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Court Affirms PUCO's Reductions In Utility's Claimed Storm Recovery Costs

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2011-0767.  In re Application of Duke Energy Ohio, Inc., Slip Opinion No. 2012-Ohio-1509.
Public Utilities Commission, No. 09-1946-EL-RDR. Order affirmed.
O'Connor, C.J., and Lanzinger, Cupp, and McGee Brown, JJ., concur.
Lundberg Stratton and O'Donnell, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2012/2012-Ohio-1509.pdf

Video clip View oral argument video of this case.

(April 5, 2012) The Ohio Supreme Court today affirmed a ruling of the Public Utilities Commission of Ohio (PUCO) that Duke Energy Ohio, Inc. is entitled to recover $14.1 million from its customers for extraordinary expenses the company incurred to restore power in its service area following the destruction caused by Hurricane Ike’s passage through Ohio in September 2008. 

Duke had sought the commission’s approval to recover more than $30 million in costs the company claimed to have incurred  during the storm recovery effort. 

The court’s 5-2 majority opinion was authored by Justice Paul E. Pfeifer.

In September 2008, powerful winds unleashed by Hurricane Ike swept north across the Midwest. The storm left almost 2 million Ohioans without power and inflicted major damage on the electrical infrastructure of  Duke Ohio and its affiliates in Kentucky and Indiana.  It was nine days before Duke had restored power to all of its customers.  Employees of the three affected Duke companies (Ohio, Indiana, and Kentucky) performed restoration work in all three jurisdictions, along with employees of Duke’s corporate service company and independent contractors. 

The PUCO permitted Duke to compile its Ohio storm-related costs and file an application to recover those costs. Duke filed a cost-recovery application asking for reimbursement of roughly $30.7 million. Other parties to the case argued that Duke was not entitled to the full amount it sought.  The commission’s staff reviewed Duke’s application and proposed reducing Duke’s recovery by roughly $1 million. The Office of the Ohio Consumers’ Counsel (OCC), which had intervened in the case, also investigated Duke’s request. Its witness pointed out numerous problems with the evidence supporting Duke’s request and argued that Duke should recover approximately $5.1 million. 

The commission agreed that there were significant problems with Duke’s evidence and ultimately issued a final order authorizing Duke to recover $14.1 million, about half of the amount it had requested.  Duke exercised its right to appeal the commission’s ruling to the Supreme Court of Ohio.

Writing for the majority in today’s decision, Justice Pfeifer emphasized that in pursuing claims for recovery of expenses before the PUCO,  it is a utility company that bears the burden of proof.
He wrote: “Duke raises five propositions of law, all variations on the theme that the commission’s order lacked record support. ... Duke seems to generally misapprehend a basic point of procedure in this case − namely, that it bore the burden of proving that its expenses were reasonable. It acknowledged this point in its application, stating that it ‘will bear the burden of proof of demonstrating that the costs were prudently incurred and reasonable.’ So Duke had to prove a positive point: that its expenses had been prudently incurred.  The commission did not have to find the negative: that the expenses were imprudent. Accordingly, if the evidence were inconclusive or questionable, the commission could justifiably reduce or disallow cost recovery.”

“On appeal, Duke shows, at best, that other parties did not conclusively prove that the claimed expenses were unreasonable or imprudent − but that claim is irrelevant because those parties did not bear the burden of proof.  Duke had not been given a blank check, but an opportunity to prove to the commission that it had reasonably and prudently incurred the costs it sought to recover. In certain respects, it failed to make the most of that opportunity.”

In reviewing the two largest reductions made by the commission in Duke’s recovery claim, the court agreed with the PUCO’s conclusion that the evidence produced by Duke to support reimbursement of a larger amount was insufficient to establish that the requested amount was reasonable and prudent.

Justice Pfeifer wrote: “In its first proposition of law, Duke argues that the commission erred by ‘precluding recovery of supplemental compensation for salaried employees.’ Salaried employees usually do not receive extra pay for extra hours of work, but Duke requested roughly $3.2 million to compensate itself for making supplemental payments to salaried workers. Duke explained to the commission that these bonuses were paid ‘[a]t management’s discretion,’ but the company did not put on testimony explaining what the employees had done to deserve the extra pay. The commission denied recovery, finding that Duke had ‘failed to show a reasonable basis on which the supplemental compensation was determined.’ 

“Duke has not shown error in this decision. Duke’s arguments do not refute the commission’s finding that Duke did not explain its bonus-pay decisions.  The company argues that salaried employees played ‘a key role’ in restoring service and that by having its salaried employees do extra work, the company reduced the need to use expensive contractors.  Therefore, it argues, the employees deserved extra pay.  Duke’s argument may support the general decision to use salaried employees, but it does not address the commission’s concern that Duke did not explain specifically how it had determined the amount of the bonuses. Duke has not pointed to evidence that contradicts the commission’s finding that Duke failed to show a reasonable basis on which the supplemental compensation was determined.”

The court also held that Duke had not shown that the PUCO acted unreasonably or contrary to law in approving reimbursement of only $3.5 million of the company’s claimed $13 million in contractor costs.

“Duke asked for approximately $13 million for payments to contractors,” wrote Justice Pfeifer, “but its supporting data suggested that some of the work by those contractors had been done in other states. For example, internal spreadsheets listed Duke’s Indiana and Kentucky affiliates as the ‘PayCo’ or ‘Pay Company’ for some of the contractors. Likewise, OCC’s witness testified that information concerning work location had been whited out ‘over and over again on different time sheets.’ In at least one case, however, the last three letters of the word ‘Kentucky’ were legible.  Other sheets lacked any information regarding work location. Based on these ‘discrepancies in the documentation for contractor expenses,’ the commission found that Duke had ‘failed to substantiate what [its actual contractor] costs are.’ Accordingly, it permitted Duke to recover only a portion of those costs, about $3.5 million.”

“Duke’s arguments against these reductions do not warrant a reversal.  Duke has shown neither that the evidence of discrepancies was faulty nor that the weight of the evidence unquestionably compelled a decision in its favor. In the pertinent section of its brief, Duke at best offers an alternative take on the evidence.  As we have explained before, reweighing the evidence is outside the scope of our function on appeal.”

Finding that Duke had not adduced evidence sufficient to overturn any of the commission’s other reductions from the company’s claimed expenses, the court affirmed the PUCO order authorizing  Duke to recover a total of $14.1 million in storm-related costs.  

Justice Pfeifer’s opinion was joined by Chief Justice Maureen O’Connor and Justices Judith Ann Lanzinger, Robert R. Cupp and Yvette McGee Brown. 

Justice Terrence O’Donnell entered a dissent, joined by Justice Evelyn Lundberg Stratton, stating that the record of the PUCO proceedings in this case shows that the commission disregarded evidence and testimony by Duke that supported the reasonableness and prudence of its claimed expenses, and instead appeared to rely on testimony by a single witness whose testimony on behalf of the OCC raised questions about the reliability of Duke’s documentation that were based largely on the witness’ unsupported speculation and inferences rather than direct proof or hard data.

Justice O’Donnell wrote: “It is not the court’s role to determine the precise amount that Duke Energy Ohio should be allowed to recover from ratepayers. That responsibility belongs to the Public Utilities Commission in the first instance. Here, however, it appears that the commission reduced Duke Energy Ohio’s recovery based largely, if not solely, on an expert witness’s review of some of the evidence presented, rather than on its own independent examination of the whole record. And because that witness’s opinion is based on speculation and is unreliable, the fact that the commission relied so heavily on it casts doubt on the entirety of the commission’s decision. Accordingly, I would reverse the decision of the commission and remand the matter for additional consideration.”

Amy Spiller, 513.287.4359, for Duke Energy Ohio Inc.

Stephen A. Reilly, 614.644.8588, for the Public Utilities Commission of Ohio.