One of the fundamental powers of self-government in Ohio municipalities is the ability to own and operate public utilities to serve their communities.1 Many municipalities in Ohio exercise this power of autonomy by operating their own electric utility. In addition to providing electric utility service within their boundaries, municipalities have the right under the Ohio Constitution to sell “surplus” electricity outside their boundaries. This ability of municipalities to sell excess electricity outside their boundaries is not unlimited, however.
The Ohio Supreme Court recently issued a decision that clarified the limits of the right of municipal electric utilities to sell excess electricity outside of their boundaries under the Ohio Constitution. In Cleveland Elec. Illum. Co. vs. ClevelandLandslide Notice #2021-Ohio-4463 (IEC), the court held that municipal utilities are not required to purchase the exact amount of electricity needed to meet the current needs of their territorial customers. A municipal utility may not acquire excess electricity for single purpose to sell it extraterritorially; however, municipalities can acquire a surplus if it is not acquired solely to resell the electricity to customers located outside their boundaries.
Background and facts
The City of Cleveland (Cleveland) operates its own municipal electric utility, Cleveland Public Power (CPP). Article XVIII, Section 6 of the Ohio Constitution allows a municipality that operates a utility to generate or purchase electricity and sell the electricity outside the municipal boundaries up to 50 % of “surplus product”. The Ohio Constitution, however, prohibits a municipality from purchasing electricity solely for the purpose of reselling all of the purchased electricity to an entity outside the geographic boundaries of the municipality. See, Toledo Edison Co. vs. Bryan90 Ohio St. 3d 288, 737 NE2d 529 (2000) (Toledo Edison).
To serve its customers, CPP purchases electricity from the wholesale electricity market of PJM Interconnection, LLC (PJM).2 In addition to power purchased wholesale through PJM, CPP holds interests in several power generation plants through its membership in American Municipal Power (AMP). Through AMP, Cleveland has a portfolio of power generation interests. Some of these interests require long-term purchases, which CPP uses to mitigate the risk of volatility in the PJM energy markets.
In 2017, Cleveland agreed to purchase all electricity produced by a solar power project in the city of Brooklyn, Ohio (Brooklyn). Cleveland planned to use electricity generated from the Brooklyn project to power Cuyahoga County-owned buildings. Cleveland also signed a 10-year agreement to be the exclusive electricity provider for several municipal buildings in Brooklyn. IEC, ¶ 7. At the time Cleveland entered into the agreement with Brooklyn, CPP sold excess electricity outside of its boundaries for an amount representing approximately three to four percent of the electricity the city sells to the city. within its limits.
IEC sued Cleveland and CPP, alleging that Cleveland’s contract to sell power to Brooklyn violated Article XVIII, Sections 4 and 6 of the Ohio Constitution. IEC asserted that Cleveland could meet customer electricity demands within its limits by relying on wholesale purchases from PJM and ongoing wholesale contracts with AMP. IEC claimed that Cleveland did not need the electricity generated by the solar project to serve its own citizens. Therefore, IEC argued that all sales to Brooklyn and other customers outside Cleveland of the solar project would be the result of an “artificial surplus” created by CPP. IEC claimed that CPP created this artificial surplus for the sole purpose of selling power outside of Cleveland’s boundaries, which violates the court’s ruling in Toledo Edison Co. and the Ohio Constitution.
Summary of court opinion
In IECthe Ohio Supreme Court upheld a decision of the Eighth District Court of Appeals, holding that a “municipal utility may acquire excess electric capacity for reasons other than reselling it as surplus beyond the limits of the municipality without violating the Constitution of Ohio”. Identifier. at ¶ 31. A municipal utility cannot, however, “acquire excess capacity for the sole purpose of reselling it outside the municipal boundaries”. Identifier.
The court first considered Article XVIII, Section 6 of the Ohio Constitution, which states:
Any municipality, owning or operating a public service for the purpose of supplying the service or product thereof to the municipality or its inhabitants, may also sell and deliver to others any transportation service of such service and the product excess of any other service for an amount not exceeding in either case fifty percent of the total service or product provided by that public service in the municipality.
In this case, it was undisputed that Cleveland was not exceeding the “50%” limit because the city was selling an excess outside its limits of only three to four percent of the amount of electricity it she was selling within her limits. However, IEC claimed that Cleveland was intentionally creating an “artificial surplus” solely for the purpose of selling that electricity outside of its borders. IEC argued that “CPP has no constitutionally permissible reason to purchase or resell additional power” as it could meet its electricity needs solely through the wholesale market and “never needs any excess electricity that it could sell as surplus”. ID. at ¶ 18.
The court disagreed with IECindicating that the CPP may have various reasons for purchasing excess electricity, such as cost, risk mitigation, economies of scale, environmental impact and reliability. ID. at ¶ 39. Therefore, the court held that CPP was not required to purchase only the exact amount of electricity it needed to serve territorial customers and could legally obtain surplus electricity if CPP did not. did not buy electricity only to sell electricity outside its territory. .
Although the court ruled that Cleveland could buy excess electricity and sell that excess outside its limits, the court determined that CPP had not yet demonstrated that its purchase of electricity from the solar panel was at purposes other than sale outside its limits. The court determined that this was a question of fact to be determined by the trial court. Therefore, the court remanded the case to the Cuyahoga County Court of Common Pleas to determine whether the amount of surplus electricity CPP has was obtained solely to satisfy its commitment to Brooklyn.
The decision in IEC establishes that municipal electric utilities can legally sell excess electricity outside of their boundaries. In doing so, municipal electric utilities must not exceed the “50%” limit contained in Article XVIII, Section 6 of the Ohio Constitution. Furthermore, in accordance with IEC, municipal public services must ensure that they do not obtain this surplus for the sole purpose of reselling it outside their territory. Although municipal electric utilities have the Ohio constitutional right to sell excess electricity outside of their boundaries, these municipal utilities should be aware of potential claims regarding the true purpose behind this acquisition of excess electricity. . Municipalities must be prepared to demonstrate that the surplus was obtained for purposes other than the sale of electricity outside their territory, such as cost, risk mitigation, economies of scale, environmental impact or reliability.
1 Section 3 of Article XVIII, the Home Rule Amendment of the Ohio Constitution, states that “[m]Municipalities have the power to exercise all powers of local self-government and to adopt and apply within their limits local police, sanitary and other similar regulations, which are not in conflict with general laws.
2 PJM is a regional transmission organization in the United States. It is part of the Eastern Interconnection network operating an electrical transmission system serving all or part of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia. It also operates one of the largest competitive wholesale electricity markets in the world.