Cincinnati v. Pub. Util. Comm.
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City of Cincinnati, Appellant, v. Public Utilities Commission of Ohio et al., Appellees. [Cite as Cincinnati v. Pub. Util. Comm. (1993), ___ Ohio St.3d ___.] Public to Utilities Commission Conversion of nuclear power coal-fired Commission valuing facility Application for rate increase properly rejected equivalent plant standard rate base, when Owner-utilities to when for construction work in progress Amended for decision convert to coal-fired facility found to be prudent, Allowance plant R.C. 4909.15(A)(1) pertains April 10, 1985 that of only to revenues collected after Court will not substitute its judgment for the commission as to which of the fairly debatable valuation periods is the most representative in determining company s cost of common equity. (No. 92-2101 Submitted June 2, 1993 Decided November 3, 1993.) Appeal from the Public Utilities Commission of Ohio, No. 91-410EL-AIR. In 1969, Company intervening appellee Cincinnati Gas ( CG&E ), (formerly Columbus Power & Columbus Southern Power & Electric Company & Southern Ohio Electric Company) and ( CSP ) Dayton Light Company ( DP&L ) entered into a joint venture to construct the William H. Zimmer Nuclear Power Station ( Zimmer ). On November Nuclear 12, 1982, Regulatory after numerous construction delays, Commission construction at the site. suspended all the safety-related 20, 1984, joint owners canceled the Zimmer project as a nuclear the By agreement dated January plant and agreed to use their best efforts to convert Zimmer to a coalfired facility. On August 1, 1984, they announced that Zimmer would be converted to a 1,300 megawatt ( MW ) coal-fired plant. On of Ohio October 23, 1984, appellee, Public Utilities Commission ( the commission ), initiated In the Matter Restatement of the Accounts and Records of The Cincinnati Electric & of Gas the & Company, The Dayton Power & Light Company, and Columbus Southern Ohio Electric Company, PUCO No. 84-1187-EL-UNC, to determine the portion of the existing Zimmer investment which may not be used and useful in a converted coal-fired plant and/or the impact the of imprudence or mismanagement, if any, on the Zimmer investment. level of On October 1, 1985, the parties to that proceeding, except appellant city of Cincinnati ( the city ) the Board of Commissioners of Hamilton County, entered stipulation which resolved that case. The stipulation and into a generally provided (1) that $861,000,000 of capital invested in the Zimmer facility would be disallowed in the owner utilities future rate cases; (2) that the investment remaining as of January 31, 1984, i.e., the remaining sunk costs (including an allowance for funds used during construction [ AFUDC ] properly accrued thereon subsequent to January 31, 1984), would not be challenged by the parties as being the result of mismanagement or as not being used and useful in a Zimmer facility converted to coal generation; (3) that the non-owner reasonableness cancel of parties reserved the right to challenge any decision subsequent to construction of Zimmer the the decision to as a nuclear plant in any future proceeding before the commission; and (4) that the total Zimmer investment that future rate commission 1985, the owners could request to be proceeding would be capped at included $3.6 in billion. unanimously approved the stipulation on November after conducting a series of public hearings reasonableness, and upon consideration of the and arguments opposing its adoption. as city s to a The 26, its testimony The city did not appeal the commission s order. Zimmer plant at service utilities electric was successfully converted to a 1,300 MW coal-fired a total cost of $3.069 billion and has been since March 30, 1991. On April 2, 1991, providing the owner each filed an application to increase their rates service, in large part to receive a return on for the respective portion of their investment in Zimmer. CG&E requested that its jurisdictional share of the facility be at $1,216,610,000. The city was granted leave CG&E s rate case, and challenged CG&E s to fixed intervene in proposed Zimmer order issued May 12, 1992, the commission reduced valuation. By its CG&E s requested rate-base allowance by $229,868,000, specifically excluding improperly accrued AFUDC on the remaining sunk costs, as well as nuclear-related costs deemed not used useful in the Cincinnati converted facility. (See the companion cases Gas & Elec. Co. v. Pub. Util. Comm. [1993], St.3d 517, Util. Comm. this date.) and 620 N.E.2d 821, and Columbus S. Power of 67 v. Co. Ohio Pub. [1993], 67 Ohio St.3d 535, 620 N.E.2d 835, decided The commission also rejected the city s alternative valuation proposals. The cause is now before this court upon an appeal as a matter of right. __________________ Fay D. Dupuis, City Solicitor, and Richard Ganulin, Assistant City Solicitor, for appellant. Lee I. Fisher, Attorney General, James B. Gainer, Duane Luckey, William L. Wright and Jeffrey D. Van Niel, W. Assistant Attorneys General, for appellee. Squire, Korkosz and Sanders & Dempsey, Alan P. Buchmann, Lisa R. Battaglia; James J. Mayer and Arthur E. Michael A. Gribler, for intervening appellee CG&E. __________________ Per Curiam. The city argues that the commission erred: (1) in determining Zimmer s reasonable original cost, including failing to make a prudence adjustment to CG&E s Zimmer rate base; and (2) CG&E s in using a twelve-month average stock price to estimate cost of common equity. For the reasons which follow, we reject these arguments and affirm the commission s order. I. A. Equivalent Plant Standard R.C. ascertain useful case the REASONABLE ORIGINAL COST 4909.15 and 4909.051 require the commission the reasonable original cost of a utility s property for ratemaking purposes. In doing used and in this so for the converted Zimmer facility, the commission separated cost into of the plant, in accordance with the 1985 stipulation, four distinct parts and included in rate base: (1) the sunk costs remaining as of January 31, 1984, which were stipulated be to used and useful in the converted coal-fired plant; to (2) the AFUDC properly accrued on the sunk costs; (3) the portion of the post-cancellation conversion costs (i.e., the going forward costs ) determined to be used and useful in this proceeding; and (4) the the AFUDC on those costs. While the city concedes that commission properly determined the reasonableness of the used and useful it conversion costs and associated AFUDC in this proceeding, contends that reasonableness commission analysis the otherwise allowable considering sunk costs. the The and CG&E generally contend that such a reasonableness of the remaining sunk costs is prohibited by stipulation. The of the commission erred by not the 1985 We agree. stipulation was crafted to provide for a dollar disallowance for nuclear Zimmer, rather than a consideration of specific plant items, in order to accommodate settlement and to avoid the need for an arduous brick by brick audit of specific plant items. between Accordingly, the stipulation does not the specific plant items deemed used and distinguish useful converted Zimmer facility, and those which were included $861 million disallowance. challenge in in the There being no means to identify the pre-January 31, 1984 plant stipulated to a be or used and useful in a converted Zimmer, it necessarily follows that the stipulation prohibits inquiry into the reasonableness of these otherwise allowable order approving the stipulation, the commission recognized the sunk costs. Indeed, in its reasonableness of the going forward costs to 1985 that only complete converted [Zimmer] facility were left open to challenge the in the instant proceeding. The city did not appeal that order and is now bound by it. Recognizing that the specific plant items represented by the sunk its costs are beyond review in this proceeding, the city alternative Zimmer valuation (including the costs and remaining the conversion costs) upon the present value allegedly comparable Rockport Power Plant in based sunk of the Indiana.2 The commission rejected the city s proposal as being contrary to the original cost rate-base valuation required by R.C. 4909.05. We have recognized that a utility s rate base under the original-cost standard is based upon the actual investment in the assets Ohio of St.2d the utility. Babbit v. Pub. Util. Comm. (1979), 81, 89-90, 13 O.O.3d 67, 72, 391 N.E.2d 1376, 1381; Franklin Cty. Welfare Rights Org. v. Pub. Util. Comm. (1978), Ohio the St.2d 1, 11, 9 O.O.3d 1, 6, 377 N.E.2d 990, 997. city s 59 55 Clearly, proposed Zimmer rate-base valuation, based upon the cost of an allegedly comparable plant adjusted to price levels at the time of valuation, violates the statutory original cost standard and is unlawful under R.C. 4909.05(E).3 The city also argues that the AFUDC accrued on the remaining sunk costs is not a reasonable cost of Zimmer and should be excluded in its entirety from rate base. As set forth more fully in S. Power, the 1985 the companion cases of Gas Elec. Co., Cincinnati explicitly & provided for the proceeding, subject only Columbus supra, allowance of to its established accounting conventions. cases that such proper supra, stipulation AFUDC in this accrual Having determined the commission s allowance of AFUDC and under those these on in sunk costs from March 1986 until completion of the Zimmer facility was neither unreasonable nor unlawful, we reject this argument. Accordingly, rejected base the and we conclude that the commission properly city s equivalent-plant standard for valuing that it properly determined Zimmer s valuation rate within the constraints imposed by the 1985 stipulation. B. Prudence While the reasonableness 1985 of stipulation prevented inquiry the remaining sunk costs, it into expressly the left open to challenge in this proceeding whether the owner-utilities decision We to convert Zimmer to a coal-fired facility was prudent. adopt which one light is prudent decision, as which reflects what a reasonable person would have done in of in commission s definition of a accord with that used in other jurisdictions,4 reasonably made. the conditions and circumstances which should have been known at the time the were known decision or was In the Matter of the Investigation into the Perry Nuclear Power The Station (Jan. 12, 1988), PUCO No. 85-521-EL-COI, at 10-11. standard without contemplates the retrospective, factual use of hindsight judgment, into the process of the utility s Co. a management. inquiry, decisionmaking See Re Syracuse Home Util. (Dec. 30, 1986), PUCO No. 86-12-GA-GCR; Re Toledo Edison Co. (July 16, 1987), PUCO No. 86-05-EL-EFC. The issue central to the prudence inquiry below was whether CG&E, in 1984, investment markets enable generating needs a it facility written to construct an in time to meet its in consideration at have off its entire Zimmer the capital less costly and still have had sufficient access to to energy could 1991. The arguably customers construction forecasted options under included, inter alia, building a coal-fired plant new ( greenfield ) site or adding an additional coal-fired generating unit at an existing facility, owned by CG&E and DP&L, at East Bend, Kentucky. Although process was the commission found that CG&E s less than adequate, and made decisionmaking a corresponding downward adjustment to the company s rate of return, it to a make prudence Specifically, warranted the because adjustment to CG&E s Zimmer refused rate commission found that an adjustment the rate-base exclusions related base. was to not AFUDC, nuclear fuel, and nuclear wind-down costs (nearly $230 million in this case), as well as the $861 million disallowance required the 1985 stipulation (approximately $400 million in this case), reduced Zimmer s valuation to the range of costs to construct alternative plant at a greenfield site. the East Bend option Further, it was not a viable alternative, found by an that primarily because CG&E s CSP did not own an interest in the site and also because abandonment construction extensive By its Zimmer contractual could have obligation resulted in litigation, the outcome of which would this to pursue costly be and uncertain. appeal, the city argues that East Bend was a viable, alternative to Zimmer s conversion, that a prudent lower-cost utility of at of manager would have selected that option over conversion the nuclear facility, and that the Zimmer rate-base valuation should be reduced to the East Bend unit s cost of construction. The narrow question presented, whether East Bend is a viable alternative, is one of fact. On questions of fact, this court will not reverse an order of the commission absent a showing that it is manifestly against the weight of the evidence, and is so unsupported by the record as to show misapprehension, mistake, or willful disregard of duty. MCI Telecommunications Corp. v. Pub. Util. Comm. (1988), 38 Ohio St.3d 266, 268, 527 N.E.2d 777, 780. We begin our review by noting that, having embarked on a joint venture to construct the Zimmer nuclear facility, the ownerutilities could not have considered completion of that facility in a vacuum. record in this proceeding that, in the alternatives to It is undisputed on the 1984, the joint collectively needed the 1,300 MW of electricity that a owners converted Zimmer facility would provide to meet their customers forecasted energy needs utilities in 1991.5 unilaterally Obviously, had any one of abandoned its the Zimmer commitment, protracted litigation could have followed, which, as it to this ability issue, to could not only have affected CG&E s owner- pertains financial pursue the East Bend option but, just as important, could have prevented completion of that facility in time to meet its customers forecasted energy needs. The city argues that CG&E could have completed an East Bend facility have on in 1991 to replace the capacity that otherwise been provided by the converted Zimmer facility. the testimony of its expert financial witness feasible It relies that for the company to accelerate completion would of it was the East Bend unit from 1998 (as assumed by a study conducted by the First Boston Corporation testimony for CG&E) to 1991. addressed accelerating only construction consideration the the and However, financial admittedly the witness s feasibility of did not take into company s capacity needs for the 1980s and 1990s, or the engineering, contractual and legal impediments selecting that, these that site. CG&E s witness testified barriers were overcome, and even assuming the financial to assuming absence of Bend, the constraints in constructing a unit at East unit could not have been placed in service until 1995 due, in part, to state (Ohio and Kentucky) and federal licensing and or later permitting requirements. The city also argues that sufficient blocks of power could have been purchased from other utilities and were available for 1991 to meet CG&E s customers energy needs until the East Bend unit was this placed into service. issue forecasted admitted data, that However, the city s his conclusion, relied upon hindsight witness based judgment and intended as a part of a prudence analysis of what the knew or should have known at the time was made. of the decision to According to the company s analyses and the on on 1991 was not utilities convert analyses the commission s staff, based upon data available at the time the decision to convert was made, such large amounts of bulk power had an uncertain availability for the 1990s and beyond to due existing low reserves in surrounding regions, the anticipated curtailment of generation expansion and the effects of acid rain legislation.6 We find determination alternative that that to the the Zimmer s record supports the East Bend option was conversion and commission s not reject a viable the city s proposition of law. C. CWIP Offset Between CG&E an for construction work in progress ( CWIP ) related allowance 1980 and 1983, the commission granted to Zimmer s construction as a nuclear facility. There is no dispute that then-existing these allowances were lawful under 4909.15(A)(1), or that they were collected by CG&E by R.C. April 11, 1983. The city argues that the commission erred by not using these lawfully CG&E s authorized and lawfully collected rate base in this proceeding. revenues While R.C. to offset 4909.15(A)(1) was amended in 1985 to provide for such offsets, it pertains only to 140 revenues collected after April 10, 1985. Ohio Laws, Part I, 58. Am.Sub.S.B. No. 27, There being no authority to offset the revenues in question, we reject the city s argument. II. RATE OF RETURN The issue presented by the city s final proposition of is whether average test-year stock price, as recommended by its determining overall it was reasonable for the commission to CG&E s cost of common equity and, rate of return.7 use CG&E s staff, ultimately, The city points to the rise in law in its CG&E s stock price during the second half of 1991 and argues first six trends months and conditions. twelve-month 12, 1992 data is unrepresentative of is more representative and recommendation should have The commission found that the was based upon post-record data and or May been city s refused We find the commission s determination to be the market average as of the issuance of the commission s order it. current It argues that either the six-month adopted by the commission. adopt that to neither unreasonable nor unlawful. Alternatively, the city argues that the six-month average as of the adopted close of hearing in mid-February 1992 should have as being more representative. The commission been rejected the various short-term valuation periods (ranging from one to six months) recommended by the experts testifying on this issue, noting that it traditionally uses a twelve-month average in order to minimize the Finding no market break) effects of short-term market fluctuations. anomalous conditions (e.g., a stock price which would make the twelve-month unrepresentative in this proceeding, the commission break or average adopted its staff s recommendation. We refuse commission is to substitute our judgment for that of as to which of the fairly debatable valuation periods the most representative in determining the company s cost common the equity. See AT&T Communications of Ohio, Inc. v. of Pub. Util. Comm. (1990), 51 Ohio St.3d 150, 555 N.E.2d 288; Cleveland Elec. Illum. Co. v. Pub. Util. Comm. (1976), 46 Ohio St.2d 75 O.O.2d 172, 346 N.E.2d 778. 105, The commission s determination, based upon its staff s recommendation, is supported by the record and is neither unreasonable nor unlawful. Accordingly, we affirm the decision of the commission on this issue. Order affirmed. Moyer, C.J., A.W. Sweeney, Douglas, Wright, Resnick, F.E. Sweeney and Pfeifer, JJ., concur. FOOTNOTES: 1. to R.C. 4909.15(A)(1) requires the commission, in fixing rates, determine public the the utility determined. as of the public utility used and useful in rendering property of [t]he set valuation as of the date service for which rates are certain to be fixed and The valuation so determined shall be the total value forth in division (J) of section 4909.05 of the Revised Code.* * * R.C. property (R.C. 4909.05(J) provides that the valuation of a utility s shall include the original cost of long-term 4909.05[C], [D], [E], [F], and [G]) less depreciation contributions of capital (R.C. 4909.05[H] and [I]). investment that assets The at issue falls under R.C. 4909.05(E), which and Zimmer provides the original cost of such property shall be the cost, as determined to be reasonable by the commission, to the person that first dedicated the property to the public use and shall be set forth in property accounts and subaccounts as prescribed by the commission.* * * 2. The empirical city also alleges that the commission benchmark, albeit an erroneous one, Zimmer s valuation. construct an used in such determining While the commission considered the cost alternative plant, it did so in the an context to of determining whether a further rate-base adjustment should be made when considering the prudence of CG&E s decision to convert, not in considering whether the specific costs to were Three Zimmer valuing utility reasonable. 3. construct general methods are recognized in property: (1) additions based dedicated the property to the public use; (2) reproduction new original cost, which values ( RCN ), existing plant upon the actual cost to the person that first cost at the estimated price levels prevailing at the date of valuation; and (3) value, which considers a property s original cost and fair current which values existing plant and additions and value, Phillips, sometimes assigning weights two. See Regulation of Public Utilities (2 Ed.1988) The to the 304, 324; Priest, Principles of Public Utility Regulation (1969) 140- 141; Rose, Confusion in Valuation for Public Utility Rate-making (1962), The city s alternative valuation is more akin to the RCN standard, which was formerly prescribed by Ohio statute, standard 47 Minn.L.Rev. 1. but which has been replaced by the original in 1976. See Babbit, supra, 59 Ohio St.2d at cost 89, 13 O.O.3d at 72, 391 N.E.2d at 1381. 4. See Phillips, The Regulation of Public Utilities (2 Ed.1988) 326. 5. MW, CG&E s DP&L s share of the converted Zimmer is approximately share is approximately 325 MW, and CSP s 600 share is approximately 375 MW. 6. The city also points to other references in the record as to the availability that American arranged was of purchased power. Electric Specifically, Power Corporation (CSP s it argues parent) to provide CG&E with backup power; however, that made as a part of the January 20, 1984 agreement to had offer convert Zimmer and extended construction. the only during the term of Zimmer s The city also points to a power sale proposal from Tennessee Valley Authority; however, the record does not reflect that the proposal would satisfy the amount or duration of power needed owners. by CG&E, not to mention the needs of the Finally, the city notes three other power sales other in the region executed in 1981, 1987 and 1990. Of course, the 1981 sale could not be for CG&E and owners at the availability analysis. considered as available the time the decision to convert was made, of the latter two are based upon other and a the hindsight None provided the amounts of power needed as a Zimmer replacement. 7. In determining the cost of common equity, customarily, model common divided as here, employs the discounted cash which, growth rate. by adding the current dividend representative stock price) and commission flow generally stated, estimates the required equity by the ( DCF ) cost of yield (dividend expected dividend
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