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Court Upholds PUCO Ruling Approving ‘Flat Rate’ Monthly Charge For Gas Distribution Service

2008-1837 and 2009-0314.  Ohio Consumers’ Counsel v. Pub. Util. Comm., Slip Opinion No. 2010-Ohio-134.
Public Utilities Commission, Nos. 07-589-GA-AIR, 07-590-GA-ALT, and 07-591-GA-AAM (case No. 2008-1837), and  Nos. 07-829-GA-AIR, 07-830-GA-ALT, 07-831-GA-AAM, 08-169-GA-ALT, and 06-1453-GA-UNC (case No. 2009-0314).   Orders affirmed.
Moyer, C.J., and Pfeifer, Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2010/2010-Ohio-134.pdf

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(Jan. 26, 2010) The Supreme Court of Ohio today affirmed orders of the Public Utilities Commission of Ohio (PUCO) that approved a change in the way two natural gas companies recover their costs of distribution service.  The Court’s 7-0 decision was authored by Justice Paul E. Pfeifer.

In 2008, the PUCO issued separate orders authorizing a change in the rate structures used by Duke Energy of Ohio (Duke) and East Ohio Gas Company, d.b.a. Dominion East Ohio (Dominion East Ohio), to calculate the portion of their customers’ monthly natural gas bills covering distribution service. Prior to 2008, the rate formulas approved by the PUCO for Duke and Dominion East Ohio required the utilities to recover a relatively small percentage of their distribution costs through a flat monthly charge assessed on each customer, and to recover the remainder of their distribution costs via a surcharge on each cubic foot of gas used by a customer during the billing period.

In its 2008 orders, the PUCO authorized Duke and Dominion East Ohio to adopt a new “Straight Fixed Variable” (SFV) rate design for recovery of their distribution costs. Under the SFV rate structure, the utility companies were authorized to significantly increase the flat monthly distribution fee charged to each customer, and to significantly decrease the distribution-related surcharge on each cubic foot of gas used.

Two consumer groups, the state Office of Consumers’ Counsel (OCC) and Ohio Partners for Affordable Energy (OPAE), exercised their right to appeal the commission’s orders to the Supreme Court. The Court consolidated the cases for review.

Writing for the Court in today’s decision, Justice Pfeifer rejected multiple arguments raised by the OCC and OPAE, who asserted that the PUCO acted unreasonably and/or unlawfully in approving the new distribution rate structure.

With regard to the opponents’ claims that the commission did not provide a reasonable justification for departing from a traditional usage-based distribution rate structure to the SFV model, Justice Pfeifer wrote that the PUCO’s order linked the change to historic increases in the cost of natural gas, and a responsive decline in gas usage by the utilities’ customers.  He wrote: “Because the PUCO attributed the utilities’ revenue deficiency to declining customer usage, the commission determined that a new rate design – one that separates or ‘decouples’ the utilities’ recovery of its cost of delivering gas (which are predominately fixed) from the amount of gas that customers actually use (which varies month to month) – was necessary to ensure that Duke and Dominion have sufficient revenues to cover their fixed costs. The PUCO determined that such a rate design would best provide the utilities with adequate and stable revenues and ensure that they would be able to continue to provide safe and reliable service. The commission also found that breaking the link between fixed-cost recovery and gas sales would remove any disincentive of the utilities to promote energy conservation and efficiency.” 

The Court also rejected the opponents’ claims that in moving from a predominantly usage-based rate model to a “flat rate” assessed equally on all customers, the PUCO had unfairly increased the share of distribution costs paid by low-usage customers and decreased the amount of those costs collected from high-volume gas users. Pointing to findings by the commission that the relative cost of providing distribution service to a given class of customers “is largely the same regardless of how much gas a customer users,” Justice Pfeifer wrote: “According to the commission, because utilities recovered most of their fixed costs under traditional rate design through a volumetric component, high-use customers were overpaying their own fixed costs and subsidizing low-use customers. The SFV rate design addresses this problem by spreading fixed costs more evenly among all customers and thereby requiring low-use customers to pay a more proportionate share of those costs.”

Justice Pfeifer wrote that OCC and OPAE had failed to meet their burden in seeking to overturn PUCO orders: “In this appeal, OCC and OPAE challenge how the commission designed the rates for gas-distribution service for Duke’s and Dominion’s residential customers.  They ask us to intervene in an area–rate design–that is within the commission’s expertise.  But appellants have not sustained their burden of showing that the commission’s orders in these cases are unlawful or unreasonable, or that the rate-making process itself was unlawfully carried out. ... Therefore, we affirm the decisions of the Public Utilities Commission of Ohio.”

Joseph P. Serio, 614.466.8574, for the Office of Consumer Counsel.

Colleen L. Mooney, 614.488.5739, for Ohio Partners for Affordable Energy.

Duane W. Luckey, 614.466.4395, for the Public Utilities Commission of Ohio.

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