Court Opinion

ID: 3196363
Source: CourtListenerOpinion
Date Created: 2016-04-21 13:07:31.494638+00
Date Added: 2024-06-11T14:22:33.084372
License: Public Domain

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as In
re Comm. Rev. of Capacity Charges of Ohio Power Co., Slip Opinion No. 2016-Ohio-1607.]

                                         NOTICE
     This slip opinion is subject to formal revision before it is published in
     an advance sheet of the Ohio Official Reports. Readers are requested
     to promptly notify the Reporter of Decisions, Supreme Court of Ohio,
     65 South Front Street, Columbus, Ohio 43215, of any typographical or
     other formal errors in the opinion, in order that corrections may be
     made before the opinion is published.

                          SLIP OPINION NO. 2016-OHIO-1607
   IN RE COMMISSION REVIEW OF THE CAPACITY CHARGES OF OHIO POWER
            COMPANY AND COLUMBUS SOUTHERN POWER COMPANY;
OFFICE OF OHIO CONSUMERS’ COUNSEL, APPELLANT/CROSS-APPELLEE; OHIO
      POWER COMPANY, APPELLEE/CROSS-APPELLANT; PUBLIC UTILITIES
                    COMMISSION, APPELLEE/CROSS-APPELLEE.
  [Until this opinion appears in the Ohio Official Reports advance sheets, it
  may be cited as In re Comm. Rev. of Capacity Charges of Ohio Power Co.,
                         Slip Opinion No. 2016-Ohio-1607.]
Public utilities—Commission complied with procedural requirements of R.C.
        4905.26—Commission committed error in calculating energy credit—
        Commission orders affirmed in part and reversed in part.
(Nos. 2012-2098 and 2013-0228—Submitted December 15, 2015—Decided April
                                         21, 2016.)
         APPEAL and CROSS-APPEAL from the Public Utilities Commission,
                                 No. 10-2929-EL-UNC.
                                      ____________
                             SUPREME COURT OF OHIO

       KENNEDY, J.
                                     I. SUMMARY
       {¶ 1} This case arises from the Public Utilities Commission’s approval of
a capacity charge for the American Electric Power operating companies, Ohio
Power Company and Columbus Southern Power (collectively, “AEP”).
Competitive retail electric service (“CRES”) providers that sell generation service
in Ohio must ensure that they have sufficient capacity to meet customer demand.
Because AEP is responsible for providing capacity to all suppliers of electricity
within its service area, CRES providers who operate in the company’s territory
rely on AEP’s capacity resources to meet their generation needs. In the orders on
appeal, the commission authorized AEP to implement a new cost-based charge for
capacity service that AEP offers to CRES providers.
       {¶ 2} The commission orders addressed many issues, and the Ohio
Consumers’ Counsel (“OCC”) appealed.1 AEP also filed a cross-appeal. We
have determined that AEP has demonstrated one commission error. Therefore,
we affirm the commission’s orders in part and reverse them in part, and remand
the cause for further proceedings.
                   II. FACTS AND PROCEDURAL BACKGROUND
       {¶ 3} The Federal Energy Regulatory Commission (“FERC”) regulates
capacity markets under its preemptive authority over wholesale electricity. See 16
U.S.C. 824(b)(1). “Capacity” refers to the ability to supply sufficient electrical
power to meet the highest level of customer demand. In order to maintain the
reliability of the power grid, generators will produce more electricity than
necessary to meet anticipated demand, plus a reserve margin to guard against
unforeseen events.

1
  FirstEnergy Solutions Corp. and Industrial Energy Users-Ohio also appealed, but they
subsequently dismissed their appeals.

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                                     January Term, 2016

         {¶ 4} AEP participates in the PJM Interconnection, L.L.C. (“PJM”)
capacity market. See Pub. Util. Comm. No. 10-2929-EL-UNC, at 3 (July 2, 2012)
(the “Capacity Order”).          AEP is a party to the PJM Reliability Assurance
Agreement (“RAA”).           The RAA is a FERC-approved rate schedule that is
intended to ensure that there are adequate capacity resources to maintain
reliability in the region covered by PJM at the lowest possible cost.                       PJM
Reliability             Assurance               Agreement,               available             at
http://www.pjm.com/documents/agreements.aspx (accessed Jan. 27, 2016); Am.
Elec. Power Serv. Corp., 134 FERC ¶ 61,039, 2011 WL 182468, at **1 (Jan. 20,
2011).
         {¶ 5} The RAA uses an auction process as the primary method by which
capacity is purchased and priced in the PJM region. However, the RAA also
contains an alternative method for meeting capacity obligations, the “Fixed
Resource Requirement Alternative (“FRR Alternative”). In lieu of participating
in the PJM auctions, a load-serving entity,2 such as AEP, may elect to satisfy all
capacity obligations in its service territory. AEP has chosen the FRR Alternative,
and hence, it was responsible for satisfying all PJM-determined capacity-resource
obligations for all loads (for both shopping and nonshopping customers) in its
service territory through May 31, 2015. See Capacity Order at 10.
         {¶ 6} The RAA also addresses how load-serving entities—i.e., generators
like AEP that supply wholesale power to the PJM region grid—are compensated
for capacity services. As noted, the RAA primarily uses auctions to set the price
for capacity resources in the various PJM region. See id.; Am. Elec. Power Serv.
Corp., 134 FERC ¶ 61,039, 2011 WL 182468, at **1; RAA, Schedule 8.1. The
RAA, however, also allows for capacity pricing to be determined through a “state
compensation mechanism,” in states that have implemented retail choice. Under

2
 A load-serving entity is any entity that provides electric energy to end-users located within the
PJM region. RAA, Article I, Section 1.44.

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                                SUPREME COURT OF OHIO

this provision, the state public-utility commission determines the cost that CRES
providers must pay FRR Alternative entities—such as AEP—for this capacity
service. RAA Schedule 8.1, Section D.8.
        {¶ 7} Since the start of the PJM capacity market, AEP had been receiving
compensation from CRES providers for capacity service at market prices, as
determined by PJM auctions.            However, in November 2010, AEP filed an
application with FERC seeking to change how it was compensated for providing
capacity to CRES providers. Specifically, AEP wanted to change from auction
pricing to cost-based pricing.3
        {¶ 8} This case was opened when the commission found that an
investigation was necessary to determine the impact of AEP’s proposed change.
Capacity Order at 3. After opening the case, the commission formally adopted a
state compensation mechanism for AEP’s capacity charge and set that charge
based on the most recent capacity auction conducted by PJM. Capacity Order at
3-4; Pub. Util. Comm. No. 10-2929-EL-UNC, at 2 (Dec. 8, 2010).
        {¶ 9} On July 2, 2012, the commission issued its order finding that AEP
was entitled to recover the actual costs it incurs to supply wholesale capacity to
CRES providers in its territory. According to the commission, AEP was entitled
to recover its actual costs based on its status as the sole provider of capacity in its
service territory.
        {¶ 10} The commission found that it had statutory authority to establish a
cost-based “state compensation mechanism” to price capacity—rather than rely
on PJM auctions. The commission rejected the contention of some parties that it
was bound by R.C. Chapter 4928 in setting the capacity charge, which governs
competitive retail electric service.        The commission found instead that the

3
  AEP relied on RAA Schedule 8.1, Section D.8, which allows an FRR Alternative Entity, if no
state compensation mechanism exists, to make a filing with the FERC to seek compensation based
on costs.

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                               January Term, 2016

capacity service at issue is not a competitive retail electric service, because AEP
was not providing capacity to end-use energy consumers. Rather, AEP was
providing capacity to CRES providers, who resold that service to retail customers.
The commission therefore determined that it could rely on R.C. 4905.04, 4905.05,
and 4905.06 to approve a cost-based charge, because the transaction is
appropriately characterized as an intrastate wholesale transaction.
       {¶ 11} On rehearing, the commission clarified that it also had authority
under R.C. 4905.26 to open the investigation in this case and to set the rate for
capacity service. Pub. Util. Comm. No. 10-2929-EL-UNC, at 29 (Oct. 17, 2012).
       {¶ 12} The commission also found that its decision was consistent with
the FERC-approved RAA, which as previously mentioned, allows state public-
utility commissions to establish a “state compensation mechanism” to price
wholesale capacity.    The commission also noted that a state compensation
mechanism, once established, prevails over other compensation methods under
the RAA.
       {¶ 13} After finding that it had authority to approve a cost-based capacity
charge, the commission determined that AEP’s cost to provide capacity was
$188.88 per megawatt-day. But because this was well above the market price for
capacity in the PJM region at the time (as established by PJM auctions), the
commission was concerned that AEP’s capacity charge would inhibit retail
shopping in its service area. For this reason, the commission ordered that CRES
providers would be required to pay only the market price for capacity, under the
theory that this would provide incentive for CRES providers to offer lower retail
electric prices, which would promote retail competition.
       {¶ 14} The commission then authorized AEP to defer recovery of the
difference between the market price charged to CRES providers and the $188.88
megawatt-day price (which reflected the company’s actual capacity costs) and
also authorized AEP to collect carrying charges on the deferral. The commission

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                                SUPREME COURT OF OHIO

further ordered that an appropriate mechanism to recover the deferred charges
would be established in AEP’s second electric-security-plan (“ESP”) case.4
        {¶ 15} Following three rounds of rehearing, the Office of the Ohio
Consumers’ Counsel (“OCC”) appealed the commission’s decision in this case
(“the capacity case”) and AEP filed a cross-appeal.
                            A. The Commission’s ESP Order
        {¶ 16} In the ESP case, the commission approved the “Retail Stability
Rider” (“RSR”) as the mechanism for AEP to recover its deferred capacity
charges. In re Application of Columbus S. Power Co., Pub. Util. Comm. Nos. 11-
346-EL-SSO, 11-348-EL-SSO, 11-349-EL-AAM, and 11-350-EL-AAM (Aug. 8,
2012) (the “ESP Order”).5 The RSR was established as a “nonbypassable” rider,
meaning that it is paid by both shopping and nonshopping customers in AEP’s
service territory.     In addition, the commission authorized AEP to begin its
recovery of a portion of those costs during the ESP period. The commission
further instructed AEP to file an application after the ESP ended that, if approved,
would allow the company to recover any remaining deferred capacity charges
starting on June 1, 2015, and continuing over the following 32 months.
                           B. AEP’s Applications with FERC
        {¶ 17} In March 2013, AEP requested that FERC confirm that the state
compensation mechanism approved by the commission is consistent with the

4
 The commission decided the ESP case in August 2012. In re Application of Columbus S. Power
Co., Pub. Util. Comm. Nos. 11-346-EL-SSO, 11-348-EL-SSO, 11-349-EL-AAM, and 11-350-EL-
AAM (Aug. 8, 2012). The decision was appealed to this court and was argued in May 2015.
Supreme Court case No. 2013-0521. Our decision in that case is also being released today. In re
Application of Columbus S. Power Co., __ Ohio St.3d __, 2016-Ohio-1608, __ N.E.3d __.
5
  On April 2, 2015, the commission approved AEP’s application to recover the remaining deferred
capacity charges, plus carrying charges on the deferral. See In re Application of Ohio Power Co.
to Adopt a Final Implementation Plan for the Retail Stability Rider, Pub. Util. Comm. No. 14-
1186-EL-RDR (Apr. 2, 2015). The case is currently pending before the commission on rehearing.

                                               6
                               January Term, 2016

RAA. AEP submitted a proposed appendix to the RAA with its request. See PJM
Interconnection, L.L.C., 143 FERC ¶ 61,164, 2013 WL 2283427 (May 23, 2013).
       {¶ 18} On May 23, 2013, FERC granted AEP’s request and accepted the
proposed appendix, subject to certain revisions to which AEP ultimately agreed.
As revised, the appendix reflects that AEP was compensated for capacity
provided to CRES providers during its ESP period at the rate established by PJM
auction. FERC found that AEP’s revised appendix is consistent with the RAA
and does not amend the agreement itself. FERC did not, however, endorse any
capacity charge above auction pricing.
       {¶ 19} After FERC accepted the amended appendix, its order became final
and nonappealable.     Thereafter, on September 26, 2013, AEP withdrew its
pending application for FERC approval of a cost-based capacity charge. See
FERC case Nos. ER11-2183 and EL11-32.
                           III. STANDARD OF REVIEW
       {¶ 20} “R.C. 4903.13 provides that a [Public Utilities Commission] order
shall be reversed, vacated, or modified by this court only when, upon
consideration of the record, the court finds the order to be unlawful or
unreasonable.” Constellation NewEnergy, Inc. v. Pub. Util. Comm., 104 Ohio
St.3d 530, 2004-Ohio-6767, 820 N.E.2d 885, ¶ 50. We will not reverse or modify
a Public Utilities Commission decision as to questions of fact when 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 misapprehension, mistake, or willful
disregard of duty. Monongahela Power Co. v. Pub. Util. Comm., 104 Ohio St. 3d
571, 2004-Ohio-6896, 820 N.E.2d 921, ¶ 29. The appellant bears the burden of
demonstrating that the commission’s decision is against the manifest weight of
the evidence or is clearly unsupported by the record. Id.

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                            SUPREME COURT OF OHIO

       {¶ 21} Although this court has “complete and independent power of
review as to all questions of law” in appeals from the commission, Ohio Edison
Co. v. Pub. Util. Comm., 78 Ohio St. 3d 466, 469, 678 N.E.2d 922 (1997), we may
rely on the expertise of a state agency in interpreting a law where “highly
specialized issues” are involved and “where agency expertise would, therefore, be
of assistance in discerning the presumed intent of our General Assembly,”
Consumers’ Counsel v. Pub. Util. Comm., 58 Ohio St. 2d 108, 110, 388 N.E.2d
1370 (1979).
                                 IV. DISCUSSION
                         A. OCC’s Arguments on Appeal
                  1. OCC’s first proposition of law challenges the
                      commission’s reliance on R.C. 4905.26
       {¶ 22} OCC argues under its first proposition of law that the commission
failed to comply with all the procedural requirements of R.C. 4905.26 in the
proceedings below. OCC concedes that R.C. 4905.26 gives the commission
authority to investigate and hold a hearing to review rates and charges that may be
unjust, unreasonable, or unlawful. But according to OCC, the plain language of
the statute requires more than the notice and hearing that was provided in the
proceedings below. OCC raises two specific challenges. Both lack merit.
       {¶ 23} First, OCC maintains that the commission violated R.C. 4905.26
when it set a new capacity charge in this case without finding that AEP’s existing
capacity charge (based on PJM auction pricing) was unjust, unreasonable, or
unlawful. But R.C. 4905.26 contains no such requirement. The statute provides:

       [U]pon the initiative or complaint of the public utilities
       commission, that any rate * * * [or] charge * * * is in any respect
       unjust, unreasonable, * * * or in violation of law, * * * if it appears
       that reasonable grounds for complaint are stated, the commission

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                                 January Term, 2016

       shall fix a time for hearing and shall notify complainants and the
       public utility thereof.

       {¶ 24} The plain language of the statute requires only that the
commission’s “initiative or complaint” allege that the rate or charge is unjust or
unreasonable. It does not require any specific finding before the commission can
change an existing rate, so we reject OCC’s first claim that R.C. 4905.26 was
violated.
       {¶ 25} Second, OCC claims that the commission violated R.C. 4905.26
because it “never established that reasonable grounds existed for a complaint”
before it held the hearing in the case below. R.C. 4905.26 states that “if it appears
that reasonable grounds for complaint are stated, the commission shall fix a time
for hearing and shall notify complainants and the public utility thereof.” This
requirement also applies when, as here, the commission itself initiates
proceedings. Allnet Communications Servs., Inc. v. Pub. Util. Comm., 32 Ohio
St.3d 115, 117, 512 N.E.2d 350 (1987).
       {¶ 26} The commission held an evidentiary hearing that began on April
17, 2012. The commission found that it had set forth reasonable grounds for
complaint in entries issued on December 8, 2010, and March 7, 2012. In the
December 8 entry, the commission initiated proceedings in this case, finding that
an investigation was necessary in order to determine the impact if AEP’s request
with FERC to change its capacity charge from a market rate to a cost-based
mechanism was approved. The commission was specifically concerned with the
effect that AEP’s proposed change could have on (1) the company’s current
capacity charges to CRES providers, (2) the manner that the company collected
capacity costs through retail rates or other capacity charges, and (3) retail
competition in Ohio.

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                                SUPREME COURT OF OHIO

        {¶ 27} In the March 7 entry, the commission stated that evidence6 had
been presented that AEP’s then-existing capacity charge might be below the
company’s costs to provide capacity. The commission further stated that AEP’s
current market-rate capacity charge could result in an unjust and unreasonable
result if left unchanged.
        {¶ 28} On appeal, OCC fails to explain exactly how these entries failed to
comply with R.C. 4905.26. Unsupported legal conclusions do not demonstrate
error. In re Application of Columbus S. Power Co., 129 Ohio St. 3d 271, 2011-
Ohio-2638, 951 N.E.2d 751, ¶ 14-17; In re Application of Columbus S. Power
Co., 128 Ohio St. 3d 512, 2011-Ohio-1788, 947 N.E.2d 655, ¶ 56-57. We find
that the commission set forth reasonable grounds to open the investigation and
hold an evidentiary hearing. See, e.g., Ohio Util. Co. v. Pub. Util. Comm., 58
Ohio St. 2d 153, 159, 389 N.E.2d 483 (1979) (commission-initiated investigation
based on belief that existing rates might not be reasonable under new rate law
satisfied reasonable-grounds requirement); Allnet Communications Servs., Inc. v.
Pub. Util. Comm., 32 Ohio St. 3d at 117-118, 512 N.E.2d 350 (allegation that
certain charges were unreasonable and unlawful due to the unforeseen magnitude
of rate increases satisfied reasonable-grounds requirement).
        {¶ 29} In any event, OCC’s real objection appears to be with when the
commission expressly invoked R.C. 4905.26. OCC notes that the commission did
not mention R.C. 4905.26 until “three months after-the-fact (in the rehearing
stage).” But OCC does not explain how it was prejudiced by this delay, which it
must in order to obtain a reversal. See Myers v. Pub. Util. Comm., 64 Ohio St. 3d
299, 302, 595 N.E.2d 873 (1992) (this court “will not reverse an order of the
commission absent a showing of prejudice by the party seeking reversal”).

6
  The evidence referenced here was submitted in support of a stipulation filed in the ESP case,
which was intended to resolve both the capacity case and the ESP case. The commission initially
approved the stipulation, but later decided to reject it. See Pub. Util. Comm. No. 10-2929-EL-
UNC, at 2, 10-13 (Feb. 23, 2012).

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                               January Term, 2016

       {¶ 30} In light of the commission’s clear authority under R.C. 4905.26 to
investigate rates and order new rates if necessary, we reject OCC’s first
proposition of law.
           2. OCC’s second and third propositions of law challenge
       the commission’s decision to defer the recovery of capacity costs
       {¶ 31} In its second proposition of law, OCC argues that the commission
violated R.C. 4928.141 and 4928.02(A) when it allowed AEP to defer the
recovery of capacity costs in this case.       According to OCC, the order is
unreasonable because it results in customers paying twice for capacity service.
       {¶ 32} OCC argues in subsection A of its third proposition of law that the
commission’s decision to authorize the deferral violates R.C. 4928.02(H), which
provides that it is state policy to avoid anticompetitive subsidies in the provision
of retail electric service. OCC also contends that the decision to defer capacity
charges violates R.C. 4928.02(L) (requiring the commission to protect at-risk
populations), and R.C. 4928.06 (requiring the commission to effectuate the policy
specified in R.C. 4928.02). According to OCC, the deferral provides an unlawful
subsidy to CRES providers in the form of discounted capacity that will ultimately
be paid by retail customers when the deferral is recovered in rates.
       {¶ 33} OCC raised these same arguments before the commission. The
commission, however, did not address the merits of the arguments.                 The
commission instead found that OCC’s arguments were prematurely raised and
beyond the scope of the capacity case because the mechanism to recover the
deferred capacity charges was not established in that case.            Rather, that
mechanism would be—and ultimately was—established in the ESP case.
       {¶ 34} The critical problem for OCC is that none of the arguments in its
second proposition of law or in subsection A of its third proposition of law refutes
the commission’s finding that the arguments were not yet ripe for review. Thus,
OCC fails to demonstrate error in the commission’s order. See In re Application

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                              SUPREME COURT OF OHIO

of Duke Energy Ohio, Inc., 131 Ohio St. 3d 487, 2012-Ohio-1509, 967 N.E.2d
201, ¶ 12 and ¶ 14.
       {¶ 35} Under subsection B of its third proposition of law, OCC argues that
the accounting order granting the deferral harmed utility customers. We lack
jurisdiction over this argument, however, because OCC failed to set forth this
claimed error in its notice of appeal.         R.C. 4903.13 (establishing that the
procedure for seeking reversal of a Public Utilities Commission order is through a
notice of appeal “setting forth the order appealed from and the errors complained
of”); Cincinnati Gas & Elec. Co. v. Pub. Util. Comm., 103 Ohio St. 3d 398, 2004-
Ohio-5466, 816 N.E.2d 238, ¶ 21.
       {¶ 36} Finally, OCC argues in subsection C of its third proposition of law
that the commission violated the regulatory principle of cost causation when it
approved the capacity-charge deferrals.        OCC, however, did not raise this
argument on rehearing at the commission as required by R.C. 4903.10, so we lack
jurisdiction to consider it now. See Consumers’ Counsel v. Pub. Util. Comm., 70
Ohio St. 3d 244, 247-248, 638 N.E.2d 550 (1994); Ohio Partners for Affordable
Energy v. Pub. Util. Comm., 115 Ohio St. 3d 208, 2007-Ohio-4790, 874 N.E.2d
764, ¶ 15.
                       B. AEP’s Arguments on Cross-Appeal
       {¶ 37} AEP raises two arguments on cross-appeal. First, AEP challenges
the commission’s calculation of the energy credit to be used to reduce the
company’s cost-based capacity charge. Second, AEP raises a regulatory-taking
argument. We find that the commission committed one instance of reversible
error in calculating the energy credit.
             1. AEP’s first proposition of law challenges the inputs the
                  commission used to calculate the energy credit
       {¶ 38} AEP first challenges the energy credit that the commission applied
to reduce the company’s capacity charge. According to AEP, the commission’s

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                                       January Term, 2016

methodology for calculating the credit is riddled with fundamental errors resulting
in a grossly overstated energy credit, which in turn rendered the capacity charge
severely understated.
                                a. Background on energy credit
           {¶ 39} The commission applied an energy credit so that AEP would not be
overcompensated for its capacity resources. The cost of capacity is a fixed cost
that includes the capital cost of building and maintaining a generation plant in a
ready state, plus a fair return on the investment. The cost of operating the plant
consists primarily of the cost of fuel used to generate electricity, and also includes
some variable maintenance and operating costs.              Revenue is generated by
operating the plant (charging for capacity) and selling the power.7
           {¶ 40} The theory behind reducing a company’s capacity charge based on
energy credit is that the company is likely to receive revenue from generating and
selling excess power. When capacity provided by a generation asset is sold to
CRES providers, the asset’s potential to generate energy for sale to third parties is
freed up. That is, when AEP is relieved of its responsibility to provide power to
standard-service-offer customers who shop, AEP has excess energy available that
it can sell to third parties (wholesale customers). This transaction is referred to as
“off-system sales.” The energy credit is designed to offset AEP’s capacity costs
with projected revenue that AEP is expected to realize from off-system sales.
           b. Matters requiring the commission’s expertise receive deference
           {¶ 41} We will defer to the commission “where there exists disparate
competence between the respective tribunals in dealing with highly specialized
issues.” Consumers’ Counsel v. Pub. Util. Comm., 58 Ohio St. 2d at 110, 388
N.E.2d 1370. One area in which this court has consistently deferred to the
expertise of the commission is in determining rate-of-return matters. Ohio Edison

7
    Revenue in excess of fuel costs is termed “margin.”

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                                SUPREME COURT OF OHIO

Co. v. Pub. Util. Comm., 63 Ohio St. 3d 555, 561, 589 N.E.2d 1292 (1992), fn. 3.
“Limited judicial review of a rate of return determination is sound” because
“ ‘cost of capital analyses * * * are fraught with judgments and assumptions.’ ”
Consumers’ Counsel v. Pub. Util. Comm., 64 Ohio St. 2d 71, 79, 413 N.E.2d 799
(1980), quoting Dayton Power & Light Co., Pub. Util. Comm. No. 78-92-EL-
AIR, at 26 (Mar. 9, 1979).
        {¶ 42} The energy credit implicates rate-of-return issues, so, in accordance
with the cases cited above, we will defer to the commission’s determination if it is
reasonable.
                c. AEP’s challenge to the shopping-level percentage
        {¶ 43} The commission calculated the energy credit based in part on a
forecast of the level of shopping for generation during the time the energy credit
would apply. An increase in shopping decreases the energy credit and results in
an increase in the company’s cost-based capacity rate. Conversely, a decrease in
shopping would increase the energy credit and decrease the capacity charge.
        {¶ 44} AEP argues that the commission erred by using a static shopping
level of 26.1 percent, which reflected the level of shopping in AEP’s territory on
March 31, 2012.8 AEP does not dispute that 26.1 percent was the level of
shopping in March 2012.              Instead, AEP maintains that the commission
disregarded uncontroverted evidence that shopping had increased from 26.1
percent on March 31 to 30.19 percent on April 30, 2012.
        {¶ 45} According to AEP, this 4 percent increase would correspond to a
decreased energy credit of $4.50 per megawatt-day and an increase in net capacity
cost in the same amount—resulting in a capacity charge of $193.30 per megawatt-
day (as opposed to the commission approved rate of $188.88 per megawatt-day).
AEP also claims that the commission found that shopping was expected to

8
 Both the commission and AEP report the date as March 31, but AEP’s evidence reflects the date
as March 1.

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                               January Term, 2016

increase even further in the months after April 2012. AEP therefore asserts that
the commission’s failure to account for increases in shopping that had already
occurred and were expected in the future was unreasonable, unlawful, and
financially harmful to the company. We disagree.
       {¶ 46} The commission explained why it adopted a static shopping level
of 26.1 percent in this case. Specifically, the commission found that it was
appropriate to use the actual level of shopping as of a recent date, rather than a
projection, because the commission expected the shopping level to fluctuate in
both directions over the time period at issue. The commission reasoned that use
of the static shopping level provided certainty to both the energy credit and the
capacity charge. The commission also decided against a nonstatic alternative
because it would have required the commission to review actual shopping levels
at regular intervals and recalculate the energy credit based on those reviews.
       {¶ 47} AEP has not come close to showing that the commission erred.
The commission explained why it adopted a static shopping level in this case: to
provide certainty to both the energy credit and the capacity charge. The pertinent
section of AEP’s merit brief, however, does not even mention the commission’s
reasoning on this issue, let alone make an argument against it.
       {¶ 48} Instead, AEP places significant emphasis on testimony from one of
its witnesses that shopping had increased more than 4 percent in one month. But
this argument ignores two critical factors.     First, a substantial fluctuation in
shopping levels over one month runs counter to the commission’s stated goal of
providing certainty to the energy credit and the capacity charge. Second, AEP
has, in essence, asked this court to reweigh the evidence and substitute its
judgment for that of the commission. But that is not our function on appeal.
Elyria Foundry Co. v. Pub. Util. Comm., 114 Ohio St. 3d 305, 2007-Ohio-4164,
871 N.E.2d 1176, ¶ 39.

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                                    SUPREME COURT OF OHIO

           {¶ 49} AEP also points to the commission’s expectation that shopping
would increase as a result of the decision to allow AEP to continue selling
capacity to CRES providers at market price. How this supports AEP’s argument
is not clear to us. It was, after all, an expectation, not an affirmative factual
finding.
           {¶ 50} For these reasons, we reject AEP’s invitation to alter the static
shopping-level percentage.
      d. AEP’s challenge to specific inputs used in calculating the energy credit
           {¶ 51} AEP also argues under this proposition of law that the
methodology used to calculate the energy credit was unreliable because it utilized
a number of flawed inputs, each resulting in an overstated energy credit. AEP
claims that it pointed out specific flaws in certain inputs but the commission did
not substantively address AEP’s arguments or identify evidence in support of the
order. AEP is correct that the commission failed to address its arguments in any
substantive manner. Accordingly, we remand the cause to correct this error.
           {¶ 52} During the proceedings below, AEP objected to the methodology
proposed by the commission’s staff to calculate the energy credit. The staff’s
methodology was based on a model licensed by its consultant in this case, Energy
Ventures Analysis, Inc. (“EVA”). AEP argued that EVA used inaccurate input
data and assumptions, which resulted in an overstated energy credit.           AEP
specifically argued that the model (1) was not properly calibrated, which resulted
in overstated gross energy margins by more than 200 percent,9 (2) wrongly
incorporated traditional off-system-sales margins, (3) failed to properly reflect
AEP’s System Interconnection Agreement (“pool agreement”) for off-system
sales, (4) overstated forecasted market prices, (5) understated fuel costs for coal

9
    AEP’s brief reports this amount as 20 percent, not 200 percent.

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                                January Term, 2016

units, and (6) understated heat rates for generation facilities. Capacity Order at
28-29.
         {¶ 53} R.C. 4903.09 requires the commission to explain its decisions and
identify, in sufficient detail to enable review, the record evidence upon which its
orders are based. MCI Telecommunications Corp. v. Pub. Util. Comm., 32 Ohio
St.3d 306, 312, 513 N.E.2d 337 (1987) (R.C. 4903.09 requires the commission to
set forth the reasons for its decisions and prohibits summary rulings and
conclusions that do not develop the supporting rationale or record); Indus. Energy
Users-Ohio v. Pub. Util. Comm., 117 Ohio St. 3d 486, 2008-Ohio-990, 885 N.E.2d
195, ¶ 30 (the commission abuses its discretion if it decides an issue without
record support). Yet the commission approved the staff’s proposed energy credit
without specifically addressing any of AEP’s challenges to the inputs used in
EVA’s methodology. The commission’s entire discussion of why it rejected
AEP’s challenges consists of the following:

         Upon review of all the testimony, the Commission finds that it is
         clear that the dispute between [AEP] and Staff amounts to a
         fundamental difference in methodology in everything from the
         calculation of gross energy margins to accounting for operation of
         the pool agreement.     [AEP] claims that Staff’s inputs to the
         AURORAxmp model result in an overstated energy credit, while
         Staff argues the Company’s energy credit is far too low.
         Essentially, [AEP] and Staff have simply offered two quite
         different approaches in their attempt to forecast market prices for
         energy. The commission concludes that [AEP] has not shown that
         the process used by Staff was erroneous or unreasonable. We
         further find that the approach put forth by EVA is a proper means

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       of determining the energy credit and produces an energy credit that
       will ensure that [AEP] does not over recover its capacity costs.

Capacity Order at 36.
       {¶ 54} The commission added little to this analysis on rehearing.          In
relevant part, the commission stated, “[W]e do not believe that the Company has
demonstrated that the inputs actually used by EVA are unreasonable. * * *
Essentially, the Commission was presented with two different methodologies for
calculating the energy credit * * *. Overall, the Commission believes that EVA’s
approach is the more reasonable of the two * * *.” Entry on Rehearing at 35-36
(Oct. 17, 2012).
       {¶ 55} We find that the commission erred in two respects.           First, the
commission’s order contains no record citations relevant to the pertinent issue,
despite a claim that it reviewed all of the testimony. The commission did cite
evidence on rehearing, but only for the purpose of showing that the staff’s
witnesses “sufficiently described [EVA’s] methodology,” and not for the purpose
of directly addressing or refuting AEP’s challenges to the inputs. Id. at 35.
       {¶ 56} Second, the commission’s analysis completely misses the mark.
The dispute here is not one involving competing methodologies, as the
commission found. Rather, the dispute is over how the staff and EVA applied
their preferred methodology to calculate the energy credit. And because AEP’s
objection here was to the inputs and not the choice of methodologies, the
commission’s reference to the fact that “Staff argues the Company’s energy credit
is far too low,” Capacity Order at 36, is not helpful. While the staff did indeed
argue against AEP’s proposed energy credit, AEP was not asking the commission
to pick its preferred energy credit over the staff’s in the context of this argument.
Rather, AEP was challenging the accuracy of the staff’s calculation of the energy
credit by arguing that it was overstated as a result of faulty inputs. Even the

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                                January Term, 2016

commission, arguing in defense of the order, seems to concede that the order falls
short, when it uses 11 pages of its third merit brief to “individually address each
of [AEP’s] claims.”
       {¶ 57} In sum, the commission’s error is clear and prejudicial (if the
energy credit is overstated, it results in an understated capacity charge).
Accordingly, we reverse this part of the order and direct the commission on
remand to substantively address AEP’s input arguments.
2. AEP’s second proposition of law asserts that the commission committed a
  regulatory taking when it precluded AEP from recovering the difference
                between its cost of capacity and the auction rate
       {¶ 58} AEP’s second and final proposition on cross-appeal argues that any
recovery that is less than its actual capacity costs would constitute a regulatory
taking. In the event that the court’s decision results in AEP’s not recovering all of
its costs, AEP requests that we rule that “ ‘just compensation’ (the difference
between [AEP’s] capacity costs and the auction rate) is owed to [AEP].”
       {¶ 59} This argument is merely hypothetical. Our decision in this case
allows AEP to recover its actual capacity costs, which the commission calculates
at a rate of $188.88 per megawatt-day. Likewise, our decision in the ESP case,
also released today, does not prevent AEP from recovering its actual capacity
costs. Thus, the question of a regulatory taking is hypothetical, so we refuse to
address it. See, e.g., State ex rel. Elyria Foundry Co. v. Indus. Comm., 82 Ohio
St.3d 88, 89, 694 N.E.2d 459 (1998) (holding that abstract and hypothetical
questions are inappropriate for judicial review).       Therefore, we reject this
proposition of law.
             C. The Motions to Dismiss of AEP and the Commission
       {¶ 60} AEP filed an amended motion to dismiss portions of this appeal,
arguing that FERC’s May 23, 2013 ruling prevents this court from exercising
jurisdiction over the preemption claims of Industrial Energy Users-Ohio (“IEU”)

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                            SUPREME COURT OF OHIO

and FirstEnergy Solutions. AEP and the commission also filed a joint motion to
dismiss, arguing that certain propositions of law of OCC and IEU should be
dismissed. As a result of our granting the applications to withdraw the appeals of
IEU and FirstEnergy Solutions and our decision herein rejecting OCC’s
arguments on appeal, these motions have been rendered moot.
                                  V. CONCLUSION
       {¶ 61} For the foregoing reasons, we reverse the commission’s orders in
part and affirm them in part, and we remand the cause to the commission for
further review.
                                                             Orders affirmed in part
                                                               and reversed in part,
                                                               and cause remanded.
       O’DONNELL, LANZINGER, and FRENCH, JJ., concur.
       O’CONNOR, C.J., concurs in judgment only.
       PFIEFER, J., dissents with an opinion that O’NEILL, J., joins.
                                  ____________
       PFEIFER, J., dissenting.
       {¶ 62} I dissent because, as I explain in my separate opinion in the
companion case released today, In re Application of Columbus S. Power Co., ___
Ohio St.3d ___, 2016-Ohio-1608, __ N.E.3d __, the Public Utilities Commission
(“PUCO”) does not have the statutory authority to act as it did.
       {¶ 63} American Electric Power (“AEP”) charges all of its, for lack of a
better word, regular customers for the cost of capacity, which is considered a
fixed cost and includes the cost of building and maintaining its plant plus a fair
rate of return on its investment. That number has been determined to be $188.88
per megawatt-day. But that rate is higher than the current market price. In order
for competitive retail electric service (“CRES”) providers to be able to sell their
service, they need access to capacity at a rate lower than actual cost. No one will

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                                January Term, 2016

pay them $188.88 per mega-watt day when the market rate from other providers is
less than that.
        {¶ 64} Ostensibly to promote a competitive market, the PUCO
proclaimed, through its ratemaking capability, that AEP can charge CRES
providers less than actual cost and that AEP’s other customers will make up the
difference between the actual cost of capacity and the cost the CRES providers
can afford to pay. It’s a great system for AEP, which doesn’t care where the
money comes from; it’s a great system for the CRES providers, who pay less than
the actual cost of capacity; and it is a horrible system for AEP’s regular
customers, who have to pay the actual cost of capacity and the difference between
that cost and what the CRES providers pay.
        {¶ 65} The cost of capacity should be borne by all entities receiving
electricity from the generation plant, not just those who don’t shop. The PUCO
should be protecting the customers who remain loyal to their providers, not
increasing their burden by forcing them to pay for somebody else’s discount. It’s
unconscionable.
        {¶ 66} The great irony of this case and its companion case is how little
they matter at this point. By now, much of the rate charges at issue have been
collected. This means that even if the court found against AEP, which it most
assuredly did not, there would be little impact on AEP.           This court, as if
intentionally proving how fallible it is, has steadfastly refused to allow rates that
have been collected to be refunded, even if the rates were unjustified. In re
Application of Columbus S. Power Co., 138 Ohio St. 3d 448, 2014-Ohio-462, 8
N.E.3d 863, ¶ 56.
        {¶ 67} I dissent.
        O’NEILL, J., concurs in the foregoing opinion.
                                  ____________

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                            SUPREME COURT OF OHIO

       Bruce J. Weston, Consumers’ Counsel, and Kyle L. Kern and Maureen R.
Willis, Assistant Consumers’ Counsel; and Dane Stinson, for appellant/cross-
appellee, Ohio Consumers’ Counsel.
       Mike DeWine, Attorney General, William L. Wright, Section Chief, and
John H. Jones, Thomas W. McNamee, and Steven L. Beeler, Assistant Attorneys
General, for appellee/cross-appellee, Public Utilities Commission of Ohio.
       Matthew J. Satterwhite and Steven T. Nourse; Porter, Wright, Morris &
Arthur, L.L.P., Kathleen M. Trafford, Daniel R. Conway, and L. Bradfield
Hughes; Murray, Murphy, Moul, & Basil, L.L.P., and James B. Hadden;
MoloLamken, L.L.P., and Jeffrey A. Lamken, for appellee/cross-appellant, Ohio
Power Company.
                                 ____________

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