Opinion ID: 4912575
Heading Depth: 1
Heading Rank: 2

Heading: Proceedings before the PUCO

Text: {¶ 6} While construction was underway, Suburban filed an application with the PUCO for a rate increase to cover the costs of the pipeline extension. Its proposed rate increase was based on a projected value of $8.9 million for the 4.9- mile extension. {¶ 7} In weighing such requests, the PUCO is required to determine “[t]he valuation as of the date certain of the property of the public utility used and useful 3 SUPREME COURT OF OHIO or    projected to be used and useful as of the date certain, in rendering the public utility service.” R.C. 4909.15(A)(1). In this case, the PUCO determined that date certain to be February 28, 2019. {¶ 8} The Consumers’ Counsel is the statewide legal representative for Ohio’s residential ratepayers. R.C. 4911.02(B). It intervened in the proceedings at the PUCO and argued that Suburban had admitted that at most only two miles of the pipeline were used and useful as of February 28, 2019. {¶ 9} After completing an investigation of Suburban’s application, the staff of the PUCO instituted settlement discussions. Ultimately, Suburban and the PUCO staff entered into a settlement agreement that did not include the Consumers’ Counsel. Under the settlement, the staff approved the rate increase based on the entire 4.9-mile extension and Suburban agreed to phase in the increase over a period of three years. {¶ 10} Settlement agreements of this type must be approved by the PUCO. See Ohio Adm.Code 4901-1-30. The Consumers’ Counsel filed objections to the agreement, arguing that the pipeline extension was not used and useful. {¶ 11} The PUCO overruled the objections and approved the settlement. In doing so, the PUCO credited testimony from the engineering firm hired by Suburban. Based on this testimony, the PUCO noted that by the 2018-2019 winter, “assuming a negative five-degree temperature, additional capacity” was required to ensure adequate pressure in the system. Pub. Util. Comm. Nos. 18-1205-GA-AIR, 18-1206-GA-ATA, and 18-1207-GA-AAM, ¶ 121 (Sept. 26, 2019). It further pointed out that according to Suburban, pressure in the system dropped to 105 psig on January 21, 2019—a month before the extension was placed into service. {¶ 12} The Consumers’ Counsel did not offer its own engineering expert. Rather, it sought to use testimony from Suburban’s expert to argue that the 4.9-mile extension was significantly longer than was required to meet Suburban’s needs in February 2019. This engineer said he believed he had done modeling for a two- 4 January Term, 2021 mile extension. He further indicated that a two-mile extension seemed to be enough for the 2018-2019 winter season. He then remarked that his modeling was focused on ensuring Suburban got longevity out of the pipeline so that Suburban would not “have to come back the next year and start building again.” The Consumers’ Counsel also pointed to testimony that the extension would allow Suburban to serve 4,000 to 20,000 more customers in addition to the 13,500 customers that Suburban had on the date certain. It further noted that after the extension was completed, the actual pressure in the pipeline was measured at 250 psig, well above the minimum needed for safe, reliable service. {¶ 13} The PUCO rejected the Consumers’ Counsel’s claim that only a twomile extension was called for, opining: With regard to [the Consumers’ Counsel’s] argument about the precise length of the extension, we find that, while a two-mile extension may have served customers through the 2018-2019 winter, Suburban would need to immediately initiate the [Power Siting Board] regulatory process again to build additional pipeline to ensure adequate capacity to serve existing customers soon after. This approach would also increase the overall cost of necessary improvements to Suburban’s distribution system, thereby increasing the rates customers pay. Importantly, [the National Association of Regulatory Utility Commissioners’] guidance on this matter notes that “utility investment is often lumpy in nature, such that it may be cost ineffective to add small increments of plant and equipment each year, rather than building to meet a longer growth horizon.” Pub. Util. Comm. Nos. 18-1205-GA-AIR, 18-1206-GA-ATA, and 18-1207-GAAAM, at ¶ 125 (Sept. 26, 2019). 5 SUPREME COURT OF OHIO {¶ 14} The PUCO denied the Consumers’ Counsel’s application for rehearing. The Consumers’ Counsel then appealed to this court, advancing two propositions of law. In its first, it argues that the PUCO erred by allowing Suburban to charge customers for property that might be useful in the future but which was not useful on the date certain. In its second, it contends that the PUCO’s decision was against the manifest weight of the evidence. III. The PUCO erred in looking beyond the date certain when it approved the rate increase {¶ 15} The PUCO is tasked with “fixing and determining just and reasonable rates” for a public utility’s service. R.C. 4909.15(A). In doing so, it must follow a ratemaking formula set out in that statute. In re Application of Duke Energy Ohio, Inc., 150 Ohio St.3d 437, 2017-Ohio-5536, 82 N.E.3d 1148, ¶ 16. Part of this formula tells the PUCO to determine “[t]he valuation as of the date certain of the property of the public utility used and useful    in rendering the public utility service for which rates are to be fixed and determined.” R.C. 4909.15(A). This valuation, known as the “rate base,” “represents the public utility’s investment in real property, facilities (power plants, pipelines, poles, and wires), and other equipment (computers and software) it uses to serve customers.” In re Duke Energy Ohio at ¶ 19. {¶ 16} The “date certain” is the date on which the utility property is assessed to determine whether it is used and useful. R.C. 4909.15(A)(1). The PUCO sets the date certain, though the date is “determined essentially by the date at which the utility files its application for a rate increase.” Ohio Edison Co. v. Pub. Util. Comm., 63 Ohio St.3d 555, 559, 589 N.E.2d 1292 (1992).
{¶ 17} The used-and-useful test allows a public utility to recover through rates the value of that portion of its property that is “ ‘actually used and useful for the convenience of the public.’ ” Cincinnati v. Public Util. Comm., 113 Ohio St. 6 January Term, 2021 259, 148 N.E. 817 (1925), syllabus, quoting G.C. 614-23. Whether something is used and useful must be measured “ ‘as of the date certain,’ not at some speculative unspecified point in time.” Office of Consumers’ Counsel v. Pub. Util. Comm., 67 Ohio St.2d 303, 309, 423 N.E.2d 1082 (1981), quoting R.C. 4909.15(A)(1). Thus, a public utility is not entitled to include in the rate-base valuation “property not actually used or useful in providing its public service, no matter how useful the property may have been in the past or may yet be in the future.” Office of Consumers’ Counsel v. Pub. Util. Comm., 58 Ohio St.2d 449, 453, 391 N.E.2d 311 (1979). {¶ 18} The used-and-useful test has been a feature of ratemaking in Ohio since 1911. H.B. No. 325, 102 Ohio Laws 549, 556-557 (enacting G.C. 614-23, predecessor section to R.C. 4909.15). The test has its genesis in the United States Supreme Court’s decision in Smyth v. Ames, 169 U.S. 466, 42 L.Ed. 819, 18 S.Ct. 418 (1898). In that case, the court articulated a constitutional standard for publicutility ratemaking that required that a utility receive a fair market value of the property being used “for the convenience of the public.” Id. at 546. In the court’s view, anything less would have led to an unconstitutional taking. See id. at 523; see also Jersey Cent. Power & Light Co. v. Fed. Energy Regulatory Comm., 810 F.2d 1168, 1175 (1987) (Robert Bork, J.) (discussing Smyth). {¶ 19} Smyth’s holding presented a two-way street. On one side, customers had to pay for the property they used for their benefit. See Smyth at 547. On the other, a public utility could not receive compensation for property that did not benefit its customers. See id. “Fair value” compensation was therefore due only for property used and useful for the convenience of the public. See Jersey Cent. Power at 1175. {¶ 20} The Supreme Court has long since abandoned the used-and-useful test as a constitutional mandate, requiring only the end result that ratemaking be “just and reasonable.” See Duquesne Light Co. v. Barasch, 488 U.S. 299, 310, 109 7 SUPREME COURT OF OHIO S.Ct. 609, 102 L.Ed.2d 646 (1989), citing Fed. Power Comm. v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944). Nevertheless, the test continues to be the standard that the Ohio legislature has chosen to determine whether a public utility may properly charge ratepayers for its capital investment.
{¶ 21} Here, there is no question that the entire 4.9-mile pipeline extension was used on the date certain—gas unquestionably flowed through the pipeline extension. The question is whether the 4.9-mile extension was useful. Though the Consumers’ Counsel concedes that two miles of the extension were useful as of the date certain, it disputes the usefulness of the pipeline extension’s remaining 2.9 miles. {¶ 22} The word “useful” is not defined by the statute. When a word is undefined, we look to its plain, everyday meaning. Great Lakes Bar Control, Inc. v. Testa, 156 Ohio St.3d 199, 2018-Ohio-5207, 124 N.E.3d 803, ¶ 8. But looking at the ordinary meaning of a word in isolation will not suffice. We instead must consider the word’s ordinary meaning as used in the surrounding text. Id. {¶ 23} “Useful” can be understood a few different ways. It is defined as (1) “capable of being put to use”; (2) “having utility”; (3) “ADVANTAGEOUS; esp : producing or having the power to produce good”; and (4) “serviceable for a beneficial end or object.” Webster’s Third New International Dictionary 2524 (2002). {¶ 24} On one hand, then, labeling something “useful” can refer to that thing’s capacity to be put to use. But that understanding makes little sense here because the statute also refers to property that is used. Presumably, “used” property is always capable of being put to use. So, understanding “useful” in this sense would render the word redundant. {¶ 25} That leaves us with the far more sensible conclusion that “useful” in the statute means “advantageous” or “beneficial.” Nothing in the statutory 8 January Term, 2021 framework suggests deviating from the everyday meaning of the word. And because assessing whether property is useful ensures “the reasonableness and justice of rates and charges for the service rendered by the public utilities,” see R.C. 4909.04, the property must be beneficial in rendering service for the convenience of the public as of the date certain. Columbus v. Pub. Util. Comm. of Ohio, 62 Ohio St.3d 430, 436, 584 N.E.2d 646 (1992). {¶ 26} With a proper understanding of the term “useful” in mind, we turn to the Consumers’ Counsel’s challenge to the PUCO’s order. C. The PUCO misapplied the used-and-useful test when it looked beyond the date certain and considered whether Suburban’s investment was prudent {¶ 27} The PUCO concluded that the 4.9-mile pipeline extension was used and useful on the date certain based on modeling that showed that without additional capacity, the pipeline was at risk of falling below minimally adequate pressure levels during the 2018-2019 winter. But that evidence showed only that the existing pipeline would soon be inadequate and that some extension was necessary; it didn’t address the Consumers’ Counsel’s contention that Suburban built far more than necessary. {¶ 28} In regard to the “precise length” of the extension, the PUCO looked not at the extension’s date-certain usefulness, but at its potential to save time and money in the future. The PUCO conceded a two-mile extension may have been adequate to serve customers as of the date certain but worried that soon thereafter Suburban would have had to seek regulatory approval for another extension. It also cited guidance from the National Association of Regulatory Utility Commissioners that “ ‘it may be cost ineffective to add small increments of plant and equipment each year, rather than building to meet a longer growth horizon.’ ” {¶ 29} The problem is that such considerations go beyond the used-anduseful test. The test measures usefulness as of the date certain, “not at some speculative unspecified point in time.” Office of Consumers’ Counsel, 67 Ohio 9 SUPREME COURT OF OHIO St.2d at 309, 423 N.E.2d 1082. By speculating about the pipeline extension’s potential for saving time and money in the long run, the PUCO looked beyond the date certain, February 28, 2019, to find the disputed 2.9 miles useful. {¶ 30} The PUCO contends it reasonably interpreted the meaning of “useful” to “include a prudently-designed pipeline extension” that would “minimize regulatory and construction costs.” But we have never interpreted the term “used and useful” to encompass capital facilities that are not presently useful, even if it might be cheaper to construct them now. To the contrary, we have held that the PUCO exceeds its statutory mandate when incorporating into the rate base “unfinished projects ineligible for rate base treatment [even] if the original decision to build the facilities and the subsequent decision to cancel the projects are prudent under the circumstances.” Office of Consumers’ Counsel v. Pub. Util. Comm., 67 Ohio St.2d 153, 166, 423 N.E.2d 820 (1981). {¶ 31} The PUCO’s reliance on the guidance from the National Association of Regulatory Commissioners and its discussion of the “lumpy nature of utility” investment is telling in this regard. The manual was prepared to serve as a guideline for state and federal regulatory utility commission personnel. It does not override applicable jurisdictional law. The PUCO is bound to follow Ohio law, not the Regulatory Commissioners’ manual. See id. at 163. {¶ 32} In effect, the PUCO applied what is known as the “prudentinvestment” test, the most prominent alternative to the used-and-useful test. Jonathan Kahn, Keep Hope Alive: Updating the Prudent Investment Standard for Allocating Nuclear Plant Cancellation Costs, 22 Fordham Envtl.Law Rev. 43, 4950 (2010). The used-and-useful test is forward-looking: it incorporates into the rate base only the property that has been taken by the public for its benefit. Baumol & Sidak, The Pig in the Python: Is Lumpy Capacity Investment Used and Useful?, 23 Energy L.J. 383 (2002); James J. Hoecker, “Used and Useful”: Autopsy of a Ratemaking Policy, 8 Energy L.J. 303, 311 (1987), fn. 38. In contrast, the prudent- 10 January Term, 2021 investment test is backward-looking: it incorporates into the rate base any investments in property a public utility made, so long as that investment was prudent when it was made. Baumol & Sidak, 23 Energy L.J. at 383. That’s the case even if the prudent investment never pans out for customers. Richard J. Pierce Jr., The Regulatory Treatment of Mistakes in Retrospect: Canceled Plants and Excess Capacity, 132 U. Pa.L.Rev. 497, 511-512 (1984). Thus, the prudentinvestment test places the risk of a failed investment on the customers, who must pay so long as that investment was prudently made. Baumol & Sidak, 23 Energy L.J. at 392. In contrast, the used-and-useful test places the risk of a failed investment on a public utility because the customers are made to pay only for what they take for their benefit. Id. at 391-392. {¶ 33} The used-and-useful test doesn’t prohibit utilities from making capital investments based on whatever scale and time frame the utility finds the most prudent. But what it does do is limit the utility’s ability to recover the costs for such investments. Only at the actual point in time in which such investments are used and useful in providing services to the ratepayers may the utility charge consumers for such capital investments. Of course, this doesn’t mean that some extra capacity may never be considered useful. In an appropriate circumstance, a limited degree of reserve capacity could be useful (or beneficial) to consumers in providing protection against unforeseen contingencies in the same way that property insurance is useful to a homeowner. In evaluating such circumstances, however, the question always must be whether the property is used and useful, not whether it was a prudent investment. {¶ 34} Certainly, the General Assembly could have opted for a prudentinvestment test, instead of the used-and-useful test in R.C. 4909.15(A). Indeed, in another section of the Revised Code, R.C. 4909.154, the General Assembly provided a test for assessing compensation for a public utility’s operating and maintenance expenses that is based on whether the utility’s policies and practices 11 SUPREME COURT OF OHIO are imprudent. The PUCO lacks authority to “legislate in its own right” and may not substitute its own test for the one adopted by the General Assembly. Office of Consumers’ Counsel v. Pub. Util. Comm., 67 Ohio St.2d at 166, 423 N.E.2d 820. But that is precisely what the PUCO did when relying on the prudence of Suburban’s investment. D. We remand for the PUCO to apply the appropriate standard {¶ 35} The application of the relevant legal standard to the facts is something that is best left to the PUCO in the first instance. In re Complaint of Wingo v. Nationwide Energy Partners, L.L.C., 163 Ohio St.3d 208, 2020-Ohio5583, 169 N.E.3d 617, ¶ 26. Here, the PUCO departed from the proper standard by looking beyond the date certain and in considering whether the investment was prudent rather than “useful.” Because the PUCO failed to properly apply the usedand-useful standard, we remand this case for it to do so. On remand, the PUCO must evaluate the evidence and determine whether the 4.9-mile pipeline extension was used and useful as of the date certain. {¶ 36} The dissent agrees that the PUCO erred when it considered the prudence of Suburban’s investment but contends that this error does not warrant a remand. The dissent essentially finds the error harmless, pointing to the portion of the PUCO’s rehearing entry in which the PUCO labeled its earlier reliance on investor prudence as “additional considerations,” Pub. Util. Comm. Nos. 18-1205GA-AIR, 18-1206-GA-ATA, and 18-1207-GA-AAM, Second rehearing entry, ¶ 22 (Apr. 22, 2020). According to the dissent, the PUCO ultimately “refuted [the Consumers’ Counsel’s] overbuilding claim,” dissenting opinion at ¶ 51, with evidence of the pipeline extension’s date-certain usefulness. {¶ 37} This characterization of the PUCO’s decision is off base. The evidence cited by the dissent as having refuted the Consumers’ Counsel’s overbuilding claim simply showed that without any extension at all, pressure levels were forecasted to drop below the minimum safety threshold. Here’s the specific 12 January Term, 2021 evidence of date-certain usefulness the dissent relies upon: (1) Suburban would have to “prepare for contingencies—such as cold temperatures, high winds, sustained weather events, and changes in load,” dissenting opinion at ¶ 56, (2) “without the 4.9-mile extension, the pressure    would drop to 104.27 psig at the end of 2018, barely above the minimum-acceptable level of 100 psig,” id. at ¶ 51, and (3) pressure “would drop to 78.72 psig in 2019 without the extension,” id. at ¶ 51. {¶ 38} The problem is that none of this evidence shows that a 4.9-mile extension was necessary. It simply shows that some extension was necessary to address safety concerns and that a 4.9-mile extension would easily do the trick. But by this logic, virtually any size extension (10 miles, 15 miles, and beyond) would pass muster. {¶ 39} The dissent rightfully notes the distinction between, on one side, a pipeline with adequate reserves and, on the other, a pipeline overbuilt with excess capacity. But we are in the dark as to which side the 4.9-mile extension lies on because the PUCO provided no analysis beyond its nod to future prudence for why the 4.9-mile pipeline extension made sense over a shorter extension. {¶ 40} We are also troubled by the dissent’s suggestion that the Consumers’ Counsel needed to provide its own modeling or forecasts for its overbuilding claim. It is Suburban that seeks the benefit of a rate increase. As such, Suburban has “the burden of proof to show that the proposals in the application are just and reasonable.” R.C. 4909.18; see also R.C. 4909.19(C); Ohio Edison Co., 63 Ohio St.3d at 558-559, 589 N.E.2d 1292. And while we recognize the dissent’s point that the PUCO is afforded discretion in how it responds to the evidence before it, this discretion is cabined by a statutory mandate to apply the used-and-useful test to ensure rates are in fact just and reasonable. R.C. 4909.15. The PUCO went astray of this requirement when it relied on “additional considerations” of investor prudence in approving the 4.9-mile extension. This was not harmless error. 13 SUPREME COURT OF OHIO E. We need not consider the Consumers’ Counsel’s remaining challenges {¶ 41} As part of the settlement agreement, Suburban agreed to phase in its rate increase over three years with customer rates reflecting charges for 50 percent of the value of the extension in the first year, 80 percent of the extension in the second year, and 100 percent thereafter. The phase-in did not change the overall amount that customers would pay in the aggregate—Suburban would still recover the full value of its investment, but the recovery would be spread out over three years. And if Suburban’s projections of growth are correct, it means that existing customers would ultimately pay less because as customers are added, the rates are spread out over a larger rate base. Within its first assignment of error, the Consumers’ Counsel challenges the PUCO’s decision to approve this phase-in, arguing that it is inconsistent with the requirement that property be valued as of the date certain. {¶ 42} A party who seeks to challenge an order on appeal must be aggrieved by that order. See Ohio Contract Carriers Assn. v. Pub. Util. Comm., 140 Ohio St. 160, 42 N.E.2d 758 (1942), syllabus. Thus, we will not reverse an order of the commission unless the party seeking reversal shows that it has been harmed by the order. In re Application of Ohio Power Co., 155 Ohio St.3d 320, 2018-Ohio-4697, 121 N.E.3d 315, ¶ 9. Here, the Consumers’ Counsel fails to show that it is aggrieved by the PUCO’s decision to allow the phase-in of the rate increase; if anything, the phase-in would seem to work a net benefit to consumers. {¶ 43} In its reply brief, the Consumers’ Counsel suggests a possible scenario where some customers could be hurt by the phase-in. It posits that if Suburban’s projections are wrong, and if instead of adding customers Suburban actually loses customers, then the remaining customers would end up paying more because the rate increase would be spread over a smaller customer base. But this argument is purely speculative: there is nothing in the record that provides any basis to predict that Suburban will lose customers. And “[w]e will not reverse a 14 January Term, 2021 commission order based on speculation.” In re Application of Ohio Power Co., 155 Ohio St.3d 326, 2018-Ohio-4698, 121 N.E.3d 320, ¶ 50. Because the Consumers’ Counsel has failed to show that it is aggrieved by the phase-in, we do not consider further its challenge to that portion of the PUCO’s order. {¶ 44} Finally, we need not consider the Consumers’ Counsel’s second proposition of law, in which it argues that the PUCO’s decision was manifestly against the weight of the evidence. Our conclusion that the case should be remanded for application of the proper standard renders this argument moot.