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NIPSCO Industrial Group v. Northern Indiana Public Service Co.

Supreme Court of Indiana

June 20, 2018

NIPSCO Industrial Group Appellant (Intervenor),
Northern Indiana Public Service Company Appellee (Petitioner).

          Argued: November 21, 2017

          Appeal from the Indiana Utility Regulatory Commission No. 44403-TDSIC-4

         On Petition to Transfer from the Indiana Court of Appeals No. 93A02-1607-EX-1644

          ATTORNEYS FOR APPELLANT Todd A. Richardson Joseph P. Rompala Lewis Kappes, P.C. Indianapolis, Indiana.

          ATTORNEYS FOR APPELLEE Brian J. Paul Daniel E. Pulliam Faegre Baker Daniels LLP Indianapolis, Indiana Claudia J. Earls Christopher C. Earle NiSource Corporate Services - Legal Indianapolis, Indiana.



         Under traditional rate regulation, an energy utility must first make improvements to its infrastructure before it can recover their cost through regulator-approved rate increases to customers. The process for recouping these costs, sometimes not until years after they were incurred, is an expensive, onerous ratemaking case, which involves a comprehensive review of the utility's entire business operations.

         In 2013 the legislature authorized utilities to obtain regulatory preapproval for "designated" improvements to their infrastructure. Under the so-called "TDSIC" Statute-which provides for more prompt reimbursement of specified transmission, distribution and storage system improvements-a utility can seek regulatory approval of a seven-year plan that designates eligible improvements, followed by periodic petitions to adjust rates automatically as approved investments are completed.

         At issue here is the Indiana Utility Regulatory Commission's preapproval of approximately $20 million in infrastructure investments for which the Commission authorized increases to NIPSCO's natural-gas rates under the TDSIC mechanism. NIPSCO is an energy utility with more than 800, 000 customers in northern Indiana. Some of NIPSCO's largest industrial customers-represented here by the NIPSCO Industrial Group-oppose NIPSCO's entitlement to favorable rate treatment under the TDSIC Statute, contending the disputed projects do not comply with the Statute's requirements.

         The Commission's holding below, which divided our Court of Appeals, approved various categories of improvements-referred to variously as "project categories", "multiple-unit-project categories", and "multiple-unit projects"-that describe broad parameters for identifying future improvements but do not designate those improvements with specificity. NIPSCO defends these categorical designations by arguing it does not, and cannot, know in advance which specific segments of natural-gas pipes throughout its system will fail each year. But it does know, based on historical performance, that a certain percentage of its system will need to be replaced annually. NIPSCO contends the TDSIC Statute permits the Commission to approve a seven-year plan that describes future investments in terms of ascertainable planning criteria, although when its plan was approved, NIPSCO did not know which specific segments of its system would need to be replaced.

         The Industrial Group, in contrast, interprets the TDSIC Statute more narrowly. It argues the Statute requires the utility and the Commission to designate specific projects upfront, rather than to rely on categories of projects not identified with specificity until later years. For the Industrial Group, the traditional ratemaking case is still the primary process for seeking reimbursement, subject to occasional use of the TDSIC procedure in the limited band of investments to which it applies.

         The stakes are much larger than just the roughly $20 million at issue between NIPSCO and the Industrial Group. The Commission, we are told, has approved billions of dollars of utility-infrastructure investments through the TDSIC process. Given the favorable regulatory treatment, utilities are likely to funnel increasing amounts of infrastructure investments through this reimbursement mechanism. How we resolve these competing visions of the TDSIC Statute will likely have enormous financial consequences for utilities and their customers.

         We conclude the TDSIC Statute permits periodic rate increases only for specific projects a utility designates, and the Commission approves, in the threshold proceeding and not for multiple-unit projects using ascertainable planning criteria. In other words, a utility must specifically identify the projects or improvements at the outset in its seven-year plan and not in later proceedings involving periodic updates. There is an appreciable difference between designating specific "projects" and "improvements" up front, which the Statute requires, and describing the criteria for selecting them later, which the Commission approved. We agree with the Court of Appeals' dissenting opinion that Commission approval of "broad categories of unspecified projects defeats the purpose of having a 'plan'." NIPSCO Indus. Grp. v. N. Ind. Pub. Serv. Co., 78 N.E.3d 730, 740 (Ind.Ct.App. 2017) (Barnes, J., dissenting).

         Because we find that preclusion principles do not bar our consideration of this important legal issue of first impression, we grant transfer, reverse the Commission's order in part, and remand.

         Factual and Procedural History

         A. Traditional utility regulation

         Utility regulation is premised on a "regulatory compact" in which the State sanctions a utility's monopoly within a defined service area and subjects the utility to various regulatory restrictions and responsibilities.

As a quid pro quo for being granted a monopoly in a geographical area for the provision of a particular good or service, the utility is subject to regulation by the state to ensure that it is prudently investing its revenues in order to provide the best and most efficient service possible to the consumer.

United States Gypsum, Inc. v. Ind. Gas Co., 735 N.E.2d 790, 797 (Ind. 2000) (quotation and citations omitted).

         The State regulates utilities through the Commission, which is authorized by statute to act with "technical expertise to administer the regulatory scheme designed by the legislature … to insure that public utilities provide constant, reliable, and efficient service to the citizens of Indiana." N. Ind. Pub. Serv. Co. v. United States Steel Corp., 907 N.E.2d 1012, 1015 (Ind. 2009) (citation omitted). See Ind. Code §§ 8-1-1-1 to 8-1-1-15. When exercising this authority, the Commission balances the public's need for adequate, efficient, and reasonable service with the public utility's need for sufficient revenue to meet the cost of furnishing service and to earn a reasonable profit. United States Gypsum, 735 N.E.2d at 797-98. "Proper rates are those which produce a fair and nonconfiscatory return, and such as will enable the company, under efficient management, to maintain its utility property and ...

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