Consumers' Counsel v. Pub. Util. Comm. - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO
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Office of Consumers' Counsel, Appellant, v. Public Utilities
Commission of Ohio et al., Appellees.
[Cite as Consumers' Counsel v. Pub. Util. Comm. (1994),
Ohio St.3d .]
Public Utilities Commission -- Application for rate increase by
small telephone company -- R.C. 4927.04(B) and the
commission's alternative regulations permit the commission
to set small company rates without a hearing -- Ratepayers
have right to protect interest they may have in just and
reasonable rates under R.C. 4905.22 by filing a complaint
under R.C. 4905.26.
(No. 93-1710 -- Submitted May 25, 1994 -- Decided
September 14, 1994.)
Appeal from the Public Utilities Commission of Ohio, No.
92-2336-TP-AIR.
On August 15, 1991, the appellee Public Utilities
Commission of Ohio adopted alternative regulatory requirements
for small local exchange telephone companies. In the Matter of
the Commission Investigation into the Implementation of
Sections 4927.01 to 4927.05, Revised Code, as They Relate to
Small Local Exchange Companies (Aug. 15, 1991), PUCO No.
89-564-TP-COI ("89-564"). The commission adopted the
alternative regulatory requirements pursuant to R.C.
4927.04(B), which provides:
"Upon the application of any telephone company having
fewer than fifteen thousand access lines, the public utilities
commission may, by order, exempt such company, with respect to
any public telecommunications service it provides, from any
provision of Chapter 4905. or 4909. of the Revised Code that is
specified and requested in such application, except sections
4905.20, 4905.21, 4905.22, 4905.231, 4905.24, 4905.241,
4905.242, 4905.243, 4905.244, 4905.25, 4905.26, 4905.30,
4905.32, 4905.33, 4905.35, and 4905.381 of the Revised Code; or
may establish alternative regulatory requirements to apply to
such company and service, provided the commission finds that
the alternative requirements are in the public interest."
The alternative regulatory requirements provide an
exception to many of the procedures associated with traditional

rate-base/rate-of-return regulation found in R.C. Chapters 4905
and 4909, and are generally intended to streamline the
regulatory ratemaking process in the increasingly competitive
telecommunications industry. In summary, the alternative
regulatory requirements provide:
(1) The telephone company notifies commission staff and
the OCC of its intent to file an application to increase its
rates and of the ratemaking methodology it intends to employ.
(2) After commission analysis the company may file a
formal rate-increase application, which need not conform to the
staff's analysis. The company must also give notice of the
filing of an application to affected municipal authorities and
to customers.
(3) The commission must then issue an entry accepting the
application, which triggers the release and docketing of the
staff's initial analysis and makes its workpapers available to
the public. The entry also sets dates for a public forum and a
subsequent settlement conference. The purpose of the forum, to
be held in the local exchange area, is to explain the proposed
increase to the public and allow the public to testify as to
concerns about the proposed increase and the adequacy of the
service. The purpose of the settlement conference is to permit
the company, commission staff, and intervening parties to reach
a consensus on the methodology used, the amount of the
increase, and the rate design.
(4) If no agreement is reached at the settlement
conference, the matter is scheduled for hearing.
(5) If the company and any one intervenor, or the company
and the commission's staff reach agreement as to all issues,
the agreement shall be reduced to writing and docketed with the
commission. Non-signatory parties, or other interested persons
who did not intervene, may file written objections to the
agreement with the commission.
(6) If no objections are filed, the agreed-upon rates
become effective automatically thirty days after the agreement
is filed, unless the commission orders otherwise.
(7) If objections are filed, the commission issues an
order approving the agreement and implementing the rates no
sooner than the forty-sixth day after the agreement is filed or
suspends the effective date of increase based on the objections
filed or its own motion.
(8) If the effective date is suspended, the commission
may subsequently issue an order accepting the agreement or it
may reject the agreement and set the matter for hearing, at
which the company will bear the burden of proving the proposed
increase to be reasonable.
Provisions of the Revised Code retained under the
alternative regulatory requirements include R.C. 4905.22 (the
right to necessary and adequate service and just and reasonable
charges) and 4905.26 (the right to file a complaint [upon
reasonable grounds] to contest, inter alia, the adequacy of
service and the reasonableness of rates).
Intervening appellee McClure Telephone Company filed an
application to increase its rates under the alternative
regulations and also requested, pursuant to R.C. 4927.04, that
it be exempted from complying with R.C. Chapter 4909, as
necessary, and specifically from Ohio Adm. Code Chapter 4901-7

and R.C. 4909.18(A) through (E). (The latter are the
voluminous standard filing requirements under the traditional
ratemaking procedure.) The commission granted the exemption
and the case was processed under the alternative requirements.
The commission's staff and the company reached an agreement
resolving all issues in the matter; OCC filed objections; the
commission's staff and the company filed responses; and OCC
filed replies. In reviewing the stipulation, the commission
stated that it had "established this procedure of allowing
objections and responses to enable the parties to advance their
positions before the Commission. The Commission will consider
the positions and arguments raised by the parties in their
filings as to both fact and law." No evidentiary hearing was
held.
The commission rejected OCC's objections, relying on the
written responses of its staff and the company, and ultimately
approved the agreement, finding that it was supported by the
record and was in the public interest. Specifically, the
commission found that the alternative regulatory treatment for
McClure permitted the commission to process the rate-increase
application in four months, rather than the customary nine (or
more) months, and that the process removed the traditional
"rate case expense" from the rates being set.
The commission denied OCC's application for rehearing.
OCC appealed to this court as a matter of right.

Robert S. Tongren, Consumers' Counsel, David C. Bergmann
and Andrea M. Kelsey, Associate Consumers' Counsel, for
appellant.
Lee Fisher, Attorney General, James B. Gainer and Ann E.
Henkener, Assistant Attorneys General, for appellee.
J. Raymond Prohaska, for intervening appellee McClure
Telephone Company.

Per Curiam. We affirm the commission's order for the
following reasons.
In its first proposition of law, OCC argues that the
commission was without authority to adopt the alternative
regulatory requirements on its own initiative, citing the
language of R.C. 4927.04(B), which provides that alternative
regulations may be established "[u]pon the application of any
telephone company having fewer than fifteen thousand access
lines." (Emphasis added.) In its second proposition of law,
OCC argues that because the commission lacked authority to
adopt alternative regulatory requirements on its own
initiative, the requirements adopted in PUCO No. 89-564-TP-COI
are actually procedural rules promulgated under R.C. 4927.04(D)
which are invalid because they exceed statutory authority.
These issues were not stated in OCC's application for
rehearing. R.C. 4903.10 provides, in part, that an application
for rehearing "shall be in writing and shall set forth
specifically the ground or grounds on which the applicant
considers said order to be unreasonable or unlawful. No party
shall in any court urge or rely on any ground for reversal,
vacation, or modification not so set forth in said
application." We have held that setting forth specific
grounds for rehearing is a jurisdictional prerequisite for our

review. Cincinnati Bell Tel. Co. v. Pub. Util. Comm. (1984),
12 Ohio St.3d 280, 290, 12 OBR 356, 365, 466 N.E.2d 848, 857,
appeal dismissed (1986), 476 U.S. 1166, 106 S.Ct. 2884, 90
L.Ed.2d 972; Akron v. Pub. Util. Comm. (1978), 55 Ohio St.2d
155, 161-162, 9 O.O.3d 122, 125-126, 378 N.E.2d 480, 485;
Cincinnati v. Pub. Util. Comm. (1949), 151 Ohio St. 353, 39
O.O. 188, 86 N.E.2d 10, paragraph seventeen of the syllabus;
and Travis v. Pub. Util. Comm. (1931), 123 Ohio St. 355, 9 Ohio
Law Abs. 443, 175 N.E. 586, paragraph six of the syllabus.
OCC does not contend that these propositions of law were
specifically raised on rehearing. Rather, it argues that the
commission does not have jurisdiction to consider such issues
and, thus, that they may be raised for the first time on
appeal. An administrative agency such as the commission may
not pass upon the constitutionality of a statute. Cleveland
Gear Co. v. Limbach (1988), 35 Ohio St.3d 229, 520 N.E.2d 188;
Atwood Resources, Inc. v. Pub. Util. Comm. (1989), 43 Ohio
St.3d 96, 100-101, 538 N.E.2d 1049, 1053. However, nothing
precludes the commission from passing upon the proper
application or construction of a statute, which is the issue
here. OCC's failure to contest the commission's construction
of R.C. 4927.04(B) on rehearing is fatal.
OCC also argues that these propositions of law are related
to allegations of error raised on rehearing and that it has
"substantially complied" with R.C. 4903.10. This argument
ignores the strict specificity test recognized by this court in
Cincinnati, supra:
"It may fairly be said that, by the language which it
used, the General Assembly indicated clearly its intention to
deny the right to raise a question on appeal where the
appellant's application for rehearing used a shotgun instead of
a rifle to hit that question." 151 Ohio St. at 378, 39 O.O. at
199, 86 N.E.2d at 23.
In its third proposition of law, OCC argues that the
retention of R.C. 4905.22 under the "exemption" language of
R.C. 4927.04(B), and the retained applicability of that section
under the commission's alternative regulations, give ratepayers
a substantive right to "just and reasonable" rates and a right
to fully participate in the ratemaking process to protect their
interests. Although OCC states that such right would not
necessarily require an evidentiary hearing, but only a fair
fact-finding process, it effectively seeks an evidentiary
hearing to resolve the factual issues presented by its
objections below.
Relying primarily on the MCI cases, infra, appellee argues
that an evidentiary hearing is not required in this case and
that the "objection and comment" procedure employed is a valid
basis for resolving the factual issues raised by OCC and for
approving the rates in the stipulation.
1. Right to an evidentiary hearing.
We have repeatedly held that the right to participate in a
ratemaking proceeding is statutory, not constitutional, and
that absent express statutory provision, a ratepayer has no
right to notice and hearing under the Due Process Clauses of
the Ohio and United States Constitutions. MCI
Telecommunications Corp. v. Pub. Util. Comm. (1988), 38 Ohio
St.3d 266, 269, 527 N.E.2d 777, 780; MCI Telecommunications

Corp. v. Pub. Util. Comm. (1987), 32 Ohio St.3d 306, 310, 513
N.E.2d 337, 342; Armco, Inc. v. Pub. Util. Comm. (1982), 69
Ohio St.2d 401, 409, 23 O.O. 3d 361, 366, 433 N.E.2d 923, 928;
Cleveland v. Pub. Util. Comm. (1981), 67 Ohio St.2d 446, 453,
21 O.O. 3d 279, 283, 424 N.E.2d 561, 566; Committee Against MRT
v. Pub. Util. Comm. (1977), 52 Ohio St.2d 231, 239, 6 O.O. 3d
475, 480, 371 N.E.2d 547, 552 (P. Brown, J., dissenting).
Cincinnati v. Pub. Util. Comm. (1978), 55 Ohio St.2d 168, 9
O.O. 3d 130, 378 N.E.2d 729, certiorari denied (1979), 440 U.S.
912, 99 S.Ct. 1225, 59 L. Ed. 2d 461, which OCC cites as
implicitly recognizing a ratepayer's right to due process in
commission proceedings, involved a hearing required by statute;
the court's reasoning in that case was consistent with Ohio
Bell Tel. Co. v. Pub. Util. Comm. (1937), 301 U.S. 292, 57
S.Ct. 724, 81 L.Ed. 1093, that in such circumstances the
hearing afforded must be "fair and open."
At common law, a utility had the same right as other
businesses to set the rate for its services. Its customers had
no substantive right to a fixed rate, and thus had no
procedural rights in the ratemaking process. See Sellers v.
Iowa Power & Light Co. (S.D. Iowa 1974), 372 F.Supp. 1169,
1172. With the advent of regulation, ratemaking became solely
a legislative function and, absent express statutory provision,
ratepayers had no right to participate in that process through
the ballot box. See Rivera v. Chapel (C.A. 1, 1974), 493 F.2d
1302, 1304; Georgia Power Co. v. Allied Chem. Corp. (1975), 233
Ga. 558, 559, 212 S.E.2d 628, 630; Pub. Util. Comm. of
California v. United States (C.A. 9, 1966), 356 F.2d 236, 241;
Franchise Tax Bd. v. Superior Court (1951), 36 Cal.2d 538, 549,
225 P.2d 905, 911.
Under Ohio's traditional ratemaking process, the General
Assembly provides for quasi-judicial ratemaking hearings in
which ratepayers in general (R.C. 4909.18, 4909.19, 4903.221)
and OCC in particular (R.C. 4911.02) may participate. However,
by enacting R.C. 4927.04(B), the General Assembly delegated
authority to the commission to exempt small telephone companies
entirely from the traditional ratemaking procedure, in which
case the process could be entirely legislative, and ratepayers
would have no opportunity to participate, or to promulgate
alternative regulations, which, at least in this case,
presented some opportunity to participate, short of an
evidentiary hearing.
That the intent of R.C. 4927.04(B) is to dispense with the
notice and hearing requirements in the ratemaking process for
small telephone companies is evident from the legislative
history of Am. Sub. H.B. No. 563. J.R. Prohaska testified on
behalf of the Ohio Telephone Association that:
"The small companies, like others, would still have to
render adequate service [a reference to R.C. 4905.22], still
have to have reasonable rates [a reference to R.C. 4905.22],
still be subject to complaint procedures [a reference to R.C.
4905.26], but would be spared the expense of needless
paperwork, procedures and hearings.")
Also, the Legislative Service Commission bill analysis
stated:
"The bill does not expressly require notice or hearing or
other procedural provisions in the case of such an application

[under R.C. 4927.04(B)]."
Therefore, we find OCC's construction of R.C. 4905.22 is
inconsistent with the intent of R.C. 4927.04(B) and the
commission's alternative regulations, which expressly do not
require hearing under the circumstances involved in this case.
2. The MCI cases and the "notice and comment" procedure.
Both OCC and the commission assume that the alternative
regulatory requirements provide for quasi-judicial fact-finding
and an order by the commission. On this basis, OCC argues that
the record below contains no evidence, that the record is
insufficient to support the commission's decision (see R.C.
4903.13), and that the case must be remanded for evidentiary
hearing upon which a proper order may be based. The commission
apparently assumes that the "objection and comment" procedure
is a sufficient basis to make a factual determination as to the
reasonableness of the rates set, and that that procedure
provides a sufficient basis for this court's review under R.C.
4903.13 (under which the court must ascertain if the
commission's order is supported by the manifest weight of the
evidence). It relies on the MCI cases, supra, in which this
court, at least in part, based its affirmance of the order upon
a similar process.
The MCI cases were appeals resulting from a
commission-initiated investigation into the reconfiguration of
the telecommunications industry after the divestiture of AT&T.
The investigation specifically concerned the charges that
telephone companies would have to pay for access to Ohio Bell's
system in order to provide long distance calling, and the
distribution of excess revenues collected under the plan. The
commission held an initial hearing in the case, as required by
R.C. 4905.26, and in its initial order found that ongoing
issues would be addressed by a notice and comment procedure.
MCI did not appeal the initial order contesting the procedure,
but argued in the 1987 and 1988 appeals that an evidentiary
hearing should have been held on the subsequent issues and that
the commission's resulting orders were not supported by
evidence of record. A majority of this court held that MCI was
not constitutionally entitled to a hearing and that the initial
hearing satisfied the statutory hearing requirement. The
majority went on to affirm the commission based on the totality
of the record before it, which included the evidence adduced at
hearing as well as the subsequent comments received.
The dissent in each case argued that the commission, as a
creature of statute, had no authority to set rates through the
quasi-legislative "notice and comment" procedure and that,
because no hearing was held on the issues, there was no
evidence upon which to base the commission's order.
While MCI struggled with the statutory hearing
requirement, there is no such dilemma here. R.C. 4927.04(B)
and the commission's alternative regulatory requirements issued
thereunder now permit essentially quasi-legislative
ratemaking. Under such a method of ratemaking, as found in
this case, there is no evidence to support the commission's
determination, and no evidence by which we may perform our
review under R.C. 4903.13. If we were to affirm the rates set
in this case as reasonable, we would be doing so upon the basis
of the untested assertions of the commission's staff and the

telephone company's attorney.
Therefore, we interpret R.C. 4927.04(B) and the
commission's alternative regulations as permitting the
commission to set small company rates without a hearing.
Ratepayers have the right to protect the interest they may have
in just and reasonable rates under R.C. 4905.22 by filing a
complaint under R.C. 4905.26. This procedure is analogous to
ratepayers' rights when the commission approves a new service
and its rates under R.C. 4909.18. The process satisfies the
intent of R.C. Chapter 4927 to streamline the regulatory
process in order that companies can respond more quickly to
competitive pressures (by earlier approval of rates), and it
also benefits consumers by eliminating rate case expense.
OCC contends further that assuming arguendo the
commission's alternative regulations resulted in an adequate
record being made, that its determination was not supported by
that record, and that the resultant rates were unjust and
unreasonable. Specifically, OCC argues that ratepayers are
improperly bearing the cost of a $1,561 unregulated loss (which
was considered in computing net income), that ratepayers are
supporting an exorbitant salary for the company's manager, and
that ratepayers are subsidizing the manager's personal use of
the company vehicle.
As stated above, the commission's determinations as to
these issues are based upon the untested comments and responses
of its staff and the company. There is no evidence by which
the court may consider the reasonableness of the commission's
determinations, i.e., whether the commission's determinations
are supported by the manifest weight of the evidence. OCC's
recourse is not through remand in this proceeding, but through
a complaint case pursuant to R.C. 4905.26.
The order of the commission is, accordingly, affirmed.
Order affirmed.

Moyer, C.J., A.W. Sweeney, Douglas, Wright, Resnick, F.E.
Sweeney and Pfeifer, JJ., concur.