Court Remands AEP Ohio POLR Charges to PUCO

The Supreme Court of Ohio reversed in part the Public Utilities Commission of Ohio's 2009 order allowing Columbus Southern Power and Ohio Power to collect POLR charges under their electric security plan, though the Court's decision was based on technical rather than policy grounds.

In its order adopting an electric security plan for the AEP Ohio companies, PUCO approved the recovery of roughly $500 million in POLR charges, which, except in certain conditions, were nonbypassable. In its order, PUCO justified the POLR charges as being based on "the cost" to the AEP companies to be the POLR and carry the risks associated therewith.

However, the Court found that this characterization of the POLR charge as being cost-based, "lacks any record support; therefore, we reverse the portion of the order approving the POLR charge."

"We have carefully reviewed the record, and we can find no evidence suggesting that AEP's POLR charge is related to any costs it will incur," the Court continued. "AEP derived its charge using a mathematical formula created to 'price' exchange-traded options. The company analogized an option to buy and sell securities to the statutory right to shop for power, changed some variables, and applied the formula. This formula, called 'the Black-Scholes model' after two of its creators, is the only evidence AEP presented in support of its POLR charge," the Court noted.

"The record shows that the model does not even purport to estimate costs, but instead tries to quantify 'the value of the optionality [to shop for power] that is provided to customers under Senate Bill 221.' Value to customers (what the model shows) and cost to AEP (the purported basis of the order) are simply not the same thing," the Court said, stating AEP's own witness made this clear.

The Court also found that the manifest weight of the evidence presented by other parties contradicts the Commission's conclusion that the POLR charge is based on cost. Previously, the Court had directed the Commission to "carefully consider what costs it is attributing," and the Court found in its instant opinion that the AEP electric security plan order is inconsistent with this precedent.

The Court remanded the issue to PUCO, and the Court said that the Commission may revisit the POLR issue. "To be clear, we express no opinion on whether a formula-based POLR charge is per se unreasonable or unlawful, and the commission may consider on remand whether a non-cost-based POLR charge is reasonable and lawful. Alternatively, the commission may consider whether it is appropriate to allow AEP to present evidence of its actual POLR costs," the Court said.

The Court also found that PUCO unlawfully granted a retroactive rate increase to the AEP companies when it allowed the companies to collect lost revenues which resulted when the electric security plan's new rates were not approved until March 2009, versus January 1, 2009. However, the prohibition on retroactive ratemaking also prohibits refunds, and thus no refunds of the unlawful rate increase will occur.

Finally, the Court found that PUCO erred in allowing AEP to include in its rate plan charges to recover carrying costs associated with environmental investments without showing that those costs fell within any of the nine categories of recoverable items set forth in the enabling electric security plan legislation. On remand, the commission may determine whether any of the explicitly listed categories of costs listed in the statute authorize recovery of the environmental carrying charges.

The case was 2009-2022, In re Application of Columbus S. Power Co.