SU1P4^^ME Ct1UR7 OF OHIO The Office of the Ohio Consumers' … David C. Rinebolt (Reg. No. 0073178) Ohio Partners for Affordable Energy 1431 Mulford Road Columbus, OH 43212 (614) 488-5739

In TheSUPREME COURT OF OHIO

The Office of the Ohio Consumers' Counsel,

Appellant,

and

Ohio Partners for Affordable Energy,

Appellant,

V.

The Public Utilities Commission of Ohio,

Appellee.

Jl.!l.:, 2

CLERK OF COURTSU1P4^^ME Ct1UR7 OF OHIO

Case No. 08-0466

Appeal from the Public UtilitiesConunission of Ohio Case Nos.:06-1068-EL-UNC, 05-725-EL-UNC, 06-1069-EL-UNC, 05-724-EL-UNC, 06-1085-EL-UNC.

MERIT BRIEFSUBMITTED ON BEHALF OF APPELLEE,

THE PUBLIC UTILITIES COMMISSION OF OHIO

Janine L. Migden - Ostrander(Reg. No. 0002310)Ohio Consumers' CounselJeffrey L. Small(Reg. No. 0061488)Counsel of RecordAnn M. Hotz(Reg. No. 0053070)Assistant Consumers' CounselOffice of the Ohio Consumer's Counsel10 West Broad StreetSuite 1800Columbus, OH 43215(614) 466.8574Fax: (614) 466.9475small (?.occ. state. oh.ushotzgocc. state.oh.us

Counsel for Appellant,The Office of the Ohio Consumers'Counsel.

Nancy H. Rogers(Reg. No. 0002375)Ohio Attorney GeneralDuane W. Luckey(Reg. No. 0023557)Section ChiefStephen A. Reilly(Reg. No. 0019267)Counsel of RecordWerner L. Margard III(Reg. No. 0024858)Assistant Attorneys GeneralPublic Utilities Section180 East Broad Street, 9th floorColumbus, OH 43215(614) 466.4396Fax: (614) 644.8764duane.luckey@puc. state. oh.usstephen.reilly(c^[email protected]

Counsel for Appellee,The Public Utilities Commission of Ohio.

Colleen L. Mooney(Reg. No. 0015668)Counsel of RecordDavid C. Rinebolt(Reg. No. 0073178)Ohio Partners for Affordable Energy1431 Mulford RoadColumbus, OH 43212(614) 488-5739Fax: (419) 425-8862cmooney2gcolumbus.rr.comdrinebolt e aol.com

Counsel for Appellant,Ohio Partners for Affordable Energy

Paul A. Colbert(Reg. No. 0058582)Counsel of RecordAssociate General CounselDuke Energy Ohio, Inc.155 East Broad Street, 21st Fl.Columbus, OH 43215(614) 221-7551Fax: (614) 221-7556paul.colbertkduke-ener .g^com

Rocco D'Ascenzo(Reg. No. 0077651)Duke Energy Ohio, Inc.139 East Fourth Street, 29 Atrium IICincinnati, OH 45201(513) 419-1852Fax: (513) 419-1846rocco.dascenzo^2duke-ener .g^

Counsel for Intervening Appellee,Duke Energy Ohio, Inc.

TABLE OF CONTENTSPage:

TABLE OF AUTHORITIES ................. ............................................................................ iv

INTRODUCTION ...............................................................................................................1

STATEMENT OF THE FACTS AND CASE .................. .................................................. 3

Proposition of Law I : ...................:.......................................................................................8

A decision of the Commission will be reversed onlywhere it is unlawful or so unsupported by the recordthat it is against the manifest weight of the evidenceand results from mistake, misapprehension, or neglectof duty. Consumers' Counsel v. Pub. Util. Comm, 64Ohio St. 3d 123, 592 N.E.2d 1370 (1992) ..................................................... 8

Proposition of Law II :........................................................................................................10

Under R.C. 4901.13, the Commission has broaddiscretion in the conduct of its hearings. Duff v. Pub.Util. Comm, 56 Ohio St. 2d 367, 379, 384 N.E.2d 264,273 (1978) . ..................................................................................................10

Proposition of Law III :.......................................................................................................16

An order of the Commission, adopting a stipulationresolving the issues raised in a proceeding before it,will not be reversed where the stipulation is supportedby evidence demonstrating that it was the product ofserious bargaining among capable, knowledgeableparties; that, as a package, it benefits ratepayers andthe public interest; and that it does not violate anyimportant regulatory principle or practice. Consumers'Counsel v. Pub. Util. Comm, 64 Ohio St. 3d 123, 592N.E.2d 1370 ( 1992) . ....................................................................................16

A. The Commission's determination that the stipulationresulted from serious bargaining among capable andknowledgeable parties is lawful and it is supported byevidence of record . ...........................................................................17

TABLE OF CONTENTS (cont'd)Page

1. The Commission's determination is based onthe record . ..............................................................................17

2. The Commission's determination that therewere not any side agreements between Dukeand any other signatory casting doubt on theintegrity of the negotiating process is based onthe record . .............................................................................. 21

3. The arguments of OCC and OPAE merely askthe Court to reweigh the evidence and substituteits judgment for the Conunission's judgment . ......................23

B. The Commission determination that a stipulationbenefits ratepayers and serves the public interest islawful and reasonable where that determination issupported by record evidence such that thedetermination is not against the weight of the evidenceand it is not the result of mistake, misapprehension, orneglect of duty and where the regulatory principlescited by appellants do not apply .......................................................26

The Commission's determination that thestipulation benefited ratepayers and served thepublic interest is supported by the evidence ofrecord . .................................................................................... 27

2. The arguments made by OCC and OPAE do notsatisfy their burden to show the Commission'sdetermination that the stipulation benefitedratepayers and served the public interest wasunlawful or unreasonable . .....................................................28

a. The Commission's determination toapprove the stipulation that adopted mostof the auditors' recommendations islawful and reasonable because theCommission is not required to accept allthe auditors' recommendations and theCommission's decision was a validexercise of its discretion .............................................29


b. The Commission's decision to approve astipulation that allows Duke to recovercosts associated with construction workin progress of environmental equipmentthrough the annually adjusted componentis lawful and reasonable because thestatutory restrictions do not apply and theapproval of the stipulation was a properexercise of the Commission's discretion . ..................33

c. OCC's miscellaneous objections do notmeet its burden to prove theCommission's decision is against themanifest weight of the evidence andunsupported in the record as to showmistake, misapprehension, or neglect ofduty . ............................................................................ 34

C. The Commission determination that astipulation does not violate any significantregulatory principles is lawful and reasonablewhere that determination is supported by recordevidence such that the determination is notagainst the weight of the evidence and it is notthe result of mistake, misapprehension, ordereliction of duty and where the regulatoryprinciples cited by appellants do not apply . ..........................36

CONCLUSION .................................................................................................................. 42

PROOF OF SERVICE ....................................................................................................... 43

APPENDIX

APPENDIX TABLE OF CONTENTS

Ohio Rev. Code Ann. § 4903.13 (Anderson 2008) ............................................................. 1

Ohio Rev. Code Ann. § 4909.15 (Anderson 2008) .............................................................1

Ohio Rev. Code Ann. § 4909.18 (Anderson 2008) ............................................................5

iii


Ohio Rev. Code Ann. § 4928.06 (Anderson 2008) ............................................................6

Ohio Admin. Code § 4901-1-01 (Anderson 2008) .... .........................................................8

Ohio Admin. Code § 4901-1-10 (Anderson 2008) ..............................................................9

Ohio Admin. Code § 4901-1-16 (Anderson 2008) ........................................................... 10



In re Columbia Gas of Ohio, Inc., Case Nos. 07-478-GA-UNC, et al.(Opinion and Order) (Apri19, 2008) .............................................................................15

In re Dayton Power & Light Co., Case No. 05-276-EL-AIR(Opinion and Order) (December 28, 2005) ...................................................................52

In re Cincinnati Gas & Electric Co., Case Nos. 05-59-EL-AIR, et al.(Opinion and Order) (December 21, 2005) ...................................................................69

In re Cincinnati Gas & Electric Co., Case Nos. 03-2080-EL-ATA, etal. (Entry) (December 9, 2003) ......................................................................................81

In re Cincinnati Gas & Electric Co., Case Nos. 03-2080-EL-ATA, et

al. (Ohio Energy Group Motion to Intervene) (October 23, 2003) .......... .....................89

In re Cincinnati Gas & Electric Co., Case Nos. 99-1658-EL-ETP, et

al. (Opinion and Order) (August 31, 2000) ...................................................................99

In re Cincinnati Gas & Electric Co., Case No. 84-1187-EL-UNC(Opinion and Order) (November 26, 1985) .................................................................165

iv

TABLE OF AUTHORITIES

Cases

Page(s)

AK Steel Corp. v. Pub. Util. Comm'n, 95 Ohio St. 3d 81, 765 N.E.2d 862(2002) ............................................................................................................................. 16

Constellation New Energy Inc., v. Pub. Util. Comm'n, 104 Ohio St. 3d 530,540, 820 N.E.2d 885, 894 (2004) . ................................................................................... 8

Constellation NewEnergy, Inc. v. Pub. Util. Comm'n, 104 Ohio St. 3d 530,820 N.E.2d 885 (2004) .................................................................................................... 9

Consumers' Counsel v. Pub. Util. Comm'n, 111 Ohio St. 3d 300, 856N.E.2d 213 (2006) ......................................................................................... 5, 11, 22, 24

Consumers' Counsel v. Pub. Util. Comm'n, 58 Ohio St. 2d 108, 388 N.E.2d1370 (1979) ..................................................................................................................... 9

Consumers' Counsel v. Pub. Util. Comm'n, 64 Ohio St. 3d 123, 592 N.E.2d1370 (1992) ............................................................................................................... 8, 16

Duffv. Pub. Util. Comm'n, 56 Ohio St. 2d 367, 384 N.E.2d 264 (1978) ......................... 10

Indus. Energy Consumers of Ohio Power Co. v. Pub. Util. Comm'n, 68Ohio St. 3d 559, 629 N.E.2d 423 (1994) ....................................................................... 16

Myers v. Pub. Util. Comm'n, 64 Ohio St. 3d 299, 595 N.E.2d 873 (1992) ...................... 10

Ohio Partnersfor Affordable Energy v. Pub. Util. Comm'n, 115 Ohio St.3d 208, 874 N.E.2d 764 (2007) ....................................................................................... 9

Sanders Transfer, Inc. v. Pub. Util. Comm'n, 58 Ohio St. 2d 21, 387 N.E.2d1370 ( 1979) ................................................................................................................... 15

Time Warner AxS v. Pub. Util. Comm'n, 75 Ohio St. 229, 229 N.E.2d 1097(1996) ...................................................................................................................... passim

Toledo Coalition for Safe Energy v. Pub. Util. Comm'n, 69 Ohio St. 2d559, 433 N.E.2d 212 (1982) .......................................................................................... 15

Weiss v. Pub. Util. Comm'n, 90 Ohio St. 3d 268, 586 N.E.2d 1017 (2000) ................. 9, 14

Statutes

Ohio Rev. Code Ann. § 4901.13 (Anderson 2008) ..................................................... 10, 14

Ohio Rev. Code Ann. § 4903.13 (Anderson 2008) ......................................................... 8, 9

TABLE OF AUTHORITIESPage(s)

Ohio Rev. Code Ann. § 4909.15 (Anderson 2008) ........................................................... 32



Other Authorities

Am. Sub. S.B. No. 3, 123^d General Assembly (June 22, 1999) ......................................... 3

In Cincinnati Gas and Electric Co., Case No. 03-93-EL-ATA (Opinion andOrder) (September 29, 2004) ......................................................................................... 17

In re Cincinnati Gas & Electric Co., 99-1658-EL-ETP (Opinion and Order)(May 30, 2002) ............................:................................................................................. 19

In re Cincinnati Gas & Electric Co., Case No. 03-93-EL-ATA (Entry onRehearing) (January 23, 2004) ........................................................................................ 4

In re Cincinnati Gas & Electric Co., Case No. 03-93-EL-ATA (Order onRemand) (October 24, 2007) ......................................................................................... 22

In re Cincinnati Gas & Electric Co., Case No. 05-724-EL-UNC (Opinionand Order) (December 20, 2007) ............................................................................. 16, 17

In re Cincinnati Gas & Electric Co., Case No. 99-1658-EL-ETP (Opinionand Order) (August 31, 2000) ......................................................................................... 3

In re Cincinnati Gas & Electric Co., Case Nos. 05-724-EL-ATA, et al.(Opinion and Order) (November 20, 2007) ............................................................ passim

In re Cincinnati Gas and Electric Co., 03-2080-EL-ATA (Entry)(December 9, 2003) ....................................................................................................... 19

In re Cincinnati Gas and Electric Co., Case No. 05-59-EL-ATA (Opinionand Order) (December 21, 2005) ................................................................................... 18

In re Cincinnati Gas and Electric Co., Case No. 05-724-EL-ATA (Entry)(March 25, 2004) ..................................................................................................... 12,19

In re Cincinnati Gas and Electric Co., Case No. 05-724-EL-ATA (Entry)(May 13, 2004) .............................................................................................................. 19

In re Cincinnati Gas and Electric Co., et. al., Case No. 84-1187-EL-UNC(Opinion and Order) (November 26, 1985) ................................................................... 17

vi

TABLE OF AUTHORITIESPage(s)

In re Cincinnati Gas and Electric, Case No. 03-93-EL-ATA ( Entry) (May16, 2007) .................................................................................................................... 6, 13

In re Cincinnati Gas and Electric, Case No. 05-724-EL-UNC ( Entry onRehearing) (January 16, 2008) ............................................................................... passim

In re Columbia Gas of Ohio, Inc., 07-478-GA-UNC (Opinion and Order)(Apri19, 2008) ............................................................................................................... 24

In re Ohio Edison, 03-2144-EL-ATA (Opinion and Order) ( June 9, 2004) ................... 18

In re The Dayton Power and Light Co., Case No. 05-276-EL-AIR (Opinionand Order) (December 28, 2005) ................................................................................... 17

vii

In TheSUPREME COURT OF OHIO

The Office of the Ohio Consumers' Counsel,

Appellant,

and

Ohio Partners for Affordable Energy,

Appellant,

V.

The Public Utilities Commission of Ohio,

Appellee.

Case No. 08-0466

Appeal from the Public UtilitiesCommission of Ohio Case Nos.:06-1068-EL-UNC, 05-725-EL-UNC, 06-1069-EL-UNC, 05-724-EL-UNC, 06-1085-EL-UNC.

MERIT BRIEFSUBMITTED ON BEHALF OF APPELLEE,

THE PUBLIC UTILITIES COMMISSION OF OHIO

INTRODUCTION

The only two appellants, the Office of Consumers' Counsel (OCC) and Ohio

Partners for Affordable Energy (OPAE), attack the Public Utilities Commission's

(Commission) order on appeal because they wanted "more." They had the opportunity to

participate in the negotiations and present their views but they were not able to reach

agreement. Consequently, they attack the agreement, and even some who entered it,

arguing their claim "more" is needed. OCC and OPAE couch their argument in the

language of the historic test the Commission applies to evaluate stipulations but their

argument is not about that three-pronged analysis. The Commission correctly applied

that analysis in this case. Moreover, OCC and OPAE do not present any credible legal

challenge to the Commission's order and they do not impeach the facts underlying that

order.

OCC and OPAE argue about the weight the Commission applied to the facts, the

Commission's view of the facts, and the resulting conclusions - all of which are matters

delegated to the Commission by the General Assembly. As part of their arguments, they

ask this Court to impose an analytic structure on the Commission that, in effect, would

grant a veto power to them. They ask this Court to require the application of rate-of-

return rate-making principles in a competitive environment. They ask the Court to apply

standards they advocate, reweigh the facts, and second-guess the Commission. This, of

course, is not the Court's appellate role and the Court consistently has refused to do what

OCC and OPAE ask in this case.

The Commission's order is supported by the facts of this case, the

recommendation of the signatory parties including the Commission's staff, and the results

of the Commission's three-pronged analysis of stipulations. The Commission

respectfully submits that order should be affirmed.

2

STATEMENT OF THE FACTS AND CASE

In 1999, the Ohio General Assembly enacted legislation restructuring the electric

utility industry and providing for retail competition regarding the generation component

of electric service. Am. Sub. S.B. No. 3, 123à General Assembly (June 22, 1999) (SB3).

Pursuant to this initiative, the Commission approved a transition plan for Duke Energy

Ohio, Inc. (Duke)' on August 31, 2000. In re Cincinnati Gas & Electric Co., Case No.

99-1658-EL-ETP (Opinion and Order at 61) (August 31, 2000), Ap. at 163.2 The

Commission permitted Duke a market development period for residential customers

ending when twenty percent of the load of each other class switched to a certified

supplier for its generation supply and no later than December 31, 2005. Id. at 6, Ap. at

108.

In January 2003, Duke applied for approval of rates subsequent to the market

development period, together with three related matters. In re Cincinnati Gas & Electric

Co., Case Nos. 05-724-EL-ATA, et al.3 (Opinion and Order at 4) (November 20, 2007),

i

2

3

At the time, Duke was known as the Cincinnati Gas & Electric Company.Throughout this brief, the company will be referred to as Duke without regard to its legalname at any point in time. Case names, however, have not been altered.

References to appellee's appendix are noted as "Ap. at _;" references toappellee's second supplement are denoted "Sec. Supp. at _;" references to appellantOCC's appendix (filed under seal) are denoted "OCC Ap. at _;" references to appellantOCC's supplement (volumes I and II filed under seal) are "OCC Supp. at _;" referencesto appellant OPAE's appendix are "OPAE Ap. at _;" and references to appellant OPAE'ssupplement are "OPAE Supp. at _."

Hereinaf(er referred to as "In re Cincinnati Gas & Electric 05-274."

3

OPAE Ap. at 21-51. As a result of that proceeding, the Commission approved a rate

stabilization plan for Duke governing its rates from January 2005 through December

2008, with certain aspects also extending through the end of 2010. In re Cincinnati Gas

& Electric Co., Case No. 03-93-EL-ATA4 (Entry on Rehearing at 2) (November 23,

2004), Sec. Supp. at 2. That rate stabilization plan provided for the establishment of the

three cost tracking mechanisms, "riders," that are set annually for the following year.

These are the riders involved in this case. The riders are: the fuel and purchased power

rider (FPP), the system reliability tracker (SRT), and the annually adjusted component

(AAC). Id. at 8-11, Sec. Supp. at 8-11.

The FPP allows Duke to recover costs associated with its purchases of fuel for its

generating stations, emission allowances, and economy purchased power to meet its load.

In re Cincinnati Gas & Electric 05-724 (Opinion and Order at 5) (November 20, 2007),

OCC Ap. at 12. Two of the consolidated cases relate to the FPP. On September 1, 2006,

Duke filed its application for the Commission's annual review of FPP component

charged between July 1, 2005 and June 30, 2006 (Case No. 05-725-EL-ATA). Id. On

August 29, 2006, Duke initiated the other FPP-related case to serve as a repository for

Duke's filing of periodic FPP reports covering July 1, 2006 through June 30, 2007 (Case

No. 06-1068-EL-ATA). Id.

The SRT allows Duke to recover costs incurred in maintaining a reserve margin

for switched and non-switched load. Id. Two consolidated cases relate to the SRT. One

4 Hereinafter referred to as "In re Cincinnati Gas & Electric 03-93."

4

involves an audit and prudence review of the SRT (Case No. 05-724-EL-ATA). In the

other, Duke seeks approval of its resource plan for 2007 and, as a consequence, the SRT

charges that would stem from it (Case No. 06-1069-EL-UNC). Id. at 6, OCC Ap. at 13.

The AAC recovers Duke's incremental costs associated with homeland security,

taxes, and environmental compliance. Id. The costs incurred annually to construct envi-

ronmental control equipment have been identified as one of these costs. Duke Remand

Rider Ex. 5 at 1-6 (Wathen Supp. Test.), Sec. Supp. at 48-53. One case involves this

rider (Case No. 06-1085-EL-UNC). Through it, Duke seeks approval of its AAC charges

for calendar year 2007. Id.

The Commission selected Energy Ventures Analysis, Inc. (EVA) to perform the

audit of the FPP and the SRT. EVA performed the management performance portion of

the audit and subcontracted with Larkin and Associates (Larkin) to perform the financial

review in the audit. EVA made six recommendations and Larkin made five

recommendations in the audit. In re Cincinnati Gas & Electric 05-274 (Opinion and

Order at 8-10) (November 20, 2007), OPAE Ap. at 28-30. The Commission staff

reviewed the AAC to verify the company's calculation. Staff Remand Rider Ex. 2 at 1

(Tufts Test.) OPAE Supp. at 59. Staff made adjustments it believed necessary. Id.

The Commission's decision establishing Duke's rate stabilization plan was

appealed to this Court and the Court remanded, in part, the case to the Commission.

Consumers' Counsel v. Pub. Util. Comm, 111 Ohio St. 3d 300, 321, 856 N.E.2d 213,

234-235 (2006). This remanded case was consolidated with the rider cases at a

prehearing on December 14, 2006. In re Cincinnati Gas & Electric 03-93 (Entry at 2)

5

(May 16, 2007), Sec. Supp. at 23; Remand Rider Prehearing Tr. at 22 (December 14,

2006), Sec. Supp. at 69. Although consolidated, the hearing was held in two phases to

hear the remanded issues and the issues involved with the riders separately. In re

Cincinnati Gas & Electric 05-274 (Opinion and Order at 5) (November 20, 2007), OPAE

Ap. at 25.

Prior to the rider phase of the hearing commencing, Duke, the Commission staff,

the Ohio Energy Group (OEG), the Ohio Hospital Association (OHA), People Working

Cooperatively (PWC), and the city of Cincinnati entered a stipulation to resolve the rider

cases. The OCC and OPAE opposed the stipulation. The stipulation provided that:

1. Duke would provide a credit to FPP customers rQsulting from thesettlement of contracts.

2. The FPP auditor's recommendation that Duke discontinue its activemanagement practices was deemed withdrawn.

3. Duke, staff, and interested parties will meet to discuss the terms andconditions under which Duke may purchase and manage coal assets,emission allowances and purchased power for the period afterDecember 31, 2008 and they will use their best efforts to agree andmake a recommendation regarding the purchase and cost recovery,after December 31, 2008, of coal, emission allowance, andpurchased power for consideration no later than the next FPP audit.

4. Duke's congestion costs shall be recovered through the Rider FPPinstead of the Rider TCR, as approved in finding (26) of the Com-mission's December 20, 2006 entry in Case No. 03-93-EL-ATA, et

al.

5. Duke's proposed AAC calculation shall be adjusted in accordance

with Staff's testimony.

6. Duke shall work with staff to amend its bill format.

6

7. The SRT will be updated with the first billing cycle of the month fol-lowing the Commission's approval of the stipulation, to recoverDuke's projected 2007 planning reserve capacity purchases by year-end, with future quarterly filings to reconcile any projected over orunder collection.

8. Duke may recover, through the SRT, short-term capacity purchasesfrom its generating assets formerly owned by Duke Energy NorthAmerica (DENA). Duke and staff are to agree on a pricing method-ology prior to Duke's purchase of the capacity. The market priceshall be either (a) the mid-point of broker quotes received, or (b) theaverage price of third-party purchases transacted, or (c) an alterna-tive agreed upon by Duke and staff. Duke's ability to maintain anoffer of firm generation service to all customers is to remain para-mount. The parties agree that the management and performanceauditor's recommendation regarding purchases of reserve capacityfrom DENA assets is not applicable to the extent it conflicts withthis provision.

9. Duke accepts all audit recommendations made in the Report of theFinancial and Management/Performance Audits of the Fuel and Pur-chased Power Rider of Duke Energy-Ohio, dated October 12, 2006,except as set forth in paragraphs one through eight of the stipulation.

Jt. Remand Rider Ex. 1 at 4-7, OPAE Supp. at 3-6. A clarification to the stipulation was

submitted by the Commission staff and Duke. It stated the eighth provision described

above "is intended to permit DE-Ohio to utilize its DENA capacity on an emergency,

intermittent basis." OCC Remand Rider Ex. 3, OPAE Supp. at 11-13. It also defined an

emergency basis as existing "where capacity to meet DE-Ohio's operational requirements

is necessary with less than seven days advance notice." Id. Finally, it also stated that

Commission approval is required where DENA capacity is needed on an emergency basis

during two consecutive seven-day periods. Id.

A hearing was held on the stipulation. The issues were briefed and the Commis-

sion decided the cases, approving and adopting the stipulation. In re Cincinnati Gas &

7

Electric 05-274 (Opinion and Order at 12-29) (November 20, 2007), OPAE Ap. at 32-49.

OCC and OPAE made applications for rehearing, which the Commission denied. In re

Cincinnati Gas & Electric 05-274 (Entry on Rehearing at 13) (January 16, 2008), OPAE

Ap. at 8-20. OCC and OPAE then appealed the decisions in the rider phase of the

consolidated cases to this Court.5

Proposition of Law I:

A decision of the Commission will be reversed onlywhere it is unlawful or so unsupported by the recordthat it is against the manifest weight of the evidenceand results from mistake, misapprehension, or neglect

of duty. Consumers' Counsel v. Pub. Util. Comm, 64

Ohio St. 3d 123, 592 N.E.2d 1370 (1992).

This Court is fully aware of the scope of review in this case. The Court has articu-

lated that standard for reviewing a Commission order many times over many years.

Consumers' Counsel v. Pub. Util. Comm, 64 Ohio St. 3d 123, 125, 592 N.E.2d 1370,

1373 (1992). R.C. 4903.13 requires this Court to affirm an order of the Commission

unless the appellants show that the order is unlawful or unreasonable. Ohio Rev. Code

Ann. § 4903.13 (Anderson 2008), Ap. at 1; Consumers' Counsel v. Pub. Util. Comm, 64

Ohio St. 3d 123, 125, 592 N.E.2d 1370, 1373 (1992).

Appellants bear the burden of proof in this appeal. Constellation NewEnergy Inc.,

v. Pub. Util. Comm, 104 Ohio St. 3d 530, 540, 820 N.E.2d 885, 894 (2004). Appellants

5 The Commission's decision in the remand phase of the consolidated cases wasappealed separately to this court. Consumers' Counsel v. Pub. Util. Comm, Case No. 08-

367.

8

must show the evidence of record does not support the Commission's factual

determinations to satisfy their burden of demonstrating the Commission's order is

unreasonable. Id. This is not a de novo review and the Court does not second-guess the

Commission's determinations. The Court upholds the Commission's determinations of

fact where, as here, the record contains sufficient probative evidence to show that the

Commission's decision was not against the manifest weight of the evidence and was not

so clearly unsupported by the record as to show misapprehension, mistake, or willful

disregard of duty. Id.

Regarding questions of law, this Court has complete and independent power.

Ohio Partners for Affordable Energy v. Pub. Util. Comm, 115 Ohio St. 3d 208, 210, 874

N.E.2d 764, 767 (2007). Nevertheless, the Court gives substantial weight to the Com-

mission's determinations in the areas of its expertise. The Court may rely on the Com-

mission's expertise in interpreting a law where highly specialized issues are involved

and, therefore, where the Commission's expertise is helpful in discerning the intent of the

General Assembly. Ohio Partners for Affordable Energy v. Pub. Util. Comm, 115 Ohio

St. 3d 208, 210, 874 N.E.2d 764, 767 (2007); Consumers' Counsel v. Pub. Util. Comm,

58 Ohio St. 2d 108, 110, 388 N.E.2d 1370, 1373 (1979). Additionally, this Court has

noted that due deference should be given to statutory interpretations by an agency that

has accumulated substantial expertise and to which the General Assembly has delegated

enforcement responsibility, such as the Commission. Constellation NewEnergy, Inc. v.

Pub. Util. Comm, 104 Ohio St. 3d 530, 540, 820 N.E.2d 885, 894 (2004).

9

This case is about the Commission's factual determinations when applying the test

it developed for evaluating stipulations. Even if it involved questions of law, the Court

should rely on the Commission's expertise and defer to the Commission's interpretations.

The case involves two areas and they both involve the Commission's expertise. One is

the test the Commission developed to evaluate stipulations. While the Court has

approved the Commission's use of this test as a reasonable way to evaluate stipulations, it

is the Commission's test. The other area involved in this case is the post-SB3

environment for the sale of electricity. As this Court knows, this is a complex area and it

is one the General Assembly entrusted to the Commission's oversight. See Ohio Rev.

Code Ann. § 4928.06 (Anderson 2008), Ap. at 6. The Commission carefully considered

the facts and made its determination. The Court should affirm to the Conunission.

Proposition of Law II:

Under R.C. 4901.13, the Commission has broad dis-cretion in the conduct of its hearings. Duff v. Pub.

Util. Comm, 56 Ohio St. 2d 367, 379, 384 N.E.2d 264,

273 (1978).

This appeal involves a number of separate cases that were consolidated by the

Commission. By virtue of that consolidation, all parties to each of the cases became par-

ties to all of the cases.

There is no statute or rule that requires a party to seek intervention in each individ-

ual docket where cases have been consolidated. The Commission properly determined

that intervention in any of the many consolidated cases was sufficient to give party status

10

to all intervenors in the consolidated proceeding. The proceeding fully complied with the

applicable statutes and constitutional principles of due process.

Pursuant to R.C. 4901.13, the Commission has promulgated rules of practice and

procedure to govern its proceedings. Ohio Admin. Code § 4901-1-01, et seq. (Anderson

2008), Ap. at 8. One of those rules provides that the parties to a Commission proceeding

include any person granted leave to intervene, and any other person expressly made a

party by order of the Commission. Ohio Admin. Code § 4901-1-10(A) (Anderson 2008),

Ap. at 8.

OCC correctly noted the importance of intervention in Conunission proceedings.

A request to intervene is not an empty gesture. But OCC would have this Court render

intervention meaningless where the Commission consolidates cases. Even though cases

could be heard together, briefed together, and decided together, OCC would require that a

party separately intervene in each and every individual case, or be barred from raising

matters that concern it. In this case, the Commission structured the cases in stages.

Regardless of how the Commission exercised its discretion to conduct these hearings,

OCC would still require multiple unnecessary interventions by each party.

Cases were consolidated before the Court's decision in November 2006

remanding, in part, the underlying application to the Commission for further

consideration. Consumers' Counsel v. Pub. Util. Comm, 111 Ohio St. 3d 300, 856

N.E.2d 213 (2006). While that case was pending on appeal before this Court, additional

cases were filed. Those cases were ultimately consolidated with the original remanded

application. OCC acknowledged that the cases were combined, and that "a single

11

evidentiary record exists that is applicable to the ultimate decisions in all the consolidated

cases." OCC Brief at 5.

All of the participants in this consolidated case properly intervened in a case that

was part of the consolidated whole. Two of the parties signing the stipulation in this

appeal intervened in the original consolidated cases. The Ohio Hospital Association

moved to intervene on February 20, 2004. In re Cincinnati Gas & Electric 03-93,

(Motion to Intervene of the Ohio Hospital Association (OHA)) (February 20, 2004), Sec.

Supp. at 76. Its motion was granted on March 25, 2004. In re Cincinnati Gas & Electric

03-93 (Entry) (March 25, 2004). People Working Cooperatively moved to intervene on

March 9, 2004. In re Cincinnati Gas & Electric 03-93 (Motion to Intervene of People

Working Cooperatively) (March 9, 2004), OPAE Sup. at. 14-16. The Commission

granted the motion on March 25, 2004. In re Cincinnati Gas & Electric 05-274 (Entry)

(March 25, 2004), OPAE Ap. at 14-16. The Commission relied upon their participation

in adopting the stipulation.

The stipulation resolved only certain issues, and the signatory parties initially filed

the stipulation in only five of the nine consolidated cases. But the Commission properly

ordered that the stipulation be filed in all of the dockets in the consolidated case:

As these cases have been consolidated, the stipulation shouldhave been filed in all of the consolidated proceedings. There-fore, the Commission's docketing division will be directed tofile the April 9, 2007, stipulation in Case Nos. 03-93-EL-ATA, 03-2079-EL-AAM, 03-2080-EL-ATA, and 03-2081-EL-AAM.

12

In re Cincinnati Gas & Electric 03-93 (Entry at 2) (May 16, 2007), Sec. Supp. at 23. By

virtue of consolidation, all parties to each of the cases became parties to all of the cases.

Each party, regardless of the specific case in which it intervened, became a party to all

cases.

This was wellknown to OCC. OCC could have opposed the inclusion of any par-

ticular party in the other cases. It made no effort to do so. OCC's argument that it was

deprived of an opportunity to object to PWC's intervention is disingenuous. First, OCC

supported the consolidation of these cases. Second, OCC acknowledged PWC's status as

a party participant in proceedings before the Commission. Finally, OCC did eventually

voice its concerns, concerns that were rejected by the Commission.

OCC supported consolidating these cases, including those now before the Court.

Remand Rider Prehearing Tr. at 22 (December 14, 2006), Sec. Supp. at 69. As OCC

itself noted in its brief, PWC, and thereby OCC, was well aware that consolidation would

significantly increase its involvement in the proceeding. Counsel for PWC noted during

the prehearing conference that it would not have intervened in other cases, and that con-

solidation, for it, created a "burden of a much larger hearing." Id. at 26-27, OCC Supp. at

721-722. There was ample reason for OCC to understand that all of the parties had been

expressly granted intervention in each of the cases.

And OCC did not object. It did not object when the cases were originally consoli-

dated at the prehearing. It did not object to the inclusion of PWC or OHA as signatory

parties when the evidentiary hearing began on the stipulation. OCC even treated PWC as

a party, and requested process vis-a-vis PWC only applicable to parties. Counsel for OCC

13

referred to PWC as a party. Remand Rider Tr. I at 15 (April 10, 2007), Sec. Sup. at 101.

OCC also requested an opportunity to conduct discovery on PWC. Id. As OCC is well

aware, discovery in Commission proceedings is generally limited to parties. Ohio

Admin. Code § 4901-1-16 (Anderson 2008), Ap. at 10.6 Nor did it seek an interlocutory

appeal at any time. Quite simply, OCC should not be heard to coinplain.

Where OCC finally expressed its opposition to PWC's intervention, it was long

after the fact. It did not choose to do so until post-hearing reply briefs were being filed,

and then only by a brief reference in a footnote. In re Cincinnati Gas & Electric 03-93

(OCC Memorandum Contra PWC's Motion for Extension of Time to File Reply Brief,

Phase II at 8) (June 6, 2007) OCC Supp. at 537. Nonetheless, OCC exercised an

opportunity to voice its concern, albeit very late in the process. It had the opportunity all

along but only chose to exercise it at this late hour in the proceeding. The Commission

properly rejected OCC's concern, and reaffirmed PWC's party status.

This Court has long recognized the Commission's broad discretion to regulate its

proceedings and manage its docket. Weiss v. Pub. Util. Comm, 90 Ohio St. 3d 15, 19,

734 N.E.2d 775, 780 (2000). As the Court has stated, "[i]t is well settled that pursuant to

R.C. 4901.13, the commission has the discretion to decide how, in light of its internal

organization and docket considerations, it may best proceed to manage and expedite the

orderly flow of its business, avoid undue delay and eliminate unnecessary duplication of

6 Permissible methods of discovery are limited to parties, except that depositionsmay be taken of persons not party to a proceeding. Ohio Admin. Code § 4901-1-21(Anderson 2008), Ap. at 11. OCC specifically indicated that it did not desire to pursue adeposition of a PWC representative. In re Cincinnati Gas & Electric 03-93 (Tr. Remand

Rider Vol. I at 11) (Apri124, 2007), Sec. Supp. at 97.

14

effort." Toledo Coalition for Safe Energy v. Pub. Util. Comm, 69 Ohio St. 2d 559, 560,

433 N.E.2d 212, 214 (1982).7 The Court will only interfere with that discretion in

extreme cases where the discretion is abused. Sanders Transfer, Inc. v. Pub. Util. Comm,

58 Ohio St. 2d 21, 23, 387 N.E.2d 1370, 1372 ( 1979). No such extreme circumstances

are present here. Indeed, the Commission's actions were perfectly reasonable. The

Commission must be able to control the scope of its proceedings in order to effectively

carry out its duties.

In sum, the Commission appropriately exercised its discretion in considering all

parties in each of the cases before it to be proper intervenors in the consolidated docket,

irrespective of the original case(s) in which intervention may have been sought. The

Commission was entitled to rely upon the participation of all of the stipulation's signa-

tory parties.

7 The Commission also has discretion whether to allow intervention.

15

Proposition of Law III:

An order of the Commission, adopting a stipulationresolving the issues raised in a proceeding before it,will not be reversed where the stipulation is supportedby evidence demonstrating that it was the product ofserious bargaining among capable, knowledgeableparties; that, as a package, it benefits ratepayers andthe public interest; and that it does not violate anyimportant regulatory principle or practice.Consumers' Counsel v. Pub. Util. Comm, 64 Ohio St.3d 123, 592 N.E.2d 1370 (1992).

The Commission's rules authorize parties to enter into stipulations. Ohio Admin.

Code § 4901-1-30 (Anderson 2008), Ap. at 14. Although not binding on the Com-

mission, it is well settled that the terms of such agreements are entitled to careful consid-

eration and are to be accorded substantial weight. Consumers' Counsel v. Pub. Util.

Comm, 64 Ohio St. 3d 123, 125, 592 N.E.2d 1370, 1373 (1992).

In evaluating the stipulation in this case, the Commission applied its familiar

three-pronged test. In re Cincinnati Gas & Electric 05-724 (Opinion and Order at 24-25)

(November 20, 2007), OPAE Ap. at 44-45. This test has been endorsed by the Court as

an efficient and proper means to evaluate the reasonableness of less than unanimous

settlements. AKSteel Corp. v. Pub. Util. Comm, 95 Ohio St. 3d 81, 82-83, 765 N.E.2d

862, 864-865 (2002); Indus. Energy Consumers of Ohio Power Co. v. Pub. Util. Comm,

68 Ohio St. 3d 559, 561, 629 N.E.2d 423, 424 (1994); Consumers' Counsel v. Pub. Util.

Comm, 64 Ohio St. 3d 123, 125, 592 N.E.2d 1370, 1373 (1992). Under this test, the

Commission reviews a stipulation to determine whether (1) it is the product of serious

bargaining among capable, knowledgeable parties; (2) as a package, it benefits ratepayers

16

and the public interest; and (3) it violates any important regulatory principle or practice.

The Commission found that the stipulation that is the subject of OCC's appeal satisfied

all three prongs of this test. In re Cincinnati Gas & Electric 05-724 (Opinion and Order

at 24-25) (November 20, 2007), OPAE Ap. at 44-45.

A. The Commission's determination that the stipulationresulted from serious bargaining among capable andknowledgeable parties is lawful and it is supported byevidence of record.

1. The Commission's determination is based on therecord.

The Commission found that the stipulation at issue resulted from serious bargain-

ing among capable and knowledgeable parties. In re Cincinnati Gas & Electric 05-274

(Opinion and Order at 27) (November 20, 2007), OPAE Ap. at 47. In reaching this

conclusion, the Commission reviewed factors it has considered historically. While the

Commission does not require any set of facts to approve a stipulation, the Commission

often approves stipulations where it finds, as here: 1) the parties to the negotiations are

experienced in utility matters, particularly if they are experienced with the utility

involved in the case; 2) the negotiations were open to all parties; and 3) the signatories

evidence a diversity of interest. See e.g. In re The Dayton Power and Light Co., Case

No. 05-276-EL-AIR (Opinion and Order at 5-6) (December 28, 2005), Ap. at 52; In re

Cincinnati Gas and Electric Co., et al., Case No. 84-1187-EL-UNC (Opinion and Order)

(November 26, 1985), Ap. at 165; In re Cincinnati Gas and Electric 03-93 (Opinion and

Order) (September 29, 2004), OCC Ap. at 101-143. Like prior cases, these

17

considerations led the Commission to find the stipulation in this case resulted from

serious bargaining among capable and knowledgeable parties. In re Cincinnati Gas &

Electric 05-274 (Opinion and Order at 27) (November 20, 2007), OPAE Ap. at 47.

The Commission's determination that those factors existed is supported by the

record. The negotiations were open to all parties. The evidence showed that all parties

were invited to all negotiations. Duke Remand Rider Ex. 6 (Smith Test. at 5), Sec. Supp.

at 30. While all parties were invited to all negotiations in this case, this is not to suggest

that this set of facts is necessary to meet the first prong of the test. In fact, when this

Court commented on this idea, it stated that "[w]e would not create a requirement that all

parties participate in all settlement meetings." Time Warner AxS v. Pub. Util. Comm, 75

Ohio St. 3d 229, 234 fn 2, 229 N.E.2d 1097, 1101, fn 2 (1996). While OCC and OPAE

argue about certain signatories' positions and possible motivations, OCC and OPAE do

not dispute that all parties, including themselves, were invited to all negotiations.

Everyone had the opportunity to participate.

OCC and OPAE also do not question that the Commission's staff and Duke are

capable and knowledgeable parties. Their arguments concern People Working

Cooperatively, the Ohio Energy Group, the Ohio Hospital Association, and the city of

Cincinnati. But these parties have participated in many prior cases before the

Commission and the Commission has found them capable and knowledgeable parties in

the past. See e.g. In re Cincinnati Gas and Electric Co., Case Nos. 05-59-EL-ATA, et al.

(Opinion and Order at 3, 7) (December 21, 2005), Ap. at 71, 75 (People Working

Cooperatively, the Ohio Energy Group, and the city of Cincinnati); In re Cincinnati Gas

18

& Electric Co., Case No. 99-165 8-EL-ETP (Opinion and Order at 4, 55) (August 31,

2000), Ap. at 106, 157 (People Working Cooperatively, and the Ohio Hospital

Association).

In addition, all the signatories are familiar with Duke's rate stabilization plan.

They became parties to Duke's rate stabilization plan case over four years ago, practically

from the outset. People Working Cooperatively moved to intervene on March 9, 2004.

In re Cincinnati Gas & Electric 03-93 (Motion to Intervene of People Working

Cooperatively) (March 9, 2004), Sec. Supp. at 84. The Commission granted the motion

on March 25, 2004. In re Cincinnati Gas & Electric 03-93 (Entry at 2) (March 25,

2004), OPAE Ap. at 14-16. The Ohio Hospital Association moved to intervene on

February 20, 2004. In re Cincinnati Gas & Electric 03-93 (Motion to Intervene of the

Ohio Hospital Association (OHA)) (February 20, 2004), Sec. Supp. at 76. Its motion was

granted on March 25, 2004. In re Cincinnati Gas & Electric 03-93 (Entry at 2) (March

25, 2004), Sec. Supp. at 71. The Ohio Energy Group moved to intervene in Case No. 03-

2080-EL-ATA on October 23, 2003. In re Cincinnati Gas and Electric Co., Case No. 03-

2080-EL-ATA (Motion to Intervene of the Ohio Energy Group) (October 23, 2003), Ap.

at 89. The Commission granted intervention on December 9, 2003. Id. (Entry at 4)

(December 9, 2003), Ap. at 84. Cincinnati moved to intervene on Apri121, 2004. In re

Cincinnati Gas & Electric 03-93 (Motion to Intervene of the City of Cincinnati) (April

21, 2004), OCC Supp. at 736-741. The Commission granted intervention on May 13,

2004. Id. (Entry at 4) (May 13, 2004), Sec. Supp. at 91. Cincinnati later withdrew on

July 13, 2004. Id. (City of Cincinnati's Notice of Withdrawal As An Intervenor) (July

19

13, 2004), Sec. Supp. at 73. It moved to intervene again. In re Cincinnati Gas & Electric

05-274 (Motion to Intervene of the City of Cincinnati) (February 21, 2007), Sec. Supp. at

112. Intervention was granted again on April 10, 2007. Remand Rider Tr. I at 8 (April

10, 2007), Sec. Supp. at 94.

The early involvement of the signatories to the 2007 stipulation also shows they

watched Duke's rate stabilization plan over a long period of time. In re Cincinnati Gas

& Electric 05-274 (Opinion and Order at 27) (November 20, 2007), OPAE Ap. at 47.

They have been aware of the plan since 2004. All the parties to the negotiations are

knowledgeable about utility matters. They are knowledgeable about Duke and its rate

stabilization plan. For these reasons, the record supports the Commission's determina-

tion that these parties are capable, knowledgeable parties. Id.

The Commission's determination that parties to the negotiations, including the

stipulation's signatories, represented diverse interests also is supported by the record.

The Commission found:

We also note ... that the stipulation was either supported ornot opposed by representatives of each stakeholder group.Residential consumers were represented by PWC and the cityof Cincinnati, OEG represented manufacturing consumers,and OHA represented commercial interests. Also involved inthe negotiations were IEU, OMG, and Dominion, none ofwhich opposed the resultant document [stipulation]. OCCand OPAE, representing residential customers, were involvedin the discussions, although they were not, apparently, suc-cessful in obtaining a result with which they could agree.

Id. OCC and OPAE do not contest the conclusion that the constituents of the Ohio

Energy Group include industrial and commercial interests and they do not contest that the

20

constituents of the Ohio Hospital Association include commercial interests. OCC and

OPAE do not contest that the constituents of IEU, OMG, and Dominion include

industrial or commercial interests.

While OCC and OPAE claim that People Working Cooperatively does not "repre-

sent" residential consumers, they do not contest that this organization serves low-income

residential consumers by providing weatherization programs for them. The status of

Consumers' Counsel as the statutorily recognized "representative" of residential

consumers in cases before the Commission does not change the residential consumer con-

stituencies of People Working Cooperatively and Cincinnati. The Commission's conclu-

sion about the groups represented in the negotiations is not contested; those groups

include OCC and OPAE. The Commission's conclusion about the stakeholder groups

represented in each signatory's constituency is reasonable and supported in the record.

2. The Commission's determination that there werenot any side agreements between Duke and anyother signatory casting doubt on the integrity of thenegotiating process is based on the record.

OCC and OPAE argue that the existence of certain agreements with Duke nega-

tively impacted the ability of the Ohio Energy Group, the Ohio Hospital Association,

People Working Cooperatively, and Cincinnati to negotiate seriously in the rider phase of

the proceeding. The Commission disagreed because none of those agreements required

anyone to execute the stipulation involved in this case. In re Cincinnati Gas & Electric

05-274 (Opinion and Order at 27) (November 20, 2007), OPAE Ap. at 47.

21

The Commission found that the agreements relied on by OCC and OPAE did not

contain any provision requiring anyone to support, or become a signatory to, the stipula-

tion involved in this case. Id. This is a distinguishing feature between the Apri19, 2007

stipulation in this case and the one parties submitted on May 19, 2004 in the part of the

proceeding that set the general structure of Duke's rate stabilization plan. Id. The

Commission withdrew its approval of the May 19, 2004 stipulation, as modified, on

remand from this Court's decision in Consumers' Counsel v. Pub. Util. Comm, 111 Ohio

St. 3d 300, 856 N.E.2d 213 (2006). In re Cincinnati Gas & Electric 03-93 (Order on

Remand) (October 24, 2007), OCC Ap. at 52-96. The Commission was persuaded that

"side agreements" entered around the time of that stipulation, in 2004, and "in which

several of the signatory parties agreed to support the stipulation [the 2004 stipulation],

raises serious doubts about the integrity and openness of the negotiation process related

to the stipulation" and, therefore, whether serious bargaining occurred. Id. at 27, OCC

Ap. at 76.

There was no evidence of such an agreement between any Duke company and any

other signatory to the stipulation involved in this case. In re Cincinnati Gas & Electric

05-724 (Opinion and Order at 27) (November 20, 2007), OPAE Ap. at 47. Additionally,

there were representations of counsel to the contrary. Signatory parties stated no such

agreements existed. In re Cincinnati Gas & Electric 05-724 (Opinion and Order at 27)

(November 20, 2007), OPAE Ap. at 47; Remand Rider Tr. I at 12-17 (April 10, 2007),

Sec. Supp. at 98-103. Highlighting these representations, the Commission explained:

22

While we did find that those agreements [the 2004 side agree-ments] impacted the stipulation in the RSP [rate stabilizationplan] case by means of provisions requiring support of thatstipulation [the May 19, 2004 stipulation], there is no argu-ment that there was a similar connection to the stipulation weare considering today [the April 9, 2007 stipulation]. The sig-natory parties to this stipulation specifically confirmed thatthere were no side agreements related to this stipulation.


OPAE Ap. at 47. No signatory committed to the April 9, 2007 stipulation outside of the

negotiation of that stipulation. The condition that threw a shadow over the negotiation of

the 2004 stipulation does not exist here. For that reason, doubts about the integrity and

openness of the negotiating process the Commission had in the other part of this con-

solidated case do not exist here and the Commission reasonably determined this case

accordingly. Id. Those determinations are based on the record in this case. Id.

3. The arguments of OCC and OPAE merely ask theCourt to reweigh the evidence and substitute itsjudgment for the Commission's judgment.

OCC contests the Commission's determination that the stipulation resulted from

serious negotiation among capable, knowledgeable parties based on its analysis of the

conflict among the parties. It advocates that the Court require the Commission to find

"sufficient" conflict of interest among the signatories to the stipulation. It then asks this

Court to reweigh the evidence under its novel conflict evaluation test and to second-guess

the Commission's finding of serious negotiations. It asks this Court to impose that new

and untested analytic structure on the Commission.

23

In applying OCC's proposed test, conflict among the parties to the negotiation

must not be the standard. OCC and OPAE were parties to the negotiations. The presence

of OCC and OPAE must indicate "sufficient" conflict, presumably, even under OCC's

proposal, if the negotiation is the relevant activity.

But, negotiation is not the relevant activity according to OCC's argument. OCC

ignores its participation and that of OPAE and argues the signatories did not have

sufficient conflict of interest. A veto over stipulations for various points of view results

from such a proposed test. That violates a principle the Commission has applied when

evaluating stipulations. The Commission has repeatedly held: no party has a veto. In re

Columbia Gas of Ohio, Inc., Case Nos. 07-478-GA-UNC, et al., (Opinion and Order at

32) (April 9, 2008), Ap. at 46. By extension, that means no point of view has a veto.

OCC's proposal violates this principle. Conflict is not the test the Commission has

applied and this Court has not attempted to dictate an analysis the Commission must

undertake. This Court has noted the importance of the openness of the negotiation

process. Consumers' Counsel v. Pub. Util. Comm, 111 Ohio St. 3d 300, 321, 856 N.E.2d

213, 234-235 (2006); Time Warner AxS v. Pub. Util. Comm, 75 Ohio St. 3d 229, 234 fn.

2, 661 N.E.2d 1097, 1011, fn. 2 (1996). The process involved with the stipulation in this

case was open to all, as the Commission found. Accordingly, a basis does not exist for

the review OCC now seeks to compel.

Moreover, OCC and OPAE present little evidence beyond the 2004 agreements.

They ask the Court to entertain inferences the Commission did not make and draw con-

clusions the Commission did not draw, based on little more than the agreements. But, the

24

agreements do not compel the inferences OCC and OPAE draw and the agreements do

not require the conclusions they attempt to promote. Accordingly, the agreements do not

provide a basis to reverse the Commission's determination.

Similar problems exist with the claims made against People Working Coopera-

tively. This organization provides weatherization assistance to low-income consumers

and, like other organizations, uses grants from Duke to do so. The existence of those

grants does not suggest People Working Cooperatively would ignore any other interests

of its constituents and enter a stipulation that it did not believe was in their best interest.

Even a focus on those grants in negotiations would not evidence an interest contrary to

what People Working Cooperatively determined was in the best interests of its constitu-

ents.

Similar problems exist with the claims OCC and OPAE made against Cincinnati.

OCC and OPAE claim Cincinnati entered the rider stipulation to protect the benefits from

a contract with Duke. The evidence in this case does not show that the governmental

officials of Cincinnati would act in a manner contrary to what they determined to be in

the best interest of the Cincinnati populace. Evidence from which to draw that inference

does not exist.

The focus and priorities of each signatory may be different from that of every

other one and different from the focus and priorities of OCC and OPAE. That is not a

basis for reversal of the Commission's decision.

25

B. The Commission determination that a stipulation benefitsratepayers and serves the public interest is lawful andreasonable where that determination is supported byrecord evidence such that the determination is not againstthe weight of the evidence and it is not the result ofmistake, misapprehension, or neglect of duty and wherethe regulatory principles cited by appellants do not apply.

The Commission found that "[t]he stipulation benefits Duke ratepayers and serves

the public interest." In re Cincinnati Gas & Electric 05-274 (Opinion and Order at 30)

(November 20, 2007), OPAE Ap. at 50. OCC and OPAE disagree because they weigh

factors associated with various issues differently. OCC and OPAE do not identify points

of disagreement beyond the ultimate conclusion - whether the stipulation benefits rate-

payers and is in the public interest - and the policy disputes underlying their arguments.

OCC and OPAE seek traditional, rate-of-return regulation. In evaluating the stipulation,

they ignore the future beyond the rate stabilization period that ends December 31, 2008.

The Commission considered the future of electrical service in Duke's service territory in

its evaluations. The Commission correctly also recognized this matter does not involve

rate-of-return regulation under R.C. Chapter 4909 but alternative regulation to promote a

competitive environment under R.C. Chapter 4928. The arguments before the Court are

about policy. OCC and OPAE are asking the Court to agree with them on policy, to re-

weigh the evidence and to second-guess the Commission's determinations.

26

1. The Commission's determination that the stipula-tion benefited ratepayers and served the publicinterest is supported by the evidence of record.

The Commission looked to the future in approving the stipulation. The rate stabil-

ization period will end on December 31, 2008. The stipulation provides for resolving the

uncertainty associated with the post rate stabilization period. The Commission high-

lighted this benefit as one of the reasons the stipulation, as a package, benefited ratepay-

ers and was in the public interest. Id. The Commission believes capacity purchases for

the post rate stabilization period "should be the subject of mandatory discussions among

the parties, as is provided in the stipulation." Id. at 28-29, OPAE Ap. at 48-49. The

Commission also found the expeditious resolution of issues provided by the stipulation

and establishing a process to address open issues are in the public interest. Id. at 27,

OPAE Ap. at 47. Additionally, the Commission looked at the immediate financial

benefit provided by the stipulation. Id. at 28, OPAE Ap. at 48. The Commission was

influenced by the larger bill credit and faster crediting that the stipulation provided as

compared to what the auditor had recommended. Id. The Commission's conclusion that

the stipulation benefited ratepayers and serves the public interest flowed from the

evidence and the Commission's evaluation of it. The Commission's conclusion was not

against the manifest weight of the evidence and did not indicate mistake,

misunderstanding, or neglect of duty.

27

That result is not affected by the desires of OCC and OPAE for "more." The

stipulation is a settlement and, by its nature, involves give and take, as the parties to the

stipulation recognized. In re Cincinnati Gas & Electric 05-274 (Stipulation and Rec-

ommendation at 2) (April 9, 2007), OPAE Supp. at 2. The stipulating parties, including

the Commission's staff, believed it was a reasonable compromise and represented it as

such. Id. After reviewing and evaluating the evidence and the parties' arguments, the

Commission agreed. In re Cincinnati Gas & Electric 05-274 (Opinion and Order at 30)

(November 20, 2007), OPAE Ap. at 50. The fact that the stipulation did not contain

"more" of what OCC or OPAE desired does not change the stipulated benefits for

ratepayers nor does it change the way the stipulation serves the public interest. Nothing

argued by OCC or OPAE impeaches the many benefits the Commission cited in its

determination.

2. The arguments made by OCC and OPAE do notsatisfy their burden to show the Commission'sdetermination that the stipulation benefitedratepayers and served the public interest wasunlawful or unreasonable.

OCC and OPAE do not disagree with the facts on which the Commission relied in

making its determination. OCC and OPAE disagree with the determination for policy

reasons. At best, their arguments boils down to a claim that the factors the Commission

weighed in its determination should be weighted differently to reach a different conclu-

sion. They ask this Court to reweigh the evidence and substitute its determination for that

28

of the Commission. That is not a basis for overturning the Commission's decision.

Accordingly, OCC and OPAE fail to satisfy their burden of proof.

a. The Commission's determination to approve thestipulation that adopted most of the auditors'recommendations is lawful and reasonable becausethe Commission is not required to accept all theauditors' recommendations and the Commission'sdecision was a valid exercise of its discretion.

OCC and OPAE complain that the stipulation does not adopt certain of the

auditors' recommendations. The lawfulness or reasonableness of the Commission's deci-

sion does not depend on the Commission's acceptance of the auditors' recommendations.

As this Court is aware, the auditors do not control the Commission's decisions; the audi-

tors' opinions are non-binding recommendations. As the Commission noted in respond-

ing to this objection: "[t]he fact that our decision did not fully accept the findings of the

auditor on any of these issues does not, in and of itself, render such decisions to be

unlawful and unreasonable." In re Cincinnati Gas & Electric 05-274 (Entry on

Rehearing at 6) (January 16, 2008), OCC Ap. at 44.

The arguments of OCC and OPAE show they recognize the Commission is not

bound by any auditor's recommendations. OCC and OPAE do not complain about all the

modifications to the auditors' recommendations. As highlighted by the Commission, one

of the modifications required Duke to provide a larger credit to customers than the

auditor recommended and required Duke to provide the credit more expeditiously. In re

Cincinnati Gas & Electric 05-274 (Opinion and Order at 30) (November 20, 2007),

29

OPAE Ap. at 50. Although OCC argued it was not enough of a quid pro quo, neither

OCC nor OPAE suggested the Commission erred in approving it.

Additionally, the stipulation did not ignore the auditors' reconunendations. Under

the stipulation, all of the auditors' recommendations were accepted "except as set forth in

paragraphs one through eight" of the stipulation. In re Cincinnati Gas & Electric 05-274

(Stipulation and Recommendation at 7-8) (April 9, 2007), OPAE Supp. at 7-8. The

stipulation included all six recommendations of the financial auditor and all but two

recommendations of the management/performance (M/P) auditor that are the subject of

the OCC and OPAE complaint. In re Cincinnati Gas & Electric 05-274 (Opinion and

Order at 8-10) (November 20, 2007), OPAE Ap. at 28-30.

One of the two M/P audit recommendations that the stipulation does not adopt and

that OCC and OPAE complain about involves Duke's recovery of costs associated with

its use of Duke Energy North America (DENA) assets to meet capacity requirements.

The stipulation allows Duke to recover those costs in emergency situations and sets a

pricing mechanism. In re Cincinnati Gas & Electric 05-274 (Stipulation and

Recommendation) (April 9, 2007), OPAE Supp. at 1-10. OPAE objects because it does

not trust the pricing protections the stipulation provides. The Commission disagreed with

OPAE's opinion, noting the express protections afforded by the stipulation and

continuing Commission audits. In re Cincinnati Gas & Electric 05-274 (Entry on

Rehearing at 6) (January 16, 2008), OCC Ap. at 44. The Commission explained:

We find no merit to OPAE's third assignment of error. In ouropinion and order, we found that the pricing mechanism for

30

the DENA assets proposed in the stipulation was reasonable.We also noted that, while the market for capacity is notmature, the witness for Duke, Mr. Whitlock, provided testi-mony that he would likely be able to get multiple brokerquotes for determining market prices. As to OPAE's claimthat the pricing of DENA assets is flawed, we find no basisfor this argument. We noted that the stipulation provides twodifferent mechanisms for setting a price and also allows forthe possibility that Commission staff might agree to a differ-ent system in appropriate circumstances. Further, we mustnot lose sight of the fact that Duke's use of the DENA assetsis to be on an emergency basis only and will be subject toaudit by the Commission. Therefore, we continue to believethat the method established by the stipulation for establishingprices for DENA assets is reasonable. OPAE's third groundfor rehearing will be denied.

Id. The Commission based its assessment on the record, and its review of the stipulation.

OCC objects to Duke recovering costs associated with meeting emergency capac-

ity requirements with DENA assets because of concerns stemming from Duke's

compliance with a prior stipulation. The Commission disagreed with OCC's assessment

that violations existed and explained:

First, while we are aware that our prior orders required certainprocedural steps to be taken before Duke might get approvalfor the recovery of the costs of using DENA capacity, we findthat Duke has complied with the underlying intent of thoseprocedural safeguards. The process that was institutedrequired Duke to give notice of its intent to use the DENAassets, to allow discovery of relevant facts by interested par-ties, and to provide sufficient detail to allow analysis of thereasonableness of its proposal. In this situation, all of thosegoals have been met. Notice was given, discovery was pur-sued, and details are available. While it is true that the stipu-lation does not include a proposed price, it does include amethodology for determining a price. We find that the pro-cess that has been followed in this proceeding has compliedwith the substance of our prior orders.

31


OPAE Ap. at 40. Again, the Commission based its assessment on the record.

The other audit recommendation that was not adopted suggested that the

Commission order Duke to abandon its market approach for procuring fuel, emission

allowances, and purchased power in favor of a portfolio approach traditionally associated

with regulated environments. See In re Cincinnati Gas & Electric 05-274 (Opinion and

Order at 10-12) (November 20, 2007), OPAE Ap. at 30-32; Jt. Remand Rider Ex. 1 at 5,

OPAE Supp. at 5. OCC and OPAE sought a return to a traditional, regulatory approach

and objected. The Commission disagreed and explained:

Based on the evidence, we find that it is reasonable to allowDuke to continue its active management of its coal, EA[emission allowances], and purchased power portfolio, asprovided in the stipulation. Evidence of record convinces usthat an active management approach allows Duke to takeadvantage of market fluctuations, thereby lowering the over-all cost to customers. We note that certain transaction costs,including brokerage fees and certain accounting costs, werenot contemplated when generation rates were established inDuke's last rate case and these costs are not passed on to cus-tomers through the FPP. In addition, we note that EVA wasable to audit the transactions in question.

Id. (Opinion and Order at 15) (November 20, 2007), OPAE Ap. at 35. The Commission

based its assessment on the record. OCC's disagreement is not a basis for error.

32

b. The Commission's decision to approve a stipulationthat allows Duke to recover costs associated withconstruction work in progress of environmentalequipment through the annually adjusted compo-nent is lawful and reasonable because the statutoryrestrictions do not apply and the approval of thestipulation was a proper exercise of the Commis-sion's discretion.

OCC and OPAE object to the Commission's decision approving the stipulation

because the stipulation permits Duke to recover costs associated with construction work

in progress (CWIP) of environmental facilities through the annually adjusted component

(AAC). They object because the inclusion of CWIP increases the rider and because it

does not limit recovery by the traditional rate-of-return rate making requirement that the

project be 75% complete. These are policy concerns rather than factual or legal concerns.

The completion requirement OCC and OPAE urge on the Court is a creature of the

rate making statute. Ohio Rev. Code Ann. § 4909.18 (Anderson 2008), Ap. at 5. Under

R.C. 4909.18, an exception to the requirement that facilities must be used and useful to

be included in rate base was recognized for construction work in progress where the

project was at least 75% complete. That requirement exists only in R.C. 4909.15 and,

accordingly, it applies only in a traditional rate making context. This case does not arise

under R.C. Chapter 4909. It arises under R.C. Chapter 4928, which concerns a competi-

tive environment. The limitation in R.C. 4909.15 has no place in a competitive environ-

ment. In re Cincinnati Gas & Electric 05-274 (Opinion and Order at 23) (November 20,

2007), OPAE Ap. at 43. This was one of the factors leading the Commission to disagree

with OCC and OPAE. The Commission found:

33

Attachment JPS-4 to the testimony of John Steffen clearlyshowed CWIP as a factor in the AAC, with no reference topercentage completion. We would note that, in the presentmarket environment, ratemaking standards such as the limita-tion on earning a return on CWIP are not dispositive of theoutcome in these proceedings. Therefore, we find that thestage of completion of CWIP should not, under these specificcircumstances, be a bar to Duke's earning a return on CWIP.

Id. at 23-24, OPAE Ap. at 43-44. The Commission found construction work in progress

was properly included in the annually adjusted component because it was identified as

part of the component from the beginning. In re Cincinnati Gas & Electric 05-274

(Entry on Rehearing at 5) (January 16, 2008), OCC Ap. at 43.

OPAE and OCC object because they believe the cost increase in the AAC is too

high in percentage terms. They do not dispute any of the factual bases for the Commis-

sion's decision. They would just weigh the facts relating to the percentage of cost

increase more heavily. That is a policy matter and it is not a basis to reverse the Com-

mission's determination.

c. OCC's miscellaneous objections do not meet itsburden to prove the Commission's decision isagainst the manifest weight of the evidence andunsupported in the record as to show mistake,misapprehension, or neglect of duty.

OCC complains that Duke is deceptive about requiring the ability to resell coal.

Responding to this complaint, the Commission highlighted its finding that Duke would

consider bids from those limiting resale of their coal and stated that Duke's standard

request for proposals should not prohibit bids from bidders who would not allow resale.

The Commission stated:

34

With regard to the auditor's recommendation that Duke per-mit the consideration of bids from bidders who seek to limitthe resale of their coal, this recommendation was consideredby us in our opinion and order. We note that testimony at thehearing showed that Duke does not require the ability to resellcoal as a condition to its purchase and it does not exclude anoffer from consideration if the supplier does not permit resale.(Duke Rem. Rider Ex. 2, at 9). We would clarify that Duke'sstandard requestfor proposals should not prohibit bids fromsuppliers who do not allow resale.

In re Cincinnati Gas & Electric 05-274 (Entry on Rehearing at 8) (January 16, 2008)

(emphasis added), OCC Ap. at 46. OCC's claim regarding paragraph 9 of the stipulation

relies on Duke's current policies. The Commission addressed whatever merit might have

been associated with this concern when it directed that "Duke's standard request for

proposals should not prohibit bids from suppliers who do not allow resale." Id., OCC

Ap. at 46. The Commission has taken steps to protect the process against the concern

OCC expresses. The Commission deems that sufficient, and any disagreements are

nothing more than differences of opinion.

OCC also complains that stipulation paragraph 8 is weakly worded. Like other

objections, this objection does not contradict the Commission's decision and it does not

outweigh the Commission's decision. Any misperception that may have resulted from the

wording of paragraph 8 was remedied the next day when Duke and staff placed a stipula-

tion as to their joint understanding of this paragraph into evidence. The lack of objection

from other signatories, either at the hearing or as an application for rehearing, signals

their agreement. Finally, the Commission spoke to its understanding of that paragraph

when it approved the Stipulation, stating:

35

Further, we must not lose sight of the fact that Duke's use ofthe DENA assets is to be on an emergency basis only and willbe subject to audit by the Commission. Therefore, we con-tinue to believe that the method established by the stipulationfor establishing prices for DENA assets is reasonable.

Id. at 6, OCC Ap. at 44. The Commission remedied this objection.

These requests, like others, seek a reweighing of the evidence and second-guess

the Commission's determination as to what is in the public interest. The Commission has

demonstrated its expertise and vision in considering the future and recognizing the

importance of addressing it, as well as the other benefits in the stipulation. The evidence

supports the Commission's determination.

C. The Commission determination that a stipulationdoes not violate any significant regulatoryprinciples is lawful and reasonable where thatdetermination is supported by record evidence suchthat the determination is not against the weight ofthe evidence and it is not the result of mistake,misapprehension, or dereliction of duty and wherethe nulatory principles cited by appellants do notapply.

The record amply supports the Commission's determination that the stipulation

does not violate any important regulatory principle. In fact, OCC and OPAE do not

attempt to refute the facts the Conunission relied upon to reach its determination that the

8 The Commission recognizes that OPAE discussed, together, prongs II and III ofthe structure for analyzing stipulations. The Commission also recognizes that OPAE maybe arguing that benefits to ratepayers and serving the public interest are regulatoryprinciples applicable to stipulations. These issues are dealt with in the preceding sectionof this brief concerning the stipulation serving the public interest. The discussion in thissection relates to any other regulatory principles that OPAE may be raising in addition tothose regulatory principles raised by OCC.

36

stipulation does not violate any significant regulatory principle. The argument is about

the weight the Commission attached to the facts, the Commission's view of those facts,

and the resulting conclusions, all of which are matters for the Commission's discretion.

This argument also is not about law. OCC and OPAE do not point to anything that is

beyond the Commission's authority to approve or order. OCC and OPAE would decide

this case differently as a matter of policy, and ask this Court to second-guess the

Commission repeatedly.

OCC also raises the party status of some signatories. The signatories are parties as

discussed elsewhere in this brief.9 Due to the consolidation of cases, and intervention by

Cincinnati, all the signatories to the stipulation were parties to the rider cases. In re

Cincinnati Gas & Electric 05-274 (Entry on Rehearing at 11) (January 16, 2008), OCC

Ap. at 49. The Commission properly rejected this claim.

This case also does not involve any regulatory principle that might be associated

with the exclusion of parties from negotiations. See Time Warner AxS v. Pub. Util.

Comm, 75 Ohio St. 3d 229, 234 fn.2, 661 N.E.2d 1097, fn.2 1101 (1996). The uncontro-

verted testimony shows the negotiations in this case were open to all parties; no one was

excluded. Duke Remand Rider Ex. 6 at 5 (Smith Test.), Sec. Supp. at 30. OCC and

OPAE object to the result of the negotiations, not the negotiation process. That process

does not violate any regulatory principle. Additionally, the lack of agreement of OCC or

OPAE does not violate a regulatory principle. As the Commission has noted often, no

9 See, pages 10-14.

37

party has a veto. This Court has noted a similar sentiment in stating that: "[w]e would

not create a requirement that all parties participate in all settlement meetings." Time

Warner AxS v. Pub. Util. Comm, 75 Ohio St. 3d 229, 234 fn.2, 661 N.E.2d 1097, fn.2

1101 (1996). The Commission's approval of a stipulation that did not include 0 CC or

OPAE does not violate any regulatory principle.

OCC and OPAE again argue policy in their complaints about including CWIP in

the annually adjusted component. Limiting construction work in progress is not a regu-

latory principle in a competitive environment as a matter of law or policy. This case

arises under the competitive retail electric provisions of R.C. Chapter 4928. For that

reason, the rate setting provisions, R.C. Chapter 4909, do not apply. Additionally, the

logic and categories of cost-based ratemaking do not apply. Staff Remand Ex. 1 at 4, 6

(Cahaan Test.), Sec. Supp. at 108, 110.

Significant differences between the competitive environment this case concerns

and a monopolistic environment involved in a "traditional" rate case affect any review.

The analytic process is different. Id. at 4-6, Sec. Supp. at 108-110. Even the technical

basis for a principle or practice is different in a competitive environment than the basis in

a cost-based regulatory application. Id. The individual components so essential to the

"traditional" rate-of return ratemaking regulation do not matter when reviewing the

implementation of a rate stabilization plan, such as in this case. Id. at 5-6, Sec. Supp. at

109-110. In a base rate increase case, the Commission evaluates a large number of

individual components and determines each one individually. Id. at 4, Sec. Supp. at 108.

The "correct" determination of each individual item is presumed to generate a fair,

38

reasonable, and sustainable solution. Id. at 4-5, Sec. Supp. at 108-109. The decision-

making in an RSP case is much different. Simply, CWIP, like all other "traditional" rate-

making principles cannot be transferred to an RSP case and used in evaluations in the

same way it is employed in a ratemaking case. Id. at 5-6, Sec. Supp. at 109-110. It is not

the same principle and it is not used in the same way. Id.

The Commission found construction work in progress was appropriately included

in the calculation of the AAC. In re Cincinnati Gas & Electric 05-274 (Entry on

Rehearing at 5) (January 16, 2008), OCC Ap. at 43. The Commission noted that it based

its determination regarding the AAC in part on the calculations supplied by Duke and

those calculations "clearly showed CWIP as a factor in the AAC, with no reference to

percentage of completion." Id. The Commission further found that "in the present market

environment, ratemaking standards, such as the limitation on earning a return on CWIP,

are not dispositive." Id. The Commission concluded "the stage of completion of CWIP,

under these specific circumstances, should, under these specific circumstances, not be a

bar to Duke's earning a return on CWIP." Id. In so fmding, the Commission followed

the testimony of its staff. The Commission's analysis followed the proper application of

regulatory principles in the exercise of its decision-making discretion. It did not violate

any regulatory principle relative to construction work in progress.

OCC and OPAE also claim that the emergency use of DENA assets provided for

by the stipulation violates regulatory principles. The arguments about DENA assets are

about policy and neither OCC nor OPAE points to any regulatory principles that are

violated by the stipulation's provisions concerning the emergency use of DENA assets.

39

OCC's complaints are about the company's activities under a prior stipulation.

Rather than discussing the current stipulation, OCC complains that the order currently

under review encourages non-compliance and discourages settlement efforts in some

unspecified manner. The Commission disagreed with OCC's claims of non-compliance

and found "the process that has been followed ... has complied with the substance of our

prior orders." In re Cincinnati Gas & Electric 05-274 (Entry on Rehearing at 9) (January

16, 2008), OCC Ap. at 47. OCC does not identify how the actions under a prior

stipulation affect the evaluation of the current stipulation. OCC's argument is based on

OCC's view of the company's credibility and OCC's claimed reaction to it. OCC claims

that it questions Duke's credibility and that discourages its efforts to settle cases. OCC's

opinions of Duke and its reactions to events are not regulatory principles.

OPAE, also, argues about policy and factual determinations, not regulatory princi-

ples. For example, OPAE notes the auditor recommended that Duke should not use

DENA assets. The auditor's recommendation, however, is not a regulatory principle as

the Commission observed. Id. at 6, OCC Ap. at 44. Even OPAE recognizes the auditor's

recommendations are not regulatory principles. Later, it argues the conditions under

which OPAE believes Duke's use of DENA assets would be acceptable.

OPAE's argument is about the conditions it believes ought to apply to Duke's use

of DENA assets and it does not cite any regulatory principle specifying what must apply.

In a nutshell, OPAE argues about the pricing mechanism associated with Duke's use of

DENA assets. It claims Duke's use should be limited to an emergency as a last resort

only if Duke demonstrates that the DENA assets are offered at a better price through a

40

pre-determined method. Except for the policy desire that DENA assets be used only as a

last resort, the stipulation does that.

The stipulation the Commission approved limits Duke's use of DENA assets to

emergency situations and the criteria for determining if an emergency exists are defined.

Moreover, the stipulation specifies a predetermined reasonable method to set the price for

the capacity from the DENA assets. Id. The argument is about whether the mechanism

the Commission approved is appropriate. That is a question of fact and not a regulatory

principle. The Commission fully supported and described the basis for its decision. Id.

The Commission's approval of the stipulation does not violate any regulatory

principle. As the arguments reveal, the issues here involve policy and not regulatory

principle. The Commission's conclusion that the stipulation does not violate any

significant regulatory principle is well-founded.

41

CONCLUSION

The Commission's determination is lawful and reasonable. The decision is within

the Commission's authority, results from the application of appropriate standards, and is

supported by the evidence of record. The evaluations of OCC and OPAE do not

contradict the Commission's decision. They contest the Commission's decision because

they desire new and different standards applied to the evaluation, view the facts

differently, and want a different decision. They ask this Court to abandon its appellate

role. The Court has refused to do so in the past and it should refuse to do so here. The

Conunission respectfully requests the Court affirm the Commission's decision in this

matter.

Respectfully submitted,

Nancy H. Rogers(Reg. No. 0002375)Ohio Attorney General

Duane Luckey(Reg,,No. 0023557)Sa^(WChief

hen A. Reillyeg. No. 0019267)

Counsel of RecordWerner L. Margard III(Reg. No. 0024858)Assistant Attorneys GeneralPublic Utilities Section180 E. Broad Street, 9th floorColumbus, OH 43215(614) 466.4396Fax: (614) 644.8764

i;

42

PROOF OF SERVICE

I hereby certify that a true copy of the foregoing Merit Brief and

Appendix as well as the Second Supplement submitted on behalf of Appellee,

the Public Utilities Commission of Ohio, was served by regular U.S. mail, postage

prepaid, or hand-delivered, upon the following pa

July, 2008.

PARTIES OF RECORD:

Janine Migden- OstranderJeffrey L. SmallAnn M. HotzOffice of the Ohio Consumer's Counsel10 West Broad StreetSuite 1800Columbus, OH 43215small e,occ.state.oh.ushotznae occ.state.oh.us

Colleen MooneyDavid RineboltOhio Partners for Affordable Energy1431 Mulford RoadColumbus, OH [email protected](gaol.com

Paul A._ColbertDuke Energy Ohio, Inc.155 East Broad Street, Inc.Columbus, OH 43215paul. colbert(?,duke-energv.com

Rocco D'AscenzoDuke Energy Ohio, Inc.139 East Fourth Street, 29 Atrium IICincinnati, OH 45201rocco.dascenzona duke-energy.com

APPENDIXTABLE OF CONTENTS

PAGE

APPENDIX

Ohio Rev. Code Ann. § 4903.13 (Anderson 2008) .............................:............................... 1

Ohio Rev. Code Ann. § 4909.15 (Anderson 2008) ............................................................. 1

Ohio Rev. Code Ann. § 4909.18 (Anderson 2008) ............................................................ 5

Ohio Rev. Code Ann. § 4928.06 (Anderson 2008) ............................................................ 6

Ohio Admin Code § 4901-1-01 (Anderson 2008) ............................................................. 8

Ohio Admin Code § 4901-1-10 (Anderson 2008) .............................................................. 9

Ohio Admin Code § 4901-1-16 (Anderson 2008) ........................................................... 10



In re Columbia Gas of Ohio, Inc., Case Nos. 07-478-GA-UNC, et al.(Opinion and Order) (Apri19, 2008) ............................................................................. 15

In re Dayton Power & Light Co., Case No. 05-276-EL-AIR (Opinion andOrder) (December 28, 2005) ......................................................................................... 52

In re Cincinnati Gas & Electric Co., Case Nos. 05-59-EL-AIR, et al.(Opinion and Order) (Deceinber 21, 2005) ................................................................... 69

In re Cincinnati Gas & Electric Co., Case Nos. 03-2080-EL-ATA, et al.(Entry) (December 9, 2003) ........... ............................................................................... 81

In re Cincinnati Gas & Electric Co., Case Nos. 03-2080-EL-ATA, et al.(Ohio Energy Group Motion to Intervene) (October 23, 2003) .................................... 89

In re Cincinnati Gas & Electric Co., Case Nos. 99-1658-EL-ETP, et al.(Opinion and Order) (August 31, 2000) ........................................................................ 99

In re Cincinnati Gas & Electric Co., Case No. 84-1187-EL-UNC (Opinionand Order) (November 26, 1985) ................................................................................ 165

i

4901.13 Publication of rules governing proceedings.

The public utilities commission may adopt and publish rules to govern its proceedingsand to regulate the mode and manner of all valuations, tests, audits, inspections, investigations,and hearings relating to parties before it. All hearings shall be open to the public.

4903.13 Reversal of final order - notice of appeal.

A final order made by the public utilities commission shall be reversed, vacated, ormodified by the supreme court on appeal, if, upon consideration of the record, such court is ofthe opinion that such order was urnlawful or unreasonable.

The proceeding to obtain such reversal, vacation, or modification shall be by notice ofappeal, filed with the public utilities commission by any party to the proceeding before it, againstthe commission, setting forth the order appealed from and the errors complained of. The noticeof appeal shall be served, unless waived, upon the chairman of the commission, or, in the eventof his absence, upon any public utilities commissioner, or by leaving a copy at the office of thecommission at Columbus. The court may pennit any interested party to intervene by cross-appeal.

4909.15 Fixation of reasonable rate.

(A) The public utilities commission, when fixing and determining just and reasonablerates, fares, tolls, rentals, and charges, shall determine:

(1) The valuation as of the date certain of the property of the public utility used anduseful in rendering the public utility service for which rates are to be fixed and determined. Thevaluation so determined shall be the total value as set forth in division (J) of section 4909.05 ofthe Revised Code, and a reasonable allowance for materials and supplies and cash workingcapital, as determined by the commission.

The commission, in its discretion, may include in the valuation a reasonable allowancefor construction work in progress but, in no event, may such an allowance be made by thecommission until it has determined that the particular construction project is at least seventy-fiveper cent complete.

In determining the percentage completion of a particular construction project, thecommission shall consider, among other relevant criteria, the per cent of time elapsed inconstruction; the per cent of construction funds, excluding allowance for funds used duringconstruction, expended, or obligated to such construction fands budgeted where all such fundsare adjusted to reflect current purchasing power; and any physical inspection performed by or onbehalf of any party, including the commission's staff.

1

A reasonable allowance for construction work in progress shall not exceed ten per cent ofthe total valuation as stated in this division, not including such allowance for construction work

in progress.

Where the commission permits an allowance for construction work in progress, the dollarvalue of the project or portion thereof included in the valuation as construction work in progressshall not be included in the valuation as plant in service until such time as the total revenue effectof the construction work in progress allowance is offset by the total revenue effect of the plant inservice exclusion. Carrying charges calculated in a manner similar to allowance for fonds usedduring construction shall accrue on that portion of the project in service but not reflected in ratesas plant in service, and such accrued carrying charges shall be included in the valuation of theproperty at the conclusion of the offset period for purposes of division (J) of section 4909.05 of

the Revised Code.

From and after April 10, 1985, no allowance for construction work in progress as itrelates to a particular construction project shall be reflected in rates for a period exceeding forty-eight consecutive months commencing on the date the initial rates reflecting such allowancebecome effective, except as otherwise provided in this division.

The applicable maximum period in rates for an allowance for construction work inprogress as it relates to a particular construction project shall be tolled if, and to the extent, adelay in the in-service date of the project is caused by the action or inaction of any federal, state,county, or municipal agency having jurisdiction, where such action or inaction relates to achange in a rule, standard, or approval of such agency, and where such action or inaction is notthe result of the failure of the utility to reasonably endeavor to comply with any rule, standard, orapproval prior to such change.

In the event that such period expires before the project goes into service, the commissionshall exclude, from the date of expiration, the allowance for the project as construction work inprogress from rates, except that the commission may extend the expiration date up to twelve

months for good cause shown.

In the event that a utility has permanently canceled, abandoned, or terminatedconstruction of a project for which it was previously permitted a construction work in progressallowance, the conunission immediately shall exclude the allowance for the project from the

valuation.

In the event that a construction work in progress project previously included in thevaluation is removed from the valuation pursuant to this division, any revenues collected by theutility from its customers after April 10, 1985, that resulted from such prior inclusion shall beoffset against future revenues over the same period of time as the project was included in thevaluation as construction work in progress. The total revenue effect of such offset shall notexceed the total revenues previously collected.

2

In no event shall the total revenue effect of any offset or offsets provided under division(A)(1) of this section exceed the total revenue effect of any construction work in progress

allowance.

(2) A fair and reasonable rate of return to the utility on the valuation as determined in

division (A)(1) of this section;

(3) The dollar annual return to which the utility is entitled by applying the fair andreasonable rate of return as determined under division (A)(2) of this section to the valuation ofthe utility determined under division (A)(1) of this section;

(4) The cost to the utility of rendering the public utility service for the test period less thetotal of any interest on cash or credit refunds paid, pursuant to section 4909.42 of the RevisedCode, by the utility during the test period.

(a) Federal, state, and local taxes imposed on or measured by net income may, in thediscretion of the commission, be computed by the normalization method of accounting, providedthe utility maintains accounting reserves that reflect differences between taxes actually payableand taxes on a normalized basis, provided that no determination as to the treatment in the rate-making process of such taxes shall be made that will result in loss of any tax depreciation orother tax benefit to which the utility would otherwise be entitled, and further provided that suchtax benefit as redounds to the utility as a result of such a computation may not be retained by thecompany, used to fund any dividend or distribution, or utilized for any purpose other than thedefrayal of the operating expenses of the utility and the defrayal of the expenses of the utility inconnection with construction work.

(b) The amount of any tax credits granted to an electric light company under section5727.391 of the Revised Code for Ohio coal burned prior to January 1, 2000, shall not beretained by the company, used to fund any dividend or distribution, or utilized for any purposesother than the defrayal of the allowable operating expenses of the company and the defrayal ofthe allowable expenses of the company in connection with the installation, acquisition,construction, or use of a compliance facility. The amount of the tax credits granted to an electriclight company under that section for Ohio coal burned prior to January 1, 2000, shall be returnedto its customers within three years after initially claiming the credit through an offset to thecompany's rates or fuel component, as determined by the commission, as set forth in schedulesfiled by the company under section 4905.30 of the Revised Code. As used in division (A)(4)(c)of this section, "compliance facility" has the same meaning as in section 5727.391 of the Revised

Code.

(B) The commission shall compute the gross annual revenues to which the utility isentitled by adding the dollar amount of return under division (A)(3) of this section to the cost ofrendering the public utility service for the test period under division (A)(4) of this section.

(C) The test period, unless otherwise ordered by the commission, shall be the twelve-month period beginning six months prior to the date the application is filed and ending sixmonths subsequent to that date. In no event shall the test period end more than nine months

3

subsequent to the date the application is filed. The revenues and expenses of the utility shall bedetermined during the test period. The date certain shall be not later than the date of filing.

(D) When the connnission is of the opinion, after hearing and after making thedeterminations under divisions (A) and (B) of this section, that any rate, fare, charge, toll, rental,schedule, classification, or service, or any joint rate, fare, charge, toll, rental, schedule,classification, or service rendered, charged, demanded, exacted, or proposed to be rendered,charged, demanded, or exacted, is, or will be, unjust, unreasonable, unjustly discriminatory,unjustly preferential, or in violation of law, that the service is, or will be, inadequate, or that themaximum rates, charges, tolls, or rentals chargeable by any such public utility are insufficient toyield reasonable compensation for the service rendered, and are unjust and unreasonable, thecommission shall:

(1) With due regard among other things to the value of all property of the public utilityactually used and useful for the convenience of the public as determined under division (A)(1) ofthis section, excluding from such value the value of any franchise or right to own, operate, orenjoy the same in excess of the amount, exclusive of any tax or annual charge, actually paid toany political subdivision of the state or county, as the consideration for the grant of suchfranchise or right, and excluding any value added to such property by reason of a monopoly ormerger, with due regard in determining the dollar annual return under division (A)(3) of thissection to the necessity of making reservation out of the income for surplus, depreciation, andcontingencies, and;

(2) With due regard to all such other matters as are proper, according to the facts in eachcase,

(a) Including a fair and reasonable rate of return determined by the commission withreference to a cost of debt equal to the actual embedded cost of debt of such public utility,

(b) But not including the portion of any periodic rental or use payments representing thatcost of property that is included in the valuation report under divisions (F) and (G) of section4909.05 of the Revised Code, fix and determine the just and reasonable rate, fare, charge, toll,rental, or service to be rendered, charged, demanded, exacted, or collected for the performance orrendition of the service that will provide the public utility the allowable gross annual revenuesunder division (B) of this section, and order such just and reasonable rate, fare, charge, toll,rental, or service to be substituted for the existing one. After such determination and order nochange in the rate, fare, toll, charge, rental, schedule, classification, or service shall be made,rendered, charged, demanded, exacted, or changed by such public utility without the order of thecommission, and any other rate, fare, toll, charge, rental, classification, or service is prohibited.

(E) Upon application of any person or any public utility, and after notice to the parties ininterest and opportunity to be heard as provided in Chapters 4901., 4903., 4905., 4907., 4909.,4921., and 4923. of the Revised Code for other hearings, has been given, the commission mayrescind, alter, or amend an order fixing any rate, fare, toll, charge, rental, classification, orservice, or any other order made by the commission. Certified copies of such orders shall beserved and take effect as provided for original orders.

4

4909.18 Application to establish or change rate.

Any public utility desiring to establish any rate, joint rate, toll, classification, charge, orrental, or to modify, amend, change, increase, or reduce any existing rate, joint rate, toll,classification, charge, or rental, or any regulation or practice affecting the same, shall file awritten application with the public utilities commission. Except for actions under section 4909.16of the Revised Code, no public utility may issue the notice of intent to file an applicationpursuant to division (B) of section 4909.43 of the Revised Code to increase any existing rate,joint rate, toll, classification, charge, or rental, until a final order under this section has beenissued by the commission on any pending prior application to increase the same rate, joint rate,toll, classification, charge, or rental or until two hundred seventy-five days after filing suchapplication, whichever is sooner. Such application shall be verified by the president or a vice-president and the secretary or treasurer of the applicant. Such application shall contain a scheduleof the existing rate, joint rate, toll, classification, charge, or rental, or regulation or practiceaffecting the same, a schedule of the modification amendment, change, increase, or reductionsought to be established, and a statement of the facts and grounds upon which such application isbased. If such application proposes a new service or the use of new equipment, or proposes theestablishment or amendment of a regulation, the application shall fully describe the new serviceor equipment, or the regulation proposed to be established or amended, and shall explain how theproposed service or equipment differs from services or equipment presently offered or in use, orhow the regulation proposed to be established or amended differs from regulations presently ineffect. The application shall provide such additional information as the commission may requirein its discretion. If the commission determines that such application is not for an increase in anyrate, joint rate, toll, classification, charge, or rental, the commission may permit the filing of theschedule proposed in the application and fix the time when such schedule shall take effect. If itappears to the commission that the proposals in the application may be unjust or unreasonable,the commission shall set the matter for hearing and shall give notice of such hearing by sendingwritten notice of the date set for the hearing to the public utility and publishing notice of thehearing one time in a newspaper of general circulation in each county in the service area affectedby the application. At such hearing, the burden of proof to show that the proposals in theapplication are just and reasonable shall be upon the public utility. After such hearing, thecommission shall, where practicable, issue an appropriate order within six months from the datethe application was filed.

If the commission determines that said application is for an increase in any rate, jointrate, toll, classification, charge, or rental there shall also, unless otherwise ordered by thecommission, be filed with the application in duplicate the following exhibits:

(A) A report of its property used and useful in rendering the service referred to in suchapplication, as provided in section 4909.05 of the Revised Code;

(B) A complete operating statement of its last fiscal year, showing in detail all itsreceipts, revenues, and incomes from all sources, all of its operating costs and otherexpenditures, and any analysis such public utility deems applicable to the matter referred to insaid application;

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(C) A statement of the income and expense anticipated under the application filed;

(D) A statement of financial condition summarizing assets, liabilities, and net worth;

(E) A proposed notice for newspaper publication fully disclosing the substance of theapplication. The notice shall prominently state that any person, firm, corporation, or associationmay file, pursuant to section 4909.19 of the Revised Code, an objection to such increase whichmay allege that such application contains proposals that are unjust and discriminatory orunreasonable. The notice shall further include the average percentage increase in rate that arepresentative industrial, commercial, and residential customer will bear should the increase begranted in full;

(F) Such other information as the commission may require in its discretion.

4928.06 Commission to ensure competitive retail electric service.

(A) Beginning on the starting date of competitive retail electric service, the publicutilities commission shall ensure that the policy specified in section 4928.02 of the Revised Codeis effectuated. To the extent necessary, the commission shall adopt rules to carry out this chapter.Initial rules necessary for the commencement of the competitive retail electric service under thischapter shall be adopted within one hundred eighty days after the effective date of this section.Except as otherwise provided in this chapter, the proceedings and orders of the commissionunder the chapter shall be subject to and governed by Chapter 4903. of the Revised Code.

(B) If the commission determines, on or after the starting date of competitive retailelectric service, that there is a decline or loss of effective competition with respect to acompetitive retail electric service of an electric utility, which service was declared competitiveby commission order issued pursuant to division (A) of section 4928.04 of the Revised Code, thecommission shall ensure that that service is provided at compensatory, fair, andnondiscriminatory prices and terms and conditions.

(C) In addition to its authority under section 4928.04 of the Revised Code and divisions(A) and (B) of this section, the commission, on an ongoing basis, shall monitor and evaluate theprovision of retail electric service in this state for the purpose of discerning any noncompetitiveretail electric service that should be available on a competitive basis on or after the starting dateof competitive retail electric service pursuant to a declaration in the Revised Code, and for thepurpose of discerning any competitive retail electric service that is no longer subject to effectivecompetition on or after that date. Upon such evaluation, the commission periodically shall reportits findings and any recommendations for legislation to the standing committees of both housesof the general assembly that have primary jurisdiction regarding public utility legislation. Until2008, the commission and the consumer's counsel also shall provide biennial reports to thosestanding committees, regarding the effectiveness of competition in the supply of competitiveretail electric services in this state. In addition, until the end of all market development periods asdetermined by the commission under section 4928.40 of the Revised Code, those standingcommittees shall meet at least biennially to consider the effect on this state of electric service

6

restructuring and to receive reports from the commission, consumers' counsel, and director of

development.

(D) In determining, for purposes of division (B) or (C) of this section, whether there iseffective competition in the provision of a retail electric service or reasonably availablealternatives for that service, the commission shall consider factors including, but not limited to,

all of the following:

(1) The number and size of alternative providers of that service;

(2) The extent to which the service is available from alternative suppliers in the relevant

market;

(3) The ability of alternative suppliers to make functionally equivalent or substituteservices readily available at competitive prices, terms, and conditions;

(4) Other indicators of market power, which may include market share, growth in marketshare, ease of entry, and the affiliation of suppliers of services.

The burden of proof shall be on any entity requesting, under division (B) or (C) of thissection, a determination by the commission of the existence of or a lack of effective competitionor reasonably available alternatives.

(E)(1) Beginning on the starting date of competitive retail electric service, thecommission has authority under Chapters 4901. to 4909. of the Revised Code, and shall exercisethat authority, to resolve abuses of market power by any electric utility that interfere witheffective competition in the provision of retail electric service.

(2) In addition to the commission's authority under division (E)(1) of this section, thecommission, beginning the first year after the market development period of a particular electricutility and after reasonable notice and opportunity for hearing, may take such measures within atransmission constrained area in the utility's certified territory as are necessary to ensure thatretail electric generation service is provided at reasonable rates within that area. The commissionmay exercise this authority only upon findings that an electric utility is or has engaged in theabuse of market power and that that abuse is not adequately mitigated by rules and practices ofany independent transmission entity controlling the transmission facilities. Any such measureshall be taken only to the extent necessary to protect customers in the area from the particularabuse of market power and to the extent the commission's authority is not preempted by federallaw. The measure shall remain the commission, after reasonable notice and opportunity forhearing, determines that the particular abuse of market power has been mitigated.

(F) An electric utility, electric services company, electric cooperative, or governmentalaggregator subject to certification under section 4928.08 of the Revised Code shall provide thecommission with such information, regarding a competitive retail electric service for which it issubject to certification, as the commission considers necessary to carry out this chapter. Anelectric utility shall provide the commission with such information as the commission considers

7

necessary to carry out divisions (B) to (E) of this section. The commission shall take suchmeasures as it considers necessary to protect the confidentiality of any such information.

The commission shall require each electric utility to file with the commission on and afterthe starting date of competitive retail electric service an annual report of its intrastate grossreceipts and sales of kilowatt hours of electricity, and shall require each electric servicescompany, electric cooperative, and governmental aggregator subject to certification to file anannual report on and after that starting date of such receipts and sales from the provision of thoseretail electric services for which it is subject to certification. For the purpose of the reports, salesof kilowatt hours of electricity are deemed to occur at the meter of the retail customer.

4901-1-01 Definitions.

As used in this chapter:

(A) "Business day" means any day which is not a Saturday, Sunday, or legal holiday.

(B) "Commission" means the public utilities commission.

(C) "Electric utility" means an electric light company as defined in section 4905.03 of theRevised Code and an electric services company as defined in section 4928.01 of the RevisedCode.

(D) "Emergency rate proceeding" means any case involving an application for anemergency rate adjustment filed under section 4909.16 of the Revised Code.

(E) "Facsimile transmission" means the transmission of a source document by a facsimilemachine or other electronic device that encodes a document into signals and transmits andreconstructs the signals to print a duplicate of the source document at the commission'sdocketing division or a party's location.

(F) "Gas utility" means a gas or natural gas company as defined in section 4905.03 of theRevised Code.

(G) "General rate proceeding" means any case involving: an application for an increase inrates filed under section 4909.18 of the Revised Code, a complaint or petition filed under section4909.34 or 4909.35 of the Revised Code, or an investigation into the reasonableness of a publicutility's rates initiated by the commission under section 4905.26 of the Revised Code.

(H) "Long-term forecast report" has the meaning set forth in section 4935.04 of theRevised Code.

(I) "Motor carrier proceeding" means any proceeding involving the regulation of one ormore motor transportation companies or private motor carriers.

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(J) "Motor transportation company" has the meaning set forth in section 4921.02 of theRevised Code.

(K) "Person" means a person, firm, corporation, unincorporated association, governmentagency, the United States, the state of Ohio or one of its political subdivisions, or any otherlegally cognizable entity including any entity defined as a "person" in division (A) of section4906.01 of the Revised Code.

(L) "Presiding hearing officer" means the commissioner or attorney examiner presiding ata public hearing or prehearing conference.

(M) "Private motor carrier" has the meaning set forth in section 4923.02 of the RevisedCode.

(N) "Public utility" has the meaning set forth in section 4905.02 of the Revised Code.

(0) "Purchased gas adjustment proceeding" means any proceeding heard under section4905.302 of the Revised Code and rule 4901:1-14-08 of the Administrative Code.

(P) "Railroad" has the meaning set forth in section 4907.02 of the Revised Code.

(Q) "Reporting person" means any person required to file a long-term forecast reportunder section 4935.04 of the Revised Code.

4901-1-10 Parties.

(A) The parties to a commission proceeding shall include:

(1) Any person who files an application, petition, long-term forecast report, or complaint.

(2) Any public utility, railroad, or private motor carrier against whom a complaint isfiled.

(3) Any public utility, railroad, or private motor carrier whose rates, charges, practices,policies, or actions are designated as the subject of a commission investigation.

(4) Any person granted leave to intervene under rule 4901-1-11 of the AdministrativeCode.

(5) Any municipal corporation which has enacted an ordinance which is subsequentlychallenged in a complaint filed under section 4909.34 of the Revised Code.

(6) Any person cited for failure to maintain liability insurance as required by section4921.11 or 4923.08 of the Revised Code.

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(B) If any public utility, railroad, or private motor carrier referred to in paragraph (A)(2)or (A)(3) of this rule is operated by a receiver or trustee, the receiver or trustee shall also bemade a party.

(C) Except for purposes of rules 4901-1-02, 4901-1-03, 4901-1-04, 4901-1-05, 4901-1-06, 4901-1-07, 4901-1-12, 4901-1-13, 4901-1-15, 4901-1-18, 4901-1-26, 4901-1-30, 4901-1-31,4901-1-32, 4901-1-33, and 4901-1-34 of the Administrative Code, the commission staff shall notbe considered a party to any proceeding.

4901-1-16 General provisions and scope of discovery

(A) The purpose of rules 4901-1-16 to 4901-1-24 of the Administrative Code is toencourage the prompt and expeditious use of prehearing discovery in order to facilitate thoroughand adequate preparation for participation in commission proceedings. These rules are alsointended to minimize commission intervention in the discovery process.

(B) Except as otherwise provided in paragraphs (G) and (I) of this rule, any party to acommission proceeding may obtain discovery of any matter, not privileged, which is relevant tothe subject matter of the proceeding. It is not a ground for objection that the information soughtwould be inadmissible at the hearing, if the information sought appears reasonably calculated tolead to the discovery of admissible evidence. Discovery may be obtained through interrogatories,requests for the production of documents and things or permission to enter upon land or otherproperty, depositions, and requests for admission. The frequency of using these discoverymethods is not limited unless the commission orders otherwise under rule 4901-1-24 of theAdministrative Code.

(C) Any party may, through interrogatories, require any other party to identify eachexpert witness expected to testify at the hearing and to state the subject matter on wbich theexpert is expected to testify. Thereafter, any party may discover from the expert or other partyfacts or data known or opinions held by the expert which are relevant to the stated subject matter.A party who has retained or specially employed an expert may, with the approval of thecommission, require the party conducting discovery to pay the expert a reasonable fee for thetime spent responding to discovery requests.

(D) Discovery responses which are complete when made need not be supplemented withsubsequently acquired information except in the following situations:

(1) The response identified each expert witness expected to testify at the hearing or statedthe subject matter upon which each expert was expected to testify.

(2) The responding party later learned that the response was incorrect or otherwisematerially deficient.

(3) The response indicated that the information sought was unknown or nonexistent andsuch information subsequently became known or existent.

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(4) An order of the commission or agreement of the parties provides for thesupplementation of responses.

(5) Requests for the supplementation of responses are submitted prior to thecommencement of the hearing.

(6) The response addressed the identity and location of persons having knowledge ofdiscoverable matters.

(E) The supplementation of responses required under paragraphs (D)(1) to (D)(3) an(D)(6) of this rule shall be provided within five business days of discovery of the newinformation.

(F) Nothing in rules 4901-1-16 to 4901-1-24 of the Administrative Code precludes partiesfrom conducting informal discovery by mutually agreeable methods or by stipulation.

(G) A discovery request under rules 4901-1-19 to 4901-1-22 of the Administrative Codemay not seek information from any party which is available in prefiled testimony, prehearingdata submissions, or other documents which that party has filed with the commission in thepending proceeding. Before serving any discovery request, a party must first make a reasonableeffort to determine whether the infonnation sought is available from such sources.

(H) For purposes of rules 4901-1-16 to 4901-1-24 of the Administrative Code, the term"party" includes any person who has filed a motion to intervene which is pending at the time adiscovery request or motion is to be served or filed.

(I) Rules 4901-1-16 to 4901-1-24 of the Administrative Code do not apply to thecommission staff.

4901-1-21 Depositions.

(A) Any party to a pending commission proceeding may take the testimony of any otherparty or person, other than a member of the commission staff, by deposition upon oralexamination with respect to any matter within the scope of discovery set forth in rule 4901-1-16of the Administrative Code. The attendance of witnesses and production of documents may becompelled by subpoena as provided in rule 4901-1-25 of the Administrative Code.

(B) Any party desiring to take the deposition of any person upon oral examination shallgive reasonable notice in writing to the deponent, to all parties, and to the commission. Thenotice shall state the time and place for taking the deposition and the name and address of eachperson to be examined, if known, or if the name is not known, a general description sufficient foridentification. If a subpoena duces tecum is to be served upon the person to be examined, adesignation of the materials to be produced thereunder shall be attached to or included in thenotice. Notice to the commission is made by filing a copy of the notice of deposition provided tothe person to be deposed or a copy of the subpoena in the case file.

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(C) If any party shows that he or she was unable with the exercise of diligence to obtaincounsel to represent him or her at the taking of a deposition, the deposition may not be usedagainst such party.

(D) The commission, the legal director, the deputy legal director, or an attorney examinermay, upon motion, order that a deposition be recorded by other than stenographic means, inwhich case the order shall designate the manner of recording the deposition, and may includeprovisions to assure that the recorded testimony will be accurate and trustworthy. If such anorder is made, any party may arrange to have a stenographic transcription made at his or her ownexpense.

(E) The notice to a party deponent may be accompanied by a request, made incompliance with rule 4901-1-20 of the Administrative Code, for the production of documents ortangible things at the taking of the deposition.

(F) A party may in the notice and in a subpoena name a corporation, partnership,association, government agency, or municipal corporation and designate with reasonableparticularity the matters on which examination is requested. The organization so named shallchoose one or more of its officers, agents, employees, or other persons duly authorized to testifyon its behalf, and shall set forth, for each person designated, the matters on which he or she willtestify. The persons so designated shall testify as to matters known or reasonably available to theorganization.

(G) Depositions may be taken before any person authorized to administer oaths under thelaws of the jurisdiction in which the deposition is taken, or before any person appointed by thecommission. Unless all of the parties expressly agree otherwise, no deposition shall be takenbefore any person who is a relative, employee, or attorney of any party, or a relative or employeeof such attorney.

(H) The person before whom the deposition is to be taken shall put the witness on oath oraffirmation, and shall personally or by someone acting under his direction and in his presence,record the testimony of the witness. Examination and cross-examination may proceed aspermitted in commission hearings. The testimony shall be recorded stenographically or by anyother means ordered under paragraph (D) of this rule. If requested by any of the parties, thetestimony shall be transcribed at the expense of the party making the request.

(1) All objections made at the time of the examination to the qualifications of the officertaking the deposition, or to the manner of taking it, or to the evidence presented, or to theconduct of any party, and any other objection to the proceedings shall be noted by the officerupon the deposition. Evidence objected to shall be taken subject to the objections. In lieu ofparticipating in the oral examination, parties may serve written questions in a sealed envelopeupon the party taking the deposition, who shall transmit them to the officer, who in turn shallpropound them to the witness and record the answers verbatim.

(J) At any time during the taking of a deposition, the commission, the legal director, thedeputy legal director, or the attorney examiner may, upon motion of any party or the deponent

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and upon a showing that the examination is being conducted in bad faith or in such a manner asto unreasonably annoy, embarrass, or oppress the deponent or party, order the person conductingthe examination to cease taking the deposition, or may limit the scope and manner of taking thedeposition as provided in rule 4901-1-24 of the Administrative Code. Upon demand of theobjecting party or deponent, the taking of the deposition shall be suspended for the timenecessary to make a motion for such an order.

(K) If and when the testimony is fully transcribed, the deposition shall be submitted to thewitness for examination and shall be read to or by him or her, unless such examination andreading are expressly waived by the witness and the parties. Any changes in form or substancewhich the witness desires to make shall be entered upon the deposition by the officer with astatement of the reasons given by the witness for making the changes. The deposition shall thenbe signed by the witness unless the signing is expressly waived by the parties or the witness is illor cannot be found or refuses to sign. If the deposition is not signed by the witness within tendays after its submission to him or her, the officer shall sign it and state on the record the fact ofthe waiver or the illness or absence of the witness, or the fact of the refusal to sign together withthe reasons, if any, given for such refusal. The deposition may then be used as fully as thoughsigned, unless the commission, the legal director, the deputy legal director, or the attorneyexaminer, upon motion to suppress, holds that the reasons given for the refusal to sign requirerejection of the deposition in whole or in part.

(L) The officer shall certify on the deposition that the witness was duly sworn by him orher and that the deposition is a true record of the testimony given by the witness. Upon paymentof reasonable charges therefor, the officer shall furnish a copy of the deposition to any party or tothe deponent.

(M) Documents and things produced for inspection during the examination of the witnessshall, upon request of any party, be marked for identification and annexed to the deposition,except that:

(1) The person producing the materials may substitute copies to be marked foridentification, if all parties are afforded a fair opportunity to verify the copies by comparisonwith the originals,

(2) If the person producing the materials requests their return, the officer shall mark them,give each party an opportunity to inspect and copy them, and return them to the personproducing them, and the materials may then be used in the same manner as if annexed to thedeposition.

(N) Depositions may be used in commission hearings to the same extent permitted incivil actions in courts of record. Unless otherwise ordered for good cause shown, any depositionsto be used as evidence must be filed with the commission at least three days prior to thecommencement of the hearing.

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4901-1-30 Stipulations.

(A) Any two or more parties may enter into a written or oral stipulation concerning issues

of fact or the authenticity of documents.

(B) A written stipulation must be signed by all of the parties joining therein, and must befiled with the commission and served upon all parties to the proceeding.

(C) An oral stipulation may be made only during a public hearing or record prehearingconference, and all parties joining in such a stipulation must acknowledge their agreementthereto on the record. The commission or the presiding hearing officer may require that an oralstipulation be reduced to writing and filed and served in accordance with paragraph (B) of this

rule.

(D) No stipulation shall be considered binding upon the commission.

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BEFORE

THE PUBLIC U'ITI.ITIFS COMMLSSION OF OHIO

Tn the Matter of the Application of ColumbiaGas of Ohio, Inc., for Approval of Tariffs toRecover, Through an Automatic AdjustmentClause, Costs Associated with theEstablishment of an ]nfrastructureReplacement Program and for Approval ofCertain Accovnting Treatment.

)))

Case No. 07478{''A-UNC

)))

In the Matter of the Application of Colun2biaGas of Ohio, Inc., for Authority to Modify itsAccounting Procedures to Provide for theDeferral of Expenses Related to theComuvssion's Investigation of theInstallation, Use, and Performance of NaturalGas Service Risers.

)))) Case No. 07-237-CA-AAM

)))

Thie is to certi*_y that the 3maqee appearing are anaccuxate and complete reproduction o£ a case filedccimwut dellvered in the regular courae o; b iêas.

Techniciau_6^ n+ita Psoceasaa '_

3'i

15

07-478-GA-UNC - 07-237-GA-AAM -2-

APPEARANCES 3OPBVION 41. BACKGROUND AND HISTORY OF THE PROCEBDINGS 4II. DISCUSSION 6

A. Applications and Prior Substantive Orders 61. Application in Deferral Caae 62. Application in Riser Case 73. Orders Issued Prior to Hearing 8

B. Summary of the Stipulation and Amended Stipulation 9C. Commission Autiwrity 13

1. Impairment of Contracts 14(a) Analytical Methodology 15(b) Application of Test 16

2. Taking of property 20D. Disputed lssues in the Amended Stipulation 22

1. Issues Relating to Riser Replacement 22(a) Reimbursement for Customers' Repairs 22(b) Customer Notification 24(c) Three-Year Time Frame 24(d) Materials to beUsed 25

2. Transfer of Responsibility for Service Lines 2'.(a) Arguments Advocating ResponsibiGty Transfer 25(b) Arguments Opposing Responsibility Transfer 27(c) Commission Resolution 29

E. Evaluation of the Stipulation 301. Serious Bargaining 312. Benefit to Customers and the Public Interest 323. Violation of Policies and Practices 35

F. Implementation 35FINDINGS OF FACT AND CONCLUSIONS OF LAW 36

16

07-478&GA-UNC - 07-237-CA-AAM

OPINION AND ORDEA

-3-

The Cnmmission, coming now to consider the testimony and other evidencepresented in these prooeeding, hereby issues its opinion and order.

APPEARANCES

Mark R, ICempic, Assistant General Counsel; Kenneth W. Christman, AssociateGeneral Counsel; Stephen B. Seiple, Lead Counsel; and Daniel A. Creekmur, Trial Attorney,200 Civic Center Drive, Columbus, Ohio 43216, on behalf of Columbia Gas of Ohio, Inc.

Vorys, Sater, Seymour and Pease LLP, by M. lioward Petricoff, Stephen M. Howard,and Michael J. Settineri, 52 East Gay Street, Columbus, Ohio 43215, on behalf of UtilityService Partners, Inc.

Carlile patchen & Murphy, LLP, by Carl A. Aveni, IL 366 East Broad Stxeet,Columbus, Ohio 43215, on behalf of ABC Gas Repair, lnc.

Chester Willcox & Saxbe LLP, by John W. Bentine and Mark S. Xurick, 65 East StateStreet, Suite 1000, Columbus, Oldo 43215, on behelf of Interstate Gas Supply, Inc.

McNees, Wallace & Nurick, by Samuel C. Randazzo, Daruel J. Neilsen, and joseph M.Clark, Fifth Third Center, Suite 1700, 21 East State Street, Columbus, Ohio 43215, on behalfof Industrial Energy Users-0hio.

David C. Rinebolt, 231 West Lima Street, Findlay, Ohio 45840, on behalf of OhioPartners for Affordable Energy.

Japine L. Migden-Ostrander, Ohio Consumers' Counsel, by Joseph P, Serio, AssistantConsumers' Counsel, Office of the Ohio Consumers' Counsel, 10 West Broad Street, Suite1800, Columbus, Ohio 43215, on behalf of residential utility customers of Colunibia Gas ofOhio, lnc.

Marc Dana, Attorney General of the State of Ohio, Duane W. Luckey, Section Chief,Anne L Hammerstein and Stephen B. Rellly, Assistant Attorneys General, 1S0 East BroadStreet, Columbus, Ohio 43215, on behalf of the staff of the Commission

17

07-478-GA-UNC - 07-237-GA-AAM -4-

OPINION

1. SACKGROUND AND HISTORY OF TI3B PROCEEDINGS

On April 13, 2005, the Commission initiated an investigation into the types of gasservice risers being installed in Ohio, the conditions of installation, and their overallperformance. In the Matter of the Intrestigation of the Installation, Use and lkrfontvb+ce ofNatural Gas Service Risers Thrrnughout the State of Ohio and Related MatterS, Case No. 05-463-GA-COI (COT case). As a part of the COI case, the Commission ordered the four largestlocal distribution companies (LDCs), including Columbia Gas of Ohio, Inc. (Columbia), toidentify a sample number of installed risers and to remove a portion of those risus forsubmission to a testing laboratory. Staff of the Commisaion has fded a report in the COIcase, finding that certain risers are more prone to failure than others. Staff submittedseveral recommendations to the Com*nission, recently considered by the Commission inthat docket.

On January 2, 2007, the chairman of the Commission issued a letter in the COI case,requesting that LIJCs consider the prudence of the current regulatory framework thatleaves responsibility for the customer-owned service lines with the homeowner and, inaddition, discuss the possibility that utilities might take over that responsib9lity.

On March 2, 2007, Columbia fded an application in case number 07 237-GA AAM,captioned above (deferral case). The application asks for the Comm3ssion's permission forColumbia to defer the expenses it has incurred in connection with the Commissianinvestigation in the COI case.

Motions to intervene in the deferral wse were filed by the Ohio Consumers' Counsel(OCC) and Ohio Partners for Affordable Energy (OPAE), on March 21 and Apri13, 2007,respectively. Columbia opposed both motions, filing memoranda contra on Apxil 9 and 23,2007. OCC replied on April 19, 2007.

On Apri125, 2007, Columbia filed an application in Case Number 07-478-GA-UNC,captioned above (riser caee). The application covers both the recovery of certain riser-related costs and the assumption of responsibility for service lines and risers. Columbiaseeks recovery of all associated costs through an automatic adjustment mechvdsm,pursuant to Section 4929.11, Revised Code. That section allows the Commission to approvea mechanism that provides for charges to fluctuate automatically in accordance withchanges in a specified cost.

Motions to intervene in the riser case were filed on Apri130, June 6, June 8, June 26,July 2, and August 7, 2007, by OPAE; OCC; Utility Service Partners, Inc. (USP); InterstateGas Supply, Inc. (IGS); Industrial Energy Users-Ohio (IEU); and ABC Gas Repair, Inc.

18

071178-GA-UNC - 07-237-GA-AAM

(ABC), respectively. Columbia opposed the intervention by OPAE, filing a memorandumcontra on May 11, 2007. OPAE replied on May 16,2007.

Correspondence relating to the riser case was received from several members of thepublic, between July 9 and March 20, 2008.

On July 11, 20o7, the Commission bifurcated the riser case and considered

Columbia's proposal to initiate the proposed infrastnuture replacement program (IRP).Applications for rehearing of the July entry were filed by USP and IGS, along with a motionby USP for clarification. The Commission issued an entry on rehearing on September 12,

2007.

A hearing on the aspects of the application that were not previously determined wasscheduled to begin on Monday, October 29, 2007. Testimony was filed by Columbia onOetober 15, 2007; by OCC, USP, and ABC on October 23, 2007; and by staff on October 24,2007. On October 26, 2007, the last business day before the hearing was acheduled to begin,a stipulation (original stipulation) was filed in the docket, reflecting the agreement ofColumbia and staff. The hearing proceeded, as scheduled, on October 29, 30, and 31,2007,with testimony by Michael Aamsey, Larry Martin, and Thomas Brown, on behalf ofColumbia; Gary Hebbler and Bruce Hayes, behalf of OCC; Philip Riley, jr., Tunothy Phipps,and Carter Funk, on behalf of USP; Timothy Morbitzer, on behalf of ABC; and DavidHodgden and Edward Steele, on behalf of staff of the Commission.

The hearing was seheduled to continue on December 3,2007. Rebuttal testimony andtestimony in support of the stipulation were flled by Columbia and staff on November 19,2007. Surrebuttal testimony and testimpny in opposition to the stipulation were filed byTJSP, on November 28, 2007. The hearing proceeded, as schednled, on December 3, 2007,with the testimony of Michael Bamsey, Larry Martin, and Thomas Brown, on behalf ofColumbia; Carter Funk, Timothy Phipps, and Philip Riley, Jr., on behaff of USPt and DavidHodgden and J4ll Henry, on behalf of staff.

At the conclusion of the hearing, the attorney examiner scheduled initial briefs to befiled on Monday, December 31, 2007, and reply briefs to be filed on January 14, 2008. OnDecember 28, 2007, one business day before the ini£ial briefs were due, an amendedstipulation (amended stipulation) was fRed in the docket, reflecting the agreement ofColumbia, staff, OCC, and OPAE. The briefs of Columbia and staff, filed on December 31,2007, referenced the amended stipulation. Initial briefs were also filed on December 31,2007, by USP, AI3C, and IGS.

On January 4, 2008, USP and ABC jointly moved to strIke the amended stipulation.On January 8, 2008, staff moved for a hearing on the amended stipulation. Staff's motionwas supported, subsequently, by Columbia and OCC. On January 10, 2008, the examiner

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reopened the record of the proceedings and scheduled a continuation of the hearing forFebruary 5, 2008. The deadline for filing reply briefs was also continued.

Testimony was filed, on January 28,2008, by Columbia, staff, and USP. On February4,2008, a joint motion was filed by Columbia, OCC, staff, OPAE, USP, IGS, and ABC. Themotion requested thatthe final day of hearing be rntuelled, as the parties had all executedan agreement setting forth certain facts that could be received into evidence, which factsprimarlly relate to the course of settlement negotiations that led up to the stipuiation andamended stipulation. Together with that motion, the parties filed their agreement(agreement as to facts). The examirter cancelied the hearing and ordered that reply briefs befiled no later than February 19, 2008.

On February 15, 2008; OCC filed comments, stating that it had reviewed Columbia'sriser material plan, as required under the amended stipulation, and had no objection 4o it.tOn that saine day, USP filed an objection to Columbia's failure to provide it with eopies ofits riser matertal plan, as required by the amended stipulation. On February 19, 2008, USPnoted that it had received Columbia's plan and, having no objection to it now withdresv itspreviously filed objectton.

On February 19, 2A08, reply briefs were filed by Columbia, OCC, skaff, OPAIs, USP,ABC, and IGS.

On February 28, 2008, Columbia filed an application to revise its rider rate based oncosts accumulated through Uecember 31, 2007, together with supporting testimony of LarryMartin. On March 3,2008, USP commented that the record is dosed and that Columbia hadmade no motion to reopen the record.

U. DISCUSSION

A. Av lications and Prior Substantive Orders

1. Appllcation in Deferral Case

Columbia, in its application for authority to defer costs for subsequent collection, listsseveral categories of costs that it has incurred:

(a) Payments to the Commission for statistical analysis performed byconsultants used to estimate Coiumbia's riser population by type.

1 The provision of a riser material plan is required by the terms of the amended stipulation imderconsideratlon in this opinion and order.

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(b)

(c)

Trafning development and training costs related to riser testing andperformance of the survey.

Labor and expenses incurred in the collection of riser samples for theCommission's investigation.

(d) Commission assessments for the testing of risers and preparation ofthe staff report.

(e)

(f)

1 (g)

Contract and company labor costs incurred to oDnduct the survey.

Project management costs, including labor and expenses for surveymanagement; data management; report generation and invoice processfor contracted services.

Incremental expenses incurred at Columbia's contact center as a resultof increased call volumes as customers inquired about the riser surveyand related riser matters.

Columbia asks, in the deferral case application, for authority to revise its accountingprooadures to allow retroactive deferral of the costs already incurred and deferral of thecosts to be incurred in these same categories, all of which, it says, stem from its oompliancewith Commission directives in the COI case. Recovery of those deferred amounts would beaddressed, Columbia proposes, either in a separate proceeding or in its next base rate case.However, the deferral case application does ask for approval of the recovery of carcyingcharges on the deferred balance.

2. Aonlication in Riser Case

The application in the riser case asks, first, for approval, under Section 4929.11,Revised Code, of tariffs designed to recover, through an automatic adjustment mechanism,costs assoclated with the inventory of risers that was ordered in the COI case, thereplacement of customer-owned risers that are identified as prone to failure, and thereplacement of customer-owned service lines that are constructed or irnstalled by Columbiaas risers or service lines are replaced. The application also asks for accounting authority topermit capitalization of Columbia's inveatment in customer-owned serviee lines and risersthrough assumption of finantial responsibility for these facilities and to pemiit deferral ofrelated costs for subsequent recovery through the automatic adjustment mechanism.

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3. Orders Issued Prior to Hearin¢

On July 11, 2007, the Conmission determined that, "in light of the attendant publicsafety concerns, it is important not to delay +nneomwarily actions designed to promotepublic safety." Therefore, the Commission bifurcated the riser case and, at that time,con,aidered Columbia's proposal to faftiate the proposed IRP. (Entry at finding 14.)2 On thebasis of our consideration at that time, we approved the following aspects of the proposal:

(a) Columbia's assumption of responsibility for future repair andreplacement of service lines (up to the meter) and risers, where thoseservice lines or risers are actually lealdng and those leaks aredetermined by Columbia to be hazardous.

(b) Columbia's replacement, in an orderly and systematic method, over aperiod of approximately three years, of all risers that are prone tofailure, as so identified in the staff report fIled on November 24, 2006,in the COl case.

(c) Columbia's reimbursement, witbin a reasonable period aftersubnussion of appropriate documentation, of those customers whohave replaced risers or service lines since November 24, 2006, foractual, reasonable costs incurred, with the mwdmum reimbursementfor the replacement of a riser being $500 and with the maximumreimbursement for the replacement of a customer service line being$1,000.

(d) Columbia's assumption of appropriate rights and responsibilitiesrelated to any new risers and service lines as those risers or servicelines are replaced or as reimbursement for replacements are paid.

(e) Accounting authority for the deferral of costs related to Columbia'sinventory of risers and related to the approved changes inresponsibility, as well as the replacement of risers prone to failure.

The Commission also specified, in that entry, certain aspects of Columbia's proposalthat we were not then deciding. Those aspects included the justness or reasonableness of,or our possible approval of, tariffs to recover, through an automatic adjustment mechanismor otherwise, costs associated with the Commission-ordered riser inventory andidentification process or with Coiumbia's replacement or repair of service lines or risers.Therefore, we made no ultimate decision to grant or deny Columbia's application under

2 All references to the reco:d relate to the retord in the riser case.

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Section 4929.11, Revised Code. We also made no decision relating to the request foraccounting authority to permit capitalization of Columbia's investment in servfce lines and

risers, the responsibility for the need to repair risers, the process for the remainder of the

proceeding, or any other issues having been raised by the parties. Finally, we stated that wemade no determination with regard to Columbia's offer to assume responsibility foradditional risers and service lines beyomd those that Columbia was specifically authorizedby that entry to repair or replace based on the need to address immediate safety issues.

(Entry, July 11, 2007, at finding23)

Applications for rehearing of the July entry were filed by USP and IGS, along with amotion by USP for clarification. The Commission's resultant entry on rehearing grantedrehearing to limit the approval such that Columbia was, at that time, authorized only toreplace risers that are prone to failure and associated service lines where an associatedservice line is detemSned by Columbia to have a hazardous leak In addition, theCommission granted rehearirig to require Columbia to reimburse customers for repairs orraplacement effected after the date of the July entry, thus deleting the terarination date onreimbursement. (Entry on rehearing, September 12, 2007, at findings 13 and 20.)

B. S>> m*nary of the Stipulation and Amended Stipulation

According to staff's reply brief, the amended stipulation differs from the originalstipulation in only a few, identifiable ways (staff reply at 5). As the amended stipulation isthe most recent agreement, we will review it in full. However, as most of the testimony onthe record pertains to the original stipulation, we will also identify all differences betweenthe two docoments.

The amended stipulation is signed by staff and Columbia, as was the originalstipulation, as well as OCC and OPAE, OCC and OPAE were not parties to the originalstipulation. The amended stipulation purports to resolve all issues in both the deferral caseand the riser case. The following is a summary of the major aspects of the amendedstipulation:

(1) Columbia should be permitted to capitalize its investment in thereplacement of prone-to-failure risers and in the repair andreplacement of hazardous customer service lines. Columbia shouldalso be permitted to assume responsibility for the future maintenanee,repair, and replacement of hazardous service lines and for thereplacement, over a three-year period, of prone-to-faflure risers.

(2) Columbia should be permitted to capitalize its investment in risers andservice lines as they are replaced (including the reimbursement ofcustomers for their replacement of such lines or risers, under the terne

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of the prior entry in the rLser case and either stipulation). Suchcapitalization should include the related depreciation, incrementalproperty taxes, and the post in-service carrying charges (PISCC) andshould be recovered thraugh an IRP rider.

(3) Columbia should reimburse customers who have contracted with adepartment-of-transportation operatoz`qualified plumber (DOT OQplumber) for replacement of a prone-to-failure riser or hazardouscustomer service lines, where the repairs are completed betweenNovember 24, 2006, and February 28, 2008, and where the request forreimbursement is made by September 1, 2008. Such reimbursementshould be made within 60 days of the request. The original stipulationprovides for payment by check or credit to a past due arrearage. Theamended stipulation requiues payment by check. Uponreimburaement, the line or riser will become the asset of Columbia.Columbia will not process any reimbursement requests received afterSeptember 1, 2008.

(4) The orfginal stipulation provides that, by November 30, 2007,Columbia would Ble a pre-filing notice containing estimated IRP riderschedules to become effective in May 2008, based on actual andprojected data through December 31, 2007. Both the origlnalstipulation and the amended sEipulation provide that, by February 28,2008, Columbia will file an application (updated, in the case of theoriginal stipulation), supporting the establishment of the level of theIRP rider based on actual costs through December 31, 2007. The IRPrider will allow the recovery of testing and survey costs deferred in thedeferral case, IRP customer notification and education costs, deferredPISCC costs, deferred depreciation, deferred property taxes, andrelated gross receipts taxes.

(5) By November 30, 2008, and on the same schedule in suaceeding years,Columbia should file a pre-filing notice containing estimated ISPschedules for the II2P r'tder to become effective the following May. Anupdated application should be filed by each following February 28,reflecting actual costs incurred through the end of the preceding yearand adjusted to reflect the associated gross receipts tax obligation.

(6) Columbia will provide to staff sufficient records to enable staff toanalyze and audit the filed schedules. Each IRP rider rate shouldbecome effective by May 1 following the February filing uniessdelayed by the Commission, found to be unreasonable or unjust by

I

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I

(7)

(8)

staff, or objected to (and not resolved to the satisfaction of theCommission) by a party to the riser case. Each rate following theinitial level wiR also true up the revennes collected with estimatedrevenues.

Riser testing and survey costs to be collected shaIl be adjusted toexclude work performed in the field that, while not directlyrecommended by the staff report in the COI case, were economical andpracticable to perform while crews were deployed. These oosts consistof activities that would have been conducted during 2007 in theabsence of the riser survey and that are required under gas pipeline

safety (GPS) regulations.

PI$CC shall be computed, in the annual IRP rider filings, based on thelife of the asset upon which it was accrued and shall bedeferred on allinvestment between the dates the asset was placed into seivice (orreimbursement of a customer was made) and the date recovery of theinvestment cotnmences. The PISCC rate shall be determined annuallybased on Columbia's weighted cost of debt, exrlusive of the equitycomponenf, and with no compounding. PISCC is to be verified bystaff.

(9) Deferred property taxes are to be calculated on all eligible assets atColumbia's estimated composite property tax rate.

(10) Deferred depreciation expense shall be calculated on all eligfble assetsat the applicable, Commission-approved rates,

(11) Columbia will defer customer notification and education expenses andwill provide staff (in the original stipulation, this was to be provided tothe Commission) with suffio.ent reaords for analysis. Staff retains theright to propose that lItP costs to be recovered be amortized forrecovery over a period longer than one year.

(12) All deferred expenses for which Columbia seeks recovery will beidentified in a separate subaccount and will not be subject to anycarrying charges. Annual filings will provide detailed explanations ofexpenses.

(13) Columbia's IItP revenue requirement will be recovered fromcustomers through a monthiy fixed charge to aEl customers under rateschedules SGS, SGTS, FRSG15, MGS, MG1S, GS, G7S, and PRGTS.

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The amount of the charge will be the quotient of total program costs tobe recavered divided by the total actual bills rendered to customersduring the test year. 'f'he initial rate is to be .set at zero. Costsrecovered tluuough the SRP rider shaIl not be recovered throughdistribution base rates.

(14) Annual IItP filings shall include a true-up of revenues collecbed withrevenuo estimated at the completion of each twelve-month recoveryperiod, with any variances to be recognized in a subsequent II2P filing.

(15) IRP fdings that request recovery of costs should include auditedaccounting and billing records in sufficient detail to enable staff andOCC (OCC was not included in the original stipulation) to analyzeColumbia's fding.

(16) Columbia will work with staff and OCC (OCC was not included in theoriginal stipulation) regarding customer notification and education,including changes in responsibility, mmplairtt handling, andreimbursement, and wlll provide drafts of materials prior to printingand distzibution.

(17) When Columbia files a distribution rate case, the rate base wlll includeits cumulative investment in net plant-in-service, inoluding prone4o-failure risers and hazazdous service 13nes repaired or replaced byColumbia, and related deferrals, through the date certain in theapplicable distribution rate case. Upon authorization by theCommission, distn'bution base rates will provide for recovery of theamortization of defetred PI5CC, deferred property taxes, and deferreddepreciation expense, as well as related gross receipts taxes, ihroughthe date certain. The IRp rider will then be adjusted to remove fromthe rider the impact of those items through the date certain.

(18) At the time it files its next base rate case, Columbia may seek approvalof a revised IRP formula that provides for a return on and of itsinvestment in service lines and risers, and related expenses. Theamended stipulation goes on to say that Columbia also may seekapproval of any amendment to the IItP, including a riser material plan,and that other signatory parties reserve the right to litigate such aproposal.

(19) Individual customers will remain responsible for the initial installationof curb-to-meter service. Columbia shall assume the fmanefal

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responsibility for repair, replacement, and maintenance of service linesthat have been determined by Columbia to have hazardous leaks.

(20) After March 1, 2008, only Columbia or its representatives may repairor replace a customer service line that Columbia has found to have ahaaardousleak.

(21) Based on a paragraph only found in the amended stipulation,Columbia will submit a riser material plan (RMP) no later thanFebruaty 1, 2008. The RMP will summarize the rSser materials to beused in the IRP, along with Columbia's rationale. Columbia'sdecisions as to materials will focus on safety but wilt also consider cost,reliability and operational flexibility. If more than one type of risermaterial is selected, Columbia will also submit to staff, OCC, andOPAE the geaeral cciteria to be used in determining the dTM++mtancesin which each materlal may be used. Any current party in the risercase may object to the costs or materials selected, on or before February15, 2006.

(22) Under a paragraph only found in the amended stipulation, theaccounting provisions of the amended stipulation will not apply tocapital investment incurred after Tune 3o, 2011, uniess otherwiseagreed to by the parties and approved by the Commiesion. Capitalinvestment incurn:d after that date will not aocrue P15CC and rno costs(e.g. depreciation, property taxes, and gross receipts taxes) related tocapital investment incurred after that date will be deferred.

(23) The amended stipulation is conditioned on adoption by theCommission in its entirety aiand withoutmaterfal modific.ation.

(24) The signatory parties agree that the original and amended stipulationsare in the best interests of all parties and urge their adoption by theComntission.

C. Commission Authoritv

According to USP and ABC, the Commission may not, as a matter of law, adopt thestipulation. USP and ABC point, variously, to the Commission's lack of authority over non-ratepayers and the oonstitutional grounds of impairment of contracts and unlawful takingof private property.

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With regard to authority over non-ratepayers, USP submits that the IItP would resultin the Commission's regulation of non-ratepayers outside of Columbia's tariff, since alandowner who is not a ratepayer (e.g., a landlord) would be prohibited from repairing hisown hazardous leak and could not influence Columbia's actions taken in the course ofeffectuating such a repair. (USP brief at 56-57.) The Commission disagrees with thisanalysis. By supplying his rental property with gas lines, the landlord is inviting his tenantto enter into a contract for the delivery of gas services, under such terms as the provideroffers. Those terms include restrictions on the ability of the tenant or landlord to makerepairs. This is not tantamount to the Commission attempting to regulate landlords.

With regard to the constitutional claims, U9P, while pointing out "that theConunission does not have authority to decide constitutional questions;" does request thatwe "reaognize" that the approach taken by Columbia's application and the stipulation is"fraught with 'legal mine fields."' (USP reply at 25.) Columbia suggests that theCommission does not have the "power to detemdrie the legal rights and liabilities withrespect to contract rights...." (Columbia reply at 11.)

We agree that traditional constitutional law questions are beyond our authority todetermine. We do not disagree that our jurisdiction is limited to that granted to us bystatute. However, the claim is made that we have no authority to approve the proposedmeasures in light of their violation of constitutional strictures. In order to decide whetheror not to approve the B2P, as set forth in the application or the amended stipulation, wemust, of necessity, review and analyze the existing body of law on this subject. Thus,although the questions are constitutiosral ones, we have no choice but to consider them andreach conclusions, prior to addressing the substance of the proceedings.

1. Imvairment of Contracts

Both the United States Constitution and the Ohio Constitution prohibit theimpairment of private conlracts by goverrunent action. The former operates to prohibitstates from "enter[ing] into any ... Law impairing the Obligation of Contracts ..." U.S.Const., Article L. Section 10. Similarly, the Ohio Constitution provides that the "GeneralAssembly shall have no power to pass ... laws impairirtg the obligation of contracts ......Ohio Const., Article II, Section 28.

USP and ABC assert that adoption of the IRP would result in unconstitutionalimpairment of its contracts with customers. "[I]f the Commission grants Columbia theexctusive authority to perform service line repairs, it would nullify at least 100,00D of LPSP's

warranty service contracts." (USP brief at 51.)

Parties to this proceeding discuss both the appropriate methodology for analyzingcontract impairment claims and, also, the appropriate application of such methodologies.

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We will first discuss and resolve the methodology question and wiII then discuss andresolve its application to the facts at hand.

(a) Anslytical Methodology

According to USP, the appropriate analysis requires answers to three questfoms: "(1)Has the state law operated as a substantial impairment of a contraclual relationship? (2)Does the law have a significant and legitimate public purpose, such as remedying a generalsocial or economic problem? (3) Are the means chosen to accomplish the purposereasonable and necessary?" (USP brief at 51, citing Energy Reserves Group, Inc. v. KansasPower and Light Co., 459 U.S. 40D, 411-412 [1983].) USP continues its discussiom byr+efecenceto the Mobile-Sierra line of cases; in which the United States Supreme Court found that theFederal Power Conindssion could change the terms of an existing contract for gas serviceonly where there was an unequivocal public neces®ity. See United Gas Co. v. Mobile GasCorp., 350 U.S. 332 (1956); Federat Power Commission v. Sierra Pacific Power, 350 U.S. 348(1956); Permian Basin Area Rate Cases, 390 US. 747 (1968).

ABC points out that laws in place at the time and place when a contract is made arean inherent part of that oontract. ABC then follows a similar approach to that used by USP,also asserting that a three-pronged approach must be followed. However, the threequestions posed by ABC are "whetherthere is a contractual relationship, whether a chengein law impairs that contractual relationship, and whether the impairment is substantiat."(ABC brief at 22, citing Gerteral Motors Corp. v. Romein, 503 U.S.181 [1992].)

Staff also addresscs this issue, starting from ABC's point regarding the inherentposition of existing laws in contracts. It suggests that the corollary is also true. That is,contracts include, as implied pzovisiaais, not only existing laws but, also, the "reservation ofessential attributes of sovereign power." The. government, thus, "retains adequate authorityto secure the peace and good order of society." (Staff reply at 30-1, citing Home Buiiding &Loan Assoc. v. 8laisdell, 290 U.S. 398 [1934]•) Staff also points to an Ohio decisfon, relating tofranchises granted by the state, in whicli the court similatly noted that such contractsremain "subject to public regulatory authority ..." 8oard of Commissionere of FranklinCounty v. Pub. Ittil. Comm., 107 Ohio St. 442 (1923). Another Ohio dedsion cited by staffspecifically holds that

[t]he protection provided by ... provisions against impairment of contractsand taking of property without due procese of law must bow to valid policepower legislation designed to protect public health, safety and welfare, as longas the exercise of that police power "bears a real and substantial relation to thepublic health, safety, morals or general welfare of the public and if it is notunreasonable or arbitrary."

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Ohio Edison Co. v. Power Siting Comm., 56 Ohio St.2d 212, 217-8 (1978)(citations omitted).

Staff suggests following the three-part test in Energy Reserves Group, which was alsodiscussed by USP. However, staff also points out that the first prong of this test alsorequires the consideration of the severity of the impairment and whether the industry hasbeen subject to prior regulation. (Staff reply at 30-33.)

Both staff and USP pointed to the test in Enerrgy Reserves Group as a useful analyt9caltool. We too find that it is a ctear statement of the law in the area and note that it has beenpositively referenced by the Supreme Court of Ohio in a deasion that followed a similaranalytical approach. City of Middletnwn v. Ferguson, 25 Ohio St3d 71 (1966). We do not findthat limiting the public purpose prong of the test to circumstances of "unequivocal publicneoessity," as was discussed in the Moln7e-Sferra line of dw;nam,a, is appropriate here. Asnoted by staff, that line of cases related to the authority of the Federal Energy Regul.aMryCommisaion to modify the terms of filed agreements, not to the constitutional argumentcurrently before us. Therefore, the Energy Reserves Group test will form the basis for ouranalysis:

The threshold inquiry is "whether the state law has, in fact, operated as asubstantial impairment of a contractuaf relationsliip." ... In detetmizting theextent of the impairment, we are th consider whether the industry thecomplaining patty has entered has been regulated in the past....

lf the state regulation constitutes a substantial impairment, the State, injustification, must have a significant and legitimate public purpose behind theregulation, such as the remedying of a broad and general social or economicproblem.. . .

Once a legitimate public purpose has been identified, the next inquiry iswhether the adjustment of "the rights and responsibilities of contractingparties [is based] upon reasonable conditions and [is] of a characterappropriate to the public purpose justlfying [the legislation s[ adoption."

Energy Reserves Group, 459 U.S. at 411-412 (citations omitted).

(b) Anlication of Test

(1) Part 1: Substantial Impairment

USP argues that the proposed IRP would "clearly constitute[j a substantialimpairment since it destroys USP's contractual relationship with its customers." (USP briefat 51-2) USP's witness, Philip Riley, testified that adoption of the IRP "would be

30

07478-GA-UNC - 07-237-GA-AAM -17-

devastating to USP." He explained that USI' has more than 100,000 active contracts withnatural gas consumers in Columbia's service territory. According to Mr. Riley, each of thesecontracts can be cancelled at any time by the customer. Adoption of the IRP would, he said,force USP out of business in bhio. (LISP Ex. 2, at 6-7.) USP also argues that, with regard tothe service ]ines (as opposed to the risers), there is no evidence to show that Columbia'spersonnel or equipment are superior to those ofpiumbers used by USP. USP, it says, has anestablished, functioning system. Columbia, it contrasts, has no experience repairing linesand has not shown that it will be faster or better. Thus, USP concludes that traruferrrttgownership of service lines to Columbia does not meet the public interest exception. (USPbrief at 52-53.)

ABC notes that it has existing, valid contracts. with approxin ately 15,000 customersin Ohio. (ABC Lx. 3, at 3.) ABC opines that adoption of the stipuIation would impair thosecontracts, by allowing Columbia the exclusive right to repair the customer service lines. Itsubmits that the impairment would be substantial "hecause it would completely wipe outABC Gas's contractual relationships." ABC concludes that the Commission should find thatthe plan would violate the prohibition against impairment of oontracts. (ABC brief at 22-23.)

Columbia disagrees with the positions taken by ABC and USP, arguing that there isno unconstitutional impairment of contracts in this situation Pirst, it suggests, there is nosubstantial impairment because the warrantors cover "a plethora of utility lines ..." It alsopoints out that the contracts in question only last for a year at a time. Columbia evenproposes that the warrantors will be benefitted, as they will still receive contract paymentsbut will not have to effectuate the repairs. Columbia also notes that the subject matter ofthese contracts is one that is within the Commission's jurisdiction. Coluumbia opines that

approval of the amended stipulation is a reasonable and necesary method for addressing atremendous public safety issue. (Columbia reply at 11-13.)

Staff points out that the warrantors would have other possiblee business relationshipswith its customers, including the coverage of water lines, sewer lines and inside gas lines.Staff also notes that, if the warrantors do lose some business, it would only be for part of ayear, as the contracts in question are for one-year terms. (Staff reply at 34.)

We find that, although the proposal before us would impair existing contracts tosome extent, that impairment would not be substantial. This is the case both because of theterms of the contracts and their eoverage. Testimony at the hearing revealed that USP offersother services to their customers, such as in-home water line warranties, in-home sewerwarranties, in-home gas line warranties, in-home electric line warranties, external sewerwarranties, external water line warranties, and landsape services; and that ABC offerscoverage of outside water lines and in-home, as well as external gas lines. Further, thattestimony showed that at least USP has offered to switch its customers' coverage from

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extemaI gas lines to other lines. (Tr. II at 119-121; Tr. EI at 14-16.) Thus, the warrantycompanies will not be deprived entirely of potential business with their current customeraFurther, we note that, at least with regard to ABC, the contracts in question are for one-yearterms. (ABC Ex, 3, at 5.) Because of that fact, no impairment for gmter then a year canresult and, in fact, most of the contracts that will be affected have remaining terms of lessthan one year. As to the USP contracts, testimony revealed that the eontracts may becancelled by the customers at any time (USP Ex. 2, at 7). As USP has no assurance, in onemonth, that any given contract wiE be in place for the next month, the loss of that contractas a result of a changed regulatory environment should not be a substantial impsirment. Inaddition, we cannot find impairment of contracts where the contracts themselves were notmade available for our review. Such,contracts might, for example, allow repairs to be madeby other parties, resulting in no impairment of the contracts but, rather, an impairment ofthe business model used by the warrantors. The business model itself is not constitutionallyprotected. We note, finally, that the Commission's gas pipeGne safety jurisdiction should beno surprise to these companies. They must have been aware, when entering into thesecontracts, that the natural gas industry is highly regulated and dangerous. The state'sregulatory power with regard to pipeline safety must be implied in any contract relating topipeline warranties.

Under the Energy Aeserves Group three-part test, if there is no substantial impairmentof contracts, the m•na+n;ng two parts need not be addressed. However, although we havefound that there is no substantial impairment of the warranty contracts, we will discuss thenext aspects of the test.

(2) Part2: Public Purnase

USP discasses the presence of a public purpose, although it addresses the question ofwhether there is an "unequivocal public necessity," a standard that we have declined toapply. USP agrees that the safety issues surrounding the field-assembled risers do posesuch a public necessity, justifying a rapid governmental response. However, USP does notagree that there is such a public purpose with regard to customer service lines. It points outthat independent service providers have repaired lines for one hundred years, with anenviable track record. USP opines that there is no evidence to show that customer servicelines are an existing hazard. (USP brief at 52, dting Tr. IV at 284-285.)

Staff discusses safety at some length, pointing to its own witness as we11 as those ofColumbia and USP. Staff witness Edward Steele testified that Columbia is responsible,under federal and state law, for the safety of the service line, even though the customerowns that line. Federal and state requirements give Columbia the rrsponsibility forperformance of leak surveys, odorization, line location, and cathodic protection (ifapplicable). He opined that safety would be improved by allowing Columbia to assume alloperation, maintenance, and replacement responsibilities for its syskem, including service

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]ines and risers. (Staff Ex. 2, at 9-12.) Testifyfn$ in support of the stipulation, Mr. Steeleopined that this approach would reault in better oversight by Columbia and a uniformapproach to repair and replacement, with clear l.ines of responafbility for the workperformed. (Staff Ex. 4A, at 5.) Columbia's witness, Michael Ramsey, testifted that leaks 3nsteel service lines can present significant safety hazards. (Col. Fac. 5, at 2.) USP witnessCarter Funk agreed that cormsion and bare steel service lines can present a safety hazard.(Tr. IV at 93.) Timothy Phipps, witness for USP, eonfirmed that gas line leaks do causehouse fires, not only damaging the property in question but also risking neighboringresidences. (Tr. IV at 108-104.) Thus, staff concludes, "the Commission has a significantand legitimate public purpose in regulating the safety of customer service lines as a part ofthe gas pipeline distribution system." (Staff reply at 36.) Columbfa similarly claints that ithas demonstrated that safety would be inamsed by allowing it to take over responsibilityfor maintenance, as set fwth in the IItP. (Columbia reply at 12-13:)

We do find that, even if there were a substantial impairment of the warrantycontracts in question, we would have a significant and legitimate public purpose in causingsuch an impairment. It is clear to us that leaks in customer service l'uuw, including gasrisers, can be a safety hazard. It is also clear to us that proper maintenance of such lines andfull compliance with federal and state safety regulations is made more diffrcult byownership and responsibility being held by different entities, as, among other things,Columbia, under the existing approach, has no ability to train the repair personnel, tosupervise the actual repair process, or to ensure uniformity in the approach to repair andmaintenance. We are also concerned that, where responsibility for the cost of repair is leftwith customers, those customers may be reluctant to report a suspected leak. We believethat castomers may report the. odor of gas more readily if they are assured that Columbiawill repair any problem without the anticipation of an out-of-pocket payment by thecustomer. We believe that adoption of the amended stipulation is likely to result in a safersystem, overall. Increasirtg public safety, as it relates to the gas distribution system, iscritical.

(3) Part 3: Suitabilitv to Purpose

USP argues that no evidence shows that Columbia has superior personnel orequipment, has any experience repairing lines, that it will provide faster or better service, orthat its work will differ in any way from the work of the technicians servicing lines today.(USP brief at 52-53, citirtg Tr. IV at 141.) Thus, USP does not believe that the IItP willreasonably address any public interest.

Staff witness Steele spelled out many ways in which approval of the IRP wouldimprove public safety. He asserted that Columbia would have better control over thequality of work being performed, that hazardous lines and risers could be repaired moreefficiently, that materials used could be verified, that a uniform line of demarcation would

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be established, and that Columbia would have complete responsibility for aA pipelinesregulated by federal pipeline safety regulations. (Staff Ex. 2, at 842)

We find that the IRP does appropriately addreas the need to improve public safety inthe gas distribution system. We recognize the expertise of staff witness Steele and. agreewith his rationale. We find it entirely reasonable that public safety will be improved byassigning maintenance responsibility to the party who carries the legal responsibility forcomplying with safety regulations. We also find that it is appropriate to allow that party tosupervise the selection of workers, the materials to be used, and the work actuallyperformed.

As adoption of the amended stipulation and, therefore, the IRP will not be anunoonstitutional impairment of contracta, we are not proitibited, on that basis, fromoonsidering it.

2, Taking of Prooerty

The United States Constitution and the Ohio Constitution also prohibit the taking of

private property without just compensation. US. Const., Amendment V; Ohio Const.,

Article I, Section 19.

USP asserts that adoption of the IRP would result in an unconstitutional taking of itscontract rights and of its service lines. With regard to the c+ontract rights, USP explains that"[c]ontract rights can constitute property protected against govemment taking without justcompensation where such rights are directly appropriated for public use." (USP brief at 53,citing Ohio Valley Adver. Corp. v. Linzel[, 168 Ohio St. 259 [1958].) USP contends thatadoption of the 1RP would cause its contracts to be of no value and would allow theCommission to regulate and oversee such lines, thereby directly benefitting theCommission. With regard to the alleged improper taking of service lines, USP contendsthat the IRP would transfer ownership of service lines to Columbia. (USP brief at 53-55.)

A$C discusses this issue only with regard to the occupation of individuallandowners' property. ABC notes that ownership does not have to be transferred in orderfor a regulatory taking to occur. Rather, compensation, ABC explains, must be paid if aregulation "frustrates property rights." (ABC brief at 18, citing Loretto v. Teleprompter

Manhattan CAT V Corp., 458 US. 419 [1982].) Considering the question of how to find suchfrustration of property rights, ABC tooks to a decision of the Supreme Court of Ohio thatfound per se takings where either the owner suffered a permanent physi,cal invasion of hisproperty or the regulation connpletely deprived the owner of all economically beneficial useof the property. (ABC brief at 18, dting State ex ret. Shetly Materials, Inc. n. Clark Cty. Bd. of

Commrs.,115 Ohio St.3d 337 [2007].)

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C:olumbia, in response, asserts that the unconstitutional taking claim is one that canonly be made by the property owner at the time of the taking. (Columbia reply at 9.)Columbia goes on to disagree with the substance of the argument, pointing out that "thelocation of facilities for service to a cvstomer on a customer's property is a condition ofserviee." It also contends that the legitimate exercise of police power, such as forpreservation of public safety, is an exception to the requirement thatcompensation must bepaid in the event of a taking of private property, pointing a state appellate court dedsion.(Columbia replyatl0-11; citing Andres v. City of Perrysburg, 47 Ohio App.3d 51 [1988].)

Staf£also disagrees with this claim of unconstitutionality. First, staff notes that thereis no permanent physical occupation in this eituation, as there was in the Loretto case relied

upon by ABC. (Staff reply at 39, 41-44.) Staff goes on to emphasize that govemmentalintrusion on a persori s property does not necessarily result in a compensable ta1dng. If itdid, then, as the Supreme Court stated, the government would be compelled to regulate bypuxchase. Andrus v. Allard, 444 U.S. 51 (1979). Staff suggests that various factors have beenused to determine whether a regulation constitutes a compensable taking, such as theeconomic impact of the regulation on the party seeking compensation, the extent to whfchthe regulation has interfered with disfinct invesiment-backed expectations, and thecharacter of the government action. Applying thoee factors, staff believes that there is littleor no economic impact on customers, that there is no interference with investment-backedexpectations, that the regulation would improve public safety, and that the regulatiom doesnot deny customers any useof their property. (Staff reply at 4041.)

We find that the proposed IRP would not result in a compensable talartg of privateproperty. First, with regard to iJSP's claim that the regulation would result in a taking of itscontract rights, we note that no contract rights are being directly appropriated for publicuse. In addition, we do not believe that UST's contracts will be of no value after adoption ofthe ICtP, as discussed above with regard to impairment of contracts. Finally, we stress thatadoption of the IRP is not a "benefit" to the Commission, as argued by USP, as thisCommission already has regulatory supervision authority over pipeline safety matters.

With regard to the claims by both USP and ABC that this would be a compensabletaking of property rights of customers, we find no taking at all. First of all, the IRP wouldnot, as asserted by USP> "transfer" ownership to Columbia Only lines repaired or replacedby Columbia would belong to Columbia. Second, and most important, no homeowner isobligated to allow Columbia to enter the homeowner's private property or to install itsrepair parts on that property. The property owner is welcome to choose not to have thoserepairs made and to etiminate gas service entirely. 'i'his is, as correctly described by staff, acondition of service. If the property owner wishes to continue to receive gas service, thenthe owner will need to allow Coiumbia to make repairs. Thus, the IRP would not take fromthe property owner the right to make decisions concerning the property. That right remainswith the property owner. Further, even for the sake of argument, if adoption of the IRP

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would result in a taking of private property, we note that the customer is being adequatelycompensated. In place of a leaking service line the customer will have use of a functionalservice line.

We do believe, however, that Columbia should, upon request by the customer, workwith the customer regarding location, relocation, and, ntanner of installation of the serviceIine, to the extent feasible under GPS regulations, Columbia's tariff, and Columbia'sprocedures.

D. Dftuted Lssues in the Amended Stipulation

USP, ABC, and IGS raise a number of specific issues regarding the content of the IRP.

We will,group these issues, in the following discussion, for effective consideration.

1. Issues Relating to Riser Replacement

(a) Reimbursement for Customers' Repa'us

IGS and USP express concem over various aspects of the proposal that Columbiawould reimburse customers, under certain circumstances, for their replacement of prone•to-failure risers. IGS argues that, contrary to the stated intent of the stipulation, imposing anarbitrary cutoff date for customers to arrange for their own riser replacemerits will not easeconcerns regarding the scarcity of DOT OQ plumbers to nudce those replacements or theprices that such plumbers might charge during times of scarce resources. Rather, IGSbelieves that the imposition of a cutoff date would worsen any such problems. In addition,IGS points out that price pressures are resolved by the inclusion of a cap on the dollaramount of allowable reimbursement. (IGS brief at 3-4.)

Pointing out that the Commission's entry on rehearing in the riser case elimina6ed aprior deadline on reimbursable customer repairs, IGS also complains that the IRP wouldgrant Columbia preferential treatment by allowing it a three-year time period in which tomake repairs, while property owners chooeing not to use Columbia's personnel would haveonly until February 28, 2008.3 IGS believes that there is no justiffcation for imposing anarbitrary cutoff date for customer repairs. "[A] customer with a riser that is prone to faiture,or whose safety is otherwise potentially compromised by a hazardous seervice line, shouldbe afforded the greatest possible latitude and choice in addressing these concerns in theirtime frame, not Columbia's three year schedule." Similarly, IGS does not believe thatreimbursement requests made after September 1, 2008, should be rejected. (IGS brief at 4-5;IGS reply at 1-3 and 5-6.)

3 This brief was, of course, filed on December 31, 2007, prior to the additional procedural steps nemsitatedby the filing of the ancended stlpulatian.

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IGS also asks that the Commission ensure that repairs or replaoeatents effectuatedthrough a consumer's warranty company would also be reimbursable. (IGS brief at 5.)

USP indicates that customers with ppmne-to-failure risers wiII not be able to ensure that theirrisers are immediately replaced but will, instead, have to wait for Columbia to reach them.USP suggests that the only reason for a cutoff date for customer replacement of such risers"is to ensure that Columbia gets a monopoly on repair." (USP reply at 2.)

Columbia responds to these concerns, stating that the cutoff dates are neitherarbitrary nor unreasonable. It asserts that the date was chosen to correlate with the start ofthe IRP. Quoting language from the Commission's July 11, 2007, entry; Columbia assertsthat the existence of a deadline is a reasonable, 15-month period in which customers couldact on their own if they feel that inunediate action is necessary.

Althaugh Columbia correctly quotes our discussion in the July 11, 2007, entry,Columbia did not mention the reversal of that conclusion by our entry on rehearing ofSeptember 12, 2007. In that later entry, we recognized that "some customers may ... beunwilling to wait for repairs until Columbia is in a position to address their property.Thus;" we continued, "some customers may wish to make their own repairs. They shouldnot be penalized for that effort." We also noted our awareness that "the entire repairprocess may be accelerated by allowing individuats to [arrange for] repairs on their ownproperty." We concluded that our prior approval of Columbia's proposed cutoff dateshould be "modified such that any customer with a riser prone to failure, who replaces that.

riser or repairs or replaces both that riser and an associated service line that has a hazardousleak, will be reimbursable by Columbia... even if the repairs or replacement are effectedafter the date of the July entry." Entry on rehearing, at finding 20. We find no evidence inthe record that would cause us to modify our conclusion on this point, nor was thatconclusion subjected to an application for rehearing. Therefore, the provisions in thestipulation that would have the effect of negating our prior conclusion, although notphrased as suct, will be of no effect. Any customer who does not wish to wait forColumbia to replace a prone-to-failure riser, or a prone-to-failure riser and associatedservice line that has a hazardous leak, may arrange for the replaoement or repair through aDOT OQ plumber and be assured of reimbursement, as previously set forth in our entry onrehearing. However, we also note that, in a filing made on Februery 15, 2008, Columbiastated that it currently expects that the cost of a full riser replacement will be $385 and thatthe cost of a riser repair using a ServiSert fitting will be $330. Customer reimbursementshould be limited to those levels, for all riser repairs or replacements made after the date ofthis opinion and order. As we noted in our entry on rehearing, in order to assist Columbiain its effort to track riser installation and usage, the Commission would advise customerswho wish to replace or repair a prone-to-failure riser through a DOT OQ plumber to contactColumbia prior to arranging for such repair.

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We also note that IGS has again raised the question of whether Columbia would

reimburse for repairs effectuated through a line warrantor. As we stated in the September12, 2007, entry on rehearing, Columbia shall, in that situation, reimburse the customer up to

the amount of any payment made by the customer. These proceedings are not theappropriate forum for resolution of any dispute between Columbia and a warrantor as tocoverage of the remainder of the cost,

(b) Customer Notification

USP declares that "the greatest flaw with either the Application or the Stipulation isthe failure to promptly inform the individual members of the public at risk directly of theDesign-A riser." It proposes that individuals who are at risk should be notified of thesituation. (USP brief at 32-33.)

Responding to this concern, Columbia reassures USP that it has "been prudent andmaintained a constant leve] of communication between it and customers informittg them ofsafety concerns presented by prone to failure risers." It goes on to catalog the variousnotices that were forwarded to customers, including an explanptory letter to aB customersin March and April of 2007; a second mailing of the same letter, in May of 2007, tocustomers having prone-to-failure risers, which mailing was halted after the July 2007 entrywas issued and was resumed in September of 2007. Columbia also recounts having issuedpress releases, having posted infonnation on its website and on its phone system, andhaving left door hangers on affected properties. (Columbia reply at 15-16.)

In our September 12,2007, entry on rehearing, at fmding 20, we ordered Columbia toinform ail of its customers with prone-to-failure risers that they were affected by thia issue.

Columbia's efforts at notification of its customers, as set forth in its reply brief, reflectprudent and appropriate notification of customers as to the nature of the problem and thepossible rectifying actions that could be taken. Thus, we do not find a problem with theproposal in this area. Columbia should continue to apprise its affected customers ofongoing developments related to their risers.

(c) Three-Year Time Frame

USP advises that "the Commission must determine whether Columbia's three-yeartimeframe for replacing the prone-to-failure risers in its service territory is aooeptable." Itpoints out that, while Columbia has claimed that three years is the minimum time in whichthe repairs can be accomplished, Columbia has not substantiated that claim. Columbia hasnot, says USP, provided any studies or time lines to prove its es4imate. In addition, USPnotes that the possible use of a partial replacement teclmique may shorten the required timefor completion. By USP calculations, if each DOT OQ plumber iisted on Columbia's

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approved list would replace two of the affected risers each day, the task would becompleted in six months. (USP brief at 34-35.)

USP is correct that proof of the appropriate time period is not in the record. Thus,the Commission is not in a position to evaluate Columbia's position. We are, therefore,ordering Columbia to work with Commissioa staff regarding its scheduling of rtserreplacement work, attempting to identify and take advantage of all possible efficiencies thatdo not result in loss of quality. As we have previously stated, this is a matter of the greateatpublic safety and must be completed as quickly as is possible.

(d) MateriaLs to be Used

USP is also croncemed that Columbia had not, at the time its brief was filed, reachedconclusions regarding the best method for replacing the prone-to-failure risers. (USP briefat 33-34.) We note, in this regard, that the amended stipulation resolves this problem byadding the RMP.

2. Tranafer of Resoonsibflity for Service l,ines

The application, as well as the arnended stipulation, proposes the transfer ofmaintenance responsibility for the service line from the customer, whose property is servedby that line, to Columbia. Certain of the intervenors disagree with that transfer. We wlllreview, first, the arguments in favor of a transfer of responsibility and the respanses tothose arguments: We will then consider the arguments opposing the transfer, followed byresponses to those arguments.

(a) Arpments AdvocatingResponsibility Transfer

Columbia asserts that it is prudent and necessary to approve the IRP, therebygranting Columbia responsibility for the maintenance, repair, and replacement of servicelines. It cites, first, its belief that appraval of the IRP will improve its ability to implementthe CPS regulations. Columbia points out that its principal obligation under the GPSregulations is to advise customers of their obligations for maintenance and repair, because itdoes not own the lines. As a pipeline operator, it is responsible for conducting inspectionsand testing service lines. However, in the event that a leak is discovered through thoseefforts, all Columbia can do is terminate service, leaving the customer without service,inconvenienced by the need to repair the line, and forced to pay for unanticipated, costlywork. Columbia also points to its inability to test failed equipmatt that is owned bycustomers (Tr. II at 99) and its lack of detailed records relating to customer-owned servicelines. All of these problems would be reaolved through approval of the II2P, aocording toColumbia, thus enhancing customer safety and enabling fulfillment of Columbia'sresponsibilities under state and federal laws. (Columbia brief at 9,12-14.)

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Columbia maintains that bare steel service lines are, at times, serfous safety hazards.It asserts that witnesses for both USP and Columbia testified that leaking bare steel servicelines can cause catastrophic evens, endangering the customer and neighbors ('Pr. IV at 93;Tr. I at 107). It points to testimony relating to hazards caused by excavation or dig-ins (Tr.Tr. III at 26). Columbia also attempts to analogize servioe Iine leaks with its own experiencerelating to corrosion leaks on company service lines where, in 2006, nine percent of the leakswere hazardous. Columbia believes that uniforat management by Columbia is the bestmethod foraddressing such problems. (Columbia brief at 1415.)

Staff recommends allowing Columbia to assume responsibility for maintenance andrepair of hazardous customer service lines, on the basis of teatimony by its witness, EdwardSteele, the chief of the Commission's Gas Pipeline Safety SeMion. Mr. Steele testified to thefollowing benefits of the IltP: results in improved quality control relating to service line andriser installation, ensures proper riser instaUatioxy provides improved documentation forrecord-keeping and failure testing, provides more efficient repair, facilitates single-triprepair work, provides verification of materials, eliminates decision-making by customers,allows for uniform line of demarcation between areas under responsibility of company orcustomer, and gives Columbia complete responsibility for all pipelines regulated by GPSregulations. (Staff brief at 11-12, citing Staff Ex. 2, at 8-9.)

ABC submits that Columbia has failed, with these arguments, to establish that thecurrent system is unsafe in the aggregate. It also suggests that' Columbia has failed toexplain how its repair process under the IRP would differ from the current system and,thereby, lead to increased safety. (ABC reply at 3-4.) ABC specifically disagrees with thecontention that the IRP would give Columbla greater control over nuterials, processes, anddocumentation of repairs in customer service lines. It points out that Columbia alreadycontrols the materials used in such repairs and already can reject repair work done on thoselines. (ABC brief at 12, citing Tr. I at 68-69.) It also notes that Columbia already has theability to document work done on servioe lines. (ABC brief at 12, citing Tr. I at 50, 70-71.)

ABC also does not believe that customers are confused by private ownership. It alsosuggests that Columbia could, if castomers are confused, undertake an education or noticeprogram, thereby alleviating the problem. ABC is concerned that the IRP would actuallyresult in increased confusion, since Columbia would not have reaponsibility for interiorlines or other downstream lines (such as service to a gas grill). (ABC brief at 10-12.)

USP also disagrees that launching the IRP would increase customer safety, raisingseveral arguments. Eirst, USP notes that Columbia's own estimate would have it replacingapproximately 0.33 percent of all service lines annually. USP asks how such a small numbercould amount to a"pressing safety issue." (USP reply at 3.) USP points out thatColumbia's own witness could not recall any instance in which a service line had acatastrophic failure. (Tr. I at 49.) USP pointed out that there was no evidence of increasing

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rates of deterioration or of superior practices by Columbia's employees. USP also contendsthat the IRP would not result in improved implementation of GPS regulations, improvedability to maitrtain records, or improved supervision of plumbers. (USP reply at 3-8.)

USP also states that the IRP would not eliminate'confusion, noting that no evidenceproved the existence of customer confusion. On the other hand, acoording to USP, there isevidence that customers are not currently confused, since Columbia itself advises customersto repair leaks through DOT OQ plumbers and Columbia's website also provides suchinformation (Tr. IV at 147-148). In addition, USP notes, the yeBow pages provideinformation on available plumbers. USP contends that the IRP will lead to confusion bycreating different zones of responsibility and ownership and by differing from thetreatment of similar lines that are located in other areas of Ohio. (USP brief at 45-49.)

In addition, USP specifically disagree:a with the benefits listed by Mr. Steele. Withregard to quality control, USP poirits out that the IRP wonld not give Columbia any controlover installation of new lines, that it already has control over the approved materials listand the approved plumbers list, and that it currently inspects all work. Regardingimproved documentation, I1SP notes that Columbia could, under the present system, keepany records it deems neoessary: USP also contends that the IRP would not create any repaireff'-iciencies. Rather, USP reasons, the IRP would eliminate customer choice, eliminatecompetition, and insert an additional level of bureaucracy. USP also disputes Columbia'srationale that its proposal must be efCtdent berause it would cost less than a standardservice line warranty, pointing out that Columbia would charge all customers Instead of justcost-causers. With regard to W. Steele's next point, USP argues that Columbia'sconveni.ence in having to make only one trip should not be a consideration. As to materialveriflcation, Z7SP posits that Columbia's likely use of independent contractors and reductionin inspedions will result in lessened material verification. Customer choice, as to who tohire for repairs or whether to purchase a warranty, is vital, in USP's opinion. USP alsodisagrees that the IRP would resuit in a dearer line of demarcation than the current systemand believes that Columbia already has complete responsibility for pipelines. (USP Ex. 2, at10; USP brief at 49-51; USP reply at 8-14.)

IGS disputes the safety claim, as well. It points out that, under the current system, allrepairs would be made by DOT OQ plumbers and would be inspected by Columbia. (IGSreply at45.)

(b) Arcuatents posing Reaponaibility Tranafer

(1) Dissimilarity with Risers

ABC opines that Columbia has failed to prove that the public interest would beserved by Columbia's taking responsibility for maintenance of customer service l'ures. ABC

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stresses that, unlike prone-to-failure risers, such lines "have no propensity for suddencatastrophic failure." Therefore, ABC believes that customer service lines do not mpresent ahazard to the publlc It points out that, instead, the slow decay that service lines doexperience has led to the development of the 19ne warranty industry and that privateownership of service lines has worked well for eighty years. (ABC brief at 6-8.)

In its reply brief, ABC continues this argument, asserting that Columbia has failed toshow that the development of hazardous leaks in serrice lines "ia the aggregate posels] awidespread threat warranting wholesale response." ABC argues that the repair process willnot differ in any way that will lead to increased safety. (ABC reply at 3-4.)

USP similarly disputes the need for Columbia to take control of service line repairs,suggestiingthat there is no reason to treat the riser problem and the service lines in the samemanner. (USP brnef at 30.) It points out that the record reflects no evidence of safety issuesassocdated with customer service lines. USP refers to teatimony by its witnesses, CarterFunk and Timothy Phipps, both of who explained that customer service line leaks generallyoccur, in metai linea, due to metal corrosion and, in plastic lines, due to shifting, impnoperinstallatiort, or damage from digging. USP noted that neither staff nor Columbia presentedevidence of a public "clamor" over service line safety. (USP brief at 38-42; USP reply at 4.)

Columbia notes that federal and state GPS regulations apply to all facilities,including service lines and risers. The IRP, as it argues, would give it responsibility forthose lines covered by the GPS rules. (Columbia reply at 19-20.)

(2) Ins

ABC also points out that the IRP would result in fewer safety checks than the currentsystem. 11'resently, all service line repairs, after being made by a DOT OQ plumber, areinspected by Columbia. ABC points to Columbia testimony stating that there would be nothird-party inspeclion under the IitP. ABC contends that this loss would result indiminished safety. (ABC brief at 8-9; ABC reply at 4-5.)

USP also asserts that third-party inspections, Which would be eliminated under theIRP, add a significant level of safety. It points to testimony by witnesses Funk and Phipps,both of whom testified that Columbia's inspection of repaixs is a valuable "check andbalance," even for the best plumbers. USP notes that Columbia's proposal would includeonly occasional, random audits of repair work. (USP brief at 42-45.)

Columbia points out that it currently performs inapections in compliance with allapplicable regulations. Under IRP, it states, field supervisors wilt awke daily field visits,service teclu idans will perform periodic quality assurance checks, a constructioncoordinator will monitor all contractors' work, and the company will conduct a formal

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audit program to inspect one-third of operating locations on an annual basis. (Columbiabrief at 15, citing Col. Ex. 5, at 2-3.) In addition, Colutnbia explains that the reason for itspresent inspection of every repair made by third-party plumbers is that many of thoseplumbers take short-cuts and Columbia ieatains responsible for ensuring safety. Columbiasubmits that, with better managerial oversight and contrachual control, inspection of everyjob will not be necessary. Finally, Columbia notes that the current system of inspectionssuffers from various problems, such as the plumber not being present, use of plumbers whoare not on the DOT OQ list, and the inability of Columbia to access conipleted repairs foritvspection. (Columbia brief at 15-20.)

Similarly, staff indicates that the current inspection system is necessitated by thequality of the third-party plumbers. With Columbia in the position of managing the work,there should be greater uniformity and clearer oversight, according to staff. (Staff reply at16-17.)

(3) Class 3lxaks

ABC and USP contend that the II2P would lessen public safety by creating a categoryof leaks (class 3 leaks) that would not be repaired by anyone. It notes that, under theapplication, Columbia would not be required to repair such leaks, as long as they remain atthat level, and that the customer would not be allowed to do so. Under the stipulation, onthe other hand, the responsibility for class 3 leaks would remein with the cvatomer,according to ABC and USP, confvaing the situation and creating a disinoentive for thecustomer to repair the leak since Columbia will repair it for free if the customer allows it toremain uncorrected. (ABC brief at 9-10; ABC reply at 5; USP brief at 45.)

Columbia explains that it will grade all leaks, as required by applicable regulations.Under the amended stipulation, it would, it continues, repair only hazardous leaks, leavinggrade 3 leaks to be monitored. Columbia assures that customers could choose to repairsuch leaks on their own. (Columbia reply at 16-17.)

(c) Commission Resclutiort

in the record reflects that, while service line leaks are generaIly notcatastrophic, they are often categorized as hazardous and can present aign'd'icent safetyhazards and do have the potential to cause catastrophic damage to the customet's propertyor neighboring properties (Col. Ex. 5, at 2; Tr. I at 107-108). Therefore, we find that it isappropriate and reasonable, in an effort to improve the level of public safety, to shiftresponsibility for maintenance and repair of service lines to Columbia, in addition torequiring Columbia to replace prone-to-faiture risers.

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With regard to the regularity of inspections under the IRP, we find that Columbia'sproposal is reasonable. Columbla plans to require regular training and education of theeniployee.a and contractors doing the repair work and will be supervising those workers inthe field. We find, therefore, that the lack of inspection of every repair is not problematic.

Finally, we are not troubled by the treatment of grade 3leaks. Such leaks are, as thename signifies, not hazardous. Columbia is required to continue to monitor their status. Ifsuch a leak becomes hazardous it will no longer be a grade 31eak and will be repaired. Thisis a reasonable approach and appropriately minimizes Columbia's intruslon on the

property of its customers.

We do note, however, that the proposed tariffs that are included as a part of theanu:nded stipulation do not require Columbia to make repairs on any particular achedule.We find that, if customers are required to allow Columbia to make all repairs of hazardousleaks on the customer service line, Columbia should be required to complete those repairsin an expeditious manner. Therefore, the amended tariffs should set forth reasonablerestrictions on the time to be taken by Columbia for repairing such lines. Columbia iadirected to work with Commission staff to develop appropriate tariff language.

E. Evdluation of the 59pulation

Rule 4901-1-30, Ohio Admuvstrative Code, authorizes parties to Commissionproceedings to enter into a stipulation. Although not binding on the Com••+isdon, the termsof such an agmement are accorded substarttial weight. See Consumers' Counset v. Pub. Util.Comm., 64 Ohio St.3d 123, at 125 (1992), citing Akron v. Pub. Ltfi[. Comm., 55 Ohio St.2d 155(1978).

The standard of review for considering the reasonableness of a stipulation has beendiscussed in a number of prior Comrnission proceedings. See, e.g., Cincinnati Gas & Electric

Co., Case No. 91-410-HIfAIR (April 14,1994); Western Reserve Telephone Co., Case No. 93230-

TP-ALT (March 30, 1994); Ohio Edison Co., Case No. 91-698-EL-FOR et a7. (December 30,1993); Cleveland Electric IIJum. Co:, Case No. 88-170-EL-AIR (January 30,1989); Restatement of

Accounts and Records (Zimmer Plant), Case No. 841187-EL.UNC (November 26, 1985). Theultimate issue for our consideration is whether the agreement, which embodiesconsiderable time and effort by the signatory parties, is reasonable and should be adopted.In coneidering the reasonableness of a stipulation, the Commission has used the followingcriteria:

(1) Is the settlement a product of serious bargaining among capable,knowledgeable parties?

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(2) Does the settlement, as a package, benefit ratepayers and the publicinterest?

(3) Does the settlement package violate any important regulatoryprinciple or practice?

The Supreme Court of Ohio has endorsed the Commission's analysis using thesecriteria to resolve issues in a manner econondcal to ratepayers and public utilities. Indus.Energy Consumers of Ohio Potner Co. v. Pub. i7fif. Comm., 68 Ohio St.3d 559 (1994) (citingConsumers' Cvunsel, supra, at 126). The court stated in that case that the Conunission mayplace substantial weight on the terms of a stipulation, even though the stipulation does notbind the Commission (Id).

As each of these criteria is debated by the parties, we will proceed to a discussion ofthe argument and our resolution.

1. Serious Bargairdng

Columbia asserts that the amended stipulation is the product of serious bargainingamong capable, lmowledgeable parties. It recounts settlement efforts among ail parties ofrecord, initiated by Columbia. Columbia admitted that, after USP and ABC stated that theywould not support any settlement in which Columbia would assume responsibility formaintenance of service lines, no further efforts were made with those parties: Ongoingsettlement discussions did not include USP or ABC. Columbia argues that theirparticipation was not necessary, as it would have been a "vain act." Columbia notes that itdid continue negotiations with IGS, as well as with OCC and OPAB, and points out thatOCC and OPAE ultimately signed the amended stfpulation, thereby gamering the supportof representatives of a wide range of interests, broadly representative of the interests ofratepayers. (Columbia reply at 3-6.)

Staff, agreeing with Columbia's conclusion on this criterion, points out that all partiesin the case are capable and knowledgeable and that the amended atipulation was executedby the natural gas utility, residential consumers, and staff of the state regnlatory agency.Staff notes that the oniy opposition was from the warrantors. (Staff brief at 7-9.) Staff alsocontends that all parties had an opportunity to partic[pate meaningfully in the process.(Staff reply at 6-9.)

USP, on the other hand, believes that the amended stipulation is not the product ofserious bargaining since it fails to have the support of the warranty service providers andplumbers and the property owners, as the "parties" with the nmst at risk. It contends that"Coiumbia and the staff are bargaining over their respective interests in conveniences;serious bargaining over property owner choice, property rights, contractual rights, and the

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right to participate in a competi6ve business as opposed to a newly created monopoly didnot take place in tliis case." USp suggests that the "reason for the serious bargainingstandard is to prevent a cabal of interests from getting together and seeking their goals atthe sole expense of another unwilling party." (USP brief at 18-20; USP reply at 14-16.)

There is no dispute among the parties that initial settlement discussions involved allof the parties, including those opposing the ultimate stipulation. There also is no dispute

among the parties that USP and ABC did not seek or initiate any settlement discussions

after October 17, 2008, because they thought it was futile to continue negotiations based ontheir understanding that neither Columbia nor the Commission staff would accept a

stipulation without Columbia assuming exclusive responsibility for the future maintenance,

repair, and replacement of hazardous customer service lines. Indeed, these facts are

included in the agreeatent as to facts, filed on February 4, 2008. While it is true, as the

parties stipulated, that some settlement discussions did not include ABC or USp and thatdiscussions with IGS were very limited, the parties also stipulated, in effect, that they

appeared to have irreconcilable positioms. USP and ABC would not accept a stipulation inwhich Columbia was assuming exdusive responsibility for the future malntenance, repairand replacement of hazsrdous customer service lines and that was unacceptable toColumbia and the staff of the Commission. (Agreement as to facts at 2, 3, and 5.) With thatin mind, we find that it was not necessary to continue to invite all parties to partidpate indiscussions.

No one possesses a veto over stipulations, as this Commission has noted many times.Additionally, those involved in the continuing discussions, and who ultimately bacamesignatories to the amended stipulation, represent diverse interests indudittg the buyers,sellers, and regulators of natural gas service. We would also note that, regardless ofwhether parties signed a stipulation or not, we have considered their arguments andpositions oit issues, Under these facts, we find the amended stipulation was the result ofserious bargaining among capable, knowledgeable parties and that the first criterion hasbeen met.

2. Benefit to Customers and thePublic Interest

As discussed previously, staff testified as to numerous ways in which the IRP wouldprovide benefits to customers and to the public at large. Staff believes that the IRP, as setforth in the amended stipulation, would enhance public safety and would be of assistanceto customers in avoiding the needs to finance expensive repairs and to choose and overseerepair personnel. Staff stresses that Columbia is in a better position than customers to makeappropriate safety determination and dedsions regarding repairs. It also contends that thecost recovery meehanism set forth in the amended stipulation is practicable and reasonable,containing appropriate regulatory accounting and economic safeguards to protect thepublic interest, while allowing Columbia to recover its incremental IRP costs. Such

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safeguards, while a part of the amended stipulation„ were not included in Columbia'sapplication. Importantly, the amended slipulation, acrording to staff, includes a sunsetprovision such that the accounting provisions would cease at the completion of the IRPprogram. Further, the amended stipulation also ensures the exclusion of costs associatedwith work required by CP$ regulatlons that Columbia would have performed absent theriser survey and, also, the prevention of double recovery. Staff has the right, under theamended stipulation, to propose amortization over longer than one year, therebymoderating the impact of IRP costs on rates. The amended stipulation enhances accountingand reporting requirements in order to ensure that staff can appropriately evaluate andverify included costs and, in addition, requires an independent audit. The accrual ofcarrying charges on certain deferred costs is prohibited by the amended stipulation and, inaddition, accrual of FI9CC on capital investment is required to be at a simple inlerest ratebased on Columbia's average cost of debt. All these provisions, In staffs opinioa, benefitthe public interest. (Staff brief at 9-15; staff reply at 9-13.)

Columbia also enumerates the benefits to customers of adoption of the iRP. Amongthose listed benefits are freedom from the risk of major repair bills, freedom from the needto choose end hue repairmen, affordability, system-wide safety, a socialized cost strmcture,coverage of all hazardous leaks, and a single point of contact in the event a leak occurs.Columbia aLso points out that the amended stipulation includes agreement on Cohvnbia'sassumption of responsibility for repair of hazardous customer service line leaks, theestablishment of accounting to be used for investment related to replacement of risers andservice lines, the establishment of a process for recovery of IItp costs, the development of anRMP that allows for objectiom by intervenors, the limitation on the time period duringwhich the IRP will allow for the accrual of P19CC or capital-related expenas, thereimbursement of customers by direct payment rather than credit, the provision of detailedrecords to staff and OCC, and the development of customer communication and educationmaterials relating to the IRP. (Columbia brief at 23, 24-25; Columbia reply at 7.) Columbianotes that the assumption of responsibility only for customer service lfne leaks that arehazardous is in keeping with USP's opening statement, in which counsel atated thatColumbia has the obligation to inspect for hazardous conditions and repair them (Columbiabrief at 24, citing Tr. I at 11). Columbia also asserts that approval of the amendedstipulation will increase its ability to implement GPS regulations (Columbia reply at 7-8).

USP, on the other hand, points out that the IRP would affect landowners who are notcustomers. It disputes the uniformity argument on the bases that Columbia will use bothemployees and independent contractors to perform its work and that independentinspections will be lost. USP argues that the loss of repairs to grade 3 leaks will, in itsestimation, diminish public safety. The loss of a customer's right to choose regarding therepair of hazardous leaks is a problem, in USP's opirni.on, as is the socialization of all costsregardless of causation. (USP brief at 20-24.)

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With regard to factors that are identified by staff as benefits, USP ltas severalcounterarguments, For example, USP contends that the IRP wiU not result in better controlof quality, as it already has an approved materials list and a list of approved plumbers andbecause it already inspects all repairs. Regarding proper installation of risers, USP pointsout that the IItP does not apply to new cronstruction and that there is no evidence thatColumbia's practices are superior to those of csurent plumbers. USP clafma that there is noreason why Columbia could not keep better records, even without the IRP. USP disagreeswith the contention that repairs wiB be more efficient and does not believe that a one-triprepair process is a valuable consideration. It also disagrees with the assertion thatveriftcation will be improved, since inspections will be reduced. It points out that,currently, customers who do not wish to make hiring decisions on repair crews can chooseto purchase a warranty policy, a choice that will be denied them if the 1RI' is adopted. USPalso disagrees that the line of demarcation between the responsibility of the customer andthe company will be made clearer. Finaily, USP does not believe that compliance with GPSregnlations wiIl be improved. (I]Sp reply at 8-14.)

ABC opines that Columbia has failed to establish that the current system is unsafe orthat the IRP would improve public safety. It also submits that, rather than diminishingcustomer confusion, the IRP would increase confusion by creating a system that wouldproduce different outcomes in different situations. (ABC reply at 3-7.)

We have considered all of the parties' arguments and find that the amendedstipulation will, as a package, benefit ratepayers and the pubiic inEerest. Our primaryconcErn is with ensuring public aafety. Under the a+wnded stipulation, Columbia hasagreed to replace all prone-to-failure risers. In light of their potential for catastrophicfailure, ihis is vital. We are oqncerned, however, with the length of time that the amendedstipulation allows for completion of this effort and would encourage Columbia to makeevery effort to replace alJ. such risers in as short a period as possible. We are aware that theamended stipulation provides that Columbia will resume to traditional regulatoryaccounting for capital investment incurred by Columbia after June 30, 2011. TheCommission agrees with tlus approach. We note that, pursuant to the RIviP, Columbia has"committed to using the Perfeclion ServiSert riser fitting within its riser replacementprogram where possible ...[allowing] for the replacement . . . without the need forexcavation...:" (Columbia reply at 6-7.) We are hopeful that the use of this alternative willalso result in faster completion of the entire replacement procrns. We are also hopefnl that,by allowing customers to continue to be reimbursed for their replacement costs, Columbiawill be relieved in the total number of risers affected by the IRp, thus allowing it to teachcompletion earlier.

Beyond risers, we find that public safety will be enhanced by allowing Columbia totake responsibility for repair of the hazardous customer service lines. The aspect of thisproposal that we find most oompelling is that it wili allow Columbia, as the employer or

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hirer of independent contractors, to control, more effectively, the work product of theplumbers making repairs to the system. We do not believe that the resultant patchwork ofowqership will cause confusion, as the critical issue is not ownership but Tesponsibility.With regard to responsibility, this change should relieve any confusion, as the customer willonly be respbnsible for any repairs on the duwnstream side of the gas meter. C.onsiderfngall of the arguments of the parties, we find that the amended stipulatfon, considered as awhole, wiil benefit ratepayers and the public.

3. Violation of Policfes and Practices

USP contends that the Commission must consider state policy, as set forth in Section4929.02, Revised Code, with regard to the amended stipulation. It argues that such policywould be violated on a number of fronts if we approve this plan. (USP brief at 24-27.) USPalso believes that the cost causer (in this situation, a costomer with a hazardous leak) shouldpay the incurred costs. Third, USP asserts that the IItP would result in the Com,,,iAmnnassert'n[g jurlsdiction over non-customer landowners. On a related issue, USP believes thatapproval of the amended stipulation would be the regulation of property rights of privatecitizens. USP's final issue relating to this criterion is that, it asserts, the Commission wouldbe creating a new monopoly over what has previously been non-jurisdictiortal property.(USP brief at 24-30.)

Staff confirms that, in its opin9on,'the amended stipulation does not violate anyimportant regulatory principle or practice. Staff spedfically addresses issues raised by USP.First, staff points out that the legislature, in adopting Section 4929.02, Revised Code, wasnot attempting to protect the warranty market. The statute, it notes, contains no policiesrelating to warranties. Staff does not believe the regulatory practice requires the eost causer,in this situation, to pay for costs imposed, since the landowner with a leaking line 9s not theonly person benefItting from its repair. Staff emphasizes that the Commission does havethe authority to adopt the amended stipulation. (Staff brief at 15-18; staff reply at 18-30.)

With regard to the state policy, as set forth in section 4929.02, Revised Code, it isunclear whether responsibility for maintenance of customer service lines was considered bythe legislature at the time of its adoption. However, we believe that customer safety,especially in this tremendously dangerous area, is of the utmost importance. Therefore, wedo not find that approval of the amended stipulation wiIl violate state policy. We afso findno other violation of important regulatory principles or practices. .

F. Implementation

Columbia should work with staff to develop tariffs to carry out this opinion andorder. Such tariffs should be &led in this docket for Commission approval.

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

(1) On March 2,2007, Columbia filed an application in case number07-237-GA-AAM.

(2) On April 25, 2007, Columbia filed an application in case number07478rGA-UNC.

(3) Motions to intervene by OCC, OPAE, USP, IGS, ABC, and IEUwere granted.

(4) The Commission approved certain aspects of Columbia'sproposal, by an entry issued on July 11, 2007, and an entry onrehearing issued on September 12, 2007.

(5) The hearing in these proceedings was held on October 29, 30,and 31, and continued on December 3, 2007.

(6) A stipulation was filed on October 26, 2007. An amendedstipulation was filed on December 28, 2007. An agreement as tofacts was filed on February 4, 2008.

(7) Briefs were filed on December 31, 2007, by Columbia, staff, USP,ABC, and IGS. Reply briefs were filed by Columbia, staff, USP,ABC,IGS, and OCC, on February 19, 2008.

(8) The issue for the Coaunission's determination is whether the

amended stipulation is reasonable and should be adopted.

(9) The Commission finds that the stipulation meets the.three

criteria for adopt5on of stipulations and should, therefore, be

adopted to the extent set forth herein.

It is, theretore,

ORDERLD, That the stipulafion fded in these proceedings be adopted to the extentset forth herein. It is, further,

ORDERED, That Columbia file, for Commission approval, proposed tariffs consistent

with this opinion and order. It is, further,

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ORDERED, That a copy of this opinion and order be served upon a13 parties ofrecord.

Paul A. Centolella Ronda E3artm F ^

^ ` .

Valerie A. Lemmie

JWK;geb

Entered in the Jou[nal

0.0 S M0e

[email protected]

51

BEFORE

THE PUBLIC UTILITIES COMIvii.SSION OF OHIO

In the Matter of the Application ofThe Dayton Power and Light Companyfor the Creation of a Rate StabilizationSurcharge Rider and Distribution RateIncrease.

Case No. 05-276-EL-AIR

OPINION AND ORDER

The Commission, considering the above-entitled application, hereby issues itsopinion and order in this mattcs.

APPEARANCES:

Faruld, Ireland & Cox, P.L.L., by Charles J. Faruki and Jeffrey S. Sharkey, 500Courthouse Plaza, S.W.,10 Ludlow Street, Dayton. Ohio 45402, on behalf of Dayton Powerand Light Company.

Jim Petro, Attorney General of the State of Ohio, by Duane W. Luckey, SeniorDeputy Attorney General, by Wemer L. Margard, III, Steven A. Reilly and Steven L.Beeler, Assistant Attomeys General, 180 East Broad Street, Columbus, Ohio 43215, onbehalf of the staff of the Public UtilitiesConunission of Ohio.

Janine L. Migden-Ostrander, Ohio Consumers' Counsel, by Jeffrey L. Small andAnn M. Hotz, Assistant Consumers' Counsel, Office of Consumers' Counsel, 10 WestBroad Street, Columbus, Ohio 43215, on behalf of the residential consumers of DaytonPower and Light Company.

McNees, Wallace & Nurick; LLC, by Samuel C. Randazzo, Lisa G. McAlister andDaniel J. Neilsen, 21 East State Street, Columbus, Ohio 43215, on behalf of IndustrialEnergy Users-Ohio.

Craig I. Smith, 2824 Coventry Road, Cleveland, Ohio 44120, on behalf of Cargill,Inc.

David C. Rinebolt, 231 W. Lima Street, Ftndlay, Ohio 45839, on behalf of OhioPartners for Affordable Energy.

Vorys, Sater, Seymour & Pease, by M. Howard Petricoff, 52 East Gay Street,Columbus, Ohio 43215, on behalf of Honda of America Mfg., Inc.

This is to cexti£y that the images appearing are anacaurade aa+3 -or.Hlete reproduction o£ a cese file

document deliv,red in tba regniar course of bueiMsa.

T®ehniciaq^te Frocesseil_^/ 7 '7

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OPINION:

1. HISTORY OF THE PROCEEDING

The Dayton Power & Light Company (DP&L) Is a public utility as defined inSection 4905.02, Revised Code, and, as such, is subject to the jurisdiction of this :Commission.

On September 3, 2003, in Case No. 02-2279-BL-ATA et al., the Couvnissionapproved a stipulation (the RSP Stipulation) which extended DP&L's nwket developmentperiod to December 31, 2005 and provided for a rate stabilization period from January 1,2006 tkuough December 31, 2008. In addition, among other terms, the R$P Stiputationprovided that all customers would be assessed a rate stabilization surcharge (the R&SRider) of up to 11 percent of the tariffed generation charges as of January 1, 2004. The RS3rider would permit DP&L to recover costs assooated with fuel price increases or actionstaken in compliance with environmental and tax laws, regulations or court oradministrative orders, and costs associated with physrcal security and cyber securftyrelating to the generation of electricity from plants owned by DP&L and its affiliates,which costs are imposed by final rule, regulation or administrative or court order. TheRSP Stipulation provided that adjustments to the RSS Rider be made by application by :DP&L to the Commission under Section 4909.18, Revised Code. In the Matter of theContinuation of the Rate Freeze and Extension of the Market Developnwnt Period for the DaytonPower ar+d Light Company, Case No. 02-2279-EfrATA, et al., Opinion and Order .(September 2, 2003).

On March 1, 2005, DP&L filed a notice of intent to file an application for an increasein rates to establish the RSS Rider. Further, on March 23, 2005, the Commission issued anentry establishing the date certain and test period for DP&L's application. On Apr4 4,2005, DP&L filed its appfication to increase rates. The Commission accmepted DP&L's 'application for filing by entry dated May 4, 2005.

Motions to intervene were filed by Industrial Energy Users-Ohio (IEU-Ohio), OhioPartners for Affordable Energy (OPAE), the Ohio Consumers' Counsel (OCC), Cargill, Inc.(Cargill), and Honda of America Mfg., Inc. (Honda). Those motions were granted onSeptember 1, 2005 and October 12, 2005.

On August 26, 2005, a written report of the staff s investigation was filed. The staffconcluded that, with ndnor adjustments, DP&L had justlfied an increase in the RSS Riderin excess of the 11 percent cap contained in the RSP Stipulation. By entry issued onSeptember 1, 2005, the attomey examiner ordered that objections to the staff report be fIIed .in accordance with Section 4909.19, Revised Code, which requfres that objections be ftled

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within 30 days of the filing of the staff report. Objections were timely filed by DP&L, theOCC, IEU-Ohio, Honda, OPAE and Cargill.

A public hearing was held on October 27, 2005 in Dayton, Ohio. Two witnessestestified at the public hearing: Ellis Jacobs, on behalf of the Community Action

Partnership of the Greater Dayton Area, and Mr. Maurice Campbell, a residentialcustomer of DP&L.

On November 3, 2005, a partial stipulation was filed with the Commission byDP&L, Cargill, Honda and IEU-Ohio. The evidentiary hearing conunenced onNovember 4, 2005, during which testimony was received by witnesses on behalf of DP&L,OPAE and the staff regarding the company's application and the staff report. The hearingcontinued on November 8, 2005, during which additional testimony was received bywitnesse.s on behalf of DP&L. The hearing was dien adjouxned to allow for furtherdiscovery related to the stipulation.

The hearing continued on November 14, 2005 at which time DP&L presented .witnesses supporting the stipulation. The hearing concluded on November 15, 2005,following testimony by a witness on behalf of OCC in opposition to the stipulation.

Post hearing briefs were timely filed on November 22 by staff, DP&L, OCC, OPAE,IEU-Ohio and Cargill. OPAB filed its reply brief on November 29, 2005. Reply briefs werefiled on December 1, 2005 by DP&L, OCC, IEU-Ohio and staff.

B. SUNIIvfARY OP THE STIPULATION

The stipulation was intended by the signatory parties to nmlve all outstandingissues in ihis proceeding. The stipulation includes, inter alfa, the following provisions:

1. DP&L's rate stabilization period is extended through December 31, 2010.

2. DP&L will provide a market-based standard service offer (MBSSO) at ratesfixed in the stipulation throughout the extended rate stabilization period

3. The 5 percent residential generation discount established in Am Sub. SenateBill 3 will continue through December 31, 2008, and the 2.5 percentresidential generation discount provided for by the RSP Stipulation will takeeffect from January 1, 2006, through December 31, 2008.

4. DP&L will implement an unavoidable RSS Rider equal to 11 percent ofDP&L's January 1, 2004, tariffed generation rates.

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5. Beglnning on January 1 of each year from 2007 through 2010, DP&L willimplement an Environmental Investment Rider (EIR) which will recoverenvironmental plant investments and incremental operations andniaintenance, depreciation, and tax costs during the rate stabilization periodand will increase each year by 5.4°/a of DP&L's tariffed generation rates. Allincreases to the FIR shall be cumulative. The increases in 2009 and 2010 willbe avoidable for switching cdstomers. DP&L would implement the EIRthrough an ATA filing, which would be subject to review by the Commissionstaff for the limited purpose of confirming that the filing implements therates provided for by the stipulation.

6. The provisions of the RSP Stipulation that were not superseded by thisstipulation will remain in effect, including Section IX.F. of the RSPStipulation, whFch provides that the Commission may terminate the ratestabilization period and trigger a competitive bidding process if market-based rates do not reasonably reflect the rates established by the stipulation.

7. The Voluntary Enrollment Procedure established by the RSp Stipulation willcontinue in 2006, as provided by the RSP Stipulation, and one additionaltime in 2007.

8. If subsequent legislation affects the terms of the stipulation, then the partieswill engage in good faith negotiations to comply with the legislation andpreserve the economic benefits of the stipulation.

III. EVALUATION OF THE STIPULATION

Rule 4901-1-30, Ohio Administrative Code, authorizes parties to Commissionproceedings to enter into stipulations. Although not binding on the Commission, theterms of such agreements are accorded substantial weight, See Consumers' Counsel o. Pub.1[[fI. Comm., 64 Ohio State 3d 123,125 (1992), citing Akron v. Pub. Litil. Comm., 55 Ohio St.2d 155 (1978).

The standard of review for considering the reasonableness of a stipulation has beendiscussed in a number of prior Commission proceedings. See, e.g., Daminion Retail v.Dayton Power and Light, Case No., 03-2405-EL-CSS et al., Opinion and Order (Febntary 9,2005); Cincinnati Gas & Eiectric Co., Case No. 91-410-EL-AIR, Order on Remand (Apri114>1994); Ohio Edison Co., Case Nos. 91-698-EL-FOR et al., Opinion and Order (December30,1993); Cleveland Electric Rlum. Co., Case No. 88-179-EL-AIR, Opinion and Order(January 31, 1989). The ultimate issue for our consideration is whether the agreement,which embodies considerable time and effort by the signatory parties, is reasonable and

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should be adopted. In considering the reasonableness of a stipulation, the Commissionhas used the following criteria:

(1). Is the settlement a product of serious bargaining among capable;knowledgeable parties?

(2) Does the settlement, as a package, benefit ratepayers and the public interest?

(3) Does the settlement package violate any irnportant regulatory principle orpractice?

The Ohio Supreme Court has endorsed the Canmission's analysis using ehesecriteria to resolve issues in a manner economical to ratepayers and public utilities. Indus.Energy Consumers of Ohio Pomer Co. v. Pub. Util. Comm., 68 Ohio St. 3d 547 (1997) (quottngConsumers' Counsel, at 126). The Court stated in that case that the Commission may placesubstantial weight on the terms of a stipulation, even though the stiputation does not bindthe Commission.

(1) Is the settlement a vroduct of serious bargaininy amone caoable,knowledgeable Darties?

OCC arguea that the signatory parties are capable, knowledgeable parties who havebreached their obligations under the RSP Stipulation. OCC further asserts that thestipulation is not the result of serious bargaining among capable, knowledgeable partiesbecause the signatory parties did not include aE of the signatory parties to the RSPStipulation approved in Case No. 02 2779-EL-ATA. Finatly, OCC argues that thisstipulation cannot alter the RSP Stipulation without the agreement of ali of the signatoryparties to that stipulation (OCC brief at 12-13).

OPAE states that the issue is not whether the proposed settlement involved capableand knowledgeable parties; instead, OPAE argues that signatory parties lacked diversityof interests. OPAE concludes that the stipulation represents an accommodation amongthree self-interested parties which excludes significant consumer gtnups (OPAE brief at 2-3). In its reply brief, OCC coneurred with OPAE's argument, noting that only two of thesix parties to the RSP Stipulation also signed the stipulation in this case (OCC reply at 6).

DP&L notes that, although its wiiness testified that the stipulation was the productof serious bargaining among capable, knowledgeable parties, OCC's witness concededthat he did not offer an opinion on this issue (DP&L brief at 5-6; Tr. III at 20-21).Therefore, DP&L argues that based upon the evidence presented at the hearing, it isundisputed that this criterion is established. In its reply brief, DP&L argues that theCommission has rejected the proposition that this criterion is satisfied only if a

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representative of each customer class signs the proposed stipulation (DP&L reply at 2,quoting Dominion Retaif v. Dayton Power and Light, supra, at 17).

The Commigsion has previously held that it wiE not require any individual party'sapproval of stipulations in order to meet the first criterion of our three-prong stendard of

review. Dominion Retail v. Dayton Power and Light, at 18. In considering whether therewas serious bargaining among capable and knowledgeable parties, the Commissionevaluates the level of negotiations that appear to have occurred and takes notice of theexperience and sophistication of the negotiating parties. In this case, it is dear from therecord that all parties participated in negotiations. Neither OCC nor OPAE argue thatthey were kept away from the negotiating table. The signatory parties aIl routinelypartic[pate in complex cases before the Commission and are all represented by counsel .who practice before the Commission on a regular basis. Moreover, although no partiesrepresenting residential consumers signed the stipulation, the signatory parties dorepresent a diversity of interests including the utility and industrial and commercialconsumers as well as a competitive retail electric service provider. Therefore, theCommission finds that the first prong of the test is met by the stiputation.

(2) Does the settlement as aMckaee benefit rateuavers and the uublic interest?

DP&L argues that the stipulation provides below-market prices and that thestipulation protects its standard service offer customers from volatilfty and rate shock(DP&L brief at 7-9). DP&L argues that there is no dispute that the atipulation wiII provideresidential customers $262 million in savings versus projected market rates from 2006 :

through 2010 (id. at 8).

Moreover, DP&L states that the stipulation will promote competition. According toDP&L, conducting Voluntary Enrolhnent Procedure (VEP) one additional time in 2007 wiEpromote competition (DP&L brief at 9). Moreover, the fact that the increases in the EIRfor 2009 and 2010 are avoidable will increase the shopping credits and promotecompetition. Finally, DP&L argues that shopping customers impose costs on DP&Lbecause of its statutory provider of last resort obligation. DP&L argues that the value ofthese costs substantially exceeds the unavoidable portions of the rate stabilization chargeand the EIR. In support of this, DP&L cites the testimony of its witness Strank, whotestified that the right of switching customers to return to DP&L's MBSSO is equivalent togranting customers a financial option to purchase generation from DP&L at a fixed price(id. at 10-13; DP&L Ex. 13C at 2-4). According to DP&L, Mr. Strunk's testimonyestablished that the value of this option provided to switching customers substantiallyexceeds the price of the unavoidable portions of the rate stabilization charge and the EIR(DP&L brief at 13; DP&L Ex. 13C at 6). Therefore, DP&L argues that the stipulatfonpromotes competition because the stipulation does not require switching customers to payfull value for their ability to return to the MBSSO.

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I

IEU-Ohio argues that the stipulation wiE benefit customers, CRE6 providers andDP&L by eliminating the uncertainty on issues regarding price and reliability of supplyfor the period after December 31, 2008. IEU-Ohio states that the stipulation protecisDP&L's customers from price volatility and potential price inereases that may occur if therate stabilization period ends on December 31, 2008. EiU-Ohio acknowledges thatcustomers will see higher prices on their total bill than they would have under the RSPStipulation; however, such increases are a result of known, measurable and justifiableincreases in costs beyond the control of DP&L (IEU-Ohio brief at 5).

OCC states that, unlike many other stipulations approved by the Commission, thesdpulation provides a complex solution to a simple compliance case and that the signatoryparties propose to disturb a settiement that resolved the cromplex legal issues in Case No.02-2279-EL-ATA (OCC brief at 13). Citing the testimony of its expert witttess, OCC arguesthat residential customers would pay in excess of $20 million more under the stipulationcompared with the RSP Stipulation (OCC Ex. 1B at 5-G). OCC alleges that the averagegeneration rate, using DP&L's market forecasts, would be a mere 0.36 percent above thatproposed in the atipulation (id. at 14-15.) Further, OCC argues that the fact that the newcharges are unavoidable would make it impossible for a marketer to compete with onlythe avoidable portiorn of DP&L's generation rate (id. at 16.)

OPAE contends that the stipulation fails to benefit ratepayers and that thestipulation is not in thepublic interest. OPAE argues that the stipulation raises customerrates above those contemplated by the RSP Stipulation. On the other hand, OPAE statesthat the benefit of protection of customees from a volatile market is unproven andspecalative (OPAE brief at 5-7). OPAE further argues that the stipulation makesgeneration-related charges unavoidable despite the fact that such charges should beincluded as part of DP&L.'s market-based standard service offer (id. at 8-9). Finally, OPAE _argues that, under the provisions of Am. Sub. Senate Bill 3, it is unreasonable andunlawful to charge customers for environmental compliance costs associated with ;generation (fd. at 10-11).

The stipulation presented in this case would extend the rate stabilization planapproved by the Commission in Case No. 02-2279-EL-ATA. Therefore, in determiningwhether this settlement, as a package, benefits ratepayers and the public interest, theCommission will be guided by the three goals the Commission set forth for the ratestabilization plans: (1) rate certainty for customers; (2) financial stability for the utility; and :(3) the further development of competitive markets. In the Matter of the Application of TYieCincinnati Gas & Electric Company to Modffy its Nonresidential Generation Rates to Provide forMarket-Bases Standard Service Offer Pricing and' to Establish an Afiprnatiae Competitive-BidSeroice Rate Option Subseguent to the Market Deaelopment Period, Case No. 03-93-F1 ATA,Opinion and Order (September 29, 2004) at 15.

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Although DP&L alleges a $262 million savings to residential consumers as theresult of stipulation, the CouimLssion finds that the oomparison between rates to be paidunder the stipulation and projected market rates from 2006 through 2010 is not therelevant comparison for the review and evaluation of the stipulation filed in this case. T'heRSP stipulation, which was approved by the Commission, establishes the prlce to beoffered costomers from 2006 through 2008, unless and until otherwise ordered by thisCommission. Therefore, the proper comparison is between: (1) the price residentialcvstomers would pay from 2006 through 2008 under the RSP stipulation plus projected.znarket prices in 2009 and 2010, and (2) the prices for 2006 through 2010 provided underthe stipulation filed in this case. According to OCC's witnessHaugh, the total generationrevenue paid by residential customers under this comparison is substantially equal; underboth scenarios, residential customers would pay $1.66 billion from 2006 through 2010(OCC Exhibit lb, Schedule MPH-1, Scenario I and Scenario III, Schedule MPH 3, andSchedule MPH-5).

Nonetheless, the Comm;ss;on's review r.annot end with this comparison. Theprojected market prices for 2009 and 2010 are simply projections. According to thetestimony at the hearing, it is undisputed that the current markets for power for 2009 and2010 are not liquid and that this lack of financlal liquidity makes such nWkets difficult topredict (Tr. III at 24). The Commission finds that there is significant value in providingpredictable, stable rates for 2009 and 2010 rather than relying on projected market rates.Because of the unpredictable nature of the market for 2009 and 2010, the Commission findsthat, although it is difficult to quantify the value of stable, predictable rates precisely, theknown rates do have, value for customers. Further, the Co misWon notes that DP&L'switness Shrunk testified that the value was consistent with that provided by an optionpurchased in the futures market (DP&L Ex. 13C at 2,6). Moreover, this value is enhancedbecause the Commission retains the authority to terminate the rate stabilization petiod, atany time, in the event that market rates are substantially below the prices provided for bythe stipulation (Signatory Parties Ex. 1 at 6; OCC Ex. 2 at 14-15. See also, Dayton Power and

Light C'otnpany, Case No. 02-2279-EL-ATA at 26-27).

Moreover, the Commission must review the settlement package for benefits to allratepayers and the public interest. No commercial and industrial customers have opposedthe stipulation. Instead; representative of commerciai and industrial customers aresignatory parties to the stipulation and these parties agree that the stipulation benefitsratepayers by eliminating uncertainty and providing for stable, predictable rates ttmugh2010.

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Therefore, the Commission finds that the stipulation, as presented, meets the firstgoal for rate stabilization plans: the stipulation provides rate certainty to customers for theperiod January 1, 2006 through December 31, 2010. The second goal established by theComntission for rate stabilization plans is to provide financial stability for the utility:Cincinnati Gas and Electric Co., Case No. 03-93-EL-ATA at 15. The testimony of DP&Lwitness Seger-Lawson established that the increases in the EEt provided for by thestipulation should recover revenues of $374,318,805 between January 1, 2006, andDecember 31, 2010 (DP&L Ex. 11F, Attaclunent A). The Commission finds that thisrevenue should provide financial stability to the utility by recovering environmentalcompliance costs incurred by DP&L and thus meets the second goal for rate stabilizationplans.

Nonetheless, the Contmission is concerned by the impact of the stipulation oncompetition. The third goal for rate stabflizatfon pians is to further the development ofcompetitive markets. Cincinnati Gas and Electric Co., Case No. 03•93-ELrATA at 15. TheCommfssion notes that, as presented, the stipulation provides that the increases to the EIRscheduled for 2009 and 2010 are avoidable. The Comtuission believes that the entire EIR .should be avoidable to customers who shop for the duration of the stipulation. Pvlak9ngthe entire EIR avoidable would promote competitive markets by increasing the shoppingcredit to customers who switch to competitive provider. Therefore, the Commission willmodify the stipulation to provide that all increases in the E[R be avoidable from 2007through 2010. The Commission finds that, as modified, the stipulation meets the goal ofpromoting the development of competitive markets.

In addition, the Commission believes that the stipulation does not specificallyaddress whether DP&L is committed to financially support the Voluntary EnrollmentProcedure (VEP). At the hearing, DP&L's witness Segar-Lawson testified that DP&L iscommitting the resources to support VEP in the amount of $500,000 per year (Tr. ]II at 139-140). Therefore, in order to clarify this provision of the stipulation, the Commission ordersDP&L to commit up to $500,000 to support VEP in 2007, in addition to the funds alreadycommitted to support VEP in 2006 by the RSP Stipulation.

The Commission finds that the value of extending stable, predictable rates through2010 is a significant benefit to ratepayers and the public interest and that such valueoutweighs the burden of the increased rates. Moreover, the Commissfon f9nds that thestipulation, as modified, meets the three goals established by the Commission for ratestabilization plans. Therefore, upon careful consideration of the record in this proceeding,the Comrnission finds that the stipulation, as a package and as modified by theCommission, benefits ratepayers and the public interest.

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3) Does the settlement nackage violate any important regdetorv nrinaciple orra ' 't

The OCC argues in its post-hearing brief that approval of the stipulation wouldviolate important regulatory principles and practices. SpecificaEy, OCC argaes that thestipulation is a coIlateral attack on the Conurussion's order approving the RSP stipulationin Case No. 02-2279-EL-ATA and is therefore iIlegal (OCC brief at 16-17). Further, OCCargues that the settlement package violates DP&L's tariffs (Id. at 18-20). FinaUy, OCCargues that approval of this stipulation ixndermines the settlement process (id. at 20-21).

DP&L asserts that the stipulation does not violate any important regulatoryprinciples or practices. DP&L argues that the stipulation provides market-based rates andprovides for competitive bidding through the voluntary enrollment process (DP&L brief at25-26). Moreover, DP&L argues that the stipulation is not barred by the doctrine of !coIlateral estoppel because several important facts and events have occurred since the RSPstipulation was approved by the Commission. DP&L states that, although the RSPStipulation included several provisions designed to promote competition, there has beenvery little customer switching to competitive providers since the Commission approvedthe RSP Stipulation; DP&L cites to undisputed testimony at the hearing that only 0.03percent of its load have switched to competitive providers unaffiliated with DP&L (id. at26-27; DP&L Ex. 11E at 3). Moreover, DP&L argues that fuel and environmental costincreases have greatly exceeded expectations at the time the RSP Stipulation wasapproved, noting that the staff report demonstrates that the increase in such costsexceeded 11 percent in the first year of the RSP Stipulation alone (DP&L brief at 27; StaffEx. 2, Schedule A-1).

The Commission finds that the stipulation does not represent an improper collateralattack on the Commission's order approving the RSP Stipulation in Case No. 02-2279-EL-ATA. The Conunissian finds that, based upon the evidence in the record in thisproceeding, the competitibe market in DP&L's service territory has not developed as the ICommission expected when it approved the RSP Stipulation. According to the testimonyat hearing, only 0.03 percent of DP&L's total load has switched to a competitive suppliernot affiliated with DP&L (DP&L Ex. 11E at 3). In addition to this testimony, theCommission notes that, in 2005, there were four rounds of competitive bidding under theVoluntary Emollment Program and that none of the rounds of competitive biddingproduced a single bidder (In the Matter of the Commission's Selection of Generation Providers

for The Dayton Power and Light Company's Voluntary Enrollment Procedure, Case No. 05-302- .EL-UNC, Reports of the VEP Oversight Group dated March 8,2005, May 12, 2005, July 7,2005, and August 31, 2005). Similarly, the Conunission finds that the record in thisproceeding demonstrates that fuel and environmental costs vastly exceeded theCommission's expectations at the time the RSP Stipulation was approved. TheComnvssion believes in the precedential value upanall of its prior decisions, including the

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decision to adopt the RSP Stfpulation in Case No. 02-2279-ELrATA; however, in light ofthe changed circumstances enumerated above, the Commission finds that extension andmodification of the RSP Stipulation is dearly needed. Consumers' Counsel a. Pub. i7til,Comm. (1984), 10 Ohio State 3d 49.

The Commission finds that the stipulation does not violate any importantregulatory principles or practices. OCC alleges that the "settiement package" violatesDP&L's tariff. At the hearing, the OCC elicited testimony from DP&L's witness Seger-Lawson that Dl'&L had offered to waive the tariff provision requfrirng sixty days notice toretuin to its standard offer service for Cargiil and Honda (Tr. ID at 104-107). The OCCbelieves that such waivers are improper and, therefore, the "settlement package" violatesDP&L's tariffs. The Cornmission notes that DP&L's witness Segar-Lawson also testified atthe hearing that DP&L will apply the waiver in a non-discriminatory fashfon to anysitnilarly situated customer (id. at 107). To the extent that OCC or any other party believesthat DP&L has applied such waiver in a discriniinatory fashion, they may file a complaintwith the ConuNssion under Section 4905.26, Revised Code. However, the Commissionfinds that this waiver is not part of the stipulation presented to the Commissfon for reviewand, therefore, is not relevant to thisprooeeding.

IV. RATE STASILIZATiON SURCHARGE RIDER

The stipulation proposed a RSS Rider amounting to 11 percent of DP&L tariffedgeneration rates as of January 1, 2004. The staff recommended that DP&L be authorized toinaease its revenue by $76,250,127, an increase of 11 percent over current generationrevenue and of 7.30 percent over total current revenue (Staff Ex. 2 at 2; Staff Ex. 3 at 2).Adding the increase of $76,250,127 to the test-year revenue of $1,043,610,976 produces anew pro forma revenue total of $1,119,817,954.

The Commission finds the recommended increase of $76,250,127 in revenue to befair, reasonable and supported by the record and, therefore, will authorize DP&L to împlement the RSS Rider proposed by the stipulation.

V. TARIFFS

As part of its investigation in this proceeding, the staff reviewed the proposed tariffprovisions for the RSS Rider, including the methodology used to calculate the rates to beincluded in the R.SS Rider and the placement of the rider in DP&L's Distribution ServiceTariff, and has reconunended that they be approved by the Conunission. The tariffs filedby DP&L do not reflect the 2.5 percent generation reduction for residential customersprovided in the stipulation. The Comnvssion directs DP&L to make this adjustment in thefinal tariffs. Otherwise, the Commission finds that the tariffs filed on Apri14, 2005, arereasonable, and they will be approved by the Conunission.

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VI. OTI-fER ISSUES

OCC objected that the staff report failed to require DP&I. to reduce its generationrates for residential customers by the additional 2.5 percent provided for by the RSPStipulation, as modified by the Commission. The OC'C states that the Commission hadruled, in adopting the RSP Stfpqlation, that the additiona12.5 percent reducHon wiB takeeffect if "insuffident competition" has been experienced in the DP&L service territory(OCC brief at 6-7). OCC notes the testimony of its witness Haugh, who testified thatresidential competition has not developed in areas served by DP&L (OCC Ex. 1-A at 11).Because the stipulation includes the additional 2.5 percent reduction in generation ratessought by the OCC, the Commission finds that, in light of our adoption of the modifiedstipulation in this case, the OCC's objection is moot

OCC objected to the staff report's conclusion that the placement of the RSS Rider inthe company's DistributionService Tariff is reasonable. OCC argues that DP&L agreed inthe RSP Stipulation that the RSS is a generation charge and that the tariffs should conformto that agreement (OCC brief at 9). In the staff report, the staff concluded that, since therider is unavoidable, its placement in the Distribution Service Tariff is reasonable (staffreport at 27). The Commission agrees with the staff's conclusion that placement of therider in the Distribution Service Tariff reduces confusion as to whether the diarges areavoidable; therefore, the Commission finds that this objection shouldbe denied.

Finally, OCC objected to the failure of the staff report to evaluate DP&L'sapplication for coinpliance with the requirements of Section 4909:18, Revised Code. Staffargues that OCC has failed to identify with any particularity either DP&L's or the staff'sfailure to comply with such requirements (staff brief at 6; staff reply at 3). Further, staffargues that the process for adjusting the RSS Rider was set forth in the RSP Stipulation, ofwhich the OCC was a signatory party. Staff notes that the Commission specifically found :that the RSS medianism was "reasonable and legally sustainable" (id. at 4, quoting DaytonPower and Light, Case No. 02-2279-EL-ATA at 28) and that this finding was upheid by theSupreme Court in Constellation NewEnergy, Inc. v. Pub. l.Itif. Comm'n, (2004) 104 Ohio St. 3d :530, 539. Finally, the staff notes that, in this proceeding, the Commission has granted toDP&L waivers of a number of the Commission's Standard Filing Requirements (staff replyat 5; Entry (March 23, 2005)). The Commission finds that the RSP Stipulation dearly statedthat adjustments to the RSS Rider should be made by applicatfon of the company underSection 4909.18, Revised Code, and that the parties intended that such application belimited to the rider only, rather than a general rate proceeding. Therefore, theCommts.sion finds that OCC objection should be denied.

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OPAE objected to the failure of the staff report to require DP&I, to provideincreased funding for energy efficiency services to low-income customers. OPAE befievesthat such services could mitigate the impact of the rate increases resutting from thestipulation. OPAE cites to the testimony of its wiiness Donnellan, the ctuef executiveofficer of the Conununity Action Partnership of the Greater Dayton Area, who testified forthe need for $1 million in funding for these services (OPAE brief at 12).

DP&L disagrees with OPAE's objection. DP&L argues that past contributions offunds by DP&L for energy efficiency.funding occurred in the context of settCements andthat OPAE dec]ined to particfpate in the settlement in this case. DP&L also argues thatwitness Donnellan provided no basis for arriving at the $1 million figure for fundingenergy efficiency programs and that witness Donnellan provided no plan on how hisorganization would spend these funds (DP&L brief at 21). The staff also disagreed withOPAE'a objection. The staff argues that the RSS Rider sought in this proceeding waspreviously authorized subject to review and verification, by the Commission in the RSPStipulation and that there was no provision in that case for the funds recommended byOPAE (staff brief at 6). Therefore, the staff conciudes that such fundfng is beyond thelimited scope of this proceeding (id. at 6-7; staff reply at 9).

The Commission will not order DP&L to provide such funding at this time. TheConwdssion believes that, absent a provision in the stipulation, the question of funding for ;energy efficiency programs is properly left to general rate cases. Although, as providedfor in the RSP Stipulaflon, this case was brought pursuant to Section 4909.18, RevisedCode, the scope of this proceeding remains a limited one, and the Commission finds thatOPAE's recommendation is outside of the scope of this proceeding and its objectionshould be denied.

Although the stipulation purports to have resolved all outstanding issues in thisproceeding, there are a number of objections to the staff report which have not beenaddressed on brief or withdrawn. To the extent that any such objection is not specificallyaddressed in this opinion and order, the Commission finds that the objection should bedenied.

FINDINGS OF FACT AND CONCLUSIONS OF LAW:

(1) DP&L is an electric light company within the meaning ofSections 4905.03(A)(4) and 4928:01(A)(7), Revised Code, and, assuch, is a public utility as defined by Section 4905.02, RevisedCode, subject to the jurisdictlon and supervision of theConunission.

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(2) On March 1, 2005, DP&L filed a notice of intent to file anapplication for an increase in rates to be diarged. In thatnotice, DF&L requested a test period beginning October 1,2004, and ending September 30, 2005, and a date certain ofM'arch 31, 2005.

(3) DP&L's application was Hled pursuant to, and thisComtni.ssion has jurisdiction over the application under, theprovisions of Section 4909.18, Revised Code. The applicationcomplies with the requirements of this statute.

(4) By entry of March 23, 2005, the Commission approved therequested test year and date certain.

(5) On April 4, 2005; DP&L filed its application for an increase inrates. By entry dated May 4, 2005, the Commission acceptedDP&L's application for filing.

(6) Intervention was granted to: the Ohio Consumers' Counsel;Industrial Energy Users-Ohio; Ohio Partners for AffordableEnergy; Cargill, Inc.; and Honda of America Mfg., Inc.

(7) A motion was granted to adniit David C. Rinebolt to practicepro hacvice on behalf of OPAE.

(8) On August 26, 2005, staff filed its written report ofinvestigation with the Commission: Objections to the staffreport were filed by several parties.

(9) A prehearing conference was held on October 6,2005.

(10) The local public hearing was held on October 27, 2005,pursuant to published notice. Two public witnesses gaveunswom testimony.

(11) The evidentiary hearing commeno:d on November 4, 2005, andcontinued on November 8, 2005, November 14, 2005, andNovember 15, 2005.

(12) On November 3, 7005, a stipulation which purports to resolveall of the issues raised by these proceedings was filed by fourparties.

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(13) The ultimate issue for the Comndssion's consideration iswhether the agreentent, which embodies considerable time andeffort by the signatory parties, is reasonable and should beadopted. In considering the reasonableness of the stipulation,the Commission has used the following cMeria:

(a) Is the settlement a product of serious bargaining amongcapable, knowledgeable parties?

(b) Does the settlement, as a package, benefit ratepayers andthe public interest?

(c) Does the settlement package violate any importantregulatory principle or practice?

(14) The stipulation was the product of serious bargaining amongcapable, knowledgeable parties representing a diversity ofinterests including the utllity and industrial and commercialconsumers as well as a competitive retail electric aerviceprovider.

(15) As modified by this Opinion and Order, the stipulation, as apackage, benefits ratepayers and the pubflc interest. Thestipulated resolution of this case is for many reasonsadvantageous and meets the three goals established by theCommission for the consideration of rate stabilization plans.

(16) The stipulation does not violate any important regulatoryprinciples or practices. In light of the changed circumstancessince the approval of the RSP Stipulation, extension andmodification of the RSP Stipulation is dearly needed.

(17) The stipulation submitted by the parties is reasonable and, asindicated herein, shall be adopted as modified by theCommission.

(18) DP&L is authorized to implement the RSS Rider to increase itsrevenue by $76,250,127, an increase of 11 percent over cuA'entgeneration revenue and of 7.30 percent over total cun'entrevenue. This RSS Rider is fair, reasonable and supported bythe record in this proceeding.

-15-

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ORDElt:

ORDERED, That the stipulation presented in these proceedings be adopted as ;modified by the Commis.cion. It is; further,

ORDERED, That the application of The Dayton Power and Light Company forauthority to increase its rates and charges for service is grazited to the extent provided in ;this opinionand order. It is,further

ORDERED, That DP&L is authorized to file in final form four complete, printedcopies of tariffs eonsistent with this opinion and order, and to cancel and withdraw itssuperseded tariffs. One copy shall be filed with this case docket, one copy sttall be filedwith the applicant's TRF docket and the remaining two copies shall be designated fordistribution to the Rates and Tariff Divisfon of the Comndssion's Utqities Department.The applfcant shall also update its tariffs previously filed electronfcally with theCommission's docketing division. It is, further,

ORDERED, That the effective date of the new tariffs sliall be a date not earlier thanboth January 1, 2006, and the date upon whfch four complete, printed copies of final tariffsare filed with the Conunission. The new tarifes shall be effective for services rendered onor after such effective date. It is, further,

ORDERED, That DP&L shall notify all affected customers of the tariff changes via abill message or a bill insert within 30 days of the effecbive date of the tarlffs. It is, further,

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ORDERED, That a copy of this entry be served upon all parties of record.

THE PUBLIC ITIES CONIIvIISSION OP OHIO

on

R. Schriber, Chairman

GAR:ct

Entered in the Journal

DM2g^^

Rene€ J. JenkinsSecretary

-17-

68

BEFORE

THE PUBLIC UTILTTIFS COMMISSION OF OHIO

ht the Matter of the Application of The Cincin-nati Gas & Electric Company for an Increase inElectric Distribution Rates.

In the Mattex of the Application of The Cincin-nati Gas & Electric Company for Approval toChange Accounting Methods.

Case No. 05-59-EL-AIR

Case No. 05-60-EL-AAM

OPINION AND ORDER

The Commission, coming now to consider the stipulation, testimony, and otherevidence presented in these proceedings, hereby issues its opinion and order.

APPEARANCES:

James B. Gainer, Associate General Counsel, Paul A. Colbert, Senior Counsel, Kate E.Moriarty, Assistant General Counsel, and Rocco O. D'Ascenzo, Counsel, The CincinnatiGas & Electric Company, 139 East Fourth Street, P.O. Box 960, Cincinnati, Ohio 45201, onbehalf of the Cincinnati Gas & Electric Company.

Jim Petro, Attorney General of the State of Ohio, Duane W. Luckey, Senior DeputyAttorney General, by Thomas G. Lindgren, William L. Wright, and John Jones, AssistantAttorneys General, 180 East Broad Street, Columbus, Oldo 43215, on behalf of the staff ofthe Public Utilities Commission of Ohio.

Janine L. Migden-Ostrander, Ohio Consumers' Counsel, by Kimberly W. Bojko,Jeffrey L. Small, and Larry S. Sauer, Assistant Consumers' Counse1s,10 West Broad Street,Suite 1800, Columbus, Ohio 43215, on behalf of residential utility consumers of theCincirmati Gas & Electric Company.

McNees, Wallace & Nurick, by Samuel C. Randazzo and Daniel Neilsen, 21 EastState Street, 17th Floor, Columbus, Ohio 43215, on behalf of Industrial Energy Users-Ohio.

Craig I. Smith, 2824 Coventry Road, Cleveland, Ohio 44120, on behalf of Formica

Corporation.

David C. Rinebolt, Executive Director and Counsel, 231 West Lima Street, P.O. Box1793, Findlay, Ohio 45839, and Colleen L. Mooney, Counsel, 1431 Mulford Road,Columbus, Ohio 43212, on behalf of Ohio Partners for Affordable Energy.

This ie to certify that the iraages appearing are an

accuraho and co;rylete reproduction of a aaee file

Bocunlent delivered in the regialar course ofbusiness.

Techni.ciaa-a L f^______nate Hrocessed -LZ`Z! -C]a

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Bricker & Eckler LLP, by Sally W. Bloomfield and Thomas J. O'Brien, 100 SouthThird Street, Columbus, Ohio 43215, on behaff of the City of Cincinnati.

Christensen & Christensen, by Mary W. Christensen, 401 North Front Street, Suite350, Columbus, Ohio 43215, on behalf of People Working Cooperatively, Inc.

Boehm, Kurtz & Lowry, by David F. Boehm and Michael L. Kurtz, 36 East SeventhStreet, Suite 1510, Cincinnati, Ohio 45202, on behalf of Ohio Energy Group.

Bricker & Eckler LLP, by Glenn S. Krassen, 1375 East Ninth Street, Suite 1500,Cleveland, Ohio 44114, on behalf of the Ohfo Association of School Business Officials, theOhio School Boards Association and the Buckeye Association of School Administrators.

Boehm, Kurtz & Lowry, by Michael L. Kurtz, 36 East Seventh Street, Suite 1510,

Cindnnati, Ohio 45202, on behalf of the Kroger Co.

OPINION;

I. HISTORY OF THE PROCEEDBVGS

The applicant, the Cincixmati Gas & Electric Company (CG&E), is an Ohiocorporation engaged in the business of production, transmission, distribution, and sale ofelectricity to approximately 660,000 consumers in ten counties in the southwestern portionof Ohio. It is, thus, an electric Eght company, as defined by Section 4905.03(A)(4), RevisedCode, and a public utility, as defined by Section 4905.02, Revised Code. CG&E's currentbase distribution rates were established by the Conunission in In the Matter of the

Application of The Cincinnati Gas & Electric Company for an Increase in Eiectric Rates in Its

Service Area, Case No. 92-1464-EL-AIR, Opinion and Order (August 26, 1993), and werefurther approved in In the Matter of the Application of the Cincinnati Gas & Electric Company

for Approval of its Electric Transition Plan, Case No. 99-1658-ECrETP et aI., Opinion and Order

(August 31, 2000).

On January 18, 2005, CG&E filed, in Case No. 05-59-EL-AIR, a notice of intent to Cilean application for an increase in rates for distribution service to be charged and, in CaseNo. 05-60-EL-AAM, an appfication for authority to modify its current accountingprocedures to allow deferrals related to a proposed capital investment reliability rider(CIRR), in its entire service area subject to the jurisdiction of the Commission. CG&Bstated, in that notice of intent, that its purposes for the application are to generate sufficientrevenue to pay its distribution-related operating expenses, service its debt, provide anadequate rate of return on its property used and useful in the rendition of electricdistribution service to its customers, to establish a demand side management rider (DSMR),a backup delivery point capacity rider (BDP), and to establish rider CIRR previouslyauthorized by the Commission in In the Matter of the Application of The Cincinnati Gas &

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Electric Company to Modify its Non-Residential Generation Rates to Provide for Market-Based

Standard Service Offer Pricing and to Establish a Pilot Alternative Competitively-Bid Service Rate

Option Subsequent to the Market Development Period, Case No. 03-93-EIrATA et at (RSP case).CG&E requested that a test period be established beginning July 1, 2004, and ending June30, 2005, and that a date certain of September 30, 2004, be established. By entry of February9, 2005, the Commission approved the requested test year and date certain. TheCommission also granted CG&E's request to waive compliance with certain filingrequirements. CG&E filed its application on February 17, 2005. By entry of April 6, 2005,the Commission accepted CG&E's application for filing as of February 17,2005.

The attorney examiners in these proceedings granted intervention to the Office ofthe Ohio Consumers' Counsel (OCC); Industrial Energy Users-Ohio; Formica Corporation;Ohio Partners for Affordable Energy (OPAE); the City of Cincinnati; People WorkingCooperatively, Inc.; Ohio Energy Group; the Ohio Association of School Business Officials;the Ohio School Boards Association; the Buckeye Association of School Administrators;and Kroger Co. The examiners also granted motions to admit David C. Rinebolt to practice

pro hac vice on behalf of OPAE.

Pursuant to Section 4909.19, Revised Code, Commission staff conducted aninvestigation of the matters set forth in CG&E's application. On September 9, 2005, stafffiled its written report of investigation with the Commission. Objections to the staff reportwere filed by several parties. On October 14, 2005, the attorney examiner issued an entrythat scheduled a local public hearing to be held on December 6, 2005, at 6:30 p.m., inCincinnati, and scheduled the evidentiary hearing to commence on December 12, 2005.CG&E published notice of the local public hearing. A prehearing conference was held onNovember 4, 2005. On November 10, 2005, pursuant to discussions among the parties atthe prehearing conference, the evidentiary hearing schedule was modified to commence onDecember 5, 2005. The evidentiary hearing commenced as scheduled. CG&E announcedthat the parties were working on the negotiation of a stipulation in these matters. Notestimony was taken on that date. The hearing was continued until December 8, 2005, toallow the parties to continue their negotiations. The local public hearing was held onDecember 6, 2005, as scheduled. One public witness gave sworn testimony and one gave

unsworn testimony.

On December 6, 2005, a joint stipulation and recommendation (stipulation) wasfiled, wliich purports to resolve all of the issues raised by these proceedings. All partiessigned this stipulation. In light of the filing of the stipulation, no further testimony wastaken. No briefs were filed by any party.

U. SUMMARY OF THE STIPULATION

The stipulation in these cases provides, inter alia:

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(1) Staff shall amend Schedule A-1 of the staff report, to reflect a

revised, recommended revenue increase.

(2) CG&E's revenue increase in these cases shall be set at$51,493,066, which represents the midpoint of the staff's rangeon updated Schedule A-1, Stipulation Attachment 3, and shallbe implemented as set forth in Stipulation Attachment 2.

(3) For purposes of these proceedings only, the revenue increaseamount shall include recovery of the rate case expensesrequested by CG&E in these proceedings, amortized over threeyears.

(4) The calculation of the distribution reliability investment riderwill be as set forth on Attachment WDW-2 of the testimony ofCG&E witness W. Donald Wathen in these proceedings.

(5) The residential customer charge shall be set at $4.50, asrecommended by staff in the staff report.

(6) CG&E may establish a real-time pricing program charge of$183.00, as recommended by staff in the staff report.

(7) CG&E will update the rate for reconnecting both gas andelectric service in its electric tariff, Sheet No. 92, to $38.00 perevent. The parties recommend that the Commission approvethe combination electric and gas reconnection charge in thesecases. CG&E may file under a separate docket, and the partiesrecommend that the Commission approve, CG&E's filing toupdate gas tariff Sheet No. 82.2 to reflect the same charge of $38to reconnect both gas and electric service. Nothing hereinprecludes any party from exercising its rights to due process inthe case to update the gas tariff.

(8) CG&E shall amend the applicability section of its DM and DStariff schedules to clarify that the DM tariff schedule isapplicable to only those customers whose monthly usage is 15kilowatts (kW) or less and the DS tariff schedule is applicableonly to customers whose monthly usage is greater than 15kW,

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(1) Staff shall amend Schedule A-1 of the staff report, to reflect arevised, recommended revenue increase.

(2) CG&E's revenue increase in these cases shall be set at$51,493,066, which represents the midpoint of khe staff's rangeon updated Schedule A-1, Stipulation Attachment 3, and shallbe implemented as set forth in Stipulation Attachment 2.

(3) Fo.r purposes of these proceedings only, the revenue increaseamount shall include recovery of the rate case expensesrequested by CG&E in these proceedings, amortized over threeyears.

(4) The calculation of the distribution reliability itivestment riderwill be as set forth on Attactunent WDW-2 of the testimony ofCG&E witness W. Donald Wathen in these proceedings.

(5) The residential cvstomer charge shall be set at $4.50, asrecommended by staff in the staff report.

(6) CG&E may establlsh a real-time pricing program charge of$183.00, as recommended by staff in the staff report.

(7) CG&E will update the rate for reconnecting both gas andelectric service in its electric tariff, Sheet No. 92, to $38.00 perevent. The parties recommend that the Commission approvethe combination electric and gas reconnection charge in thesecases. CG&E may file under a separate docket, and the partiesreconvnend that the Commission approve, CG&E's filing toupdate gas tariff Sheet No. 82.2 to reflect the same charge of $38to reconnect. both gas and electric service. Nothing hereinprecludes any party from exercising its rights to due process inthe case to update the gas tariff.

(8) CG&E shall amend the applicability section of its DM and DStariff schedules to clarify that the DM tariff schedule isapplicable to only those customers whose monthly usage is 15kilowatts (kW) or less and the DS tariff schedule is applicableonly to customers whose monthly usage is greater than 15kW,as set forth on Attachment 1 to the stipulation.

(9) CG&E shall withdraw its proposed modifications to Rider X,relating to its line extension policy.

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(10) The parties agree to the revenue distribution set forth onAttachment 2 to the stipulation.

(11) CG&E shail withdraw its request for a capital investmentreliability rider from these proceedings and ;shall not make afuture request for a capital investment reliability rider, or acomparable rider, in any proceeding prior to January 1, 2007.

(12) CG&E may implement the rates agreed upon herein, on aservices-rendered basis, on January 1, 2006.

(13) CG&E will amend its arrearage crediting program enrollmentpolicy to permit income-ineligible percentage of incomepayment plan (PIPP) customers who have a default balance toenroll in the arrearage crediting program. If a customer who isaccepted into CG&E's arrearage crediting program defaults onthe payment obligations of the program in any way, thatcustomer will no longer be eligible for CG&E's arrearagecrediting program until or unless that customer again becomeseligible for PIPP and subsequently becomes income-ineligiblefor PIPP. This provision is conditioned upon CG&E's continuedcost recovery of arrearages associated with this programthroughgas PIPP and the universal service fund.

(14) CG&E shall contemporaneously provide to OCC any electricreliability performance reports or analyses, and broadband overpower lines reports or analyses, that it files, provides, or makesavailable to the Commission or the staff.

(15) CG&E agrees to withdraw its application to establish a fixed billprogram, filed in Case Number 05-230-EL-ATA, et al., andagrees not to file a request for a fixed bill program in anyproceeding prior to January 1, 2007.

(16) CG&E shall continue to fund its existing contracts forweatherization and energy assistance, pursuant to contractchanges made in conjunction with the Cinergy CommunityEnergy Partnership Board, through the term of the rateapproved in this case, or December 31, 2008, pursuant to thestipulation filed May 19, 2004, in Case No. 03-93-EL-ATA,whichever is later.

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(17) CG&E shall withdraw its request for rider BDP in these casesbut may refile its request for rider BDP as an ATA case, subjectto Commission review and approval.

(18) CG&E shall implement a non-residential demand sidemanagement tracker, set initially at $0:00. The program contentshall be determined by CG&E, working with the CinergyConimunity Energy Partnership Board and staff, and shallinclude a total of $1.5 million for programs targeted at schoolfaciliHes over three years. CG&E shall apply for Commissionapproval of any proposed demand side management programand rider. CG&E's obligation under this provision isconditioned upon the Commission's approval of the contents ofthe program and cost recovery thereof.

(19) CG&E shall, concurrent with Commission approval of thestipulation, provide notice to customers of the rates affected bythe stipulation by a bill insert with the customer's bill at the firstpractical billing eycle inunediately following Cornmissionapproval of fhe stipulation.

(20) All recommendations set forth in the staff report, unlessotherwise set forth in the stipulation, including the stipulationattachments, shall be implemented by CG&E.

III. EVALUATION OF THESTIPULATION

The stlpulationin the present proceedings is unopposed. Rule 4901-1-30, OhioAdministrative Code, authorizes parties to Commission proceedings to enter intostipulations. Although not binding on the Commission; the terms of such an agreement areaccorded substantial weight. See, Consumers' Counsel v. Pub. Util. Comm:, 64 Ohio St.3d 123,at 125 (1992), citing Akron v. Pub. Util. Com»6, 55 Ohio St.2d 155 (1978). This concept isparticularly valid where the stipulation is unopposed by any party. and resolves all issuespresented in the proceeding in which it is offered.

The standard of review for considering the reasonableness of a stipulation has beendiscussed in a number of prior Commission proceedings. See, e.g., CincinnatiGas & EleCtricCo., Case No. 91-410-EL-AIR (April 14, 1994); Western Reserve Telephone Co., Case No. 93-230-TP-ALT (IVlarch 30,1004); Ohio Edison Co., Case No. 91-698-EL-FOR et al. (December 30,1993); Cleveland Electric Yltum. Co., Case No. 88-170-EL-AIR (January 30,1989); Restatement ofAccounts and Reeards (Zimmer Plant), Case No. 84-1187-EL-UNC (November 26,19$5). Theultimate issue for our consideration is whether the agreement, whieh embodiesconsiderable time and effort by the signatory parties, is reasonable and should be adopted.

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In considering the reasonableness of a stipulation, the Commission has used the following

criteria:

(1) Is the settlement a product of serious bargaining amongcapable, knowledgeable parties?

(2) Does the settlement, as a package, benefit ratepayers and thepublic interest?

(3) Does the settlement package violate any important regulatoryprinciple orpractice?

The Ohio Supreme Court has endorsed the Conunission's analysis using thesecriteria to resolve issues in a manner.economical to ratepayers and public utilities. Indus.Energy Consumers of Ohio Power Co. v: Pub. Util. Comm., 68 Ohio St.3d 559 (1994) (citingConsumers' Counsel, supra, at I26). The court stated in that case that the Commission mayplace substantial weight on the terms of a stipulation, even though the stipulation does notbind the Commission (Id.).

Based on our three-prong standard ofxeview,we#fnd that the first criterion, that theprocess involved serious bargaining by knowledgeable, capable parties, is met. Counselfor the applicant and the staff, as well as the intervenors, have been involved in many casesbefore the Commission, including a number of prior cases involving rate issues. Further, areview of the terms of the stipulation shows that the parties engaged in comprehensivenegotiations prior to signing the agreement.

The stipulation also meets the second criterion. As a package, it advances thatppblic interest by resolving all issues raised in these proceedings without incurring thetime and expense of extensive litigation. Although the stipulation includes a rate increasefor all customers, the increase will allow CG&E the opportunity to recover expenses andmaintain service quality.

Finally, the stipulation meets the third criterion because it does not violate anyimportant regulatory principle or practice.

Our review of the stipulation indicates that it is in the public interest and representsa reasonable disposition of these proceedings. We will, therefore, adopt the stipulation inits entirety.

IV: RATE OF RETURN AND AUTHORIZED 1NCREASE

As stipulated by the parties, under its present rates CG&E would have a netoperating income of $38,829,236: Applying this figure to the rate base of $839,965,328

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results in a rate of return of 4.62 percent, Such a rate of return is insufficient to provide theapplicant with reasonable compensation forthe service it renders to its customecs.

The parties have agreed that CG&E should be authorized to increase its revenue by$51,493,066, an increase of approximately 19.83 percent over current adjusted annualreveiiue. Adding the stipulated increase of $51,493,066 to the stipulated test-year revenueof $259,668,203 produces a new pro forma revenue total of $311,161,269. Theapplicationofthe stipulated net operating income of $69,213,143 to the rate base of $839,965,328 results ina rate of return of approximately 8.24 percent. (Att.3 to the Stipulation.)

The Commission finds the stipulated increase of $51,493,066 in revenue, whichresults in a rate of return of approxinlately 8.24 percent, to be fair, reasonable, andsupported by the record and, therefore, will adopt the stipulated increase and rate of returnfor purposes of these proceedings.

V. RATES AND TARIFFS

As part of its investigation in these matters, the staff reviewed CG&E's various ratesand charges, and the provisions governing terms and conditions of service. By way of thestipulation, the parties have resolved all outstanding issues. Filed in this docket onDecember 9, 2005, and modified on December 15, 2005, were proposed tariffs that wouldproduce revenue authorized by this order and which are in conformartce with the changesagreed to by the staff. The staff has reviewed the proposed tariffs and has recommendedthat they be approved aspart of the stipulation. The Conlmission finds that the tariffs filedon December 9, 2005, and modified on December 15, 2005, are reasonable and they will beapproved as part of the stipulation.

VI. CUSTOMER NOTICE AND EFFECTIVE DATE

The rates approved herein shall be effective on a services-rendered basis, effectiveon January 1, 2006. CG&E should be aware, however, that final copies of the approvedtariffs must be filed before the tariffs can become effective.

CG&E has prepared and submitted a form of customer notice, docketed onDecember 14, 2005. Such notice shall be approved and shall be sent to customers inaccordance with the terms of the stipulation.

FINDINGS OF FACT:

(1) CG&E is an electric light company within the meaning ofSections 4905.03(A)(4) and 4928.01(A)(7), Revised Code, and, assuch, is a public utility as defined by Section 4905,02, RevisedCode, subject to the jurisdiction and supervision of the

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Commission. CG&E is alsoan electric distribution utility withinthe meaning of Section 4928.01(A)(6), Revised Code.

(2) On January 18,. 2005, CG&E filed, in. Case No. 05-59-EL-AE2, anotice pf intent to file an application for an increase in rates fordistribution service to be charged and,. in Case No. 05-60-EL-AAM, an application for authority to modify its currentaccounting procedures to allow deferrals related to theproposed rider CIRR, in its entire service area subject to thejurisdiction of the Commission: In that notice, CG&E requesteda test period beginning July 1, 2004, and enditng June 30, 2005,and a date certain.of September 30, 2004.

(3) By entry of February 9, 2005, the Commission approved the

requested test year and date certain.

(4) On February 17, 2005, CG&Efiled its apPEcation for an increasein rates. By entry of April 6, 2005, the Commission acceptedCG&E's application for filing as of February 17, 2005.

(5) Intervention was granted to OCC; Industrial Energy Users-Ohio; Formica Corporation; Ohio Partners for AffordableEnergy; the City of Cincinnati; People Working Cooperatively,Inc.; Ohio Energy Group; the Ohio Association of SchoolBusiness Officials; the Ohio School Boards Association; theBuckeye Association of School Administrators; and Kroger Co.

(6) A motion was granted to admit David C. Rinebolt to practicepro hac vice on behalf of OPAE.

(7) On September 9, 2005, staff filed its written report ofinvestigation with the Commission. Objections to the staffreport were filed by several parties.

(8)

(9)

A prehearing conference was held on November 4, 2005.

The local public hearing was held on December 6, 2005,pursuant to published notice, One public witness gave sworntestimony and one gave unsworn testimony.

(10) The evidentiary hearing commenced on December 5, 2005, andwas continued to December 8, 2005. However, as a stipulationhad been filed prior to that date, the hearing was not held.

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(11) On December 6, 2005, a stipulation was filed, which purports toresolve all of the issues raised by these proceedings. All partiessigned this stipulation.

(12) CG&E filed proposed revised tariffs, a customer notice, andproof of publication of the application and the hearings.

(13) The value of all CG&E's property used and useful for therendition of service to its customers affected by this application,determined in accordance with Section 4909.15, Revised Code,is not less than $839,965,328.

(14) The parties also agreed that the adjusted operating income ofCG&Ewas $38,829,236, and the required operating income was$69,213,143, resulting in an income deficiency of $30,383,907.Under the stipulation, the parties agreed that a revenue increaseof $51,493,066 was required.

(15) CG&E's proposed reyised tariffs, as filed on December 9, 2005,and modified onDecember 15, 2005, and notice to customers areconsistent with the discussion and findings set forth in thisopinion and order and shall be approved. CG&E's presenttariffs governing distribution service to its customers affectedby this opinion and order should be withdrawn and canceled.

CONCLUSIONS OF LAW:

(1) CG&E's application was filed pursuant to, and this Commissionhas jurisdiction over the application under, the provisions ofSections 4909.17, 4909.18, and 4909.19, Revised Code. Theapplication complies with the.requirements of these statutes.

(2) A staff investigation was conducted, a report of thatinvestigation was duly filed and mailed, and a public hearingwas held, the written notice ofwhicli complied with therequirements of Sections 4909.19 and 4903.083, Revised Code.

(3) The stipulation submitted by the parties is reasonable and, asindicated herein, shall be adopted in its entirety.

(4) The existing rates and charges for service are insufficient toprovide the appiicant with adequate net annual compensationand return on its property used and useful in the provision ofservice.

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(5) Atate of return of 8,24 percent is fair and reasonable undec thecir,cumstances of this case and is sufficient to provide theapplicant just compensation and return on its property usedand useful in the provision of service to its customers.

(6) CG&Eis authorized to withdraw its current tariffs and to file, infinal form, revised tariffs that the Commission has approvedherein.

ORDER:

ORDERED, That the stipulation presented in these proceedings be adopted in itsentirety. It is, further,

ORDERED, That the application of CG&E for authority to increase its rates andcharges for service is granted to the extent provided in this opinion and order. It is, further

ORDERED, That CG&E is authorized to [ile in final form four complete,. printedcopies of tariffs consistent with this opinion and order, and to cancel and withdraw itssuperseded tariffs. One copy shall be filed with this case docket, one copy shall be filedwith the applicant's TRF docket and the remaining two copies shall be designated fordistribution to the electricity division of the Commission's utilities department. Theapplicant shall also update its tariffs previously filed electronically with the Commission sdocketing division. It is, further,

ORDERED, That the effective date of the new tariffs shall be a date not earfier thanboth January 1, 2006, and the date upon which four complete, printed copies of final tariffsare filed with the Commission. The new tariffs shall be effective for services rendered onor after such effective date. It is, further,

ORDERED, That CG&E's proposed customer notice be approved and that CG&E bedirected to send that notice to its customers in accordance with this opinion and order. Itis, futher,

ORDERED, That Case Nos. 05-230-EL-ATA, 05-231-GA-ATA, 05-232-EL-AAM, 05-233-GA-AAM, 05-234-EL-UNC, and 05-235-GA-UNC be dismissed and dosed of recordand that a copy of thfs opinion and order be placed in the docket of each of such cases. Itis, further,

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ORDERED, That a copy of this opinion and order be served upon all partieaofrecord in the above captioned proceedings and upon all parties of record in Case Nos. 05-230-EL-ATA, 05-231-GA-ATA, 05-232-EL-AAM, 05-233-GA-AAM, 05-234-EL-UNC, and 05-235-GA-UNC.

THE PUBLIC Ua'i1.ITIES COMMISSION OF OHIO

Ronda Hartma

Entered in the lournal

6EC 2 1 200^_

Rene$].Jenkins

8ectetary

!I7/M,r^-

80

BEFORE

THE PUBLIC UTILITIFS COMMISSION OF OHIO

In the Matter of the Application of TheCincinnati Gas & Electric Company to ModifyIts Nonresidential Generation Rates toProvide for Market-Based Standard Service ) Case No. 03-93-EL-ATAOffer Pricing and to Establish an AlternativeCompetitive-Bid Service Rate Option Sub-Sequent to the Market Development Period.

Inthe Matter of the Application of TheCincinnati Gas & Electric Company forAuthority to Modify Current Accounting ) Case No. 03-2079-EL-AAMProcedures for Certain Costs Associated with )theMidwest Independent Transmission )Systezn Operator:

In the Matter of the Application of TheCincinnati Gas & Electric Company forAuthority to Modify Current AccountingProcedures for Capital Investment in its ) Case No. 03-2081-EL-AAMElectric Transmission and Distribution System ) Case No. 03-2080-EL.ATAAnd to Establish a Capital InvestmentReliability Rider to be Effective after theMarket Development:Period.

In theMatter of the Commission sPromulgation of Rules for the Conduct of aCompetitive Bidding Process for Electric ) Case No. 01-2164-EL-ORDDistribution Utilities Pursuant to Section4928.14, Revised Code.

ENTRY

The Commission finds:

(1) The applicant, The Cincinnati Gas & Electric Company (CG&E), is apublic utility as defined in Section 4905.02, Revised Code, and, assuch, is subject to the jurisdiction of this Commission.

(2) On January 10, 2003, CG&E filed an applicaNon (pricing applica-tion), in Case No. 03-93-ELrATA (pricing case), to modify its non-residential generation rates to provide for market-based standardservice Affer (MBSSO) pricing and to establish an alternative com-petitive-tiid process (CBP) subsequent to the etnd of the marketdevelopment period (MDP). Tluough its pricing application,CG&E intends to offer a retail markef-based generation rate to non-residential end-use custnmers that do not switch to a competitiveretail electric service (CRES) provider or the CBP for their genera-tion service. CG&E's proposed CBP will provide non-residential

Tuisie to certiPy that the imaCes a.ppearin3 are.an

accarate and complete repreduction ot acauc filo

do,um.ant delivered in the regular course of'bu iaege

PeclitiicianDate Procesaed ^

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end-use customers with another option in addition to the MBSSOthrough a competitive offering by a CRES provider.

(3) A technieal conference was held on February 12, 2003, to allowinterested persons the opportunity to better understand CG&E's

ricing application. Interested persons and the Commission's staffstaff) also were provided the opportunity to file comments and

reply comments and to propose alternative methodologies toCG&E's application,

(4) Motions to intervene in the pricing case were filed by The KrogerCo. Industrial Energy Users-Ohio (IEU-Ohio); AK Steel Corpora-tion (AK Steel); General Electric Company; Constellation NewEne-rgy, Inc:;: MidAmerican Energy Company; Oluo Consumers'Counsel (OCC); Strategic Energy, LLC; Dominion Retail, Inc.;Energy America, LLC; Duke Realty (Duke); Ohio Partners forAf£ordable Energy (OPAE); and National Bnergy MarketersAssociation (NEMA) (collectively; intervenors). As the Commis-.sion finds that CG&E's pricing application may have a direct effecton the MBSSO and CBP for all CG&E customers and that the inter-venors have set forth valid reasons for intervention, all of themotions to intervene filed by the intervenors will be granted.Motions for admission. pro lincvice were filed to admit Craig G.Goodman and David C. Rinebolt to practice before the Commissionin the pricing case. These motions will also be granted.

(5) Comments andJor ieply conunents regarding the pricing applica-tion, and/or proposed alternative methodologies, were.fded by aliof the intervenors other than Duke, as well as by staff, CG&E; TheDayton Power & Light Company, and Eagle Energy, LLC (collec-tively, commenters):

(6) OCC, IEU-Ohio, AK Steel, and OPAE, have filed motions to dismissCG&E's pricing application or, alternatively, to set the matter forhearing pursuant to Section 4909.18, Revised Code, or to stay thematter until. the CommisBion completes its rulemaking in In theMatter of the conunission's Promulgation of Rules for the conductof a Competitive Bidding Process for Electric Distribution UtilitiesPursuant to Section 4928.14, Revised Code, Case No. 01-2164-ELrORD (rulemaking proceeding). OCC also requests that theCommission consolidate CG&E's pricing application with therulemaking proceeding. These parties and several other partiesZ ng comments argue that CG&E's pricing application should be

missed or stayed until the Commission has considered thecomments filed in the rulemaking proceeding and has establishedproper procedures for the development of MBSSOS and CBPs.They arpue that it would be premature to go forward with CG&E'sapplication before rules are a pproved. In addition, all commenters,including staff, believe that CG&E's pricing application is contraryto electric restructuring public policy objectives set forth in Section

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4928.02, Revised Code, and that the pricing application producesresults that are unreasonable and unlawful. It is also asserted thatcertain proposed riders affect customers who would not takeservice through MBSSO or CBP and; therefore, constitute anincrease in rates. Further, certain commenters argue that theapplication would eliminate the ability of residential customers tobe bid as a part of a pool that includes non-residential customers,eliminating the potential for maximum savings under the CBP. Thecommenters that oppose the pricing application request that theCommission find that the pricing application may be unjust andunreasonable and set the matter for hearing if the Comn-ussion doesnot dismiss the pricing application.

(7) Staff recommends, in its comments, that the Conunission hold ahearingon the pricing application inasmuch as it appears to staffthat the pricing applicatton appears to be unjust and unreasonable.Staff believes that CG&E's pricing ap plication should not beaccepted because its MB550 is intrinsically anti -competitive. Staffbelieves that approval of the pricing application would essentiallyallow CG&E to provide service in the same manner as a CRES pro-vider and that CG&E..should not activety compete as a CRES pro-vider within the operational and legal structure of a public utility.Staff also notes that the prerequisite market irnstitutions for theMBSSO are not yet in p(ace. Staff argues that CG&E is seekingapproval of a market tracking mechanism which is specific to thewholesale market as it exists today; however, this market is not suf-ficiently developed to provide confidence in any tracking method-ology. Staff also agrees with the various commenters who believethat the pricing apphcation is premature inasmuch as the Commis-sion is still considering MBSSO and CBP rules. Staff also assertsthat certain pf the costs to be recovered through the proposedtariffs haveltot been justified.

(8) After considering aB the motions and comments filed, the Commis-sipn believes that the motions to dismiss CG&E's pricing applica-tion should be denied. However, staff and the commenters haveraised many issues that merit holding a hearing on CG&E's pricingapplication. It appears that the pricing application may be unjustand unreasonable and that, piirsuant to 3ection 4909.18, RevisedCode, a hearing should be held. The Commission also believesthat, in light of the current status of the rulemaking proceeding, itwould not be premature and counterproductive to hold a hearingprior to the completion of that proceeding. The Commissionfurther finds that OCC's request to consolidate the pricing casewith the rulemaking procedure should also be denied as it wouldonly unnecessarily complicate the rulemaking proceeding.

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(9) On October 8, 2003, CG&E filed an application (MISO costs appli-cation), in Case No. 03-2079-EL-AAM (N1ISO costs case), to permitit to defer Schedule 10 Federal Energy Regulatory Commission(FERC) costs and costs assessed by the Midwest IndependentSystem Operator (MISO) pursuant to schedules 16 and 17 of itsOpen Access Transmission Tariff, also approved by FERC.Through its MISO costs application, CG&E states that it hopes to beable to recover certain costs in order to provide it with the incentiveto maintain a sufficient level of capital investment necessary tomaintain reliable traitsmission and distribution.

(10) On October $, 2003, CG&E also filed an.application (capital invest-ment application), in Case No. 03-2081-EL-AAM, to permit it todefer capital investments made during the market developmentperiod in its transmission and distribution system and, in Case No.03-2080-EL-ATA, to establish a rider to recover such capital in-vestments made after the market development period (collectively,capital investment cases). CG&E states thatit intends, through thecapital investment cases, to facilitate the operation of a reliabletransntission and distribution system by iemoving the disincen-tives to capital investment which were created by frozen xates.

(11) On October 23, 2003, and November 4, 2003, The Ohio EnergyGroup (OEG) and OCC, respectively, filed motions to intervene inboth the MISO costs case and the capital investment cases. As thesecases could have an impact on customers' rates, and OEG and OCChave set forth valid reasons for intervention, these motions will begranted.

(12) OEG and OCC also filed motions to dismiss theMISO costs appli-cation and the capital investment application. OCC argues that theCommission has no authority to grant CG&E's requests and thatthe MISO costs application and the capital investntent applicationare inconsistent with the statewide electric transition framework,with the stipulation CG&E signed to settle its electric transitionplan case; and with the distribution and transmission rate capestablished for the MDP. Similarly, OEG contends that these appli-cations"violate statutory provisions establishing a transmission anddistribution rate cap during the MDP, that the applications areattempts to engage in single-issue ratemaking and, with regard tothe capital investment application, that the proposed rider iscounter to#he statutory framework for ratemaking.

(13) The Commission, after due consideration of OEG's and OCC'smotions to dismiss the MISO costs application and the capital in-vestment application, finds that the motions should be denied.

1

-4-

In tLe Matter of the Application of TTieCiricinnAt! Gas & Electric Company for Apprpiwl of its Electric TransitionPtan andfor Autfrorization to Collect Transition Reoetues, Case No. 99-1658-EL-$fP (ET1" case).

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However, as OEG and OCC have raised a number of issues thatmake it appear that the MISO costs application and the capital costsapp lication may be unjust and unreasonable, a hearing should beheld. The Commission further finds that, as there may be issueswhich overlap among the pricing case, the MISO costs case and thecapital investment case, these cases should be consolidated. Inaddition, the consolidation of these cases will help the Commissionconsider CG&E's electric operations on a more unified basis.

(14) The Commission is concerned that the competitive.retail market forelectric generation has not developed as rapidly as was anticipatedwhen it issued its opinion and order the ETP case. We have previ-ously stated that we encoutage electric utilities to consider theestablishment of plans which will stabilize prices following thetermitiation of their MDPs, and will allow additional time for com-petitive electric markets to grow.2 As the competitive retail marketfor electricgeneration has not fully developed in the CG&E terri-tory, the Commission finds it advisable that CG&E file a rate stabi-lization plan as part of these proceedings, for the Commission'sconsideration.

(15) The Commission will establish the following procedural schedulefor these proceedings:

(a) Monday, January 26, 2004 -CG&E is requested to filea proposed rate stabilization plan.

(b) Tuesday, February 24, 2004 - A technical and proce-dural conference w.ill be held at 10:00 a.m., in hearingroom 11-D, at the offices of the Commission.

(c) Tuesday, March 2, 2004 - This is the deadline for fil-ing motions to intervene in these proceedings and forfiling objections to CG&E's proposed rate stabiliza-tionplan.

(d) Thursday, March 25, 2004 - CG&E's testimony is due.

(e) Thursday, April 1, 2004 - Staff's testimony is due.

(0 Thursday, April 8,.2004 - This is the testimony duedate for all other parties wishing to present testimony.

(g) Monday, April 19, 2004 - An evidentiary hearing willbe held at 10:00 a.m., in hearing room 11-D, at theoffices of the Commission.

-5-

? In the na#ter of the Continuation of the Rate Freeze and extension of the Market Deoeloprnerct Period for TheDayton posuei andLrght Company, Case No.02-2T79-EL-ATA, et al. (Opinion and Order;9/2/2003, at 29).

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(16) A local public hearing will be held at a time and place to be deter-mined by futu.re entry.

It is, therefore,

ORDERED, That motions to intervene and motions for adznission pro $ac vice, as setforth in findings (4) and (11), be granted. It is, further,

ORDERED; That the motions to dismiss CG&E's pricing application and OCC'smotion to consolidate the pricing case with Case No. 01-2164-EL-ORD be denied. It is,further,

QRDERED, That OEG's and OCC's motions to dismiss the MISO costs applicationand the capital costs application be denied. It is, further,

ORDERED, That Case Nos. 03-93-EL-ATA, 03-2079-EL-AAM, 03-2080-EL-ATA, and03-2081-EL-AAM be consolidated. It is, €urther,

ORDERED, That the procedural schedule set forth in €inding (15) be €ollowed. It is,further,

ORDERED, That a copy of this entry be served upon all parties of record.

THE PUBLIZID)IiLITIES CWMISSION OF OHIO

Alan R. Schriber, Chairman

L(,.^^.^ onald L. Mason

JWK/SEF;geb

Entered in the Joumal

nEc a Ma-4;:t:ReneBJ.JenkinsSecretary

Judith A. Jones

86

BOEHM, ICURTZ & LOWRYA'I'EORNEYS AT LAW

36 EAST SEVBNTH 91126ETSUITE 2110

CINCtNNATI, OHIO 45202TELEPHONE (513) 421-2255

'IBLF.COPIER (513) 421-2764

VIAOVERNICHT MAIL

October 22, 2003

Public Utilities Commission of OhioPUCObocketing180 E; Broad Street, l0th FloorColumbus, Ohio43Z15

In re: Case No. 03-2081-EL-AAM and 03-2080-EL-ATA

DeaFSir/Madam:

C

Please find enclosedan original and twenty (20) copies of the Motion to Intervene and Motion to Disnlissof The Ohio Energy Oroup filed in the abov¢-Teferenced matter.

Copies have been served on all parties oti the attached certificate of service. Please place this documentof tile.

Respectfully yours.

Michael L. Kurtz, Esq.BOEHM, KURTZ & LOWRY

MiKAuxEnCI.

^.*,is Aa to cer'>457 th.iT ' Sun•';.::% .:.C.p^=csr.6 ara an. . .. S.i.c.•,•.[^t : . . .. . ...... :..... :>! . ..:,4'^_'..^___

. .. d.^' , -^.:1..p.:..1..: _ ^ . ,.. .i,r.., ._^.°..^-Z u--7.e -., ;t ._ ...__.. . . . .

87

,

iCERTIFICATE OFSERVICE

I liereby certify that true copy of tlle foregoing was sened by regular mail, unlessothenvisenoted, this22" day of October, 2003 to the following:

Paul A. Colbert, Esq.Cinergy Corporation155 E. Broad StreetColumbus, Oh43215

]ohn Smad, Esq.Kimberty W. Bojko, Esq.Ohio Consumers CounselI0 W. Broad StreetColumbus. Oh 43215

.

Michael L. Kurtz, Esq.

88

BEFDRETHEPUBLIC UTILITY COMMISSION OF OHIO

In The Matter Of The Application Of Ciuciguati Gas&ElectricCompany for Authority to Modify Current Accounting Procedures Docket No. 03-2081-EL-AAMFor£apital Investment in its Electric Transmission and Distri0ution: DocketNo.93-2080-EL-ATASystem and to Establish a Capital Investment Reliability RiderTo be Effective After the Market Developinent Period

Pursuant to Ohio Rev.Code§4903,22.1 and OhioAdmin. Code §4901-1-I1, the Ohio Energy

Group (OEG) files this Motion to Intervene.

OEG is anon-profitentity organized to represent the interests of large industriai and commercial

customers in electric apd gas regulatory proceediri,gs befote the Public Utility Commission of Ohio

("Commission"). OEG`s members who are participating in this intervention arec Ford Motor Company,

AKBteel Corporation, The Proctor and GambleCo., AirProducts & Chemicals, Inc., Daimler-Chrysler

C.orp., Owen-Illinois, Inc., Intetnational Steel Group, Inc., and General Electric - Aircraft Engines.

Several of these companies purchase electdo power services from Cincinnati Gas & Electric. Therefore,

the interests of OEG's members may be directly affected by the outcome of this proceeding. The

interests of OEG cannot be adequately represented by any other party. OEG intends to play a

constructive role inthis case and provide infoanationwhich will assist the Commission,


October 22, 2003

David:F. Boehm, Esq.Michael L. Kuttz, Esq.BOEIL'41, KURTZBi LOWRY36 East Seventh Sfreet; Suite 2110Cincinnati,Dhio 45202Ph: (513)421-2255 Fax: (513)421-2764E-Mail:oiyoenereveroun.comCOUNSEL FOR OHIO ENERGY GROUP

89

BEFORETHE PUBLIC UTILITIES COMMISSION OF OHIO

In the Matter of the Application of The )CipoinnatiGas & ElectricCompany for )Authority to Modify Current A.ccounting )Procedures for Capital Investment in its )ElectricTransmissionAud DistributionSystem And to Establish a Capital

}Investment Reliability Rider to beEffective AftertheMarketDevelopment }Period )

Case No. 03-2081-EL-AAMCase No. 03-2080-EL-ATA

OHIO ENERGY GROUP'S MOTION TO DISMISS CG&E'S

APPLICATION FOR AUTHORITY TO MODIFY CURRENT

ACCOUNTING PROCEDURES

COME NOW Ohio Energy Group and pursuantto OhtoAdministrative Code §4901-1-12, move

the Commission for an Order directing the dismissal of Cincinnati Gas & Electric Company's above

captioned Application for the reasons set fqrth in the accotnpanying memorandum.

Respcctfully submitted,

Michael L. Kurtz, Esq.KurtJ. Boetltn, Esq.BOEHM,.KURTZ& LOWRY36 East Seventh Street, Suite 2110Cincinnati, Ohio 45202Ph: :(513)421-2255 Fax:(513)421-2764

David F. Boehm, Esq.

COUNSEL FOR OHIO ENERGY GROUP

90

BEFORETHE PUBLIC UTILITIES COMMISSION OF OHIO

In the Matfer of the Application of The )Cincinnati Gas & Electric Company for }Authority to Modify Current Accounting ) Case No, 03-2081-EL-AAMProcedures forCapital Investment in its ) Case No. 03-2080-EL-ATAElectricTransmissionAndDistributionSystem And to Establish a CapitalInvestment Reliability Rider to beEffective After the Market DevelopmentPeriod

MEMORANDUM IN SUPPORT OF

OHIO ENERGY GROUP'S MOTION TO DISMISS

CG&E'S APPLICATION FOR AUTHORITY

TO MODIFY CURRENT ACCOUNTING PROCEDURES

COME NOW Ohio Energy Group (°OEO") and in support of its Motion to Dismiss Cincinnati

Gas & Electric Company's ("the Company") Application state the following:

On October 8, 2003 the Company filed its Application in the above-captioned matter. The

Company's Application requests that the Commission allow the Company to modify its cutrent

accounting procedures to permit it to defer the incremental costs incurred as a result of the Company's

net capital invesunenf in electric transmission and distribution ("T&D") beginning from January 1,

2001;the effective date of the rate freeze required by Ohio Revised Code § 4928.34(A)(6), until the end

of themarket dcvelopment period ("MDP"). The Company rcquests that the Commission allow it to

recover a series of costs including depreciation, property tax expenses, and carrying charges on "net"

91

incremental plant investments. Additionally, the Company proposes to recover T&D costs after the

MDP through a. new Capital Investment Reliability Rider (Rider CIR), which, beginning afterthe cnd of

the MDP will allow it to recover its additional tiansmission, and distribution costs on an automafic or

semi-automatie basis from year to year. For the reasons set forth below OEG requests that the

Commission dismiss the Company's Application in this matter.

I. ARGUMENT

1. CG&E's Proposal Violates The Specific Statutory Provisions Establishinc A TransmissionAnd Distribution Rate Cao Duritlti The Market Deveiooment Period.

The Company's proposal constitutes a rate inercase during the MDP in violation of the plain

language of RC 4928.34(A)(6) and the Stipulation and Recommendation in Case Nos. 99-1658-EL-ETP,

et al., which requ'irea rate freeze during thetetm of the MDP. Additionally, the Company's proposal is

inequitable as it seeks to take away one of the primary incentivesgiven to ratepayers in consideration of

the rjsks and costs to ratepayers of implementing competitive retail electricservice.

RC 4928.34(A)(6) prescribes that there shall be a capott all T&D rates for the entirety of the

market development period.

"[Tfhe total of all unbundled components in the rqte unbundling plan are capped andsl:all equal dut•ing the market development period.,, the total ofall rates andcharges ineffect under the appltcable bundled schedule of the elec[ric utilit)r pra•suant to sectioii4905.30 ofthe Revised Code in effect on the dajbefore the effective date of this section.including the transition charge determined amdersection 4928.40 of the Revised Code,adjusted for any changes in the taxation of electric utilities arrd retail elec[ric seiviceunder Sub. S.B. No 3 of the 123rd generaPassembly, the universal service riderauthori:ed b}, section 4928.51 ofthe Revised Code, and the ternporaq, rider authorizedbp section 4928.67 of the Revised Code. "

Additionally, the Company agreed to ehe cap on T&D rates during the MDP in its May 8, 2000

Stipulation and Recommendation in Case Nos. 99-1658-EL-ETP, et al. ("Stipulation")

92

"CG&E agrees to amend its Rate Unbundling Plan by adding the following: For the

permose of developing irarrsrnissiatt anddistribution rates that shall bein effect deu-brg

the mm•Itet depelopnientpet'rod; the distribution rate shall be set assuming the strm of t/te

tmbttndled transmission rate and the unburid(ed distr•ibution rate shall r•emain

froien." Id at 4.]

The Company's proposal violates RC 4928.34(A)(6) and the Stipulation by increasing rates

during the term of the MDP. [t seeks to eircumvetrt the rate cap by tracking present costs that are

unrecoverable during the MDP in order to recover them after the MDP. In other words, the Company is

attempting to raise rates during the MDP, when a rate increase is prohibited, by deferring payment of the

costs of thetateinerease until after the MDP. This delayed implementation of the rate increase does not

cure its fundamental violation of the statute and the Stipulation. A deferred rate increase for costs

incurred by the Company during theMDP is nonetheless a rate increase counter to the statutory rate

freeze.

Other state utility commissions have recognized that deferring the recovery of costs incurred

during a rate freeze until after the term of the rate freeze amounts to a rate increase in violation of that

rate freeze. -The California Public Utilities Commission made such a determination in an Order

resolving the applications of several utilities conceming ratemaking, accounting, and other regulatory

concems arising with the end of a transitionperiod and statutory rate freeze.t In that case Pacific Gas &

Electric Company proposed to defer costs incutted during a statutory rate freeze perind until after the

rate freeze. In holding that, "[n]o utility may carrp over costs incurred during 0=e r•ate fireze period to

the post-rntef eezeperiod..."Z,the Califomia Commission explained:

"If the Commission were to permit a utility to cat•ry over costs incurred during the rate

, fireie to the period following the rate freeze, the utility's rates frotn the rateft•eezeperiod

tirould effectively exceed those in effect ott June 10, 1996, Theh• full Gnpact would simplv

'Re Pacific Gas and Electric Companv 1999 WL 1138183 (Cal, P.U.C.)-(1999)' Id. at 22.

3

93

be deferred to the subseqttent period. A carry over from the rate freeze period would beunlawful iinder §368(a), 0

The same logic applies here. The Ohio Legislature's purpose in implementing a ratc freeze

would be completelyundone if the Commission allowed CO&E to simply delay payment of the cost of a

rate increase until the statutory rate feeeze period ends.

In addition„ to the fact that the Company's proposal is a facial violati9n of 4928:34(A)(6), the

Company's proposal is inequitable as a breach of the compact between the Company and its ratepayers

that is implicit in Senate Bill 3. Senate Bill 3 which gave rise to 4928.34(A)(6) as well as the other rules

concerning competitive retail electric service, was essentially a compromise between the uNlities and its

customers. The Company received numerous benefits as a part of Senate Bill 3 and the resulting

Legislation; most significantly the Company will recover over one billion dollars in regulatory transition

charges ("RTC's"). In exchange for paying for RTC's, other costs associated with deregulation, and

perhaps the risk that acompetitive market would be slow to develop or fail to develop,utility customers

were guaranteed that distribution and transmission rates would notinerease during the life of the MDP.

The Company now proposes to terminatea primary benefit promised to customersfrom the enactment

of competitive retail electric service without giving any additionalconsideration toratepayers. The

Commission shoulddismiss the Company's Applicationas a rate increase in violation of the rate freeze

required by RC 4928.34(A)(6) and agreed to by the Company in the Stipulation.

3id.at7.

4

94

2. The Company's Proposal Violates The Statutory Framework ForRatemakine Even In TheAbsence Of The Statutory Rate Caps As An Attempt To Eneace In Single-IssueRatemakina.

The Company's proposal constitutes single-issue ratemaking and selective cost recovery. In

essence, the Cotnpany is asking for a rate case in which the singleissue is the reeovery of distribution

and transmission costs while ignoring offsets for reveaue increases, cost reductions, accumulated

depreciation, accumulated deferred income taxes due to accelerated tax depreciation, or any other factor

that would mitigate or eliminate the need for a rate increase.

This proposal to engage in single-issue ratemaking is counter to RC 4909.15 and other related

Sections. RC 4909.15 specifies the test year parameters, including the valuation of property at a date

certain, andthe establishment of rates on an all-in cost of service basis. In other words, the Company's

proposal is nothing short of an attempt to rewrite the entire statutory framework for ratemaking by

converting it to real-time ratemaking for selected cost components. There is no justification for creating

an altemative form of regulation whereb'y the Company cherry-picks which costs to include in its filing

and which components to exclude. If the Company wishes to seek an increase in rates after the

expiration of the statutory rate freeze it should make a complete base rate filing and make any such

filings on an all-in cost of service basis. The Commission legally cannot and should not allow this

attempted end-mn around the legislature and the ratepayer protections reflected in the Code designed to

prevent just such abuse.

The Cotnpany's proposal is particularly inequitable given the numerous factors that would

mitigate oreliminate the need for a rate increase that are conspicuously absent from the Company's

Application. For example, the Company's native load sales increased 5.5"/o in 2002 compared to 2001.

Yet it has not proposed a deferral for the increased revenues. The Company has reduced its cost of fixed

capital through new debt financing reflecting the lower interest rates currehtly available. Yet it has not

5

95

proposed a deferral for its reduced financing costs. The Company's existing plaut and new plant in

service investment continues to depreciate by approximately $40 million annually and generate tax

benefits, providing reductions in rate base that have the effect of offsetting incrcascs in ratc base from

new capital additions. Yet it has not proposed an offsetting deferral for the carrying costs it no longer

will ineur due to this reduction in rate base. She Company's Application ignores these and other factors

that reduce costs or increase revenue and focuses only on selected increases in costs to the Company.

In addition to the Company's failure to consider the all-in cost ofservice application to defer

only selected cost increases, the Company neglected to include in its Apphcatlon the critical fact that its.

earnings for 2002, on a per books basis, already exceed its required return on common equity. On a per

books basis, the Companyearned an afier tax return on equity in excess of 12%. This after tax ROE is

excessive given current market conditions. In other words, the Company's recent earnings have

exceeded its required return without any of the requested deferrals and taking into account all capital

additions through the end of 2002.

Jn addition to violating the rate freeze, the Company's proposal to increase T&D rates during the

life of the MDP breaches the statutory prohibition against single-issue ratemaking. The Commission

should dismiss the Company's request to recover costs without consideration of increased revenue and

reduced costs.

Finally, the Company's request constitutes impermissible retroactive ratemaking for the period

commencing January 1, 2001 through the date of the Commission's Order in this proceeding. T'he

Commission lacks authority to issue the functional equivalent of a rata increase on a retroactive basis

regardless of the Conlpany's packaging of its request as an "accounting modification." The Company's

request would result in some three years of retroactive and selective cost recovery.

6

96

3. The Company's Proposed Capital Inyestment Reliability Rider. Which Would Allow TheCompany To Automatical14 Recover Its T&D Costs Each Year Without Cousideration OfCost Of Service IsLikewise Counter To The Statutory Framework For Ratemakine.

The proposed Capital Investment Reliability Rider (Rider CIR), whichwould beactivated at the

conclusion of the MDP, would allow the Company to recover its additional T&D costs on an automatic

or semi-automatic basis each year, similar to a fuel adjushnent clause. As noted above, the Company's

proposed deferrals during the MDP are seriously flawed in that they fail to reflect the all-in cost of

service, including increases in revenues and reductions ineosts. The Rider CIR is an attempt to extend

this unlawful method of recovery past the terutof the MDP through an open-ended, one-sided recovery

mechanism. There are no limitations on the amounts of deferrals. There are no earnings caps. There

are no limitationson the future recovery period The Rider C[R could continue indefinitely depending

upon whether the Company seeks a base rate increase subsequent to the MDP. If the Rider CIR were

approved, the Company tivould not need to seek a base rate increase because its over earnings could

continue indefinitely.

7

97

II. CONCLUSION

The Company's Application is a bad faith attempt to undo the Stiputation approved by this

Commission. The Application is an attempt to engage in unlawful single-issue ratemaking. The

Application plainly violates the rate freeze provisions of R.C. §4928.34. The Application should be

rejected.


David q,Michael L. Kurtz, Egq.Kurt J. Boehm, Esq.BOEHM, KURTZ & LOWRY36 East Seventh Street, Suite 2110Cincinnati, Ohio 45202Ph: : (513) 421-2255 Fax: (513) 421-2764

COUNSEL FOR OHIO ENERGY GROUP

B

98

SUMMARY OFTHE COMMLSSION'S OPINION AND ORDER aF AUGUST 31,2000

IN THE CINCINNATI GAS & ELECTRIC COMPANYELECTRJC TRANSITION PLAN CASE

CASE NO. 99-1658-EL-ETP ET AL.

!

0

On June 22,1999, the Ohio General Assembly passed legislation requiring the re-structuring of the electric utility industry and providing for retail competition with re-gard to the generati,on component of electric service (Amended Substitute Senate BillNo. 3 of the 123' General Assembly). Govemor Bob Taft signed this legislation (SS3)on July 6, 1999 and most provisions of SE3 became effective on October 5,1999. Section4928:31, Revised Code, required each electric utility to file with the Commission a tran-sition planfor the company's provision of retail electric service in the state of Ohio,

On December 28, 1999, Cincinnati Gas & Electric Company filed its transitionplan, as well as applications for tariff approval and accounting authority. On May 8,2000, a stipulation and recommendation on CG&E's transition plan (CG&E Ex. 60) wasfiled on behalf pf CG&E, the staff, Obio Consumers' Council, Ohio Council of Z2etailMerchants, fndustrial Energy Users-Ohio, Kroger Company, The Ohio Manufacturers'Association, National Energy Marketers Association, New Energy Midwest, LLC, WPSEnergy Services, Inc., Enron Energy Services, Inc., Dynegy, Inc, Cinc4nnatilHamiltonCounty Community Action Agency, Supporting Council of Preventive Effort, TheOlrio Hospital Association, People Working Cooperatively, Exelon Energy, StrategicEnergy, Columbia Energy Services Corp., Colunibia Energy Power Marketing Corp.,Mid-Atlantic Power Supply, city of Cleveland, and American Municipal Power-Clhio.Stand Energy Corp.; and Local Union 1347 ]nternational 13rotherhood of ElectricalWorkers, ?iFIrCIO subsequently signed the stipulafion. Also on May 8,2000, a stipula-tion on CG&E`s employee assistance plan was filed on behalf of CG&E, the staff, Indus-trial Energy Users-Ohio, The Ohio Council of Retail Merchants, AK Steel , KrogerCompany, The Ohio Manufacturers' Association, The Ohio Hospital Association, Co-lumbia Energy Services Corp., Columbia Energy Power Marketing Corp., Exelon En-ergy, Strategic Energy, Mid-Atlantic Power Supply Assoc:, Ohio Consumers' Council,New Energy Midwest, LLC, WPS Energy Services, Inc., and Enron Energy Services,Inc.A third stipulation on CG&E's independent transmission plan was filed on May 8;2000, on behalf of CG&E, staff, Ohio Consumers' Council, The Ohio Council of RetailMerchants, Industrial Energy Users-Ohio, Kroger Company, TheOhio Manufacturers'Association, New Energy Midwest LLC, WPS Energy Services, Inc, Enron Energy Serv-ices, Tnc„ Dynegy, lnc., and The Ohio Hospital Association. The evidentiary hearingswere held on May 30, and June 1, 2, 5, 6, 8, and 14, 2000. A local publlc hearing washeld on June 8, 2000, in Cincinnati, Ohio.

In the opinion and order, the Commission is approving the agreements submit-ted by the various parties listed above with certain modification regarding the opera-tional support plan, The Commission found that the terms of the agreements, consid-ered in their totality, advance the public interest and provide substantiaI benefits to allcustomer classes. The stipulations provide for extended rate freezes, rate reductions,

99

99-1658-ELrETI'et al. -u-

flexibility for larger contract customers not otherwise available, low income energy efJ*Ciciency grants and, as a result of shorter, defined transition periods for CG&E, signifi-cant rislcs with respect to its ability to recover transition costs. The stipulations, amongother tlungs: provide a five-percent reduction of CG&E's generation component forresidential rate schedules; waive the switching fee for the fust 20 percent of residentialcustomers that switch to a certified supplier during the market development period;

;• create shopping credits that facilitate the development of the retail marketplace, main-tain for five years the market development period, induding a rate cap, to the residen-tial customers, irrespeetive of the number that switch; continue support for energy ef-fidency and weatherization services to low-income persons by maintaining certain ex-isting contracts valued at approximately $4 milIIon for five years, commit CG&E towork with other regions, RTO/ISO groups and transmission level customers to de-velop and z'mplement specific proposals to address reciprocity and interface/seams is-sues; and offer to customens with contracts approved pursuant to Section 4905.31, Re-vised Code, who would otherwise be on the primary distribution, transmission, or3ighting rate schedules, a one-time right, through December 31,2001, to cancel any suchcontract without penalty, provided that the customer remains a distribution customerof CG&E.

The Commission also determined that CG&E's transition plan filing, asamended by the settlement agreements, is in compliance with the statutory require-ments contained in S83: By approving the stipulations, the Commission also author-izes certain accounting treatments for CG&E to create the necessary regulatory assets,Odefer costs, and recover those costs through a regulator,ytransition charge.

This summary was prepared to provide a brief statement of the Copnmmission'saction in this case. It is not part of the Cornmission's decision and does not supersedethe full text of the Commission's opinion and order.

100

TABLE .FCONTENTS

APPEARANCES :..............................................................................................................................11. HISTORY OF THE PROCEEDINGS...... ...... ....................... ... .................... ....... .. ......,:.:3H. SUMMARY OF THE STIPULATIONS ................. ............... .......... ................... ...,......... 5

A. The Transition Plan Stipulation .. ..................... ........................................5B. The Independent Transmission Plan (ITI') Stipulation .................................. 9C The Employee Assistance Plan (EAP) Stipulation ;:,:............................. 11COMMLSSION REVIEW OF TI3E STIPULATIONS, CG&'E'S TRANSITIONPLAN COMPI:IANCE W1TH SECTION 4928.34,. REVISED CODE, AND ISSUESRAISED BY PARTIES OPPOSING THE STIPULATIONS ........................................12A, CG&E's Operations Support Plan (OSP)..... ...................................................... 12B. CG&E's Unbundling Plan ..... ... ,..... .. ....... .................... ......... ...... ......... ........:1.6

1. Unbundled Transmission Component (Section 4928.34(A)(1);Revised Code) ........................................... ......... ......... ........:16

2. Unbundled Distribution Component(Section 4928.34(A)(2),Revised Code)... ....... . .................... ......... ..... ......... ........ .:......:17

3. Other Unbundled Compotients (Section 4928.34(A)(3), RevisedCode) .................................... ............................. ............................................. 17

4. Unbundled Generation Component (Section 492$.34(A)(4), Revised• Code) ......... ......,.. ......... ........ ......... ........:18

5. Cap on Unbundled Components (Section 4928.34(A)(6), RevisedCode)................._.......................................................................,...................18

6. Compliance with Commission Rules (Section 4928.34(A)(7),Revised Code) ..............................................................................................19

7. Elimination of Gross Receipt Tax Effect (Section 4928.34(A)(15),Revised Code)... ....... . .:....... .................... ....... .......... .. ...... ..... . .... ::....19

C. Transition 'Revenues ................................................. ............................................ 221. Stranded Generation Benefits ............... ........ ......... ........... ......... .. ......... 242. Existing Regulatory Assets ........ ....... .............................. .......... ................. 283. CG&E's Request to Defer and Recover Certain Costs as Regulatory

Assets..... . ...................... ...:...:. , . . .. .. .. ............ . ..... ........ ........... ......... .. ........ .314. Transition Costs Compliance with Statutory Requirements. . ...... ....37

D. Transition Plan Stipulation's Compliance with Sections 4905.33,. 4905.35,4928:37 and 492B.40, Revised Code .......... ......... ........... ......... ............ .:..:..: ....:.:..39

E. Shopping Credzts ...:..... . ......... ......., ... ...... ... ......:.42F. CG&E's Corporate Separation Plan (CSP) :.........................................................45G. CG&E's Employee Assistance Plan (RAP) ........................................................47H. CG&E's Educafion Plan :.....:.. ......... ......... .... ..... ....:....481. Independent Transmission Plan (ITP) ......... ....... ......... ........... ......... .. .... .....49J. Exempt 4Vholesale Generator (EWG) ...........................................................52

IV. CRITERIA FOR EVALUATING STIPULATIONS ......................................................54• V. PENDING MpT[ONS ......... :...............:............ ......... ......:. .. ......... 57

101

0i 99-1658-EL-ETT' et al.

A. Intexlocuto;y Appeal of Examiner's Ruling .................................................... 570B. Fiii:ng of Compliance Tariffs ............... ......... ...................... 59

I^ VL FIlVDINGS OF FACT AND CONCLUSIONS OF LAW ......... ......... ........60

0

102

BEFORE

THE PUBLIC UTTL1TfFS COMMISSION OF OHIO

In the Matter of the Application of TheCincinnati Gas & Electric Company forApproval of its Electric Transition Plan,Approval of Tariff Changes and NewTariffs, Authority to Modify CurrentAccounting Procedutes, and Approval toTransfer its Generating Assets to anExempt Wholesale Generator.

Case No.99-1658-ELÊTPCase No. 99-1659-EL-ATACase No. 99-1660-EL-ATACase No. 99-1661-EL-AAMCase No. 99-1662-EL-AAIvICase No. 99-1663-EL-UNC

OPINION AND ORDER

The Commission, comixcg now to consider the stipulations, testimony, andother evidence presented in these proceedings, hereby issues its opinion and order.

APPEARANCES:

James B. Gainer, Paul A. Colbert, John J. Finnigan, Jr., and Michael J. Pahutski,139 East Fourth Street Room 25 ATII, Cincinnati, Ohio 45202, and Baker & Hostetler,by Michael D. Dortch andBrian T. Johnson, 65 East State Street, Suite 2100, Columbus,

. Ohio 43215, on behalf of Cindnnati Gas & Electric Company.

Betty D. Montgomery, Attorney General of the State of Ohio, Duane W. Luckey,Section Chief, by Thomas W. McNamee and Stephen Nourse, Assistant AttorneysGenera1,180 East Broad Street, Columbus, Ohio 43215-3793, on behalf of the staff of thePublic Utilities Comnussion of Ohio.

Boehin, Kurtz & Lowry, by Michael J. Kurtz, 36 EastSeventh Street, Suite 2110,Cincirulati, Ohio 45202, on behalf of The Ktoger Company.

Chester, Willcox & Saxby, by Jeffrey L. Small, 17th South High Street, Suite 900,Columbus, Ohio 43215, on behalf Ohio Council of Retail Merchants, and by John W.Bentine, on behalf of the city of Cleveland and The American Municipal Power-Ohio,Inc.

McNees, Wallace & Nurick, by Samuel C. Randazzo, Gretchen J. Hummel, andKimberly J. Wile, Fifth Third Center, 21 East State St:, Suite 1799, Columbus, Ohio43215, on behalf of The Industrial Energy Users-Ohio.

Boehm, Kurtz & Lowry, by David F. Boehm, 36 East Seventh Street, Suite 2110,Cincinnati; Ohio 45202, on behalf of AK Steel Corporation,

^ David C. Rinebolt, PO Box 1793, Findlay, Ohio 45839-1793, on behalf of OhioParlners for Affordable Energy.

103

^-- ----- - - - -- -^ _ _ . . . _ _ ,49-165fi-ETxETP et al. -2-q.

Sutherland, AsbiU. & Brennan T.I P, by Paul F. Forshay and Keith McCrea, 1275*Pennsylvania Avenue, NW, Washington, DC 20004-2415, on behalf of Shell EnergyServices Co-,LLC.

1•Bricker & Eckler LLP, by Sally W. Bloonifield, Elizabeth H. Watts, and Amy

Straker-Bartemes, 100 South Tbird Street, Columbus, Ohio 43215-2368, on behalf ofThe Ohio Manufacturers' Association, Strategic Energy LLC, Colunibia Energy ServicesCorp., Colulhbia Energy Power Marketing Corp., Exelon Energy, and MidAtlanticPower Supply Associaffon, and by Wanda M. Schiller on behalf of Strategic Energy

I LLC, and by David Dulick on behalf of Exelon Energy.

Robert S. Tongren, Ohio Consumers' Counsel, by Evelyn R. Robinson-McGriffand Werner L. Margard, III, Assistant Consumers' Counsels, 10 W. Broad St., Suite11i00, Columbus, Ohio 43215-3485, on behalf of the residential consumers of The Cin-cinnati Gas & Elestric CRinpan.y.

Craig Goodman, 3333 K Street, N.W., Suite 425, Washington, D.C. 20007 andJohn & Hengerer, byJoelle Ogg. 1200 17th Street, NW, Suite 600, Washington, D.C.20036, on behalf of the National Energy Marketers Association.

Thompson, Hine and Flory, by Robert P. Mone and Scott A. Campbell, 10 WestBroad Street, Suite 700, Columbus, Ohio 43215, on behalf of the Ohio Rural Eiectric Co-operatives, and Buckeye Power, Inc.

Vorys, Sater, Seymour & Pease, by M. Howard Petricoff, 52 East Gay Street, POBox 1008, Columbus, O.bio 43216r100$, on behalf of Enron Energy Services, Inc.; NewEnergy Midwest, [,I.C; WPS Energy Services, Inc.; and Dynegy, Inc., and Janine L.Migden, 400 Metro Place North, Suite 310, Dublin, Ohio 43017-3375, on behalf of EnronEnergy Services, Inc.

Judith A. Phillips,1077 Celestial Street, Suite 110, Cincinnati, Ohio 45202, on be-half of Stand Energy Corporation.

Ellis Jacobs, 333 W. First Street, Suite 500, Dayton Ohio 45402, on behalf of theSupporting Council of Preventive Effort and Cincimati/Hamilton County Commu-nity ActionAgericy.

Bell, Royer & Sanders Co., LPA, by Langdon D. Bell, 33 South Grant Avenue, Co-lumbus, Ohio 43215-3927, on behalf of the Greater Cleveland Growth Association.

Snyder, Rakay & Spicer, by Gary A. Snyder, 316 Talbot Tower, Dayton, Ohio45402, onbehalf of Local Union 1347, International Brotherhood of Electrical Workers,AFL-CIO.

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Richard L. Sites, 155 East Broad Street, Columbus, Ohio 432I5-3620, on behalf ofThe Association for Hospitals and Health Systems, dba Ohio Hospital Association.

Bruce Weston, 169 West Hubbard Avenue, Columbus, Ohio 43215, on behalf ofPeople Working Cooperatively.

William M. Ondrey Gruber, 2714 Leighton Road, Shaker Heights, Ohio 44120,and Vicki L. Deisner, 1207 Grandview Avenue, Room 201, Columbus, Ohio 43212,3149,on behalf of the Ohio Environmental Council.

Jodi M. Elsass-Locker, Assistant Attorney General, 77 South High Street, 29thFloor, Columbus, Ohio 43215 and Maureen Grady, 369 South Roosevelt Avenue, Co-lumbus, Ohio 43209, on behalf of the Ohio Department of Development.

3: HtSTORY OF THE pROCP,$DINGS

On June 22,1999, the Ohio General Assembly passed legislation requiring the re-strocturing of the electric utility industry and providing for retail competition with re-gard to the generation component of electric service (Amended Substitute Senate BellNo. 3 of the ]23' General Assembly). Governor Bob Taft signed this legislation (here-inafter SB3).on July 6,1999, and most provisions of S133 became effective on October 5,

^ 1999. Section 4928.31, Revised Code, requires each electric utility to file with theCommission a transition plan for the company's provision of retail electric service inOhio. The plan must include a rate unburidling plan, a corporate separation plan, aplan to address operational support systems and any other technical implementationissues related to competitive retail electric service, an employee assistance plan, and aconsumer education plan. On December 28, 1999, Cincinnati Gas 8= Electric Company(CG&E or the Company) filed its transition plan, appendices, schedules, testimony, andsupplemental information, pursuant to SB3- On January 7, 2000, CC&E held a techni-cal conference with interested parties on its consumer education plan and employeeassistance plan.x Between January 26, 2000, and February 14, 2000, various parties filedobjections to CG&E's transition plan filings. By entry of February 1, 2000, an additionaltechnical conference was held on February 24, 2000. By entry ofMarch 2, 2000, a secondprehearing conference was scheduled for May 11, 2000, and the hearing was scheduledfor May 22, 2.000. At the request of the parties, the hearing was continued to May 30,2000. Supplemental testimony was filed by CG&E on May 1 and 3,2000. CG&E filed asecond;supplemental testimony of its witnesses on May 17, 2000. AK Steel Corporation(AK Steel), Buckeye Power, Inc: (Buckeye), and Ohio Rural Electric Cooperatives(OREC) filed testimony on May 24, 2000, Pursuant to Section 4928.32(B), Revised Code,

AlsoonJanuary21 and 25, 2000, CG&E held technical conferences at its operational supportplan andrate unlivndtingplan. Between February3 and14, 2000, CG&E held technical conferexices on the transI-tion revenue, corporate separation, independent traesmission, and shopping incentive portions of itstransition plan.

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the Staff Report of Exceptions and Recommendations (Staff Report) was filed on March*28; 2000.

7ntervention was granted in this proceeding to the following parties: KrogerCompany; The Ohio Council of Retail Merchants; Industrial Energy Usecs-Ohio; AXSteel; Ohio Partners for Affordable Energy; Shell Energy Services Company, LLC(Sheil); The Ohio Mauufacturers' Association; Ohio Consumers' CouncIl; NationalEnergy Marketers Association; OREC, Buckeye Power, Inc.; New Energy Midwest, LLC;WPS Energy Services,-lnc., Dynegy, Inc.; Enron Fitergy Services, Inc.; Stand EnergyCorporation; PP&L Energy Plus Co.; Exelon Energy, Strategic Energy; Columbia EnergyServices Corp.; Columbia Energy Power Marketing Corp.; Mid-Atlantic Power SupplyAssociation; The Cincinnafi/Haniilton County Community Action Agency; The Sup-porting Cauncil of Preventive Effort; Local Union 1347, InternationaI Brotherhood ofElectricaI Workers,AFGCIO; The Association for Hospitals and Health Systems, d.b.a.The Ohio HosPital Association; American Municipal, Power-Ohio, Ine.; People Work-ing Cooperatively;. Ohio Environmental Council, Ohio Department of Development(ODOD); and Greater Cleveland Growth Association.2

On May 8, 2d00, a stipuIation and recommendation on. CG&E's transition plan(CG&E Ex. 60) was filed on behalf of CG&E; the staff, Ohio Consumers' Council; OhioCouncil of Retail Merchants; Industrial Energy Users-Ohio; Kroger Company; TheOhio Manufactnren;' Association; National Energy Marketers Association; New EnergyMidwest, LLC; WPS Energy Services, Inc:; Enron Energy Services, Inc.; Dynegy, Tne.,Cincinnati/HatniIton County Community Action Agency; SupporYing Council of Pre-ventive Effort; The Ohio Hospital Association, People Working Cooperatively; ExelonEnergy, Strategic Energy; Coluixmbia Energy Services Corp.; Columbia Energy PowerMarketing Corp.; Mid-Atlantic Power Supply; city of Cleveland; and American Mu-nicipaI Power-Ohio. Sfand Energy Corp. and Local Union 1347, Internatiional Brother-hood of Electrical Workers, AFL-CIO, subsequently Bigned the stipulation, Also onMay 8, 2000, a stipulation on CG&H's employee assistance plan was filed on behalf ofCGdcE; the staff; Indus(rial Energy Users-Ohi:o; The Ohio Council of Retail Merchants;AX Stee1, Kroger Company; The Ohio Manufacturers' ,A.ssociation;, The Ohio HospitalAssoci.atlozt; Columbia Energy Services Corp.;, Columbia Energy Power MarketingCorp.; Exelon Energy; gtrategic Pnergy; Mid-Atlantiic Power Supply Assoc.; Ohio Con-sumers' CouncII; New Energy Midwest, LLC; WPS Energy Services, Inc.; and EnronEnergy Services, Inc. A third stipulation on CG&E's independent transmission planwas filed on May 8, 2000, on behalf of CG&E; staff; Ohio Consumerc' Council; The OhioGouncil of Retail Merchants; Industrial Energy Users-Ohio, Kroger Company; TheOhio Manufacturers' Association; New Energy Midwest, LLC; WPS Energy Services,Inc.; Enrori Energy Services, Inc.; Dynegy, Inc.; and The Ohio Hospital AssociaHon.

2 PP&L ):.nagyPlus Co. was grantedintetvention in these proceedingsbut fi[ed a noHce of withdrawaLmMasrh 13, 2000. The mo4ons to iritervene on behalf of F¢stFiiergy, Oluo Edison, Cleveland Electric Il^.himiiwting Coaipany, and ToIedoEdison were denied on Man•h23, 2000.

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The evidentiary hearings were held on May 30, and June 1, 2, 5, 6, 8, and 14, 2000.CC&E filed its rebuttal testimony on June 12, 2000. A local public hearing was held onJune 8, 2000, in Cincinnati, Ohio. Initial briefs were filed on July 5, 2000, by CG&E, staff,AK Steel, Buckeye and OREC collectively, Shell, People Working Cooperatively, OhioConsumers' Council, and Industrial Energy Users-Ohio. Reply briefs were filed on July19, 2000, by CG&E, Staff, Shell, AK Steel, and Buckeye and OREC.

A. SUMMARY OF THE STjPUL.ATICSNS.

A. The Transition Plan Stipulation

CG&E's transition plan stipulation provides, among other things, that:

(1) CG&E agrees to eliminate the $563 million of generationtransition charge (GTC) recovery proposed in its transitionplan.

(2) Approval of the stipulation shall be deemed to grant toCG&E accounting authority to create the necessary regula-fory assets and defer costs and recover, through a regulatorytransition charge (RTC), the following regulatory assets, in-cluding but not limited to exdsting regulatory asset balanceson CG&E's books as of December 31, 2000, deferral of transi-tion implementation costs, deferral of purchased powercosts sufficient to maintain an adequate operating reservemargin as determined by CG&E, deferral of the litigationcost reimbursement, deferral of the Ohio Excise Tax overlap,and deferral or adjustment to the amortization schedule toreflect the effects of any shopping incentive. CG&E will notseek rate recovery of any costs deferred pursuant to such ac-counting authority that are not recovered through the RTC.During the market development period (MDP), for account-ing purposes, there exists an implied residualRTC (unbun-dled generation charge7ess the shopping credit provided tocustomers). All regulatory assets created and recovered pur-suant to this stipulation are in compliance with the re-quirements of Sections 492839 and 4928.40, Revised Code..

(3) There will be no further netting or adjustment of any kindto CG&E's transition cost recovery, including but not lim-ited to any adjustment of RTC rates, or shopping creditsthrough 2010, related to the sale, lease, or transfer by CG&E,.or any of its affiliate, of any generating asset.

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I(4) CG&E wilLnot end the MDP for residential customers prior

to December 31, 2005.

•(5) CG$rE may end the MDP for all customer classes, except forthe residential class, when. 20 percent of the load of suchcTass switches the purchase of its generation supply to a cer-tified supplier. This provision is effective only to the extentthat CG&E does not possess as an affiliate a retail electricgeneration provider, selling commodity generation at retail.This paragraph also requires that CG&E measure switchingtiykilowatt-hour (kWh) for the residential cL1ss, and aver-age demand for all other customers. At the end of the MDPfor each non-residential rate schedule, the rate freeze onnon-switchuig customers and the rate freeze for transntis-sion, distYIbution, and ancElary service on switching cus-tomers will end. The shopping credit estabIished at thetime. of ex.ercising choice for swite.Uing cnstomers will con-tinue as a credit on the bills of such switching customersthrough December 31, 2005, and will not be affected by theend of the 14iDP; and the RTC will be collected from all non-residential customers pursuant to the stipulation throughDecember 31, 2010.

(6) CG&E will make the RTC charge load factor sensitive forrate classes billed on demand/energy rates. The RTC ratedesign will include a declining block structnr.e where thefirst kWh per kW of billing demand wiii recover the RTCcharge to fhe maximum extent possible.;

(7) The parties agree with and adopt CG&E's independenttransmission plan stipulation and CG&E's employee assis-tance plan stipulation.

(8) CG&E's esempt wholesale generator (EWG) is prohibitedfrom selling power to an affiliate for resale at retail inCG&E's service 'territory, except through CG&E's require-ments commodity service agreement (RCSA) and is prohib-ited from selling to an affiliate certified supplier on morefavorableprices or terms than CG&EselIs to a non-affiliatecertified sypplier. The infortnation regarding the sales ortransfers of power and ancillary serv9ces by the EWG to anaffiliate shall be simultaneously posted with the execution

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of any agreement for the sale or transfer on a publicly avail-able electronic bulletin board. These provisions do not ap-ply during the MDP to wholesale sales of power and ancil-lary services from the EWG to CG&E for CG&E standard of-fer customers under the RCSA. Approval of the stipula-tions constitutes a finding of fact by the Commissiori of theitems necessary for the Federal Energy Regulatory Commis-sion (FERC) to approve CG&E's EWG and RCSA. Nameay:that the transaction under the RC$A wfll benefit consum-ers; does not violate any state law; would not provide theEWG ,any unfair competitive advantage by virtue of its af-filiation with CG&$ and is in the public interest. Also,with respect to the transfer of CG&E generation assets to anEWG, allowing such generation assets to be an eligible facil-ity for EWG ownership: will benefit consumers; is in thepublic interest; and does not. violate state law.

(9) The following rates and terms, which reflect a five-percentreduction of CG&E's generation component, includingRTC, shall be approved for the customers on residential rateschedules: the shopping credit on the bills of swifching cus-tomers for the first 20 percent of the load per class for thecalendar years 2001-2005 will be 5,0000 cents/kWh, Theshopping credit on the bills of switching customers after 20percent of the load per class switches forthe calendar years2001-2005 will be 3.9407 centsJkWh. For the calendars years2006-08 aU residential customers will pay an RTC rider of0.6114 cents/kWh. Residential customers will pay no RTCafter December 31, 2008. The kWh associated with Percent-age of Incotne Payment Program (PIPP) customers will notbe included in the determination of the first 20 percent ofthe switching customers' load per dass: CG&E's EWG willnot bid to supply the CG&E PIPP customers if such custom-ers are aggregated and bid out as a group.

(10) The shopping credit for secondary distribution small is es-tabliehed as 5.3601 cents/kWh through December 31, 2005,for the first 20 percent of load that switch, and 4.5438cents/kWh through Decembe,r 31, 2005, for the remaining80 percent. The RTC for secondary distribution small is es-tablished as 0.9499 cents/kWh from the end of the MDPthrough December 31, 2010. The shopping credit for secon-dary distribution large is established as 4.8145 cents/kWhthrough December 31, 2005, for the first 20 percent that

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swftch, and 4.2460 cents/kWh through December 31, 2005,for the.remaining 80 percent. The RTC for secondary distri-bution Latge is established as 0.6719 cents/kWh from theend of the MDP through December 31, 201o. Secondary dis-trthution snRall and secondary distribution large customersalso have an identifrable shopping credit and RTC throughDecember31, 2010.

(11) The shopping credit for primary distribution is establishedas 3:8877 cractts/kWh through December 31, 2005, for the first20 percent that switch, and 35145 cents/kWh through De-cember 31,2005, for the remaining 80 percent. The RTC forprinuuy distribution is established as 0.4562 cents/k4Vhfrom the end of the MDP ehrough Deoember 31, 2010. Theshopping eredit for transmission is established as 3.27cents/kWh through December 31, 2005, for the first 20 per-cent that switch, and 3.0322 cents/kWh through December31, 2005, for the remaining 80 percent. The RTC for trans-mission is established as 0.3043 cents/kWh from the end ofthe MDP Yiuough December 31, 2010. The shopping creditfor fighting is established as 3.0057 cents/kWh through De-cember 31, 2005, for the fust 20 percent that switch, and2.8272 cents/kWh through December 31, 2005, for the re-maining 80 percent. The RTC for lighting is established as0.2290 cents/kWh from the end of the MDP through De-Ceniber 31, 2010. Customers with contracts approved pursu-ant to $ection 490531, Revised Code, who would otherwisebe on the ,primary distribution, transmission, or lightingrate schedules shall have a one-time right through Decem-ber 31, 2001, to cancel any such contract without penalty,provided that the customer remains a distribution customerof CG&E.

(12) CG&E will maintain certain of its existing contracts withproviders of energy efficiency and weatherization contractsuntil December31, 2005.

(13) The TJniversal Service Fund (USF) Rider and the Energy Ef-ficiency Revolving Loan Fund Rider will be deternuned bythe ODOD and approved by the Commission.

(14) CG&E agrees. to accept any resolution of issues agreed to byaIl Operatiortal Support Planning for Ohio Taskforce (O$PO)working gibup participants and to incorporate any such

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changes in its transition plan except with respect to the fol-lowing: CG&E will establish new minimum stay rules forresidential customers; CG&E will amend its open accesstransmission tariff to add a new schedule for retail energyimbalance service; CG&E commits to use its best efforts totake the actions necessary to purchase supplier accounts re-ceivable and to provide consolidated bill ready billing andsupplier consolidated billing; and CG&E agrees to revise thecollateral computation that it will use for establishing a cer-tified gupplier's creditworehiness. In addition, large com-mercial and industrial customers who return to CG&E'sstandard service'offer otherthan through certified supplierdefault must provide at least 90t1ays advance notice toCG&E if they are planning to return to CG&E's standardservice offer between May 1 and October 31 of each calendar

year.

(15) CG&E will waive the switching fee for the fust.20 percent ofresidential customers that switch'the purchase of generationsupply to asertifìed supplier during the i91DP.

(16) CG&E will establish a technical task force to resolve ongoingtechnical issues that ma.y arise due to restnrcturing imple-mentation.

(17) CG&E will pay $1.5 milIion in litigation reimbursement tothe active intervenor signatory parties.

(18) The parties agree that the stipulation is conditioned uponadoption in its entirety by the Commission without. mate-rial mod'ification by the Commission and, if the Commis-sion rejects or modifies all or any part of this stipulation orimposes additional conditions or requirements upon theparties, the parties shall have the. right within 30 days of is-suance of the Commission's order to either file an applica-tion for rehearing or terminate and withdraw from thestipulation.

B. The Independent Transmission Plan (ITP) Stigylation

OnTvlay 8, 2000, CG&E filed its ITP stipulation. CG&E's 1TP stipulation providesthat:

(1) The sum of CG&E's transmission and distribution ratesshall remain frozen during the MDl' such that if CG&E's

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unbundled transntission rate increases, its unbundled dis-#ribution rate shall decrease by the inverse amount. CG&Ewill also perform and file aFERC seven-factor test by March31,2001.

(2) Until the Midwest Independent System Operator (Iv1ISO) be-contes operational, CG&E and its affiliates shall provide fortransm9ssioo service for both affiliates and non-affiIiates onthe same terms and conditions, consistent with Open AccessSame-Time Tnformation System (OASlS) and FERC Stan-dards of Conduct. CG&E wiII also provide distribution serv-ice only under the rates, terms and conditions stated in itsdistribution tariffs,

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(3) A transmissinn customer receiving retail commodity servicewi]I have the same priority for requesting and receiving net-work tranamission service as an existing network customerunderCG&&H's open access transmission tariffs (OA'I'I').

(4) Retail customers or their certified suppliers who take 138 kVhansmission service are entitled to receive either network orfirm point-to-point transmission service or any other trans-mission service for whic.h the customer is eligible.

(5) CG&E agrees to participate in the collaborative process underfiERC Order 2000, 89 FERC Section 61,285, to discuss uitegrat-ing the facilities of the transmission-owning utilities in Ohioso as to achieve the objectives listed in Rule 4901:1-20-17(B)(3),OA.C., and Section 492812, Revised Code. To the extent notresolved in the Commission proceeding. In the Matter of theCommissiott's Investigation Into the Adequacy and Availabil-ity of EIectric Power for the Summer Months of 2000 fromOhio's Investor-Ouwned Electric lltitifp Companies, Case AIo.00-617-Et:,COi, CG&E wiR enter into a joint stipuIation withall of the other transmission=owning utilities in Ohio to sub-mit the subject of how to achieve the objectives listed in Rule4901:1-20Y17(13)(3), O.A_C., and reTated issues to a separate jointCommissi6n hearing dealing solely with that subject as part oftheir respective transition plan application proceedings; or ifsuch other transmission-owning utilities will not so agree, tojointly request, together with all of the other intervenors inthis case, that the Commission order the other transinission-owning ut►lities to participate in such a hearing. CG&E willalso participate in a statewide collaborative process to resolve

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the transmission seams issues in Ohio to effectuate the policyobjectives of Sectioit 4928.12, Revised Code.

C. The Employee A sis ancP Plan .Ap) Stipulation

On May 8, 2000, CG&E filed its EAP stipulation. No parties oppose the EAPstipulation. The EAp stipulatioYt provides that:

(1) CG&E's EAP; as originally filed in this case, be found tocomply with Sectio.n 4928.31, Revised Code, and Rule4901:1-20-03,:O.A.C., Appendix C.

(2) The partieswho intervened in CG&E's transition plan pro-ceeding withdraw all of their prelitninary objections relat-ing to CG&H's EAP. Specifically, Coalition for Choice inElectricity (CCS)3withdraws preliminary objections SectionD, including D-1 through ll-3, and Industrial Energy Users-Ohio, Cincinnati/Hamilton County Community ActionAgency and Supporting Council of Preventive Effort with-draw their adoption of CCE's preliminary objections SectionD

(3) To the extent that the parties have representatives servingon the electric employee assistance advisory board estab-lished under Section 4928.431; Revised Code, the partiesagree that their representatives will recommend to theCommission that the Commission approve CG&E's HAP.

(4) The parties agree that nothing herein resolves or ivaivesany party's right to present evidence and arguments inthese cases regarding CG&B's request to recover costs assod-ated with employee assistance incurred under CG&Fs EAP,in accordance with Section 4928.39, Revised Code.

3 CCEis composed of TheOhio Manufacturers` Association, The ]ndustrial Energy Users-Ohio, TheOhio Council of Retail Merchants, Oluo Partners for Affordable Ene;gy, Fraoci Energy Services, Inc.,SupportingCouncilof Preventative Effort, Corporation ofOhio Appalachian Development, NewEn-ergy Midwest, LLC; Greater Cleveland Growth Assoc, Ashtabula County Community Acflon Agency,and WP5SEttergy Services, Inc.

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JZ(, COMMISSION RRRVrcS^l nFTFTF 4TfPi iT ATfONS Ct'&&'S TIZANSITION _

xIr gN OMn TANCF V4nTU SF'CT[ON 4928 34REVISED CODE. AND 1S4UF.S0

RAIRFD BY PAR: G OPPOSING THE srrPirt.ATION

Y

A. CG&E's OneratIons SttpYlort Plan (OSP)

On November 30,1999, the Commission issued an . entry in Case No. 99-I141-EilORD, dizecting Ohio's ihvestor-owned electric utilities and interested stakeholders topar6icipate in a taskforce for the development of uniform business practices and elec-tranic data iiiterchange (EDA standards. pureuant to this directive, the Commission'sstaff created the OSPO taskfotre. On May 15, 2000, numerous ObI'O participants filed apro forma certified supplier tariff (pro forma tariff) and a stipulation (OSPO stipula-tion) in each utility's transition plan case. The pro forma tariff contains a number ofservice regulations on which the parties were able to agree. These relate to: supplierregistration and credit sequirements, end-use customer enrollment process, end-usecustomer inquiries and requests for information, metering services and obligations,load profiling and scheduling, transmission scheduling agentis, confidentiality of in-€ormation, voluntary withdrawal by a competitive reYail electric service (CRES) pro-vider, liability, and alternatHve dispute resolution. In the OSPO stipulation, the partiesspecifically request the Commission to resolve issues in four general areas: (1) energyimbalance service, (2) TMi*+b*+um stay requirements for residential and small commer-cial customers returning to standard offer service, (3) consofidated billing and purchaseof receivables, and (4) adoption ofEDI standards: On May 18, 2000, the Commissionîssued an entry initiating a generic docket (Case No. 00-813-ELrEDI) to establish proce-dures for parties desiring to file conunents and reply comments regarding the OSPOstipulation and pra forma tariff. On July 20, 2000, the Comniission issued a, findingand order approving the OSPO stipulation and resolving the four issues left unre-solved.

Under the transition plan stipulation in this case, CG&E agrees to incorporateinto its transition plan, the OSPO stipulation and pro forma tariff with exception ofcertain terms that the stipulating parties have agreed will apply to CG&E. These termsinclude: (1) the establishment of new iminimum stay rules for residential customers;(2) amendments to CG&B's open access transmission tariff to add a new schedule forretail energy imbalance service; (3) using CG&E's best efforts to take the actions neces-sary to purchase certified supplier accounts receivable and to provide consolidated billreacly billing and supplier consolidated billing; and (4) agreeing to revise the collateralcoihputation that it wt71 use for estabIishing a certified suppliei s cKeditworthiness.Shell contends that allowing CG&E to exempt these four areas from compliance withthe OSP stipulation will undermine the entire OSP process, preclude universal prac-tices that the Comniission tried to establish through the 03P task force, and wi11 deterthe development of effective competition.

Under CG&H's minimum stay requirement, during the N1DP, a residential cu.tomer who takes generation service from CG&E for any part of the period May 1^

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through. September 15 (the stay out period) must remain a standard offer customerthrough May 14 of the following year before such :customer may elect to switch to an-other supplier, provided that: (1) customers may switch suppliers at any time if theyhave not previously switched; (2) folIowing the stay out period through the followingMay 14, returning customers may switch to another supplier .at any time for the re-mainder of the MDP; and (3) during the first year of the MDP, residential customersreturning to CG&E's standard offer service will not be subject to a minimum stay. Fur-ther, if a certified supplier defaults, an end-use customer has a one billing cycle timeperiod in which toselect another certified supplier. If the end-use customer fails to se-lect another certified supplier by the end of one billing cycle, the end-use custonter willremain on CG&E's standard service offcer and be subject to any applicablee minimumstay requirement.

$hell contends that CG6s5's proposed minimum stay requirement violates SB3,as it contends SB3 contemplates no llmitation on a residential customer's freedom ofatovement between service options even if. those movements involve a return tostandard offer service. Shell also elaims that CG&E'sminimum stay provision couldremove large numbers of such consumers from the competitive market place for sub-stantial pexiods of time and reduce competition.

With respect to the issue of CG&E's minimum stay requirements, we defer toour rtiling in.our July19, 2000 finding and order in In the Matter of the Establishmentof Electronfd Data Exchange Standards and Uniform Business Practices fnr the ElectricL(tility Industry, Case No. 00-813-EL-EDI (bereafter 00-813)• In that order, we approvedthe use of minimum stay requirements conditioned upon the development of a mar-ket-based "come artd go" rate alternative service. See page 13 of our finding and orderin 00-813. We also prohibitedthe imposition of a mandatory stay when a customer de-faults to the utility's standard offer service due to the default of ihe supplier of electric-ity. We also established a uniforrn penalty free return to standard offer service policyand a uniform period throughout phio in which companies can impose a sum-mer/stay period of May 16e° through September 15s`. Accordingly, the Commissioswill approve the stipulation's treatment of minimum stay requirements conditionedupon certain modification so that CG&E's minimum stay requirements are in compli-ance with our order in 00-813 and any entry pn rehearing therefrom 4

Shell also objected to C'G&E's ietail energy imbalance service proposal, which itargues would create a narrow energy imbalance bandwidth for transmission schedul-ing agents. Shell contends that these bandwidths present an intolerable approach toenergy imbalances for those transmission-scheduling agents. tryirSg to serve weathersensitive residential loads. SheE claims that the stipulation's energy imbalance service

4 We note that m August 24, 2000, GG&E filed a request for exception in these proceedings regardingminimum sta7 requirements. Tnesmuch as the issue raised in that request are thesame issues raised Inthe companys application for rehearing in 00-813, theCommission wi11 address the issues in the entry

. .. on reheaiing.

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proposal would achieve an anticompetitive outcome the Commission should avoid,*namely, imbalances as an increasing source of penalty costs for residential marketersand an increasing revertne source for CG&E.

L)nder the transition plan stipulation, CG&E witl amend its OATT to add a newi: schedule for retail energy imbalance service. In addition, CG&E will amend its OATT

applicationprocedures to allow a"description of purchased power designated as net-work resource including source control area location, transmission arrangements anddelivery point(s) to the transmission provider's transmission systenn." CG&E will alsoauiend its OATr to allow transmi.ssion customers to designate new resources on a day-ahead basis, provided that there exists available transfer capacity, that it is subject to theapproval of the transmission provider, and that the transmission customer relin-quishes network transmission rights to a designated resource once a new resource is

^' . designated.

On this issue, onIy Shell is actively opposing the CG&E transition case stipula-tion while the other intervening marketets signed the CG&H transition case stipu-lation. Further, Shell offered no evidence at hearing to support its position. We be-Iieve thatCG&E's proposal for energy imbalances is reasoiiable. As we noted in 00318,although a single standard for operations is a goal which we would hope to eventuallyachieve in Ohio, we recagnlze that a great many differences currently exist between theelectric utilities, who have traditionally operated in isolation with their own uniquecomputer systems and processes, and that some differences will need to beaccepted by®suppliers if Customer Choice is to become a reality on January 1, 2001. We also consid-ered the facFthat each utility wi$ only need to have an energy imbalance mechanismuntil its transmission assets become part of a funcfioning RTO, at which time, the RTOwould become responsible for energy imbalance service. Since CG&E is anticipated tobe in an RTO by 2001, we do not believe that uniformity with all the other utilities inthe interim is crucial to tlle development of the Ohio choice market with the changesto CG&E's OATT set forth inthe stipulation. Therefore, we do not find CG&E's energyimbalance service propoaal to be anticompetitive.

Shell also raised an issue related to CG&E's proposal for consolidated billing.Under the O$P, CG&E will use its best efforts in taking the actions necessary to imple-ment purchasing of supplier accounts receivable by June 1, 2001, to implement con-solidated bill ready billing by January 1, 2002, and to implement supplier consolidated

t 4 billing by June 1, 2002. These provisions are based on CG&E's best efforts and do notrequire CG&E to take any act3on-that would hinder or delay the implementation of thecompetitive framework necessary to faciiitate customer choice in its service territory.Further, the implementation of these billing functions is not contingent upon theCommission making a determination under Section 4928.04, Revised Code, with re-spect to the unbundling of thebiRing function, but shall proceed independent of anysupplier compensation or CG&E credit for such billing service.

$

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Shell contends that the transition plan stipulation makes no provision for a bill-ing credit from CG&.S in the event that a customer decides to take its billing.servicesfrom a third party. Shell argues that it intends to perform consolidate billing for itscustomers and that permitting a year lag between implementation of utility and sup-plier consolidated billing would place Shell at a competitive disadvantage againstthose marketers that rely on CG&E's billing functions: Shell also complains that theconsolidated billing proposals wouldpreclude marketers from establishing a coinmu-nication link in order to build supplier name recognition and consumer loyalty.

As we determined in 00-813, we have adopted a target date fpr consolldate bill-ready biIIing by no later than June 1, 2002, and a target date for supplier consolidatedbilling by July 1, 2002. Having determined these dates are reasonable and the fact thatCG&E's proposal agrees to dates earlier, we find the stipulated target dates by CG&E arereasonable.

Shell contends that CG&E's OSP would impose additional collateral require-ments on third-party suppliers beyond those adopted in the OSP pro forma tat5ff. Shellcontends that the proposed collateral calculation relies too heavily on CG&E-generatedusage estimates which, in the case of new market entrants, would amount to guesswork. Shell argues that it is unclear how parties could verify either the shoppingcredit calculations or pricing data used by CG&E to establish these additional collateral

^ obligations. Also, Shell claims that there is no support for why such additional collat-eral is needed.

CG&E notes that its OSP provides fpr implementing a rollateral calculation thatwill be applicable to certified suppliers who serve retail customers in CG&E's serviceterritory and is intended to cover CG&E's risk as the default supplier, CG&E will calcu-late the amount of coIlateral to cover its risk as the default supplier by muitiplying 45days of CG&E's estimate of the summer usage of the certified supplier's customers by aprice set at the highest monthly average megawatt hour price for CG&E off-systempurchased power from the prior summer less the average shopping credit that CG&Ewill receive due to the defaulting certified supplier's customers returning to CG&E'sstandard service offer.

On this issue, Shell offered no evidence to support its position. On review, wefind CG&E's proposal quantifiable and not, as suggested by Shell, mere guess work.We also find that a collateral calculation applicable to certified suppliers who serve re-tail customers in CG&E's service territory will cover CG&E's risk as the default sup-plier. Finally, CG&E x+ill be expected to be able to verify its charges to any affected certi-fied supplieror retail customer upon request.

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Based on our findings above, we believe the company's operational support*plan set forth in the stipulation, subject in modification to comply with 00-813, is rea-sonable and appropriately addresses operational support system,s and technical imple-mentation procedures. Accordingly, we find the transition plan meets the statutoryrequirements of Section4928.34(A)(9), Revised Code: We also note that CGBxE's transi-tion plan filing included a proposed billing format. The Commission directs the staffto fmalize a bill format which includes a'price to compare' (which is the price for anelectric supplier to heat ion order for the customer to save money) for residential and

; small commercial customers. As part of our approval of CG&E's transition plan, thecompany must meet staffs requirements regarding billing format.

B. CRdTR'silt7lhundling Plan

Section 4928.31(P.)(1), Revised Code, requires that the filed transition plans con-tain a rate unbundling plan that separates existing; bundled utility rates into theircomponent parts consistent with the provisions of Section 4928:34(A); Revised Code,and applicable Commission rules. Discussed below are the various requirements re-gardingunbundling contained in Section 4928.34(A), Revised Code, CG&E's plans fotunbundled rates, and ATC SteeI's objections.

Provi: io s of Section 4928 34(A). Revised Code

1. Unb in dYd Tranamiccion Component (Section 4928.34(A)(1). Re-vised Code)

YJ'nder this section, the Commission must determine whether the unbundledcomponents for the'electric ttansmission coznponent of retail electric service equal thetariff rates detetanined by the PERC in effect on the date of approval of the transitionplan. The unbundled transmission component must include a sliding scale of chargesto ensure that refunds determined or approved by the FERC are fiowed through to re-tail electric customers.

CG&E statesthat all stipulating parties have agreed that CG&E's rate unbundlingplan satisfies the statutory requirements of Section 4928.34(A)(1), Revised Code (CG&EEx. 60 at 3, 5, 6), As described by CG&E witness John P. Steffen, CG&E developed itsunburtdled transmission and ancillary services rates from CG&E's current FERC ap-proved OATT (CG&E Ex. 12 at 8, 1b-18). CG&E's proposed unbundled transmissionrates are set out in $chedules C)h1B-1, IINB-7:1 and UNB-7.2 (CG&E Ex. 23). Consistentwith Section 4928.34(A)(1), Revised Code, and Rule 4901i1-20-03, App_ A, Part (C)(Z),OA.C., these unbuzidled components reflect the OATT rates approved by FERC, whichrates are currently in effect and are not subject to refund (CG&E Ex. 12 at 7).

Consistent with Rule 4901:1-20-03, App. A, Part (C)(2)(a), O.A.C., CC&E has un-bundled and set out as separate components in its proposed tariffs, Schedules UNB-11O

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7.1 and 7.2, the following ancillary services: (1) Scheduling, System Control and Dis-patch, (2) Reactive Supply and Voltage Control, (3) Regulation and Frequency Control,(4) Spinning Reserve, and (5) Supplemental Reserve (CG&E Ex. 23): The rates for theseservices are based on the FERC rates currently in effect (CG&E Ex. 12 at 7).

2. Unbundled Distribution Comnonent (Section 4928.34(A)(2). Re-vised Code)

This section requires that the unbundled components for retail electric distribu-tioit servite in the rate unbundling plan equal the difference between the costs attrib-utable to the Companys transntission and distribution rates based on the Company'smost recent rate proceeding, and the tariff rates for electric transmission service deter-mined by the FERC under division (A)(1) of this section.

CG&E states that, consistent with Section 4928.34(A)(2), Revised Code, and Rule4901:1-20-30, App. A, Part (C)(3), O.A.C., the unbundled distribution rate componentdeveloped by CG&E is the difference between the sum of the transmission and distri-bution eomponents of rates in effect on October 5, 1999, as further adjusted to reflectthe effect of tax changes attributable to amendment of Section 5727.111, Revised Code,by SB3 and the unbundled transmission rate determined pursuant to Section4928.34(A)(1), Revised Code (CG&E Ex. 12 at 7). CG&E functionalized costs to genera-

. tion, distribution, transmission and other costs (CG&E Ex. 12 at 9-11). As with the un-bundled transmission rate components, the resultant distn`bution rates are set out inRevised Schedules UNB-1, UNB=7:1 and UNB-7.25 (CG&E Ex.23).

3.. Other Unbundled Co3npon n c (S2St?oIy 4928 .34(A)(3). RevisedCAde)

This section requires that all other unbundled components required by theComnussion in the rate unbundling plan must equal the costs attributable to the par-ticular service, as reflected in the Company's schedule of rates and charges.

CC&E contends that, consistent with the provisions of Section 4928.34(A)(3),Revised Code, and Rule 4901:1-20;03, App: A, Part (C)(4), OA,C., existing rates are un-bundled to separate out certain components to be reflected in several riders for CG&E.The stipulations provide for a Universal Service Fund (USF) Rider and an Energy Efff-riency Revolving Loan Fund (EERLF) Rider set out in Sections 4928.51 and 4928.61,Revised Code, for CG&E (CG&E Ex. 60 at 15). On July 13, 2000, ODOP filed an applica-tion with the Commission pursuant to Sections 4928.52 and 4928.62, Revised Code, re-garding the establishment of USF and EERLF riders. ODOD has determined that theUSF rider should be $0.0002442/kWh and that the EERLF rider should be

5 In the case of customereon special contracts, the charges for distribution, transnussion, anallary serv-ices, kWh tax, the universal service fund, and the energy. efficiency fund are those charges that wouldapply if the customer were seryed on an applicable.rate schedule (CG&E Ez.23, afUNB-7.1 at 17-19).

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$0.00010758/kWh. Attached to. the application were supporting calculations to justify*the riders. ODOD has allocated to CG&E $4,900,898 of the total $64.6 million annual

j target for USF funding and $2,159,262 of the total $15 million annual target for EERLF;- funding (ODOD application, attachments T) and E). In its application, as amended onj, July 17, 2000, ODOD has requested that the USF rider take effect September 1, 2000, and

the EERT..F take effect January 1, 2001, both on a biIls rendered basis.

4. U bun

CQ[l^

f Frerequ3site (A)(4) requires that the unbundled components for retail electric1' generation service in the rate unbundlipg plan must equal the residual amount re-I maining after the deterxnination of the transmission, distn'bution, and other wabun-

dled components, and after any tax related adjustments as necessary to reflect the ef-1 fects of the amendment of Section 5727.111, Revised Code.

CG&E states that. consistent with the provisions of Section 4928.34(A)(4), Re-vised Code, the componentfor retail electric service in CG&E's unbundled rates is theresidual amount remaining after determination of the transmission, distribiution, andother unbundled components, as further adjusted to reflect the effect of tax changes at-tributable to amendment of Section 5727.111,Revised Code, by SB3. CG&E states that,as required by Section 4928.40(C), Revised Code, CG&E has calculated a five percent re-duction in the unbundled generation component for residential customers. CG&E and4tbe parties to the stipulations have agreed to such an adjustment for residential cus-tomers (CG&E Ex 50 at 11-12). CG&E states ihat, under the stipulations, it has agreed toforego its statutory right to seek reduction of this discount during the MDP because allshopping credits have been set and fixed during the MDP and are not subject to ad-justment (CG&E Ex. 60 at 11-13).

5. ,Caa on Unbun_dled Components (Section 492$ S4(A)(6). Revi.w^dCodel

This provision requires that the total of all unbundled components is cappedand, during the MDP, wiII equal the total of rates in effect on the day before the effec-tive date of SB3. The cap wiIl be adjusted for changes in taxes, the TJ•SP rider, and thetemporary rider under5ection 4928.61, Revised Code.

CC&E argues that consistent with Section 4928.34(A)(6), Revised Code, and Rule4901:1-20-03, App. A, Parts (C)(5)(b) and (D), O.A.C., the total of aIl unbundled compo-nents of the CG&Es unbundled rates are capped, with limited statutory exceptions,during the NIDP. CG&Econtends that the total of aIl unbundled components of exist-ing rates equals the rates and charges of the bundled components except for adjust-iments to reflect changes in taxation effected by 8B3, the USF and EERLP riders (CG&EEx.12 at 11-12). Further, CG&E states that it initially unbundled existing rates to refleccomponents representing its transition charges, in,cluding separation of RTC and GT

ndl d Generation COmpOnent (Section 4 2834(A)(4] Pvied

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(CG&E Ex. 12 at 31-10; and CGBzE Ex. 23 at TJN&'), UNH-7.1). However, the stipulationshave substantially modified the originally proposed unbundled rates for RTC and GTC(CG&E Ez. 60 at 11-14). The result of the stipulations is ihat CG&E is no longer request-ing any GTC recovery or generation-related cost deferrals to the next rate case. Instead,CC&E is requesting an RTC that reflects new and existing regulatory assets approved bythe Commission.

6. nmoli n.wi h.ommiscion R il c (Section 4928.94(A)(7). Re-yRged Code)

This section requires the rate unbundling plan to comply with any rules adoptedby the Commission under division (A) of Section 4928:06, Revised Codes. The rulesadopted by the Commission regarding unbundling of rates are set fortlt in Rule 4961:1-20-03, O.A.C., Appendix A. Theportions of tht Appendix that address the unbundlingof separate rate components are covered in -the discussion above of the various rateunbundling provisions included in the Company's plan, as amended by the stipula-tion.

CG&E's compliancewith the provisions of Parts (A) through (D) of Appendix Ais discussed in the immediately preceding sections, which address the unbundting ofthe separate rate components. Compliance with Parts (E), (F) and (G) are addressed by

^ CG&E witnesses Steffen, Morris, Jett, and Pefley and are supported by the UNB sched-ules, the OSP stipulation in 00-813, and the transition plan stipulation.

7. Elimination ofGrioy Receipt Tax Effect (Section 4928.34(A)(15). Re-vised Code)

This Section requires that all unbundled components be adjusted to reflect theelimination of the gross receipts tax imposedby Section 5727:30, Revised Code.

CG&fi states that the stipulations permiYCG&Eto defer and 7ecover through theRTC the financial reporting impact of the Ohio excise tax overlap (CG&E.Ex 60 at 6;and CG&E Ex.77 at 4). CG&E believes that this mechanism is envisioned by, and con-sistent with, the requirements of Section 4928.34(A)(6), Revised Code, whirh, in part,provide that the effect on customer rates resulting from such tax overlap "shall be ad-dressed by the Commission through accounting procedures, refunds, or an annual sur-charge or credit to customers, or through other appropriate means, to avoid placing thefinancial responsibility for the difference uponYhe electric utility or its shareholders."

6 Section 4928.06, Revised Code, directs the Commi.ssicn to enact rules to effectuate coavnencrment ofcompetitive retail etectric service. The Commission has enacted rales in compliance with this statutethrough its various generic nileproceedings:.

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AK Sfeel's O(}jQctins to CG&E's Unbundling Plan

AX Stee1's primary objection to CG&E's unbundling pIan is that CG&E's func-tional cost-0f-service study that is used to unbundle retail rates assigns distributioncosts to transmission sesvice voltage customers (rate Schedule I'S) who do not use thedistribution system. AIS Steel states that CG&E's unbundling analysis is based on theCG&E's cost-of-service study submitted by CG&E in its most recent electric rate case in1992, Case No. 92-1464-ET AIR (Tr. I at 8). This study is presented in Schedule UNB-4of the Company's filing in this case.

AK Steel states that, as a result of the unbundling analysis required by SB3 andthe Comaassion's regulations, the origuial cost-of-service study had to be unbundledand functionalized into distribution, transmission, and generation cost functions.Some of the expenses and plant accounts in the origuna11992 cost of service study werealreadyrefiected on a.functionaIized basis. For example, direct production plant, dis-tribution plant, and transmission plant were separately identified in the cost-of-servicestudy and allocated to customer classes on a functionalized basis. Other costs, how-ever, such as administrative andgeneral expenses (A&G) were not functionalized inthe origutal study, since there was no need to do so in order to produce bundled rates.To fully functionalize aI1 costs, in order to develop unbundled rates, AK Steel contendsit was necessary for the Company to develop a functional analysis of the remaining ex-penses and plant accounts; principally, A&G expenses, general and intangible (G&I)^plant, comnton plant, and property taxes.

AK Steel argues that, although CG&E's functional cost analysis is based on the1992 cost-of-service study (tINB Schedule 4), AK Steel witness Baron testified thatCG&E has erred in the development of its unbundled distribution, transmission andgeaeration costs because it has inappropr9ately functionalized A&G expenses, propertytaxes, G&S plant, and comrnon plant. AK Steei believes that the errors associated withkhis misfunctionalization produce unjust and unreasonable rates, particularly for thetransmission service class (AK Steel Fx_ 13 at 41). For example, AK Steel contends thatCG&E has produced unbundled tariffs for the transmission service voltage class thatiinclude a distribution charge when there are no distribution costs associated with serv-ing this class (Tr: I at 71). CG&E's proposed unbundled tariff for Rate Schedule TS re-flects a charge of $0:502 per kW for distribution service. Aecording to AK Steel, the dis-tribution rate for Rate Schedule TS should be $0 (AK Steel Ex.13 at 9).

AK Steel contends that in the 1992 cost-of-service study there were 34 customerstaking service on Rate Schedule TS. Those customers were assigned $15,746 of net dis-tribution plant costs, exclusively associated with meters. No such equipment (otherthan $15,746 of meters) is required to serve the 34 T'S customers. In its unbundlinganalysis, CG&E assigned $473,979 to Rate Schedule T6 for G&I plant associated withdistribution (Tr. I at72). The Company assigned $473,979 of G&I plant to support a dis-tribution investment of $15,746 (Tr. I at 73). According to AK Steel, this amounts toG&I support ratio of 30 times the underlying distribution net plant. AK Steel furthe^

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argues that CG&E only assigned $361,244 of general and intangible plant to the Secon-dary Distribution Small customer class to support over $27 million in distribution netplant (Tr. I at 73). The G&I support ratio for this class is .013 or 13 percent.

AK Steel asserts that similar implausible results are produced in the Company'sanalysis of A&G expenses that support distribution costs. In the development of itsunbundled rates in this proceeding, the Company has assigned $485,569 of customeraccount expense toiate schedule TS to service 34 transmission service customers (Tr. Iat 6-12). At the same time, the Company has assigned $370,077 to the Secondary X7istri-bution Smail class to support customer billing for 31,000 customers (Tr. I at 79). AKSteel argues further that, in CG&E's unbuttdling analysis, the Company has calculatedthat $2,231,007 of property taxes (out of this $6.2 miIIion total) is associated with distri-bution property for Rate TS, even though it only has $15,746 of net distribution plantthat is associated with nieters. According to witness Baron, the underlying allocationof costs that is reflected in current buridled rates (from the 1992 cost of service study) isthe appropriate source to functionalize costs for use in unbundling in this proceeding-AK Steel requests that CGBcE's unbundling and functional cost analysis be rejected.

AK Steel also argues that, should the Comirtission find that CG&E is entitled toreceive regulatory transition costs, these charges must be allocated on a cost-of-servicebasis.

0Commission Conclusion

CG&E and our staff argue that AK Steel's arguments against the Company's rateunbundling plan are without merit. After reviewing the arguments, the Commissionagrees. As testified to by Company witness Steffen, CG&E began its rate unbundlingwith its current transmission and distribution revenue requirements which werecomputed based upon a functionaiization review of the cost-of-service study inCG&E's last rate case, Case No. 92-1464-EL-AIR (CG&E Ex. 12 at $-9). The revenue re-quirements were adjusted for the effects of SB3 tax changes. Following the formula setforth in 6B3; CG&E subtracted the transmission component revenue requirement, de-ter,mined by applying FERC tariff rates pursuant to Section 4928.34(A)(2), Revised Code,froxn the combined transmission and distributioa revenue requirement, to arrive atthe unbundled distribution component revenue requirement (CG&E Ex. 23 at UNB-6.1at 11). Company witness Steffen, at hearing, stated that the unbundled costs are a directresult of following the statutory requirements of SB3 (Tr. I at 75).

We find that the unbundling plan agreed to by the parties to the transition planstipulation is teasonable and consistent with Section 4928.34, Revised Code. To adoptAK Steel's position would result in altering the cost allocations established in the 1992rate proceeding and shift costs among the different rate classes in a manner not in-tended by the legislation. Adoption of AK Steel's recommendations could result inrates for certain classes that may exceed the statutory cap set forth in Section4928.34(A)(6), Revised Code. 'The evidence of record shows that the unbundling plan

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proposed by the Company follows the intent of Section 4928.34, Revised Code. In unobundling the rates for each customer class, the Company had to follow the recluire-rnents of SB3, which not only dictated the unbundled transmission rate to be a FERCrate, but also necessitated the use of the CG&E 1992 cost-of-service study. Althoughcertain allocations of costs may appear to be incongruous, we find that CG&E has fol-lowed the statutory scheme in unbundling its rates. Further, one of the purposes ofthis proceeding is to establish unbundled rates based on the already adopted cost-of-service study, not to alter that study or to determine.whether a more appropriate allo-cation of t:osts should be used to unbundle rates. To do so would clearly be inconsis-tent wyitls the mandate of Section 4928.34(A)(6), Revised Code, which, requires the un-bundling of the rates in effect on the day before the effective date of SB3. We also findthat the transition charges for each class proposed in the stipulation reflect the cost al-locations from the Company's last rate case and, accordingly, are based on the 1992 cost-of-service study. Therefore, we find such allocation of regulatory transition costs to bereasonable.

With regard to the establishment of the USF and EERLF riders, we note theComniission by entry issued on August 17, 2000 approved a USF rider for CG&E of$0.0002442/kWh effective September 1, 2000, and a EERLF rider af'$0.00010758/kWheffective January 1, 2001.

After reviewing the testimony and exhibits submitted by CG&E that support theproposed unbundled rates, and having considered and rejected the objections and ar-^guments raised by AK Steel, we find that the Company has satisfied the statutory re-quirements for the unbundling of rates set forth in divisions (A)(1) to (7), (15) of Sec-tion 4928.34, Revised Code.

C. Transition Revenues

Section 4928,34 (A)(12), Revised Code, requires that the transition revenuesauthorized under Sections 4928:31 to 4928.40, Revised Code, must be the allowabletransition costs o£ the Company pursuant to Section 4928.39, Revised Code, and thatthe transition ebarges for enstomer classes and rate schedules are the charges underSection 492$.40, Revised Code. Section 4928,39, Revised Code, requires the Commis-sion to determine the total allowable amount of the Company's transition costs to bereceived by the Company as transition revenues. Such transition costs must meet thefollowing criteria:

(1) The costs were prudently incurred.

(2) The costs are legitimate, net, verifiable, and directly assigna-ble or allocable to retail electric generation service providedto electric consumers in this state.

0(3) The costs are unrecoverable in a competitive market.

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(4) The utility would otherwise be entitled an opportunity torecover the costs.

-23-

Section 4928.40(A), Revised Code, provides, among other things, that a companymay create additional regulatory assets, with notice and an opportunity to be heardtl5rough an evidentiaryhearing, as long as the company does not increase the level ofregulatory transition charges:above those contained in the company's existing rates.

CG&E's request for transition cost recovery in its original transition plan filingtotaled $1.518 billion, including carrying charges of $311 million, and deferral and re-covery of $280 million of transition implesnentation costs, including carrying charges,until its next distribution rate case (CG&E Ex. 65 at Ex. WPLJP-8a). CG&E's request in-cluded $563 million of generation plant transition costs (CG&E Ex. 13 at 12). Further-more, CG&E sought the right to modify its request for transition revenues for the costsof power purchased to provide reliable service.

According to CG&E, the stipulations significantly modify and reduce CG&E's re-quest for iransition cost recovery to $884 million plus carrying costs and purchasedpower deferrals necessary to maintain an adequate operating reserve margin (CG&EEx. 77 at 4: 5, Ex. LJP-R-1, Ex. LJP-R-2). The transition plan stipulation provides CG&E

^ with no GTC recovery and places the electricity market price risk entirely on CG&E.The stipulations do provide CG&E recovery of previously approved regulatory assetstotaIing $401 million and new regulatory assets totaling at least $483 million (CG&E Ex.60 at 6-7; CG&E Ex. 50 at Ex. JPS-SUP-5; and CG&E Ex. 77 at Ex. LJP-R-2).

CG&E states that the difference between CG&E's original request for $364 mil-lion of previously approved regulatory assets and the request, as modified by the stiipu-lations, of $401 million is broken down as followsi $26,571 for grossed-up carryingcharges recommended by staff in its Staff Report; an adjustment of $1,548,386 for regu-latory liabilities for three percent and four percent investment tax credit related to gen-eration; an adjustment to the Statement of Financial Accounts Standards (SFAS) 109balance of $27,299,428 toproperly refleet IRS normalization rules; an adjustment to re-store the regulatory asset balance previously reduced by CG&E due to staff's recom-mendation F-9 on page 30 of the Staff Report for franchise and municipal taxes; and anupdate from estimated ro December 31, 1999 year end balances (CG&E Ex. 50 at 43-44,and Ex. ]PS-SUP-5).

The new regulatory assetsrequested include the $115 million, before carryingcosts, of transition implementation costs for which CG&E originally sought deferral,

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and deferral of the shopping incentive, Ohio excise tax overlap, and purchased powercosts2 (CG6iE Ex.12 at JPS-5; CG&E Ex. 60 at 6-7, and CG&E Ex. 77 at 3-5, LJP-R-1).

Set forth below are the issues and objections raised by AK Steel and Shell to theestablishment of regulatory transition charges and the recovery of transition revenuesas proposed by the parties to the transition plan stipulation.

1. Stranded Generation Kenefitis

AX Steel argues that, while CG&E has withdrawn its claim for GTC and nowclaiins only RTC costs, an analysis of the generation costs shows that CG&E hasstranded generation benefits which must be "netted" against any RTC claimed by theCG&E, AK Steel argues that stranded benefits occur when unregulated market prices

0

will be so high as to provide excessive returns on the investments made under reguIa-tion. Accordingto the testimony of AK Steel witness Falkenberg, these stranded bene-fits amount to $957 million (AK Steel Ex. 15 at 64). Mr. Falkenberg testified that whenonly three mistakes in :the CG&E study were corrected, the Company had strandedgeneration benefits (Id. at99).

Mr. Fa}kenberg also took issue with CG&E's market price model used to deter-mine the value of generation assets. Mr. Falkenberg developed an independent mar-ket price and stranded cost forecast that was substantially different from that developedby CG&E witness Pifes Mr. Falkenberg testified that only three variables are key in th;qdeteruiination of market price forecasts. They are: (1) fuel prices; (2) cost of new capao-ity; and (3) reserve margins (Id. at 10). Mr: Falkenberg testified that recent natural gasprices from futures contracts and current trading illustrates that gas prices used inCG&E forecast are simply too low.

With regard.to forecasting oost and performance of new merchant plants, Mr.Falkenberg pointed out that Dr. Pifer's study erred in its computation of the real fixedChaige rate, the variable that determines the annual cost of ownership of new plants,and has a direct impact on market prices. Ivlr. Falkenberg contends that Dr. Pifer's fore-cast understates these costs by 16 percent (AK Steel Ex. 15 at 38). Mr. Falkenberg con-tends that this mistake alone overstates CG&E's stranded costs by $183 miIlion in Dr.Pifer's study (Id. at 39).

On the subject of reserve margins, Mr. Falkenberg presented a forecast premisedon a 15 percent reserve margin, a level Mr. Falkenberg considers reasonable and the

7 The $115 aunion of new regutatoryassets incIades$3 million for Transition Plan Ca,se expense, $50,000for the c'...d.oisrton'fiansition Cost Consultant, $4•6 million for the Comaiission mandated ConsoaerFducetionProgram costs,$65 mi1[ion for upgrades to CG&I:'s informaflonand customer service systems,$15 mIDion of othenvise unrecoveratite costs associated with the MI60, and $28 nul3ioa of costs to es^tablish the EWG (CG$sE Ex. 12 at Ex. JPS-5).

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consensus of experts' opinions (AK Steel Ex. 15). "i'his is in contrast to Dr. Fifer's En-ergy Only (no reserve margin) market concept. Mr. Falkenberg argues that Dr. Pifer'sanalysis suggests that reliability wiIl be just fine as reserve margins drop to two percentin the years ahead.

Beyond the market price model, AK Steel argues that CG&E ignores the plantsthat, even under its own calculations, have stranded benefits. According to Dr. Pifer'sstudy, only the Ziinmer and Woodsdale combustion turbine generators have strandedcosts. Mr. Falkenberg calculated what he believes to be stranded generation benefitsof$957 million as summarized on AK Steel Ex. 8. AK Steel argues that Section 4928.39,Revised Code, requires the transition cost must be "legitimate, ngt, verifiable, and di-rectly assignable or allocable to retail electric generation service." AK Steel contendsthat any regulatory transition costs the Commission approves would have to be nettedagainst stranded generation benefits.

Another problem with the Company's forecast, according to AK Steel, is thatCG&E witness Speyer uses a carbon tax on coal that he presumes will add more than abillion dollars iii costs to the CG&E generators. Mr. Falkenberg testifies that this as-surnption is speculative and biased inasmuch as no one knows what the U.S. Senatewill do about global warming, or if the utility industry will even be affected (AK SteelEz.15 at 7-8 and 41j48). As a result, AK Steel contends [that the CG&E study overstatesstranded costs by $350 million (AK Steel Ex. 15 at 48). AK Steel argues that, sf thesemistakes and other biases were corrected, the CG&E study would replicate the results ofiVlr. Falkenberg's study that shows the Company has $957 million in stranded benefits(AK Steel Ex. 8).

Shell supports AK Steel's arguments regarding stranded generation benefits.Shell argues in its objection and on brief that the stipulation's approach to transitioncosts fails to demonstrate that the amount of stranded costs recovered (whatever itmight be) is a"net" figure, i.e., the result of considering both losses and gains realizedas a result of transitioning to a competitive market place. Shell disagrees with CG&E'sposition that, because SB3 does not make reference to transition benefits or negativetransition costs, there is no legal requirement for such. an offset. Further, Shell dis-agrees with CG&E's position that the word "net" in 5133 does not imply offsetting mar-ket valuations below book value on some plants with market valuations above bookvalue on others. Shell argues that the testimony of Mr. Falkenberg illustrates that, farfrom having stranded generation costs, the market value of CGBzE's generation portfo-lio substantially exceeds its book value, thereby providing the utility a market pre-mium. Shell argues that the stipulation fails to satisfy one of the statute's fiindamen-tal criteria for transition cost approval, provides a potential windfall to CG&E in theform of generation premiums and inflated transition cost recoveries, and dramaticallydisadvantages ratepayers.

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Shell also argites that the stipulation, if approved, would deny ratepayers a shareof the market premium associated with generation assets. According to Shell, thesegeneration assets have a book value of approximately $1.59 billion (Shell Brief at 39).Shel1 contends that, if CG&E transferred these assets to an EWG, it would substantiallyharm ratepayers by denying them any share of the market preniium associated withthis portfolio of generation assets. Shell argues thatin originally valuing its genera-tion assets for GTC purposes, CG&E relied on unrealistically low projections of futurewholesale power market prices which is the most significant factor in valuing genera-tion assets. SheB states that, #rom a review of Company Ex. 33, Ex. HWP-2, 1 of 1, thefirm power price assumed in 2001 by CG&E's ana]ysis contrasts sharply with CG&E'sown recent purchase power costs of $0.0297 in 1998 and $0.0334 in 1999. SheII believesthat a wholesale market price substantially higher than that utilized by CG&E isneeded to adequately value the utility's generation portfoHo. Shell submits that bysirnply employing a wholesale market price projection more in keeping witb. CGBYE'sown actual recent experience in wholesale power markets would greatly reduce, if noteliminate completely, the supposedly uneconomic generation costs identified byCG&E's analysis. Shell also contends that CG&E's analysis contains several other du-bious assumptions that, when corrected, produce even larger stranded benefits. Forexample, CG&E discounts the projected earnings streams for its generating plants us-ing a 13.63 percent equity cost and a capital struchrre comprised of 49,percent equity and51 percent debt. .Another questionable assumption, according to Shell, concerns theretirement dates for the Beckjord, Conesville, Stuart, and Zimmer generating plantsCG&E owns each of these plants in partnership with American Electric Power's (AEP)subsidiary, Columbus Southern, Power Company: CG&E has assumed much earlierretirement dates than thos& that were assumed by AEP's Transition Plan filing (CaseNos. 99-1729-ELÊTP and 99-1730-EL•ETP).

CG&E disputes the finding of Mr. Falkenberg and disagrees with the argumentsraised by AK Steel and Shell. CG&E contends that Mr. Falkenberg's future fuel priceassumptions lack reliabflity. CG&E argues the single most significant variabte in theforecast is future natural gas prices. CG&E states that.low price gas forecasts tend to in-crease the calculated stranded costs, while high price gas forecasts tend to decreasestranded costs.

CG&E states that Mr. Falkenberg relies upon the Energy Information Agencys(EIA) Annual Energy Outlook, 2000 (AEO 2000) forecast as his sole source of fuel priceinformation. CG&E argues that there are several other more credible fuel forecasts.Each of the other forecasts project lower future fueI prices than AEO 2000. CG&E alsocontends that W. Falkenberg did nothing to compare AEO 2000 to the other variousforecasts lhat are credible, or even to evaluate the historical accuracy of any of theseforecasts (Tr. IV at 149, 156). Additionally, both AEO 2000 and AEO 1999 demonstratethat EIA`s forecasts tend to be considerably higher than other fuel forecasts that Mr.

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^ Falkenberg himself concedes are credible (Id. at 150-154, CG&E Ex. 73 at 99). EIA's aver-age forecast price at the wellhead demonstrated an average absolute percentage forecasterror of 72.2% (I'r. N at 160-164; and CG&E Ex. 67 at 81, 84,90).

CG&E argues that Mr. Falkenbergs market structure assumption is equally bi-ased, and ignores the laws of economics altogether. As an economist, Dr. Pifer as-sumed that mazket forces, the laws of supply and demand, will ultimately determinethe price at which electricity will be sold in the future, and that this price wiil reflectwhatever reserve capacity market participants are willing to pay. Mr. Palkenberg,however, opines that these economic market forces should be ignored, and instead as-serts that a 15 percent reserve margin must be factored into the market structure analy-sis. CG&E argues that the effect of Mr. Falkenberg's 15 percent reserve requirement as-sumption is that prices, and thus utility income, areassumed to be higher than theeconomic laws of supply and demand would otherwise dictate (Tr. IV at 178).

CG&E asserts that Mr. Palkenberg did not evaluate the risk of future environ-mental regulation as itYelates to the potential increased costs of3JOx, S02, PM 2.5, orIvfercury regulations. Mr. Falkenberg evaluated only the risk of future tightened C02restriction resulting from implementation of the Kyoto protocols currently under con-sideration by the U.S. Senate to reduce greenhouse gases (Id. at 127-129, 168). CG&Econtends that Mr. Falkenberg has assumed that no increased environmental regula-

• tion, of any sort, is likely, despite his failure to evaluate what these other environ-mental regulations might be. CG&E also notes that Mr. Falkenberg himself concedesthat, by coniparison to EIA, Mr. Speyer's use of a $10 per ton figure is conservative.CG&E argues that Ivir. Falkenberg's testimony regarding the existence and amount ofstranded costs, or stranded benefits, is simplynot credible and should be ignored.

With regard to the issue of netting of market premiums against transition costsraised by Shell and AK Steel, CG&E argues that SB3 provides it an opportunity to re-cover its revenue requirement through the transition charge from customers thatchoose to switch electric suppliers and that the netting recommendation contradictsthe ratemaking statutes in effect and newly created SB3. Under the framework of theselaws, unbundled xates plus transition charges mustgive CG&E the same opportunityto collect its revenue requirement as CG&E has under its current bundled rates. CG&Eargues that, by basing its transition charge on the net market value of all of CG&E gen-eration assets as proposed by AK Steel and Shell, the Commission would be denyingCG&E an opportunity to collect its revenue requirement associated with the Commis-sion approved book value of assets from CG&E's last rate case and with previously ap-proved regulatory assets. CG&E also contends that, although it is not requesting to re-cover any GTC as part ofthe stipulation, that amount was fully netted (CG&E Ex. 22 atI-IWP-5 at 6; CG&E Ex. 13 at LjP-1; and CG&E Ex. 50 at JPS-SUP-6).

After considering the arguments raised above, the Commission comes to theconclusion that CG&E has put forth sufficient evidence to support its argument that

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i there are no stranded generation benefits that should offset the regulatory transition*cost proposed by the stipulations. The Commission finds that Dr. Pffer's market fore-cast for electric power and future fuel price forecasts is reasonable. Dr. Pifer based hisfuture fuel prices on a broader based analysis than that used by Mr. Falkenberg and,therefore, should have a greater degree of reliability. Further, the record shows thatthe EIA has had problems with accurately forecasting coal and natural gas prices usedin its Annual Energy Outlook. We also believe Dr.P"ifer's market structure assump-tions are reasonable. Dr. Pifer assumed that market forces, the laws of supply and de-mand, will ultimately determine the price at which electricity will be sold in the fu-ture, and that this price will reflect whatever reserve capacity for which market paxtid-pants are willin.g to pay. The use of a 15 percent reserve margin used by Mr. Falken-berg is unlikelyto hold true in a competitive market We further find that ehanges inenvironmental regulation that could occur may have an affect on market forecasts andshould appropriately be considered as Mr. Speyer has done: From the evidence pre-sented,lvlr. Speyer's estimated costs of environmental compliance is conservative andnot unreasonable.

With regard to the issue of ='nettfng" stranded generation benefits, believed toexist by AK Steel and Shell, with stranded regulatory costs, the Commission finds thatthe stipulation provides an equitable resolution of this matter. The Companyhasagreed to forego asserting a claim for stranded generation costs that they calculate onbrief to be approximately be $470 million on a netted basis (CG&E Reply Brief at 22•CG&E Ex. 22 at 1TWP-5 at 6; CGBrE Ex.13 at LJP-1 at footnote 3; and CG&E Ex_ 50 at JPVSCIP-6). Furt}ier, the parties to the stipulation have agreed, based on all the terms andconditions that are set forth in the stipulation, that there is no further netting or ad-justments of any kind to CG&E's transition cost recovery that are necessary (CG&B Ex.60 at 7). Additionally as discussed above, the Comniission does not agree with Mr.Falkenberg's stranded benefit analysis and, therefore, cannot find that there arestranded benefits that exceed the amount of the GTC that CG&Ehas agreed to foregorecovery of as part of the stipulation. Based upon the above finding, the Commissionfinds that there are no stranded generation benefits that should offset the regulatorytransition cost proposed by the transition plan stipulation.

2. FYis' gReeu>atoryAssets

AK Steel takes exceptions with a number of accounting treatments used byCG&E in calculating its existing regulatory assets to be recovered in its RTC. AK Steelargues that the Company mischaracterized the acenmulated deferred income taxes(ADI'17 as a component of the GTC rather than the RTC. According to AK Steel wit-ness Kollen, the ADIT is a regulatory liability that should be subtracted from regulatoryassets and provided to ratepayets through a reduced RTC rather than the GTC (AKSteel Ex. 14 at 21). Mr.:Kollen also states that the FERC Uniform System of Accountsclassifies AD1T as a "Deferred Credit," not as "Utility Plant" and, therefore, CG&E ac-counting is not consistent with the FERC accounting standards. AK Steel argues thaIs

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the Commission should recognize the Company's ADTr associated with all its generat-ing tuGts as a regulatory liability and reduce the Company's regulatory asset transitioncost claim to be recovered through the RTC, regardless of whether the Commission ac-cepts or rejects the stipulation.

AK Steel alsoarguesthat the SFAS 109 regulatory tax assets and liabilities mustbe stated on a net present value basis because there are tno carrying costs associated withthese future taxes under existing cost-based regulaflon (AK Steel Ex. 14 at 25). Further,AK Steel takes issue with the Company's proposal to include in the distribution com-ponent of unbundled rates a hypothetical SFAS 109 regulatory asset for municipal and

; franchise tax temporary differences the Company projects will exist in 2002. AK Steelargues that the Company has acknowledged that it will not record and is not requiredtorrecord such a regulatory asset at December 31, 2000 (AK Steel Ec. 14 at 25-26). Thus,according to AK Steel, it would be absurd to allow the Company to create a hypotheti-ca16FAS 109 regulatory asset at December 31, 2000, that will not exist at that date andthen to recover this`hypothetical cost from ratepayers in the distribution component ofunbundled rates,

AK Steel also disagrees with the Company's ezcess deferred income tax (ED1T)and the related SFAS 109 tax benefrts. The Company has removed the entirety of theEDIT tax benefits from the ADiT component of its net book value computations;thereby increasing its generation transition costs claims. AK Steel argues that the EDITamounts represent taxes prepaid by ratepayers at tax rates higher than they are cur-rently. Historically, these EDIT prepaid taxes benefits were amortized back to ratepay-ers over the remaining lives of the underlying assets. The Company semoved EDITbenefits of $11.378 million (AK Steel Ex. 14 at 28). In addition, AK Steel argues that theremoval of the EDIT regulatory liability from the ADIT utilized byYhe Company in itsSFAS 109 regulatory asset computations improperly increased the Company's SFAS109 regulatory asset transition cost claim by$19.186million on a nominal dollar basis,or $8.068 million on a net present value basis (AK Steel Ex. 14 at 28). AK Steel con-tends that the EDTT and the related SFAS 109 tax benefits belong to ratepayers pursuantto existing cost-based regulation (AK Steel Ex. 14 at 29 and Tr. VI at 33-34). According toAK Steel, the Conimission should reject the Company's attempt to unilaterally appro-priate these regulatory liabilities in order to increase its claimed regulatory asset transi-tion costs. '

Similar to the EDTT, AK Steel argues that the Company failed to reduce its regu-latory or generation transition cost claims by the net present value tif its investmenttax credit (ITC) amounts. AK Steel argues that the ITC and the related SFAS 109 taxbenefits belong to ratepayers pursuant to existing cost-based regulation (AK Steel Ex. 14at 35 and Tr. VI at 33-34). AK Steel requests the Commission reject the Company's at-tempt to unilaterally appropriate these regulatory liabilities in order to increase itsclaimed regulatory asset transition costs.

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AK Steel also argues that there will be no normalization violation if the Com-*mission pmvides the ADIT, EDIT, ITC, and related SFAS 109 regulatory liability taxbenefits to ratepayers through the RTC: Mr. Kollen stated that the normalization re-cluirements of the Internal Revenue Code of 1986, as further desanbed in the 1RS regu-laiions and as further interpreted for specific taxpayers in the IRS Private Letter Rul-ings, provide that there is no normalization violation if sirch ADIT benefits are pro-vided to :ratepayers no more rapidly than the time period over which the underlying

1: costs are recoverecl through regulated rates. All transition costs allowed by the Com-! mission in this proceeding will be recovered in ten years or less which is more thanthe recovery of generation transition costs of five years or less under a GTC.

Lastly, AK Steel requests that, if the Company sells its generating assets, then thereIated SFAS 109 amounts wil11e reversed (eliminated) from the balance sheet, withno gain or loss recognized. Thus, the unamortized SFAS 109 regulatory asset transi-tion.cost balance as of the date of the sale should be removed from the RTC. TheCommission should establish this treatment in its order in this proceeding in order toassure that ratepayers are not penalized in the event of a sale of the generating assets(AK Steel Ex.14 at 18-19).

CG&E witness W. Hriszko disagrees with Mr. Kollen's charactetization of theADIT. Mr. Hriszko testified that the IRS views ADIT as an interest-free loan from thefederal government (CG&E Ex. 76 at 3)• Similarly, Mr. Kollens treatment of EDIT bal-

' ainces inthe Company's SFAS 109 computation cannot be justified according to CGBrE.eCongress established specific rules concerning how the benefits of EDIT were to beshared between ratepayers and shareholders. CG&E argues that these rules would beviolated by the treatment thatMr. Kollen proposes (Id. at 8). Mr. Hriszko states in hisrebuttat testimony, that the adjustments that Mr. Kollen proposes violate the tax nor-malization rules. The TR$ has ruled that, where thecost of property is no longer in-cluded in the calculation of cost of service for ratemaking purposes, the inclusion oftax benefits from such property is a violation of the tax normalization tules (CG&E Ez.71 at 31)- CG&E believes it is dear that the Ohio General Assembly has directed thisCommission to resolve deregulation issues now so that deregulation of the generationmarket occur wif.hin Ohio no later than January 1, 2001. Thus, according to CG&E, theOhio General Assembly clearly contemplated that the current IRS position regardingtax treatments of these items would control, and that CG&E would necessarily set itsregulatory asset balances recogniziuig the existing position of the IRS.

CG&E disagrees with Mr. Kollen's treatment of SFAS 109 regulatory asset formunicipal and franchise tax temporary differences. CG&Eargues that Section 4928.34(A)(6), Revised Code, expressly allows the Company to recover costs associated withstatutory tax changes and that it is following the recommendation for collection ofsuch assets set forth in the Staff Report.

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The Commission finds that $401.4 million for jurisdictional regulatory assetsquantified by CG&E witness Steffen is reasonable and based upon the Staff Report ad-justments to the Company's original transition plan filing (CG&E Ex. 50 at)1?SSUP-5 at1). We find that the tax-related adjustments to these regulatory assets proposed by AKSteel witness Krollen would not be in keeping with the tax normalization rules estab-lished by the IRS. As Mr. Hriszko testified, Mr. Kollen's proposal would decouple taxattributes from the assets that generated the tax attrJbutes, naniely generation plants.By offsetting these tax attributes against regulatory assets, a pattern would be estab-lished that would return these tax attn`butes to the ratepayer over a period of time thatis different than the period of time over which the tax attributes would normally re-verse (CG&E Ex 76 at 2). Accordingly, we will not adopt the adjustments to the RTCproposed by Mr. Kollen above. The Commission has already approved $401 million ofCG&E's regulatory assets and, therefore, found that amount prudent. The testimony ofCC&E witnesses Steffen and Pefley support findings that such transition costs wereprudently incurred; legitimate, net, verifiable, and directly assignable or allocable to re-tail electric generation service; are unrecoverable in a cotrtpetitive market, and that theutility would otherwise be entitled an opportunity to recover the costs.

3.Assets

The parties to the transition plan stipulation have requested accounting author-ity to create the necessary regulatory assets, defer the costs of those assets, and recoverthem throngh an RTC. Such costs are associated with purchased power, litigation ofthis proceeding, establishing an EWG, aud shopping incentives, among others. AKSteel contends that many of the items in the stipulation that CG&E seeks fo have ac-counting authority to defer and recover as regulatory assets do not meet the criteria es-tablished for transition costs under Section 4928.39, Revised Code, as discussed above.Set forth below are the objections raised by AK Steel and Shell, the responses to thoseobjections, and the Comnlission's findings.

nbiections of AK Steel and Shell

One of the costs which CG&E is asking to be deferred as a transition cost is pur-chased power costs sufficient to maintain an adequate operating reserve margin as de-tennined by CG&E. AK Steel argues that CG&E does not show anywhere in its transi-tion plan filing or stipulation the amount of money claimed, forecasted, or desired forpurchased power. AK Steel also argues that, since the 1999 fuel and purchased powercosts, including the snmmer 1999 price spikes, are already being recove,red irt the EPC, aseparate deferral of purchased power costs clearly would be a double and improper re-covery. AK Steel Witness Baron testified that there is no basis to determine that thesecosts are prudently incurred. Neither are these purchased power costs directly assigna-ble or allocable to retail electric generation service provided to electric consumers who

• shop- Under the stipulation, deferred purchased power expenses will be charged to all

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ratepayers through the RTC, both those who shop and those who remain CG&E cus-tomers. AK Steel witness Baron believes that, under traditional standard ratemakingmethodologies, shopping customers who do not impose any purchased power ex-penses on CG&E should not be assigned these costs, conirnry tothe stipulation.

AKSteel next takes issue with CG&$'s proposals to pay $1.5 million in litigationreimbursement to be shared, and agreed upon, by, and arnong, active intervenor signa-tory parties to the stipulation. The intervenors are given voting rights to be used todisburse the money with agreement of75 percent of the active patties constituting abinding vote as to reimbursement. AK Steel argues that this proposal is inappropriateand illegal and does not comply with Section 4928.39, Revised Code. AK Steel furtherasserts that the costs are not prudently incurred, because the Company is not obligatedor required in any case to pay the legal fees of its opponents but only its own legal fees.AK Steel knows of no past precedent to allow a public uta7ity to pass on to its ratepayersthe legal costs of intervenors.

AK Steel's third issue concerns the deferral and recovery of $28 million associ-ated with CG&E's plan to seB off aIl its generating units to an affiliated EWG. The costsare for start up and debt financ'tng and refinancing ( I'r. I at 52). AK Steel witness Kol-len testified that these costs are discretionary and are not required by SB3. Thus, thecosts cannot be considered just and reasonable transition costs as a threshold matter.Further, Mr: Kollen contends that the costs to estabSsh an EWG are not directly assig-nable or allocable to xetati electricgeneration service inasmuch as it is not a retail serv-,ice (AK Steel Ex. 13 at 36). AK Steel further argues that CC&E may not incur most ofthese costs if CG&E is able to release the generation assets from its exjsting first mort-gage obligations without having to redeem the first mortgage bonds. AK Steel claimsthat this wouId save the Company $22.5 million dollars of the $28 million dollars re-quested for EWG transaction costs ('Tr. III at 40).

AK Steel's final issue in tkus area concems the overstatement of deferred shop-ping incentive transition costs and its affect on the determination of whether theCompany will over recover transition cost over the next ten years. AK Steel disputesCG&E 's quantification of the level of transition revenues and transition costs thatwould be recovered as result of the stipuIation. CG&E submitted the testimony of wit-ness Pefley to show the level of transition costs that the Company will actually recoveras a result of the stipulation (CG&E Ex. 77, T:JP-R-2). Based on this analysis, the Com-pany claims that it will under-recover approximately $153 million through the year2010 under the Stipulation (Tr. VI at 2). Among the costs included in the Company'sanalysis are the atnounts for regulatory assets claimed by CG&E in its original filingand supplemental filings ($401.4million), as well as $115.6 million of implementationcosts, $345 million of Ohio exeise tax overlap, and shopping incentives of $333 mil-lion.

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AK Steel witness Baron developed an analysis that estimates the level of RTCrevenue secovery on a present-value basis. Mr.Baron calculated that the Companywill recover RTC revenues of $651,257,591 on a present-value basis if the stipulation isapproved and implemented by the Commission (AK Steel Ex. 13 at 67). This $651 mil-lion revenue amount far exceeds the regulatory assets that the Company has claimedin its filing ($401 million) or the regulatory assets that AK Steel witness Kollen has de-veloped for CG&E ($12 million) (AK Steel Ex. 13 at 67).

AK Steel argues that, of all the costs included in the Company's analysis that itrelies on to support the stipulation, the $333 million of shopping incentives is themost unreasonable. AK Steel defines a shopping credit as the additional amount ofpaymentnecessary to induce a customer to leave the incumbent utility (CG&E) anduse an alternative supplier. AK Steel argues that the Company uses this exaggeratedshopping incentive quantification to argue that the stipulation produces transitionrevenueS that are lower than its claimed transition costs: AK Steel argues that CG&Ehas calculated shopping incentives for the first 20 percent of customers in each cus-tomer class based on a comparison of the shopping credits paid to such customers andthe Company's estimated market price, as developed by CG&E's witness Pifer.

AK Steel argues that when the shopping incentive quantification used by CG&Eis corrected to reflect the actual shopping incentives provided to the first 20 percent of

• each customer class, the Company's analysis falls apart. Mr. Baron developed theshopping incentives using the difference between the RTC that all customers will payand the RTC net of shoppingincentives that is offered to the first 20 percent of eachrate class. AK Steel argues thatusing this interpretation of the shopping incentiveproduces a shopping incentive cost to CG&E of $135.8 million, instead of the Com-pany's $333 million amount, When this value is substituted into Ms. Pefley's analysisof transition costs, it shows that CG&E will actually overrecover$425.7 million by theend of the ten-year transition period (AK Steel Ex. 20). Shell supports AK Steel's posi-tion the shopping incentive-related transition costs are overstated. Due to unrealisti-caily low average energy pricesused in the Company's calculations, Shell. argues thatshopping incentive-related transition costs are inflated.

Shell also takes the position that the new regulatory assets have yet to be in-cbrred and, therefore, were not prudently incurred as required by SB3. Shell also be-lieves that SB3 leads to the inescapable conclusion that the regulatory asset portion ofthe RTC charge must reflect only CG&E's previously approved regulatory assets, andthat newly approved regutatory assets must be recovered within the parameters of thatRTC charge. Because the stipulation would premise its RTC charge on both existingand new regulatory assets, Shell believes it violates SB3.

Shell also argues that the stipulation s request for new regulatory assets fails tosatisfy SB3 in several additionAl respects. The proposed new regulatory assets for pur-chased power costs, payment of other parties' litigation costs, and the effects of any

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shopping incentive simply do not fall within the parameters of "regulatory assets" asedefined by SB3. lf anything, many of these costs, such as EWG set-up costs ($28 mil-lion) MTSO costs ($15 million) and &ystem & Business Processes ($65 million) con-tained in the transition implementation costs, and future purchased power costs repre-sent the type of "going forward" costs related to the future conduct of CG&E's businessthat regulatory agencies consistently have refused to include in stranded cost calcula-tions.

SBrEand Skaff?RSespon=es

CC&E argues that it will incur costs associated with purchasing power to main-tain an adequate reserve margin as it meets the needs of its customers who take serviceunder CG&E's standard offer service. These costs are directly assignable to retail elec-tric generating service. Because the mechanism to recover these costs, the RTC, is fixedby the stipulation, CG&B wiB have the incentive to prudently manage these costs.AdditionaIly, these costs will be recorded on the Company's books and will be verifi-abie by the Comnnission. CG&E further argues that„ since these costs will be incurredto provide regulated generation service under fixed rates, there is clearly no possiblerecovery through the market.

With regard to litigation costs, CG&E's argues that the limited payment of theseexpenses is prudent inasmuch as the Company would have spent far znore on its own

andîf the case was fully litigated. CG&E believes that, given the number of partieswitnesses, the $1.5 million is not an unreasonable sum of money nor improper toprovide as part of a settlement offer. CG&E notes that the Commission will have ac-cess to the company's books and records to verify that CG&E has incurred these ex-penses:

CG&E also disagrees with AK Steel's EWG arguments. The Company arguesthat these costs are appropriately recovered under Section 4928:39, Revised Code.CC&E views these cost as the most pragmatic and economical way#o comply with theCorporate Separation Plan required by Section 4928.17, Revised Code. CGBsE states thatit will take all measures to +Y+iniinize costs of the transfer and the amount proposed tobe recover represents the expected costs to accomplish this task (CG&E Ez. 39 at Ex_ LJP-SUP-1, 3 and 5). CG&E states that it will record and defer the actual costs incurred, andmake its books and records available the Commission for review.

CG&E asserts that Mr. Baron has mischaracterized the shopping incentive andthe associated cost. Ivlr. Baron calculates the cost to be the difference between the shop-ping credit that CG&E proposes to the first 20 percent of customers who switchand thesh3pping credit offered to the remaining 80 percent of customecs(Tr. VI at72). Thiscomputation reflects the cost that CG&E will incur to induce 20 percent of its custom-ers to switch. CG&E disagrees with this analysis. CG&E believes that customers will beinduced to switch only if they can obtain real savings or value. The measure of thi9A

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value, or inducement, will be the difference between the amount the customer is tred-ited by CG&E for not taking generation from CG&E, and the amount the customermustpay to an altemative supplier for retail generation. According to Ms. Pefley, theinducement, or incentive to shop, is simply the difference between CG&E's shoppingcredit and the market price (CG&E Ex: 77 at Ex. No.L)P=R-2 at 4-5).

The staff supports the arguments made by CG&E regarding the deferral and re-covery of regulatory transition costs. Because CG&E Ytas agreed to a fixed RTC riderrate, it bears a risk of never recovering a certaizt portion of the deferrals based upon fu-ture, unknown, and presently unknowable market conditions. Mr. Baron's concem, ofallowing CG&E to "defer puxchase power costs sufficient to maintain an adequate op-erating reserve margin," is more an academic difference than a real issue according tostaff. The stipulation does not provide any separate rate recovery of the accounting de-ferrals but merely provides accounting flexibility to the Company; It does not reducethe Company's risk of recovery, nor guarantee it a fixed and excessive stream of reve-nue. The staff notes that CG&E has waived the right to seek any rate recovery :of anycosts deferred pursuant to such accounting authority that are not recovered throughthe RTC (CG&E Ex. 60 at 6).

Staff further points out that, in Section 4928.40(b)(2), Revised Code, satisfactoryshopping incen6ve results are referred to as onecause for the Commission to consider

^ ending the MDP. Staff contends that the transition charges shall be structured to pro-vide shopping incentives to customers sufficient to encourage the development of ef-fective competition in the supply of retail electric generation service (Section 4928.40,Revised Code). Staff believes that CG&E's deferral and recovery of reasonable shop-ping incentives provides the room for competing marketers to enter and create a vi-able and competitive market.

The staff also believes that the establishment of a EWG is a reasonable methodboth of ensuring corporate separation and ofcompensating CG&E for their compliancewith Section 4928.17(A), Revised Code.

Commiscion Conclusion

The Comnvssion finds that the costs of the new regulatoiy Assets discussedabove meefthe requirements of Section 4928:39, Revised Code, and can be deferred forrecovery through the RTC. We believe the record demonstrates that the costs subjectto recovery are prudently incurred, are directly assignable to retail electric generationservice provided to electric customers in this state; not recoverable in a competitivemarket, and would otherwise have been recoverable. Inasmuch as purchased powercosts will be incurred to provide regulated generation service under fixed rates, it isreasonable to recover future costs of purchased power through the RTC. Further, webelieve the Company would have spent far more on litigation if it had to fully litigate

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the case. The payment of other parties' legal costs under terms of this stipulation, al-*though unique, is not unreasonable taking into account the full parameters of thiscase.

With tespect to the recovery of EWG transition costs, the Commission finds thati. these costs are attribtttable to electric restructuring and the provision of retail elettric

generation service. We believe Mr. Kollen takes a too restrictive position regardingj, this requirement: We further find that the Company has adequately supported its pro-

jected costs of transfer9ng its generatioa assets through the testimony of witness Pefley(CG&S Ex. 39).

Regarding the issue of the cost of shopping credits, SB3 perntits the Commissionto authorize shopping incentives in order to induce at least 20 percent of customers ineach customer class to shop (Section 4928.40(A), Revised Code). The Company has pro-jected the cost to be $333 milfion as opposed to $135.8 million calculated by Mr. Baron.The stipulation provides CG&E the accounting authority to create the necessary regula-tory assets and defer and recover deferrals or adjustiments to the amortization sched-ules to reflect the effect of any shopping incenflves (CG&E Ex. 60 at 6). The Companyargues the measure of this value, or inducement, will be the difference between theamount the customer ;s credited by CG&E for not taking generation from CG&E, andthe aatount the customer must pay to an alternative supplier for retail generation.According to Ms. Pefley, the inducement, or incentive to shop, as simply the differencebetween CG&E's shopputg credit and the market price. The Commission finds this ap-0proach to ar.rive at the amount of deferred costs is reasonable and in keeping with thestipulation, The stipulation addresses the effects ofany shopping tncentives, not justthose related to the tirst 20 percent of customers that switch. We further note, aspointed out by our staff; that the stipulation does not provide any separate rate recov-ery of the accountipg deferrals but merely provides accounting flexibility to the Com-pany. It does not reduce CG&E's risk of recovery, nor guarantee it a fixed and excessivestream of revenue. Accordingly, we are not persuaded by the arguments raised by AKSteQl and Shell on this issue.

The Commission would also like to note that, inasmuch as the transition planstipulation is a compromise involving a balancing of competing positions and doesnot necessarily reflect,the views which one or more of the parties to the stipulationwould have taken if these issues had been fully litigated, our approval of these newregulatory assets does not necessary reflect what the Commission's position wouldhave been had not the issue been part ofan all encompassing stipulation. Accordingly,our decision to accept the creation and accounting treatment of the new regulatory as-sets creates no precedent for any other traiisition plan proceeding. We further notethat, although the stipulation provides for the opportunity to recover the cost of vari-ous newly created regulatory assets, CG&E'a analysis shows that at the end of 2010 theunrecovered balance of generation-related regulatory assets is projected to be approzi-mately $153 million (CG&E Ex. 77 at LJi'-R-2 at 1). The recovery mechanism for thesO

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costs provides protection to consumers and supports the reasonableness of approvingthe creation of these new regulatory assets.

4.

•

5t1F1 fo S411^1•7,74'fR9YU.JIC:nI

Shell argues that the stipulation's treatment of regulatory transition costs vio-lates SB3 in a variety of fundamental respects. Shell states that the Commission mustdetermine the total aUowable amount of the transition costs of the utility to be re-ceived as transition revenues and that these costs must meet the standards of Section4928.39 (A) through (D), Revised Code. SheIl contends that the stipulation's treatmentof transition costsviolates each of the foregoicig statutory provisions.

Shell contends that nowhere does the stipulation purport to identify the maxi-mum leveI of transition costs authorized for recovery by CG&E. In fact, the stipulationmakes plain that its proposed transition revenue recovery is "not limited to" the regu-latory assets it identifies. AK Steel argues that CG&E has failed to provide (a) theamount of itstransition revatues; (b) the amount of itstransitfon costs; and. (c) proof thatits transition revenues equal its transition costs.

AK Steel asserts that, under the stipulation, there is no mechanism to track theRTC revenue recoveryand tocompare the RTC revenues to the revenue requirementof the allowed regulatory asset transition costs. Thus, AK Steel claims that the RTC re-covery will be excessive because it will not terminate,once the Company has recoveredthe allowed costs, butrrather will extend for the maximum ten-year RTC recovery pe-riod, eight years for residential customers. AK Steel argues that such a result is incon-sistent with the statutory requirements. Pursuant to Section 4928.34(12), Revised Code,AK Steel contends that the Conipany may not recover more than its allowed transitioncosts.

Shell also takes exception to Ms. Pefley's rebuttal testimony which suggests that,even if purchase power costs are excluded, e$153 million shortfall still exists betweenCG&E's RTC revenues under the stipulation and its likely transition costs. Shell ar-gues that IGts. Pefley's numbers are unreliable, as they rest on inappropriate assump-tions concerning kWh sales leveIs, market prices, switching rates, and carrying charges.All of these inappropriate assumptions serve either to decrease CG&E's RTC revenuesor to increase ifs RTC costs, thereby producing the revenue "gap" about which Ms. Pe-fley complains. Shell contends that, when these erroneous premises are corrected, theresults strongly suggest that, in fact, CG&E would take in far more in RTC revenuesunder the stipulation than it would incur in RTC costs.

Shell contends that Ms. Pefley's transition cost figures are still further inflated bythe high carrying charge she imputes. CG&E's calculations assume an RTC carryingcharge equal to the utility's fnll authorized pre-tax rate of return of 14.23 percent(Company Ex. 77 Ex. LJP-R-2 at 7 of 5). Tn light of the non-bypassable, guaranteed na-ture of RTC collections, Shell states that CG&Edoes not face the same level of business

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risk with respect to theix collection as applies to other aspects of its regulated buslness..A.dditionally, Shell claims that other jurisdictions that have considered this matterhave had no difficulty concluding that such transition costs merit a carrying chargecloser to the utility's cost of debt than its overall rate of retunn.

CG&E argues that the rebuttal testimony of Ms. Pefley demonstrates that the' Company's recovery of transition costs through the RTC will fall $153 million short of

the transition costs that CG&E has shown exist (CG&E Ex 77 at LJP-R-2 at 1). Further,CG&E points out that the stipulation imposes the risk of a shortfall upon CG&E ratherthan the consumers. Further, CG&B states that it has used a carrying charge of 14.23percent because that is the authorized rate ofreturn from its last rate case.

As discussed previously in this order, the Commission finds that existing andnew regulatory assets for which the stipulation requests recovery through the RTC arereasonable and do not violate the various provisions of SB3. Although not aA of theregulatory transition costs are calculable to the penny at this point in time, Companywitness Pefley has provided a reasonable accounting of what the amounts of transitioncost are or axe projected to become. The stipulation does provide CG&E recovery ofpreviously approved regulatory assets totaling $401 million and new regulatory assetsestimated to total at least $483 million (CG&E Ex. 60 at 6-7; CG&E Ex. 50 at Ex. JPS-SUP-5; and CG&E Ex_ 77 at Ex. L7P-R-2). It is cIear from S83 that the Commission is author-ized to permit the creation of, or amortization of, additional regulatory assets. There-

- fore, we do not buy intd the argnment the transition regulatory assets must already beoin existence to be prpdently incurred ($ection 4928.40(A), Revised Code).

Further, Ms Pefley filed rebuttal testimony to support the reasonableness of theamount of transition costs t,o:be recovered through the RTC. Based on a present valueof RTC revenue of $517 million, calculated using Mr. Baron's methodology and a pre-tax authorization rate of return, and comparing it to $552 million of transition costsallowed to be recove red based on the stipulation, not including shopping credit costs,purchased power costs, and appropriate carrying charges, CG&E demonstrates that it isnot likely that it will over recover all of its regulatory transition costs through the RTCrider (CG&E Ex. 77 at 4 and 5).

We also note that the Company is only entitled to an opportunity to collect itstransition charges and that there is no precise arithmetic guarantee under Section4928.34(S)(12), Revised Code: Many factors will come into play in the future that willdetermine whether the Company will under- or overrecover alI of its approved transi-tion costs: Consequently, we do not believe thatthe stipulation is unreasonable or inviolation of Section 4928:34(A)(12), Revised Code, because the stipulation does notguarantee that the Company will recover no more than the projected transition costs.With the considerable number of parties that have agreed to the stipulation, the

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Commission can conclude that the recovery of transition costs established by the stipu-lation is reasonable and will not lead to any significant overrecovery of transftioncosts.

D. Transition Plan Stipulation's Compliance with Sections 4905.33 4905 354928.37 and 4928.40. Revised Code

As discussed in our summary of the stipulations, the shopping credits for eachcustomer class set forth in the stipulation are higher for the first 20 percent of the loadof that customer class that switch to an electric energy marketer. Further, the RTC forresidential customers ends at December 31, 2008, as opposed to December 31, 2010, forother customers. The stipulation also provides for a MDP for residential customers offive years while the IvIDP for other ciasses could end sooner than five years.

AK Steel contends that these provisions of the stipulation are unreasonable andin violation of Sections 4905.33 and 4905.35, Revised Code. Section 4905.35, RevisedCode, provides in relevant part as follows:

(A) No public utility shall make or give any undue or unrea-sonable preference or advantage to any person, firm, corpo-ration .;.or subject any person, firm, corporation ...to anyundue or unreasonable prejudice.

Section 4905.33, Revised Code, provides in relevant part:

No public utility shall directly or indirectly, or by anyspecial rate,rebate, drawback, or other device or method, charge, demand, col-lect, or receive from any person, firrn, or corporation a greater orlesser compensation for any services rendered; or to be reindered,except as provided in Chapters 4901., 4903., 4905., 4907., 4909, 4921,4923-, and 4925. of the Revised Code, than it charges, demands, col-lects, or receives from any:other person, firm, or corporation fordoing a Iike and contemporaneous service under substantially thesame circumstances and conditions.

QWections of AK Steel and Shell

AK Steel states that the shopping credit, although nowhere found in SB3, repre-sents the number, on average, of the cost of power, below which it pays a customer onthe Standard Service Offer (SSO) to begin shopping. AK Steel argues that the stipula-tion's offer of enhanced shopping credits to some customers at the expense of similarcustomers in similar circumstances is discriminatory. Further, AK Steel contends thatthe effect is far worse as to non-residential customers, because CG&E may cancel theMDP and, thus, the availability of the SSO as soon as there ezists 20 percent shopping

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by load in a rate class. .AIC Steel believes that it is to CG&E's distinct economic advan-0tage to cancel the MDP as soon as a class aclueves 20 percent load switching eventhough the remaining 80 percent lose the safe harbor of the S50. AK Steel contendsthat significant preference or advantage based upon a place in a queue is unreasonableand unjust and that no rational justification can be found to charge different rates tothe same class of customers based on the ability to get into a line first.

AK Steel also argues that CG&E has bestowed upon the residential class benefitsthat it has not deemed to confer on the non-residential customers. While non-residential customers may be expelied from the SSO whenever the first 20 percent of

p the customer load of the class switch, the residential customers have the security of theSSO until December 31, 2005. AK Steel believes this is a considerable advantage since itsecures them against t}te vagaries of the market place for five years regardless ofwhether 20 percent load switching as occurred or not. Furtber, AK Steel argues thatthe reduced RTC recovery period for residential customers is discriminatory since itmeans an underpayment by the residential customers of their share of the RTC.

AK Steel also argues that these provisions concerning shopping credits also vio-late Sections 4928.37 and 4928.40, Revised Code, because they perrnit certain customersto by-pass the non-bypassable RTC and create a RTC of less than zero for the first 20percent of residential customers.

Shell aJso takes issue with the provision of the stipulation that wouid permiothe Company to end the MDP for non-residential customers prior to Deceniber 31,2005. Specifically, Section 5 of the stipulation would grant CG&E the authority to endthe MDP, at its sole option, if (1) 20 percent load switching by class has occurred, (2)CG&E provides notice to the Commission, and (3) CC&E does not have a certified sup-plier affiUate in its service territory. Shell argues that, because CG&E has indicated ithas no intention of establishing a retail rttarketing affiliate and the noticeprovision ispurely ministerial, CG&E's exercise of this requested discretion would turn on thelevel ofnon-residential customer switchiug. Shell states that, under SB3, a utility'sapplication to end the MDP must demonstrate either that there is 20 percent switchingrate by the customer class, or there exists effective competition in the utility's serviceterritory (Section 4928.40 (B) (2), Revised Code). Shell contends that the Commissioncannot authorize an early termination to the MDP unless it finds either of the requisitethreshold arcurnstances to eiist, something it obviously cannot do now, prior to thecommencement of the MDP. Shell argues that the stipulation's request for ' up front"authorization to end the MDP seeks fo strip the Commission of this flexibility andhand over toCG&E the authority to determine whether circumstances warrant earlytermination. In Shell's view, the stipulation'sproposal concerning early terminationof the IvIDP is unlawfnt, represents ill-conceived policy, and should be rejected.

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Reponses of CG&E and Staff

CG&E disagrees with the arguments made by AK Steel and Shell. The Companyasserts that all customers have an equal opportunity to shop and that CC&E exercisesno influence over which customers will be among the first 20 percent of load to switch.CG&E also points out that Section 4905:33, Revised Code, recognizes circumstanceswhere preferences may be given pursuant to statutory authority, and Section 4905.35,Revised Code, only prohibits undue or unreasonable preferences. CG&E cites Section4928.40(A), Revised Code, which permits the Commission to authorize shopping in-centives to. induce 20 percent switching, to support its argument that the shopping in-centives provided are reasonable and permissible by law. With respect to the differ-ence in the MDP and I2.TC recovery periods among the various classes of customers,CG&E argues that residential customers are not similarly situated to commercial andindustrial customers in a competitive context. Further, CG&E points out that any un-derrecovery of RTC due to the treatment of residential customers within the stipula-tion is absorbed by CG&E and that CG&E has shown it will underrecover transitioncosts of approximately $153 million (CG&E Ex. 77 at 2).

CG&E also disagrees that the RTC is being by-passed or is established at belowzero. CG&E states that it has shown through the testimony of witness Pefley that allcustomers pay an undiscounted RTC which is offset by a shopping incentive (CC&E Ex.

• 65 at Ex, LJP-Sup-8; and CG&E Ex. 77 at LJP-R-2 at 3). CG&E argues that 5133 requires theCommission to consider offsetting the RTC with shopping incentives.

The staff takes the position that shopping incentives are legitimate regulatorytools designed to promote competition. Staff believes that the structure of the shop-ping credits, MDPs, and the RTC recovery periods are consistent with the regulatoryintent of SB3.

Commission Cond icion

The Commission finds thak the structure of the shopping credits, MDPs, and theRTC recovery periods do not violate Sections 490533 and 4905.35, Revised Code.Clearly, Sections 4928.37(B) and 4928.40(A), Revised Code, provide the Commissionwith the authority to approve the shopping incentives set forth in the stipulation. Al-though customers who take the early initiative to shop for an alternative supplier ofgeneration will benefit from their actions, this does not amount to undue preferencenor create a case of discrimination. All customers will have an equal opportunity totake advantage of the shopping incentives. The Commission cannot conceive of amechanism that provides customers with more of. an incentive to shop than thosecreated by the stipulation. The Commission also finds that Section 4928.40(t1), RevisedCode, authorizes the Commission to set the recovery of the costs associated with regu-latory assets up to December 31, 2010. The Commission does not find it discriminatory

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to have two different periods for the recovery of the RTC, one for residential custom-i, ers and one for non-residential customers, inasmuch as the rates, incentives, and

shopping credits vary between the various customer classes.

We also believe that,inasmuch as SB3 permits the Commission to authorizethe end of a MDP prior to December 1, 2005 if there is a 20 percent switching rate by aparticular class of customer, the approval of such through this order as part of thestipulation is not unreasonable nor contradictory to Section 4928.40(B), Revised Code.Further, we do not believe that the development of a shopping incentive should beviewed as creating an RTC of less than zero or that it permits the RTC to be by-passed.We view the two as separate provisions of the SB3.

E. Shopninr- Credits

Section 492B.40, Revised Code, provides for the establishment of shopping in-centives to induce customers to switch to a certified supplier to obtain their generationsupply. The goal of the incentive is to achieve at least a 20 percent switching rate byDecember 31, 2003. CG&E states that the stipulation createssuch shopping incentivesby granting shopping credits greater than the projected market price of power: Per thestipulation, such credits are equal to or greater than CG&E's unbundled generationcomponent to the first 20gercent of customers that switch to a certified supplier to ob-

' tain their generation supply (CG&E Ex. 60 at 11-14):

eShell argues that the stipulation's shopping credits would not spur the level ofswitching sought by 5B3 and the Commission's rules, particularly among residentialratepayers. Shell's position is that, once a marketer adds on to the wholesale price ofpower such. costs as line loss, advertising, other customer acquisition costs, collectioncosts, reserves for bad debt, accounts payable, customer call centers, office ovetheads,and the marketer profit, there will be no margin left to provide the customer a savingsoff of the $0.05 shopping credit provided the first 20 percent of residential customerswho shop. Thus; according to Shell, during the MDPs crucial initial stages, whenCG&E's service territory first opens to competition, the stipulation's proposed $0.05shopping credit would force residential marketers to either offer no significant con-sumer savings or to do so at a loss. Shell also contends that assuming, for argument'ssake, that the initial $0.05 credit did induce a 20 percent residential switch rate by themidpoint of the MDP, the prospect for further customer switching would vanish un-der the subsequent $0.0394 shopping credit provided the remaining 80 percent of resi-dential customers.

Shell argues that, in short, the fact that the stipulation's proposed shopping cred-its exceed CG&E's unbundled generation charge has no bearing on whether they meritapproval by this Comnussion: Instead, Shell maintains that the Commission must as-sess whether those credits would produce the effective competition and competitivechoice sought by SB3. Shell claims that CG&E's attempt to mask the deficiency of th*

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. inadequate $0.05 credit.

stipulation's shopping credits through a simplistic comparison to those offered by Du-quesne Light Company misses the mark. Unlike CG&E, Duquesne Light Company didmore to promote competition than merely provide shopping credits. Shell believesthat CG&E should actually provide a certain amount of generation capacity at a prede-ternvned price to those retail suppliers competing to sertre its market.

In conclusion, Shell argues that the stipulation's residential shopping credits arei. wholly inadequate for accomplishing the level of switching and effective competition

sought by SB3 and the Commission should reject them. Alternatively, Shell claimsthat, if the Commission finds that providing generation capacity is not well suited forthe CGBrE system, the Commission, at a minimum, should increase substantially thestipulation's residential shopping credits. In this regard, Shell recommends increasingthe credit to $0.055 per kWh for the entire MDP. This enhanced initial shopping credit,according to Shell, would have a much greater chance of engendering immediate, vig-orous third-party participation in the CG&E residential market than the stipulation's

Shell also takes issue with Section 3 of transition plan stipulation that provides:

There will be no further netting or adjustments of any kindto CG&E's Transition Cost recovery, including buPnot lim-ited to any adjustment of RTC rates, or shopping creditsthrough 2010, related to the sale, lease or transfer by CG&E,or any of its affiliates> of any generating assets.

Shell argues that this provision represents a blatant attempt to tie the Commis-sion's hands regarding future actions it might take to protect and encourage the emerg-ing competitive market place in light of unanticipated market conditions. Shell be-lieves that this provision of the stipulation is in conflict with Section 4928.40 (B) (1),Revised Code, which permits the Commission to conduct a periodic review no moreoften than annually and, as it determines necessary, adjust the transition charges oftheelectric utility as initially established or subsequently adjusted. Moreover, Shell arguesthat the Commission is specifically permitted to adjust the regulatory asset componentof a utility's regulatory transition charge on a prospective basis after December 31, 2004,or earlier in conjunction with approval of an early termination date for the MDP (Sec-tion 4928.39 (D), Revised Code). Shell argues that the acceptance of Section 3 of thestipulation would negate the Commission's broad authority to safeguard retail compe-tition during the MDI' and should be rejected_

CG&E's argues thatits plan for shopping incentives filed with its transition plandescribes numerous studies conducted by CG&E in developing a switching forecast(CG&E px: 8 at 2-15; and CG&.E Ex. 16 at 6-27). These studies include residential cus-tomer satisfaction studies, commercial and industrial satisfaction studies, an imagetracking study, atid a market forecast study (CG&E 5.16 at 6). CG&E contends that an

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analysis of these studies reveals that, with certified suppliers offering as little as twopercent value over CG&E's standard service offer, 22.7 percent of residential load, 52.1percent of commercial load, 89.5 percent of industria] load, and 69 percent of govern-mental load are projected to switch to certified suppllers by the end of 2003 (CG&E E.x.16 at 25,27). CG&E asserts that theae projections far exceed the switching targets speci-fied in Section 4928.40(A), Revised Code. However, CG&.E contends that with thestipulated shopping credits, the customers who switch will receive far greater than twopercent added value, based on projected retail market pflces, and the first 20 percent ofthe customers who switch will receive even greater incentives.

CG&E also points out. that Shell's use of CG&E's wholesale power purchases in1998 does not reflect properly the wholesale price of power in the future. CG&E assertsthat much of this power was purchased during peak periods when prices were high.CC&E argues. that it is more appropriate to look forward to projected zetail marketprices (CG&E Ex.'T7atLJP-R-2 at 4).

The Commission finds that the stipulation provides appropriate shopping in-centives to achieve a 20 percent load switching contemplated by Section 4928.40(A),Revised Code. We bei;eve CG&E's forward looking wholesale prices of power used toestimate future retail power markets are more appropriate than CG&E purchasedpower costs from pastyears. p'urther, the record lacks sufficient evidence to supportShell's recommendation of a shopping credit of $0.055 per kWh. The stipulation's$0.05 shopping credit for the first 20 percent of residential customer load that switchesOexceeds the unbundled rate for generation and, therefore, should help ensure thatresidential customers have an incentive to shop. The first 20 percent load switchedfrom the remaining customer dasses will also have an adequate incentive to shop in-asmuch as shopping credits will equal 100 percent of the unbundled generation rate.We believe that these significant shoppingincentives will effectively foster early com-petition byproviding significant motivation to customers to switch retail generationsuppliers.

With regard to Section 3 of the stipulation, the Commission does not believethat ttiis provision is in conflict with Sectaon 4928.40(B)(1), Revised Code. This sectionof the Revised Codepermits the Commission to conduct a periodic review no moreoften than annually and, as it determines necessary, adjust the transition charges of theelectric utility as initially established or subsequently adjusted. It does not require suchreviews or adjustments. We believe that the stipulation establishes reasonable transi-tion charges, shopping credits, and incentives for customers to shop. We do not be-lieve that Section 3 negates the Commission's broad authority to safeguard retail com-petition during the IvTDP. Various sections of SB3 give the Commission the continuedoverszght to m.onitor the progress of cornpetitive retail electric services, to take actionwhere necessary, and to promote the policies of the state of Ohio set forth in Section4928:02, Revised Code.

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F. &ki`s Cornorate Seoara5on Ylan

CG&E proposed a CâP that it contends meets a11 the requirements set forth inSections 4928.17 and 4928.06, Revised Code, and the Commission's rules on utilities'¢ode of conduct, No parties opposed CG&E's CSP. Under its plan, effective January 1,2001, CG&E will notoffer non-tariffed products and services and it will transfer anysuch products and services to a fully separated affiliate (CG&E Ex. 57 at 2). Addition-ally, CG&E's CSP provides for the transfer of its generating assets to an EWG and, ac-cording to the plan, CG&E will complete the transfer by no later than December 31,2004 (CG&E Ex. 57 at 3). CG&E's CSP also describes the mechanisms that CG&E willutilize to ensure that CG&E institutes proper accounting procedures for affiliate trans-actions (CG&E Ex. 57 at 4-5)• CG&E's CSP includes provisions related to structural safe-guards, separate accounting, financial arrangements, complaint procedures, educationand training, the policy statement, internal compliance monitoring, and a detailed list-ing of CG&E's electric services. As described in the testimony of Paul G. Smith, CG&Ewill implement a cost allocation manual, pursuant to Rules 4901:1-20-16(G)(1)(a) and(b) and 4901:1-20-16(J), O.A.C. (CG&E Ex:14 at 5). CG&E will also only share employees,facilities; and services in accordance with its SEC-approved service agreements, pursu-ant to Rule 4901:1-20-16(G)(1)(c), O.A.C. (CG&E Ex. 37 at 3). Under its proposal, CG&Ewill keep its books, records, and accounts separate from those of its affiliates pursuantto Rule 4901:120-16(G)(2), O.A:C. (CG&E Ex. 14 at 6). CG&E will also follow the Com-mission's rules on financial arrangements to preserve the financial independence ofCG&E from its affiliates pursuant to Rule 4901:1-20-16(G)(3), O.A.C. (CG&E Ex.14 at 7).

CG&E's filing includes an affi,liate code of conduct that complies with the Com-mission's rules. According to the Company's proposal, CG&E is prohibited from re-leasing any proprietary customer information to an affiliate without the prior authori-zation of the customer (CG&E Ez. 37 at Ex. PGS-1 at 2). xurthermore, CG&E's affiliatecode of conduct requires CG&E to make customer liSts available on a nondiscrispina-torybasisto all nonaffiliated and affiliated certified retail electric competitors transact-ing business in its service territory (Id. at 1). CG&E's afffliate code of conduct stipulatesthat the Company shall treat as confidential all information obtained from any certi-fied supplier of retail electric service and that the Company shall not tie the provisionof regulated services to the taking of any goods and/or services frozn CG&E's affiliates.CG&E maintains that its code of conduct ensures that anticompetitive subsidies willnot flow from a noncompetitive retail electric service. to a competitive retail electricservice or to a product or service other than retail electric service, and vice versa (Id, atb),

CG&E notes that Section 4928;17(C), Revised Code, provides that "for goodcause, the Commission may issue an order approving a corporate separation plan thatdoes not comply with Section 4928.17(A)(1), Revised Code, but complies with suchfunctional separation requirements as the Commission authorizes to apply for an in-

• terim period. Further, CG&E states that the Commission's corporate separation rulesrequire the utiliry to show good cause for selecting an interim functional separation

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plan. CG&E believes that it has met this burden through its corporate separation fi- 0ttancing plan. CG&E notes that its corporate separation financing plan provides for aprogram to complete the traqsfer of its generating assets to an EWG by December 31,2004, and it describes the expected costs CG&E would incur if it is forced to transfer itsgenerating assets to the SWG by December 31, 2000. It is CG&E's intention to achievethe transfer of assets to the EWG at the lowest cost practicable by seeking to minimizethe transaction costs, including tax obligations; minimize the expenditures related tothe recapitalization of CG&E; and optimize the capital structure of CG&E. CG&E's abil-

I ity to minimize its transaction costs will turn on three:key issues: (1) what steps CG&Emust take to adjust its capital structure as a result of the corporate separation plan, (2)whether it can release the generation from the mortgage without having to redeemthe firgt mortgage bonds; and (3) whether it can eliminate or minimize the tax obliga-tions whizh may arise from the transfer (Id: at 3). CG&E is undertaking the process ofseeldng to releasethe generation assets from its existing first mortgage lien obligations(Id. at 3). CG&E expects this process to take at least six to nine months (Id, at 3), WhileCG&E hopes that it can achieve this release, there can be no assurance that CG&E willbe fuIIy successful. In the event CG&E is unsuccessful, it may have to pursue othermeans to release the properties, as descnbed in CG&E's Corporate Separation Financ-

; ing I'Ian.

CG&E has presented a corporate separation plan for Commission approval pur-suant to Section 4928,17(C), Revised Code. CG&E has indicated that, if it is forced totransfer its generating assets to the EWG by December 31, 2000, it will incur significantcosts. Since the corporate separation plan does not provide for complete separation byDecember 31, 2000, in order for this Commission to approve an interim plan the com-pany must show "good cause" pursuant to Section 4928:17(C), Revised Code. This sec-tion provides that an interim plan must be consistent with such functional separationrequirements as is authorized for the interim period, and that the plan must providefor ongoing compliance with the policy set out in Section 4928.02, Revised Code. Sec-tion 4928.17(A)(2), Revised Code, also requires that all plans satisfy the public interestin preventing unfair competitive advantage and abuse of market power. The planmust also be sufficient to ensurethat no undue preference or advantage is extended toor received by the competitive retail affiliate from the utility affiliate (Section4928(A)(3), Revised Code), The Commission's rules also address interim, plans and re-quire that such plans set out a detailed timeline of progression to full structural separa-tion, and that they be subject to periodic Commission review (Rule 4901i1-20-16(G)(1)(d), O.A.C.).

We find that CG&fi's proposed interim plan achieves the structural separationcontemplated by Section 4928.17(A)(1), Revised Code, and the corresponding Comfnis-sion rules, The Company has shown that it will incur significant costs if it is forced totransfer its generating assets to the EWG by December 31, 2000. We find that goodcause exists to aliow the separation as proposed by the company to occur by December31, 2004, in. that specific steps are set forth to insure the release of the subject properries*

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in that time frame. The plan provides for competitive retail electric service through afully separated affiliate of the utility and includes separate accounting requirementsand code of conduct necessary to effectuate the policy specified in Section 4928.02, Re-vised Code. The plan also satisfies the public interest in preventing unfair competitiveadvantage and preventing the abuse of market power. The plan also is sufficient toensure that the Company will not extend any undue reference or advantage to any af-filiate, division, or part of its own business engaged in the business of supplying thecompetitive retail electric service or nonelectric produce or service. CG&E has pro-vided a reasonable timeline for its transition to full structural separation. Therefore,the Company has niet its burden of showing'good cause" for this Commission to ap-

i prove the interim functional separation plan. We will closely monitor the implemen-tation of the plan and take appropriate steps where we find competitive inequality, un-fair competitive advantage, or abuse of market power. We believe that through theperiodic Commission review of the interim separation plan, through. auditing of thecompany's books and records, including the cost allocation manual, and the complaintprocess, this Commission can ensure that the corporate separation plan is imple-9nented in accordance with the policy enunciated in SB3.

G. CG&E's Emvloyee Assista_ncePlan (E.AP)

CG&E's EAP was presented through the testimony of Richard L. Bond, CG&E'sgeneral manager of Compensation, Benefits and Human Resources Information Sys-tem. Mr. Bond described CG&E's EAP iricluding the programs for severance, retrain-ing, retirement, retention, outplacement and other assistance that the company com-mits to provide to its employees whose employment is affected by electric industry re-structurung (CG&E Ex:17, 3). Mr. Bond contended that CG&E's RAP provides for all ofthe types of benefits described in Section 492831(A)(4), Revised Code, and that the EAPwill be communicated to CG&E's eligible employees verbally and in writing (Id: at 3).He noted that CG&E has had experience with voluntary workforce reduction and vol-untary severance plans and that a very substantial nuniber of those employees whowere efigible to participate in the plans took advantage of the plans' benefits (Id. at 5).Mr. Bond also testified that CG&E has no current plans to downsize its workforce dur-ing the MDP as a result of restructuring (Id: at 6). CG&E has requested no transitioncosts related to the EAP(CG&E Ex.12 at Ex. JPS-5 at 1). No parties-opposed CG&E's EAPor the EAP stipulatiott.

Pursuant to Section 4928.34(A)(10), Revised Code, the Commission finds thatthe Company's EAP sufficiently provides severance, retraining, early retirement, reten-tion, outplacement, and other assistance for the Company's employees whose em-ployment is affected by electric industry restructuring. As noted above, CG&E's EAPwill be subject to negotiations with CG&E's unions and, in accordance with the EAPrules, we will continue to provide the Company flexibility in implementing the EAP.

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H. CG&E's Education Plan

Section 4928.31(A)(5), Revised Code, requires each utility's transition plan to in-clude a consumer education plan consistent with Section 4928.42, Revised Code. Sec-tion 4928.42, Revised Code, provides that, prior to the starting date of competitive re-tail electric service, the Comnussion shall prescribe and adopt a general plan by whicheach electric utility shall provide during its MDP consumer education on electric re-structuring, Utilities are required to spend up to $16 million in the first year on con-sumer education within their certified service territories and an additional $17 millionin decreasing amounts over the remaining years of the MDP. As part of itstrarisitionplan, CG&E filed an education plan, which was later amended. CG&E's amended edu-cation plan targets residential customers; small and nvd-sized commercial customers;elected officials, community leaders, civic organizations, trade assodations, and con-sumer groups; andlarge commercial and industrial customers. The amended planalso describes the methods, timelines, and spending that will be used for CG&E's edu-cation campaign. Further, CG&E's amended education plan included deferral of its ex-penditures bn consumer education in CG&E's requested transition costs recovery. Noparties opposed CG&E's amended education plan.

On November 30, 1999, the Commission issued rules for the electric transitionplan proceedings, and adopted a general plan for electric utilities' consumer educationin Case No. 99-1141-EL-ORD, Tn the Matter of the Commis&ton's Promulgation ofRules for Electric Transition Plans and of a Consumer Education Plan, Pursuant toOChapter 4928, Revised Code. After the companies filed their transitioXt plans, variousintervenors filed preliqzinary objections. Separate staff reports were filed in each ofthe transition plan proceedings. In each staff report, the staff stated that the consumereducation plans are consistent with the requirements issued by the Commission onNovember 30,1999_8 After reviewing all of the education plans filed in all of the tran-sition cases and after considering the objections and comments submitted, we found inour July 20, 2000 finding and order in 99-1658-EIrETP et al., CG&E's amended educa-tion plan tobe in compliance with Section 4928:42, Revised Code, and we approvedCG&E's education plan subject to three contingencies. Frst, we noted that, with regardto provisions for the funding of local community-based organizations (CBO), althoughwe did not require funding of the CBOs, we did encourage CGSxE to provide CBO fund-ing. We also required CG&E to include an unaffiliated energy marketer representativeon their advisory groups. Second, we required that the plans for CG&E include furtherdetails on how the territoryspecific campaigns will be managed and operated, howmaterials and information will be disseminated, and how funds will be allocated to ac-tivides, as well as other matters. Further, We conditioned our approval on the Com-mission staff's continuing supervision of the general and territory-specific plans as fur-ther details are developed for each of the consumer education programs. With the

8 The staffs only recommendation was the inclus[on of en energy marketer representative in the advi-sory goup: CG&E was the onty company tofilean amended education plan that added an energy marketer representative to the advisory group.

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conditions to CG&E's education plan set forth in our July 20,2000 order, we find that- CG&E's transition plan complies with Section 492831(A)(5), Revised Code.

I. inyj_enendent Transmission Plan (1TP)

Pursuant to Section 492$.12(A), Revised Code, no entity shall own or controltransmission facilities (as defined by federal law) in Ohio as of the date of competitiveretail electric service unless the entity is a member of, and transfers control of those fa-cilities to, one or more qualifying transmission entities. Section 4928.12(B), RevisedCode, sets forth nine rec)uirements for a qualifying transmission entity must meet in-cluding: (1) the transmission entity is approved by FBRC; (2) the transmission entityseparates mntrol of transmission facilities from control of generation facilities; (3) thetransmission entity implements, to the extent reasonably possible, poiicies and proce-dures designed to minimize pancaked transmission rates within Ohio; (4) the trans-mission entity improves servicereliability within Ohio; (5) the transmission eiitityprovides for an open and competitive electric generation marketplace, eliminates barriers to market entry and precludes control of bottlenecked transmission facilities; (6)the transmission entity is of sufficient scope or otherwise increases economical supplyoptions; (7) the transmission entity's governance structure is independent fromtransmission users, (8) the transmission entity satisfies customers' elecericity require-ments; and,(9) the transmission entity maintains real-time reliability of the transmis-sion system, ensures comparable and'non-discriminatory transmission access and nec-essary services, minimizes congestion and addresses transmission constraints. CG&Estates that the requirements of Section 4928.12(B), Revised Code, are substantially simi-lar to the requirements establislied by the PERC for Independent System Operators(ISOs) in Order No.8889 and for Regional Transmission Organizations (RTOs) in OrderNo. 2000.1e CG&E asserts that an RTO approved under PERC's Order No: 2000 re-quirements will of necessity also satisfy the requirements of Section 4928.12(B), Re-vised Code.

CG&E witness John C. Procario (CG&E Exs. 20 and 54) sponsored and explainedCG&E's TTP, which is Part G of CG&E's transition plan. Mr. Procario explained howCG&E believes the Iv11S0 and CG&Fs participation in the MISO satisfies each of therequirements of Section 4928.12(B), Revised Code, as well as the more specific eriteriaset forth in Rule 4901:1-20-17, O.A.C. Mr:Procario indicated that CG&E will belong tothe MISO and that the MISO is a transmission entity approved by PERC. He noted thatPERC initially gave conditional approval to the MISO on September 16, 1998 (CG&E Ez.20 at 9). The MISO transmission owners subse4nently made a compliance filing andFERC issued an order approving the compliance filing on April 16, 1999, conditionedon a minor change that the MISO Transmission Owners made on May 17, 7999 (CG&E

• 9FERC Stats. & Regs., T 31,036 0996)10 FERC Stats. & Regs.'d 31,089 (2000).

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.Ex.20 at 9-10). He indicated that the MISO still must make additional compliance fil-ings within 60 days of becoming operational regarding filing and operatintgproceduresand the MISO must also make a compliance filing arising from FERC's recent Order2000 (CG&E Ex. 20 at 9; 89 FERC Section 61;285; Buckeye Ex. 2 at 22).

Mr. Procario indicated that the MISO w'sll separate control of transmission facili-ties from control of generation facilities because the MiSQ will have functional controlover transmission facllities (CG&E Ex: 20 at 14-15). Mr. Procario testified that the MISOalso eliminates pancaked transmission rates wit'hin the MLSO, by providing for non-pancaked zonal rates during a six-year transition period (CG&E Ex. 20 at 20). At the endof the six-year eransiHon period, the progression to a single rate or combined rates willdepend on how quickly states encompassed by the MISO adopt customer choice andthe development of independent transmission companies (Id. at 22). Under the ITPstipulation, CG&E committed to participate in the eollaborative process under FERCOrder 2000 to discuss integrating the facilities of the transmission-owning utilities inOhio. CG&E will also seek to enter into a joint stipulation with all of the other trans-mission-ownit?g utilities in Ohio to subnvt the subject of how to achieve the objec-tives listed in Rule 4901;1-20-17(B)(3), O.A:C., and related issues to a sepaxate jointConunission hearing dealing solely with that subject as part of their respective transi-tion plan application proceedings. CG&E will also seek to jointly request, togetherwith the intervenors in this case, that the Commission order the other transmission-owning utilities to pazticipate in such a hearing. CC&E will alsb participate in a state.awide coBaborative process to resolve the transmission seams issues in Ohio.

Mr. Procario noted that the MISO improves service reliability within Ohio be-cause the IviLSO will act as the security coordinator for the transnussion facilities underits functional control (CG&E Ex:. 20 at 24). In addition, the IvIISO will promote opencompetition because the MLSO's transmission usage and availability will be publiclyposted on OASIS in real time and the MISO's transmission rates will be calculated in auniform manner and will also be publicly available (Id. at 29). Mr. Procario indicatedthat the MISO is of adequate size and scope to increase economical supply options. Henoted that the MISO's scope and configuration is significant because the MISO wouldserve a 16-state area and span three reliability couricils: MAIN, ECAR, and Iv1APP(CG&E Ex.20 at7). Mr. Procario also testified that the MISO has several structhral fea-tures that provide for independent governance. The MLSCYs governing structure con-sists of an itidependent board of directors and an advisory committee. Any eligibletransmissloln customer may join the MI$O. The members elect the board of directors(CG&E Ex, 20 at 36, 37). The MISO provides fox satisfaction of customer requirementsbecause it provides non-discriminatory open access to the transinission system for alleligible transmission customers (CG&E Fx. 20 at 44): Finally, Mr. Procario noted thatthe MTSC) will provide for real-time reliability because it will have primary responsibil-ity for short-termreliabillty of the grid's operation (CGBrE Ex. 20 at 48).

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We note that the transition plan stipulation and the rrl' stipulation are de-signed to address the fact that, even if the MISO is fully approved by FERC by January 1,2001, itwill not be operational until some time later that year. The MISO is currentlyscheduled to become operational during 2001 (CG&E Ex. 20 at 10). CG&E respectfullyrequests that the Commission approve a deferral of CG&E's compliance with the ITPrequirements until December 31, 2003, as the Comnrission is expressly authorized to dounder Sections 4928.34(A)(13) and 4928,35(G), Revised Code.

Obinrtions toCG&E"s ITP

Buckeye, a non-profit electric generation and transmission cooperative, andOREC, a statewide association that represents the interests of Buckeye and its members,argue that CG&E's transition plan fails to meet the requirements of Section 4928. 12(B),Revised Code, because it fails to satisfy the requirement to minimize pahcaked trans-inission rates in Ohiotl. Buckeye and OREC contend that rate pancaking is a major ob•stacle to the development of workably competitive markets for electric generationservice, According to Buckeye and OREC, CG&p has three options under SB3 tominimize transmission rate pancaking by January 1, 2001. In this case, Buckeye andOREC argue that CG&E has failed to make an adequate proposal in its transition planunder any of these three criteria to minimize pancaking and, therefore, its transitionplan should be rejected (Id. at 6).

Buckeye and OREC contend that, under the first option, utilities can all be partof one transmission entity. Buckeye notes that CG&E is a member of the MISO, whilethree ot the other four investor-owned utilities in Ohio, American Electric PowerCompany ("AEP"), FirstEnergy Corporation ("FirstEnergy"), and Dayton Power andLight Company (")P&L`°), plan to be members of the Alliance RTO, Buckeye andOREC agree that a merger of these two entities would maximize the reliability benefitsand enhance competition. However, they claim that CG&E participated in discussionsabout merging the Midwest I:SO and the Alliance RTO, but those discnssions havebeen unsuccessful. Thus, Buckeye and OREC contend that, so long as CG&E remainsin the MISC), and AEP, FirstEnergy, and DP&L are in the Alliance RTO> there will be atransmission "seam" in Ohio, and the requirement to minimize transniission ratepancaking will not be met. Under the second option, CC&E can enter into reciprocityagreements with other Ohio utilities to minimize pancaking of rates. Mr. Solomonexplained in his direct testimony how such reciprocity agreements are established.Buckeye and OREC state, however, that CG&E acknowledged that it has never pro-vided a reciprocity proposal for the other Ohio utilities to consider. Mr. Solomon ar-gued that the failure of the MISO and the Alliance RTO to reach agreement on merg-ing into a single RTO could resultin the creation of at least two RTOs that would oper-ate within Ohio (Id. at 7). The third option allows utilities to propose another means

• 11 Rate pancaking otturs when each owner of a transmission system is allowed to add the transmissionprice to the costof delivering energy.

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to minimize rate pancaldng. According to Buckeye and OREC, CG&E claims it is safis- ^fying#he third criteria because, under the stipulation, it is agreeing to participate in thecollaborative process under FERC to resolve the transmission seams issues, and to par-ticipate in hearings at the Commission if other transmission owning utilities wiIl notagree to work together (Id. at 1$); Buckeye and OREC argue that, under this option, theutility must provide documentation to enable the Commission to determine whetherit has met its burden (td: at 19). They argue that CG&E has failed to provide documen-tation that would demonstrate that the MISO will minimize pancaked transmissionrafes. Further, Mr. Solomon contends that CG&ffs TTI' is only a promise to continuetalldtig about pancaking and, therefore, CG&E's transition plan should be rejected.

Ca mia ion -on 1 u ion

Pursuant to Section 4928.34(A)(13), Revised Code, as an alternative to approvingan ITP that complies with Section 4928.12, Revised Code, the Commission may, forgood cause shown, authorize a company 'to defer compliance until an order is issuedunder division (G) of Section 4928;35 of the Revised CodeJ' Upon review, we find thatwe will defer approval of CG&E's ITp: Our action is based, in part, because the Com-mission cannot determine, at this time, whether the Midwest ISO, in its present state,is compliant with the requirements of Section 4928:12, Revised Code. At this time, theMISO is not operational and is not projected to be operational until late 2001. Fur-thermore, CG&E's 117 does not, at this time, minimize pancaked transmission ratesand there are no provisions in the stipulation that act to minimize pancaked transmis-esion rates during the interim time period until the Midwest ISO is operational. Wenote that, under the stipulation in FirstEnergy Corp. (99-1212-EL-ETP et. a1.,) theFirstEnergy Corp: operating companies agreed to reimburse any supplier serving retailcustomers within the operating companies' respective service areas for the cost of anyassodated transmission charges imposed by the Pennsylvania-New Jersey-MarylandInterconnect and/or by the Midwest ISO. No such provisions exist under the CG&Estipulation. Accordingly, for these reasons, the Commission will defer the approval ofCG&E's 1'I'P until such time as the activities set forth in paragraph 5 of the IT'P stipula-tion have been explored to adequately address compliance with Section 4928.12, Re-vised Code, and Rule 4901:10-20-17(B)(3), OA.C., regarding minimizing pancakedtransmission. rates. We will authorize CG&E to defer compliance with these provi-sions until an order is issued pursuant toSection 4928:34(A)(13), Revised Code.

J. F..iteml2t Whot sal : n.rator (EWG)

Under section$ of the transition plan stipulation, CC&E's EWG will be prohib-ited from selling power to an affiliate for resale at retail in CG&E's service territory, ex-cept through CG&E's RCSA, and it will be prohibited from selling to an affiliate certi-fied supplier on more favorable prices or terms than CG&E sells to a non-affiliate certi-fied supplier. The information regarding the sales or transfers of powet and ancillary.services by the EWG to an affiliate shall be simultaneously posted with the executionO

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of any agreement for the sale or transfer on a publicly available electronic bulletinboard.

Shell objects to CG&E's treatment of the wholesale power price it would pay tothe EWG. Shell claims that, by shielding the price paid to the EWC for the wholesalepower resold as standard offer service, stipulation Section 8 would deprive the marketplace of pricing transparency regarding the EWG's dea&ngs with an affiliate that likelywould be its single largest customer during the IvIDI'. Shell also contends that it wouldmake it more difficult for competitors to discern anticompetitive price discriminationin.favor of standard offer service. Shell argues that, even if a supplier did not purchasepower from the EWG, the pricing information at issue would represent a significantpartof the prevailing wholesale market, and would assist suppliers in assessing prlcesavailable from alternative wholesale power sources. According to Shell, withholdingthe EWG's standard offer-related pricing thus would distort the wholesale market pric-ing signals received by third-party suppliers, thereby producing unecononuc wholesaledeals that, in turn, would make it more difficult for marketers to offer significantlylower prices to consumers. BheU contends that access to the wholesale prices paid theEWG by CG&E also would permit third parties and the Commission to monitor theexcess generation revenues collected by CG&E under its frozen rate for standard offergeneration service.

• CG&E claims that Shell's first contention is wrong. It maintains that, underCG&E's RCSA, the price to be paid by CG&$ to the EWG is set at the unbundled genera-tion rate charged to CG&E's customers who have not switched and that these unbun-dled rates are delineated in CG&E's filed tariffs. Thus, the price charged by the EWG toCG&E is information available in public documents and simply not shielded. CG&Ealso finds Shell's arguments regarding suppliers pnrchasing power from the EWG asnot credible. CG&E maintains that its RCSA sets the price to be paid by CG&E at theunbundled generation rate charged to CG&E's custonters who have not. switched andthat these generation rates are set forth in its filed tariffs. CG&E also contends that it isrequired to report monthly data related to noncompetitive electric generation servicesto the Comxnission bn a quarterly basis. It contends that this information is all that isneeded to monitor CG&E's generation revenues. CG&E also argues that to allow sup-pliers to purchase power from the EWG at unbundled generation standard service of-fer rates would provide nothing more that a subsidy to CRES providers and should berejected.

Upon review of the issues raised by Shell, we find that stipulation Section 8 tobe reasonable. We agree with CG&E that, according to the stipulation, the price to bepaid by CG&E to the EWG under CG&E's RCSA will be set at the unbundled genera-tion rate charged to CG&E's customers who have not switched. This information willbe available in CGBtE's filed tariffs and will not be shielded. We also agree with CG&Eon Shell's second argument regarding access to sufficient information in order tomonitor CG&E's generation-related revenue. We believe that the rate information set

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forth in CG&E's tariffs in conjunction with CG&E's reporting data on sales, billedrevenues, and other monthly data will provide sufficient information in order tomonitor CG&E's generation revenues. Finally, with regard to the issue of allowingsuppliers, such as Shell, to purchase power from the EWG at unbundled generationstandard service offer rates, the Commission finds that the stipulation provides ade-quate measures to promote competition and, therefore, does not believe it is necessaryto ntandate at what price suppliers can purchase power from the EWG.

IV. S' 1'rERIA FOR EUALiA'j'jNr 4TIONS

Rule 4901-1-30; Ohio Administrative Code, authorizes parties to eommissionproceedings to enter into stipulations. Although not binding on the Commission, theterms of such agreements are accorded substantial weight. See, Consumers Counsel a.Pub. l.itit. Comm. (1992), 64 Ohio St.3d 123, at 125, citing Akron v. Pub. iltii. Comm:(1978), 55 Ohio St.2d 155. This concept is particalarly valid where the atipulation issupported or unopposed by the vast majority of parties in the proceeding in which it isoffered.

The standard of review for considering the reasonableness of a stipulation hasbeen discussed in a number of prior Commission proceedings. See, e.g., Ohio-American Water Co., Case No. 99-1038-WW-AIR Qune 29, 2000); Cincinnati Gas &Electric Co., Case No. 91-410-EL-AIR (April 14,1994); Western Reserve Telephone Co,,Case No. 93-230-TP-ALT (Ivfarch 30, 1004); Ohio Edison Co., Case No. 91-698-EIrFOR eteal. (December 30, 1993); Cleveland Etectric Iilum. Co., Case No. 88-170-EL-AIR (January30, 1969); Restatement of Accounts and Records (Zimmer Plant), Case No. 84-1187-EL-UNC (November 26, 1985). The ultimate issue for our consideration is whether theagreements, which embody considerable time and effort by the signatory parties, arereasonable and should be adopted. In considering the reasonableness of a stipulation,the Conimission has used the following criteria:

(1) Is the settlement a product of serious bargaining among ca-pable, knowledgeable parties?

(2) Does the settlement, as a package, benefit ratepayers and thepublic interest?

(3) Does the settlement package violate any important regula-tory principle or practice?

The Ohio Supreme Court. has endorsed the Commission's analysis using thesecriteria to resolve issues in a manner economical to ratepayersand public utilities. Tn-dus. Energy Consumers of Ohio Power Co. v. Pub. Util. Comm. (1994), 68 Ohio St.3d.547 (citing Consumers' Counsel, supra, at 126). The court stated in that case that theComndssion may place substantial weight on the terms of a stipulation, even thougthe stipulation does not bind the Commission (14.).

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Based on our three-prong standard of review, we find that the first criterion,that the process involved serious bargaining by knowledgeable, capable parties, is met.Ivlultiple bargaining sessions, open to all parties, took place before commencement ofthe hearirtgs. The parties to these negotiations have been involved in many cases be-fore the Conimission, including a number of prior cases involving rate issties. Fur-ther, there have been few settteznents in ntajor cases before this Commission in whichthe overwhelming majority of intervenors either supported or do not oppose the reso-lution of issues presented by the stipulations.

The stipulations also meet the second criterion. The stipulated resolution ofthese cases is for many reasons advantageous and promotes the public interest. Thestipulations establish a framework for transition to and development of a competitiveelectricity marketplace in an orderly fashion. The stipulations also remove significantuncertainty and continuing controversy which could delay the primary goal of theseproceedipgs to create a functioning and effective retail market for the sale of electricityto CG&E customers and an orderty transition from the traditional regulatory envi-ronment to one of supplier and service choices: Further, the stipulations assure an ag-gressive transition to a functioning retail generation market and provides other sig-nificant economic benefits for consumers, some of which would otherwise have beensubject to legal challenge by CG&E. These benefits take the form of extended ratefreezes, rate reductions, flexibility for larger contract customers not otherwise available,low income energy efficiency grants and, as a result of shorter, defined transition peri-ods for CG&E, significant risks with respect to its ability to recover transition cnsts.Additionally, through the availability of shopping credits and incentives, the stipula-tions enable marketers to conipete and sell retail etectiicity. Some of thesebenefits in-clude:.

(1) Offers a five percent reduction of CG&E's generation com-ponent, including RTC, for residential rate schedules

(2) Creates shopping credits that facilitate the development ofthe retail marketplace.

(3) Waives the switching fee for the first 20 percent of residen-tial customers that switch to a certified supplier during theNTDp.

(4) 7vlainta'uts for five years the MDP, including a rate cap, tothe residential customers, irrespective of the number thatswitch.

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(5) Continues support for energy efficiency and weatherizationservices to low iacome persons by maintaining certain ez-isting contracts valued at approximately $4 million for fiveyears.

(6) Prohibits the Company's EWG from offering, power or ancil-lary services incident to the delivery of power at prices andterms more favorable than those available to the aion-affiliated electric suppliers.

(7) Offers to customers with contracts approved pursuant toSection 4905.31, Revised Code, who would otherwise be onthe primary distribution, transmission, or lighting rateschedules, a one-time right, through December 31, 2001, tocancel any such contract without penalty, provided that thecustomer remains a distribution customer of CG&E.

(8) CG&E offers to make best efforts to implement consolidatedbill,ready billing by January i, 2002, and to implement sup-plier conso7idated billing by June 1, 2002.

(9) CG&E commits to work with other regions, RTO/ISOgroups and transmission level customers to develop andimplement specific proposals to address reciprocity and in-terface/seams issues.

(10) CG&E commits to accept any resolution of issues agreed toby all OSPO working-group participants and to incorporateany such changes in. its transition plan.

(11) CG&E offets to amend its OATT to add a new schedule forretail energy imbalance service, and will amend its OATT toallow transmission customers to designate new resourceson a day-ahead basis, provided that there exists availabletransfer rapacity that is subject to the approval of the trans-mission provider, and that the transmission customer ire-linquishes network transmission rights to a designated re-source once a new resource is designated.

(12) CG&E offers to establish a technical task force to address andattempt to resolve technical and operational issues that mayarise upon implementation of customer choice.

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Adoption of the stipulations also reduces significantly the number of possibleappeals, and provides additional lead time to put in place the mechanisms necessary toget the customer choice program up and running. Additional evidence that the publicinterest is served by the stipulations is found in the support offered by representativesof residential, commercial, and industrial customers, including OCC and the Commis-sion's staff. As indicated above, the agreement provides that certain rates will be de-creased and the prior rate plan freezes extended.

Finally, the stipulations meet the third criterion because they do not violate anyimportant regulatory principle or practice. Indeed, the agreemente balance the inter-ests of a broad range of parties that represent a diverse spectrum of views. As indicatedin the description of stipulations provided above, the stipulations provide substantialbenefits to all customer classes and shareholders. Further, the policies of the state em-bodied in SB3 will be implemented more quickly and efficiently than would otherwisebe possible.

V. PENDING MOTIONS

A. nturloc±torv Anneal of E.zantiner's Ru

On May 15, 2000, AK Steel filed a moti.ort to compel discovery against CG&E to^ name and produce for deposition and other discovery all persons who have knowl-

edge of any agreements, promises, payments, or inducements offered to any of the sig-natories to the transition plan stipulation filed in this case. Further, AK Steel re-quested that each such person be required to pro;luceall letters, notes, agreements,tapes, and contracts discussing, proposing, promising, or agreeing to some inducementto a signatory. AK Steel argued that, according to the language in the stipulation, thestipulation and CG&E's filing in this case represent all of the facts and data uponwhich the signatories relied when agreeing to the stipulation- AK Steel contended thatit has reason to believe that some or all of these assertions are untrue and it seeks toconfirm or disprove its suspidon. AK Steel claimed that, if it were shown that someor all of the signatory parties to the stipulation were offered or promised special con-sideration in addition to the terms of the stipulation, :it would impeach or contradict"the fundamental assertions of the stipulation. AK Steel cited to Rule 4901-1-16(B),O.A.C., that provides that any party to a Commission proceeding may obtain discoveryof any matter, not privileged, which is relevant to the subject matter of the proceeding.AK Steel argued that an intervenor inquiring into the reasonableness of a stipulationshould not be prevented from discovering the motives and considerations provided tothose who signed and supported the stipnlation.

Also on May 15, 2000, CG&E filed a memorandum in opposition to AK Steel'smotion to compel discovery. CG&E contended that AK Steel's motion is in direct con-flict with the policy of the Commission to encourage settlement and is irrelevant to

• the proceeding. CG&E argued that the stipulation is a recommendation that is not le-gally binding upon the Commission. CG&E contended that the Commission must

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conclude independentlythat, based on the evidence, the stipulation offers a just and isreasonable resolution of the issues. CG&E claimed that the motives of the parties whosigned the stipulation are irrelevant to the determination of the Commission's ap-proval of the stipulation. CG&E also contended that the only result of an inquiry intoany alleged side agreements among the parties could only be to approve or disapprovesuch alleged agreements, which is not relevant to the stipulation. CG&E also con-tended that public policy favors the compromise and settlement of disputes and theCommission recognizes the need to encourage settlement among parties.

The examiners assigned to this case issued an entry on May 19, 2000 ruling thatAK Steel's motion should be denied. Theexaminers found that AK Steel failed to state.what relevance the informafion it might discover through its motion to compel couldhave on the Commissiori s determination in this case. The examiners stated that thestipulations in these cases address the rates and services proposed in CG&E's transitionplan and that the: Commission's charge wIli be to determine if the stipulations andCG&E's transition plan are just and reasonable. The examiners also stated that mo-tives of the parties in agreeing or not agreeing to sign the stipulation should not andwill not affect the Commission's determination of the reasonableness of the stipula-tions and CG&E's transition plan. Consequently, the examiners believed that the dis-covery request of AK Steel was not relevant to the subject matter of the proceeding.The examiners further noted that evidence of the motives of parties in signing a stipu-lation is generally not admissible in a hearing.

On May 24, 2000, AK Steel filed an application for review and interlocutory ap-peal of the hearing examiners' May 19, 2000 discovery ruling, AK Steel argues that itwas improper for the examiners to deny its motion to compel. AK Steel argues thatthe evidence adduced from the discovery would be relevant to whether the stipula-tions are discriminatory on their face and not in the public interest if it can be shownthat CG&E has agreed to give special considerations to parties that signed on to thestipulations. AK Steel reiterates many of the same argument raised in its original mo-tion to compei. On May 25, 2000, CG&Efiled a memorandum in opposition to AKSteei's application forreview.

Inasmuch as AK Steel's application for review has not been addressed prior tothe issuance of this opinion and order, the Commission will address it at this time.The Commission affbms the ruifng of the examiners for the reasons set forth in theexaminer's May 19, 2000 entry. The Commission agrees that the information AK Steelseeks to discover will not lead to relevant information. The Commission will deter-mine if the stipuiation.and CG&E's transition pIan are just and reasonable. The transi-tion plan and stipulation can not be modified by any private agreements not before theCommission. The motives of the parties in agreeing or not agreeing to sign the stipu-lation will not affect the Commission's determination of the reasonableness of thestipuiation and CG&E's transition plan. Further, as noted by the examiners, theCommission's longstanding po&cy has been to encourage settlements in cases thate

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come before it. TheCommission believes that its policy would not be advanced if oneparty in a case could require another party to disclose information on the motives to-ward settlement or force another party to produce all letters, notes, agreements, tapes,and cqntracts related to that settlement motivation, By granting AK Steel's motion, wewould be forcing such disclosures.

Further, the Commission has the authority to verify CG&E's compliance withSB3, Title 49 of the Revised Code, and the Commission's rules, including the corporateseparation requirements of the Commission's order and CG&E's corporate separationplan and applicable code of conduct. Tn addition, the Commission has authority toaudit any transactions made by CG&E and its affiliates. This authority allows theCommission to prevent any improper subsidy or discriminatory treatment of custom-ers. Accordingly, AK Steel's request that the Commission overtum the examiners' de-cision is denied.

B. F'ling of o Lnce Tariffs

On June 27, 2000, the CCE filed a motion for a"compliance tariff filing, service,review, and comment procedures.p" The motion states that, because of the broad-sweeping changes that will be subject to the provisions of the tariffs ultimately ap-proved in these proceedings, it is necessary to allow interested parties adequate time to

• review and comment on the proposed tariffs prior to final approval. CCE requests thatthe Commission order each of the applicants in the transition plan cases to serve tariffsand.associated work papers simultaneous with their filing with the Commission. CCEasks that a two-week period be provided after the date of receipt of the tariffs and workpapers in order for intervenors to review the documents and submit comments to theCommission for its eonsideration prior to approval of the tariffs.

CC$'s motion shall be granted, subject to modification. We believe that, insteadof receiving formal filings with respect to CG&E's compliance tariffs, a more informalprocess will be beneficial to all interested parties. Accordingly, the Company and otherinterested parties should observe the following time2ix<es for distributing and review-ing CG&E's proposed tariffs pursuant to this order: (1) within 14 days following the is-suance of this order, CG&E should distribute (via electronic mail, fax, or ovemight de-livery) to all intervenors and the Commission's staff a working draft of its proposedcompliance tariffs as well as associated work papers, and UNB schedules that reflect therates embodied in the compliance tariffs; (2) within 14 days thereafter, interested par-ties s'hould circulate (via electronic mail, fax, or ovemight delivery) comments to theCompany and the staff regarding the Company's working draftI^, and (3) within 14days thereafter, CG&E shall formally file its proposed tariffs in the form of an applica-tion for approval of compliance tariffs.

22 This motion was jointly filed in all of the pending electric transition plan dockets:

^ 13 Neither the working draft nortke informal comments are to be filed formally inthedacket in tlus pro-ceeding.

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. 99-1658-EL.-ETP et al.

VI. FIlVDINGS OF FACT AND CONCLUSIONS OF LAW:

• (1) On December 28, 1999, CG&E filed its transition plan, ap-pend'ices, schedules, testimony, and supplemental informa-tion.

(2) Preliniinary objections were filed between January 26, 2000,and February 14, 2000:

(3) On March 27, 2000, the Staff Zteport was filed. CG&E filedsupplemental testimony on May 1, 3, and 17, 2000, and re-buttal testunony on June 12, 2000.

(4) Intervention was granted to a number of parties. On May 8,2000, a stipulation and recommendation on CG&E's transi-tion plan was filed by CG&E; the staff; Ohio Consumers'Council; Ohio Council of Retail tvferchants; Industrial En-ergy Users-Ohio; Kroger Company; The Ohio ManufacYur-ers' Association; National Energy Marketers Association;New Energy Midwest, LLC, WPS Energy; Enron EnergyServices, Inc.; Uynegy, Inc.; Cincinnati/Haznilton CountyCommunity Action Agency; Supporting Council of Preven-tive Effort; The Ohio Hospital Association; ODOD, PeopleWorkiatg Cooperatively; Exelon Energy; Strategic Energy;Columbia Energy Services Corp.; Columbia Energy PowerMarketing Corp., Mid-Atlantic Power Supply; dty of Cleve-land, and American Municipal Power-Ohio: Stand EnergyCorp. and Local Union 1347, International Lirotherhood ofElectrical Workers, AFL-CIO subsequently signed the stipu-lation.

(5) Also on May 8, 2000, a stipulation on CG&E's employee as-sistanceplan was filed on behalf of CG&E; the staff; Indus-trial Energy Users-0hio; The Ohio Council of Retail Mer-chants; AK Steel Corporation; Kroger Company; The OhioManufacturers' Association; The Ohio Hospital Association;Columbia Energy Services Corp.; Columbia Energy PowerMarketing; Fxelon Energy; Strategic Energy; Mid-AtlanticPower Supply Assoc.; Ohio Consumers"Council; New En-ergy Midwest, LLC; WPS Energy Services, Inc.; and EnronF,netgy Services, Inc: A third stipulation on CG&E's inde-pendent transmission plan was filed on May 8, 2000, on be-half of CG&E; the staff; Ohio Consumers' Council; The OhioCouncil of Retail Merchants; Industrial Energy Users-Ohio;

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Kroger Company; The Ohio Manufacturers' Association;New Energy Midwest, LLC, WPS Energy Services, Tnc,; En-ron EnergyServices, Inc.;l7ynegy,Inc.; and The Ohio Hospi-tal Association.

(6) Prehearing conferences were held on April 5, and May 11,2000. The evidentiary heaiings were held on May 30, June1,2,5,6,8,and14,2000:

-61-

(7) A local pubIic hearing was held in Cincinnati,. Ohio on June8,2000.

(8) Pursuant tv Section 4928.39, Revised Code, the total allow-able transition costs for CG&E, as agreed to in the transitionplan stipulation, are reasonable and include the recovery of$401.4 million of exisHng regulatory assets and projected$483 million of new regulatory assets, plus certain carryingcosts and purchased power costs.

(9) The stipulation provides appropriate shopping incentivesto achieve a 20 percent load switching contemplated by Sec-tion 4928.40 (A), Revised Code.

(10) CG&E's transition plan, as modified by the stipulations, sat-isfies the requirements of SB3, and is approved for the rea-sons and to the extent set forth herein.

It is, therefore,

ORDERED; That CG&E's transition plan and stipulations filed on April 17, 2000,and May 8, 2000, are approved, to the extent set forth in this opinion and order andsubject to final approvaI of CGBrE's compliance tariffs. It is, further,

ORDERED,That the tariff amendments and accounting authority requested byCG&E are approved in accordance with the discussion set forth in this opinion and or-der. It is, further,

ORDERED, That CG&E and other interested intervenors follow the timelinesfor informal review and comments with respect to fhe company's compliance tariffs,and that CG&E file an application for approval of its compliance tariffs in accordancewith the directives set forth in this opinion and order. It is,'further,

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ORAERED, That a copy of this opinion and order be served upon all parties ofrecord.

SEF/RRG/vrzn

Entered in the Journal

^s 3120. ^rue opy

c^" goriia^Searetary

0

164

ncrppE

THE PUBLIC UTILITIES CONXIS91ON ^. ^BIO

In the Matter of the Reetatement of)the Accountsand Reoordsof TheCincinnati Gas & ElectricCompany,The Dayton Power andLight Company,l Case No. 84-1187-EL-UNCand Coiumbua & Southern Ohio Elec-1tric COmpany.

OPINION AND ORDER

The Commission, ooming now #o.consider its entry initiatingthis proceeding issued October 23, 1984, the stiputation andrecommendation oontaining a proposed resolution of this matterjointly filedby a majority of the parties to the proceeding onOctober 1, 1985, the public testimony admitted intoevidence atpublic hearings held in Dayton, Ohio ^'i october 30, 2985, inCinqinnati,Ohio on November6, 1985, :.7d in Columbus, Ohio onNovember. 7,.19851 having appointed its attorhey axaminer, Barth9. Royer, pursuant to Section 4901,18 Revised Code to condutt apublic hearingfor the taking of expert testimony and to certifythe record thereof diroctly to theCommiasionl having reviewedthe testimony and exhitiita admitted into evidence at the hearing.trhieheonmlenced November 8, 1985 and concluded November 12, 19851and beirtg otherwise fully advised in the preinises, fierebyissuesitsOpinion and order.

APPEARAb'CES,

Mesere.Squire, Sanders i Denipsey, by Mr. Alan P. 6uchmann,1800 Nuntington Buildinq.Cleveland, Ohio 44115, on behalf of TheEincinnati Gas 6 BleotracCOmpany.

Masers. Sn,ith a Schnacke, by Mr^ Charles J, Faruki, 2000Couithouse Plaaa, N.E.,Dayton.Qhio 45401, bnbehalfof TheDaytonPowerand Light Company.

Messrs. Porter, Wrighty Morris & Arthur, by Messrss SamuelN. Porter andUanael Conway, 41 South High Street,Columtius,Ohio43215, oh 6ehalfaf Columbus & Southern Ohio Eleetric Company.

Mr. Ant,honyJ. Celebrezze, Jr,,, Attorney General ofOhio, byMr. Robert S.Tongren,AseistantAttorney General, :180East SrcadStreat, ColumbuspOhio 43215, on behalf of the Staff of thePublic Utilitiee Commiseion of,Ohio.

Mr. Nilbiam A. Spratley, Consumere' Counael, and Ms. GretchenJ. Nummel, Aesistant Cohsumers' Counsel, on tiehalf of the resi-deqtiai costomera of The Cincinnati Ges & Electric Company, TheDayton Powerand Ligbt Company, and Columbus & Southern OhioElectric Campany.

.Mr. Lee C. FAlks, Psosecuting Attorney oE Montgomery County,Ohio, and Mr. Chris R. Van Schaik and Ms. Linda Nowiand; Assistant

- Prosecuting Attorneys, 41 North Perry Street, Suite 300, Dayton,Ohio 45402i and Mesara: Enepper, White, Artei& Hadden,by Mr.Golin P. Gartland, 180 East Broad Street, Columbus,ohio 432I4, onbehalf of the Montgomery County Coalition, an ad heoassociationof local governmental entities Comprisedof the Snar.ds of CountyCommissioners of Montgomery , Preble, Mercer, Union, P'ranklin,Logan Shelby, Brown, Highiand, Scioto, Narren, Miami and ClarkCount1es, the cities of Betlefoqtaine, Bradford, Pairborri,Greerifield, 8uber Hsights, Miamieburg: Moraine, Troy, Vaadalia,WestCarmllton, Union, Post Wiltiams,'Covington,Athens, Marys-ville, Washington Couxt House, Xenie, Germantown, Greenville,Kettering, New Lebanen, Sidney, Trotwood, Urbana, Oakwood,Quincy,^BeSlbrook, Chillicotho.Reynoldsbur.g,. Baton, firanklin andWaverly, the villages of Ansonia,Clayton, Fort Loramie, River-side,Sppring Vailey, Lynchburg, Pitsbutg,eelle Center, DublQ:n, n

r

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Midway. waynesVille,Patadmn, Casstown, Y,ewisburg, South Charles-toxi, Annd, Bowersville, Cedaxville, Coldwaeer,Fletcher, Montazuma,Brookville) Russells Point, P,easant Hill, Phillipsburg, Botkins,LUdlow Fa11s,Woodstock, Yorke+hire, South EoIon, P.ockford andWren, and theTewnahips of Rnnd9lph, Butler and Harrison.

Mr. Arthur M. Ney; Jr., Prosecuting Attorney of HamiltonCou2ty, Ohio, by Mr. Thomas J.faheoa, Assistant ProaecutingAttosney, 420 Hamilton Cour.ty Coux::house. Cincinnati, Ohio 45202,on behalf of the Board of County Commissionecs of HamiltonCoahty, Ohio.

Mr. Richard A. Castellini, Cincinnati citq Solicitor, by Hr,W. Peter Heile andMs. Mancy H. Si¢agons, Assistant City 6olicitors,Rooai 214, City xall, Lincinnati; Okio 45202, -on beha].f ef thecity qfCincinnati.

Dell, Randaxzo & Bentine Co., T.:P.k., by Mr. Samuel C.Randaszo;.21 East State Streat, Columbua, Chio43215, on behalfof th8 Industrial Energy ConsuIDers, an ad hoc association com-

prised of Anheuser-B¢sch, Inc., rwericanStandard, 2ne.,Emery

Industries, Inc., Foid Mor.or Lompany. W.R. Graceand Companyo

Ceneral MotorsCorporation, P.P.G..Industries, and Southwestern

POrtland Cement.

Mesare, steer, strausa, whitc & Tobias, by Messrs. David P.Boehm and Sames erennan,22o0 Central Truet Tower, Cincinnati,Ohio 45202, on behal£ of Armco, Inc.

HISTORXOFTHE PROCEEDINGS,

The Cincinnati Gas b Electric Company (CG&E),The DaytonpowCr and Light Company (DP&L) , and Coivnaous & Southern OhiOElectric Compeny (C4SOE), are Ohio corporations engaged In thebusina99 of suQplying electric service in this etate. As publicutiiities within th0 definition ofSection 4805.02 Revised Codeand electric light companiea wittiin the de€inition of Section4905.03(A)14) Revised Codo, these companies are 9ubjeot$q thejurisdiction of this Commission pursuant to Sections 4905.04,4905,05, and 4905.D6 Revised Code.

In 1969, CG&E, DP&L, and C&SqR announced that they wouldjointly undertake construction of a nuc7.ear power generatingstation, the Nilliam H. Bimmer Nuclear Power Station, Unit 3(Zimmer) at Moscow, Ohip. The unit was to be an B10 Mw facility,which was to be placed in service 1n1975. The Cincinnati Gas &ESectYic Companywas designated as the project manager. Actualei,te work on the project began in 7971. Numerous de].ays wereencountered during the construction of the plant, and the pro-jected in-servite date was revised on a number of occasions.Const.ruetion continued until Novembei 12r 1982, whan the NuclearRegulatory Commieaion {HAC) issuedan ordsr in its Docket No.50^350, :Inthe Matterof The.Cincinnati=Gas & Electric Co ^nwi1,21am H.. mmer Nuclear Powe stat on, suspending all sa ety-re ate constructicn at he site. Ae'a XeFult of the NRC order,eGaH could no longer project when Zimmer mtqht be placed insomviOe(See Cincinnati Ges & Electric Coipany, Case No. 02-485-SL-AIA[March70,19d"))•

On Jatituary 20, 1984, the aimmer ewperS entered into anagreement which pravided, lnter alia, that they would ceaseconstruction of BimIDerae nuclear plant and u9e their bestefforts to convert Eimmer to a coal-fi'rpd generating facility.Ownership raeponsibilitiesfor the project were allOcated on thefollnwing basiat CG$E, 46.58; DP6L, 28.18s and CaSO&, 25.46. OnAugust L' 1984, the pwnersannounced that Bimmer would be con-verted te a 1300Mwcoai-fired generatingfacility, with theconversion to be managed and eupervieed by CneAmerican EleatricPoVierBervice Corporation. ThP.b'wner9 have estimated the total n

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84-1187=Et-UM1C

cost ef a converted 1300 MW coal-fired 17isuner facility, includingAFUpC; to be approximately55,372,000,060.

The ConNlission initiated the instant proceeding by its entryin this docket iff October23. 1984. In this entry, the Cemmissionoutlined the troubled-history of the 8nmmer project. The eommis-sion also noted thit in a report su6mitted3uly 15, 1984, 0'8rien-RreItzberg & Assoliates(OKA), a consultant retained by theConmiission in connection with its case No. 83-1321-HS.COI, In the,Matter of the: Commission investi. ation into the Dis sitionof-E ninêr Nuclear^powar. Plan . onsiruct on Ccsts, cono utled,interalxa; Y at C nc nnatas & E ectr Cs rr.sponsible"for sa5Es an-.

tTal mismanagemant in the design and eonst.ructinn of the ZimmerNuciear Generation <_tation"ain. H Zlmmer Nuclear Power Station.Anall!sis ^f PossibleMismana ement'an corre at6 Cost, OBAReport, kXecu t3ve Suminary, at 2-31. In v ewof 8 mmer's history

and the consultant's conolpsion,the Comm!ssion found reasonablecause to believe that Zimmer would never be completedas anuclear facility and that jpismanagement might have centributed tothat result. At that time, the 2immer cwnGrs maintained theproject on their books of account at a tetai value in excess of

$Ii780,0001000.

Mipdfulof the concerns o€ the financiai markets relative tothe secdrities ofthe Ziinmer oWners, particularly in view oP theproposal to convert the facility, the Colmnl,ssion deemed itappropriateto establish, with certainty, the aaset value of theplantl To this end, the Coinmission,pursuant to ite authcsityundor eection 4909.13 RoVised Code,crdered that the accounts andrecords of the Zinmier. owners should be xentatedto reflect the£act that the Zinvner values maintained on -the oompanies' booksincluded coets incurredYor property which might never be -isedqnd tisaful,costs incurred as a result of imprudence or misman-egement, andcosts incurredtor property which might exceed thereasonable costRor ii,ke ftems in a facility initially designedfor caai-firedgeneratian.

The October 23, 1984 entry initiated a multi-phaaeprooeed-ingto examine this matter. As a part of the first phaseOfthisproceeding, the ¢immer owners were directed to file summaries ofthe costs connected wiphttie tiimmer project in a specifiedaccounting farmat and to submit a unitized accounting of theoverail aonstruction costs classified according to the prescribedaccount claesifioations for completed in-service electric plant.t4ritten expert testimony wasto be filed explaining the owners'identification andsegregation of the2immsr costs. The Commis-sion indicated that upon receipt of this information, itwouldsyhedulethe leatter forpublichaaring.

OnDecember 17, 1984,-DP&L and C&SOH filadmotionsrequest-ing extensionsof time to respond to the Conmiission'S October 23,1984 entry. CGSB filed a eimilar motion on Deceniber 18, 1984.TheCommission, by entry ef December 27, 1904,.clranted theextension until a date to be establi.*hed by further order.

9y letter of July 22, 1985," Founsel -for CG6E, Dr&L, andCa50Erequestedthat the attorney examiner convene a settlementconference antong the parties tothe proceeding and thu Commis-sion's staff. Aa 9escribedin this letter, the purpose ofsuch aeonference would be to assist and encourage the parties tocoIDpromise and eettle this case witbout the necessity of theiengthyhearing process outlinedin ttie Commission's October 23,1984 entry. Byeniry of August 1, 1995, the attorney eKaminerfound that a 3ettlenient conference should be convened to providethe parties and the staff the opportunity to reach a negotiatedresolution of the issues in the case which would then bepresentedto the CommissioA for its consideration. AccoSdingly, asettle-mentconference was acheduled for August 19, 1985at the afficesof the Convnission, with subsequent sessions to be scheduled by

F, I

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84-1187-EL-UNC

ayreen(ent of the parties.The examiner noted that tkern wereseveral other cases pending at the Comtnission which relacedtothe Zimmer prOject, specifically, caee Nos. b2-1627-EL-CSS,83-1321-kL-C01, 84-93-EL-AAM, and 84-259-EL-CSS, and that theultimate resolution ofthe dnstantcase could affect the Lnterestsof participants in those otherproceedings. Thus, the August 1,1985 entry provided that partiec to those procr.gdings, Yr.cludingthose parties who hed patitinned to intervene, ahould be affordedthe opportunity to participate in the settlement conference•

on October 1• 1985, a stipolatien and recommendation (Jt.Sx, 1) containing a propOsedresolution Ot the case was fi$edbya number of. theparties who had participated in the settlementConfeience. The signetoriesincluded CG&E,DP&L, C&SOE, theCosmlission's staff, and intarvenore Of£ica of Contiumers' counsel,Industrial Enexgy Censumere (eee Letterof Counsel filed Octcbor4, 1985),• and elrmco, Inc. Counsel for the Mantgomery CountyCoalition signedthe atipulation and recommendation on be`half ofthe Hoardn£.County Ce.:amissioners af Montgomery County buto dueto locistical problems, could not cbtain authority to si3nanbehalf of the other members of the Coalition at the time thedocument was filed. Subsequently, counael has notified theCommission that eome twenty-five to thirty-five of the eighty 1members of the Coalition have joined in the sett,lementproposal(Tr. IIz, 55-581 Tr. VI, 10-.16). Intervenors Beard of CtfYntyCommissioners of Namil.ton County and the city of Cincinnatiparticipated in the eettlenient conferencebut did not sign thestipulation and reconunendation.

8yEntry of October 10,.1985, hearings ware scheduled:.fortha takingaf testimony xelative to the question ofwhethes theCommission should adopt the stipuiation and xecpmmendation.No.tice Of the hearings was published by CGSS, 9PaL, and C&SO8 innewspapers of general circulation in their respective serviceterritories.

5essions of the hearingwere conductedby t9e ;-mmission onOctober 30, 1985atthe 4ayton Municipal Auilding, ^1 West ThirdStreet, nayton,.. Ohiof on November 6, 1985 at Cincinnati CityNall, $01 Plum Streat, Cincinnati, Ohiot and onNcvember 7, 1985at theofficea of the Conmii.asion,180Bast Hroad Street, Columbus,-0hio, toafford members of the public the opporlunity to offertestimohy relative to the proposad stipulation and Yeoommenda-tion. Forty-three public witnesses offered statemants at theeeproceed;inge, of which twenty-seven Were eworn statemants, Thehearing for. the takLngofexpert testimony commencedNovembar 8,1985 at the offices of the Commiseion tiefore attorney examinerBarth E. Aoyer.2herecorded transcript of that phase of theproceeding and the exhibits admitted into evidence have beencertified to the COmnlission by the examiner for its considera-tion. Fina3, oral argumentswere heldbefore the Commission onNnvember 14, 1985.

COMMI88IC1N REVIENANn DISCUSSIDNI

This matter is now befo're the Commission forconsjderationof the stipulatic,l and recummend ation submitted Cetober 1, 1$85by the siminer owneret the Conunias9on's staff, thn office of

1 The xamaintng memp:..: vf the Montgonary County Coalition,withkhe excepticu of the village otBradford, have not yettakenaposition on the proposedsettiement. Thecommissionwill eontinueto accept filings .on behalf of these membersof tpeCoalition indicating their position on this matterfor so long as it retains juriadiction over this ease. TheCouncil of the villaye of eradfosd voted not to 'oin in thesettlement (Letter ofDradford CSerk-Treeaurer filsd November19, 19e5),

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TNIS IS TO CCIITTPY '1HAT 71i0 h1ICNOPNOTCXMpII APPGIHING(1N THIS Pitb1STR1P iR APo aiTYmnTF m.m rvximrra cevanrvvrrn+r nn ^ r.cr: erre m,.,

84-1107-FL-UNC -5-

consumers' Coun5el, theMontgoniaryCounty Coaliti.on,1 the indus-trial Snergy Consumers,and Armcn, Inc.,aii bEwhcm are partiesto this proceeding. Tliis document, a copyofwhieA is attachedas aa appendixto thiso+?der, cante.ins a proposzd settlement afthe is3uea raised by the Commissiqh's ontry of October 23, 1984initiating this eaae, As describ?d above, that entry conunenced amulti-phase pioceedingr the purpose of which was toestetilisfl theasset value of the tiimmer plant by identifying andexciudingthatportion of the Zinimer investment which will neverrepreser.t usedand useful property as a result of the proposed conversion 04Simmer to coal-fired generation and any further portion of theinvestment which is attributabletoimprudence or "ismanaqefnentin the conattuction ef the plant.The questious for the Commis-sion are whether the propoeed settlement satisfies the objaetivesset out in the antry initiating this case andwhether the proposedeettlement Yepresents a reasonable3esolution o£ this matter.

The Commission begins its reviea of the prnpesed sti2pulationandrecommendation with a summary of its majorelementn. First,the settlement provides that the sum of $661,000,000,. plus anyASlowance for eunda Used Dnring Construction (AFU[C) accrued onthissum since Sanuary 31, 1984, would ba diaalloved in futurerato casea involving theZinmerowners (Jt. 6x. 1, Para. Î5a).Disailowed" is dafinodto nwan that thia ameunt will not beincluded in rgte base, will not be treated -ae an aitowabloexpense and amortised ratably, andwill not be the basis of anyspeci.ai treatment in the determination of a reasonable rate ofreturn ( Id.,Para. 153), The parties to the stipulation agrcethat thisamouat, which represehts slightly over one-hal£of thetotal BSmmer investment as of .Tapuary 31, 1984, satisfiestheCommission's intention asexpressed in :ts-October 23, 1984entryto dete.rmine that portion of the inveetment in 2i.mmer which maynot be used anduseful in a convertes coal-fired 1300 MN.:£acili,tyand(or t.o impact of lmprudence or mismanagement, if any, on thelevalof theafmmer investment (ld „ Para, LSD).

Next, the etipulation provides that if the owners detormine

to go forwaCdwith the qonversion, none of the parties willehaiienge theportion o£ the January 31, 1984 investment remain-ingalter the disaliowedamount isexcluded on used andyseCulormismanagament groUnds (TA., Para. 'SF). HoWever, the non-ownerparties specifically reserve the right to chalienge the xeason-ablaptiss qt anq deoision subsequent to the decision to cancelconntruction of Zimmer as a nuelear-:plant in any future proceed-ings(Id., Pars. 15G). This right includes the right to chal-

lenge i:lie reasonableness, prudence, _ aecessity for, and cost ofpollution control and abatomenteguipment to-moet requirementsestablished subsequent to the date oP this agreement frd., Para.i5H).

The stipulation and recoaanendation further provides for acost cailtng crcap on ths maximum investment which the ownersmrly request the Commission to include in rate base when, if ever,the plant is eetually coNpleted as a 1300 MH coal-ficedfacilityQL4., Para 191). The ceiling amount is to be the leeser of the

Ae previously indicated, thAposition ofall the individualmembers of the Montgomery County Coaiitionwas not known atthe tinW the stipulation and recommehdation was subn+itted1Jt. E><. 1, -at1).

Tn char.. -terizing these provis:.ons as the "niajor" elementsof the eoatlement, the Commission $oes not intend to snggest

that other provisions are unimportant. Clearly, the proposedsettien,ent must be considered as a package.

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actUal co9t- to complete or 53.6 bilSion (Id.). This amountmaybe raised only to reflect costa incurred as a result of acts ofGod (to the extentthat suSh coets excaed reasonable insurancacoverage)andJor reasonable. a^d prudent investment in pollutioncontrol and abatement faciL,ities nacessary to meet new govern-mental standards (Yd.), The amount may be reduced pursuant to aspecific formula torefloct the recoveryor awardof dnmegesas aresult of certain pending 2immer litigation (Id.).

Finally, the stipulation and recommendationprovides for theterminar,ioil of all other Simmer litigation pending before theConmission. ThisSncludes Case Nos, 82-1623-EL-CSS, 84-53-8L-AAN.and 84-259-EL-CSS,as well as the Commission investigation inCase No. 83-1321-EG-COT (id.. Para. iSKI.

Tiao pointa should be olarif;ed attheobtsat. First,participation by the non-owner parties zn the stipuiation should,in no way, be construed to mean that they support the proposedconversion (Id,f, nor should acceptance of the stipulation byltheCorumission be viewed as u finding by the Commission that theconversion is reaaonable and prudent. Second, eppiroval of thisstipulation:would have no effeet on current rates to the custeunersof these companies. It is only whan, if ever, a completedconvertod Ss.nwer coal-fired facility becomea eligible for ratebaao recognition that tha nunibers contained in the stipulationcoma intopIay.

Tuio e%p.rt witnesaas offered testiw,any supporting approvalof tl:e BettZemelit. Dr. GCOrge R. Hdll, a former PERC CofnmisBiOnerand now a consultant with Charles River Associates,.appeared onbeheif of the Eimme): owners. Mr, John D. Borrowo,Director ofVkiiitieset the {anaeissfoh, testifiedfor the Commission'astaff. The citytof cincinnati, the only party of eecord opposingtha stipulati0n,presented as its witnessHr. Charles Komanoffof the consulting firm Eomanoff Energy Associatee. Mr. Somanoffrecommended that the stipulation be rejected; In addition tothsse expert witnesses, forty-three public witnesses offeredstatements at the lvcal hearingsheld in this case (Tr. 2-I3I,passim).A substantial majority of these individuais, rapYesent-iig abroad cross section of consumer, labor, investor, community,and gaverrunental interests, urged the Commission to approve theBetElement.

Dr. Hall pre£aces his analysis of the stipulation andrecommendation with the general proposition that it is soundxegulatory policy to encourage disi•ate-resolution through settle-ments(DpBL Es. 2, at 0). As âr Hallekpiaine, litication tsekpensive and time-consuming (Id,). It introduces uncertaintyintothe kegulatoryprocess, a factor which also carries signifi-cant cost consequences (F d . at 3-41. Allthese aosts eventua3ly,in one,way or another, €Lowthrough to consumers (Id.). Thus,6r. Hallframes the issue now before the Commission as whetherapprova],of ttie settlement is•preferableto the alternative of anexpensive and protracted reeolution of this matter throughlitigqtitin (Id. at 3). `

Although Ar. tiali believes fhat settlements are to beencouraged, he acknoiwlsdges that they must be examihed on acase-spepific basisiad. at 8-51. However, he cautions tliat as apart of that evaluation, regulators and analystsmust not secondguess the parties to the negotiation by speculating as to thetrade-of£s and comprosleea they would have made in constructingthe settlementpackage had thay been invoived inthe negotiations

The Board of- County Commissioners of Hamilton County,although participating !n the proceeding, has taken hoposition on the settlement (Tr. VI, 3).

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84-1187-6L-DNC

(ld, at 51. They niuat not fecua n any single element of thestlpulatien, but,.must zeco9nizethat the eettlement is a packagewhich reflects the qive-and-(3ke of the negotiating Process (Id-8t 4-51.Thus, he proposes Oxee criteria _or evaluating settle-mentsi 11 Ts the settlement a product of sericus bargainingamcog capable, knowledgeable parties? 21 Does the settlement,asa package, benefit ratepayers and the publictaterest? 'sl Doesthe aettlementpac'age vielate any important regulatory principleor practice? ( Sd., at S. Applyingthese tests to the facts ofthis case, ur, xa}i concludes thatthe stipulation andrecommen-d3tioh beforethecommission ahould be approved(Sd.at 13-23),

TheCOmmisBioh aga'ees with Dr. Hall that it issound regu-latory policy toencouraqe parties to its proceedings to reAolveS.iasues thrnugh negotiated settlements. Moreover, givah themagnitu8e o£ this casa, a 9tipuiated result here would be of evengreater benefit than in most proceedings. Cne need only looktothe New York Public Service Commission's audit of the Shorehamnuclear unit, a proceeding commanced in 1979 and not concludeduntil June of this year, to appreciate what might be in storeshould this case be fully litiqated ITr. VI, 42). Clearly, thedirect coste of Sitigation would be enormous. In addition, onemust aleo Consider the indirept COatS WhichwGuld flow fCom theuncertainty which wou-G attend this case as it wends its waythrough the Commission and the courts. One might well ask howthe Zinuner owners can be expected to make a reasonable decisionon whether to proceeQ wi.th converaionwithout knowing the regu-latory treatmentwhich wi11 ultimately be accordsd the existingSimmer inveatment. It is certain that their abiiity to attractfinancing#or the conversion wouid be seriously aPfectedy forinvestors would obviously be reluctant to provide the requiredcapital without knowing the fate of the existing investment.Thus, a reasonablesettlement that would provide firm arswersatthis time does appear to reptesant a preferable alternative tothe battle of.experte andlawyeY9 which wi11 ensue should thisniatter be fully litigated.

ALthough there are obvious advantages to a stipulatedr,esolutiog of thiacase, the f.ommi.asion nlust still de.termine that•this particular •^f"+fient is reasonalole. cr. Ha11'9 pr'oposedcriteria p=ovie a.-»-opriatebackdrop against which to conaiderthis question Ier n be little doubt his firstatandard --whether the se::.. a a product of serious ^bargaining amongcapable, knowlei, parties -- hasbeen satisfied. As de-scribedby 14r. Sorrows in his testimony, this atipulation is theresult of six weeks of intensive negotiatior.s (Staff Hx, 1, at3). The participants have been involved in numerous otherprooeedings in which Einsner aosta were in issue and are c;:rtainlywell-versed in the subject (id. at 2, Tr. vr, 35-37). Thediversity;of the interests repreeented by the eignatories isramarkable, a fact which, o£ Stsel€, is strong testimony to thereasonab3enessof tha settSement package, in short, the Commis-sion has nocause for concern as to. the eRficacy of the negotia-tions which produced the st.pulation.,,andrecommendation. Moreover,the Commission cammends the parties for their afforts in develop-iyg this proposal.

The evidehce with zespect tb Dr. Na11's second criterian --oihetftextho settlement is of benefit to ratepayers and in thepublic interest --- requires a somewhat more detai-Lau review. Inhis filed testimony,Mr. Horrows identifieswhat :° regards asfour majorbenefits of the etipulation (Id. at 10-i1). First, hecites thedisaLiowance of @861,000,CC0, BTus any AP'UfiC accrued onthis amount since January .17., 1984, pointing out that the stipula-tion guarantees that the ratepayers of the three oompanies aillnaver be raquired to pay these costs 11d. at 10). If AYUOC werecontiiued on this disallowed amount, the amount would approxi-mately double by 1991, going ihtorate base at that time at ava1c2 of $1.7 billion(.7t. 8x. 1. para. 1581. By excluding the

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.Asindicated nhnve, thc city of Cincinnati cpposes thesett1ement. This oppcsition appeate xo be based on two separategrounds. First, the city complains that the stipulation does notspellcut the baaia upon which certain key prov,isions, such asthe disallowed $861 miiiion and the 53.6bi1lion ceiiing, werocalculated (CttyEr.. 1, at 6-71. Counsel far Cincinnati arguesthat the Conmii5s}on should defer consideration nf the settleiientto provide the parties time to conduct discovery, subgoenaG'Hrien-8raitzber(j & Associates representatives, and enrageexperts in an effort to empirically validate the reasonabiehessof these numbers fTr. V2,44-48). This objection requires littlediecussion, for it reveala that the city haseimpLymissed thepoiht. As explainsd above,the purpose of the stipulation is toavoid fhe very exercise which the city now suggests be u5dertaken.The numbers in the stipulation aretheresuitof negotiation andcomQromise and) as sueh, are obviously not subject to empiXicalvalnrxation. The proposal is that they be accepted in lieu ofwhatever would have resulted fr.om Tengthy, expehsiva process offully litigating this matter. To examine the stipulation in themanner proposedbythe city is to start down the very track thatthe se*tlenlent is deaigned to avoid: The Commission's purposehere is not to second guCss the collaetive judgment of thepartioe supporting the stipulation, but rather to deteinlihe ifthe aettlammnt, as a packeqe, represents a reasonable resolutionof :this case.

Thesecondbas.is for the citv's opposition to the settlementis aet outtn the testimvny of its witness,Mr. somanoif. Mr.Aohianoffdoes not challenge the propriet,v of resolving thismatter through a settlement; however, he believes that thesettlement irithis nase should bepredicated on a different basisthan that contained in thestipu}ation and recommendation nowbe£ore the Commission ('fr. V. 42) . Ar. Komanoffarguss that ifthe tiinuner owners need new- generating oapacity, they havethaoption ofbuilding new coal-fired capacity apart fronl the Zimmerfacility (City tix. 1,at 10). Thus,he contends that the appro-priate$tandard for deterndning the anlount of aifimerinvestmentto ultdnfately be allowed in rate iiase should be the cost ofalternative, equivalent coal-fired capacity (Id,), Mr. Rcmanoffsuggests that there is no reason that the Comni'ission should feelcompel3ed to establish that cost at this time. Instead, her.-rommonds thatthe appropriate cost be determined at or near thet.ime the convertedp7,ant goss into service, based on tha cost ofother nOn-convertedcoal-fired plantscompleted in the saloe timeframe (Id. at 18) .1te oPfetS an analysis which purports todemonatrate that a new single 1300 MDi coal unit completed in1991, the year the proposed Zimmer conversion is scheduied forcompletion, would cost between $2.0 anfl $2.5 billion CCity.Ex. 1,at 21-33b.. Mr. Xolnanoff tielieves that the actuai cost of theconverted 3iimner plant wi]lexceed the $3.6 billioncap providedin the stipulation. Givon the difference between that cnilingamount and •his 42.0ta 92:5 billion estimate, he mair..iair.s thatthe proposed settlement will eventually result in recognition ofan exceas of some $1.0 to $1.$ biliionin rate baee (City Bx. 1,at 35).+ Each ofthese assumptions and argumehts tequirescomment.

As we anderatand 14r. lcamanoff's testimonyrthe basis for theequivalent plant standard he retommends ie, in large nfeasure,hisessunqstion that tke'6imNor owners have the option of buildingcomparable new coal-fired capacity apart from the Eimmer facility

ThA short answer here, o£ course, is that none of theparties to the stipulation, including taowho had previo+alyengagod his services in connection with 816mer niatters (Tx.V; 20-221, agreed wfth Mr: Komanoff, ittakes at lsast twoparties te producea stipulated result.

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(City Ex. 1, aC 101 Tr. V, 16r 104-105}. Cartainly thc owne[scannot simply abandon their s1.7 b!l.lian i.nveatment in Simmer andexpect toobtain financing for a new eeal-fired 1300 MW unit norshou].d they do so Yfeportion of tho cxisti;,; int•estmnnt canecononiicallybc used in a converted faoility.Thus, Mr. Xoman-nff's underlying aasumption is, at best, u^reaTistic. Althoughconceding tliathe had made no analysisof the financial impact ofhia proposal on the Eillnter owners in connecfion with this case(Tr;V,28), Mr, Komanoff has praviously expressed the view thatthe cancellation of simmer "couldweli mean financial ruin, atleagt for Cincinnati Oas and Electric Company" ('cr.Vt 108-109).A Cincinnati investmentbroker testified at the public hearingthat without the settlement he believes that "• . Cincinnati andperhaps the other utilities would abeolutelybe out of thecapital markets" (Tr. II, 105). Moreover, even i f- it werereasonableto expect the owners to abandon the potentialiy usefulportion of t)iis 8inuner investnient and proceed with the canstruc-tion ofnaw coal-fired generation, it is far from clear that thiscould be accomplished in anything approaching the time frameanticipated#orthe proposed Zinuiler conversion (Tr. §, 100-103),if the option Mr, NomaneFfposits does net, in fact, exist, theCoainlission must guestioh the zeasonableneBs of a standardwhichassumes that it does.

TheCommisHioll turns llext to Mr. Komanoff's ar9ufinentthat it(e ngt neceseary to estali;ish the aeset vaiue of the plant atthis point and that thisanalysis can be undertaken when theplant goes into aenvice. First, this suggestion ignoree theinlportanceattached toresolving the queation of the asset valueof the existirtg Bimmerinvestment by the Conmlission in itsOctober 23, 1984 entry and by Dr. Hall in his testimony in thiscase. Mr.xonianoff acknowledged that he had no experience inattemptinq tosecure financing on behalf of aneleotric utility(Tr. V, 141). Thus, Aisassessment of the importance of certaintyto the financial markets in matters of this nature is subject toqueation ( Id, at 142-143). Second, the equivalent plant standardrecommende^d by Mr. Komanoff for ultimately valuing ths plant maybe inconsistentwith the original cost rate base provisions ofOhio ;aw (Sae Sections 4909.05and 4909.15 Revised cefle).xndeed, thie standard may be reminiscent of the days of the RCNLDrate- basc.Mr. Komanotf, who -isnot a lawyer (Tr. V, 17),testifiad that he had not discueeed the"legal basis o£ hisproposal tuith covnsei (Tr. V, 143), and further indicatedthatAewas unfamiliarolith the terms "reconstructioncoet new" and "falrvalue° sate hase(Tr. - Vp 47-48). Mr. Borrows observedthat .ifthis equivalentplant standard were to ba adoptedand applied toall production accounts ofthe 2irmner owners, their aggr® gsteratehase would increase_by an amount in excess of $4 biklion(Tr, IV, 159-161). Although the Cemmission reaches no conclusio q

on this issue at this time, even if this standard were to bedeemed appropriate, the analyeisrequired to apply it would besuffici®ntly subjective to fuel a fiqht among experts recruitedby parties with divergent interests. Although Mr. Komanaffksiieves that a statistical approach could be successfullyomployed (Tr. V. 93), he concede8 that ten different expertswouid co111e up with t@p different answers ('rr. V, 94). Althoughhe did not foresee that those answers would-.necessarily.be "allovar the lot"(Yd.), it is clear to the Commission that giver. theextrenie VariatEo-ne in the dollar per &W cost of generatingfacilities which have come on line in recent years (Tr: V,92-93)., it would be difficult to arriva aL a conclvsive resultunder Mr. 8oviano£f's proposed teet.

Mr. 8omanoff maintains that if ths Comnlission believes itessential to establish a value for the converted plant at thistime, it should rely on his analyeie based on the 1300 M1V Rockporti,indiana units Seing built by the Indiana & Michigan ElectricCompany (City EX. L, at 20-21). The first of theseunits wentinto commercial service in Decomber, 1984. (ld.). His study, n

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which produced an eatimated i991 cost of a nnb1300 Mw coal-firedunit of tietweeh $2.0 and $2.,5 billion, suffets from tho sameinfirmities discussed above 1Id. at 20-33). A9ain, Mr. Komanoffmistakes the paint of thla proraeding. The Conm!ssion isnot, asapart of thiscase, attempting toestablish a rate base valuefor.a Converted 2immer facility. That canonly be done in a ratecase involvimg :a Sinvner ownerafter the 5immer conversfon iscompleted. The objective here is to est`blish tho value of theexisting Sintmer investnrent. Tf the proposed stipulation isadopted, partieswill not be precluded from raising arguments asto the appropriate ratebase inclasion forthe goir,g Porward costof the tacility, subject to the constraiut imposed by the caplimiting the total amount which canbe recognized. Tndeed, theirony of Mr. Komanaff'e testimony is that there is nothing in thesettIement, itself, which precludes consideration ofMr, xamanoff'sproposal as a standard for valuing the going forward investmentwhen, if ever, that issue comes before the Coitlmiesion in a rate

caee. Althotlgh sopre of the public witnesses testifying in thisproceeding opposed the settlement (I'r.I, 39, 52, 68, 841 Tr. It,35, 54, 62, 122, 129, 139; Tr, III, 231, a substantial majorityurged the CcnNiissiontoadopt the stipulation! Shesewitnessesincluded ratepayers (TS. I, 60, 64,82, 93, 102; Tr, I1., 27, 89,9U-, 92, 94, 121), eleoted represeritatives and other publicoff.icialn (Tr. ;, 24,95; ^Tr.. II,24, 44), nnion re prssentatives

(Tr, I, 65;Tr, II113¢; Tr. III, 18, 59, 761, etoekholdere]Tr.I, 102;TZ, II, 91), economic developnient consultants (Tr. I, 29,901, representativr.s o£ various Chanibers of Conuaerce (Tr, 1, 35rTr, II, 4481 Tr. L11, 66), a representative of a tradeassociationfTr,I, 86; Tr,-,II, 124), and repiesentatives of various publicinterest groups-. (Tr. 11, 72, 1111 Tt. III, 71.). Althoughthesewitnesseshad different reasons for endorsing the proposedsettlemsnt, twopredominant themes euierged. Many o$ the wntnessesviewed acceptance of the settlenient as a nacessary step if 2inmeris to be conipleted as aconverted facility, an end. they believewill benefitthe serviceterritoriesof the Zimmer owners in avarf.ety of wnys. othersexpressed the opinion that the proposedsettlement represents a reasonable resolution of past Y.i7nmerproblems and wiLl lead to lower future ratesto the customers ofthe -three conipanies thanniight otharwise be anticipated.

eased opon ovr review of the record in this case, theConmlission is ofthe opinion that the mtipulation an(i recommenda-ti.onis reasonable and should be aticepted. As one of the publicwitnessae in this preeeeding cogently observed, there Ss not asingle soul who is anything other than unhappy about Zimmer'atroubled history, but no one can wave a magicwand andmake thathistory disappear iTr. XI, 100). However, thia settlenientrepreeenta an apportunityto put nuclear tiAmmer-behind us, and todo so now, not after the yeare of litigation which would surelyensue shouldpiecontinue the course charted inthe entry -initiat-ingthis cnseor embark on a journey of the type recommended bycity of Cineinnati witness Komanoff. Acceptanae of this stipu+1'ation does not guarantee that 8immer will be converted toeoa1-#ired generation. Acceptance of the stipulation will,however, repiaca uncertainty with 4ertaint.y,a very importantcommodicy to all those with a stake fn the zimmer project. Theaiwar owners clearly need the measure of certainty providedbythe proposed settlement if they ara to have areasonable basisupon which todecide whether to proceed With the conversion.Investors andpotential i,nvestor.a need to know, with certainty,the fate of the existing investment in Zinmer if they are to beexpected to financa the proposed conversion. Finally, customersoftheee companies zeceive the certain guarantee that they willnot, in the futuro, pay Eor costs associated with past nlismanage-ment at ainmier and that there is afixed ceiling beyond whichth®y will never be charged forthe;tonverted facility. Thesettlement proposad in the stipulatibn and reconunendataon, as a

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package, reasonably satispies the Conimission's Gbjoetive ini.n3tiatingthis prOceeding, is in the pu@lictnterest, nndshPUld, thetefore,'beapproved.

Although this decision alosee the chapter an nuclearSinuner,the Commission believes that one valuable ],e;son to be learned£rom this unfortunate experieace is that theacrimony and atietrustwhich becaniethe hallmarks of the relationehYpbetween theseutilities.and their customers during the years of the Zimmercontroversy served ouly to exacerbata the Zimmer problem, 11heconunirf:on hopes- that an open exchange of views between thecompaniesand consuniers niay prevent thie atmosphere of suspicionfrom pervading the next chapter in the Zimmer story. To thisend, the convnission will initiate a series of meetings to beheld-in the service territories of each o£the Zimmerowners atintervain over the remaining course of the project. Thesemeetings will aerveas foruma fat the exchange ofinformation andideas antong the companies, consumers and representatives oflabor, investoX, community. and goverlunental interests oftfietype that participated in this procesdingan topics such as theneed for theplant ana the status of codstruction.

FINDINGB OFFACT AND CONCLUSIONS OF LAW:

1) 7heCincinnati Gas & Electric Company, TheDayton Power and L,ight Conipany, and ColumbusqSouthern Ohio8leetric Conipany ere aubjectto the jurisdiction of thia Convnisaionpursuano to Section 4905..04, 4905.05 and4965.06 Revised Code.

27 This ^.proceeding was conmienced by ConimissionentryofOctober 23, 1984, pursuant toSection4905.13 Revised Code, toxestate theaccounts andrecords of The CincinnatiGas bElectricCompany, The Dayton Pewerand 7.ightCompany, and Columbus & Southern Dhio Eiec-tric Company to reflect the appropriate assetvalue for the William li. Zimmer NuclearPow9rStation.

3) On 04tober 1, 1985,a numberof the partiesto this proceeding jointly filad a stipula-tionandrocommendation containing a proonsedsettlementofall issues in this case.

4) Public hearings have been held herein taconsider theproposed settienient.

5) Leg81 notice ofthese hear#nge was dulypublished in accor(lance witb therequirementseetablished by theCommission.

6) The record in this proceading shows that thestipulation and racommendation is the resultof serious,arms-length negotiations amongknowledgeable partias representing a widerange of intetests and that the proposedsettlement has been endorsed by numerouspublir witnesses who repreaent abroadcross-sec'ion of consuqter, labor, invastor,community, and governnlental interests.

7) The record further shows that the proposedsettlement is a preferable alternative to thelengthy, expeneive iitigation process whichwou:d be required ehould the oourse outlinedin theCommisa?.on's entXy of Occtober 23,1484he pursued and that the proposed settlement

11

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reasonably satisfies the objectives set outip that entry,

81 The record further shows that the proposedsettlen,ent a.s in the public interc+st andshould bepccepted.

9) PursuanttD Paragraph 15K ofthe stipulationand racommendatiosv this proceeding shall beterniinahed and closed as a matter of record.

10) PurSUant toParagraph15K of the stipulationand recommendatian, con,plainants in Case Nos.82-1623-SL-CHS, 84-93-EL-AAM and 54-259*EL-CS5 shall forthwith withdraw same.

11) Pursuant to Paragraph15Kof the stipulationand secanunendation Case No. 83 I321-EL-COIshould lxe terminated and closed as a matter

of record.

It is, therefore,

ORDERED, That the stipulation and qecanunendation filed inthD.s docket on October 1, 3985 be appraved. It is, further,

ORDFRBD, That, pursuant to the terms of the stipulation andracenu'i®ndation, this proceeding shall be terminated and closed asa matter 4$ record. Lt is, further,

ORDERED, That, pursuant to the terms of the stipulation andrecofiniendation, the aomvlainants in Case Nos. 02-1623-EL-CSS,84-93-E1.-7WM and84-259-BL-CSS shall withdraw these cases,forthwith. it ise further,

DADERED,That, pursuant to the kermsof the stipulation andrecoaimendatiop, Case No, 83-1321-EL-COI shall be tetininated andclosed as a,matter of record. It is, further,

ORDERED, That all objaations and motixs not &peoificallydiscussed in this Opinion and Order, or renderedmoot thereby, beoverruled and denied. Stie, futther;

O&UERED, That copias of this Opinion and Order be servedupon allparties of recerd.

DEfitgekEnteredin the Jaurnal

" / ^ L

Mary nn* nskSecretary

NOV 26qrue 6epy

r

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