Court Opinion

ID: 6756383
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:27:26.444983+00
Date Added: 2024-06-11T16:02:27.187735
License: Public Domain

Locher, J.,
dissenting. I must respectfully dissent from the majority opinion.

I.

This case represents the end of the reproduction cost new less depreciation (RCNLD) era in Ohio, the last state to adhere to this formula as the sole measure of determining utility rates.
Ohio’s method of fixing rates had its origin in the ancient doctrine espoused by the Supreme Court of the United States in 1898,3 repudiated by that court in 1942; however, it lives on to haunt public utility regulation in Ohio. That doctrine is based on the rationale that fixing of rates is akin to the exercise of the power of eminent domain.4 Of course, under this theory, the Public Utilities Commission could never reduce rates because any reduction of earnings would reduce the value of the enterprise. Nevertheless, 44 years later the Supreme Court did assert *163that the fixing of public utility rates was not an exercise of the power of eminent domain, but a form of legislative price-fixing under the police powers of the various states.
During the years that Smyth v. Ames (1898), 169 U. S. 466, was law, the Supreme Court of the United States never held in any case that the constitutionally protected value of a public utility was reproduction cost or that RCNLD is the sole measure of the rate base.
Ohio’s rate-making statute was passed by the General Assembly in 1913, and, if you compare our statute, you will find that it prescribes essentially the same broad standard for ascertaining value as contained in the statement in the case of Smyth v. Ames, supra.
I contend that the line of eases in Ohio is now out of alignment for this reason: When the United States Supreme Court, in 1942, lifted the constitutional restraint upon the police power of the state of Ohio by abandoning the concept of a constitutionally protected method of valuation in public utility rate-making, the question in Ohio then became one of giving effect to the provisions of our statute with its scope of review limited to protecting the line of confiscation, and the line of confiscation is not synonymous with reproduction cost because the Constitution does not equate this standard of value with property. But, the Supreme Court of Ohio, I submit, erroneously continued to look to the precedential cases on the abandoned constitutional concept to support its interpretation of the provisions of our regulatory statute.
This court has from time to time, after Smyth v. Ames, supra, was overturned, indicated that elements of value other than RCNLD may be considered, but apparently these utterances lack vitality.
In a 1936 rate appeal, the court conceded that original cost of property and cost of reproduction are relevant factors to be considered in determining value for rate-making. In the landmark East Ohio Gas Co. v. Pub. Util. Comm. (1938), 133 Ohio St. 212, case, the Supreme Court of Ohio specifically held that the Ohio General Assembly *164adopted the principle of the rule of Smyth v. Ames, supra (169 U. S. 466). I noted earlier that this rule permits consideration of elements of value other than reproduction cost and that our statute states the provisions of the rule almost verbatim.
In Marietta v. Pub. Util. Comm. (1947), 148 Ohio St. 173, the first case to come before the Ohio Supreme Court after the United States Supreme Court had lifted the constitutional present value concept, the court suggests in its opinion that the Ohio statute might not contain a mandatory requirement to use reproduction cost, but it relied on the old line of cases to hold that the sole measure of the rate base is reproduction cost.
The court declared that the net investment or actual capital of a public utility is irrelevant under our statute. It declared that the amount of debt and capital stock of a hypothetical company having a value equal to the reproduction cost value was controlling, not the actual capital of the actual company. This pronouncement led to Ohio Fuel Gas Co. v. Pub. Util. Comm. (1960), 171 Ohio St. 10, wherein the Public Utilities Commission allowed the company to earn its actual interest requirements on its capital represented by long-term bonds on the theory that interest was a fixed obligation. The Supreme Court of Ohio reversed the commission because the Public Utilities Commission did not allow an amount for interest equivalent to the hypothetical company, but the court did rule that the hypothetical interest should be used by the commission in computing allowable income tax expense. This, of course, would have the effect of allowing more for interest than the actual company requires to service its bonds but would allow less for income tax expense than the actual company would incur because the Internal Revenue Service would compute the tax using actual interest as a deduction, while the commission would deduct the hypothetical interest of the hypothetical company.
More recent case developments have created further confusion. In Dayton Power & Light Co. v. Pub. Util. *165Comm. (1962), 174 Ohio St. 160, at page 162, the commission followed the court’s previous decisions and considered a hypothetical company using, in turn, hypothetical interest to compute the federal income tax as the court directed.
In the decisions which appear consecutively in 174 Ohio State Reports, the Supreme Court reversed its earlier affirmance of the Dayton case, in which the commissipn had followed the previous decisions of the court, and it reversed the commission in General Telephone Co. v. Pub. Util. Comm. (1963), 174 Ohio St. 575, and Ohio Fuel Gas Co. v. Pub. Util. Comm. (1963), 174 Ohio St. 585, on the grounds that the commission was wrong in following the. Ohio Fuel, supra (171 Ohio St. 10), case decision of the court. It is admitted that RCNLD is costly to the commission, the utility and the ratepayers, because it makes the administrative process of regulating rates unnecessarily complicated and cumbersome, and the regulatory framework is conducive to long delay. The consumers are required to provide a fair rate of earnings on an engineering estimate of what it would cost to reproduce a given utility property no matter how obsolete.5

11.

An examination of the rate of return determined by the commission reveals several interesting and bemusing aspects of the instant cause. First, Ohio Edison chose not *166to present any evidence on the appropriate rate of return. The well-established law in Ohio clearly places the burden of proof upon the applicant, Ohio Edison, to demonstrate the unreasonableness of the prior rates and the reasonableness of the proposed rates. Mt. Vernon Telephone Corp. v. Pub. Util. Comm. (1955), 163 Ohio St. 381. Instead, Ohio Edison entered into a “stipulation” accepting the staff’s determination of the “legally appropriate” rate of return. The commission then accepted a 9.07 percent rate of return, despite the fact that the appellants, representing the individual consumers within their communities, did not join in this so-called stipulation. I seriously doubt that this can really be viewed as a stipulation, when the appellants did not agree to it. Perhaps, more importantly, the net effect of this agreement is that it permits Ohio Edison to avoid meeting its burden of proof as to the reasonableness of the rates; thus Ohio Edison did not produce any expert witnesses and thereby precluded any opportunity for the cross-examination of its witnesses on this issue.
Interestingly, despite Ohio Edison’s apparent belief that its expert did not need to testify because of this “stipulation,” the commission has placed in the record of this instant cause the proposed testimony of Ohio Edison’s expert witness, Victor A. Owoc, wherein he arrives at a rate of return of 10.01 percent. Appellants have correctly asserted not only that this was merely “proposed testimony,” but that it was never offered as testimony and there was never an opportunity for cross-examination on it. I, therefore, believe that appellant’s motion to strike the proposed testimony from the record should be allowed.
Absent this belated attempt to augment the record, I can find no evidence upon which the commission could determine that a 9.07 percent rate of return is reasonable. As previously emphasized, Ohio Edison presented no testimony as to the reasonableness of the rate. Moreover, the staff witness, in testimony before the commission, refused to recommend this rate of return from an economic *167standpoint, believing it to be excessive in terms of economic feasibility. I do not read General Telephone Co. v. Pub. Util. Comm. (1976), 46 Ohio St. 2d 281, as mandating the absurdity that a monopoly must be given a rate of return which produces revenues that are not congruent with the realities of economics.
Perhaps the most striking facet of the 9.07 percent rate of return is that Ohio Edison in its application sought an 8.5 percent rate of return, believing that figure to be “fully compensable.” The staff of the commission reduced Ohio Edison’s rate base by 15 percent from $603,091,000 to $511,279,000. This reduction was accepted by the commission, which then deftly increased the rate of return from the requested 8.5 percent to 9.07 percent to compensate for the loss in the rate base suffiered by Ohio Edison. Surely, the ratepayers, the raison d’etre for the existence of the utility facilities, must be heard to exclaim, after hearing of the rate base cut and the automatic rate of return increase, “Heads you win — tails I lose.”
Finding that the instant cause presents a real question as to whether any or at the very best only a modicum of evidence was presented to the commission to support a rate of return which exceeds that of the amount requested by Ohio Edison and the amount of return urged by the staff,6 I would remand tiffs cause to the commission with instructions to amend its order of February 4, 1977, to provide rates commensurate with the evidence that was presented to it.

 Smyth v. Ames (1898), 169 U. S. 466, modified and affirmed in 171 U. S. 361.

 Where the state fixes rates which reduce the value of the utility property, such reduction constitutes a taking of property under the Fourteenth Amendment to the United States Constitution.

In Chief Justice Taft’s dissenting opinion in Ohio Fuel Gas Co. v. Pub. Util. Comm. (1963), 174 Ohio St. 585, 589, the following is stated:
“Heretofore, because of pronouncements of law and decisions of this court, investors in Ohio public utilities have probably enjoyed greater benefits than have investors in public utilities in any other jurisdiction. However, in my opinion, the decisions in these casen and-General Telephone Co. v. Public Utilities Commission and City of Dayton v. Public Utilities Commission, which are all being decided today, require the extension of those benefits well beyond what can reasonably be justified under the statutes of this state. * * *”
See my dissent in Akron v. Pub. Util. Comm. (1977), 51 Ohio St. 2d 27, 30, joined in by Celebrezze, J., which details further mischief imposed upon the Ohio rate-making process by this court’s application of accelerated depreciation and the normalization of tax benefits.

The revenue increase “stipulated” and granted in this case is 120 percent more than the increase which the staff felt to be Justified ($14.9 million). See dissent of David Sweet, Commissioner, at page two thereof.