Opinion
No. 90-1576
Submitted June 5, 1991 —
Decided February 5, 1992.
APPEAL from the Public Utilities Commission of Ohio, Nos. 89-616-GA-AIR through 89-620-GA-AIR, 89-943-GA-CMR, 89-944-GA-CMR and 89-1586-GA-COI.
This appeal arises from the order of appellee, the Public Utilities Commission of Ohio ("the commission"), in a consolidated case in which it considered five applications of Columbia Gas of Ohio, Inc. ("Columbia") to increase general service rates, complaints and appeals by Columbia from two regulatory rate ordinances enacted by Columbus and Zanesville, and a commission-originated investigation into the "reasonableness of the revenues being provided by special contract customers * * * [and], to the extent the earned rate of return from one group of customers greatly exceeds that of other groups, * * * whether it is appropriate for the Commission to use the 'excess' revenues to offset the revenue requirements of other customer groups. If it is, what factors should the Commission consider in determining the groups to benefit and the amount of the benefit." Columbus v. Pub. Util. Comm. (1992), 62 Ohio St.3d 430, 584 N.E.2d 646, decided today, involves an appeal from the commission's order with respect to the Columbus ordinance case; this appeal is from the part of the order concerning special contract rates, case No. 89-1586-GA-COI.
Appellant is an ad hoc group of industrial customers who have special contracts with Columbia to transport gas they buy from other sources. Special contracts are negotiated by the customers and Columbia and approved by the commission. They are authorized under R.C. 4905.31.
Pursuant to the commission's investigation order, its staff presented evidence that by applying the operating income generated by special contract customers to the rate base associated with that service, Columbia was receiving an earned rate of return of 44.85 percent from special contract customers, which produced "excess revenues" of over $6.2 million. However, the staff also found that the rates that produced these excess revenues should not be adjusted for the following reasons:
(1) They were set by voluntary agreements between Columbia and these customers, none of whom had filed a complaint to challenge them;
(2) the commission had previously encouraged transporting companies to "optimize" special contract revenues related to transportation services in case No. 85-800-GA-COI (August 11, 1988);
(3) certain conditions previously imposed by the commission for the revision of special contracts had not been met;
(4) Columbia and the customers had a previous opportunity, in case No. 84-413-GA-AEC (October 30, 1984), to test the appropriateness of the contracts under the commission's conditions, but chose instead to enter into a stipulation to continue the rates; and
(5) there was no evidence that the existing special contract rates hindered services because both special contract transportation volumes and the transportation volumes from other sales had increased during the past year.
The staff then recommended that the excess revenues be credited to the revenue requirement of the general service customers. The staff also made several alternative proposals for distribution of the revenues. The commission, two commissioners dissenting, essentially accepted the staff findings, adopted one of the alternate proposals for distribution, and ordered the $6.2 million dollars in excess revenues split between Columbia and the general service customers. The commission's rationale for doing this was:
(1) that R.C. 4909.15(D)(2) permitted it;
(2) that having found special contract rates to be reasonable, if it set general service rates without regard to total company operations, it would be abdicating its regulatory responsability by allowing Columbia a greater rate of return than it had otherwise allowed for total company operations; and
(3) that since it had previously directed companies to optimize special contract revenues related to transportation services, it was reasonable to permit Columbia to retain fifty percent of the excess revenues.
Appellant appeals from this order. We permitted the Office of Consumers' Counsel and the city of Toledo to intervene.
The cause is now before this court upon an appeal as of right.
Bell Bentine Co., L.P.A., Langdon D. Bell, Barth E. Royer and Judith B. Sanders, for appellant.
Lee I. Fisher, Attorney General, James B. Gainer, Duane W. Luckey and Anne L. Hammerstein, for appellee.
Kerry Bruce, for intervening appellee, city of Toledo.
William A. Spratley, Consumers' Counsel, Joseph P. Serio and Evelyn R. Robinson-McGriff, for intervening appellee, Office of Consumers' Counsel.
Appellant, Industrial Energy Consumers, first argues that the general service rate cases and the commission's self-initiated investigation into the special contract rates are separate proceedings which cannot be combined. Appellant claims that, because R.C. 4909.15(A)(1) and (D) refer to ratemaking in the context of the "service for which rates are to be fixed and determined" and "the service rendered," the general service rates in the rate proceeding must be based only on the cost to serve general service customers, that applying the excess revenues to satisfy the cost of serving general service customers would make the general service rates dependent on factors unrelated to cost, and that the excess revenues identified in the commission's investigation may only be used to reduce the special contract rates from which they were derived. Appellant claims that this rate reduction must be accomplished via the R.C. 4909.15 ratemaking formula. Accordingly, appellant asserts that the commission exceeded its statutory authority by combining the two proceedings and using the excess revenues generated by one rate to decrease the general service revenue requirement related to another rate. The commission argues that R.C. 4909.15 permits it to combine the proceedings and to set rates based upon total company revenues in order to assure that the rates set for the general service customers do not provide the company with a rate of return on its entire operations greater than the 10.55 percent that the commission has authorized. R.C. 4909.15(D) states in part:
"When the public utilities commission is of the opinion, after hearing and after making the determinations under divisions (A) and (B) of this section [ i.e., after computing the company's revenue requirement by the statutory formula], that any rate * * * [or] charge * * * will be * * * unreasonable * * *, the commission shall:
"* * *
"(2) With due regard to all such other matters as are proper, according to the facts in each case,
"* * *
"(b) * * * [F]ix and determine the just and reasonable rate * * * to be * * * charged * * * for the performance or rendition of the service that will provide the public utility the allowable gross annual revenues under division (B) of this section, and order such just and reasonable rate * * * to be substituted for the existing one. * * *" (Emphasis added.)
With regard to Columbia's five applications for an increase in general service rates, the commission found that Columbia's proposed general service rates for the five regions combined would produce a return (13.77 percent) that would exceed the 10.55 percent rate of return that the commission found reasonable in these cases. Accordingly, it fixed rates pursuant to R.C. 4909.15(D) that would afford the company the opportunity to earn a 10.55 percent rate of return. In doing so, it regarded the special contract revenues as "other matters" affecting the general service rates and revenue requirement. We agree that the statute permitted this conclusion.
Accordingly, we do not agree that the investigation conducted pursuant to R.C. 4905.26 compelled the commission to adjust only special contract rates under an R.C. 4909.15 analysis. Special contract rates are not set by the R.C. 4909.15 formula. Rather, they are the product of negotiations between Columbia and the special contract customers, subject to commission approval. The rate negotiated was $.25 per Mcf., recently augmented by a $.10 per Mcf. "take-or-pay" charge. Moreover, when a customer enters into a special contract, it does so because it has determined that it will purchase gas from an unregulated source and, presumably, that the cost of this gas plus the transportation charge under the special contract will be less than the cost of fully regulated gas purchased from Columbia. Appellant's members having voluntarily entered into this arrangement, appellant has no right to insist that its members' overall cost be further reduced by applying formula rates to transportation costs. The R.C. 4909.15 ratemaking formula simply has no necessary application here.
Appellant also argues that the commission's decision was arbitrary, capricious, and an abuse of discretion because it did not order the special contract rates reduced. Appellant contends that the special contracts are adhesion contracts and that appellant's members have no reasonable alternative other than to deal with Columbia. The commission rejected this argument. It stated that the maximum allowable special contract transportation rate is $.35 per Mcf., whereas the rate for tariffed general service transportation is approximately $1.30 per Mcf. This difference, the commission contended, makes the reasonableness of the special contract rates self-evident. Secondly, the commission reasoned that appellant could renegotiate existing contracts or gather its own cost-of-service data, which were not filed in this case, and bring a complaint case. Moreover, the commission found these "sophisticated" consumers to be capable of determining their own risks and negotiating a reasonable price for transportation under special contracts.
Essentially, the commission found insufficient grounds to intercede in the negotiated special contracts between Columbia and appellant's members. Appellant has not demonstrated that such intercession is compelled by law. Therefore, we find that the commission's conclusion was reasonable under these facts. It was obligated under law to ensure Columbia a reasonable rate of return on its investment, not to provide appellant a better bargain than its members made for themselves. Accordingly, we hold that the commission's order distributing the "excess revenues" derived from special contracts was not arbitrary, capricious, or an abuse of discretion, and we affirm this part of the order.
Order affirmed in part.
MOYER, C.J., SWEENEY, HOLMES, DOUGLAS, H. BROWN and RESNICK, JJ., concur.
WRIGHT, J., dissents.