A 30-foot-long stainless steel gavel sits outside the Ohio Judicial Center in Columbus. Credit: Sam Howzit / Flickr / Creative Commons

The Ohio Supreme Court heard argument on the lack of limits for FirstEnergy’s credit rider.

Lawyers for Ohio manufacturers, consumers and environmental advocates urged the state’s highest court Wednesday to halt to an unrestricted charge by FirstEnergy’s Ohio utilities.

At issue was whether the Public Utilities Commission of Ohio could authorize a rider to boost company credit ratings with no strings attached for use of the money, including the potential for the utilities to funnel it to their parent, FirstEnergy Corporation.

The challenged rider is called a Distribution Modernization Rider. However, “not one penny is required to be spent on distribution,” said attorney Kim Bojko, who represents the Ohio Manufacturers’ Association Energy Group in the case and also argued on behalf of the Office of the Ohio Consumers’ Counsel and other customer advocates. Instead, the money is ostensibly meant to help improve the companies’ credit rating before they invest in grid upgrades at some point in the future.

At stake is roughly $500 million plus millions more to cover FirstEnergy’s income taxes on the monies, collected by the utilities since January 2017 and currently authorized through the end of this year. The PUCO’s 2016 order also lets FirstEnergy seek to continue the charge for an additional two years.

A ‘bailout’

The appeal is part of a continuing saga in which FirstEnergy has sought customer guaranties or subsidies from utility customers to address financial woes of generation subsidiaries. Those subsidiaries filed for bankruptcy last year, and a September 2018 bankruptcy court order set the stage for a possible reorganization of those companies.    

Before 2017, FirstEnergy’s requests to the PUCO went through several iterations, ballooning to $8.5 billion in the summer of 2016. PUCO staff introduced the concept of the Distribution Modernization Rider during the rehearing process that summer, with none of the parties to the case having testified or giving evidence on it beforehand.

The PUCO’s fall 2016 decision adopted that rider with no strings except for a vague statement that the money should help improve FirstEnergy’s and its utilities’ credit rating.

“The credit support rider is an illegal, customer-funded bailout masquerading as a distribution modernization rider,” Bojko told the court. And although the PUCO’s order referred to a statute that authorizes charges for grid modernization, the lack of restrictions for use of the charge means “it is a giveaway, not an incentive,” Bojko added.

If a given charge doesn’t fit within the categories outlined by statute for an electric security plan, it’s not authorized, she said.

The ‘only way’?

Lawyers for the PUCO and FirstEnergy countered that the credit support rider is necessary for any future grid modernization.

The PUCO knew FirstEnergy didn’t have a good credit rating in 2016 to be able to accomplish future grid projects, PUCO lawyer Thomas McNamee told the court. “The only way we can change that is to improve their credit situation.”

Moreover, McNamee said, the lack of restrictions was deliberate on the commission’s part, in order to give FirstEnergy and its utilities more flexibility in how they improved their financial outlook.

“But then is there any requirement that you continue to go forward to modernize the grid with these rider funds?” asked Ohio Supreme Court Justice Melody Stewart.

“Not with these funds specifically. That’s not the purpose of these funds,” McNamee said. But, he added, “we’re removing a significant roadblock” by improving FirstEnergy’s ability to borrow money.

The PUCO will ultimately conduct an audit on the funds’ use, said lawyer James Lang, arguing on behalf of FirstEnergy’s utilities. “The rider is an incentive because … it makes grid modernization less expensive,” Lang said. “The companies can do more of it.”

But any revenue arguably improves a company’s credit position, Environmental Defense Fund lawyer John Finnigan told the Energy News Network after the court session. “If the court says that this rider is legal, then it seems that the commission has unbridled power to approve any rider they want for any purpose, because any rider would improve the company’s credit metrics.”

During rebuttal argument, Bojko noted that the available credit ratings for FirstEnergy’s three Ohio utilities in mid-2016 were all “one notch above investment grade,” when the PUCO order was issued. So, she argued the utilities weren’t the ones needing a credit boost.

It’s unclear how much, if any, the subsidies affected the parent corporation’s credit rating. Moody’s long-term senior unsecured rating for FirstEnergy stayed stable from 2016 until now with a rating of Baa3. FirstEnergy’s investors’ website shows that the Standard & Poor’s rating for long-term debt had risen from BBB- in April 2016 to BBB in August 2018. In the meantime, however, FirstEnergy’s generation subsidiaries had filed for bankruptcy.

In any case, any actual grid modernization projects must be authorized in separate proceedings, which have not yet begun. And “even if that separate rider is lawful, that doesn’t make this rider lawful,” lawyer Rachel Bloomekatz told the court, arguing on behalf of environmental advocates in the case.

‘A chance for due process’

Even if the PUCO had authority to impose the credit support charge, its action violated basic procedural requirements, challengers noted.

The rider was “unlawfully created in the rehearing process through the introduction of new evidence that could have been introduced in the initial hearing,” Bojko told the court. That violates Ohio law governing how the commission is supposed to act and rule, she said.

Those procedures are important “because they give people a chance for due process,” Finnigan said. “One of the fundamental rights that everyone has in any legal proceeding is a right to present your arguments and get a fair hearing. There was no chance for that hearing.”

In fact, the PUCO “never even found that doing this rider now would make modernization cheaper in the future,” Bloomekatz said. The PUCO speculated that the interest rate for borrowing funds would be lower, she said. “But it did not find that it would make it $600 million cheaper.”

Both Bojko and Bloomekatz urged the court to order a halt to further collection of the charge, with remand to the PUCO for further action. That could include adjustment of future customer charges for the remaining 5 1/2 years of the electric service plan for which the rider was a part, Bojko said. Or, Bloomekatz suggested, the PUCO might order FirstEnergy’s utilities to actually use the amounts already collected for actual grid modernization projects.

What’s next?

It’s unclear how soon any order might come. The Ohio Supreme Court has been averaging about a year between oral argument and final decisions, Finnigan said, although he hopes the court rules sooner than that in favor of the challengers.

“What it really boils down to is whether there are any limits on the commission’s power, and that’s what this case will decide,” Finnigan said.

Meanwhile, FirstEnergy’s Ohio utilities continue to collect the charge. The Office of the Ohio Consumers’ Counsel, Ohio Manufacturers’ Association Energy Group and others sought a stay last summer after FirstEnergy refused to say what its utilities were doing with the collected funds. However, the court denied that stay in September.

Kathiann M. Kowalski

Kathi is the author of 25 books and more than 600 articles, and writes often on science and policy issues. In addition to her journalism career, Kathi is an alumna of Harvard Law School and has spent 15 years practicing law. She is a member of the Society of Environmental Journalists and the National Association of Science Writers. Kathi covers the state of Ohio.