The Public Utilities Commission of Ohio (PUCO) rejected a claim that consumers overpaid $74.5 million for the operation of two coal-fired power plants, partially owned by the Ohio Power Company (AEP Ohio), which lost money on electricity generation in 2018 and 2019. The Supreme Court of Ohio today affirmed that decision.

In a unanimous opinion, the Supreme Court affirmed the audit findings for the “purchase power agreement” rider, which allowed AEP Ohio to be reimbursed for its share of the operating expenses for the Ohio Valley Electric Corporation (OVEC).

Writing for the Court, Justice Patrick F. Fischer explained the dominant issue in the challenge to the audit findings was the PUCO endorsement of the use of a “must-run strategy” of two 1950s-era plants, even when the costs of generating electricity exceeded the market rate price that electric utilities were paying. Challengers to the rider argued that the plan was imprudent and the OVEC operators, not consumers, should bear the costs.

Justice Fischer wrote that the Court can only overturn a PUCO decision that is unlawful or unreasonable, and some evidence presented to the PUCO indicated that not using a must-run strategy could be very costly to customers. “The commission was presented with conflicting evidence concerning the prudence of the must-run strategy, and it decided to credit the evidence showing that the strategy was prudent when the decision to utilize that strategy was made,” he stated. That decision, the Court found, did not constitute reversible error.

Chief Justice Sharon L. Kennedy and Justices R. Patrick DeWine, Jennifer Brunner, Daniel R. Hawkins, and Megan E. Shanahan joined Justice Fischer’s opinion. Ninth District Court of Appeals Judge Jennifer Hensal, sitting for Justice Joseph T. Deters, also joined the opinion.

Rider Authorized to Assist Operations
OVEC originally constructed power plants in the 1950s to supply electricity to federal uranium enrichment facilities in southern Ohio. It is now jointly owned by utilities and controlled by a board of directors. The investor-owned utilities receive a share of the electricity generated by OVEC that is sold on the open market. They also split the cost of operating it. OVEC operates two plants: one in Ohio and one in Indiana. As a part-owner, AEP Ohio is entitled to about 20% of the OVEC plants’ output and has one vote on the committee that makes operational decisions.

In 2015, the PUCO authorized AEP Ohio to establish a power purchase agreement rider, and in 2016, the commission allowed AEP Ohio to collect payments from consumers if necessary. The rider works as either a charge or a credit to consumers in the AEP Ohio service territory. If OVEC produces electricity at a cost below the market rate, it will earn revenues that can be used to offset charges on AEP Ohio customer bills. If the cost of OVEC power is more than the market rate, then the rider allows AEP Ohio to collect a surcharge that increases customers’ bills.

In authorizing the rider, the PUCO required an annual audit, which, among other things, requires AEP Ohio to prove OVEC operations are “prudent and in the best interest of retail ratepayers.”

Customer Charges Challenged
The PUCO selected London Economics International (LEI) to audit AEP Ohio’s rider for 2018 and 2019. LEI did not make any findings that AEP Ohio's actions were imprudent, but did find “that the OVEC plants cost customers more than the cost of energy” that can be bought in the wholesale market. LEI recognized other considerations, such as the plants’ contributions to employment and fuel diversity in the state, which could outweigh the energy costs paid by AEP Ohio customers.

One of the LEI recommendations was for OVEC to reconsider its must-run strategy and consider other strategies, including not operating the plants at times when the cost to produce electricity exceeds the market rate.

The Office of the Consumers’ Counsel and the Ohio Manufacturers’ Association Energy Group intervened in the audit process and raised objections to the findings that AEP's actions were prudent. A consumers’ counsel public records request revealed an email exchange between a PUCO staff member and Dr. Marie Fagan, LEI’s chief economist. In a draft of the audit reviewed by the PUCO staff, the staff requested edits seeking a “milder tone” in the findings.

The staff raised concerns with LEI’s statement, “Therefore, keeping the plants running does not seem to be in the best interests of the ratepayers.” A later version of the draft audit replaced that sentence with, “However, LEI’s analysis shows that the OVEC contract overall is not in the best interest of AEP Ohio customers.” Neither sentence appeared in the final draft.

Fagan testified at a hearing on the audit that LEI does not make revisions that it does not agree with and that removing the statements did not change the overall audit findings that AEP’s operations as part of OVEC were prudent.

The PUCO approved the audit findings and rejected claims by the consumers’ counsel and the manufacturers’ association that customers should be refunded the $74.5 million collected through the rider. The groups appealed the decision to the Supreme Court.

Supreme Court Analyzed Audit Findings and Process
Justice Fischer explained the key argument between AEP and the challengers to the audit was the use of the must-run strategy and the proposed alternatives. In contrast to must-run, the plants could employ an “economic strategy,” in which its units run only when it is the lowest-cost option for supplying electricity to the market.

The challengers claimed the commission overlooked evidence of the imprudence of AEP’s operating decisions and failed to account for the language in the draft reports, which cast doubt on the use of the must-run strategy.

The Court noted it will not overturn a commission’s factual determination unless, when considering the record, the order is found to be unlawful or unreasonable. The opinion stated that to measure whether a decision is “prudent” requires a backward-looking test to determine whether the investment was “prudent when it was made.”

The challengers argued that a reasonable plant operator in a competitive marketplace would have conducted a daily financial analysis to determine whether to employ the must-run or economic strategy. The evidence would have led the OVEC operators to either employ the economic strategy and run the plants when revenues exceeded costs or shut down the plants altogether until market conditions changed.

The Court noted that AEP Ohio generally performs this analysis for its own plants, but OVEC did not do this analysis for 10 of the 11 units operating at its two plants. OVEC kept the plants on a must-run strategy for most of 2018 and 2019, resulting in significant revenue losses.

The Court found evidence at the PUCO hearing on whether the strategy was prudent “ran in both directions.” Jason Stegall, an American Electric Power Service Corporation manager, testified on behalf of AEP Ohio and explained why it was reasonable to use the must-run strategy.

Stegall stated that the plants were designed to provide “baseload generation” to ensure a continuous source of electricity. He noted that the plants were not capable of instantaneous startup and shutdown and were not designed to be turned on and off frequently. Frequent cycling of the units could introduce greater risks through wear and tear on the facilities, he testified. He suggested that in the long run, it may be more economical to keep the OVEC units running even if they lose money in the short run.

The commission also noted that, while the plants operated at a loss, they generated $32 million in revenue during the audit period, and that charges to AEP Ohio customers would have been higher if the plants had not generated revenue. The commission recognized, in retrospect, it might have been more prudent in some months to use an economic strategy, but the decision had to be evaluated at the time it was made. The commission did not “clearly lose its way” when finding the actions were prudent, the Court stated.

The Court examined the impact of the language in the draft audit, in which LEI stated that the OVEC contract was not in the best interest of AEP Ohio ratepayers. If the language in the draft was the only evidence in the record, the finding that AEP’s actions were prudent might be a close call, the opinion stated. But LEI insisted its removal of the statement was done independently and did not affect its overall assessment. The Court agreed that the overall record supported the PUCO’s decision to approve the charges obtained through the rider.

2024-1735. In re Rev. of the Power-Purchase-Agreement Rider of Ohio Power Co., Slip Opinion No. 2026-Ohio-1485.

View oral argument video of this case.

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.