

papers of general circulation the “substance and prayer of

its application.” Cleveland asserts that CEI’s proposed

notice under R. C. 4909.18 and its published notice under

R. C. 4909.19 were inadequate because no mention was

made of the four terminated nuclear units in either notice.

Cleveland relies on Committee Against MRT v. Pub.

Util. Comm. (1977), 52 Ohio St. 2d 231, and Ohio Assn. of

Realtors v. Pub. Util. Comm. (1978), 60 Ohio St. 2d 172,

to support its contention that CEI’s statutory notices were

inadequate. In MRT, supra, we stated, at page 233, that

“°° a highly innovative and material change in the method

of charging customers should be included in the notice.”

(Emphasis added.) The cancelled power plant information

that Cleveland insists should have been included in the

CEI notices herein complained of did not relate to an

innovative method of charging that would profoundly

affect the rates paid by certain categories of utility cus-

tomers. Therefore, Cleveland's reliance on MRT and Real-

tors is misplaced.

The proposed notice under R. C. 4909.18(E) need

only convey the “substance” of the application and the

notice published pursuant to R.C. 4909.19 need only con-

tain the “substance and prayer’ of the application. The

decision of the CAPCO companies to terminate the pro-

Realty Co. v. Cleveland (1975), 41 Ohio St. 2 41, 43.

H-10

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

posed plants did not alter the “substance” or the “substance

and prayer’ of CEI’s application because CEI did not re-

quest additional rate relief when it revised its original

application to reflect the terminated plant expenditures.

We hold that the CEI notices met the standards of R. C.

4909.18 and 4909.19, and consequently Cleveland's asser-

tions to the contrary are unfounded.

Ill B.

Cleveland's second procedural objection relates to the

adequacy of the staff investigation and report in regard

to the cancelled nuclear power plants. R. C. 4909.19 re-

quires that the commission investigate and issue a report

on rate increase applications. The commission did conduct

an investigation and prepared a report on the original CEI

application. As noted however, the initial commission staff

report was silent on the subject of the terminated plants

because the decision to cancel the plants was announced

too late to be included in the report. However, the staff

did subsequently investigate the matter of the terminated

facilities and assessed the effect of the cancelled generat-

ing stations on CEI’s pending rate application. Cleveland

now complains that the omission of these matters from the

original report and the tardy presentation of the staff re-

view of the four terminated plants after hearings on the

application had already begun were prejudicial and in

violation of R. C. 4909.19. Cleveland asserts that “inter-

venors have been consistently denied the opportunity to

adequately prepare their case. They have [had] no oppor-

tunity to review the Staff's findings prior to hearings and

thus no opportunity to prepare evidence to support or

rebut the same.”

H-11

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

Notwithstanding these contentions, Cleveland, after

posing objections to the original report, did receive the

benefits of the staff's investigation of the four terminated

nuclear plants and had ample opportunity to cross-examine

the commission’s and CEI'’s experts at the public hearings.

Cleveland did not seek additional time to prepare its case

while these matters were pending before the commission.

Moreover, Cleveland had already intervened in the case

before the plant closing issue surfaced and therefore was

not prejudiced by the omission of the cancelled plant data

in the original report. Worthington Hills Civic Assn. v.

Pub. Util. Comm. (1976), 45 Ohio St. 2d 11.

The purpose of the staff report is “°**to facilitate

meaningful contest of rate increase applications by provid-

ing interested parties with the materials necessary for an

informed challenge.” Duff v. Pub. Util. Comm. (1978), 56

Ohio St. 2d 367, 376. The commission report in this case,

as supplemented by the follow-up investigation conducted

by the commission staff, provided appellant Cleveland with

the opportunity to make an informed challenge. Therefore,

the commission’s investigation and report in the instant

rate application case comply with the statutory require-

ments set forth in R. C. 4909.19.

IV A.

The core issue in each of these appeals is whether the

commission lawfully and reasonably permitted CEI to treat

its investment in the four cancelled nuclear generating

stations as amortizable costs.

The commission order stated and analyzed the ques-

tion in this fashion.

“°° *What the company seeks is the recovery of costs

incurred on behalf of its ratepayers to assure that adequate

service could be maintained***. The significant question,

H-12

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

given the Commission's past pronouncements with respect

to the impropriety of the recovery of past losses through

future rates, is whether the amortization of these extra-

ordinary costs does violence to this principle. The dis-

tinguishing feature that sets this adjustment apart from

those we have rejected on this ground in the past is that

costs associated with the termination of the units did not

really become costs until the fact of termination. Cancella-

tion does not create a past loss, but gives rise to a current

cost.*°**[RJejection of this adjustment would have a very

direct impact on applicant’s final performance as, in the

absence of funding of the amortization through rates, ap-

plicant would be required to write off these costs cur-

rently***. Thus, we now see the wisdom of the standard

emerging from the cases from other jurisdictions; if the

expenditures are prudent, amortization should be per-

mitted.

“In determining whether these expenditures were pru-

dent, one must bear in mind what is and what is not at

issue. No one disputes that the 1973 decision to embark

on the construction in question was reasonable as it was

based on the best data available***. Similarly, no one

disputes that the decision to terminate construction was

reasonable, given the intervening decline in growth ex-

pectations and the uncertainties which now attend the

construction of nuclear units.°** The Commission finds

that applicant’s decisions were reasonable and prudent at

every step of this process, and concludes that the proposed

adjustment should be approved.”

The appellants argue that the commission exceeded

its authority and disregarded a carefully crafted statutory

scheme when it acceded to CEI’s request to amortize the

cancelled nuclear plant expenditures.

There is no question but that the overwhelming

weight of authority from other jurisdictions supports the

H-13

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

position of the commission.’ In only two instances has

amortization been disallowed." It is important to note, how-

ever, that none of the previous rulings on this precise éz:ue

represents the opinion of the highest court of the jurisdic-

tion in which the case arose. Virtually all of the decisions

that the commission, CEI, and the amici cite in support

of amortization derive from regulatory proceedings. Even

more significant is the fact that no other case has consid-

ered the propriety of the commission’s proposed amortiza-

tion with reference to Ohio law. Thus, while counsel for

the parties and intervenors before the court in this cause

have thoroughly canvassed the administrative decisions

in other jurisdictions and have supplied this court with

copies of those decisions, we must regard these foreign

regulatory opinions as advisory in nature. The construction

of Ohio law is particularly the province of this court, and

we are nowise bound by the pronouncements of regulatory

regimes elsewhere in effect.

® See, e.g., Re San Diego Gas & Electric Co. (Cal. Pub. Util.

Comm. 1979), 29 P.U.R. 4th 613; Re Potomac Electric Power Co.

(Md. Pub. Ser. Comm. 1977), Order No. 6999; Re Consumer Power

Co. (Mich. Pub. Ser. Comm. 1975), Case No. F-700; Re Northern

States Power Co. (Minn. Pub. Ser. Comm. 1977), Dkt. E-0021

GR-76-934; Re Public Service Electric and Gas Co. (N.J. Dept. of

Energy, Bd. of Pub. Util. 1980), Dkt. No. 794-310; Re Consolidated

Edison Co. of New York (N.Y. Pub. Ser. Comm. ), Case No.

9187; Re Carolina Power & Light Co. (N.C. Util. Comm. 1979),

Dkt. No. E-2, Sub. 352; Re Gulf States Utilities Co. (Pub. Util.

Comm. of Texas 1979), Dkt. No. 2677; Re Virginia Electric &

Power Co. (Va. Corp. Comm. 1979), 29 P.U.R. 4th 65; Re Wiscon-

sin Electric Power Co. (Pub. Ser. Comm. of Wis. 1980), Case No.

05-C1-3; Re Potomac Electric Power Co. (D.C. Pub. Ser. Comm.

1979), 29 P.U.R. 4th 517.

™See Re Arizona Public Service Co. (Ariz. Corp. Comm.

1980), Decision No. 51009; Re Northern States Power Co. (Pub.

Ser. Comm. of N.D. 1980), Case No. 10,097.

H-14

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

IV B.

The commission’s approval of amortization was pre-

dicated on the prudence of CEI’s original decision to build

the nuclear facilities and the subsequent decision to cancel

the plants. We must decide whether the test of prudence,

as applied by the commission, which supports treating the

expenditures associated with the terminated nuclear gen-

erating stations as amortizable costs, is consistent with the

statutorily mandated ratemaking formula contained in

R. C, 4909.15.

IV B(i).

The controversy surrounding the cancelled nuclear

power plants focuses primarily on R. C. 4909.15(A)(4),

which delineates the service-related costs that a utility may

recover from its ratepayers. This section states in relevant

“The public utilities commission, when fixing and de-

termining just and reasonable rates, fares, tolls, rentals,

and charges shall determine:

“(4) The cost to the utility of rendering the public

utility service for the test period®*°”

The commission urges that “an expenditure by a utility

can be considered a cost of rendering the public utility

service if it fails in fact to achieve its intended purpose***°

[if] the expense was reasonably calculated to provide

[future] utility service at a reasonable cost.” The under-

pinnings for the commission rationale may be found in

those statutory provisions that require utilities to maintain

adequate service presently and for the foreseeable future.

See, e.g., R. C. 4905.22 (adequate service and facilities).

Notwithstanding the provisions that impose a duty on

utility companies to plan for the future, the question under

H-15

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

R. C. 4909.15( A) (4) remains whether the cancelled plant

expenditures represent “[t]he cost to the utility of render-

ing the public utility service for the test period.” Test

period considerations aside, what the company sought and

what the commission granted was the amortization as

service-related costs of an investment that never provided

any service whatsoever to the utility’s customers.

We seriously question whether the General Assembly

contemplated that the commission would treat the type of

expenditures controverted herein as costs under R. C.

4909.15( A) (4). The now terminated nuclear plants repre-

sented a major capital investment that ultimately would

have been included in the rate base under R. C. 4909.15

(A)(1), had the projects not been cancelled. It is our

opinion that R. C. 4909.15(A)(4) is designed to take into

account the normal, recurring expenses incurred by utilities

in the course of rendering service to the public for the

test period.’ A non-exhaustive list of such expenses would

include reasonable expenditures for repairs, maintenance,

personnel-related costs, administrative expenses, and taxes.

The extraordinary loss sustained by CEI in connection

with the terminated n..clear plants cannot be transformed

into an ordinary operating expense pursuant to R. C.

4909.15( A) (4) by commission fiat. The commission’s state-

ment that “[c]ancellation does not create a past loss, but

gives rise to a current cost” is unpersuasive. Under this

rationale we question whether there could ever be a “past

loss” the return of which would not be recoverable in

future ratemaking proceedings notwithstanding the com-

8 Appellants contend that the “direct, primary benefit” test

enunciated in Cleveland v. Pub. Util. Comm. (63 Ohio St. 2d 62),

supra, is applicable to the case at bar. We disagree. The direct, pri-

mary benefit standard should not be wrenched from the institu-

tional advertising expenses and charitable contributions context in

which it arose.

H-16

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

missio:. » assertion to the contrary. The commission’s char-

acterization of the investment in the four terminated plants

as “cost” under R. C. 4909.15(A)(4) in light of what we

perceive to be the legislative intention underlying that

section is unreasonable. Therefore, to the extent that the

commission’s order in regard to the cancelled plants is

predicated on R. C. 4909.15(A)(4), the order cannot

stand.

IV B(ii).

The commission and CEI also argue that even if, as we

have found, R. C. 4909.15( A) (4) is inapplicable, then un-

der R. C. 4909.15(D)(2)(b) the commission may autho-

rize the amortization of the investment in the terminated

nuclear facilities.

R. C. 4909.15 states in relevant part:

“(D) When the public utilities commission is of the

opinion, after hearing and after making the determinations

under divisions (A) and (B) of this section®**that the

maximum rates, charges, tolls, or rentals chargeable by any

such public utility are insufficient to yield reasonable com-

pensation for the service rendered, and are unjust and un-

reasonable, the commission shall:

“(2) With due regard to all such or matters as are

proper, according to the facts in each case,

“(b) °° *fix and determine the just and reasonable rate,

fare, charge, toll, rental, or service to be rendered, charged,

demanded, exacted, or collected for the performance or

rendition of the service that will provide the public utility

the allowable gross annual revenues under division (B) of

this section, and order such just and reasonable rate, fare,

charge, toll, rental, or service to be substituted for the

existing one.*°*”

H-17

Consumers’ Counsel vy. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

Fox purposes of R. C. 4909.15(D)(2)(b) the question

presented is whether the cancelled nuclear power plant

costs fall under the “all such matters as are proper”

language of the statute. The commission views R. C.

4909.15(D)(2)(b) as a virtual wild card to be played

whenever the commission in its discretion sees fit. We

interpret the statute less sweepingly, first because the pro-

visions are linked inextricably with the ratemaking factors

contained in R. C. 4909.15(A) and (B), and secondly be-

cause the General Assembly undoubtedly did not intend

to build into its recently revised (1976) ratemaking formula

a means by which the commission may effortlessly abro-

gate that very formula.

To be a proper matter giving rise to a permissible

adjustment under R. C. 4909.15(D)(2)(b), the matter in

. question must relate to factors otherwise included in R. C.

4909.15. R. C. 4909.15(D)(2)(b) makes reference to “the

allowable gross annual revenues under division (B).” (Em-

phasis added.) Having previously determined that the nu-

clear plant costs are not properly includable under R. C.

4909.15(A), then these costs can have no effect on the

gross annual revenue determination under R. C. 4909.15(B).

Therefore, we reject the commission’s argument invoking

R. C. 4909.15(D)(2)(b) as alternative statutory authority

for its order granting CEI permission to amortize its invest-

ment in the cancelled nuclear facilities.

It is our view that R. C. 4909.15(D)(2)(b) is de-

signed to allow the commission to make minor adjustments

to rates ascertained by the statutory formula when the

criteria upon which the rates are based are skewed for one

reason or another. Thus, under R. C. 4909.15(D)(2)(b),

the commission may smooth out anomalies in the rate-

making equation that tend to make the test year data un-

representative for ratemaking purposes.

H-18

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

IV B(iii)

“[T]his court has consistently recognized that the

Public Utilities Commission is a creature of the General

Assembly and may exercise no jurisdiction beyond that

conferred by statute.” Dayton Communications Corp. v.

Pub. Util. Comm. (1980), 64 Ohio St. 2d 302, 307. See,

also, Werlin Corp. v. Pub. Util. Comm. (1978), 53 Ohio

St. 2d 76, 80; Ohio Public Interest Group v. Pub. Util.

Comm. (1975), 43 Ohio St. 2d 175, 176, paragraph five of

the syllabus; Penn Central Transportation Co. v. Pub. Util.

Comm. (1973), 35 Ohio St. 2d 97, paragraph one of the

syllabus. Stated differently, the commission may not legis-

late in its own right. This, however, is what the commis-

sion has attempted to accomplish in the case at bar.

The commission order enrafts upon the statutory rate-

making scheme an exception © »at would allow utility com-

panies to recover their investment in unfinished projects

ineligible for rate base treatment if the original decision to

build the facilities and the subsequent decision to cancel

the projects are prudent under the circumstances. In so

doing the commission has exceeded its statutory mandate.

We hold that the commission unreasonably and unlawfully

exceeded its statutory authority when it approved amor-

tization of CEI’s investment in the four terminated nuclear

power plants.

IV C.

Appellants contend that the commission also erred in

including the cancelled plant costs in the calendar year

1979 test period because the termination was not an-

nounced until January 23, 1980. Inasmuch as we have

already determined that the commission improperly

allowed amortization of the utility’s investment in the

terminated nuclear facilities, it is unnecessary for us to

address the timing issue raised in this cause.

H-19

wonsumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

IV D.

We are mindful of the policy considerations that

prompted the commission’s decision. The commission, CEI,

and the amici argue strenuously that to rule as we have

today will seriously disadvantage Ohio utilities in capital

markets thereby “driv[ing] up the return on investment

required by investors in Ohio utilities.” This gloomy sce-

nario, however, does not imbue the commission with the

authority to rewrite the statutes. The statutes in question

contain no provisions insulating investors from the type of

losses sustained in the cancelled-plants venture.

If, as has been argued, these are parlous times for the

utilities industry, and if, therefore, in order to attract and

retain investment capital, utility companies must not only

be granted a fair and reasonable rate of return pursuant

to statute but must also be assured the return of capital

invested in failed projects that would otherwise not be

recoverable under the ratemaking formula, then the com-

mission and the utilities should petition the General Assem-

bly to enact changes in the ratemaking structure so as to

provide this extra modicum of protection for the investors.

Absent such explicit statutory authorization, however, the

commission may not benefit the investors by guaranteeing

the full return of their capital at the expense of the rate-

payers. Under the ratemaking formula now in effect con-

sumers are not chargeable for utility investments and

expenditures that are neither included in the rate base

nor properly categorized as costs. What we previously

stated in a rate base case is applicable to the case at bar:

“°**Tt is only proper that their [the investors] venture

be found operational before they commence to recoup their

capital outlays from the consumers.” Consumers’ Counsel

v. Pub. Util. Comm. (1979), 58 Ohio St. 2d 449, 456-457.

H-20

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Opinion, per SWEENEY, J.

We take a dimmer view of the second policy argu-

ment advanced by the commission to support its order.

The commission suggests that if the appellants prevail

on this issue, then “[rJather than prudently cance] certain

projects, it is not inconceivable that at least some utility

managements would complete expenditures on a project

and have ratepayers pay a return on dollars which would

have more wisely not been spent.” R. C. 4909.154 specifi-

cally empowers the commission to investigate manage-

ment policies, practices and organization to determine

whether a public utility is properly managed. If a utility

completes a project that should have been abandoned,

then the commission must under the “used and useful”

requirement of R. C. 4909.15(A)(1) disallow rate base

treatment and under R. C. 4909.154 disallow any claimed

operating expenses related to the unnecessary project. We

are confident that if any utility managers who might be

tempted to act as the commission suggests are aware that

the commission, pursuant to its statutory responsibilities,

is vigorously scrutinizing all proposed and in-progress

construction projects, these managers will decide whether

or not to abandon a particular project according to their

best and most prudent business judgment. Thus, we re-

ject the commission’s argument that our decision today

may engender imprudent decision making in utility com-

pany boardrooms.

For reasons hereinbefore stated the order of the com-

mission is affirmed in part and reversed in part, and this

cause is remanded to the commission for a redetermina-

tion of CEI’s allowable operating expenses, excluding

therefrom the expenditures attributable to the cancelled

nuclear facilities.

Order reversed in part and

affirmed in part.

H-21

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Concurring and Dissenting Opinion, per P. BROWN, J.

Ce.esrezze, C. J.. W. Brown and C. Brown, JJ.,

P. Brown, Locuer and Hoimes, JJ., concur in part

and dissent in part.

Pau. W. Brown, J., concurring in part and dissenting

in part.

I concur in Parts I, II and III of the majority opinion

insofar as they affirm the commission’s decision to allow

rate base treatment for CWIP attributable to the Bruce

Mansfield coal-fired generating station. I dissent, however

from Part IV of the opinion.

In Part IV of its opinion, the majority reverses the

commission’s decision to allow amortization of the costs

incident to termination of the four nuclear facilities in

question. In so doing, the majority does not disturb the

commission's findings that CEI acted both prudently and

reasonably in incurring these costs. Instead, the majority

holds that it was not the intent of the General Assembly to

treat expenditures of this type as “costs” within the mean-

ing of R. C. 4909.15(A)(4). I believe the majority's inter-

pretation of this section to be too restrictive.

The term “cost” is not defined in R. C. Chapter 4909.

Therefore, it is necessary to look elsewhere to ascertain the

meaning of this word. In 1961, the commission adopted

standard accounting procedures to be used by Ohio util-

ities. “The system of accounts and records identified and

designated as ‘Uniform System of Accounts Prescribed for

Public Utilities and Licensees effective January 1, 1961’

* * * is adopted by this Commission * * *.” Ohio Adm.

Code 4901:1-9-05. This “Uniform System of Accounts” was

promulgated in 18 C.F.R., Part 101.

An analysis of this uniform system clearly demon-

strates that expenditures such as those incurred in the

termination of the four nuclear generating units were in-

H-22

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Concurring and Dissenting Opinion, per P. BROWN, J.

tended to fall within the statutory definition of “costs.”

The uniform system states, in part:

“182 Extraordinary property losses.

“A. * ° ° this aceount shall include extraordinary

losses on property abandoned or otherwise retired from

service which are not provided for by the accumulated

provisions for depreciation or amortization and which

could not reasonably have been foreseen and provided for

°°*” (Emphasis added.) Id., at 324.

“407 Amortization of property losses.

“This account shall be charged with amounts credited

to account 182°°*.” Id., at 356.

This accounting system has been in effect in Ohio for

approximately two decades. Given this fact, we can rea-

sonably assume that the General Assembly was cognizant

of its existence when it amended R. C. 4909.15 in 1976,

and that it was not the intent of the General Assembly to

treat these extraordinary property losses in a different man-

ner in which they were treated by the Public Utilities

Commission.

Moreover, as the majority correctly notes, “the over-

whelming weight of authority from other jurisdictions sup-

ports the position of the commission.” The majority dis-

misses this significant point with the facile statement that

none of the cases from these other jurisdictions represents

the opinion of the highest court of the jurisdiction; nor,

has any other jurisdiction construed or applied Ohio law

in reaching its determination. While I do not assert that

decisions from other jurisdictions are controlling in Chio,

I cannot accept the majority's summary disposition of

these foreign decisions. First, this court, in the past, has

recognized the persuasive value of decisions from other

jurisdictions in this area. See Ohio Water Service Co. v.

Pub. Util. Comm. (1980), 64 Ohio St. 2nd 12. Second, the

H-23

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Concurring and Dissenting Opinion, per P. BROWN, J.

near unanimity of decisions from other jurisdictions allow-

ing amortization of these types of expenditures further

demonstrates the reasonableness of the commission’s de-

cision in this case.

Appellants urged before this court that before any ex-

pense or cost could be passed on to the ratepayers, it must

confer a direct and primary benefit upon said ratepayers.

Implicit in the majority's decision is an acceptance of this

argument. Thus, the majority, today, takes another step

toward entrenching the spurious “direct, primary benefit”

test into the public utilities law of Ohio.’

“Review of orders of the Public Utilities Commission

on appeal is limited to a consideration of whether the

order is unreasonable or unlawful®**.” Cremean v. Pub.

Util. Comm. (1976), 48 Ohio St. 2d 163, paragraph one

of the syllabus. The order in the instant cause is neither

unreasonable nor unlawful. Accordingly, I would affirm

the decision of the commission in its entirety.

Hoiaes, J., concurs in the foregoing concurring and

dissenting opinion.

Locuer, J., concurring in part and dissenting in part.

I concur in the syllabus and Parts III (notice and staff

investigation) and IV (amortization) of the majority

opinion. I would also note, however, that the financial

effect of this decision on CEI will be insignificant. CEI

informed its investors in its “1979 Annual Report”:“***

The Company [CEI] will seek the approval of the Federal

Energy Regulatory Commission and The Public Utilities

Commission of Ohio for authority to amortize [the costs

previously expended toward the four nuclear units whose

construction CAPCO terminated] over a suitable number

of years. The extent to which these costs may be recovered

*See Justice Herbert's dissent in Cleveland v. Pub. Util.

Comm. (1980), 63 Ohio St. 2d 62, 75, in which I concurred.

H-24

Consumers’ Counsel v. Pub. Util. Comm.

67 Ohio St. 2d 153 (1981)

Concurring and Dissenting Opinion, per P. BROWN, J.

through rates will he determined by the PUCO. If any

costs of termination are not permitted to be recovered, the

Company would be required to reduce Net Income by the

disallowed amount. In any event, the resolution of these

matters should not have a material adverse impact on the

financial position of the Company.”

I dissent from Part I of the majority opinion (CWIP),

because PUCO refuses to define standards for review of

CWIP matters. My dissenting opinions in Consumers

Counsel v. Pub. Util. Comm. (1979), 58 Ohio St. 2d 108,

117, and Consumers Counsel v. Pub. Util. Comm. (1981),

66 Ohio St. 2d 162, 167, express the reasons for my con-

cern.

I-l

APPENDIX I

BEFORE

THE PUBLIC UTILITIES COMMISSION OF OHIO

In the Matter of the Application of

The Cleveland Electric Illuminating

Company for Authority to Amend and

Increase Certain of its Filed Sched-

ules Fixing Rates and Charges for

Electric Service.

In the Matter of the Complaint and

Appeal of The Cleveland Electric

['luminating Company from Ordi-

nance Nv. 1673-79 of the Council of

the City of Cleveland, Ohio Passed

August 7, 1979, entitled “An Ordi-

nance Setting the Maximum Rates

which may be Charged by The

Cleveland Electric Illuminating

Company for Electric Service Within

the City of Cleveland.”

s

+

Case No.

- 79.774-EL-CMR

4

REHEARING ENTRY

The Commission, coming now to consider the above-

entitled matters, and, specifically, its opinion and Orders

in these dockets of July 10, 1980, and its applications for

rehearing filed by the applicant and other participating

parties, hereby makes the following findings.

a fC Py By

in granting, in

part, the application of the Cleveland Electric

a Company for authority to increase

its rates

charges for electric service rendered

1-2

Rehearing Entry, PUCO Case No. 79-537-EL-AIR

2)

3)

4)

jurisdictional customers, and sustaining the com-

pany’s complaint that Ordinance No. 1673-79 of

— of Cleveland was unjust and unreason-

able.

Rehearing applications were timely filed pursuant

to the provisions of Section 4903.10 Revised Code

by the applicant, the City of Cleveland, the Office

Consumers’ Counsel, Senior Citizens, et al., and

the Industrial Electricity Consumers.

Through its rehearing application, the [lluminat-

ing Company alleges that the Commission's July

10, 1980 Opinion and Order is unreasonable and

unlawful in some 39 particulars. Review of these

assignments of error indicates that the majority

represent yr? —- than a ogy ae

company's ori objections relative to

issues which have now been decided adversely

to the applicant. The Commission is of the opin-

ion that t claims were adequately considered

in the order now complained of with the excep-

tion of three of the issues which the applicant

elected to address in the memorandum accom-

panying its rehearing application.

By its twenty-fourth assignment of error, appli-

cant alleges that the Commission unreasonably

refused to adjust test-year labor expense to -

nize wage increases which became effective su

sequent to the test period. In considering this

ground for rehearing, the Commission must first

point out that adjustments for out-of-. 2riod cost

changes, while accepted in some instances where

strict conditions are satisfied, are the exception

rather than the rule. If the test-year concept is

to remain a viable basis for determining cost of

service, a matching of revenues and expenses

must be maintained. The Commission has de-

parted from this principle in only the most com-

pelling circumstances as, for example, in cases

where we are confronted with a very remote test

I-3

Rehearing Entry, PUCO Case No. 79-537-EL-AIR

5)

6)

year (Columbia Gas of Ohio, Case No. 77-1309-

GA-AIR [May 24, 1979]). Applicant that

the adjustment proposed in pr ng does

satisfy the conditions discussed in prior Com-

mission orders, specifically East Ohio Gas Com-

ee ee No. 79-535-GA-AIR (July 9, 1980).

As the Commission has granted rehearing on this

issue in the East Ohio case (East Ohio Gas Com-

pany, supra, Entry on Rehearing, August 7, 1980)

we believe the matter deserving of further con-

sideration in these dockets as well. Rehearing on

this ground should be granted.

Through the twenty-eighth ground advanced by

the company as a basis for rehearing, applicar:

contends that the Commission erred in exclud-

ing certain advertising costs from allowable ex-

penses without evidence as to whether the ad-

vertisements in question benefited the custo-

mers. As the Commission found in the order now

complained of, these advertisements appeared

to be solely promotional in character. However,

on the day preceeding the issuance of the Opin-

ion and Order, the Supreme Court of Ohio hand-

ed down its decision in Cleveland v. Public Utili-

ties Commission, 63 Ohio St. 2d 62 (1980),

whereby a new test for the eligibility of adver-

tising expenses was apparently established. As

the Commission will herein grant the rehearing

sought by certawr, other participants with respect

to the advertising question in light of this devel-

opment, we deem it appropriate to also permit

the company to participate in our efforts to in-

terpret the import of the Court’s decision. We,

therefore, find the application for rehearing on

this ground to be well made and hereby grant

rehearing on this issue.

By its twenty-ninth assignment of error, appli-

cant charges that the Commission acted unrea-

sonably in failing to include any allowance for

charitable contributions in the cost of service

Bf

pie it | ’ aH Mie Ain

1 aeutcll

Hit Hi ii | bis i

it i i Hi iH nt

ii it i bil aa

‘getevtumstiom 4: The amemamen | ace Sus or

te

lta

|

Seg Eat PCCD Car Ne S01

10)

11)

12)

pany. We commend Applicant's Exhibit Nos. 6,

9 and | (Sched. B-6 and Sched. C-4) to the

Se eee. Ainaag Gs gums caus

only the Commission's determination that

1-6

Rehearing Entry, PUCO Case No. 79-537-EL-AIR

14)

1980 in this docket whereby the Commission ac-

cepted applicant's new tariffs for filing. —_

venors cael that this Entry contains

erroneous finding that the tariffs, as SS

conformed to Commission's July 10, 1980

Opinion and Order. y, intervenors

charge that the Ind and Large Industrial

rate schedules approved (PUCO No. 11, 6th Rev.

Sheet No. 26 and PUCO No. 11, 6th Rev. Sheet

No. 28) are not consistent with the Commission's

directive concerning the adjustments to the pro-

posed tariffs to reflect the fact that the

revenue increase aut was somewhat less

than that originally requested by the company.

In the July a. - Opinion and Order, the

Commission did poe set out the

method to be employed in in ad justin the tariffs.

The Commission oa poly - t the staff tariff

recommendations which were not hens g to spe-

cific objection should be implemented. Among

those recommendations was the staff yg

that if the rate relief authorized w

that requested, the reductions in the ‘canes —

sched should be performed so as to retain

the proportionality between the various blocks

(S.R., p. 56). The applicant also supported this

tochaigue (Tr xX, oe, | 55-56) which, it might

Renee May og sae the approach customarily

Commission under such circum-

stances eeaceny A e.g. on Power and Light, Case

No. 79-510-EL-AIR [July 31, 1980]).

The Commission a with the Industrial Elec-

tricity Consumers that the Industrial and Large

ee rate sheets submitted by the applicant

ed by the Commission's July 14, 1980

ok - no downward adjustment to the

—— energy portions o rate struc-

tures as se cen aget “oe the impact

of the failure of ry ust all portions

of these rates is so y less than a

1-7

Rehearing Entry, PUCO Case No. 79-537-EL-AIR

ORDERED, That the rehearing application filed

August 8, 1980, by the Cleveland Electric Illuminating

Company be, and hereby is granted to the extent provided

above and denied in all other respects. It is, further,

ORDERED, That the rehearing application filed

August 11, 1980, by the City of Cleveland be, and hereby

is granted to the extent provided above and denied in all

other respects. It is, further,

ORDERED, That the rehearing application filed

August 8, 1980, by the Office of Consumers’ Counsel be,

and hereby is denied. It is, further,

ORDERED, That the rehearing application filed

August 8, 1980, by Senior Citizens, et al., be, and hereby is

granted to the extent provided above and denied in all

other respects. It is, further,

ORDERED, That the rehearing application filed

August 7, 1980, by the Industrial Electricity Consumers, be

and hereby is denied. It is, further,

ORDERED, That the rehearing granted to consider

the issues identified above be, and hereby is scheduled to

commence at 9:30 A.M. on Wednesday, October 8, 1980,

at the offices of the Commission, 375 South High Street,

Columbus, Ohio. It is, further,

1-8

Rehearing Entry, PUCO Case No. 79-537-EL-AIR

ORDERED, That copies of this Entry be served upon

all parties of record.

THE PUBLIC UTILITIES COMMISSION OF OHIO

/s/ Wu11am Newcoms

( Chairman )

/s/ Svermen A. Reuiy

/s/ Micuart DetBane

( Commissioners )

Company for Authority to Amend Case No.

Filed { 79-537-EL-AIR

the City of Cleveland, Ohio Passed Case No.

Ordi- F 19 774-FL-CMR

filed by the Cleveland Electric Iuminating Company pur-

J-2

Opinion and Order, PUCO Case No. 79-537-EL-AIR

suant to Section 4909.34 Revised Code; the Staff Report

of Investigation issued pursuant to Section 4909.19 Re-

vised Code; having appointed its attorney examiner, Barth

E. Royer, pursuant to Section 4901.18 Revised Code to

conduct a public hearing and to certify the record thereof

directly to the Commission; the testimony and exhibits

introduced into evidence at the public hearing commencing

April 2, 1980, and concluding May 22, 1980; its prior

Entries and Orders in these dockets; and being otherwise

fully advised in the premises and in compliance with Sec-

tion 4903.09 Revised Code, hereby issues its Opinion and

electric light company within the definitions of Sections

J-3

Opinion and Order, PUCO Case No. 79-537-EL-AIR

effect the Iuminating Company's existing rates for service

within that municipality for a two-year period commencing

June 19, 1980. The company filed a complaint and appeal

from said ordinance pursuant to the provisions of Section

4909.34 Revised Code on August 31, 1979. By Entry of

September 26, 1979, the Commission determined that the

|

4

T

JA

x (SetTY EET Gas

: a He He

HUH eee HAH

HG lil a

: tit THE Hi i

it Mr ‘vl ras

AL ee eta a

) iat : an ett i

at ie lal

fue sen

Bi tietgrcrg reel ice ite

J-46

Opinion and Order, PUCO Case No. 79-537-EL-AIR

J-7

Opinion and Order, PUCO Case No. 79-537-EL-AIR

its rehearing entry of October 5, 1979, for a review of the

reasonableness of the rates contained therein in the con-

text of the pending rate proceedings. We will address the

street lighting matter through a separate opinion.

JURISDICTIONAL ALLOCATIONS

In assigning rate base and demand-related expenses

J-8

Opinion and Order, PUCO Case No. 79-537-EL-AIR

in the past, the test-year data, as the staff points out, shows

a leveling of the monthiy peaks (S.R., pp. 4-5, Tr. XX, p.

117). The lowest actual 1979 monthly peak (October)

was 87 percent of the highest monthly peak (July) (S.R.,

pp. 4-5). In six other months, the peak was in excess of 95

percent of the annual peak ( App. Ex. 6C ). When the 1979

monthly peaks are plotted graphically, it is evident that

the peaks have become hills and that the valleys have

filled in (Tr. XX, p. 117). If the Commission limits its

analysis to this data, it is clear that the staff's 12-month

coincident peak method should be preferred. Indeed, this

is the method applicant uses before the Federal Energy

Regulatory Commission, although, in fairness, it should

be noted that the FERC apparently now requires the use

of the 12-month method (S.R., p. 5, Tr. XV, p. 13).

Applicant attempts to justify its continued use of the

two peak method by relying on estimates of the 1980

summer and winter peaks which, it contends, more ac-

curately portray expected conditions. This novel approach

is attended by several significant problems. First, from a

conceptual standpoint, there should be some matching of

the data sets involved in the determination of the alloca-

tion ratios and the property and expenses to which they

are to be applied. After all, the purpose of the exercise

is to assign existing plant based on existing demand, not

to allocate future plant constructed to serve some future

level of demand. However, quite apart from this theoreti-

cal consideration, is the question of the reliability of ap-

plicant’s projections. The company attacks the staff method

by claiming it does not adequately consider normal weath-

er conditions (Tr. XX, pp. 113-115), an assumption auto-

matically taken into account in applicant's forecast. No

one disputes that temperature is a significant factor but

there are also other factors to be assessed such as the

level of economic activity ‘n the service territory, the

j-9

Opinion and Order, PUCO Case No. 79-537-EL-AIR

availability of the natural gas heating alternative, the im-

pact of conservation efforts, the effect of rapidly increas-

ing electric rates, and the track record of the company in

predicting peak loads. On balance, the Commission does

not believe that the test year data relied on by the staff

is so unrepresentative as to yield an unreasonable result.

Finally, we come to applicant's complaint that the staff

method does not adequately consider daily operating

characteristics because ten of the twelve monthly peaks

were daytime peaks (App. Brief, pp. 27-28). Applicant

attaches great significance to figures indicating that its

daily load exceeds 90 percent of the daily peak for fifteen

to nineteen hours on an average weekday basis (Tr. XV,

p. 14). Because its projected winter peak is an evening

peak, applicant contends that its method more properly

weights the evening load’s contribution to capacity re-

quirements. This argument loses sight of the fact that

both methods are peak responsibility methods and have

nothing whatever to do with load duration. If applicant

believes this diversity factor to be of such critical impor-

tance, the company should employ an allocation method

specifically designed to recognize it rather than risk using

a method which, in theory, could have resulted in the

selection of two daytime peaks, thereby losing the evening

load’s contribution in its entirety. In fact, had applicant

used calendar 1979 data, this would have been the case

(App. Ex. 6C). The Commission does not believe that the

staff method, which at least affords twelve measurements

instead of only two, can be faulted on this score.

In light of the foregoing discussion, the Commission

is of the opinion that the staff’s 12-month method should

be adopted for purposes of these proceedings. Although

we do not view the fact that the FERC mandates the use

of this method as being in any way controlling for the

purposes at hand, there is a certain comfort in the sym-

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Opinion and Order, PUCO Case No. 79-537-EL-AIR

Jurisdictional Rate Base

(000's Unmitted)

Applicant! —_Staff

Plant In Service ____ . $1,889,583 $1,876,927

Depreciation Reserve ........... (464,002) (466,049)

Net Plant In Service $1,424,981 $1,410,878

CWIP 95,501 91,521

Working Capital 128,394 62,565

Deferred Taxes and Tax Credits ___. (25,687 ) (79,215)

Jurisdictional Rate Base $1,623,189 $1,486,049

‘App. Rev. Sched. B-1

*Staff Ex. 7, Appendix D, Rev. Sched. 7.1

The difference between the respective plant in service

determinations of the applicant and the staff is, in part,

attributable to the difference in the allocation methodolo-

gies employed. There are, however, additional reasons for

the discrepancy in these figures which must be explored,

as well as other related issues arising from intervenors

objections which must be considered.

Land and Land Rights:

As a part of its investigation in these proceedings, the

Commission staff reviewed the company’s land accounts

in order to assure that the real property proposed for inclu-

sion in rate base satisfied the statutory used and useful

Similar staff analyses in prior cases involving

this company have resulted in some transfers to future

use or non-utility property accounts, and the staff inspec-

tion of additional parcels ir. -onnection with the cases now

before us has again produced a recommendation that the

rate base be adjusted (S.R., pp. 21-22). Specifically, the

staff concluded that a deduction in the amount of $368,938

was appropriate based on its finding that three ash disposal

J-12

Opinion and Order, PUCO Case No. 79-537-EL-AIR

sites associated with the East Lake plant were no longer

used and useful and its opinion that the acreage at the

Inland substation and Strongsville service center was in

excess of that reasonably required for utility operations

(S.R., p. 21; $.R., Sched. 8.2; Staff Ex. 2, pp. 8-11). Appli-

cant objected to the deduction from rate base of the origi-

nal cost dollars represented by these parcels ind, through

its witness Kemper, presented evidence in support of its

position that the property in question was used and useful

at date certain (App. Ex. 3A, pp. 4-7).

The staff excluded the Vine, Syracuse A, and Syracuse

B ash disposal sites based on its conclusion that the capacity

of these areas to receive fly ash had been exhausted. Appli-

cant points out that one of the sites can still accommodate

fly ash and is also being used to store cinders which are

eventually sold to municipalities (App. Ex. 2A, p. 4). The

Commission agrees that the value of this parcel, $25,499,

must be restored to rate base. The Commission does not

agree, however, that the other two ash disposal sites con-

stitute used and useful property as contemplated by the

statute. Applicant acknowledges that these two parcels are

filled to capacity, but argues that they are still satisfying

one of their original purposes, holding fly ash. Further, the

company claims that the sites have little resale value and,

because land is not depreciable property, there is no way

that any cost recovery or return can be realized unless the

parcels are included in rate base. There is no merit in

either of these arguments. Property can only be considered

used and useful if it is utilized in providing service. The

record is clear that the two parcels in question can no

longer receive fly ash; thus, they do not meet this require-

ment. Moreover, the fact that the parcels may have limited

resale value is totally irrelevant. Once the property has

been found not to be used and useful, it goes without

saying that ratepayers cannot be required to contribute

toward a return on it. The Commission, therefore, accepts

J-13

Opinion and Order, PUCO Case No. 79-537-EL-AIR

the staff's rate base adjustment for these two ash disposal

sites.

The staff's proposed deductions for excess land at the

Inland substation and the Strongsville service center pre-

sent much closer questions (Staff Ex. 2, pp. 10-11). The

Commission has previously recognized that there are a

number of factors which must be considered in evaluating

adjustments involving the elimination of minor portions

of land parcels on the theory that the total acreage at a

site is above that reasonably required to support a given

installation (Ohio Edison Company, Case No. 78-1567-EL-

AIR, et al. [January 30, 1980]). Obvious practical con-

straints exist upon obtaining precisely the acreage neces-

sary for a particular operation, and there is a possibility

that severance damages would actually produce a net detri-

ment to the ratepayer if a somewhat smaller parcel had,

in fact, been acquired. Although the site maps introduced

by the applicant might appear to suggest the need for this

type of analysis in this case (App. Ex. 3A, pp. 28-29), the

Commission finds the critical evidence in this area to be

the admissions of applicant's own witness with respect to

the company’s specified plans for the future use of much

of the area excluded by the staff at these two locations

(App. Ex. 3A, pp. 5-6). Given this state of the record, we

conclude that the dollar associated with these areas should

properly be assigned to Account 105 (Land Held for Fu-

ture Use) until such time as the planned construction is

accomplished. Applicant's objection to the staff adjust-

ments should be overruled.

Beaver Valley Common Facilities:

In arriving at its recommended rate base for purposes

of these proceedings, the Commission staff excluded from

plant in service the amount of $8,894,241 which repre-

sents applicant’s share of the common facilities at the

Beaver Valley nuclear generating plant (S.R., p. 22; S.R.,

J-14

Opinion and Order, PUCD Case No. 79-537-EL-AIR

Sched. 8.1). Because applicant's ownership interest in

Beaver Valley is limited to Unit No. 2, a unit still under

construction, the staff concluded that it would be improper

to consider the company’s share of the common facilities,

although completed in connection with the first Beaver

Valley unit, as used and useful property until such time

as Unit No. 2 is placed in service. Applicant objects to the

staff's treatment.

The Commission has had occasion to consider this

precise question in a number of its recent decisions, includ-

ing that issued in this company’s last rate case (Cleveland

Electric Mluminating Company, Case No. 78-677-EL-AIR

[May 2, 1979]; Ohio Edison Company, Case No. 77-1249-

EL-AIR [November 17, 1978]; Toledo Edison Company,

Case No. 79-143-EL-AIR [February 29, 1980]). We have

repeatedly held the staff adjustment to be proper, and

nothing presented in this record would persuade us to alter

that view (App. Ex. 4, pp. 43-44). Although the Com-

mission recognizes that FERC accounting principles re-

quire that common facilities be classified as plant in service

at the time the first unit is placed in service, this does not

change the fact that the common facilities in question do

not satisfy the statutory criteria for rate base eligibility

(Section 4905.15(A)(1) Revised Code). Cleveland Elec-

tric Illuminating Company does not own Beaver Valley

Unit No. 1. Although applicant's customers may, from time

to time, receive power from the first Beaver Valley unit by

virtue of certain CAPCO transactions, this does not render

the portion of the common facilities assignable to Unit No.

2 used and useful property for ratemaking purposes. This

objection is again overruled.

Applicant contends that if the common facilities are

to be eliminated from rate base, consistency requires that

the Commission direct the company to reclassify this prop-

erty as plant held for future use, to cease accruing depre-

ciation, and to resume the accumulation of AFUDC until

J-15

Opinion and Order, PUCO Case No. 79-537-EL-AIR

such time as Unit No. 2 is transferred to plant in service

(App. Ex. 4A, p. 49). The staff has also recommended a

reclassification of the property (S.R., p. 22). In the Toledo

Edison case, supra, the Commission agreed that the prin-

ciples underlying the exclusion of the common facilities

from rate base dictate that the property be reclassified

for Ohio regulatory purposes and directed that depreciation

accruals be stopped. The Commission did not reach the

question of the resumption of AFUDC in the context of

that decision, but believes that such a measure would be

inconsistent with the classification of the property as plant

held for future use. The Commission, therefore, orders

applicant to reclassify the Beaver Valley common facilities

and to cease accruing depreciation. Applicant's proposal

Davis-Besse Nuclear Plant:

Through their filed objections, intervenors City of

Cleveland and Senior Citizens et al., contend that appli-

cant’s share of the Davis-Besse nuclear plant, a generating

facility co-owned by Cleveland Electric Illuminating Com-

pany and Toledo Edison Company, should be excluded

from the rate base on the theory that the plant is not

“used and useful” within the meaning of that term as

employed in Section 4909.15(A)(1) Revised Code. The

Commission is on familiar ground in considering these

objections as the City of Cleveland advanced similar argu-

ments in the company’s last rate proceeding (Cleveland

Electric Illuminating Company, Case No. 78-677-EL-AIR

[May 2, 1979] ). The Commission's finding in that case that

Davis-Besse was properly includable in rate base has just

been affirmed by the Supreme Court (City of Cleveland

v. Public Utilities Commission, S.Ct. Case No. 79-1158

[July 9, 1980], 63 Ohio St. 2d [1980]). Although a

considerable portion of the record now before us is devoted

J-16

Opinion and Order, PUCO Case No. 79-537-EL-AIR

to this question, when the law and the evidence are sifted

out from the rhetoric and the statements of counsel, the

Commission once again comes to the same inescapable

conclusion. Davis-Besse must and should be included in

the rate base. This is a most difficult issue to address, not

because it presents a close question, but because much of

intervenors’ attack is so illogical as to defy analysis (See,

Tr. XXIII, pp. 73-81).

Rather than begin with counsel for the City of Cleve-

land’s repeated charge that Davis-Besse is a “white ele-

phant” that is unsafe and unreliable (City of Cleveland

Brief, p. 4), it may prove more fruitful to begin with an

unimpassioned look at the facts. No one, including com-

pany witnesses who were examined on the subject, dis-

putes the fact that the unit's 1979 performance was ex-

tremely disappointing (Tr. VIII, p. 67). The plant actually

produced only some 59 percent of its budgeted generation

during the test year (Senior Citizens Ex. 1). It exhibited

a unit capacity factor in 1979 of only 39.4 percent (City

of Cleveland Ex. 2L). Davis-Besse was forced off line 15

times during the test period, although in five of those

instances the duration of the outage was less than one

day (City of Cleveland Ex. 8). The principal reason for

the unit’s poor annual availability factor was the 103-day

shutdown mandated by the Nuclear Regulatory Commis-

sion in the wake of the Three Mile Island incident (City

of Cleveland Ex. 8). In terms of production expense, Davis-

Besse is by far the cheapest source of energy available to

the company (City of Cleveland Ex. 4). Despite the three

month outage referred to above and another extended

outage in December of 1979, the unit contributed over

1.6 billion Kwh to applicant's system generation during

the test year, roughly 10 percent of the company’s total

production (City of Cleveland Ex. 4). Where, in these

facts, is there support for the proposition that Davis-

Besse is not used and useful?

j-l7

Opinion and Order, PUCO Case No. 79-537-EL-AIR

Senior Citizens, et al., suggests that if the plant can-

not be excluded from rate base in its entirety, then, at

minimum, the Commission should eliminate a portion of

its value based on a calculation comparing its actual per-

formance to its expected performanc>. The contention that

forced outage rate during the test year. The proper re-

sponse is not the exclusion of all or part of the plant from

cisely the applicant and the staff have proposed in

this case (App. Ex. 1, Sched. 3.12; S.R., p. 12). The ap-

such an adjustment for ratemaking purposes

j-18

Opinion and Order, PUCO Case No. 79-537-EL-AIR

What the evidence does show is that in each instance

where a problem forced the unit off line, the problem was

identified, reported, and remedied to the satisfaction of the

Nuclear Regulatory Commission, the agency that does have

authority in this area. It is true that the NRC has ordered

a number of modifications, and that some of these have

been quite costly (Tr. XXIII, p. 130); but it must be re-

membered that the plant has been subject to NRC scrutiny

since the time it was on the drawing board and that it was

last case, the Supreme Court of Ohio issued its decision in

Consumers’ Counsel v. Public Utilities Commission, 58

Ohio St.2d 449 (1979). This case represented an appeal of

a Toledo Edison rate order ( Toledo Edison Company, Case

No. 76-1176-EL-AIR [June 9, 1979] ) wherein the Commis-

sion had determined that the Davis-Besse plant should be

considered used and useful and, therefore, includable m

rate base despite the fact that it had not been assigned

commercial operating status before the date certain. The

Commission based this conclusion on the fact that the unit

had been synchronized with the system and was producing

electricity, albeit through test generation, prior to date

certain. The Court reversed, finding as follows:

jJ-19

Opinion and Order, PUCO Case No. 79-537-EL-AIR

as support for the proposition that Davis-Besse should not

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the sake of argument that this statement is correct, how

would the exclusion of the plant from rate base do anything

but exacerbate these problems? The fact is that the capital

costs associated with the construction of all types of capac-

J-20

Opinion and Order, PUCO Case No. 79-537-EL-AIR

(Tr. VIII, p. 69). The relevant point is that the investment

in the plant has been made, the plant is providing service,

and the suppliers of the required capital are entitled to a

return on their investment.

There are other inconsistencies in intervenors’ argu-

exante Ghat chocill act op unnetiead. The City of Clovdaad

complains that it costs the ratepayers approximately

$800,000 per week for each week the plant does not oper-

ate (City of Cleveland Brief, p. 3). Which way does this

cut? We would have thought that this testifies to the bene-

fit of having Davis-Besse on the system. Then, there is the

suggestion by Senior Citizens, et al., that the uncertainties

associated with Davis-Besse increase risk, thereby driving

up investors’ return requirements (Senior Citizens Brief,

p. 21). We would merely inquire as to what impact on the

company’s cost of capital intervenor would anticipate were

the Commission te disallow any return on the tremendous

investment in this plant as it would have us do. Finally, we

come to the theory that if the Commission includes Davis-

Besse in rate base, the company will have no incentive to

seek legal redress for any losses occasioned by the alleged

defects in the design or construction of the unit or by the

alleged negligence of Toledo Edison personnel in managing

its operation. Senior Citizens’. et al., even suggests that if

the Commission recognizes Davis-Besse for ratemaking

purposes, such a step would afford a defense in any legal

action that applicant might maintain. These arguments are

totally without merit. In the first place, they assume that

the company has some actionable claim arising out of the

unit's admittedly poor performance. It would certainly be

improper for the Commission to engage in speculation in

this area, and even more improper to base a rate case de-

duction on the innuendo of intervenors’ attorneys. Detailed

contracts and agreements govern applicant's relationship

with those firms that constructed and operate Davis-Besse.

Intervenors should examine their provisions before spread-

J-21

Opinion and Order, PUCO Case No. 79-537-EL-AIR

ing these assertions on the record. The Commission cannot

deny applicant a return on this plant at this point in time

with the instruction that it go sue someone or other in

hopes thai it will recover something from them in the fu-

ture. If it should eventuate that applicant does obtain some _

recovery through litigation, whether involving Davis-Besse

or any other aspect of its operation, under circumstances

where customers are entitled to share in the benefits the

Commission will see to it that they are properly credited

(Ohio Power Company, Case No. 77-380-EL-FAC (Feb-

ruary 7, 1979); Ohio Power Company, Case No. 78-676-

EL-AIR [April 16, 1979] ). There is simply no basis in law

or fact for excluding all or part of the net original cost of

Davis-Besse from the rate base determined for purposes

of these proceedings.

Excess Capacity:

The Commission staff, as a part of its investigation in

these proceedings, examined applicant’s generating ca-

pacity to determine whether capacity exists which exceeds

that reasonably required to meet the company’s net peak

demand and afford a reasonable reserve margin. As a result

of this review, the staff concluded that applicant's produc-

tion system was not excessive (S.R., pp. 22-23; Tr. XXI,

pp. 114-120). Intervenors City of Cleveland and Senior

Citizens, et cl., object to the staff's finding, contending that

property is not used and useful. The short answer here

would be to simply point out that there is nothing in this

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J-22

Opinion and Order, PUCO Case No. 79-537-EL-AIR

once again set out the considerations which must be taken

into account in dealing with this question.

This so-called “excess capacity” issue has been before

the Commission time and time again in recent years in

cases involving almost all major electric companies subject

to our jurisdiction, including this applicant. (See e.g., Day-

ton Power and Light Company, Case No. 76-823-EL-AIR

[July 22, 1977]; Monongahela Power Com-zany, Case No.

76-824-EL-AIR [September 7, 1977]; Dayton Power and

Light Company, Case No. 78-92-EL-AIR [March 9, 1979];

and Cleveland Electric Illuminating Company, Case No.

78-677-EL-AIR [May 2, 1979]). One fact that has clearly

emerged from these cases, as it has from the record in the

instant proceedings, is that it is most inappropriate to mea-

sure the reasonableaess of existing capacity levels by a

simple comparison to some assumcd ideal reserve margin

(Tr. VIII, pp. 106-109; Tr. XXI, pp. 116-117). Reserve

requirements are company-specific, and what is reasonable

for one electric utility may not be reasonable for another

depending on factors such as unit sizes and generation mix.

Next, assuming appropriate reserve criteria can be estab-

lished, it must be recognized that in light of the extensive

lead times invclved in the construction of generating facil-

ities and the variety of factors which can influence load

growth, it is obviously unrealistic to assume that any utility

would have the forecasting capability which would allow

it to add capacity in the precise increments required to

maintain the theoretically appropriate margin. This prob-

lem is intensified by the large size of the units being added

today. Thus, the relevant inquiry is not whether the reserve

at any point in time matches some optimum margin, but

whether, given all those factors which can influence con-

struction and load growth, the company can be fairly said

to have acted imprudently in its capacity planning. As we

will discuss in more detail infra, there has been no showing

that this has been the case with respect to this applicant.

J-23

Opinion and Order, PUCO Case No. 79-537-EL-AIR

Finally, there is the conceptual problem which at-

tends a capacity adjustment based on the theory that a

portion of a company’s production capacity is not used

and useful. All applicant's generating stations, although

they may have been downrated or off line from time to

time, were in service meeting customer demand pursuant

to principles of economic dispatch during the test period.

Thus, each unit, standing alone, clearly would meet the

used and useful requirement. A percentage adjustment to

system capacity ignores the reality that such capacity is

comprised of individual units which represent actual

substantial dollar investments committed to assure that

adequate service can be maintained. As the Commission

stated in the Columbus and Southern decision cited above:

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Intervenors’ objections are, hereby, overruled.

Depreciation Reserve:

Section 4909.05(H) Revised Code requires that the

Commission determine the proper and adequate reserve

for depreciation to be deducted from the original cost of

applicant’s used and useful property. The staff, in the

course of its investigation, tested applicant's booked

ratemaking purposes (S.R., pp. 23-24). The staff did take

exception, however, to a retroactive adjustment to the

the

performed by applicant in order to reflect

j-%4

Opinion and Order, PUCO Case No. 79-537-EL-AIR

mission in Determination of Depreciation Charges, Case

No. 77-1368-EL-UNC (December 12, 1979). The Com-

Construction Work In Progress:

J-25

Opinion and Order, PUCO Case No. 79-537-EL-AIR

allowance was subsequently reduced to $95,501,269 in

light of applicant's acceptance of a staff adjustment which

reclassified 48 of the job orders based on a finding that the

construction in question was complete and the property

in service at date certain (App. Ex. 3A, p. 28; App. Rev.

Sched. B-1). The staff recommends a jurisdictional al-

lowance of $91,521,464 (S.R.., pp. 24-25; S.R., Sched. 10).

the staff's recommendation as reasonable (O.C.C. Ex. 1,

pp. 7-8); but the City of Cleveland and Senior Citizens,

et al., contend that there should be no construction work

in progress allowance authorized in these cases.

The claims of the intervenors opposing any allowance

(See Ohio Edison Company, Case No. 78-1567-EL-AIR

[January 30, 1980] and cases summarized therein). Senior

Citizens’ contention that the statute creating the allow-

ance is unconstitutional has been definitively laid to rest

(Consumers’ Counsel v. Public Utilities Commission, 58

Ohio St. 2d 108 [1979]), and its charge that the Com-

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Cleveland and Senior Citizens, et al., urge the Commission

J-26

Opinion and Order, PUCO Case No. 79-537-EL-AIR

to ignore this substantial capital investment in establishing

rates in this case. Given our perception of the purpose of

the statutory provision allowing consideration of construc-

tion work in progress as explained in Columbus and South-

ern Ohio Electric Company, Case No. 77-545-EL-AIR

(March 31, 1979), and recently reiterated in Ohio Edison,

supra, we would think that there would be less room for

argument concerning the propriety of including Mansfield

Unit No. 3 than any other of the items for which applicant

has requested recognition. In light of the Commission’s

rejection of intervenors’ excess capacity theory and con-

sistent with our prior holdings with respect to proposed

“overwhelming need” standards, the Commission over-

rules these objections (Dayton Power and Light Com-

pany, Case No. 76-823-EL-AIR [July 22, 1977]; Cleve-

land Electric Mluminating Company, Case No. 78-677-

EL-AIR [May 2, 1979]).

As indicated above, the difference in the applicant

and staff construction work in progress recommendations

is relatively minor, and part of the remaining disparity

is attributable to the difference in the allocation methods

for each of these items is set out in the testimony of ap-

plicant’s witness Kemper (App. Ex. 3A, pp. 10-28). Given

the obvious constraints which preclude the Commission

from proceeding with an individual analysis of each one

of these job orders within the confines of this written

opinion, we believe it reasonable to resolve the matter

through a more general discussion. In light of the fact

nnn De eonay Senne Oe Sa

J-27

Opinion and Order, PUCO Case No. 79-537-EL-AIR

statute. However, the staff has inspected each of these

items and has offered additional reasons why they should

not be considered (Staff Ex. 1, pp. 3-18). Nothing in this

record would persuade us that the allowance recom-

mended by the staff is unreasonable.

Applicant begins its criticism of the staff's findings

by suggesting that the Commission should, as a matter of

policy, recognize in the allowance any expenditures re-

lating to efforts to improve power plant productivity or

required by various governmental agencies for environ-

mental or safety reasons (App. Ex. 3A, p. 9). The un-

fortunate negative implication of this recommendation is

that if the Commission fails to adopt these criteria it is

unconcerned about applicant's productivity, the environ-

ment, or the public safety. We trust that all concerned

will recognize this smoke screen for what it is and will

realize that the real issue here is whether or not the ex-

penditures represent qualifying construction projects un-

der the statute and our past decisions.

Review of the testimony of staff witness Weiss indi-

cates that the reasons underlying the staff's exclusion of

the projects now in issue fall in four basic categories (Staff

Ex. 1, pp. 3-18). Some were excluded because the staff

found them to be less than 75 percent complete. Several

were eliminated upon a finding that they represented a

purchase rather than a construction project. Others were

excluded because they were of a replacement nature.

Finally, there were exclusions based on the conclusion

that the expenditures involved were more properly as-

sociated with maintenance rather than construction. In

several instances, the exclusion was tied to more than one

of these reasons. Each one of the identified criteria has

been recognized by the Commission in past cases as repre-

senting an appropriate standard by which to test the

eligibility of specific expenditures for inclusion in the con-

struction work in progress allowance (S.R., p. 25). More-

over, the Commission has also pointed out that there is

J-28

Opinion and Order, PUCO Case No. 79-537-EL-AIR

judgment involved in applying every one of these tests.

Despite the complaints from those who would have the

Commission establish rigid rules to be strictly applied in

every case, we continue to believe that judgment must

play an important role in determining what evidence is

properly considered in authorizing an allowance for con-

struction work in progress in a given case.

For purposes of illustration, consider the Commis-

sion’s determination that items which constitute purchases

are not construction projects within the meaning of the

statute. The logical foundation of this standard is so clear

that an explanation is almost superfluous. An item ac-

quired by a utility through a single-payment transaction

is either in service at date certain and, therefore, in rate

base, or it is not, and no return may be earned on it. A

purchase is not construction, nor is it a project. Appli-

cant’s job order no. 50030, a caterpillar tractor-scraper

acquired for use at one of the company’s power plants, is

a clear-cut example of a purchase (App. Ex. 3A, p. 23). It

was properly excluded by the staff (Staff Ex. 1, p. 14). But

compare this situation to job order no. 50228, a crawler

tractor purchased and delivered prior to date certain but

which required additional company labor before it was

ready for use (App. Ex. 3A, p. 22; App. Ex. 3B). Does

this change its essential nature from a purchase to a con-

struction project? The Commission would agree with the

staff conclusion that it clearly did .ot (Staff Ex. 1, p. 13),

but there is now an element of judyment involved.

This same element of judgment is also present to

some degree in each of the other tests the staff employed.

The staff's finding that several of the job orders proposed

for inclusion by applicant were not 75 percent complete

followed from the staff's opinion that these items, because

of their scope and purpose, should be examined individu-

ally and not considered as a part of a larger project as the

company had suggested (Staff Ex. 1, p. 7). The exclusion

J-29

Opinion and Order, PUCO Case No. 79-537-EL-AIR

of items on the ground that they represent replacement

projects or maintenance work also requires that a view be

taken as to the basic characteristic of the expenditure

(See Toledo Edison Company, Case No. 79-143-EL-AIR

[February 29, 1980]). In each instance, the Commission

believes the treatment recommended by the staff to be

consistent with the intent of the statute and, therefore,

finds that the construction work in progress allowance

proposed by the staff should be adopted for purposes of

these proceedings. Those items excluded are not properly

as major new construction when the amount of

the obligated capital involved is considered in connection

with time period for which it has been committed and

the purpose to which it has been put. Applicant's objec-

tion is overruled.

Working Capital:

The applicant, the staff, and Consumers’ Counsel

each proposed an allowance for working capital to be

included in the rate base valuation in accordance with

the provisions of Section 4909.15(A)(1) Revised Code.

All three estimates were derived through the use of the

formula approach, but there are significant differences

between the results of the respective calculations. Appli-

cant requests an allowance of $128,393,775 (App. Rev.

Sched. B-1), while the staff's 1ecommended allowance is

$62,865,000 (Staff Ex. 7, Rev. Sched. 7). Consumers’

Counsel's calculation resulted in a proposed allowance of

$56,935,000 (O.C.C. Ex. 1, Rev. Sched. JTC-2). Issues

exist with respect to each element of the formula which

we will address, in turn, below.

The difference in the cash component of the formula

as presented by the parties is, in part, the product of the

sponsors’ respective positions on various expense issues

and, in some measure, created by the difference in alloca-

tion methods. The most significant difference, however,

J-30

Opinion and Order, PUCO Case No. 79-537-EL-AIR

arises from the fact that the applicant failed to exclude

fuel expense from operation and maintenance expenses

in computing its proposed cash allowance. Staff witness

Hanna and Consumers’ Counsel witness Chapski both

believe this deduction to be appropriate (Staff Ex. 7, p.

12; O.C.C. Ex. 1, pp. 12-13). Much of the debate on this

point has centered on applicant's complaint that fuel ex-

pense was not deducted under the original formula as

propounded by the FPC (now FERC) (App. Brief, p.

12). Be that as it may, it is clear that this Commission

has consistently excluded fuel expense under its version

of the formula for some years, and, in most instances,

without objection from the utility involved (See, e.g.,

Ohio Edison Company, Case No. 78-1567-EL-AIR [Jan-

uary 30, 1980]). The Commission has cited as one of the

virtues of the formula method for determining a working

capital allowance that it assurcs evenhanded treatment

among rate applicants (United Telephone Company of

Ohio, Case No. 72-995-Y [September 9, 1974]). It has

never suggested that the formula does more than approxi-

mate the result of a full-blown lead-lag study. If appli-

cant wishes to depart from this formula on the grounds

that it does not properly recognize one item or another,

we suggest that it support this claim with a properly con-

ceived lead-lag study which examines all the timing dif-

ferences involved between when expenses are incurred

and payments are received. Applicant’s objection is over-

ruled

The applicant and the staff utilized the date certain

balance for purposes of determining the materials and

supplies component of the working capital formula. Con-

sumers’ Counsel witness Chapski used the average of thir-

teen monthly balances in arriving at his recommendation

with respect to this component, a technique approved by

the Commission on numerous past occasions, including

this company’s last rate case, on the grounds that it may

J-31

Opinion and Order, PUCO Case No. 79-537-EL-AIR

produce a more representative allowance. The staff has

indicated that one of the reasons it utilized the date cer-

tain balance in this case was that actual test-year data was

not available at the time of its audit (Tr. XXI, pp. 174-175).

This data is now available to the Commission through

Senior Citizen’s Ex. 10, and the Commission concludes

that the thirteen monthly balance method may properly

be adopted utilizing the information contained therein.

Jurisdictional materials and supplies calculated on this

basis total $19,034,217. This amount must then be ad-

justed to eliminate those materials and supplies held for

new construction, extensions and additions in accordance

with the decision of the Supreme Court in City of Cincin-

nati v. Public Utilities Commission, 160 Ohio St. 2d 395

(1954), and the consistent practice of the Commission in

implementing that decision. Applicant objects to this ad-

justment, claiming that the materials and supplies inven-

tory is not maintained with a view as to the ultimate

purpose to which individual items may be put (Tr. II, p.

83). This may well be true, but it certainly does not

preclude an after-the-fact analysis of the use to which the

items are actually put (S.R., Sched. 11A). The Commis-

sion finds the staff adjustment to account for this consider-

ation to be reasonable and proper in all respects. Applica-

tion of this adjustment factor to the inventory as deter-

mined above produces an allowance for materials and

supplies of $16,491,246 which we deem reasonable for

purposes of determining the working capital allowance to

be authorized in these proceedings.

The fuel inventory allowance is composed of three

separate items: oil, coal, and deferred nuci. .» fuel. Dif-

ferences exist in each of these areas. Applicant based its

proposed allowance for oil on a targeted capacity supply

level of 90 percent (App. Ex. 5A, p. 13). The staff and

Consumers’ Counsel are in general agreement that 78 per-

cent of capacity represents a more reasonable inventory

J-32

Opinion and Order, PUCO Case No. 79-537-EL-AIR

level in light of the company’s actual experience (S.R., p.

25; Staff Ex. 6, p. 7; O.C.C. Ex. 1, p. 11). Applicant's wit-

ness Chopp was unable to explain the derivation of the

the 90 percent target, nor was he aware if 90 percent of

tank capacity had ever actually been achieved (Tr. II, pp.

98-100). It was certainly not achieved in the test year.

Under these circumstances, the Commission believes the

staff's proposed allowance for the oil inventory is on much

firmer footing, and we will accept the staff's recommenda-

tion with respect to this component of the fuel inventory

allowance.

The determination of the proper allowance for the coal

inventory has been a subject attended by considerable de-

bate in these proceedings. Applicant originally based its

proposed allowance on the assumption that a 63.33-day

supply represented a reasonable inventory balance ( App.

Ex. 5, pp. 16-17). This number was derived through what

can only be described as a rather primitive analysis based

on the assumptions that the company maintains a 50-day

supply in a normal year and a 90-day supply during a year

in which a UMW contract is up for renewal. As the miner's

contract runs for a three-year period, the calculation as-

sumed two years at the 50-day level and one year at the

90-day level producing a weighted average of 63.33 days.

Cross-examination by counsel for Senior Citizens, et al.,

quickly pointed up the flaw in this logic, as it is apparent

that even if one accepts the validity of the general ap-

out the third year, but would gradually be built up in

anticipation of a possible strike and would dissipate as the

threat of the strike passed or as the reserves were called on

in the event a work stoppage actually occurred. Mr. Chopp

conceded the point (Tr. III, pp. 55-57). This prompted

applicant to revise its calculation, this time assuming a

50-day supply in the first two years and a gradual build up

and decline in the third year. The resulting weighted aver-

age became 55.3 days (App. Ex. 5G), and, based on this

J-33

Opinion and Order, PUCO Case No. 79-537-EL-AIR

calculation, the company now claims a 55-day coal inven-

tory to be a reasonable basis for establishing the coal allow-

ance. Rather than engage in this speculation, both staff

witness Hefner and Consumers’ Counsel witness Chapski

pegged their recommended allowances to the actual exper-

ience of the company. Mr. Hefner, based on date certain

data, a review of the monthly balances, and consideration

of applicant’s budget as it related to coal procurement con-

cluded that a 45-day supply was reasonable (S.R., p. 25;

Staff Ex. 6, pp. 6-7; Tr. XXI, pp. 48-49). Mr. Chapski

simply relied on the average of the thirteen monthly bal-

ances, December, 1978, through December, 1979, in arriv-

ing at his recommended allowance which is slightly below

that proposed by the staff in terms of actual dollars (O.C.C.

Ex. 1, p. 11).

Applicant challenges the conclusions of these witnesses

on several counts. The company argues that the use of

test-year data is inappropriate, asserting that coal inventory

levels in 1979 were lower than normal due to uncertainties

arising from questions as to what low sulphur-high sulphur

coal mix would be permitted ( App. Ex. 5A, p. 14) and due

to the fact that the current UMW contract was only in its

second year. Applicant presented an exhibit showing that

the monthly balances from the three-year period 1976

through 1978 averaged 55 days (App. Ex. 5B). However,

when the 1979 data is added to this table a somewhat

different picture emerges (Tr. VI, pp. 69-70). Although

applicant claims that test-year inventory levels were lower

than normal, the 1979 average of the monthly balances, 37.4

days, is actually higher than the 1978 average of 36.5 days

(App. Ex. 5B). These numbers are both quite different

from the 50-day supply applicant contends should be asso-

ciated with the years where no strike is imminent. Cer-

tainly a plausible interpretation of this data is that the

company considered the inventory remaining at the con-

clusion of in March of 1978 to be reasonably

the strike

adequate under the circumstances. If one employs appli-

J-34

Opinion and Order, PUCO Case No. 79-537-EL-AIR

cant’s three-year weighted average approach using actual

data rather than the assumed inventory levels utilized by

the company, the results confirm the reasonableness of the

staff's recommended allowance. The average monthly bal-

ance for 1977, the year of the strike, constituted a 66.3-day

supply. Adding this to twice the 1978 average of 36.5 days

and dividing by three yields a 46.4 day supply, a far better

match with the staff's 45-day supply than with the com-

pany’s 55-day recommendation.

Applicant's witness Chopp described the 45-day supply

recommended by the staff as being “dangerously close” to

the 40-day level specified by the Commission in Case No.

77-1139-EL-COI as the point at which the Company is per-

mitted to abandon economic dispatch (App. Ex. 5A, p. 14).

Taken at face value, this might be cause for concern; but

the fact is that the company never had a 40-day monthly

balance from March of 1978 through July of 1979 (App.

Ex. 5B). As the staff points out on brief, the 40-day trigger

solved. Under the leasing agreement between the owners

of Davis-Besse and the lessor of the nuclear fuel for the

plant, applicant was required to begin payments for nu-

clear fuel in November 1976, whether or not the plant

J-35

Opinion and Order, PUCO Case No. 79-537-EL-AIR

(App. Ex. 5A, p. 12). The jurisdictional value of the in-

vestment in the fuel core is, of course, properly included

in the working capital allowance. This balance is subject

to reduction as payments are made to the lessor. Proper

accounting dictates, however, that the nuclear fuel be ex-

pensed at the time when the fuel is consumed, even though

the lease payments are actually made monthly under the

terms of the contract (App. Ex. 5, p. 10). Thus, those

payments made prior to the commercial operation of the

plant are being amortized over the actual fuel burn-up

(App. Ex. 5, p. 15). Applicant charged AFUDC on the

payments made during this period (App. Ex. 5A, p. 12).

The staff recommends that this AFUDC component,

$228,835, be eliminated for purposes of determining the

working capital allowance, contending that AFUDC was

not properly chargeable on these payments as they do not

represent construction costs of the type subject to AFUDC

accumulation (Staff Ex. 7, p. 21; Staff Ex. 3, Rev. Sched.

11). The Commission agrees that this component should

be eliminated. In so finding, we do not in any way suggest

that applicant acted imprudently in entering into the leas-

ing arrangement at the time it did, but we do not believe

it consistent with the concept of a reasonable working

capital allowance to charge ratepayers with these additional

costs. Applicant’s objection is overruled.

The applicant and the staff relied on the date certain

balance for purposes of determining the allowance for

deferred nuclear fuel (App. Ex. 1, Sched. B-5.1; Staff Ex.

3, Rev. Sched. 11). Consumers’ Counsel used the average

of thirteen monthly balances, which produced a somewhat

lower figure (O.C.C. Ex. 1, p. 11). Senior Citizen's et al.,

objects to these methods, arguing that they improperly

charge ratepayers for increases in the balances caused by

the extended outage of Davis-Besse in the late spring and

early summer of last year (Senior Citizens Brief, pp. 9-10).

As explained above, because nuclear fuel is expensed only

when it is actually consumed, the balance will increase

J-36

Opinion and Order, PUCO Case No. 79-537-EL-AIR

under the operation of the lease in those periods when

Davis-Besse is not on line. As intervenor correctly ob-

serves, the date certain balance is the second highest of the

test-year monthly balances (App. Ex. 5E). As other aspects

of test-year operations have been normalized so as to

protect ratepayers from charges attributable to the unit's

poor performance, we see no reason why the allowance

for deferred nuclear fuel should not be accorded similar

treatment. Applicant's witness Chopp agreed that there was

no theoretical difference between such an adjustment and

those made in other areas (Tr. VI, pp. 67-68). The evi-

dence now before us will not permit the Commission to

precisely calculate such an adjustment, but we believe a

reasonable proxy for a normalizing adjustment of this type

to be to establish the allowance for deferred nuclear fuel

with reference to the average of the thirteen monthly

balances adjusted so as to eliminate the three months of

the TMI-related shut down (App. Ex. 5E). The results

of this calculation produce a jurisdictional average of the

ten remaining monthly balances of $7,013,586. The Com-

mission is of the opinion that this represents a reasonable

allowance for deferred nuclear fuel.

The largest single cause of the disparity between the

applicant's working capital recommendation and that pro-

posed by the staff and Consumers’ Counsel stems from the

fact that applicant failed to include an offset to the work-

ing capital allowance to reflect the availability of accrued

taxes as required by the decision of the Supreme Court in

Cleveland Electric Illuminating Company v. Public Utilities

Commission, 42 Ohio St. 2d 403 (1975). Applicant has

presented nothing new in support of its objection to the

offset; in fact, it has presented almost nothing at all. Con-

sumers Counsel's objection that the offset should include

FICA taxes has also been disposed of by prior Commission

decisions (See Columbus and Southern Ohio Electric

Company, Case No. 77-545-EL-AIR [March 31, 1978]).

The tax offset proposed by the staff is hereby approved.

1-37

Opinion and Order, PUCO Case No. 79-537-EL-AIR

The final area of disagreement relates to the deduction

for customer deposits required by the decision of the Su-

preme Court in Consumers’ Counsel v. Public Utilities

Commission, 58 Ohio St. 2d 108 (1979). Applicant, consis-

tent with its apparent theory that precedent should be

ignored if it works to the company’s disadvantage, made

no such deduction. The staff, in accordance with prior

Commission decisions, treated the jurisdictional customer

deposit balance as an offset to working capital, while Con-

sumers Counsel contends that it should be subtracted

directly from rate base. As the Court indicated in the Con-

sumers Counsel decision, supra, the practical effect of

either technique is the same. The Commission finds the

deduction of $833,000 proposed by the staff to be appro-

priate, and will express the deduction as a working capital

offset for purposes of these proceedings.

The following schedule presents in summary form the

Commission's determination of the allowance for working

capital to be included in rate base for purposes of these

proceedings. These figures take into account revisions

necessary to reflect the disposition of those other issues

which affect the allowance.

Jurisdictional Working Capital Allowance

(000’s Omitted)

Cash Element

(% of Adjusted Operation and

Maintenance Expense,

Fuel and Purchased Power) —_ $ 20,335

Materials and Supplies 16,491

Fuel Inventory

(Including Deferred Nuclear Fuel) — 47,012

Tax Offset

(% of Adjusted Taxes, excluding

FICA and deferred FIT) —___ (20,480)

Customer Deposits (833)

Jurisdictional Working Capital Allowance $

J-38

Opinion and Order, PUCO Case No. 79-537-EL-AIR

Accumulated Deferred Taxes and Tax Credits:

In every rate order issued since interperiod tax alloca-

tion became permissible under Section 4909.15( A) (4) Re-

vised Code, this Commission has reduced the rate base of

normalizing utilities by an amount equal to the balance of

accumulated deferred taxes and tax credits which may be

deducted without loss of benefit under the applicable pro-

visions of the Internal Revenue Code. Although this prac-

tice is consistent with the customary regulatory treatment

of these items throughout the country (Tr. XI p. 3), the

Commission continues to be subjected to theories ad-

vanced by applicant utilities as to why such an adjustment

is improper or inappropriate. Mercifully, the barrage has

slowed somewhat of late, and in this case applicant has

primarily directed its objection to the amount of the de-

duction rather than to its propriety.°

The staff proposes a reduction to rate base in an

amount equal to the date certain balance of jurisdictional

accumulated deferred income taxes associated with liberal-

ized depreciation (Account 282) and accelerated amorti-

zation (Account 281), and the date certain accumulated

deferred investment tax credits (Account 255, 3 and 4 per-

cent components only). (S.R., p. 26). The total deduction

is $79,215,257 (S.R., Sched. 12). Applicant also reduced

rate base to reflect these balances, but restricted its origi-

* Applicant did again raise the now familiar “Congressional intent”

argument considered and rejected by the Commission in the

"s last rate case (Case No. 78-677-EL-AIR [May 2,

1979]). The Commission has no quarrel with applicant's inter-

that the tax credits involved were authorized to provide

an incentive for capital investment; but the rate base deduction

is not inconsistent with that intent (Staff Ex. 7, pp. 27-28). Con-

gress has specifically indicated those circumstances under which

a rate base deduction is not permitted without loss of the bene-

fit, and the Commission has made no adjustment in those in-

stances (Section 46(f), Internal Revenue Code).

J-39

Opinion and Order, PUCO Case No. 79-537-EL-AIR

nal adjustment to some 44 percent of that proposed by the

staff based on a purported identification of the risk-related

portion of the deferred amounts ( App. Ex. 1, Sched. B-8;

App. Ex. 4, pp. 45-48). Through his supplemental testi-

mony, applicant's witness Maugans now proposes an even

more limited reduction based on the theory that only the

deferred amounts actually recovered through rates may

properly be deducted from rate base (App. Ex. 4A, Ap-

pendix 6; App. Ex. 4A, pp. 33-38). The Commission finds

neither of these arguments persuasive.

Able cross-examination by staff counsel made short

work of the novel concept that a risk differential exists with

respect to a portion of the deferred balances and credits

which dictates that they be included in rate base (Tr. XI,

pp. 2-33). Mr. Maugans apparently concedes that the ac-

cumulated deferrals represent interest-free capital and, as

such, may properly be deducted from rate base (Tr. XI,

p. 20). However, the witness then draws a distinction be-

tween the terms “interest-free” and “risk-free” in arguing

that a return should be allowed on a portion of the balances

(Tr. XI, p. 20). The risk to which Mr. Maugans makes

reference in the risk that the ultimate tax liability associated

with the deferrals will not be paid. This risk is so obviously

a risk to the federal government as opposed to one borne

by the investors that this matter merits no further discus-

sion. Indeed, applicant has abandoned the argument on

brief.

The alternative deduction presented through Mr.

Maugan’s supplemental testimony is based in language ap-

pearing in the Commission's decision in Ohio Power Com-

pany, Case No. 78-676-EL-AIR (April 16, 1979) to the

effect that a determination must be made as to whether

existing rates reflect normalization before a rate base re-

duction for deferred taxes can properly be made (App. Ex.

4A, p. 35). In light of this statement, Mr. Maugans at-

tempted to calculate the portion of the deferred balances

J-40

Opinion and Order, PUCO Case No. 79-537-EL-AIR

which had actually been recovered through past rates and

concluded that a rate base deduction of no more than

$25,687,045 was appropriate (App. Ex. 4A, p. 37). Al-

though there are very real problems presented by the

assumption that the amount of the recovery through past

rates can actually be identified, the Commission need not

consider this point in view of our conclusion that appli-

cant’s reliance on the language cited is misplaced. First, the

Commission would point out that the discussion in Ohio

Power, supra, related solely to the question of the appro-

priate treatment of deferred taxes associated with Ohio

Electric Company, a subsidiary of Ohio Power whose rates

had not theretofore been subject to Commission review.

Secondly, whether or not one believes the issue in that case

to have been correctly decided, it is quite clear trom other

orders addressing this subject that the Commission has

viewed the controlling factor to be that these deferred

amounts are not investor-supplied sources of funds, with-

out real concern as to whether they are theoretically pro-

vided by customers or by the federal government. In fact,

in the very first rate decision following statutory authoriza-

tion of normalization, the Commission approved a rate base

deduction (Dayton Power and Light Company, Case No.

76-88-GA-AIR [July 22, 1977]). Certainly there had been

no actual customer “funding” of the deferrals at that time.

In essence, the deferrals operate as a continuing offset to

the original cost of the property with which they are asso-

ciated and should be so considered for rate-making pur-

poses. The Commission is of the opinion that Section

4909.05(I) Revised Code contemplates this type of rate

base adjustment, but even if in the absence of express stat-

utory authority we would view the staffs deduction as

an appropriate and necessary adjunct to our approval of

interperiod tax allocation. Applicant’s objection should be

overruled.

J-4l

Opinion and Order, PUCO Case No. 79-537-EL-AIR

Rate Base Summary:

In light of the foregoing discussion, the Commission

finds the jurisdictional rate base as of the date certain of

June 30, 1979, to be as set forth on the following table. This

table also presents the Commission findings as to rate base

properly attributed to the application area and the City of

Cleveland under the staff's allocation methodology which

we have heretobefore approved.

Rate Base Summary

(000’s Omitted)

Total Application City of

Plant In Service _.._.. $1,876,953 $1,302,137 §$ 574,816

Depreciation Reserve _. (466,049) (323,352) ( 142,697)

Net Plant In Service _.. $1,410,903 $ 978,784 $ 432,119

CWIP 91,521 62,976 28,545

Working Capital ____ 62,525 43,619 18,906

Deferred Taxes and

Tax Credits... (79,216) (54,514) (24,702)

Rate Base $1,485,734 $1,030,866 $ 454,868

OPERATING INCOME

Applicant and the Commission’s staff each submitted

an analysis of test-year accounts reflecting the results of

operations under the company’s present permanent rates.

Consumers’ Counsel also submitted evidence in support of

proposed adjustments to the staff's findings and several

intervenors have challenged certain of the results of the

staff audit through their filed objections. A number of the

issues presented are identical to those heard and decided

in the company’s last rate case (Cleveland Electric Ilumi-

nating Company, Case No. 78-677-EL-AIR [ May 2, 1979]),

j-42

Opinion and Order, PUCO Case No. 79-537-EL-AIR

as are the arguments advanced in support of the competing

positions. The Commission sees no purpose to be served

by another detailed analysis of these same questions and,

where appropriate, will merely indicate that our deter-

mination is in accord with our prior decision.

Operating Revenue:

The staff found applicant would have realized gross

annual operating revenues of $773,389,000 had its present

permanent rates been in place throughout the test year

(Staff Ex. 3, Rev. Sched. 1). Although applicant originally

raised a number of issues with respect to the staff's revenue

determination through its filed objections, revisions offered

by the staff at hearing have served to remove most of these

matters from controversy (Staff Ex. 3; Staff Ex. 4; Staff

Ex. 7). The applicant and the staff now agree with respect

to the annualization of fuel costs and revenues and this

question requires no further review. Applicant will be

directed to file base (or non-fuel) rates sufficient to com-

pensate the company for the approved allowable expenses,

exclusive of fuel costs includable under Rule 26, and yield

the authorized return on rate base, based on test-year

operations as analyzed herein (Dayton Power and Light

Company, Case No. 78-92-EL-AIR [March 9, 1979]).

An issue does remain, however, with respect to appli-

cant’s proposal to amortize the revenue and expense im-

pact of a change in the demand charges contained in the

contract governing purchases from Ohio Power Company

(App. Ex. 1, Sched. C-3.21; App. Ex. 7A, pp. 2-3). The

staff recommends against such an adjustment, pointing

out that the change, which became effective January 1,

1980, is out-of-period, and that the annualization of pur-

power costs, even to year-end levels, has not been

considered appropriate by the Commission (Staff Ex. 7,

pp. 36-37). The staff also explains that the specific change

j-43

Opinion and Order, PUCO Case No. 79-537-EL-AIR

in the Ohio Power contract relates to short term and lim-

ited term purchases, many of which will be recovered

through the fuel adjustment clause (Staff Ex. 7, p. 37).

As the Commission found in our recent decision in Toledo

Edison Company, Case No. 79-143-EL-AIR (February 29,

1980), the month-to-month and year-to-year fluctuations

in purchased power expense may occur for a variety of

reasons and there is no assurance that an annualizing ad-

justment of the type proposed by applicant will render

purchased power expense any more reflective of future

conditions than reliance on the test-year figures. Further,

allowable purchased power costs under the fuel adjust-

ment clause cannot be predicted because of the multitude

of complex factors which govern recovery through that

mechanism. Applicant’s proposed adjustment does not

adequately consider this point (Staff Reply Brief, p. 8).

The Commission will accept the staff's recommendation in

this regard.

Labor Expense:

There are several issues in these proceedings which

fall under the general heading of labor expense. Specif-

ically, they involve the annualization of union wage in-

creases, the annualization of non-union wage increases,

and the annualization of overtime expense. The staff an-

nualized union and non-union wage increases in place at

the conclusion of the test year, but did not annualize the

effect of any increases in the overtime rate (S.R., Sched.

3.4). Applicant annualized union wage increases through

the May 1, 1980 contract, and non-union and overtime

through the completion of the test year ( App. Ex. 1, Sched.

C-3.4). Consumers’ Counsel objects to the annualization

of any non-union wage increases.

The Commission has addressed each of the issues pre-

sented in a number of its recent decisions. For purposes

J-44

Opinion and Order, PUCO Case No. 79-537-EL-AIR

of these proceedings, we accept the staff adjustment for

union and non-union increases in accordance with our

decisions in this company’s prior case and in Toledo Edison

Company, Case No. 79-143-EL-AIR (February 29, 1980).

We reject applicant's annualization of the May 1, 1980

increase as it does not comply with the standards for such

a post-test period adjustment as set out in Columbia Gas

of Ohio, Case No. 77-1309-GA-AIR (May 24, 1979) and

Cincinnati Gas and Electric Company, Case No. 79-11-

EL-AIR (January 7, 1980). Although the per unit rate of

the increase may be known with certainty, there is no as-

surance that changes in number of employees, budgeted

hours, and employee mix will not lead to an overstatement

of the costs properly matched with that level of service and

productivity experienced during the test year (See Colum-

bia Gas of Ohio, Case No. 76-704-GA-CMR [June 29,

1977]). We do find, however, that applicant has satisfied

the requisites of Dayton Power and Light Company, Case

No. 79-372-GA-AIR (May 7, 1980), with respect to its

proposed annualization of overtime expense, and that

adjustment should be approved. Pension costs will be

adjusted to reflect the above findings.

Power Plant Maintenance Normalization:

The applicant and the staff both adjusted power plant

maintenance expenses to reflect the deferral of mainte-

nance originally scheduled for the first half of the test year

to future periods due to the extended shut-down of Davis-

Besse during the second quarter of 1979 (App. Ex. 1,

Sched. C-3.11; S.R., p. 14; S.R., Sched. 3.12). The staff

adjustment normalized maintenance only to the extent

budgeted maintenance was pushed into the second half

of the test year. Applicant’s adjustment recognized main-

tenance deferred into 1980. The purpose of this adjust-

ment is to establish a reasonable annual allowance for

J-45

Opinion and Order, PUCO Case No. 79-537-EL-AIR

power plant maintenance. The Commission agrees with

applicant that the staff adjustment fails to recognize the

level of maintenance which would have been performed

during the test year but for the unusual outage. The de-

ferral of maintenance for the first half to the second half

of the year meant that maintenance planned for the latter

period had to be deferred until some subsequent time as

maintenance schedules had become filled (App. Ex. 5A,

pp. 22-24). Applicant's adjustment should be approved

and its objection to the staff adjustment is, hereby,

sustained.

Vehicle Fuel Annualization:

In recognition of the extraordinary increases in the

cost of fuel used in company vehicles, the staff annualized

vehicle fuel prices to year-end levels (S.R., Sched. 3.7).

Applicant also proposes an annualizing adjustment to ve-

hicle fuel; but would have the Commission calculate the

adjustment with reference to March, 1980 price levels

(App. Ex. 1, Rev. Sched. C-3.8; App. Ex. 5A, p. 21). Our

earlier discussion with respect to annualizations based on

post-test year data is dispositive of this issue as well. The

Commission is, of course, aware that gasoline prices have

continued to rise after the close of the test year. However,

an annualization based on some post-test year price level

ignores what the company’s response to this post-test year

increase might be. The matching principle may be vio-

lated. For example, in this instance applicant's witness

Chopp acknowledged that the company was undertaking

programs to reduce fuel consumption in an effort to offset

these increased costs (Tr. II, p. 110). One would not

reasonably anticipate that even the company’s most strin-

gent conservation program would totally offset the rise in

prices; but the point is that there is no way to measure

what the actual effects may be. Thus, although the cost

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Opinion and Order, PUCO Case No. 79-537-EL-AIR

change may be known and measurable, an element of

speculation remains. The Commission overrules appli-

cant’s objection to the staff's adjustment.

Storm Damage and Tree Trimming Expense:

As in applicant's prior case, the staff normalized storm

damage and tree trimming expense to assure that the rates

set in these proceedings would reflect a representative al-

lowance for these items (S.R., p. 14; Staff Ex. 3, Rev. Sched.

3.13 and 3.14). The staff method, which was essentially

the same as that approved in the last case, was based on an

average of the annual expenses incurred for these items

for the previous five years, restated to 1979 dollars. Appli-

cant objected to the staff adjustments and offered alterna-

tive calculations based on essentially the same method

rejected in the last case. Applicant contends that the staff's

adjustment fails to recognize that there has been an actual

increase in the amount of work being done; but the com-

pany has offered little in the way of conclusive proof that

this alleged increase has, in fact, occurred (Staff Reply

Brief, p. 14). Consistent with our decision in applicant's

prior case, the Commission again finds the staff adjustments

to be proper.

Ordered Load Research Expenses:

Applicant proposed an adjustment to test-year ex-

penses to reflect costs associated with load research activity

it is compelled to engage in under the provisions of the

Public Regulatory Policies Act of 1978 ( App. Ex. 1, Sched.

C-3.10). The staff recommends that this adjustment be

rejected (S.R., p. 18). This expense of $72,084 relates to

certain load meters which applicant leased after the close

of the test year. The staff's opposition to the adjustment is

based not only on the fact that no costs were incurred in

the test year, but also on its observation that while the

transaction is treated as a lease for purposes of this adjust-

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Opinion and Order, PUCO Case No. 79-537-EL-AIR

ment, it will be treated as a purchase and capitalized when

the property is actually acquired (S.R., p. 14). The Com-

mission agrees that the adjustment should be disallowed.

Advertising Expense:

The staff reviewed the advertising expenses included

in applicant's test-year operating expenses and concluded

that no adjustment was required based on its view that

the company’s advertisements conformed to Commission

guidelines and PURPA standards (S.R., p. 15). However,

at hearing, Consumers’ Counsel and Senior Citizens, et al.,

presented a series of exhibits which contained the copy

of advertisements placed in various media by the Illuminat-

ing Company during the test year (O.C.C. Ex. 6; Senior

Citizens Ex. 11). These adds are clearly promotional and

of no benefit to the consumers. In general, the only infor-

mation they impart is a general observation that although

the cost of service has risen over the years, electricity still

represents a good value. As calculated from exhibits indi-

cating the test-year expense associated with these ads,

their jurisdictional cost was $238,617 (O.C.C. Ex. 7, Senior

Citizens Ex. 12). This amount should be eliminated from

allowable expenses. The Commission can anticipate appli-

cant’s objection to this adjustment. It will be based on the

argument that no witness offered testimony that the ad-

vertising was promotional in nature or did not benefit con-

sumers. Our response will be borrowed from another

source. We know it when we see it.

Charitable Contributions:

As fully explained in the Commission’s decision in the

company’s last rate case, the Illuminating Company does

not generally contribute directly to charity, but makes its

donations through the vehicle of the CEI Foundation.

However, in the course of its investigation the staff did

discover some $18,352 that the company had charged to

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Opinion and Order, PUCO Case No. 79-537-EL-AIR

jurisdictional operation and maintenance expense which

the staff believed should be reclassified as a charitable

contribution (S.R., p. 15; $.R., Rev. Sched. 3.17). Appli-

cant explained that it had elected to treat this amount as

an expense for fear that if it made the donations through

the CEI Foundation it could be subjected to penalties if

the IRS perceived an indirect benefit to the company (App.

Ex. 5A, p. 25; Tr. II, p. 115). The Commission is not par-

ticularly concerned as to what treatment the company

accords this amount for tax purposes; but for ratemaking

purposes it is clear that it should be considered as a char-

itable contribution. Applicant’s objection to the reclassifi-

cation is overruled.

This Commission has consistently approved a reason-

able allowance for charitable contributions in its cost of

service analyses and was prepared to do so again in these

proceedings. However, the opinion just issued by the

Supreme Court in City of Cleveland v. Public Utilities

Commission, S.Ct. Case Nos. 79-1158 and 79-1173 (July 9,

1980), 63 Ohio St. 2d(1980), quite clearly reverses the

Court's recent decision in City of Cincinnati v. Public Utili-

ties Commission, 55 Ohio St. 2d 168 (1978), which specifi-

cally approved this long-standing Commission practice. In

accordance with this new decision, the Commission now

finds that the intervenors’ objections to any allowance for

charitable contributions should be sustained. As the Com-

mission would have accepted the staff's method of cal-

culating an allowance for charitable contributions as we

did in the prior case, the effect is to reduce allowable

expenses from what we would have otherwise determined

by the amount of $492,539 (S.R., Sched. 3.18).

Rate Case Expense:

Contrary to customary practice, the company did not

propose an allowance for expenses incurred in connection

with these proceedings in its cost of service analysis.

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Opinion and Order, PUCO Case No. 79-537-EL-AIR

Rather, applicant elected to rely on the rate case expenses

actually charged to its books during the test year on the

theory that it will be filing such cases on an annual basis

(App. Ex. 5A, pp. 26-27). The staff did obtain an estimate

of the costs anticipated by applicant in connection with

these proceedings (App. Ex. 1, Sched. C-9), made a de-

termination that the estimate was reasonable, and recom-

mended that the estimated expense be amortized over a

two-year period. Thus, the staff's proposed allowance is

$174,000 (S.R., Sched. 3.19). Upon review of the record

relative to this subject, the Commission believes the staff's

proposed allowance should be accepted. The bulk of the

rate case expense incurred by applicant during the test

year related to its prior case. As a theoretical matter, ex-

penses associated with the prior case should not be built

into the rates authorized in these proceedings. Moreover,

the Commission is concerned that applicant's proposed

method of dealing with this subject may make our review

of the reasonableness of these expenditures more difficult.

With due regard for our prior observations concerning the

nature and purpose of the rate case expense allowance, the

Commission sees no reason to depart from our usual prac-

tice with respect to this item (See, e.g., Columbus and

Southern Ohio Electric Company, Case No. 77-545-EL-

AIR [March 31, 1978]).

Intervenor City of Cleveland objects to the staff's

proposed allowance for rate case expense and a consider-

able portion of this record is devoted to its attack on the

reasonableness of the staff's finding. This onslaught was

then broadened to include the question of legal fees in

general. Despite the pages of transcript generated by the

City of Cleveland's efforts in this regard, there is not one

iota of affirmative evidence that the rate case expense

allowance is unreasonable or that applicant’s practices

with respect to retaining legal counsel are inconsistent with

that which should be expected from a major corporation

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Opinion and Order, PUCO Case No. 79-537-EL-AIR

(Tr. XXXI). Further, intervenor never suggested, either

through a witness or on brief, what it considered to be

reasonable with respect to these areas. All the Commission

is left with are its bare assertions that the amounts pro-

posed by the applicant and the staff are not. These ob-

jections should be overruled.

PUCO Maintenance Tax and Consumers’ Counsel

Assessment:

Although it has been the consistent practice of the

Commission, applicant objects to the staff's classification

of the PUCO maintenance tax and Consumers’ Counsel

assessment as “other taxes”, contending that the Uniform

System of Accounts requires that they be charged to opera-

tion and maintenance expense (App. Ex. 5A, p. 24). The

significance of this issue is, of course, the effect on the

working capital calculation. On brief, staff counsel argues

that the accounting requirements are not as clear cut as

applicant would have us believe and points out that appli-

cant is one of the few utilities that does not account for

these items as taxes (Staff Reply Brief, p. 11). Neither of

these arguments need detain us, for no ma

This text is long and has been trimmed here. Open the source document for the complete record.