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

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a a : sme Court, U.S

B3°49 FILED

JUL 12 198°

ALEAY

In the Supreme Court of the United States

October Term, 1982

THE CLEVELAND ELECTRIC ILLUMINATING

COMPANY,

Appellant,

VS.

THE PUBLIC UTILITIES COMMISSION OF OHIO,

Appellee.

On APPEAL FROM THE SUPREME CouRT OF OHIO

APPENDIX

ALAN P. BUCHMANN

Of Counsel: Counsel of Record

RicHarD W. McLaren, JR.

Aan D. WricHtT Squire, Sanders & Dempsey

Vice President-Public 1800 Huntington Building

Affairs and Legal Cleveland, Ohio 44115

Craic I. SMITH (216) 687-8500

The Cleveland Electric

Illuminating Company Attorneys for Appellant,

55 Public Square The Cleveland Electric

Cleveland, Ohio 44113 Illuminating Company

TABLE OF CONTENTS OF

APPENDIX

Appellant's Notice of Appeal To The Supreme Court of

The United States (filed July 7, 1983)

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

St. 3d 91, 447 N.E. 2d 733 (1983)

Cleveland Electric Illuminating Co. v. Pub. Util. Comm.,

4 Ohio St. 3d 107, 447 N.E. 2d 746 (1983)

Consumers’ Counsel v. Pub. Util. Comm. (CEI), 4 Ohio

St. 3d 111, 447 N.E. 2d 749 (1983) .

Opinion and Order of the Public Utilities Commission

of Ohio in Case No. 81-1378-EL-AIR — January 5,

1983) - LS res

ieheoins Entry of The Public Utilities Commission of

Ohio in Case No. 81-146-EL-AIR (filed May 12, 1982)

Opinion and Order of the Public Utilities Commission of

Ohio in Case No. 81-146-EL-AIR (filed March 12, 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

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

1982)

Entry on Rehearing of the Public Utilities Commission

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

9, 1981)

Opinion and Order of the Public Utilities Commission

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

1981)

Journal Entry of Ohio Supreme Court Denying Motion

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

PAGE

261

264

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

Se.2d 153, 423 N.E. 2d 820 (1961) —

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)

Order On Motions For Summary Disposition, in Docket

No. ER 81-612-000 of the Federal Energy Regulatory

Commission (filed April 14, 1982) ____

Letter of Federal Energy Regulatory Commission Staff

directing immediate write-off (dated July 7, 1982)

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

4905.20, 4905.22, 4909.15; Ohio Administrative Code

§ 4901:1-9-05 -

PAGE

308

400

419

422

FILED

JULY 7 1983

SUPREME COURT OF OHIO

JAMES WM. KELLY, Clerk

IN THE SUPREME COURT OF OHIO

CASE NO. 82-989

THE CLEVELAND ELECTRIC

ILLUMINATING COMPANY,

Appellant,

THE PUBLIC UTILITIES COMMISSION OF OHIO,

Appellee.

Appeal From the Public Utilities Commission of Ohio

Case No. 81-146-EL-AIR

In the Matter of the Application of

The Cleveland Electric Illuminating Company

for Authority to Increase Its Filed Schedules

Fixing Rates and Charges for Electric Service

NOTICE OF APPEAL

TO THE SUPREME COURT

OF THE UNITED STATES

ANTHONY J. CELEBREZZE, JR.

Attorney General

RoBErT S. TONGREN

Harris S$. LEVEN

Assistant Attorneys

General

Public Utilities Commission

of Ohio

375 South High Street

Columbus, Ohio 43215

Attorneys for Appellee

WILuiAM A, SPRATLEY,

Ohio Consumers’ Counsel

MARTIN J. MARz

STEVEN M. SHERMAN

GrETCHEN J. HUMMEL

Associate Consumers’

Counsel

137 East State Street

Columbus, Ohio 43215

Attorneys for Intervening

Appellee, Office of

Consumers’ Counsel

ALAN P, BUCHMANN

RicHARD W. McLAREN, JR.

SeumeE, SANDERS & DEMPSEY

1800 Huntington Building

Cleveland, Ohio 44115

(216) 687-8500

ALAN D. WRIGHT,

Vice President — Public

Affairs and Legal

Craic I, SMiru,

Senior Counsel

The Cleveland Electric

Illuminating Company

55 Public Square

Cleveland, Ohio 44113

(216) 622-9800

Attorneys for Appellant,

The Cleveland Electric

Illuminating Company

IN THE SUPREME COURT OF OHIO

CASE NO. 82-989

THE CLEVELAND ELECTRIC

ILLUMINATING COMPANY,

Appellant,

Vv.

THE PUBLIC UTILITIES COMMISSION OF OHIO,

Appellee.

Appeal From the Public Utilities Commission of Ohio

Case No. 81-146-EL-AIR

In the Matter of the Application of

The Cleveland Electric Illuminating Company

for Authority to Increase Its Filed Schedules

Fixing Rates and Charges for Electric Service

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 Supreme

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 April

13, 1983 affirming the March 17, 1982 Opinion and Order

of the Public Utilities Commission of Ohio in Case No.

81-146-EL-AIR.

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

Of Counsel:

ALAN D, WRIGHT,

Vice President — Public

Affairs and Legal

Craic I. SMiru,

Senior Counsel

The Cleveland Electric

Illuminating Company

55 Public Square

Cleveland, Ohio 44113

(216) 622-9800

ALAN P, BUCHMANN,

Counsel of Record

RicHarp W. McLaren, JR.

Squire, SANDERS & DEMPSEY

1800 Huntington 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 7th day of July, 1983.

ANTHONY J, CELEBREZZE, JR.

Attorney General

Rosert §, TONGREN

Harris §, LEvEN

Public Utilities Commission

of Ohio

375 South High Street

Columbus, Ohio 43215

Attorneys for Appellee,

The Public Utilities

Commission of Ohio

WILLIAM A, SPRATLEY,

Ohio Consumers’ Counsel

MARTIN J. MARZ

STEVEN M. SHERMAN

GRETCHEN J. HUMMEL

Associate Consumers’

Counsel

Office of the

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 Electric

Illuminating Company

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

DECISION AND OPINION OF

THE SUPREME COURT OF OHIO

Dayton Power & LicHT CoMPANY, APPELLANT, U.

Pusiic Utitities COMMISSION OF OHIO ET AL., APPELLEES.

Public Utilities Commission: post-test-year wage adjust-

ment disapproved, when; increased excise tax levy

imposed by Am. S. B. No. 448 is a recoverable “nor-

mal” expense, when, R. C. 4909.161; Fifth and Four-

teenth Amendments not violated by denial of utility’s

request to treat expenditures associated with can-

celled generating plant as amortizable costs, R. C.

4909.15 (A)4).

1. Payment of any type of increased excise tax levy after

November 15, 1981 shall be considered to be a normal

expense incurred by a public utility in the course of

rendering service to the public. (R. C. 4909.161, con-

strued ),

2. The Public Utilities Commission’s disallowance of a

utility's request to treat its expenditures associated

with a cancelled generating plant as amortizable costs

pursuant to R. C, 4909.15(A)(4) does not violate the

Fifth and Fourteenth Amendments to the Constitution

of the United States.

(No, 82-526 — Decided

April 13, 1983.)

Appea from the Public Utilities Commission of Ohio.

[92] This appeal is taken from an order of the Public

Utilities Commission of Ohio (hereinafter “commission” )

granting appellant, the Dayton Power & Light Company

(hereinafter “DP&L”), a rate increase in case No. 81-21-

EL-AIR. DP&L filed its application to increase rates for

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

electric service with the commission on April 4, 1981. The

commission designated the period beginning October 1,

1980 and ending September 30, 1981 as the statutory test

period and set March 31, 1981 as the date certain. After

public hearings were held, the commission issued an order

on February 3, 1982. The order inter alia denied DP&L’s

requests (1) to include a post-test-year wage adjustment,

(2) to allow recovery for installment payments of a one

percent gross receipts tax payable after the test year, and

(3) to amortize its investment in a cancelled power plant.

DP&L applied for a rehearing on the aforementioned

issues, which the commission denied.’

On November 20, 1979, DP&L and the Utility Work-

ers of America entered into an agreement providing for a

7.48 percent wage increase effective October 25, 1981,

approximately one month after the designated test year

ended. Appellant sought to adjust the hourly wage rate

to be used in calculating its cost of service to reflect the

October 25, 1981 wage increase. The proposed adjustment

would have raised the average hourly wage rate from

$9.76 to $10.3194. The commission denied this adjustment

on authority of Consumers’ Counsel v. Pub, Util. Comm.

(1981), 67 Ohio St. 2d 372 [21 0.0. 3d 234].

Appellant also requested an adjustment to allow the

full recovery of tax payments made pursuant to Am. S. B.

No. 448, which imposed a temporary one percent gross

receipts tax on utility companies effective January 1, 1981.

The commission had allowed recognition of the one percent

gross receipts tax in DP&L’s most recent prior rate case,

case No, 80-687-EL-AIR, but the rates established in that

1The commission did grant a limited rehearing in connection

with changes in the treatment of investment tax credits prompted

by the Economic Recovery Tax Act of 1981. This matter is not, how-

ever, before this court.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

case were not in effect long enough to allow DP&L to

recover the total amount paid pursuant to Am. S. B. No.

448. In its order the commission overrode its staff's recom-

mendation* and denied rate recognition for the balance of

one percent temporary tax payments, distinguishing the

instant case from case No. 80-687-EL-AIR for the follow-

ing reasons:

“In applicant's prior case, as in those other rate pro-

ceedings wherein we approved an allowance for the tem-

porary one percent increase in the gross receipts tax, rate

recognition of the increase was clearly required in the

rates authorized were to reflect the cost of providing serv-

ice during the period the rates were to be in effect °°°.

However, the same factors are not at work here, for al-

though the temporary increase was in effect during the

test period [93] and a payment at the increased rate was

made subsequent to the test period, the obligation to pay

the tax at the increased rate has now terminated °°*°. As

we have held on so many occasions as to make citation

unnecessary, it is not the Commission’s function to provide

for dollar-for-dollar recovery of specific past expenses, but

to provide a reasonable future earnings opportunity. Ac-

cordingly, there should be no allowance in this proceeding

for the temporary one percent increase in gross receipts

tax imposed by Am. Senate Bill No. 448.”

In its application for rehearing DP&L argued that the

enactment of R. C, 4909.161, effective November 15, 1981,

mandated full recovery of the tax payments in question.

The commission declined to modify its order, finding that

“the cited statute [R. C. 4909.161] does provide for recov-

“The staff recommended “that full recovery be allowed but that

applicant [appellant] be required to file tariffs containing reduced

rates upon full recovery of the one percent increase.”

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

ery of certain excise tax increases; but we think it apparent

that the legislation cannot logically be interpreted to per-

mit recovery of a tax increase which had expired long

before the rates set in this case became effective.”

Appellant's application proposed an adjustment pro-

viding for the amortization of $4,796,000 in expenditures

associated with the cancellation of construction of the

Killen Generating Station Unit 1 (hereinafter “Killen” ).

The commission denied the amortization, citing Con-

sumers’ Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.

2d 153 [21 0.0. 3d 96}.

The Office of Consumers’ Counsel (hereinafter “OCC”)

has been granted leave to intervene as an appellee.

The cause is now before this court upon an appeal

as of right.

Mr. Stephen F. Koziar, Jr., Smith & Schnacke Co.,

L.P.A., Mr. Charles J. Faruki, Mr. Paul L. Horstman and

Mr. D. Jeffrey Ireland, for appellant.

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

I. Resnik and Mr. Donn D. Rosenblum, for appellee.

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

Timothy C. Jochim and Ms. Janine L. Migden, for inter-

vening appellee.

Sweeney, J. This appeal presents three issues for re-

view. The first is whether the commission erred in dis-

approving appellant's proposed post-test-year wage adjust-

ment. The second is whether the commission properly

denied recovery of the increased excise tax levy imposed

by Am. S. B. No. 448. The third is whether the exclusion

of the Killen expenditures pursuant to R. C. 4909.15( A)

(4) amounts to the confiscation of appellant's property in

violation of the Fifth and Fourteenth Amendments to the

Constitution of the United States

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

Before proceeding further, we note that “[t]he scope

of this court’s review of commission orders is set forth in

R. C. 4903.13, which states in pertinent part:

“*“A final order made by the public utilities commis-

sion shall be reversed, vacated, or modified by the supreme

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

court is of the opinion that such order was unlawful or

unreasonable.”

[94] “‘ “Under the ‘unlawful or unreasonable’ stand-

ard 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

evidence 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 mis-

apprehension, mistake or willful disregard of duty,”

Columbus v. Pub. Util. Comm. (1979), 58 Ohio St. 2nd

103, 104 [12 0.0. 3d 112]. See also, Consumers’ Counsel

v. Pub. Util. Comm. (1979), 58 Ohio St. 2d 108, 110 [12

O.0. 3d 115]; Ohio Utilities Co. v. Pub, Util. Comm.

(1979), 58 Ohio St. 2d 153, 164 [12 0.0. 3d 167]; Duff v.

Pub. Util. Comm. (1978), 56 Ohio St. 2d 367, 370 [10

0.0. 3d 493]; General Motors Corp. v. Pub. Util. Comm.

(1976), 47 Ohio St. 2d 58 [1 O.0. 3d 35], paragraph two

of the syllabus; Cleveland Electric Illuminating Co. v.

Pub. Util. Comm. (1975), 42 Ohio St. 2d 403 [71 0.0. 2d

393], paragraph eight of the syllabus. We assess the appel-

lant[’s] objections with this standard of review in mind.’

Consumers’ Counsel v. Pub, Util. Comm. (1981), 67 Ohio

St. 2d 153, 155-156 [21 O.0. 3d 96].” Armco, Inc. v. Pub.

Util. Comm. (1982), 69 Ohio St. 2d 401, 404-405 [21

0.0. 3d 361].

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

The issue of post-test-year wage adjustments has

twice been before us recently. In Consumers’ Counsel v.

Pub. Util. Comm, (1981), 67 Ohio St. 2d 372 [21 0.0, 3d

234] (hereinafter “EOG”) this court reversed an order of

the commission granting the East Ohio Gas Company a

9.4 percent wage annualization to reflect an increase in

wage rates, which increase went into effect after the

designated test year had ended. After reprising the ap-

plicable statutes, R. C. 4909.15 (A) (4), 4909.15(C), and

4909.15(D)(2)(b), we determined in EOG that the labor

adjustment granted by the commission did not represent

the type of anomalous condition for which inclusion of

costs not incurred during the test period would be per-

missible.’ As we noted in EOG, supra, at page 374, the

General Assembly has expressly endorsed the test-year

methodology:

“The language of R. C. 4909.15 is unequivocal. Rate

increases are based on costs of rendering utility service

during the test period. The dates of the test year follow

directly from the date the utility chooses to file for its

rate increase. Aware that its employee labor contract was

about to be renegotiated, the utility company filed the

application with the commission at a time which caused

the test year to end prior to the beginning date of the

new contract. The adjustment which EOG sought on re-

hearing to take into account its increased labor costs aris-

ing from that contract would violate the test-year concept

embodied in R. C. 4909.15.” (Emphasis sic. )

Appellant seeks to distinguish EOG on its facts and

argues in its first [95] proposition of law that “[a] utility's

*Compare EOG with Bd. of Commrs. v. Pub. Util. Comm.

[1982], 1 Ohio St. 3d 125 ( post-test-year adjustment for line clear-

ance allowed. )

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

labor expense, as determined under Rev. Code § 4909.15

(A)(4), includes a known and measurable increase in

wage rates pursuant to a contract negotiated and executed

prior to the end of the test period.” The significance that

appellant attributes to the fact that it had already com-

mitted itself to the subject wage agreement while the

new wage package in EOG had not been negotiated prior

to the end of the test period is unwarranted. In the sec-

ond case previously alluded to involving post-test-year

wage adjustments, Ohio Water Service Co. v. Pub. Util.

Comm. (1983), 3 Ohio St. 3d 1, we were presented with

facts virtually identical to those presented herein. Ohio

Water Service's wage agreement with its employees had

been negotiated and the obligations had become fixed

prior to the test year. The disputed wage increase in Ohio

Water Service went into effect one day after the test

period ended. Relying on our analysis in EOG, we held

that the commission did not err in excluding the post-test-

year wage adjustment. The same rationale applies to the

case at bar. Thus, while we acknowledged in EOG and

Ohio Water Service that the test-year data are not immu-

table and have upheld appropriate exceptions in previous

cases,* exceptions must remain exceptions, and ad hoc

tinkering with the statutory formula is not to become the

rule. We recognized as much in Consumer's Counsel v.

Pub. Util. Comm. (1981), 67 Ohio St. 2d 153 [21 0.0. 3d

96] (hereinafter “CEI”), in discussing the exceptions lan-

guage contained in R. C. 4909.15(D)(2)(b), where we

stated, at page 165, that “°°°® the General Assembly un-

doubtably did not intend to build into its recently revised

(1976) ratemaking formula a means by which the com-

mission may effortlessly abrogate that very formula.”

‘See, e.g., Bd. of Commrs., supra, fn. 3.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

Moreover, the commission itself came to a similar conclu-

sion regarding test-period data under the revised rate-

making formula when it expressed doubt in a previous

DP&L case, case No. 76-88-GA-AIR, as to whether it could

continue its former practice of routinely permitting ad-

justments for known and measurable post-test-year cost

changes. The commission stated, at page 6 of its opinion:

“°°° Although the argument for post-test-year adjust-

ments of this nature [l]oses force when dealing with much

more current test years’ and although the practice may be

prohibited by Section 4909.15(C) Revised Code, the prin-

ciple [annualization of certain costs at levels existing at

the end of the test year] remains controlling with respect

to cost changes which occur within the test period.” EOG,

Ohio Water Service, and now the case at bar simply con-

firm what the commission surmised in 1976 with respect to

the General Assembly’s intentional circumscription of the

commission's authority to grant the type of post-test-year

adjustment requested by appellant in its application. As

one commentator has noted, “ °°*° adjusting only for se-

lected changes is repugnant to the test year’s theoretical

roots — its usefulness is capturing for simultane- [96] ous

observation the dynamic interrelationship among revenue,

expenses and investment.” ‘ Note, The Use of the Future

‘The commission's recognition of “much more current test

years” is borne out in the instant case as appellant filed a notice

of intent to apply for a rate increase in October 1981 with another

planed for mid-1982.

*OCC witness Miller expressed this view, stating that “***

[selectivity] is the problem I have with the whole annualization

procedure. It's not so much that I disagree with the fact that some

figures may not be more properly adjusted, but all things should be

looked at and adjusted has been my problem.” See, generally,

Catalant, Rate Making in an Inflationary Context: Theories and

Applications, 110 Pub. Util. Fort., April 15, 1982, at page 53.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

Test Year in Utility Ratemaking (1972), 52 Boston U. L.

Rev. 791, 796. Accordingly, appellant's contention that

R. C, 4909.15 mandates inclusion of the post-test-year

wage adjustment is without merit.’

Appellant asserts in its second proposition of law that

“Revised Code § 4909.161 mandates that the public utilities

commission approve rate schedules which will permit a

public utility to fully recover in its rates the increased

excise tax levy resulting from the 1% additional gross re-

ceipts tax imposed by Am. Senate Bill N. 448.” As pre-

viously noted, the commission disallowed recovery of

DP&L’s tax payments made pursuant to Am. S. B. No. 448

that had not been recovered under the rates established in

case No. 80-687-EL-AIR. Am. S. B. No. 448, which imposed

an additional one percent tax on gross receipts, became

effective on January 1, 1981 and expired June 30, 1981.

Appellant paid the increased tax levy in four installments in

January, March, June, and December 1981. The first three

installment payments were made within the test year but

prior to the November 15, 1981 effective date of R. C.

4909.161. The December payment was made outside the

test period but after R. C. 4909.161 took effect. The com-

mission acknowledged R. C. 4909.161 in denying rehearing

TAppellant also asserts that “*°*® [t]he rates established °**

without recognition of the known and measurable wage increase

are unreasonable and confiscatory,” but offers little to support the

contention. The record does contain exhibits comparing the actual

payroll expenses for September 1981 ($7,255,717) and November

1981 ($7,183,568), but appellant does not refer to these or any other

calculations in making the argument that denial of the post-test-year

wage adjustment is somehow confiscatory. Based on these figures,

moreover, it would be difficult for appellant to argue unrepresenta-

tiveness, much less, confiscation.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

but declined to make the adjustment sought by DP&L for

the reason “that the legislation cannot logically be inter-

preted to permit recovery of a tax increase which had

expired long before the rates set in this case became effec-

tive.” While we find no fault with the commission’s iogic,

we are compelled to disagree with its reading of R. C.

4909.161, at least insofar as the commission denied recov-

ery of the December payment or any portion thereof not

previously recovered.

R. C. 4909.161 states as follows:

“Notwithstanding the provisions of Chapters 4905.

and 4909. of the Revised Code, the payment of any type

of increased excise tax levy shall be considered to be a

normal expense incurred by a public utility in the course

of rendering service to the public, and may be recovered

as such in accordance with an order of the public utilities

commission. Any public utility required to [97] pay any

such increased excise tax levy may file with the public

utilities commission revised rate schedules which will

permit full recovery on an interim or permanent basis in

its rates, of the amount of any resultant increased tax

payments and the commission shall promptly act to ap-

prove such schedules.”

The statute sets forth the broad rule that “the pay-

ment of any type of increased tax levy shall be considered

to be a normal expense.°°°®” This provision is keyed to

“payment” of a tax irrespective of whether the tax upon

which the payment has been made remains in effect or

has expired. Ordinarily the commission would be empow-

ered to deny recovery for an anomalous expense and,

indeed, we do not disturb the commission's disallowance

of the unrecovered portions attributable to the January,

March and June 1981 installments paid on the temporary

one percent gross receipts tax. The General Assembly's

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

enactment of R. C. 4909.161 has, however, established as

a matter of law that payment of any type of increased

excise tax levy after November 15, 1981 shall be consid-

ered to be a normal expense incurred by a public utility in

the course of rendering service to the public. Thus, the

commission erred in disregarding the plain language and

import of R. C. 4909.161 when it denied recovery of the

December installment payment (or the unrecovered bal-

ance thereof) in the current case.

The record does not reflect the precise amounts of

the installments paid pursuant to Am. S. B. No, 448 or

the amount of the tax that has been recovered pursuant

to the rates set in DP&L’s previous rate case. We find it

necessary, therefore, to reverse and remand the cause to

the commission for further proceedings to determine (1)

the amount of the installment paid in December, the full

recovery of which is mandated by R. C. 4909.161, and

(2) to prevent a possible over-recovery, the amount, if

any, of monies previously recovered under the rates set

in case No. 80-687-EL-AIR attributable to the December

installment. Upon making these determinations, the com-

mission shall modify its order so as to allow appellant to

recover the difference between the December one percent

excise tax payment and any monies already recovered

thereon.

In its final proposition of law appellant challenges the

constitutionality of the commission’s disallowance of

DP&L's request to treat its investment in the cancelled

Killen facility as amortizable costs. Before proceeding to

appellant's specific contentions regarding Killen, it is ap-

propriate for us to review the historical development

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

underlying current federal constitutional doctrine respect-

ing utility ratemaking.

The leading federal constitutional cases involving

claims of confiscatory utility rate orders establish two

fundamental precepts. The first is that “°° ® he who would

upset the rate order °°° carries the heavy burden of mak-

ing a convincing showing that it is invalid because it is

unjust and unreasonable in its consequences.” FPC vy. Hope

Natural Gas Co. (1944), 320 U.S. 591, 602 [98] See, also,

Permian Basin Area Rate Cases (1968), 390 U. S. 747, 767.

The second precept is that a challenged rate order must

be “viewed in its entirety,’ FPC v. Natural Gas Pipeline

Co. (1942), 315 U. S. 575, 586; Hope Natural Gas Co.,

supra, at page 602, to determine whether the rates set

pursuant to the order fall within “the broad zone of reason-

ableness.” Permian Basin Area Rate Cases, supra, at page

770.°

‘A third important precept to be drawn from the federal cases,

that “[t]he Constitution does not bind rate-making bodies to the

service of any single formula or a combination of formulas,” Natural

Gas Pipeline Co., supra, at page 586; Hope Natural Gas Co., supra,

at page 600; Permian Basin Area Rate Cases, supra, at page 800,

need not concern us because the General Assembly has prescribed

a statutory ratemaking formula for the commission to follow in con-

tradistinction to the broad grant of authority delegated by Con-

gress to the Federal Power Commission (and now FERC) to

establish rates under the Natural Gas Act as amended, Sections 717

et seq., Title 15, U. S. Code.

Accordingly, it is unnecessary to reprise the constitutional for-

mula based on the rule of Smyth v. Ames ( 1508), 169 U. S. 466, 547

(“fair return upon *** value”), the controversy engendered by

Smyth during the years of its ascendancy, see, e.g., Missouri, ex rel.

Southwestern Bell Tel. Co., v. Pub. Serv. Comm. ( 1923), 262 U. S.

276, 289 ( Brandeis, ].. concurring), or the prudent investment

theory proposed by Justice Brandeis in Southwestern Bell to sup-

plant Smyth and provide a more workable mode of constitutional

analysis.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

The historical background from which these precepts

developed was summarized by Justice Black in his dissent-

ing opinion in McCart v. Indianapolis Water Co. (1938),

302 U. S. 419, 427-428:

“For the first hundred years of this Nation’s history,

federal courts did not interfere with state legislation fixing

maximum rates for public services performed within the

respective states. The state legislatures, according to a

custom which this Court declared had existed ‘from time

immemorial’ decided what those maximum rates should

be. This Court also said that ‘for protection against abuses

by legislatures the people must resort to the polls, not to

the courts.’ It was not until 1890 that a dividend court [in

Chicago, M & St. P. Ry. Co. v. Minnesota (1890), 134

U. S. 418] finally repudiated its earlier constitutional inter-

pretation and declared that due process of law requires

judicial invalidation of legislative rates which the courts

believe confiscatory. The dissenting Justices adhered to

the long existing principle that regulation of public utilities

was a ‘legislative prerogative and not a judicial one.”

(Footnotes omitted. )

In Natural Gas Pipeline Co., supra, Justice Black

expanded upon his McCart history lesson in a concurring

opinion joined by Justices Douglas and Murphy where he

once again expressed his deep disagreement with the

notion that “ ‘due process’ means no less than ‘reasonable-

ness judicially determined’ °** which, in the words of

Justice Holmes, makes the sky the limit of judicial power

to declare legislative acts unconstitutional, the conclusions

of judges, substituted for those of legislatures, become a

broad and varying standard of constitutionality.” 315 US.,

at page 600. Justice Frankfurter, concurring separately,

took issue with Justice Black's historical exegesis, stating,

at page 609, that “|wihile the doctrine of ‘confiscation,

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

as a limitation to be enforced by the judiciary upon the

legislative power to fix utility [99] rates, was first applied

in Chicago, M & St. P. Ry. Co. v. Minnesota, 134 U.S. 418,

that decision followed principles, expounded in Stone v.

Farmers’ Loan & Trust Co., 116 U. S. 307, especially at

331. °°*® Mr. Chief Justice Waite, who delivered the opin-

ion in the Stone case as well as in the earlier decision in

Munn vy. Illinois, 94 U. S. 113, was therefore the author

of the doctrine of ‘confiscation’ and its corollary, ‘judicial

review. His view was shared by such stout respecters

of legislative power over utilities as Mr. Justice Miller °°°

Mr. Justice Bradley °°* and Mr. Justice Harlan. The

latter, indeed, agreed with Mr. Justice Field that the

regulatory power exercised in the Railroad Commission

Cases, 116 U. S. 307, constituted an impairment of the

obligation of contract. By no one was the doctrine of

judicial review more emphatically accepted, and applied

in favor of a public utility, than by Mr. Justice Harlan in

the decision and opinion in Covington & Lexington Turn-

pike Co. vy. Sandford, 164 U. S. 578, especially at 591-95.”

While we are not here concerned with whether Jus-

tice Black or Justice Frankfurter was more faithful to the

muse of history, we do find it significant that Justice

Frankfurter did not take exception to Justice Black's char-

acterization of Natural Gas Pipeline Co, as “°°* a new

chapter in the regulation of utility rates °°° [which]

erases much which has been written in rate cases during

the last half century °°*°.” Id., at page 602. The majority

opinion in the 1944 Hope Natural Gas Co. case essentially

adopted the theory of legislative hegemony in the sphere

of economic regulation expressed in the Natural Gas Pipe-

line Co. concurrence. The court stated, at page 601, “that

the ‘authority of Congress to regulate the prices of com-

modities in interstate commerce is at least as great under

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

the Fifth Amendment as is that of the States under the

Fourteenth to regulate the prices of commodities in intra-

state commerce. 315 U. S. p. 582. Ratemaking is indeed

but one species of price fixing. Munn v. Illinois, 94 U. S.

113, 134. The fixing of prices, like other applications of

the police power, may reduce the value of the property

which is being regulated. But the fact that the value is

reduced does not mean the regulation is invalid.”

In Permian Basin Area Rate Cases, supra, the court

deferred to the legislative will as expressed by Congress

administrative surrogate, the Federal Power Commission,

so completely that Justice Douglas, the author of the Hope

Natural Gas Co. opinion, was compelled to dissent in an

ironic turnabout. 390 U. S., at pages 829-845. In the words

of one commentator, “with the Permian decision the Court

has completed a long circle back to almost where it started

in Mun [v. Illinois (1876), 94 U. S. 113] 92 years previous.

The Constitution no longer provides any special protection

for the utility investor. Regulation is deemed no different

from any other governmental action; it can ‘limit strin-

gently’ the profitability of his investment in endeavoring

to balance the ‘broad public interest entrusted to its pro-

tection.’” Bernstein, Utility Rate Regulation: The Little

Locomotive That Couldn't (1970), Wash. U.L.Q. 223,

259-260. Although utility companies continue to appeal

allegedly confiscatory rate orders that state courts

have [100] upheld as constitutional, the United States

Supreme Court in recent years has been disinclined

to hear these appeals and has dismissed them sum-

marily either for want of a substantial federal question,

see, e.g., Appalachian Power Co. vy. West Virginia Pub.

Service Comm. (W. Va. Oct. 10, 1977), unreported,

appeal dismissed (1978), 435 U. S. 901; South Central

Bell Tel. Co. vy. Louisiana Pub, Serv. Comm. (La. 1977),

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

352 So. 2nd 964, appeals dismissed (1978), 437 U. S. 911;

California Assn. Of Utility Shareholders v. California Pub.

Util. Comm. (Cal. July 19, 1979), unreported, appeal dis-

missed (1979), 444 U. S. 986; C & SOE vy. Pub. Util.

Comm. (1980), 64 Ohio St. 2d 175 [18 0.0. 3d 389],

appeal dismissed (1981), 452 U. S. 933; or for want of a

properly presented federal question, see CEI, supra (67

Ohio St. 2d 153 [21 O.O0. 3d 96] ), appeal dismissed (1982),

pee AG , 71 L. Ed. 2d 455, appeal dismissed

(Jan. 11, 1983), 51 U.S.L.W. 3507. The high court’s sum-

mary dispositions of the aforementioned appeals at the

least suggest that the court has implicitly recognized the

commentator’s conclusion that “the Constitution no longer

provides any special protection for the utility investor.”

It is against this federal constitutional backdrop that we

now view appellant’s specific contentions regarding the

disallowed Killen expenditures.

Appellant contends that “[a]n interpretation of Rev.

Code § 4909.15(A)(4) which excludes from a_ utility's

cost of service the accumulated costs associated with the

cancellation of a planned generating facility is unconsti-

tutional as applied to that utility, and violates the Fifth

Amendment applied to the Federal Constitution.”* Spe-

cifically, DP&L argues that denying recovery of the Killen

expenditures amounts to the confiscation of its property

and urges us to overturn our decision in CEI.

*The confiscation clause of the Fifth Amendment applies to the

states through the Due Process Clause of the Fourteenth Amend-

ment. See Webb's Fabulous Pharmacies, Inc. v. Beckwith (1980),

449 U.S. 155,

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

In CEI, supra, we held in the syllabus that “[t]he

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

vestment in terminated nuclear generation stations as

amortizable costs to be recovered from the utility’s rate-

payers is inconsistent with the ratemaking formula con-

tained in R. C. 4909.15 and is unreasonable and unlawful.”

Several of the constitutional arguments advanced by ap-

pellant are similar to the statutory arguments that we con-

sidered and rejected in CEI. For example, appellant would

rely on R. C. 4905.22 to support its contention that Killen

expenditures “were incurred in order to provide necessary

and adequate service.”"® The commis- [101] sion in CEI

phrased its argument in virtually identical terms. We ad-

dressed this argument, at pages 163-164, stating as follows:

“The commission urges that ‘an expenditure by a util-

ity can be considered a cost of rendering the public utility

service if it fails in fact to achieve its intended purpose

°°° lif] 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 main-

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

plant expenditures represent ‘[t]he cost to the utility of

RK. C. 4905.22 provides in pertinent part:

“Every public utility shall furnish necessary and adequate

service and facilities, and every public utility shall furnish and pro-

vide with respect to its business such instrumentalities and facilities,

as are adequate and in all respects just and reasonable. °**”

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

rendering 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 pro-

vided any service whatsoever to the utility's customers.”

“°°? The now terminated nuclear plants represented

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. °°°

“The extraordinary loss sustained by CEI in connec-

tion with the terminated nuclear plants cannot be trans-

"Cf. West Ohio Gas Co. v. Pub. Util. Comm. (1935), 294 U. S.

63, 78 (Stone, J., concurring) :

“e°*The property for which constitutional protection is invoked

is that ‘used and useful in the public service,’ not the enlarged busi-

ness of the future which petitioner hopes to obtain through the

present expenditure of money. I know of no constitutional principle

upon which this expenditure must be taken from the pockets of

the patrons of the present business, any more than the cost of

future service lines required to carry on the new business. ***”

Although Justice Stone made the above-quoted statement to

express his disagreement with the expansive constitutional protec-

tion afforded “prudent outlay” by his brethren, his narrower con-

ception of that which the constitution protects became the majority

position in Natural Gas Pipeline Co., an opinion delivered by Chief

Justice Stone. Moreover, Justice Stone joined the Hope Natural Gas

Co., majority, which delimited the constitutional inquiry even

further by deleting the references to “constitutional requirements”

and “the limits of due process” that the concurring justices in

Natural Gas Pipeline Co. found objectionable.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

formed into an ordinary operating expense pursuant to

R. C. 4909.15(A)(4) by commission fiat. The commis-

sion’s statement that ‘[c]ancellation does not create a past

loss, but gives rise to a current cost’ is unpersuasive. Under

this rationale we question whether there could ever be a

‘past loss’ the return of which would not be recoverable

in future ratemaking proceedings notwithstanding the

commission’s assertion to the contrary. °°°”

Appellant further contends that the commission, in

denying the Killen amortization on the strength of this

court’s decision in CEI, disregarded the constitutional re-

quirement announced in FPC v. Hope Natural Gas Co.,

[102] supra (320 U. S. 591), at page 603, that “[t]he rate-

making process °°°® involves a balancing of the investor

and the consumer interest.” Appellant asserts that it “and

all Ohio utilities are disadvantaged in the capital markets

where they must attract capital in order to plan for the

future and to provide adequate facilities under Rev. Code

§ 4905.22 because the utilities must inform their investors

that they may not be permitted to earn a rate of return

on this investment if the facilities which are prudently

planned and necessary today are cancelled in the future.”

This same argument was presented under the rubric

of “policy” in CEI where we stated, at pages 167-168:

“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 ‘drivjing] up the return on invest-

ment required by investors in Ohio utilities. This gloomy

scenario, however, does not imbue the commission with

the authority to rewrite the statutes. The statutes in ques-

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

tion 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 pur-

suant 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 commission and the utilities should petition the Gen-

eral Assembly to enact changes in the ratemaking struc-

ture 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 ex-

pense of the ratepayers. Under the ratemaking formula

now in effect consumers 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: ‘°°° [t is only proper that their [the investors’]

venture be found operational before they commence to

recoup their capital outlays from the consumers.’ Con-

sumers’ Counsel v. Pub. Util. Comm. (1979), 58 Ohio St.

2d 449, 456-457 [12 0.0. 3d 378].”

In Consumers’ Counsel vy. Pub. Util. Comm. (1979),

58 Ohio St. 2d 449 [12 O.0. 3d 378] (hereinafter “Toledo

Edison” ), this court held that the Davis-Besse Unit 1 gen-

erating station. which was not “used and useful in render-

ing the public utility service” pursuant to R. C. 4909.15

(A)(1). could not be included in the utility's rate base.

Toledo Edison made a constitutional argument similar to

that presented herein to which we responded, at page 456:

Dayton Power & Light Co. v. Pub. Util. Comm..

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

“Toledo Edison argues that to deny inclusion of the

unit in its rate base would be tantamount to the confisca-

tion of its property in violation of its constitutional right

to due process of law. In Columbus Gas & Fuel Co. v.

Pub. Util. Comm., supra (292 U. S. 398), the Supreme

Court addressed the issue of [103] whether gas fields not

yet in service should be included in the rate base. Justice

Cardozo, speaking for the court, stated, at page 406:

“There will be no need in the computation of the

rate base to include the °°° value of fields not presently

in use, unless the time for using them is so near that they

may be said, at least by analogy, to have the quality of

working capital. °*°® Postponement of °*° profit until the

state of imminent or present use is not an act of confisca-

tion, but a legitimate exercise of legislative judgment.’

“ooo

“It would be inequitable to prematurely shift the risk

of plant failure from the utility's investors to the rate-

payers by the inclusion in the rate base of highly complex

and innovative technology which has not been proven to

be reasonably free from significant design or construction

defects. The initial risk of failure is appropriately borne

by investors, who have undertaken the project and who

will ultimately profit from its success.”

While we again note that Toledo Edison involved

rate base consideration under 4909.15(.A)(1), as opposed

to matters relating to cost of service under R. C. 4909.15

(A)(4), the analogy is a fair one insofar as it indicates

that the General Assembly has adopted a consistent posi-

tion in balancing investor and consumer interests in utility

ratemaking. Pursuant to the statutory ratemaking formula

investors are issued a fair and reasonable return on prop-

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

erty that is determined to be used and useful, R. C, 4909.15

(A)(2), plus the return of costs incurred in rendering the

public service, R. C. 4909.15(A)(4), while consumers

may not be charged “for utility investments and expendi-

tures that are neither included in the rate base nor prop-

erly categorized as costs.”* We see no constitutional in-

firmity in the balance thus struck by the General Assembly.

Appellant also presents an elaborate argument prem-

ised on the Federal Energy Regulatory Commission

(FERC) Uniform System of Accounts, 18 C.F.R., Part

101, which Ohio utilities are required to follow pursuant

'2Am. Sub. S. B. No. 378 as passed by the Senate included the

following language, offered to amend R. C, 4909.154:

“In its establishment of just and reasonable rates for public

utilities under section 4909.15 of the Revised Code, the public

utilities commission shall allow any expenditures incurred in the

provision of public utility services unless such expenditures are

found by the commission to have resulted from imprudent man-

agement.”

This proposed amendatory language was deleted by the House

of Representatives and did not reappear in the final version of the

bill. See Am. Sub. S. B. No. 378.

Although Section 7 of Am. Sub. S. B. No. 378 as passed by the

Senate, stated that, “Section 4909.154 of the Revised Code, as

amended in Section 1 of this act, is not intended to reverse Con-

sumers’ Counsel vy. Public Utilities Commission (1981), 67 Ohio

St. 2d 153 [21 0.0. 3d 96], with respect to those specific capital

costs that were disallowed in that case,” the “any expenditures”

language of the amendment would have broadened the range of

allowable expenses considerably. That the General Assembly chose

not to enact this proposed provision is further evidence that our

decision in CEI comports with the legislative intention underlying

the ratemaking statutes.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

to Ohio [104] Adm. Code 4901:1-9-05," to support in-

clusion of its Killen expenditures. We were treated to sim-

ilar accounting-based contentions in CEI but found it un-

necessary to discuss them in our opinion because as OCC

notes, “it is not the Uniform System of Accounts which

governs public utility ratemaking, but rather the Ohio

Revised Code.” (Emphasis sic.) Thus, the controlling fac-

tor for ratemaking purposes is not whether the Killen ex-

penditures must be accounted for under Account 182,

“extraordinary property losses,” as appellant claims, or

whether these expenditures should be assigned to Account

No. 121, “nonutility property” or Account No. 426.5, “other

deductions,” as OCC suggests. While we have acknowl-

edged the Uniform System of Accounts in previous opin-

ions, see, e.g., Consumers’ Counsel v. Pub, Util. Comm.,

supra (58 Ohio St. 2d 108 [12 0.0. 3d 115] ), at page 112;

Toledo Edison, supra, fn., at pages 455-456, we have never

held and do not hold today that accounting practice and

'§Ohio Adm. Code 4901;1-9-05 provides in pertinent part:

“The system of accounts and records, identified and designated

as ‘Uniform System of Accounts Prescribed for Public Utilities and

Licensees, effective January 1, 1961, as adopted by the Federal

Power Commission, is adopted by this Commission effective as of

January 1, 1961, for electric light companies operating within the

State of Ohio which are subject to the jurisdiction of the Federal

Power Commission except to the extent that the provisions of said

Uniform System of Accounts are inconsistent in any way with the

outstanding orders of this Commission pertaining to the accounting

treatment to be followed with respect to emergency facilities and

the Federal income tax results thereof and with respect to acceler-

ated depreciation and the Federal income tax results thereof. This

Commission reserves to itself the right to require the creation and

maintenance of such additional accounts as may hereafter be pre-

scribed, to cover the accounting procedure of such electric light

companies operating in the State of Ohio. ***”

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

the ratemaking provisions of the Revised Code are func-

tionally equivalent."* We rejected sub silentio this line of

argument based on the Uniform System of Accounts in

CEI and expressly reject it in the case at bar.’

In its final argument appellant asserts that “[e]xclu-

sion of the costs associated with the cancellation of Killen

Unit No. 1 guarantees that DP&L will be unable to earn

a fair and reasonable rate of return.” There is little eviden-

tiary support for this contention. As the commission stated

in its order, DP&L “objected to the staff's reversal of the

company’s [proposed Killen] adjustment, but presented

no witnesses relative to the subject and did [105] not ad-

dress the matter on brief.”"® This failure to present evi-

dence relating to Killen and the effect thereof on the rates

set by the commission may perhaps be explained if, as it

appears, appellant's position is that excluding the Killen

expenditures is confiscatory as a matter of law. Per se con-

fiscation in a utility rate case may exist as an abstract

premise, but the constitutional cases make it clear that a

“The commission acknowledged the distinction between ac-

counting and ratemaking in its opinion dated March 17, 1982, in

case Nos. 81-146-EL-AIR and §1-1565-EL-UNC, stating, at page

28, that “although we cannot allow an amortization allowance for

ratemaking purposes, for book purposes the applicant is authorized

to amortize the balances assignable to the terminated nuclear units

over an appropriate period of time, not to exceed 15 years.” See

Consumers’ Counsel v. Pub. Util. Comm, (1983), 4 Ohio St. 3d 111.

Appellant's argument based on the Uniform System of Ac-

counts is further flawed by its internal inconsistency. As OCC

recognized, “[a]ppellant did not and cannot explain the contradic-

tion between its apparent recognition that Account 182 covers ‘ex-

traordinary property losses’ and its simultaneous claim that Account

182 relates to ‘normal expenses.’ ”

At oral argument appellant briefly mentioned Killen but

presented no argument relating thereto, relying instead on its briefs.

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

successful challenge must demonstrate that the rate order

when reviewed in its entirety falls outside the “broad zone

of reasonableness,” Permian Basin Area Rate Cases, supra,

at page 770, and the “heavy burden” of establishing un-

reasonableness must be borne by the challenger. Hope

Natural Gas Co., supra, at page 602.

Appellant's expert testified that “the °°° [CEI] ruling

serves to increase the risk associated with common stock

ownership of electric utitlities in this state,” but did not

attempt to quantify this perceived additional risk. More-

over, there is nothing to suggest that the commission did

not take this purportedly greater risk into account in its

order."’ In determining the cost of equity capital the com-

mission concluded that 16.44 percent was a “reasonable

estimate,” even though 16.44 percent was in “the upper

half of the °°*° [cost of capital] range °°°.” The commis-

sion selected this figure after finding “*°*® it imprudent to

dampen any optimism that may exist in the investment

community with respect to the possibility that this com-

pany may be emerging from its extended financial crisis

by authorizing an unduly conservative equity earnings

opportunity in this proceeding.” The commission’s rate of

return summary stated that “[a]pplying a cost of equity

"The commission order did not specifically refer to “the in-

crease in investment risk resulting from the [CEI] decision,” as did

the order in case Nos. 81-146-EL-AIR and 81-1565-EL-UNC (at

page 40), but it is quite clear that the commission is fully cognizant

of CEI. Indeed, it is the commission's position that the instant

appeal “concerns the definition of risks*** [and CEI] merely de-

fined the economic risks and benefits under Ohio law. One of the

risks is that investors, not consumers, will be required to pay for

plants which will never provide service to ratepayers. This, of

course, may make Ohio untilities’ capital and debt less attractive to

investors, but it does not make rates confiscatory.”

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

of 16.44 percent to the equity component of the capital

structure approved herein produces, when combined with

the findings relative to long-term debt and preferred stock,

a weighted cost of capital of 12.11 percent. The Commis-

sion is of the opinion that a rate of return of 12.11 percent

is sufficient to provide applicant reasonable compensation

for the electric service it renders customers affected by

this application.” It follows that if the 16.44 percent cost

of equity component is within the upper half of the range,

then the 12.11 percent rate of return is also within the

upper range. Thus, even if appellant were correct in its

assertion that the Killen exclusion precludes it from earning

its authorized rate of return, there is nothing in the record

to suggest that any reduced rate of return attributable to

the Killen exclusion would not still be constitutional be-

cause “°*°*® any rate selected °°° from the broad [106]

zone of reasonableness °°*° cannot properly be attacked

as confiscatory.” Permian Basin Area Rate Cases, supra,

at page 770.

To prevail, appellant must prove not only the unrea-

sonableness of the Killen exclusion but also the confiscatory

effect this exclusion had on the rates established by the

commission, viewing the rate order “in its entirety.” Hope

Natural Gas Co., supra, at page 602. We are unprepared

to say that appellant has carried this “heavy burden” in

either respect. In CEI we held that a utility's investment in

cancelled generating facilities could not be treated as

amortizable costs to be recovered from the utility's rate-

payers under the statutory ratemaking formula, Appellant's

arguments in the instant case are but variations on the

statutory and policy arguments we found wanting in CEI,

and we find them no more appealing when attired in con-

stitutional raiment. Moreover, even these unpersuasive

constitutional contentions lose whatever force they might

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

have had in the absence of any showing that the commis-

sion’s order “viewed in its entirety” is confiscatory. The

rule is clear: “*°° If the total effect of the rate order can-

not be said to be unjust and unreasonable, judicial inquiry

°°° is at an end.” Hope Natural Gas Co., supra, at page

602. The total effect of the commission's rate order cannot

be said to be unjust and unreasonable and therefore our

judicial inquiry is at an end. Accordingly, we hold that the

commission's disallowance of DP&L’s request to treat its

Killen expenditures as amortizable costs pursuant to R. C.

4909.15(A)(4) does not violate the Fifth and Fourteenth

Amendments to the Constitution of the United States.

For the reasons hereinbefore stated the decision of

the commission is affirmed in part and reversed in part

and the case is remanded to the commission for further

proceedings consistent with this opinion.

Judgment accordingly.

CeLEBREZZE, C.J., W. Brown, C. Brown and WILson,

J.J., concur,

Locuer and Hotes, J.J., concur in part and dissent

in part.

Wison, J., of the Second Appellant District, sitting

by assignment.

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

I concur in Parts I and III of the majority opinion. As to

Part Il, however, I dissent.

This court has traditionally upheld the test-year con-

cept. Part I of the majority opinion, Consumers’ Counsel v.

Pub. Util. Comm. (1981), 67 Ohio St. 2d 372 [21 O.0. 3d

234], and Ohio Water Service Co. vy. Pub. Util. Comm.

(1983), 3 Ohio St. 3d 1, enhance that tradition. Neverthe-

less, the majority fails to recognize that the issue in Part

Dayton Power & Light Co. v. Pub. Util. Comm.

4 Ohio St. 3d 91, 447 NE 2d 733 (1983)

II is essentially the same as that in Part I: whether this

court will reverse the decision of the Public Utilities Com-

mission to exclude a post-test-year expense from consider-

ation. Both Consumers’ Counsel, supra, and Ohio Water

Service, supra, lead to the same conclusion. We should

affirm the decision of the Public Utilities Commission

[107] because: (1) the requested expense was incurred

after the test year, and (2) the utility decided when to

file its rate case. See Consumers’ Counsel, supra, at pages

374-376.

We should not apply or construe R. C. 4909.16].

Nothing in that provision suggests that it was intended to

supersede the test-year concept. Furthermore, its applica-

tion may violate the constitutional prohibition against the

retroactive application of statutes, see Secion 28, Article

II of the Ohio Constitution, and the statutory presumption

in favor of prospective laws, see R. C. 1.48, because of R. C.

4909.161 became effective after the original tax liability

accrued and after the test year.

Accordingly, I would affirm the decision of the Public

Utilities Commission as to all three issues before this court.

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

I agree with the majority's resolution of the second and

third issues. However, with respect to the first issue, the

denial of appellant's post-test-year wage adjustment, I

dissent on the basis of my dissenting opinions in Con-

sumer’s Counsel vy. Pub. Util. Comm. (1981), 67 Ohio St.

2d 372, 376 [21 O.0. 3d 234], and Ohio Water Service

Co. v. Pub. Util. Comm. (1983), 3 Ohio St. 3d 1, 4.

Cleve. Elec. Illum. Co. v. Pub. Util. Comm.

4 Ohio St. 3d 107, 447 NE 2d 746 (1983)

DECISION AND OPINION OF

THE SUPREME COURT OF OHIO

CLEVELAND ELecrric ILLUMINATING COMPANY,

APPELLANT, 0,

Pusiic Uritities COMMISSION OF OHIO ET AL.,

APPELLEES

Public Utilities Commission; expenditures associated with

four terminated nuclear generating stations not amor-

tizable, when; private property not unconstitutionally

confiscated by R. C. 4909.15(A)(4); Commission's find-

ings of fact adequate, when, R. C. 4903.09.

(No. 82-989 — Decided April 13, 1983. )

AppEaL from the Public Utilities Commission of Ohio.

This is an appeal by the Cleveland Electric Iluminat-

ing Company (hereinafter “CEI” or “company”) from an

order of the Public Utilities Commission (hereinafter

commission”) fixing the company’s rates and charges for

electric service.’ CEI had proposed an adjustment provid-

ing for the amortization of expenditures associated with

the cancellation of four nuclear [108] generating stations.’

The commission denied the amortization, citing Con-

sumers’ Counsel v. Pub. Util. Comm. (1981), 67 Ohio St.

2d 153 [21 O.0. 3d 96], wherein this court first considered

the expenditures here under discussion.

'The same order of the commission, case Nos. 81-146-EL-AIR

and 81-1565-EL-UNC, decided March 17, 1982, is the subject of

the appeal taken by the Office of Consumers’ Counsel in case No.

82-1004, Consumers’ Counsel v. Pub. Util. Comm. (1983), 4 Ohio

St. 3d 111, decided this date.

*For a description of the facts leading up to the termination of

the facilities in question, see Consumers’ Counsel, infra, at page 154.

Cleve. Elec. Illum. Co. v. Pub. Util. Comm.

4 Ohio St. 3d 107, 447 NE 2d 746 (1983)

CEI sought rehearing of Consumers’ Counsel, supra,

which we denied by entry dated September 1, 1981, CEI

then appealed to the United States Supreme Court, which

dismissed for want of a properly presented federal ques-

tion. See 71 L. Ed. 2d 455 (Jan. 25, 1982).

On October 21, 1981, in case No, 81-1096-EL-COI,

the commission again considered the same expenditures

and ordered a reduction in CEI’s rates as mandated by

Consumers’ Counsel, supra. CEI’s appeal from that deci-

sion was dismissed, on July 7, 1982, without opinion by this

court in Cleveland Elec. Illum. Co. v. Pub. Util. Comm.,

case No. 82-165. On appeal, the United States Supreme

Court again dismissed the cause for want of a properly

presented federal question. See 51 U.S.L.W. 3507 (Jan. 11,

1983).

The Office of Consumers’ Counsel has been granted

leave to intervene as appellee.

The cause is now before this court upon an appeal

as of right.

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

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

Mr. Richard W. McLaren, Jr., for appellant.

Mr. Anthony J. Celebrezze, Jr., attorney general, Mr.

Marvin I. Resnik, Ms. Marsha R. Schermer and Mr. Harris

S. Leven, for appellee Public Utilities Commission.

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

Martin J. Marz, for intervening appellee Office of Con-

sumers’ Counsel.

Per Curiam. In the present appeal, CEI advances

three propositions of law. First, CEI urges this court to

re-examine its holding in Consumers’ Counsel, supra; sec-

ond, CEI challenges the constitutionality of R. C. 4909.15

(A)(4); and third, CEI contests the adequacy of the

commission's opinion and order.

Cleve. Elec. Illum. Co. v. Pub. Util. Comm.

4 Ohio St. 3d 107, 447 NE 2d 746 (1983)

The question whether the expenditures associated

with the four terminated nuclear generating stations may

be included in test year expenses as allowable operating

expenses was addressed by this court in Consumers’ Coun-

sel, supra. In that case we held in the syllabus that:

“The Public Utilities Commission’s treatment of a util-

ity’s investment in terminated nuclear generating stations

as amortizable costs to be recovered from the utility's rate-

payers is inconsistent with the ratemaking formula con-

tained in R. C. 4909.15 and is unreasonable and unlawful.”

In the present case, we are confronted with exactly

the same issue arising out of exactly the same set of facts.

We are no more persuaded by ap- [109] pellant’s argu-

ments today than we werc when they were originally ad-

vanced in Consumers’ Counsel. We adhere to our position

taken in that case for the reasons expressed therein.

Appellant suggests, however, that such an interpre-

tation of R. C. 4909.15(A)(4) constitutes a confiscation

of private property in violation of the Fifth and Fourteenth

Amendments to the United States Constitution. We re-

cently addressed this precise constitutional question in

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

4 Ohio St. 3d 91. After a thorough review of the applicable

constitutional standards, we determined that R. C. 4909.15

(A)(4) does not violate the Fifth and Fourteenth Amend-

ments, stating, at pages 103-106.

“ee? Pursuant to the statutory ratemaking formula

investors are assured a fair and reasonable return on prop-

erty that is determined to be used and useful, R. C.

4909.15(A)(2), plus the return of costs incurred in render-

ing the public service, R. C. 4909.15(A)(4), while con-

sumers may not be charged ‘for utility investments and

expenditures that are neither included in the rate base nor

properly categorized as costs, [Footnote omitted.] We see

Cleve. Elec. Illum. Co. v. Pub. Util. Comm.

4 Ohio St. 3d 107, 447 NE 2d 746 (1983)

no constitutional infirmity in the balance thus struck by

the General Assembly.

“eo00

“°° Per se confiscation in a utility rate case may exist

as an abstract premise, but the constitutional cases make

it clear that a successful challenge must demonstrate that

the rate order when reviewed in its entirety falls outside

the ‘broad zone of reasonableness’ [Permian Basin Area

Rate Cases (1968), 390 U. S. 747, 770] and the ‘heavy

burden’ of establishing unreasonableness must be borne

by the challenger. [FPC v. Hope Natural Gas Co. (1943),

320 U. S. 591, 602. }

“eo0

“°°° The rule is clear: *°°° If the total effect of the

rate order cannot be said to be unjust and unreasonable,

judicial inquiry °°° is at an end. °°°” (Emphasis added. )

Moreover, the Constitution imposes no methodological

strictures on ratemaking authorities. See Dayton Power &

Light Co., supra, at page 98, fn. 8.

CEI has not demonstrated that the rate order in its

entirety is confiscatory. The commission submits that CEI’s

failure to do so “precludes a finding of confiscation in this

case.” The commission specifically adjusted the cost of

common equity upward to reflect the perceived increased

risk to investors as a result of this court’s decision in Con-

sumers’ Counsel, supra. See the commission’s order in case

No. 81-146-EL-AIR, at page 40, and Consumers’ Counsel

v. Pub, Util. Comm. (1983), 4 Ohio St. 3d 111. This adjust-

ment buttresses the conclusion that the instant order falls

*The commission states in its brief: “*** [T]he Commission

would submit that its rate of return finding, which CEI has not

claimed is insufficient or even assailed, precludes a finding of

confiscation in this case.”

Cleve. Elec. Illum. Co. v. Pub. Util. Comm.

4 Ohio St. 3d 107, 447 NE 2d 746 (1983)

within the broad zone of reasonableness. Thus, even if

appellant were correct in its assertion [110] that the ex-

clusion based on R. C, 4909.15(A)(4) is improper, there

is nothing in the record to suggest that the commission’s

order, viewed in its entirety, would not still be constitu-

tional because “any rate selected °°* from the broad zone

of reasonableness °°° cannot be attacked as confiscatory.”

Permian Basin Area Rate Cases, supra, at page 770.

The law set forth in the second paragraph of the

syllabus in Dayton Power & Light Co., supra, is controlling

here: “The Public Utilities Commission’s disallowance of

a utility's request to treat its expenditures associated with

a cancelled generating plant as amortizable costs pursuant

to R. C. 4909.15(A){4) does not violate the Fifth and

Fourteenth Amendments of the Constitution of the United

States.”

We likewise reject appellant’s final contention that

the commission failed to render adequate findings of fact

pursuant to R. C. 4903.09.*

R. C. 4903.09 states, in pertinent part:

“In all contested cases °*°* the commission shall file

°°° findings of fact and written opinions setting forth the

reasons prompting the decisions arrived at °°°.”

The purpose of R. C. 4903.09 is to provide this court

with sufficient details to enable us to determine, upon

appeal, how the commission reached its decision. See

General Tel. Co. v. Pub. Util. Comm. (1972, 30 Ohio St.

2d 271 [59 O.O. 2d 338]. In the present case, we find that

‘Specifically, CEI contends that the commission has failed to

adequately explain its conclusions on three issues; (1) the computa-

tion of the allowance for funds used during construction, (2) the

evidentiary ruling made as to a particular exhibit, and (3) the

determination of the allowable amount of fuel inventory.

Cleve. Elec. Illum. Co. v. Pub. Util. Comm.

4 Ohio St. 3d 107, 447 NE 2d 746 (1983)

the commission’s order and opinion contained reasoning

that adequately responded to CEI’s claim. Indeed, where

pertinent, the report alluded to specific passages from the

transcript to support its rationale.’ Accordingly, we find no

violation of R. C. 4903.09.

For the above stated reasons, the order of the com-

mission is affirmed.

Order affirmed.

CELEBREZZE, C. ]., STEPHENSON, SWEENEY, C. BROWN

and J. P. CeLesrezze, JJ., concur.

Howes, J., concurs separately.

Locuer, J., concurs in judgment only.

STEPHENSON, J., of the Fourth Appellate District, sit-

ting for W. Brown, J.

[111] Hotmes, J., concurring. I concur in the court's

resolution of the first issue, which relates to the amortiza-

tion of the cancelled nuclear generating stations, solely on

the basis of stare decisis. However, I believe that the

proper approach to this question was set forth in Justice

Paul W. Brown’s dissenting opinion in Consumers’ Counsel

v. Pub, Util. Comm. (1981), 67 Ohio St. 2d 153, 168 [21

0.0. 3d 96}, which I joined.

*R. C, 4903.09 contains no requirement that the commission's

findings of fact or reasonings be correct. Accordingly, we make no

comment on the commission's actual disposition of the issues in-

volved in CEI’s third proposition of law.

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

DECISION AND OPINION OF

THE SUPREME COURT OF OHIO

CONSUMERS COUNSEL, APPELLANT, V.

Pusiic Urtitities COMMISSION OF OHIO ET AL.,

APPELLEES,

Public Utilities Commission: rate base for determining rate

increase may not include customer-supplied funds,

when; adjustment for flotation costs proper, when;

increased “perceived risk to investors” following court

decision properly considered in determining rate of

return on common equity; expenditures associated

with four terminated nuclear units amortizable, when,

R. C. 4905.13.

(No. 82-1004 — Decided April 13, 1983.)

AppEAL from the Public Utilities Commission of Ohio.

On January 30, 1981, Cleveland Electric Hluminating

Company (company) notified the Public Utilities Com-

mission of Ohio (commission) of its intent to file an appli-

cation for an increase in rates, and of its intent to use the

twelve months ending December 31, 1982 as the test period

and March 31, 1981 as the date certain. The commission

approved the proposed date certain, but directed the com-

pany to file its application and supporting exhibits on the

basis of a test period with the approved date certain as

the mid-point, as well as on the basis of the fully projected

test year ending December 31, 1982.

On May 5, 1981, the company formally applied to the

commission for the authority to increase its rates and

charges for electric service to its customers. Depending on

whether the 1980-1981 or 1982 test year is used, the

company sought additional gross annual revenues of

$134,834,473 or $135,293,271. The commission, by order

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

dated May 27, 1981 accepted the application, assigned this

rate case number 81-146-EL-AIR, and on June 17, 1981

granted appellant, Office of Consumers’ Counsel the right

to intervene. Briefing and hearings followed in due course.

In its opinion and order dated March 17, 1982, the

commission approved a rate increase based on the fully

projected test year. It allowed the company a return on

common equity of 17.30 percent, and further found an

overall [112] rate of return of 12.25 percent, upon a rate

base of $1,900,527,000, to be fair and reasonable. The new

rates would generate approximately $1,166,292,000 in

gross annual operating revenues, an increase of

$106,977 ,000.

The cause is now before this court upon an appeal as

of right.’

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

Deborah A. Ballam and Mr. Martin J. Marz, for appellant.

Mr. Anthony J. Cc'*brezze, Jr., attorney general, Mr.

Marvin I. Resnik and Mr. Harris S. Leven, for appellee.

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

Buchmann and Mr. Richard W. McLaren, Jr., for inter-

vening appellee.

Per Curiam. R. C. Chapter 4909 requires the commis-

sion to determine just and reasonable rates for services

rendered by our state's public utilities. Consumers’ Counsel

raises questions of law and fact in this appeal from the

commission's order, claiming the rate increase allowed

therein to be unlawful and unreasonable. We consider

these claimed errors under our bifurcated standard of re-

view well-stated by Justice Pau! Brown:

‘Case No. 82-989 Cleveland Flec Illum. Co v. Pub. Util

Comm. (1983). 4 Ohio St 3d 107. decided this date also arises

from the same rate case Cleveland Electric Mluminating Co., the

appellant in that case. is intervening appellee here

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

“As to questions of fact, this court has repeatedly

enunciated the rule that orders of the commission will not

be reversed unless they are manifestly against the weight

of the evidence or are so clearly unsupported by the record

as to shown misapprehension, mistake or willful disregard

of duty. [Citations omitted.]

“As to question of law, however, this court has com-

plete, independent power of review. Legal issues are ac-

cordingly subjected to more intensive examination than

are factual questions.” Consumers’ Counsel v. Pub. Util.

Comm. (1979), 58 Ohio St. 2d 108, 110 [12 0.0. 3d 115].

We address the contentions of Consumers’ Counsel

in the order in which they arise in the calculation of the

rate increase.

As with every application for an increase in rates,

the commission first determined the appropriate rate base

valuation as of the date certain. R. C. 4909.15(A). Con-

sumers’ Counsel challenges the calculation of the rate

base, contending the commission as a matter of law im-

properly failed to deduct from working capital an amount

equal to the company’s accrued nuclear fuel disposal ac-

count balance. At the date certain in this rate case, the

accumulated balance was $3,126,000.

Since the granting of the company’s 1978 application

for a rate increase, the commission has allowed the inclu-

sion in current operating expenses of deferred costs for

the disposal of spent nuclear fuel used at the Davis-Besse

Nuclear Power Plant. The spent fuel is presently being

accumulated and stored at a temporary site, with ultimate

disposal method and cost yet to be determined. It is ex-

pected that permanent disposal will occur in the late

[113] 1980's, hut this future expense is allowed to be in-

cluded in current operating expenses on the principle that

the cost will be incurred due to present operations of

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

Davis-Besse. The amounts included in operating expenses

are based on estimates prepared by the United States De-

partment of Energy and these customer contributions are

kept in a reserve fund by the company, available for in-

‘estment. Revenues from investment of the fund are re-

ined to the general fund.

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

St. 395 [53 0.0. 304], paragraph five of the syllabus, this

court held:

“In fixing telephone rates, customers’ contributions in

the form of accruals [sic] for the payment of taxes, deposits

to secure payment of customers’ bills for service or as

advances on installation charges, and collections of rents

to be paid at future dates, which will be constant with

reasonable certainty in the foreseeable future and which

are available for investments in materials and supplies, or

for use as working capital, should be used as an offset on

the allowance for working capital, including investments

in materials and supplies necessary for the normal opera-

tions of the company and for plant maintenance and re-

pair.” (Emphasis added. )

The principle underlying this holding is that investors

in public utilities should be permitted to earn a return only

on that property for which they have supplied funds, not

on funds contributed by customers. Consumers’ Counsel,

supra, at 115. By deducting such deposits from working

capital, the company’s cash flow generated by the cus-

tomer - supplied account is offset by the hypothetically

equivalent reduction in revenues caused by the smaller

rate base.

Since Cincinnati, this court has consistently applied

the principle that a utility may not earn a return on cus-

tomer-supplied funds which are “constant with reasonable

certainty and available for investments.” Consumers’

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

Counsel, supra; Cleveland Elec. Illum. Co. v. Pub. Util.

Comm. (1975), 42 Ohio St. 2d 403 [71 0.0. 2d 393],

paragraph nine of the syllabus. Conversely, when such an

account is not “constant with reasonable certainty,” as

with customer deposits in the form of budget billing bal-

ances, no offset against working capital and concomitant

reduction in rate base are required. Cleveland v. Pub. Util.

Comm. (1982), 7 Ohio St. 2d 290, 294 [24 O.O. 3d 370].

In the instant case, the commission justified permit-

ting the company to earn interest on the accrued nuclear

fuel disposal account without a compensating rate base

deduction by stating its intent that the monies earned be

used to pay the higher costs expected when actual dis-

posal occurs in the future. The commission speculates that

the amounts charged to current customers will be insuffi-

cient to cover actual disposal costs and further speculates

that the return earned on the account will be available

to offset this additional expense.

We note the inherent uncertainty of the estimated

cost of permanent disposal and the possibility that such

costs may in fact be less than expected. [114] We also note

the inability of the commission or company to track pre-

cisely the funds earned by this account. Given these facts,

we are not persuaded that an exception to the general

rule of law should apply. It is uncontroverted that the cus-

tomer-supplied funds in this account are constant with

reasonable certainty and are available for investments.

Accordingly, working capital should be offset in the

amount of the accrued nuclear fuel disposal account, there-

by reducing the rate base. This, in effect, will deny the

company a return on accrued customer-supplied funds.

By failing to order such an offset, the commission erred as

a matter of law and its decision must be reversed.

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

Having determined the appropriate rate base and

operating expenses, the commission next considered capital

structure, fixing the relative percentage of debt, preferred

stock and common equity. It then determined what it

believed to be the correct cost for each of these com-

ponents. After the commission ascertained the cost of

capital components, it assigned rates of return which must

be “fair and reasonable.” From these rates, an overall

cost of capital is derived, which is equated with the fair

rate of return, and when applied to the rate base, together

with expenses, results in the permissible rates to be

charged the customer.

Consumers’ Counsel disputes the calculation of cost of

common equity. It contends the adjustment of the baseline

cost of equity to account for a flotation costs’ improperly

included an increased risk to investors as a result of this

court’s decision in Consumers’ Counsel v. Pub, Util. Comm.

(1981), 67 Ohio St. 2d 153 [21 0.0. 3d 96] (hereinafter

“CEI’). In that case, this court disallowed the recovery

of the costs of four cancelled nuclear plants. Consumers’

Counsel here does not dispute that some adjustment was

appropriate for flotation costs, but argues that the com-

mission has misused the concept in order to guarantee a

return of invested capital in the terminated units.

Whether the figure derived by the commission to

reflect flotation costs is correct is a question of fact, there

being no dispute that some adjustment for flotation costs

is appropriate. Although Consumers’ Counsel proposed a

different amount, there was sufficient evidence in the

record to support the commission's decision to adopt its

*Flotation costs are incurred with the issuance of new or previ-

ously unissued stock and includes direct issuance costs such as

underwriting fees and printing costs, and indirect costs such as

dilution in the value of company stock already on the market.

Consumers’ Counsel vy. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

staff's proposal. In fact, the same range for /lotation costs

was upheld by this court in Consumers’ Counsel v. Pub.

Util. Comm. (1981), 67 Ohio St. 2d 303, 310 [21 0.0.

3d 191]. Moreover, nothing in the record evidences any

improper considerations underlying the approved amount.

Accordingly, we find the flotation cost adopted by the

commission neither unreasonable nor against the manifest

weight of the evidence.

With respect to the return on common equity, the

commission first adopted a range of 17.02 percent to 18.13

percent. This range, derived by the commission staff, gives

the commission discretion in selecting a specific point [115]

within the range to adjust the return on common equity

for the specific facts of the case presented. Although it

typically chooses the midpoint of the recommended range,

in this case the commission noted two factors which per-

suaded it to alter this practice. First, the selection of the

projected test year as the operating period for rate making

purposes was believed to offer the company “a better

opportunity to earn its authorized return.” This factor, if

viewed alone, would support the selection of the low point

of the recommended range.

The second factor specifically considered by the com-

mission was “the increase in investors’ perceived risk” fol-

lowing release of our decision disallowing recovery of the

cost of the four cancelled nuclear plants. The commission

had as evidence of the increased risk a relative decline in

price for common stock following our announcement of that

decision, and the lowering of the company’s bond rating

by Standard & Poor's, this court's holding being cited as a

factor in that action. Consequently, the commission select-

ed 17.30 percent as the appropriate return on common

equity, a figure midway between the low point and mid-

point of the recommended range.

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

Consumers’ Counsel contends that consideration of the

increased risk found to arise from our decision in CEI

when calculating return on common equity violates the

holding that ratepayers not pay for the terminated units.

The determination of the rate, however, was based on

empirical data presented by the company’s rate of return

witnesses, which testimony was considered relevant to that

determination.

R. C. 4909.15(A)(2) requires the commission to de-

termine a fair and reasonable rate of return to the utility.

The question whether a decision of this court may have

so increased the perceived risk to investors as to require

a higher rate of return on common equity is one the com-

mission may consider a factor in its decision. We do not

find the commission’s action in this regard “so clearly

unsupported by the record as to show misapprehension

or mistake or willful disregard of duty” and accordingly,

find no error.

Finally, in a related issue Consumers’ Counsel chal-

lenges the commission’s decision to authorize the utility

to amortize the balances assignable to the four terminated

nuclear units over an appropriate period of time not to

exceed fifteen years. This book amortization does not

affect the rates paid by customers. It is an accounting pro-

cedure available as an alternative to writing off the cost

of the terminated facilities (the company’s share being

approximately $50 million) in a single year. Such book-

keeping methodology is not governed by the ratemaking

statutes. See Dayton Power & Light Co. vy. Pub. Util.

Comm. (1983), 4 Ohio St. 3d 91. Rather, the commission

has express statutory authority under R. C. 4905.13 to

prescribe the manner in which a utility must keep its

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

books of account. The authorization in this case does not

contravene the decision in CEI and does not appear so

unreasonable as to justify reversal.

Accordingly, the decision of the commission is re-

versed for its failure to include an offset to the rate base

by the amount in the accrued nuclear fuel [116] disposal

account, affirmed in all other respects, and the cause re-

manded for further proceedings in accordance with this

decision.

Judgment accordingly.

CELEBREZZE, C. J., STEPHENSON, SWEENEY, Hotes, C,

Brown and J. P. CeLesrezze, JJ., concur.

Locuer, J., concurs in part and dissents in part.

STEPHENSON, J., of the Fourth Appellate District, sit-

ting for W. Browy, J.

Locuenr, J., concurring in part and dissenting in part. I

concur in the holding of the majority requiring that CEI

remove the accrued nuclear fuel disposal account balance

from the rate base. I concur in the judgment only as to the

accounting treatment of the costs of the cancelled nuclear

plants. Otherwise, I dissent.

In Consumers’ Counsel vy. Pub. Util. Comm. (1981),

67 Ohio St. 2d 153 [21 0.0. 3d 96] (“CET”), we refused to

allow CEI to amortize as costs to be recovered from its

ratepayers approximately $56,400,000 which it had invested

in four cancelled nuclear power plants. Regrettably, the

majority opinion signals an abject retreat from the stand.

What CEI condemned, today’s holding condones.

Our decision in CEI reaffirmed the fundamental

principle of rate base analysis. That is a plant must be

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

used and useful before the PUCO includes it in the rate

base.

“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 pursu-

ant 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 commission and the utilities should petition the Gen-

eral Assembly to enact changes in the ratemaking struc-

ture so as to provide this extra modicum of protection for

the investors. Absent such explicit statutory authoriza-

tion, however, the commission may not benefit the in-

vestors by guaranteeing the full return of their capital at

the expense of the ratepayers. Under the ratemaking

formula now in effect consumers are not chargeable for

utility investments and expenditures that are neither in-

cluded 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: “°°° It is only proper that their [the

investors’] venture be found operational before they com-

mence to recoup their capital outlays from the consumers.’

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

St. 2d 449, 456-457 [12 O.O. 3d 378].” (Bracketed mate-

rial sic.) CEI, supra, at 167-168, CEI, therefore holds

that CEI’s investors must bear the entire cost of the

cancelled plants.

[117] In this case, the PUCO expressly allowed CEI

to recover an increased return on capital due to an “in-

crease in investors’ perceived risk associated with the

Court’s [CEI] decision.” The commission accomplished

this by raising the rate of return from 17.02 to 17.30 per-

Consumers’ Counsel v. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

cent.* This approach by the PUCO allows CEI to gain

indirectly, by means of an increased rate of return, what

we prohibited it from receiving directly, by means of

amortization, in CEI, The burden of the (supposedly ) in-

creased risk, therefore, is back on the consumers con-

trary to our observation in CEI that “°°° the commission

may not benefit the investors by guaranteeing the full

return of their capital at the expense of the ratepayers.”

CEI, supra, at 167.

Regrettably, today’s decision marks the second time

that the majority of this court has turned its back on CEI.

See Consumers’ Counsel v. Pub, Util. Comm. (1982), 1

Ohio St. 3d 22 (“Consumers’ Counsel |1982)"). In that

case, a procedural subterfuge prevailed over precedent to

ensure that the utility would receive payment for its share

of the expenses paid toward the same cancelled nuclear

plants which were involved in CEI, Consumers’ Counsel

(1982), supra, at 25 (Locher J., dissenting ).

Today, this court falls prey to a combination of se-

mantic and statistical confusion. This is ironic indeed be-

cause: (1) the United States Supreme Court dismissed

CEI's appeal for want of a properly presented federal

question, Cleveland Elec. Illum. Co. v. Office of Consum-

ers’ Counsel (Jan. 25, 1982), U.S. , 71 L. Ed.

2d 455; and (2) we have recently reaffirmed the holding

of CEI and upheld its constitutionality in Cleveland Elec.

Illum. Co, v. Pub, Util, Comm, (1983), 4 Ohio St. 3d 107

(“CEI [1983]”): “In the present case, we are confronted

*The PUCO also adjusted the rate of return upward in order

to compensate CET for flotation costs. See footnote 2 of majority

opinion, We should also reverse and remand the decision of the

commission for a determination of the extent to which the adjust:

ment allows a return on investor capital in the cancelled plants and

instruct the commission to reduce the rate of return accordingly.

Consumers’ Counsel vy. Public Utilities Comm.

4 Ohio St. 3d 111, 447 NE 2d 749 (1983)

with exactly the same issue arising out of exactly the same

set of facts. We are no more persuaded by appellant's argu-

ments today than we were when they were originally ad-

vanced in [CEI]. We adhere to our position taken in that

case for the reasons expressed therein.” CEI (1983), supra,

at 108-109.

We should have summarily reversed the PUCO’s hold-

ing as to investor risk and flotation costs because CEI

is res judicata. That is, CEI stands for the proposition that

ratepayers are not to pay for these cancelled nuclear plants.

This rule should apply whether the mechanism used to

subvert the “used and useful” principle is called “amortiza-

tion” or anything else. The majority, however, desolates

CEI,

Accordingly, I would remand this case to the PUCO

for a determination as to the extent to which the rate of

return includes elements of compensation for the nuclear

plants and a reduction of the rate of return consistent with

that determination.

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

Opinion and Order of the

Public Utilities Commission of Ohio

(Filed January 5, 1983)

BEFORE

THE PUBLIC UTILITIES COMMISSION OF OHIO

In the Matter of the Application of |

The Cleveland Electric Illuminating

Company for Authority to Amend Case No.

and Increase Certain of its Filed{ 81-1378-EL-AIR

Schedules Fixing Rates and Charges

for Electric Service.

OPINION AND ORDER

The Commission, coming now to consider the above-

entitled application filed pursuant to Section 4909.18 Re-

vised Code, and the Staff Report of Investigation issued

pursuant to Section 4909.19 Revised Code; having ap-

pointed its attorney examiner, Barth E. Royer, pursuant

to Section 4901.18 Revised Code to conduct a public

hearing and to certify the record directly to the Commis-

sion; having reviewed the testimony and exhibits intro-

duced into evidence at the public hearing commencing

October 12, 1982 and concluding November 10, 1982; and

being otherwise fully advised in the premises, hereby

issues its Opinion and Order.

History of the Proceedings:

The Cleveland Electric Iluminating Company, the

applicant herein, is an Ohio corporation engaged in the

business of supplying electric service and steam heating

Opinion and Ord2r, PUCO Case No. 81-1378-EL-AIR

service in this state. As a public utility within the defini-

tion of Section 4905.02 Revised Code, an electric light

company within the definition of Section 4905.03(A ) (4)

Revised Code, and a heating company within the defini-

tion of Section 4905.03(A)(9) Revised Code, applicant

is subject to the jurisdiction of this Commission pursuant

to Sections 4905.04, 4905.05, and 4905.06 Revised Code.

The company provides retail electric service to some

713,000 customers in a 1,700 square mile service territory

which encompasses the greater Cleveland area as well as

all or parts of nine northeastern Ohio counties. Applicant

also provides steam heating service to some 350 customers

within the City of Cleveland, but it is the company’s

electric operations which are the subject of this proceed-

ing. The company’s present rates for electric service were

established by Order of this Commission in Cleveland

Electric Illuminating Company, Case Nos. 81-146-EL-AIR

and 81-1565-EL-UNC (March 17, 1982), as subsequently

modified by the Commission’s Entry on Rehearing in the

consolidated docket of May 12, 1982.

On November 13, 1981, The Cleveland Electric Illu-

minating Company served and filed a notice of its intent

to submit a permanent electric rate increase application

pursuant to Section 4909.18 Revised Code as required by

Section 4909.43(B) Revised Code and Rule 4901-7-01

Ohio Administrative Code. As a part of this prefiling noti-

fication, applicant requested that February 28, 1982 be

fixed as the date certain for the valuation of property and

that the twelve months ending December 31, 1983 be

established as the test period for the analysis of accounts.

By its Entry of December 9, 1981, the Commission ap-

proved the date certain proposed by the company, but

found that the company should submit an analysis of

accounts based upon a test year with an ending date of

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

August 31, 1982, in addition to the fully-projected test year

analysis proposed in its prefiling notification.

The instant application was submitted March 19,

1982, and was accepted for filing as of that date by Com-

mission Entry of April 14, 1982. The form of legal notice

proposed by the company was also approved. On May 28,

1982, applicant filed a notice requesting approval of cer-

tain amendments to the form of notice initially approved

so as to reflect the change in its existing rates resulting

from the Commission’s Entry of Rehearing of May 12,

1982, in the consolidated cases referred to above. The

Commission approved the revised form of notice by Entry

of June 23, 1982.

In accordance with the provisions of Section 4909.19

Revised Code, the staff of the Commission conducted an

investigation of the matters set forth in the application

and the related filings. A written report of the results of

the staff investigation was filed September 7, 1982, and

was served as provided by law. Objections to the staff

report were timely filed by the applicant and by inter-

venors Consumers Counsel, City of Cleveland, Indus-

trial Electricity Consumers, Senior Citizens, et al.', Fair

Rates Campaign Coalition’, and the Ohio Cable Television

‘Pursuant to the attorney examiner's Entry of October 6, 1982,

the participation of intervenor Senior Citizens, et al. has been

limited to rate design and tariff questions (See Senior Citizens

Coalition v. Public Utilities Commission, 69 Ohio St. 2d 625 [1982] ).

Accordingly, intervenor's objections relating to other matters have

been stricken (Tr. II, pp. 74-75).

*Pursuant to the attorney examine:’s Entry of October 15, 1982,

the participation of intervenor Fair Rates Campaign Coalition has

also been limited to rate design and tariff questions, and its objec-

tions relating to other matters have been stricken (Tr. IV, p. 3)

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

Association.’ Intervenor United States Steel Company

filed no objections, and did not subsequently participate

in the proceeding.

Pursuant to the Commission's Entry of September 22,

1982, the public hearing of this matter commenced Octo-

ber 12, 1982, at the State Office Building, 615 West

Superior Avenue, Cleveland, Ohio, Chairman Jon F. Kelly

presiding. The purpose of the Cleveland hearing was to

afford members of the public affected by the application

the opportunity to present statements concerning the

proposed increase. The hearing was reconvened October

18, 1982, at the offices of the Commission, 375 South High

Street, Columbus, Ohio, before attorney examiner Barth

E. Royer and concluded November 10, 1982. The recorded

transcript of the proceeding and the exhibits admitted

into evidence have now been certified to the Commission

by its examiner for its consideration.

Appearances:

Messrs. Alan D. Wright, Vice President—Public Af-

fairs and Legal, and Craig I. Smith, Senior Counsel, Cleve-

land Electric Illuminating Company, 55 Public Square,

Cleveland, Ohio, and Messrs. Squire, Sanders and Demp-

sey, by Messrs. Alan P. Buchmann and Richard W. Mc-

Laren, 1800 Union Commerce Building, Cleveland, Ohio,

on behalf of the applicant, The Cleveland Electric Ilumi-

nating Company.

8The Ohio Telephone Association filed objections to the Staff

Report recommendations relating to the question of pole attach-

ment rates at the time it filed its petition for leave to intervene.

However, the petition for leave to intervene was denied by the

attorney examiners Entry of October 8, 1982, a ruling affirmed

by the Commission in its Entry of November 3, 1982. Accordingly,

those objections should be dismissed

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

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

Messrs. Marvin I. Resnik, Harris $. Leven and Donn D.

Rosenblum, 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

Messrs. Martin J. Marz and Steven M. Sherman, Associate

Consumers’ Counsel, and Ms. Anne L. Hammerstein, Legal

Intern, 137 East State Street, Columbus, Ohio, on behalf

of the Office of Consumers’ Counsel, intervenor.

Mr. James E. Young, Director of Law, City of Cleve-

land, by Mr. Craig A. Glazer, Assistant Director of Law,

Room 106, City Hall, 601 Lakeside Avenue, Cleveland,

Ohio, on behalf of the City of Cleveland, intervenor.

Bell and Randazzo, Co., L.P.A. by Messrs. Langdon

D. Bell and Samuel C. Randazzo, and Ms. Judith B.

Sanders, 21 East State Street, Columbus, Ohio, on behalf

of Air Products and Chemicals, Inc., Aluminum Company

of America, ELKEM Metals Company, General Motors

Corporation, Jones & Laughlin Steel Corporation, L.C.P.

Chemicals and Plastics, Inc., PPG Industries, Inc., Sohio

Industrial Products, and Union Carbide Corporation (here-

inafter “Industrial Electricity Consumers’), intervenors.

Mr. Joseph P. Meissner, Cleveland Legal Aid Society,

1223 West 6th Street, Cleveland, Ohio, on behalf of the

Senior Citizens Coalition, the Greater Cleveland Welfare

Rights Organization, Inc., and the Western Reserve Alli-

ance, Inc. (hereinafter “Senior Citizens, et al.”), intervenors.

Messrs. Vorys, Sater, Seymour and Pease, by Mr. Wil-

lian S. Newcomb, Jr., 52 East Gay Street, Columbus, Ohio,

and Messrs. Hogan and Hartson, by Messrs. Gardner F.

Gillespie and Paul Glist, 815 Connecticut Avenue, Wash-

ington, D.C., on behalf of the Ohio Cable Television Asso-

ciation, intervenor.

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

Mr. James A. Draper, 33 Public Square, Suite 810,

Cleveland, Ohio, on behalf of the Fair Rates Campaign

Coalition, Intervenor.

. Messrs. Wayne I. Emery and Kenneth P. Pepperny,

600 Grant Street, Room 1569, Pittsburgh, Pennsylvania, on

behalf of the United States Steel Company, intervenor.

Commission Review and Discussion:

This case comes before the Cominission upon the ap-

plication of The Cleveland Electric Illuminating Company,

pursuant to Section 4909.18 Revised Code, for authority

to increase its rates and charges for electric service to

jurisdictional customers. Applicant alleges that its existing

rates are insufficient to provide it reasonable compensation

for the service it renders, and seeks Commission approval

of rate schedules which would yield some $233,262,000 in

additional gross annual revenue based on test-year opera-

tions as analyzed herein.

ALLOCATIONS

Because the instant application affects only the com-

pany’s retail electric sales, it is necessary to allocate prop-

erty, revenues, and expenses to insure that the rates

ultimately authorized reflect only the cost of providing

jurisdictional electric service. The staff generally adopted

the allocation factors proposed by the applicant, noting

that these allocation factors had been derived through the

same methodology approved by the Commission in appli-

cant’s recent cases (S.R., pp. 3-4). Intervenor City of Cleve-

land objected to the staff's acceptance of applicant's

allocation methodology, but did not pursue the matter at

hearing or on brief. The objection is overruled.

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

RATE BASE

The following table compares the original company

and staff estimates of the value of applicant's property

used and useful in rendering electric service to jurisdic-

tional customers as of the date certain of February 28,

1982. Objections to the staff's rate base valuation will be

discussed under appropriate subheadings below.

Jurisdictional Rate Base

(000's Omitted)

Applicant! __ Staff?

Plant In Service $2,551,996 $2,579,861

Less: Depreciation Reserve 614,829 618,135

Net Plant In Service $1,967,167 $1,961,726

Plus: CWIP 421,265 383,131

Working Capital 183,025 119,469

Less: Other Items i 165,542

Jurisdictional Rate Base $2,572,457 $2,298,784

‘App. Ex. 1B, Sched. B-1

2S.R., Sched. 7

Plant In Service:

As the above table indicates, the difference between

the date certain plant in service values initially proposed

by the applicant and the staff is relatively small. There

are, however, a number of issues relating to the plant in

service determination which must be addressed.

Land and Land Rights:

Because the schedules submitted with the application

were developed prior to the Commission's decision in

Cleveland Electric Illuminating Company, Case No. 81-

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

146-EL-AIR (March 17, 1982), the rate base valuation

originally proposed by the company did not reflect the

Commission’s determination that certain company-owned

land parcels were larger than reasonably necessary to

support the utility installations located thereon. Applicant

did report these land exclusions in its subsequent filings

(App. Ex. ID, Sched. B-2.7), but calculated the associated

rate base deductions using a method which differed from

that employed by the Commission in the prior case (App.

Ex. ID, WPB-2.7.b; Tr. IV, pp. 9-10, 18-19). The Com-

mission determined the amount to be excluded by simply

multiplying the booked original cost of the total site by

the percentage represented by the acreage determined

not to be used and useful. The Commission acknowledged

that this calculation implicitly assumed that all land at a

given site had a uniform per acre value, but observed

that no evidence had been presented upon which to base

a determination of the relative value of the included and

excluded portions, even had we wished to undertake an

analysis of this type. Applicant’s witness Moore contends

that the site land exclusions as calculated by the company

for purposes of this case recognize the difference in value

between the included and excluded property, but we find

the witness’s presentation on this subject to be less than

persuasive (Tr. IV, p. 22). The Commission notes, how-

ever, that applicant has now identified that portion of the

booked original cost of the site properties in question

which represent acquisition costs (Tr. IV, p. 12). As we

have held on a number of prior occasions, capitalized ac-

quisition costs should not be included as a part of the

deduction for excess land (See, e.g., Ohio Edison Com-

pany, Case No. 78-1567-EL-AIR [January 30, 1980]).

Thus, the exclusions must be recalculated so as to apply

the percentages determined in the last case to the booked

cost less acquisition cost of each of the site properties (App.

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

Ex. ID, WPB-2.7.b). This produces a total deduction for

excess land at the Keppler Substation, the Quaker Sub-

station, the Buckeye Substation, the Mayfield Service Cen-

ter, and the Parma Radio Station of $79,482.

In Cleveland Electric Illuminating Company, Case

No. 79-537-EL-AIR (July 10, 1980), the staff recom-

mended exclusion of three of applicant's ash disposal sites

based on its conclusion that the capacity of these areas

to receive fly ash had been exhausted. The Commission

agreed that two of the sites were not used and useful, but

included the company’s Vine site in rate base upon a

showing that it could still accommodate fly ash and that

it was also used to store bottom ash, some of which was

eventually sold to municipalities for use as road cinders.

In the instant case, the City of Cleveland objected to the

staff's failure to investigate whether the Vine site should

still be regarded as used and useful, and questioned how

the site, which was described as being almost filled to

capacity several years ago, could still be capable of receiv-

ing fly ash. Staff witness Fox acknowledged that the

staff had not made an on-site inspection of the Vine ash

disposal site in connection with its investigation in this

case in light of the small dollar amount involved, but in-

dicated that the staff had confirmed, through company

personnel, that the property was still being used for ash

disposal (Staff Ex. 3, pp. 21-22). Applicant's witness

Moore expressly so testified (Tr. IV, pp. 97-99), and there

is no evidence to the contrary. This objection should be

overruled.

Davis-Besse Gatehouse:

Based on the results of its field inspection and _ its

review of certain job orders, the staff concluded that a

new gatehouse at the Davis-Besse nuclear plant had been

improperly transferred to plant in service prior to the

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

date certain and recommended that applicant's investment

in the facility be reclassified to construction work in prog-

ress for purposes of this case (S.R., p. 14). Applicant ob-

jected, contending that the first floor of the gatehouse

was actually in service at date certain and that the invest-

ment should be recognized in rate base as plant in service

and not through the construction work in progress allow-

ance (App. Ex. 3A, p. 3). As both the applicant and the

staff recognize, the treatment accorded the date certain

investment in the first floor of the gatehouse, now fixed

at $1,382,407 (App. Ex. 28, p. 5), becomes material only

if the statutory limitation on the construction work in

progress allowance comes into play (See Section 4909.15

Revised Code). Thus, although the matter has been the

subject of considerable debate, the question may well

prove rather academic. It certainly has become needlessly

complicated.

Applicant has clearly documented that the first floor

of the gatehouse, which houses personnel processing facili-

ties, was in service as of February 28, 1982, the date cer-

tain in this proceeding (App. Ex. 3A, Appendix A; App.

Ex. 3B; App. Ex. 28, pp. 1-5). Staff witness Weiss, al-

though noting that there was still some clean-up, land-

scaping, and maintenance work being performed at the

time of the staff's inspection in May of 1982, apparently

does not dispute that part of the gatehouse facility was in

use at date certain (Tr. IX, pp. 142-145a; Staff Ex. p. 4;

App. Ex. 19). The staff's position, however, is that the

first floor of the gatehouse is only a part of a larger project,

which also includes the second floor of the gatehouse, as

well as an adjacent parking area, and that because the job

orders covering this other construction had not been com-

pleted by date certain, the entire “project” should be re-

garded as construction work in progress. The staff's argu-

ment mistakes the fundamental point. Although the defini-

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

tion of what constitutes a “construction project” within the

meaning of that term as employed in Section 4909.15

(A)(1) Revised Code may be significant for purposes of

determining whether some particular construction activity

is eligible for inclusion in the construction work in progress

allowance in a given case, this is all irrelevant where the

question is merely whether certain property should be in-

cluded directly in rate base. That issue is controlled by the

statute’s “used and useful” criteria, standards which the

first floor of the gatehouse clearly satisfied. Accordingly,

the Commission finds that applicant's objection should be

sustained, and that the jurisdictional portion of the com-

pany’s date certain investment in the Davis-Besse gate-

house should be restored to rate base.

Through a related objection, intervenor City of Cleve-

land questioned the staff's finding that the company’s

plant ledgers and continuing property record (CPR) rep-

resented a reliable source of original cost data (S.R., p.

14), in light of the staff's recommendation with respect

to the Davis-Besse gatehouse. The short answer, of course,

is that the Commission has rejected staff recommendation

in question, thereby confirming the reliability of the rec-

ords. However, staff witness Weiss did respond to this

objection through his pre-filed testimony and upon cross-

examination (Staff Ex. 2, pp. 5-6; Tr. IX, pp. 176-177),

and we find nothing in the record to suggest that the

staff's evaluation of the reliability of the company’s rec-

ords was incorrect. Intervenor has not pursued the ques-

tion on brief. The objection is overruled.

Beaver Valley Common Facilities:

This Commission has consistently held that where an

applicant utility's ownership interest in a generating sta-

tion is limited to a unit still under construction, it is im-

proper to include the utility’s share of the common facili-

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

ties in rate base until such time as the unit, itself, receives

rate base recognition, notwithstanding the fact that the

common facilities were completed in connection with a

unit already in service (See, e.g., Cleveland Electric Illu-

minating Company, Case No. 79-537-EL-AIR [July 10,

1980] ). In such circumstances, the Commission has direc-

ted that the common facilities be classified as plant held

for future use, with no depreciation to be accrued or

AFUDC charged against the subject property (Cleveland

Electric Illuminating Company, supra). It has become

apparent, however, that this practice works a rather un-

reasonable result, for the utility is denied both rate base

recognition as well as AFUDC on the common facilities

even though their construction could not have proceeded

in any other fashion. As discussed in our decision in Toledo

Edison Company, Case No. 81-620-EL-AIR (June 9,

1982), the Commission cannot remedy this problem by

simply authorizing a resumption of AFUDC, as such a

measure would produce a conflict with FERC accounting

procedures which require that AFUDC on common facili-

ties cease when the first unit is placed in service. However,

where a state commission expressly authorizes the practice,

the FERC will accept the accrual and deferral of carrying

charges associated with a utility's share of common facili-

ties, equivalent to AFUDC, with the accrued deferral

charges to be added to the value of the common facilities

when those facilities are determined to be used and use-

ful for state ratemaking purposes (Staff Ex. 8, pp. 9-10).

This was the treatment approved in Toledo Edison Com-

pany, supra, in connection with that company’s ownership

interest in the common facilities at the Beaver Valley

nuclear plant.

Applicant also owns a share of the common facilities

at Beaver Valley by virtue of its ownership interest in

Beaver Valley Unit No. 2, and has objected to the staff's

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

failure to recommend that it be permitted to adopt the

accounting treatment approved for Toledo Edison. At

hearing, staff witness Montgomery agreed that applicant

should be authorized to accrue and defer carrying charges,

equivalent to AFUDC, on its investment in the Beaver

Valley common facilities (Staff Ex. 8, pp. 9-10), and the

Commission so finds. Consistent with the Toledo Edison

Company, decision, supra, and Mr. Montgomery's recom-

mendation, the authorization to begin accruing carrying

charges shall be regarded as prospective in nature, and we

will not at this time approve the one time “make up” pro-

posed by applicant's witness Chopp to recognize carrying

charges from the time the common facilities were placed

in service in 1976 to the present (App. Ex. 5A, p. 27).

Other Items:

At hearing, applicant's witness Moore identified two

necessary corrections to applicant's proposed plant in

service figures (Tr. IV, pp. 4-6). The first correction was

to reverse a previous adjustment so as to exclude certain

property not yet actually in service as of date certain

(App. Ex. 1B, Sched. B-2.2). The second correction ex-

cluded certain equipment at the Elden Substation which

the Commission had determined not used and useful in

Cleveland Electric Illuminating Company, Case No. 81-

146-EL-AIR (March 17, 1982). Both the adjustments will

be approved.

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 recom-

mended that applicant's booked reserve be used as a start-

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

ing point in this analysis, but proposed an adjustment to

restate the reserve as if the new depreciation accrual rates,

which became effective March 1, 1982 as a result of Case

No. 81-839-EL-AAM, had been in place throughout the

test year (S.R., p. 16; S.R., Sched. 9-1). As discussed

infra, all parties agree that these new accrual rates should

be used to annualize depreciation expense, but applicant

has objected to the adjustment to the reserve. The argu-

ments raised by the company in support of this objection

are essentially identical to those considered and rejected

by the Commission in Cleveland Electric Illuminating

Company, Case No. 80-376-EL-AIR (May 1, 1981) and

Cleveland Electric Illuminating Company, Case No. 81-

146-EL-AIR (March 17, 1982), wherein we approved

similar ratemaking adjustments to the booked reserve. For

those reasons previously stated, and consistent with staff

witness Fox's recommendation in this case (Staff Ex. 3, pp.

7-8), the Commission again overrules this objection (See

also Toledo Edison Company, Case No, 80-377-EL-AIR

[April 9, 1981] and Dayton Power and Light Company,

Case No. 80-687-EL-AIR [July 15, 1981]).

Applicant has also objected to the staff's failure to

reduce the depreciation reserve associated with applicant's

share of Bruce Mansfield Unit No. 3, on the theory that

although book depreciation accruals began when the plant

went into service in September of 1980, no depreciation

expense was recognized in rates until May of 1981 when

Cleveland Electric Illuminating Company, Case No. 80-

376-EL-AIR, stipra, was decided. Applicant advanced this

same argument in its last rate case, and we again find the

objection to be without merit (Cleveland Electric IMlumi-

nating Company, Case No. 81-146-EL-AIR, supra). As

staff witness Fox testified in this case, the notion that

rates are designed to recover specific past expenses, or

that these expenses are somehow traceable to actual dollars

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

of revenue generated by those rates, mistakes the nature

of the ratemaking exercise (Staff Ex. 3, pp. 6-7). The

objection is overruled.

The Commission is of the opinion that a jurisdictional

depreciation reserve of $618,135,000 as recommended by

the staff is proper and adequate for purposes of this case.

Deducting this amount from the original cost of includable

property results in a finding of jurisdictional net plant in

service of $1,963,736,000.

Excess Capacity:

Consumers’ Counsel and the City of Cleveland both

objected to the staff's failure to propose an adjustment for

excess capacity in light of the finding in the Staff Report

that applicant's installed generating capacity exceeds the

level calculated through the staff's 20 percent and 15 per-

cent reserve margin tests ($.R., Sched. 8.2). Consumers’

Counsel did not pursue its objection, but the City of Cleve-

land has once again flailed away at this issue, ignoring

everything the Commission and the Supreme Court have

had to say with respect to this subject in the past (See,

e.g., Columbus and Southern Ohio Electric Company, Case

No. 77-545-EL-AIR [March 31, 1978]; Cleveland Electric

Illuminating Company, Case No, 79-537-EL-AIR [July 10,

1980]; Dayton Power and Light Company, Case No. 81-

21-EL-AIR [February 3, 1982}; Cleveland Electric Illu-

minating Company, Case No. 81-146-EL-AIR [March 17,

1982]; City of Cleveland vy. Public Utilities Commission,

63 Ohio St. 2d 62 [1980]), and disregarding the expert

testimony, including that of its own witness, in this case

(Staff Ex. 3, pp. 15, 22-24; App. Ex. 15; Tr. XIII, pp. 51-

55). We have repeatedly explained that reserve require-

ments are company-specific, and that the 20 percent and

15 percent “standards” used by the staff are merely rules

of thumb. We have pointed out that it is impossible for a

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

company to add increments of capacity at a rate which will

lead to a precise match with some theoretically ideal

reserve margin at every point in time, and that increased

construction lead-times and the size of units being added

today have made attaining and preserving this match even

more difficult. We have also explained the conceptual

problems which attend a rate base adjustment for excess

capacity. Finally, we have identified the real area of con-

cern to be whether, given all the factors which can influ-

ence construction and load growth, a company can be

fairly said to have acted imprudently in its capacity plan-

ning.

There is nothing in this record which suggests that

applicant’s capacity planning has, in any way, been im-

prudent. Although City of Cleveland witness Stutz was

critical of applicant's present forecasts of future demand

(City of Cleveland Ex. 1A, 1B, and 1C), he expressly de-

clined to comment on the company’s past capacity plan-

ning. Mr. Stutz acknowledged, however, that the company

had responded to declining demand forecasts by cancelling

the construction of several generating units and deferring

the in-service dates of others (Tr. XII, pp. 52-55). Given

this testimony, we see no purpose to be served by address-

ing applicant's witness Raab’s criticism of Mr. Stutz’s fore-

casting methodology (App. Ex. 30) or in checking the

scoreboard to determine in how many cases his forecasts

have been accepted as opposed to the number in which

they have been rejected (App. Reply Br., pp. 22-23).

Perhaps the most telling point in connection with this

subject is that in the company’s prior case the staff con-

cluded that applicant had no excess capacity, while in this

case the staff tests revealed excess capacity, even though

applicant has added no new capacity in the intervening

period (Tr. X, pp. 69-70). How, we ask, was applicant

supposed to respond from a capacity planning standpoint

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

to the decrease in load which produced this phenomenon?

Clearly the company was not expected to retire an existing

unit between the two dates certain, and the Commission

will not theoretically dismantle one now. The objections

are overruled.

Construction Work In Progress:

Section 4909.15(A)\(1) Revised Code provides that the

Commission may, in its discretion, include in its rate base

determination a reasonable allowance for construction

work in progress. The statutes limit eligibility for the allow-

ance to projects which are at least 75 percent complete,

and further provide that the allowance may not exceed 20

percent of the remainder of the rate base. Applicant pro-

posed eight projects, with a total jurisdictional date certain

cost of $421,290,437, to be considered as evidence by the

Commission in establishing the construction work in prog-

ress allowance for purposes of this case (App. Ex. 1B,

Sched. B-4). Of this amount, $417,098,137 represents appli-

cant’s share of the jurisdictional date certain cost of Perry

Unit. No. 1, a nuclear power plant currently under con-

struction (S.R., Sched. 10). The staff determined that seven

of the projects, including Perry and its switchyard, satisfied

the 75 percent complete test and could be considered by

the Commission for inclusion in the allowance. Applicant

objected to the exclusion of Project No. 1979 IVPN, which

the staff regarded as maintenance rather than construction

(S.R., Sched. 10.7), while the City of Cleveland objected to

the inclusion of several of the smaller projects, which it

apparently considered to be replacement in nature. Staff

witness Weiss adequately responded to these objections

(Staff Ex. 2, p. 4), and neither party has pursued the matter

further. These objections should be overruled.

Both Consumers’ Counsel and the City of Cleveland

objected to the staff's determination that Perry Unit No.

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

1 was 75 percent complete at date certain. In Ohio Edison

Company, Case No, 78-1567-EL-AIR (January 30, 1980),

the Commission was called upon to consider whether

Bruce Mansfield Unit No. 3 was 75 percent complete at

the date certain and, therefore, eligible for rate base recog-

nition in that proceeding. The question was a close one,

and the Commission took great pains to explain its per-

ception of the purpose of the 75 percent standard and to

evaluate the multitude of tests and calculations which were

offered as evidence of the percent completion of the proj-

ect. In this case, however, we do not believe that the evi-

dence concerning percent completion of Perry Unit No.

1 requires any such detailed analysis, for the record clearly

supports the conclusion that the project was at least 75

percent complete at date certain. In Ohio Edison, supra,

the Commission was alerted to the need for careful scru-

tiny by the fact that the construction progress report from

the month in which the date certain fell indicated the proj-

ect to be significantly less than 75 percent complete and

by the fact that the testimony offered by the witnesses

presenting construction status estimates based on physical

inspections was inconclusive. Here, the Perry Nuclear

Power Plant monthly progress report for February 28,

1982, indicates that the project was 81.7 percent complete

at that date (App. Ex. 144). The reliability of the report

was well supported (Tr. IV, pp. 153-154), and the con-

clusion contained therein was never challenged. More-

over, all the witnesses offering testimony as to percent

completion based on physical inspection, including Con-

sumers Counsel witness Bridenbaugh, agreed that physical

inspection revealed that the project was more than 75

percent complete at date certain (App. Ex. 14, pp. 2-3;

Staff Ex. 3, p. 16; OCC Ex. 2, pp. 2, 8-9). In fairness, the

Commission must acknowledge that Mr. Bridenhaugh did

not recommend that the results of a physical inspection

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

be used as the basis for determining the percent completion

of a project, but given the manipulations he performs in

connection with the other tests he proposes, we do not

believe any of his other findings to be meaningful. One

can, of course, imagine all sorts of circumstances which

could delay the January, 1984 date by which Perry is

expected to produce positive net generation or the May,

1984 commercial date, but speculating and scheduling

based on achieved project progress are two different

things. Either of these dates, when coupled with a reason-

able starting date (Tr. X, p. 101; Tr. IV, p. 16), will show

Perry to have been 75 percent complete at date certain on

an elapsed time basis. Any reasonable version of the dollars

obligated test will vield the same conclusion (App. Br., pp.

25-26). The objections to the staff's finding that Perry

Unit No. 1 is eligible for inclusion in the construction work

in progress allowance in this case are overruled.

Having determined that the Perry project is eligible

for inch ion in the construction work in progress allow-

ance, the question becomes to what extent the investment

should be recognized. Consumers’ Counsel and the City

of Cleveland contend that it should not be considered in

the allowance at all, a position we regard as unreasonable

given the size of the investment and the length of the con-

struction period. Applicant argues that Perry be included

to the maximum amount permitted by law, a proposal we

regard as somewhat excessive given the fact the project

will not actually be rendering service until 1984. However,

we also recognize that applicant has not yet noticed a

new rate increase application, and that including Perry

in the construction work in progress allowance at a signifi-

cant level may well forestall the next filing. It will certainly

limit the so-called “rate shock” which would result from

delaving rate recognition until all of Perry is included in

plant in service in some subsequent case (App. Ex. 4A, pp.

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

26-27). Thus, in an attempt to recognize all competing

factors, we find that Perry should be included at two-thirds

of its jurisc:ictional date certain cost. Combining two-thirds

of the jurisdictional date certain cost of the Perry project,

or $278,065,425, with the cost of those other projects

determined to be eligible by the staff and netting the

result with estimated retirements associated with certain

of the projects, produces a construction work in progress

allowance of $282,109,645. The Commission finds this to

be a reasonable allowance for purposes of this proceeding.

Working Capital:

The applicant and the staff both utilized the formula

approach for purposes of determining the allowance for

working capital to be included in the rate base valuation

pursuant to Section 4909.15(.A)(1) Revised Code (App.

Ex. 1B, Sched. B-5, §.R., Sched. 11). Although this area

is often the subject of considerable controversy, the staff's

working capital recommendation in this case drew rela-

tively few objections. Much of the disparity between the

company and staff estimates is attributable to applicant's

failure to include deductions for accrued taxes and cus.

tomer deposits in its version of the formula. Although

applicant again objected to the staff's recognition of these

offsets to the working capital requirement, these issues

have long since been laid to rest. (See Cleveland Electric

Illuminating Company vy. Public Utilities Commission. 42

Ohio St. 2d 403 [1975] and Consumers’ Counsel v. Public

Utilities Commission, 58 Ohio St. 2d 108 [1979]). These

objections are, again, overruled, Another cause of the dif-

ference between the two working capital proposals is tied

to the respective positions adopted by the applicant and

the staff with respect to certain operating expense issues.

The Commission’s resoluion of those issues, discussed infra,

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

will, of course be reflected in the working allowance ulti-

mately approved.

Cash Component:

Applicant objected to the staff's determination of the

cash component of working capital, contending that the

staff had failed to adequately recognize fuel expense in

its calculation. The only record reference to this objec-

tion is in the prefiled testimony of applicant's witness

Chopp, who complains about what he characterizes as the

“continued erosion” of the original FPC (new FERC)

formula (App. Ex. 5A, p. 18). The staff's practice of elimi-

nating fuel and purchased power from operation and main-

tenance expenses before making the one-eighth calculation

is consistent with long-standing Commission precedent.

The results of that calculation, when coupled with the

additional allowance for the lag in the recovery of fuel

expense under the EFC (5.R., Sched. 11.1), produces a

reasonable value for the cash component of the working

capital allowance. This objection should be overruled.

Materials and Supplies:

The staff based its proposed allowance for materials

and supplies on the average monthly materials and sup-

plies inventory balances for the period June, 1981 to

May, 1982, adjusted so as to exclude materials and sup-

plies held for new construction, additions, and extensions

(S.R., p. 16). Applicant's requested allowance is based

on the date certain balance (App. Ex. 1B, Sched. B-5).

Although the company did adjust this balance to eliminate

the so-called “hetterments” portion for Standard Filing

Requirements reporting purposes, it has again objected

to this deduction ( App. Ex. 5A, p. 21). As the Commission

has repeatedly held, this adjustment is required by the

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

Supreme Court's decision in City of Cincinnati v. Public

Utilities Commission, 160 Ohio St. 395 (1954). Although

applicant suggests on brief that the Commission has

missed the point of its earlier arguments regarding the

interpretation and application of this decision, we see

nothing in this discussion which the Commission has not

addressed before (See Cleveland Electric Illuminating,

Case No, 79-537-EL-AIR [July 10, 1980]). This objection

is overruled,

Applicant next contends that if the Commission is to

exclude a portion of the materials and supplies inventory

in determining the working capital allowance, the com-

pany should be permitted to accrue AFUDC on. this

amount (App. Ex. 5A, p. 21). As staff witness Fox ex-

plained, these inventory amounts should not be regarded

as eligible for AFUDC until they become part of a con-

struction project (Staff Ex. 3, p. 10). Applicant acknowl-

edges that the Commission rejected a similar proposal in

the company’s last case, but argues that the Commission's

decision in Dayton Power and Light Company, Case No.

§2-S58-EL-AAM ( August 25, 1982) now lends additional

support to its position. We fail to see how the circum-

stances in Dayton Power and Light Company, supra, which

involved the continuation of AFUDC on a major gener-

ating facility until it was recognized as plant in service

for rate case purposes, are in any way parallel to those

presented here. Thus, we will not authorize the accrual

of AFUDC on the betterments portion of the materials and

supplies inventory

\Ithough there is certainly nothing improper about

using the date certain balance as the starting point for

determining the materials and supplies component of the

working allowance. the Commission has generally tended

to favor the average monthly balance approach on the

theory that it may vield a more representative result) Mr

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

Fox indicated that the twelve monthly balances used in

the staff's calculation represented the most recent data

available at the time of the staff's investigation, and that

had the test-year monthly balances been available, these

would have been the figures the staff would have utilized

(Staff Ex. 3, p. 9). This data has now been supplied

through an exhibit sponsored by applicant's witness Chopp

(App. Ex, 5A, Appendix VI-C), and we agree that this

updated information should be used in the calculation.

The Commission further finds that the balance from

August, 1981, which has been included on Mr. Chopp’s

exhibit, should be incorporated in deriving the average

monthly balance to be used for the materials and supplies

component, as the use of thirteen monthly balances serves

to bracket the test year and date certain. The Commis-

sion has used the thirteen monthly balance method in

past Cleveland Electric Hhiminating Company cases, and

we see no reason to depari from that practice here.

The remaining question in this area centers on the

ratio to be used to identify the portion of the materials

and supplies balance to be excluded as representing mate-

rials and supplies held for future construction, additions,

and extensions. Both the applicant and the staff initially

used a ratio developed from calendar 1981 data which

supported inclusion of 79.31 percent of the balance in the

materials and supplies component | App. Ex. 1B, WPB-5.2,

d. Staff Fx. 3, p. 9). However, at hearing, applicant: pro-

posed the use of a ratio of SLIL percent which was

apparently developed trom data trom the twelve months

ending June 30, 1982.) App. Ex. 5A. p. 20. App. Ex. ID

WPB-5.2. d)) Although applicant asserts on brief that Mi

Fox agreed to the use of this new ratio in the calculation

\pp. Reply Br. po 4). that is not how we interpret the

stall witness s testimony. Mir Fox stated that the staff

had not reviewed the study upon which the new ratio

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

was based and, therefore, had no basis for recommending

that it be utilized (Tr. X, p. 17). Given these circum-

stances, and in light of the fact that the period examined

in developing the new ratio did not coincide with the

test year either, the Commission is of the opinion that the

use of the ratio originally proposed is appropriate and

will produce a reasonable result. Substituting 79.31 per-

cent in the thirteen month average calculation set out in

the appendix to Mr. Chopp’s testimony (App. Ex. 5A,

Appendix VI-C) produces a total jurisdiction materials

and supplies component of $23,255,683, which the Com-

mission finds should be included in the working capital

allowance in this case.

Fossil Fuel Inventory:

The fossil fuel component of the working capital

allowance must take into account the company’s necessary

investment in both coal and oil inventories. Applicant

based its proposed allowance for coal stock on the date

certain inventory levels at its generating stations, priced

out at estimated year-end 1982 prices (App. Ex. 1B,

WPB-5.2, b). The Commission has rejected this technique

on a number of prior occasions, including this company’s

last rate case, finding the use of vear-end prices, be they

actual or estimated, to be inimical to the concept under-

lving a date certain rate base valuation | Cleveland Electric

Hluminating Company, Case No. S1-146-EL-AIR 'March

17, 1982). Dayton Power and Light Company, Case No

78-92-EL-AIR [March 9 1979)). We do so again here.

The staff, on the other hand, calculated its proposed

allowance for coal inventory by first determining a reason-

able days supply for each generating station, and then

pricing the inventory level equivalent to that days supply

at date certain prices Stalf Ex. 3. pp. 12-15. App. Ex. 5A,

Appendix VIL). Although applicant objected generally to

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

the staff's calculation, the company took issue with only

two specific aspects of the staff's computation.

Applicant contended that the staff's use of a 45-day

supply requirement in connection with the valuation of

the coal inventory at the Avon Lake station was unreason-

able. Applicant’s witness Chopp conceded that the date

certain inventory level at Avon Lake was below the com-

pany’s 55-day target for its wholly-owned plants, but ex-

plained that there were special circumstances which had

resulted in a temporary reduction in the coal inventory

at Avon Lake (App. Ex. 5A, pp. 23-24; see also Tr. III,

pp. 160-161). Noting that the staff had used the 55-day

supply assumption in connection with the company’s other

generating facilities even though the actual date certain

inventory at certain of those stations exceeded the 55-day

goal, Mr, Chopp argued that it would be appropriate to

use a 55-day supply for the Avon Lake calculation as

well (App. Ex. 5A, p. 24). At hearing, staff witness Fox

revised the staff's calculation to reflect a 55-day supply at

all locations, the inventory level the Commission deter-

mined to be appropriate in Cleveland Electric Iluminating

Company, Case No. $1-146-EL-AIR, supra, the company’s

last case (Staff Ex. 3, pp. 12-13). This change, although

increasing the days’ supply for Avon Lake, resulted in a

reduction in the days’ supply for Bruce Mansfield (Staff

Ex. 3, p. 13). Mr. Fox also proposed a revision to the

average daily burn figures initially used by the staff, point-

ing out that the estimated values upon which the staff

had relied appeared to be overstated when compared to

the actual experience during the most recent 12-month

period for which data was available | Staff Ex. 3, p. 14

The Commission finds the changes in the days’ supply and

average daily burn figures proposed by Mr. Fox to be

reasonable, and will incorporate these changes in the coal

inventory calculation

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

Applicant also objected to the price used by the staff

for purposes of valuing the coal inventory at the Bruce

Mansfield facility. The staff calculated its recommended

allowance for Quarto coal at Bruce Mansfield based on

the Quarto cost recognized for EFC purposes (Staff Ex.

3, p. 13). Mr. Chopp argued that although the allowable

pass-through of Quarto coal costs had been limited in prior

EFC proceedings, the inventory valuation for rate case

purposes reflect the actual price paid for Quarto coal ( App.

Ex. 5A, pp. 24-25). Staff witness Fox agreed and revised

the staff's calculation by substituting the date certain price

of Quartco coal for the EFC cost originally used by the

staff (Staff Ex. 3, pp. 13-14). This adjustment, coupled

with those other changes previously discussed, results in

a revised staff jurisdictional coal inventory allowance rec-

ommendation of $46,085,006 (Staff Ex. 3, p. 14), which

the Commission finds to be reasonable.

Applicant calculated its proposed allowance for the

oil inventory using the same methodology it employed in

connection with the coal component. The staff determined

an allowance for oil inventory by multiplying the quan-

tities reflected in the 13-monthly average balances by the

applicable date certain price (S.R., p. 16; App. Ex. 5A,

Appendix VIL). However, the staff recommended that the

oil inventory allowance proposed by the company, which

was lower than that which resulted from its own calcula-

tion, be accepted for purposes of this case. Applicant

objected, claiming that it was improper for the staff to

recommend acceptance of the company’s proposal simply

on the grounds that it produced a lower number. As the

Commission has often observed, there are a number of

reasonable methods available for determining the allow-

ance from the various inventories included in the total

working capital allowance. Were we confronted here with

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

a choice between two values, both of which resulted from

reasonable methods properly applied, we might be some-

what more receptive to the staff's “least cost” argument

(Tr. X, pp. 23-24). In this case, however, we have already

specifically rejected the method used by applicant to de-

velop its proposed allowance for oil inventory, as it is

precisely the same method that we found inappropriate

for determining the allowance for coal stock. Consistency

requires that we adopt the oil inventory allowance de-

termined by the staff. Combining this jurisdictional oil

inventory allowance of $15,198,607 with the coal stock

allowance approved above produces a fossil fuel inventory

allowance of $61,283,613 which we find reasonable for

purposes of this proceeding.

Deferred EFC Balances:

Several parties filed objections relating to the staff's

inclusion of a component in working capital for deferred

EFC fuel expense ($.R., Sched. 11.2). However, as the

parties and the staff have recognized, the matter of the

recovery of carrying costs associated with the deferred

EFC balances is now the subject of a separate generic

proceeding, Case No, $0-928-EL-ORD. Thus, there is no

need to address the question in the context of this case.

Deferred Nuclear Fuel:

Intervenor City of Cleveland objected to the staff's

inclusion of an allowance for deferred nuclear fuel in its

determination of applicant's working capital requirements.

As a review of the Commission's discussion of the question

in Cleveland Electric Illuminating Company, Case No.

79-537-EL-AIR (July 10, 1980) will indicate, deferred

nuclear fuel is just as proper a component of the working

‘ 78

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

capital allowance as are the fossil fuel inventory balances.

The purpose of the inclusion of an allowance for deferred

nuclear fuel is not to provide for recovery of these deferred

costs as intervenor erroneously asserts on brief (City of

Cleveland Br., p. 29), but rather to afford the company

a return on funds that have been invested but not yet

recovered, This objection is without merit and is overruled.

Deferred Quarto Coal Costs:

Both the applicant and the staff included a com-

ponent in their working capital calculations to recognize

deferred Quarto coal costs (App. Ex. 1B, Sched. B-5;

S.R., Sched. 11). Consumers’ Counsel and the City of

Cleveland have again objected, but have presented noth-

ing in the way of evidence or argument which would per-

suade the Commission that it is inappropriate to include

an allowance for the deferred Quarto balance in working

capital (See, e.g., Cleveland Electric IMluminating Com-

pany, Case No, 81-146-EL-AIR [March 17, 1982]; Ohio

Edison Company, Case No, 81-1171-EL-AIR [November

3, 1982] Toledo Edison Company, Case No, $1-620-EL-

AIR [June 9, 1982}). Through a related objection, Con-

sumers Counsel pointed out that the staff did not cal-

culate the allowance for the Quarto coal cost deferral on

a net of tax basis. Staff witness Montgomery agreed, and

presented a revised allowance for this item of $12,315,000

which the Commission finds reasonable for purposes of

this case (Staff Ex. 8, p. 14),

Working Capital Summary:

The following schedule presents the Commission’s

determination of the allowance for working capital to be

included in rate base in this proceeding.

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

Jurisdictional Working Capital Allowance

(000's Omitted)

Cash Element

(% of Adjusted Operation and Maintenance Expense,

excluding Fuel and Purchased Power) $ 33,685

Fuel Expense Lag ..........- iieanapetile ‘santa 6,77:

Materials and Supplies 23,256

Fossil Fuel Inventory 61,284

Deferred Nuclear Fuel 4,071

Deferred Quarto Coal Costs 12,315

Less; Customer Deposits 1,217

Tax Offset

(4 of Adjusted Taxes, excluding FICA, deferred

FIT, and Additional Ohio GRT) 29,307

Jurisdictional Working Capital Allowance $110,860

Other Rate Base Deductions:

The staff made its customary adjustment to reduce

rate base by the jurisdictional portion of the date certain

balance of accumulated deferred taxes associated with

accelerated amortization, liberalized depreciation, and

those accumulated deferred investment tax credits which

may be deducted without loss of benefit (S.R., p. 16; S.R.,

Sched. 12), Applicant filed its usual general objection to

the deductions for these items, which account for some-

thing in excess of $142,000,000 of the difference between

the applicant and staff rate base valuations, but has ap-

parently finally decided to leave this dead horse alone

as it did not pursue the matter at hearing or on brief.

The objection is overruled (See, e.g., Cleveland Electric

Illuminating Company, Case No. 79-537-EL-AIR {July 10,

1980] ).

There are, however, a number of specific objections

to the staff deductions for accumulated deferred taxes and

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

tax credits, as well as to certain other rate base deductions

the staff has recommended for purposes of this case. In

addition, there are several objections through which var-

ious parties argue that the staff should have recognized

certain other items as rate base offsets. We will take up

these matters, in turn, below.

ITC — Projects Not In Rate Base:

Applicant objected to the staff's inclusion of invest-

ment tax credit claimed on qualified progress expenditures

on projects not included in rate base in its calculation of

the deferred investment tax credit deductions (App. Ex.

9A, pp. 10-11). Staff witness Montgomery agreed that the

tax credit associated with such projects should not have

been deducted (Staff Ex. 8, p. 12), and the Commission so

finds. In this connection, the Commission notes that in

light of the inclusion of only two-thirds of the Perry Unit

No. 1 investment in the construction work in progress al-

lowance, the investment tax credit associated with that

portion of the date certain investment in Perry not included

in rate base may not properly be used to reduce rate base.

Thus, the rate base deduction for the four percent portion

of investment tax credit on qualified progress expenditures

should be $1,784,950.

Tax Benefit Transfers:

The applicant, the staff, and Consumers’ Counsel each

propose a different rate base treatment for the proceeds

from the sale of tax benefits under the “Safe-Harbor Lease

Election” created by the Economic Recovery Tax Act of

1981. Applicant's witness Jirousek recommends that there

be no rate base deduction, apparently on the grounds that

if subsequent Treasury Department regulations dictate

that all the proceeds be treated under the investment tax

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

credit rules, a rate base deduction might jeopardize the

transactions (App. Ex. 9A, pp. 7-9). The staff recommends

that the proceeds be segregated into two components, an

ACRS portion and an investment tax credit portion, with

the rate base deduction to reflect the unamortized balance

of the ACRS component (S.R., p. 12; Staff Ex. 8, pp. 7-8);

Consumers’ Counsel witness Effron proposes that all pro-

ceeds for the sale of tax benefits be deducted, on the theory

that both the ACRS portion and the investment tax credit

portion represent non-investor supplied funds (OCC Ex. 1,

pp. 25-26). However, Mr. Effron acknowledges that he

would not extend this principle to instances where a pro-

hibition against a rate base deduction exists which would

cause the loss of the benefit (OCC Ex. 1, p. 26). As staff

witness Montgomery testified, it is precisely this consider-

ation which has prompted the staff to treat the ACRS por-

tion and the investment tax credit portion differently (Staff

Ex. 8, pp. 14-15). The City of Cleveland, although present-

ing no witness on the subject, also argues that all proceeds

from the tax benefits transfers should be deducted from

rate base and relies on an April 13, 1982 exposure draft

issued by the Financial Accounting Standards Board (App.

Ex. 17) in support of its position that the anticipated Trea-

sury Department regulations may well not contain any

prohibition against such a rate base deduction (City of

Cleveland Br., pp. 31-33),

The Commission had occasion to consider this precise

question in its recent decision in Ohio Edison Company,

Case No, S1-L171-EL-ATR (| November 3, 1982), wherein

we concluded that the ratemaking treatment of the pro-

ceeds of the tax benefit transfers should conform to the

treatment which would be followed assuming the benefits

had been taken directly by the applicant. Nothing in this

record would persuade us to alter that view. We had the

benefit of the same FASB exposure draft in Ohio Edison

Opinion and Order, PUCO Case No, 81-1378-EL-AIR

Company, supra and although we have heard considerable

argument as to its implications we remain of the opinion

that the staff's proposed rate base treatment of the pro-

ceeds of the tax benefit transfers which is consistent with

full normalization is appropriate. Indeed it now appears

that this exposure draft has been withdrawn (App. Br. Ap-

pendix A). Accordingly the Commission finds that the

staff's proposed deduction should be approved. The objec-

tion of applicant Consumers’ Counsel, and the City of

Cleveland are overruled.

Capitalized Employee Benefits:

As discussed infra, the Commission has accepted the

staff's recommendation that applicant be permitted to

practice deferred tax accounting with respect to capitalized

employee benefits which are currently deductible for fed-

eral income tax purposes. Thus, rate base should be reduced

to reflect the associated deferred taxes (Staff Ex. 8, p. 18).

Although Consumers’ Counsel has filed an objection which

goes to the question of whether normalization should be

approved for this item, Consumers’ Counsel witness Effron

agrees that if deferred tax accounting is authorized, the

staff's rate base deduction is appropriate (OCC Ex. 1,

p. 54), Accordingly, the Commission finds that the staff's

proposed deduction of $1,102,000 should be approved

(S.R., Sched, 12).

Accumulated Deferred Taxes — Nuclear Fuel:

Consumers’ Counsel objects to the staff's use of the

date certain balance of accumulated deferred taxes relat-

ing to nuclear fuel as the basis of the rate base deduction

for this item. Consumers’ Counsel witness Effron contends

that because the deferred nuclear fuel cost reflected in the

working capital allowance is based on an average of 13-

monthly balances, the use of the date certain deferred

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

tax balance creates a mismatch (OCC Ex. 1, p. 24). Staff

witness Montgomery argued that the staff method pro-

duced a reasonable result (Staff Ex. 8, p. 14), but indicated

that an alternative approach would have been to simply

include nuclear fuel in working capital on a net of tax

basis (Tr. XIII, pp. 124-127). This would have produced a

result equivalent to that recommended by Mr. Effron (OCC

Ex. 1, Sched. RB-4, p. 5). Upon review of the record

relative to this subject, the Commission agrees that the

adjustment proposed by Mr. Effron properly synchronizes

the rate base deduction for accumulated deferred taxes

associated with nuclear fuel with the deferred nuclear

cost recognized in the working capital allowance. Thus,

the Commission finds the staff's proposed deduction for

accumulated deferred taxes associated with nuclear fuel

to be understated, and, accordingly, will reduce rate base

by an additional $509,000 (OCC Ex. 1, p. 24).

AFUDC Adjustments:

In Cleveland Electric Illuminating Company, Case

No. 81-146-EL-AIR (March 17, 1982), the Commission

determined that applicant had, since 1977, been using an

improper method for booking AFUDC and directed the

company to restate its capital accounts to reflect the book-

ing of AFUDC on a net of tax basis for the period in ques-

tion, The Commission further provided for a rate base de-

duction to give effect to its finding that AFUDC had been

overbooked, indicating that a similar measure would be

necessary in subsequent cases until such time as the re-

statement could be completed. The staff has proposed such

a rate base adjustment in the instant case (S.R., p. 17;

§.R., Sched, 12), to which the company has objected. Al-

though applicant continues to maintain that its method of

booking AFU DC was not improper, it is pursuing that argu-

ment through other channels and has not attempted to

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

relitigate that question in this proceeding. The company’s

specific objection here is that the staff's deduction is over-

stated in that the staff has reduced rate base by an amount

equal to all excess AFUDC, not just that associated with

property which is in rate base (App. Ex. 5A, pp. 27-29).

Applicant agrees that if one accepts the premise that

AFUDC has been overbooked, it is appropriate to reduce

rate base so as to eliminate the excess AFUDC. Applicant

contends, however, that one cannot properly deduct an

AFUDC component from rate base which was not in rate

base to begin with. Were it not for the tax consequences

which flow from the overbooking of AFUDC, the Commis-

sion would agree that the only adjustment necessary would

be to eliminate the excess AFUDC associated with rate

base property. However, the fact is that these tax conse-

quences must be recognized, and the staff's adjustment is

a reasonable way to accomplish this result (Tr. XIII, pp.

142-150, 162-172).

Applicant, of course, books AFUDC in connection

with all construction work in progress, regardless of

whether that construction is included in rate hase. More-

over, all AFUDC gives rise to a tax benefit in the form of

an interest expense deduction. The Commission's method

of calculating the interest expense deduction to be used

in determining the allowance for federal income tax ex-

pense, which is to multiply the rate base by the weighted

cost of debt, automatically normalizes this tax benefit so

long as company has consistently booked AFUDC net of

tax. No further adjustment is required, either to rate base

or in the federal income tax calculation, as the tax benefit

associated with AFUDC has already been fully allocated.

The value of property currently in rate base has been

reduced by the amount of the tax benefit, and future cus-

tomers share in the benefit as construction not currently

recognized in rate hase goes into rate base at a similarly

reduced value. However, where a company has booked

Opinion and Order, PUCO Case No. 81-1378-EL-AIR

excessive AFUDC, the interest deduction available to the

company will be greater than that to which it would have

been entitled had AFUDC been properly booked net-of-tax.

Simply reducing rate base by eliminating the excess

AFUDC component will not remedy this problem, as the

company still retains the entire benefit of the excess inter-

est deduction associated with property not yet in rate base.

That benefit must be passed on to customers, and there are

two ways by which this can be accomplished. The deduc-

tion could be flowed through directly as a deduction to

federal income tax expense, or, as the staff has proposed, it

can be deferred and used to reduce rate base. As the

Commission has consistently approved interperiod tax allo-

cation for interest deductions since normalization became

permitted under Ohio law, we believe the staff method to

be the more appropriate of the two. Thus, the staff's pro-

posed rate base deduction for this item of $9,608,009

should be approved. Applicant's objection is overruled.

Intervenor City of Cleveland has also filed an objec-

tion through which it proposes an adjustment to the

AFUDC component of certain rate base property. In

Cleveland Electric Illuminating Company, Case No. 81-

146-EL-AIR, supra, the City of Cleveland argued that the

Commission should disallow AFUDC on a waste water

treatment project (1976-1WW ) which applicant had pro-

posed for recognition in the construction work in progress

allowance in that case. The City’s argument was based on

its claim that the construction time for this project had

been excessive, which, in turn, had served to generate an

excessive AFUDC accrual. However, the only “evidence”

intervenor presented to s

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