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Indiana office of Utiity Consumer Counselor v. Indiana Michigan Power Co.

Court of Appeals of Indiana

March 11, 2014

INDIANA OFFICE OF UTILITY CONSUMER COUNSELOR, Appellant/Cross-Appellee/Statutory Party,
v.
INDIANA MICHIGAN POWER COMPANY, Appellee/Petitioner, and STEEL DYNAMICS, INC., Cross-Appellant/Intervenor

Editorial Note:

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.

OPINION

MEMORANDUM DECISION - NOT FOR PUBLICATION

BRADFORD, Judge

CASE SUMMARY

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the value of I&M's inventory of materials and supplies rather than a thirteen-month average, and applying an allegedly outdated capital structure.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 ...


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