INDIANA OFFICE OF UTILITY CONSUMER COUNSELOR, Appellant/Cross-Appellee/Statutory Party,
INDIANA MICHIGAN POWER COMPANY, Appellee/Petitioner, and STEEL DYNAMICS, INC., Cross-Appellant/Intervenor
These opinions are not precedents and cannot be cited or relied upon unless used when establishing res judicata or collateral estoppel or in actions between the same party. Indiana Rules of Appellate Procedure 65(D).
APPEAL FROM THE INDIANA UTILITY REGULATORY COMMISSION. The Honorable James D. Atterholt, Kari A.E. Bennett, Larry S. Landis, Carolene R. Mays, and David E. Ziegner, Commissioners. Cause IURC No. 44075.
ATTORNEYS FOR APPELLANT/CROSS-APPELLEE INDIANA OFFICE OF UTILITY CONSUMER COUNSELOR: RANDALL C. HELMEN, DANIEL M. LE VAY, LORRAINE HITZ-BRADLEY, Indianapolis, Indiana.
ATTORNEY FOR CROSS-APPELLANT STEEL DYNAMICS, INC.: ROBERT K. JOHNSON, Greenwood, Indiana.
ATTORNEYS FOR APPELLEE INDIANA MICHIGAN POWER COMPANY: PETER J. RUSTHOVEN, TERESA MORTON NYHART, Barnes & Thornburg LLP, Indianapolis, Indiana.
BRADFORD, Judge. MATHIAS, J., and PYLE, J., concur.
MEMORANDUM DECISION - NOT FOR PUBLICATION
On or about September 23, 2011, Appellee-Petitioner Indiana Michigan Power
Company ("I&M") requested permission from the Indiana Utility Regulatory
Commission (the "Commission") to raise its rates for electrical service.
Appellant/Cross-Appellee/Statutory Representative the Indiana Office of Utility
Consumer Counselor (the "OUCC") objected to I&M's request. Following an
evidentiary hearing that was conducted over the course of approximately sixteen
days, the Commission granted I&M's request.
The OUCC appeals the Commission's decision on I&M's requested rate increase. On
appeal, the OUCC contends that the Commission erred in including I&M's prepaid
pension asset in the rate base amount, using an end-of-test-year method to
determine the value of I&M's inventory of materials and supplies rather than a
thirteen-month average, and applying an allegedly outdated capital structure.
Cross-Appellant/Intervenor Steel Dynamics, Inc. ("SDI") also challenges the
Commission's order, arguing that the Commission erred in failing to adopt a
voltage-differentiated fuel adjustment charge ("FAC"). We affirm.
FACTS AND PROCEDURAL HISTORY
I&M is a subsidiary of American Electric Power Corporation ("AEP"), which
provides electric utility service to customers in certain areas of Indiana and
Michigan. On September 23, 2011, I&M filed a petition with the Commission
seeking authority to increase its rates and charges. During a November 2, 2011
prehearing conference, the Commission issued an order establishing that the
twelve months that ended on March 31, 2011, represented the "test year" to be
used for rate determinations. The Commission's order also established December
31, 2011, as the "rate base cutoff" date.
On February 2, 2012, I&M updated its rate base to reflect plant additions as of
December 31, 2011. In February through June of 2012, the Commission conducted an
evidentiary hearing over the course of approximately sixteen days. Both parties
and multiple intervenors presented evidence and testimony during the evidentiary
hearing. On February 14, 2013, the Commission issued its final order in which it
granted I&M's request to increase its rates and charges. Soon thereafter, both
I&M and the OUCC filed motions to reconsider. The Commission subsequently
granted I&M's motion and denied the OUCC's motion. This appeal follows.
DISCUSSION AND DECISION
I. Background Information and Standard of Review
A. Background Information on the Methodology of Rate Regulation
"[R]atemaking is a legislative rather than judicial function."
Office of Util.
Consumer Counselor v. Pub. Serv. Co. of Ind., 463 N.E.2d 499, 503 (Ind. Ct.
App. 1984). "Toward this end the complicated process of ratemaking is more
properly left to the experienced and expert opinion present in the Commission."
Id. As such, the Commission is "imbued with [the] broad discretion necessary for
it to perform its function and arrive at its goals." Id.
The Commission's primary objective in every rate proceeding is to establish a
level of rates and charges sufficient to permit the utility to meet its
operating expenses plus a return on investment which will compensate its
investors. IC 1971, 8-1-2-4 (Burns Code Ed.); Federal Power Comm'n v. Hope
Natural Gas Co. (1944), 320 U.S. 591, 605, 64 S.Ct. 281, 88 L.Ed. 333.
Accordingly, the initial determination that the Commission must make concerns
the future revenue requirement of the utility. This determination is made by the
selection of a "test year"--normally the most recent annual period for which
complete financial data are available--and the calculation of revenues, expenses
and investment during the test year. The test year concept assumes that the
operating results during the test period are sufficiently representative of the
time in which new rates will be in effect to provide a reliable testing vehicle
for new rates.
The utility's revenues minus its expenses, exclusive of interest, constitute the
earnings or the "return" that is available to be distributed to the utility's
investors. Allowable operating costs include all types of operating expenses (e.g., wages, salaries, fuel, maintenance) plus annual charges for
depreciation and operating taxes. While the utility may incur any amount of
operating expense it chooses, the Commission is invested with broad discretion
to disallow for rate-making purposes any excessive or imprudent expenditures. IC
1971, 8-1-2-48 (Burns Code Ed.).
Test-year revenue and expense data, however, may not always provide a suitable
basis for determining rates. Because of abnormal operating conditions such as
unusual weather or atypical equipment outages, test-year revenues and expenses
or both may not faithfully reflect normal conditions. If test-year results are
unrepresentative, appropriate adjustments must be made to correct for the
effects. This type of adjustment is commonly labeled an "in-period adjustment."
Since test-year results are relevant for a determination of utility rates only
to the extent that past operations are representative of probable future
experience, further adjustments are usually necessary to account for changed
conditions not reflected in test-year data. For example, if future operations
will be required to bear higher tax rates or higher levels of wages and salaries
than were incurred during the test year, test-year data must be adjusted to
reflect increased costs. This type of adjustment to test-year data is usually
referred to as an "out-of-period adjustment."
After the utility's existing level of earnings or "return" is established, the
amount of investment in utility operations--the "rate base"--is determined by
adding the net investment in physical properties to an allowance for working
capital. The "rate base" consists of that utility property employed in providing
the public with the service for which rates are charged and constitutes the
investment upon which the "return" is to be earned. Since traditional
rate-making methodology utilizes the "historical" test year, the "rate base" is
usually defined as that utility property "used and useful" in rendering the
particular utility service. IC 1971, 8-1-2-6 (Burns Code Ed.). The property
included in the "rate base" may be valued by one of two standard methods: (1)
the 'original cost' method, which is based on book value (the cost of an asset
when first devoted to public service), or (2) the "fair value" method, which
takes into account the declining purchasing power of the dollar through
"reproduction cost new" studies utilizing price ...