Summary of Cleveland Electric Illuminating Co. v. Cleveland

Introduction

One of the fundamental home rule powers of Ohio municipalities is the ability to own and operate public utilities to serve their communities.¹ Many Ohio municipalities exercise this home rule power 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 borders. This ability of municipalities to sell surplus electricity outside their boundaries is not unfettered, however.

The Ohio Supreme Court recently issued a decision which clarified the limits on municipal electric utilities’ right to sell excess electricity outside their boundaries under the Ohio Constitution. In Cleveland Elec. Illum. Co. v. Cleveland, Slip Opinion No. 2021-Ohio-4463 (CEI), the court held that municipal utilities are not required to purchase the exact amount of electricity required to satisfy the current needs of its territorial customers. A municipal utility may not acquire surplus electricity for the sole purpose of selling it extraterritorially; however, municipalities can acquire a surplus if the surplus is not acquired solely to resell the electricity to customers outside their boundaries.

Background and facts

The City of Cleveland (Cleveland) operates its own municipal electric public utility, Cleveland Public Power (CPP). Article XVIII, Section 6 of the Ohio Constitution allows a municipality that operates a public utility to generate or purchase electricity and sell the electricity outside the municipality’s boundaries up to 50 percent of the “surplus product.” The Ohio Constitution, however, precludes a municipality from purchasing electricity solely for the purpose of reselling the entire amount of the purchased electricity to an entity outside the municipality’s geographic limits. See, Toledo Edison Co. v. Bryan, 90 Ohio St.3d 288, 737 N.E.2d 529 (2000) (Toledo Edison).

To serve its customers, CPP purchases electricity through PJM Interconnection, LLC’s (PJM) wholesale electricity market.² Along with wholesale electricity bought through PJM, CPP has an interest in several electricity-generation plants through its membership in American Municipal Power (AMP). Through AMP, Cleveland has a portfolio of power-generation interests. Some of those interests require long-term purchases, which CPP uses to mitigate the risk of volatility in the PJM energy markets.

In 2017, Cleveland agreed to buy all the electricity generated by a solar energy project in the City of Brooklyn, Ohio (Brooklyn). Cleveland planned to use the electricity generated by the Brooklyn project to supply power to buildings owned by Cuyahoga County. Cleveland also signed a 10-year agreement to be the exclusive electricity provider to several municipal buildings in Brooklyn. CEI, ¶ 7. At the time Cleveland entered into the agreement with Brooklyn, CPP sold surplus of electricity outside its boundaries in an amount representing approximately three to four percent of the electricity that the city sells inside its boundaries.

CEI sued Cleveland and CPP, alleging that Cleveland’s contract to sell electricity to Brooklyn violated Article XVIII, Sections 4 and 6 of the Ohio Constitution. CEI claimed that Cleveland could satisfy the electricity demands of customers within its boundaries by relying on wholesale purchases from PJM and current wholesale contracts with AMP. CEI claimed that Cleveland did not need the electricity generated by the solar project to serve its own citizens. Therefore, CEI argued that all sales to Brooklyn and other customers outside Cleveland from the solar project would be the result of an “artificial surplus” created by CPP. CEI claimed that CPP created this artificial surplus for sole purpose of selling electricity outside Cleveland’s boundaries, which violates the court’s decision in Toledo Edison Co. and the Ohio Constitution.

Summary of court’s opinion

In CEI, the Ohio Supreme Court upheld a decision by the Eighth District Court of Appeals, holding that a “municipal utility may acquire excess electricity capacity for reasons other than reselling it as surplus beyond the municipality’s boundaries without violating the Ohio Constitution.” Id. at ¶ 31. A municipal utility may not, however, “acquire excess capacity for the sole purpose of reselling it outside the municipality’s territorial boundaries.” Id.  

The court first examined Article XVIII, Section 6 of the Ohio Constitution, which states:

Any municipality, owning or operating a public utility 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 utility and the surplus product of any other utility in an amount not exceeding in either case fifty percent of the total service or product supplied by such utility within the municipality.

In this case, there was no dispute that Cleveland was not exceeding the “50 percent” limitation because the city was selling a surplus outside its boundaries of only three to four percent of the amount of electricity it sold inside its boundaries. However, CEI claimed that Cleveland was intentionally creating an “artificial surplus” solely for the purpose of selling this electricity outside its boundaries. CEI argued that “CPP has no constitutionally authorized reason to buy or resell extra energy” because it could fulfill its electricity requirements solely through the wholesale market and “never needs to have any excess electricity that it might sell as surplus.” Id. at ¶ 18.

The court disagreed with CEI’s position, stating that the CPP may have various reasons for purchasing surplus electricity such as cost, risk mitigation, economies of scale, environmental impact and reliability. Id. at ¶ 39. Therefore, the court held that CPP did not have to purchase only the exact amount of power it needs to serve territorial customers, and could lawfully obtain a surplus of electricity if CPP was not purchasing power solely to sell electricity outside its territory.  

Although the court held that Cleveland could purchase a surplus of electricity and sell this surplus outside its boundaries, the court determined that CPP had not yet demonstrated that its purchase of power from the solar array was for any other purpose than selling outside its boundaries. The court determined that this was a question of fact to be decided by the trial court. Therefore, the court remanded the case to the Cuyahoga County Common Pleas Court to determine if the amount of electricity that CPP has in surplus was obtained solely to satisfy its commitment to Brooklyn. 

Conclusion

The decision in CEI establishes that municipal electric utilities can lawfully sell surplus electricity outside their boundaries. In doing so, municipal electric utilities must not exceed the “50 percent” limitation contained in Article XVIII, Section 6 of the Ohio Constitution. Furthermore, in accordance with CEI, municipal utilities must ensure that they are not obtaining this surplus for the sole purpose of selling outside their territories. Although the municipal electric utilities have an Ohio Constitutional right to sell surplus electricity outside their boundaries, these municipal utilities should be mindful of potential claims regarding the true purpose behind this acquisition of excess power. Municipalities should be prepared to show that the surplus was obtained for purposes other than selling electricity outside their territories, such as cost, risk mitigation, economies of scale, environmental impact or reliability.