NIPSCO Industrial Group v. Northern Indiana Public Service Company and Office of the Utility Consumer Counselor

FILED
May 31 2018, 11:15 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEES
Todd A. Richardson Brian J. Paul
Bette J. Dodd Daniel E. Pulliam
Joseph P. Rompala Faegre Baker Daniels LLP
Lewis & Kappes, PC Indianapolis, Indiana
Indianapolis, Indiana Claudia J. Earls
M. Bryan Little
Nisource Corporate Services
Indianapolis, Indiana
William I. Fine
Randall C. Helmen
Tiffany T. Murray
Office of Utility Consumer
Counselor
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
NIPSCO Industrial Group, May 31, 2018
Appellant-Intervenor, Court of Appeals Case No.
93A02-1711-EX-2735
v. Appeal from the Indiana Utility
Regulatory Commission
Northern Indiana Public Service The Honorable David Veleta,
Company and Office of the Senior Administrative Law Judge
Utility Consumer Counselor, Cause No. 44733-TDSIC-2
Appellees-Petitioner.
Riley, Judge.
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 1 of 15
STATEMENT OF THE CASE
[1] Appellant-Intervenor, NIPSCO Industrial Group, appeals the Order of the
Indiana Regulatory Commission (Commission) in which the Commission
authorized Appellee-Petitioner, Northern Indiana Public Service Company
(NIPSCO), to impose a statutory regulated rate adjustment based on total load
on its utility customers.
[2] We reverse.
ISSUE
[3] NIPSCO Industrial Group presents us with two issues on appeal, one of which
we find dispositive and which we restate as: Whether the Commission failed to
comply with Indiana Code section 8-1-39-9(a)(1), which requires the allocation
of a rate adjustment to be based on firm load, by approving NIPSCO’s
computation which utilized an allocation based on total load.
FACTS AND PROCEDURAL HISTORY
[4] NIPSCO is a public electric and gas utility that services over 461,000
residential, commercial, industrial, wholesale, and other customers in Indiana.
The NIPSCO Industrial Group represents a group of five of NIPSCO’s largest
industrial customers.
[5] As with other utilities, NIPSCO recovers its costs for providing electric service
through rates approved by the Commission. Traditionally, a utility’s rates
charged to customers are adjusted through periodic rate cases, which are
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 2 of 15
expensive, time consuming, and sometimes result in large, sudden rate hikes for
customers. Another method to set rates is through ‘tracker’ proceedings, which
allow incremental increases for specific projects and costs between general rate
case proceedings. In 2013, the General Assembly enacted Indiana Code
Chapter 8-1-39, which allows a utility to petition for a tracker for certain
proposed new or replacement Transmission, Distribution, and Storage System
Improvement Charge or TDSIC (TDSIC Statute). Thus, in contrast to
traditional regulation in which utility rates are determined through general rate
cases based on comprehensive review of the utility’s finances and operations,
the TDSIC permits incremental rate adjustments at six-month intervals to
reflect specific costs associated with defined infrastructure projects. Pursuant to
section 10 of the TDSIC Statute, an energy utility must first secure regulatory
approval for a 7-year plan designating an eligible project that the utility
proposes to construct. See Ind. Code § 8-1-39-10. Once a 7-year plan is
approved, the utility may then file petitions every six months under Section 9,
seeking rate adjustments that reflect costs as they are incurred on approved
projects. See I.C.§ 8-1-39-9. Specifically, section 9 mandates that a periodic
adjustment of the basic rate must, among others, “use the customer class
revenue allocation factor based on firm load approved in the utility’s most
recent retail base rate case order[.]” I.C. § 8-1-39-9(a)(1).
[6] The statutory phrase “based on firm load” refers to a distinction between utility
services rendered on a firm as opposed to an interruptible basis. See I.C. § 8-1-
39-9(a)(1). For customers electing firm service, the utility is required to provide
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 3 of 15
service with a high degree of reliability, whereas interruptible service is subject
to interruption as needed to meet the needs of customers, and is thus less
reliable. Because the utility does not have to build capacity and maintain
resources to meet interruptible demand, the service promotes efficiency and
reduces the level of needed investment, to the benefit of the interruptible load
ratepayers. Accordingly, NIPSCO serves distinct customer classes under
different rate schedules that reflect the service each class elects. NIPSCO’s tariff
includes seventeen different rate classes and large volume customers, like the
NIPSCO Industrial Group, who receive firm services under three different
industrial rate schedules. Within the limits defined in the three industrial rate
schedules, the customers may designate a portion of their load as interruptible,
with the rest of their demand falling within the firm load service.
[7] The aggregate TDSIC costs recoverable in a given six-month period are used to
compute revenue requirements, which is the amount of additional dollars that
NIPSCO seeks to collect from its customers collectively. Those revenue
requirements are then divided among the different customer classes based on
allocation factors derived from the most recent general rate case. See I.C. § 8-1-
39-9(a)(1). Once the dollar amount to be recovered from each customer class is
determined, specific rate factors are computed by dividing the revenue total for
the given class by the total projected class consumption for the upcoming six-
month period.
[8] In July 2016, the parties entered into the TDSIC Settlement, in which NIPSCO
sought the Commission’s approval of its 7-year electric plan. Among others,
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 4 of 15
the parties stipulated in the TDSIC Settlement to a defined structure for TDSIC
proceedings, including compromises on the implementation of allocation
factors. The TDSIC Settlement noted that “[t]o the extent that terms of this
Settlement refer to issues currently pending in Cause No. 44688, the terms
approved by the Commission in Cause No. 44688 shall apply to the TDSIC []
proceedings filed in accordance with the 7-Year Electric Plan.” (Appellant’s
App. Vol. III, p. 62). Joint Exhibit D to Cause No. 44688 recognized “class
allocation factor percentages [that] shall be applied to the respective distribution
– or transmission – related revenue requirement and then the resulting TDSIC
charge factor (per kWh) applied to each customer’s firm (or non-interruptible)
load within that class.” (Appellant’s App. Vol. II, p. 246).
[9] Six days later, the Commission approved the Settlement Agreement which
further specified the allocation factors referenced in the TDSIC Settlement. In
approving the Settlement Agreement, the Commission found:
For purposes of establishing any rate schedules allowing for the
recovery of 80% of NIPSCO’s approved capital TDSIC
expenditures and costs pursuant to Indiana Code § 8-1-39-9(a),
the Settling Parties agree that Joint Exhibit D to the Settlement
Agreement reflects, pursuant to Indiana Code § 8-1-39-9(a), the
customer class revenue allocation facts that should be applied to
firm load.
(Appellant’s App. Vol. II, p. 152). Likewise, Joint Exhibit D to the Settlement
Agreement acknowledged
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 5 of 15
pursuant to Indiana Code § 8-1-39-9(a), the customer class
revenue allocation factors that should be applied to firm load.
The Settling Parties agree that allocation factors shown on Joint
Exhibit D to the Settlement Agreement should be applied for the
periodic recovery of any approved capital TDSIC expenditures
and costs to properly account for difference between transmission
and distribution customers.
(Appellant’s App. Vol. II, p. 152). It is undisputed by the parties that the
revenue allocation factors of Joint Exhibit D “are based on total load, including
firm and non-firm load.” (Non-Conf. Exh. Vol. II, p. 136).
[10] Subsequently to entering into both agreements, NIPSCO filed a first petition,
seeking a rate adjustment in accordance with section 9 of the TDSIC Statute
(TDSIC-1). In its petition, NIPSCO adopted a new method to determine the
allocation and calculate the newly proposed rates. Specifically, NIPSCO: (1)
allocated the revenue requirements using the Settlement Agreement’s Joint
Exhibit D factors based on total load (firm plus interruptible); (2) computed the
rate adjustment by dividing the class revenue portion by the total projected load
(firm plus interruptible); and (3) then applied the adjustment only to firm sales
and not to interruptible sales. This calculation and application limited the rate
increase for firm service to the same adjustment that would have been
determined if interruptible load had been removed in the first step of the
calculation. The parties did not object to this method of rate adjustment
computation and the TDSIC-1 was approved by the Commission.
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 6 of 15
[11] NIPSCO filed its second petition for a rate increase (TDSIC-2) under the
Settlement Agreement on June 30, 2017. In the TDSIC-2 proceeding before the
Commission, NIPSCO proposed an allocation that reflected the distinct
transmission and distribution facts, but did not separate out interruptible load.
Instead, NIPSCO based its cost allocation (1) on total load, including both firm
and interruptible load, and (2) computed the rate adjustment for the different
classes based on firm load only, resulting in higher charges to customers in rate
classes with substantial interruptible load. The Commission issued its final
Order on October 31, 2017, approving NIPSCO’s proposed allocation.
Specifically, the Commission found:
Indiana Code [s]ection 8-1-39-9(a)(1) states that the [p]etition
must use the customer class revenue allocation factor based on
firm load approved in the public utility’s most recent retail base
rate case order. Specific to the evidence of this proceeding, the
[p]arties explicitly agreed to and the Commission approved the
allocation factors established in the Rate Case Settlement and the
Settlement. Those agreements leave no question as to what
factors should be applied and no allowance for subsequent
migrations. Thus, we find that the allocation factors reflected in
Joint Exhibit D to the Rate Case Settlement are to be used to
calculate NIPSCO’s TDSIC-2 customer class specific revenue
requirement. Further, we find that the derivation of the customer
class specific rate factors to collect the class allocated revenue
should use the firm load within that class[.]
(Appellant’s App. Vol. II, p. 15) (footnote omitted).
[12] The NIPSCO Industrial Group now appeals. Additional facts will be provided
if necessary.
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 7 of 15
DISCUSSION AND DECISION
I. Standard of Review
[13] Judicial review of the Commission’s decision is governed by Indiana Code
section 8-1-3-1, which provides that
[a]ny person, firm, association, corporation, limited liability
company, city, town or public utility adversely affected by any
final decision, ruling, or order of the [C]omission may, within
thirty (30) days from the date of entry of such decision, ruling, or
order, appeal to the court of appeals of Indiana for errors of law
under the same terms and conditions as govern appeals in
ordinary civil actions, except as otherwise provided in this
chapter and with the right in the losing party or parties in the
court of appeals to apply to the supreme court for a petition to
transfer the cause to said supreme court as in other cases. An
assignment of errors that the decision, ruling, or order of the
[C]omission is contrary to law shall be sufficient to present both
the sufficiency of the facts found to sustain the decision, ruling,
or order, and the sufficiency of the evidence to sustain the finding
of facts upon which it was ordered.
[14] More specifically, our review is two-tiered:
On the first level, it requires a review of whether there is
substantial evidence in light of the whole record to support the
Commission’s findings of basic fact. Such determinations of
basic fact are reviewed under a substantial evidence standard,
meaning the order will stand unless no substantial evidence
supports it. In substantial evidence review, “the appellate court
neither reweights the evidence nor assesses the credibility to the
[Commission’s] findings.” The Commission’s order is
conclusive and binding unless (1) the evidence on which the
Commission based its findings was devoid of probative value; (2)
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 8 of 15
the quantum of legitimate evidence was so proportionately
meager as to lead to the conviction that the finding does not rest
upon a rational basis; (3) the result of the hearing before the
Commission was substantially influenced by improper
considerations; (4) there was no substantial evidence supporting
the findings of the Commission; (5) the order of the Commission
is fraudulent, unreasonable, or arbitrary. This list of exceptions is
not exclusive.
At the second level, the order must contain specific findings on
all the factual determinations material to its ultimate conclusions.
McClain v. Review Bd. of Ind. Dep’t of Workforce Dev., 693 N.E.2d
1314, 1317-18 (Ind. 1998), described the judicial task on this
score as reviewing conclusions of ultimate facts for
reasonableness, the deference of which is based on the amount of
expertise exercised by the agency. Insofar as the order involves a
subject within the Commission’s special competence, courts
should give it greater deference. If the subject is outside the
Commission’s expertise, courts give it less deference. In either
case[,] courts may examine the logic of inferences drawn and any
rule of law that may drive the result. Additionally, an agency
action is always subject to review as contrary to law, but this
constitutionally preserved review is limited to whether the
Commission stayed within its jurisdiction and conformed to the
statutory standard and legal principles involved in producing its
decision, ruling, or order.
Citizens Action Coalition of Ind., Inc. v. Indianapolis Power & Light Co., 74 N.E.3d
554, 562-63 (Ind. Ct. App. 2017) (internal citations omitted) (quoting N. Ind.
Pub. Serv. v. U.S. Steel, 907 N.E.2d 1012, 1016 (Ind. 2009)). However, where
the facts are undisputed and the issues involve the Commission’s interpretation
of the statutory language, we review such interpretation de novo. BP Products
North America, Inc. v. Officer of Utility Consumer Counselor, 947 N.E.2d 471, 476
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 9 of 15
(Ind. Ct. App. 2011), mod’d on reh’g on different grounds, 964 N.E.2d 234 (Ind. Ct.
App. 2011).
[15] The Commission’s “authority ‘includes implicit powers necessary to effectuate
the statutory regulatory scheme.’” United States Gypsum, Inc. v. Ind. Gas Co., 735
N.E.2d 790, 795 (Ind. 2000) (quoting Office of Util. Consumer Counselor v. Pub.
Serv. Co., 608 N.E.2d 1362, 1363-64 (Ind. 1993)). As a legislative creation, the
Commission is limited to exercising “that power which has been conferred
upon it by statute.” Citizens Action Coal. Of Ind., Inc., 74 N.E.3d at 562. With
respect to matters within its jurisdiction, it is accepted that the Commission
“enjoys wide discretion.” Id. at 565. We will not override the Commission’s
findings and decision simply “because we might reach a contrary opinion on
the same evidence.” Id. The party challenging the Commission’s decision
bears the burden of showing there is insufficient evidence in the record to
support the Commission’s findings; it is not enough to “merely cite to other
evidence of record which would support a determination more favorable to
their position.” Id. at 565-66.
[16] It is a well-established “basic legislative policy that questions of rate-making
methodology are best consigned to the Commission’s expertise.” Id. at 562. In
rate cases, “the Commission’s primary objective is to establish a level of rates
and charges that will permit the utility to meet its operating expenses plus a
return on investment which will compensate its investors.” Id. “In determining
fair rates, the Commission considers a representative level of anticipated
revenues and expenses and the property employed by the utility to provide
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 10 of 15
services to its customers.” United States Gypsum, Inc., 735 N.E.2d at 798. When
the Commission “determines that a utility’s rates have become unjust and
unreasonable, it may modify them by ordering just and reasonable rates to be
charged prospectively.” Id. Because the “rate-setting procedure is
comprehensive[,] the Commission must examine every aspect of the utility’s
operations and economic environment in which the utility functions to ensure
that the data it has received are representative of operating conditions that will,
or should, prevail in future years.” Id. (internal quotation marks omitted).
II. Analysis
[17] The rate-making methodology in this cause is controlled by the TDSIC Statute
and two interrelated settlements reached by multiple parties—including the
parties on appeal—and formalized by the Commission in two Orders. The
parties do not contest the content of the settlements, nor is there a dispute
surrounding the meaning of the statutory language; rather the disagreement
before us focuses on the application of the agreements and the TDSIC statute in
calculating the most recent rate adjustment.
[18] Pointing to the unambiguous language of the TDSIC Statute which requires the
customer class revenue allocation factor to be based on firm load, the NIPSCO
Industrial Group contends that in its calculation of the proposed rate
adjustment in the TDSIC-2, NIPSCO allocated the revenue requirements based
on total load, and then, in the second step, switched to firm load when
computing the rate adjustment. The NIPSCO Industrial Group maintains that
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 11 of 15
“[t]he governing statute requires use of firm load for the first step, allocation,
but NIPSCO used total load for that step and did not shift to firm load until the
second step.” (Appellant’s Br. p. 20). By allocating on a wider base and the
adjusting rates on the smaller subset of firm load customers only, NIPSCO
introduced a mismatch that overcharged firm load sales in rate classes with a
combined interruptible load. In response, NISPCO and the Officer of the
Utility Consumer Counselor (OUCC) appear to concede in their joint appellate
brief that “under the TDSIC-2 calculation, the TDSIC adjustment is collected
from all ratepayers, including those who take interruptible load.” (Appellees’
Br. p. 19). They posit that an allocation based on total load rather than firm
load is “fair to all ratepayers” and “fairly spread costs across all customer
classes.” (Appellees’ Br. pp. 28, 30).
[19] In support of its argument, the NIPSCO Industrial Group points to this court’s
decision in NIPSCO Indus. Group v. Northern Indiana Public Serv. Co., 31 N.E.3d 1(Ind. Ct. App. 2015), which it claims mirrors the instant situation. In NIPSCO
Indus. Group, the most recent rate case had been resolved with a settlement
featuring an allocation exhibit that did not separate out firm from interruptible
load. Id. at 13-15. In setting a rate adjustment, NIPSCO proposed an
adjustment to the exhibit factors to remove interruptible load in order to comply
with the statutory “based on firm load” requirement, which was approved by
the Commission over the OUCC’s objection. Id. at 5. The OUCC contended
that the allocation exhibit from the rate case settlement must be utilized without
any modification. Id. Upon review, we concluded that “the allocation facts
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 12 of 15
from the [] settlement agreement were based on both firm and non-firm load.
Consequently, the adjustment to remove the non-firm load portion was within
the Commission’s discretion and expertise.” Id. at 17.
[20] Turning to the cause before us, we reiterate that the TDSIC statute mandates
that a periodic adjustment of a utility’s basic rate must, among others, “use the
customer class revenue allocation factor based on firm load approved in the
utility’s most recent retail base rate case order[.]” I.C. § 8-1-39-9(a)(1)
(emphasis added). The most recent base rate case order applicable to TDSIC-2,
as referenced in the Statute, is the “Commission’s July 18, 2016, Order in
Cause No, 44688.” (Appellant’s App. Vol. II, p. 13). Joint Exhibit D to Cause
no. 44688, as incorporated in the TDSIC Settlement, recognized the customer
class revenue allocation factors to be applied to firm load. Again, this same
requirement of firm load was approved in the Settlement Agreement by
incorporating Joint Exhibit D, which should be applied “for the periodic
recovery of any approved capital TDSIC expenditures[.]” (Appellant’s App.
Vol. II, p. 152). However, as acknowledged by all parties, the factors of Joint
Exhibit D themselves were determined based on total load.
[21] The contention before us revolves around NIPSCO’s proposed calculation of
the rate adjustment in TDSIC-2. In TDSIC-2, NIPSCO continued to base the
initial allocation step on the Joint Exhibit D factors, without adjustment, as it
had done in TDSIC-1. However, instead of continuing to use the total load, as
in TDSIC-1, NIPSCO then switched to firm load when computing the unit rate
adjustment. Thus, instead of spreading the costs of the adjustment over firm
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 13 of 15
load and interruptible load and then applying the cost adjustment to firm load
only, in TDSIC-2 NIPSCO burdened the cost increase on the firm load
percentage only, thereby resulting in a higher price adjustment than when the
calculation is computed over a larger customer base (firm plus interruptible
load).
[22] The record reflects that at the time Joint Exhibit D was negotiated, the final
percentage of interruptible load within each rate class was not yet known and as
such, the parties reiterated on the face of the Exhibit that the allocation facts
should be applied to firm load. In NIPSCO Indus. Group, we approved the
removal of the interruptible portion from the allocation factors in computing the
rate adjustment. We reach a similar decision here. The TDSIC Statute speaks
to the first step—the customer class revenue allocation factor—which it bases
on firm load only; the statute does not include any requirements as to the
second step—computing unit charges to recover the allocated amount from
customers within a given rate class. Therefore, it is not sufficient to merely
APPLY the rate adjustment to firm load customers as was done in TDSIC-2,
the CALCULATION itself must reflect the firm load basis, as we approved in
NIPSO Indus. Group. In other words, merely applying the computed rate
adjustment on firm load fails to comply with the TDSIC Statute which
mandates that the adjustment itself uses the allocation factor based on firm
load.
[23] We recognize that the Commission has “the technical expertise to administer
regulatory schemes devised by the legislature.” Indiana Office of Util. Consumer
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 14 of 15
Counselor v. Lincoln Utilities, Inc., 834 N.E.2d 137, 145 (Ind. Ct. App. 2005),
trans. denied. “We also give great deference to the [Commission’s] rate-making
methodology.” Id. However, the Commission’s “authority is limited to that
which is granted to it by statute.” Id. at 142. We conclude that the
Commission exceeded its statutory authority by allowing a rate adjustment
based on allocation factors computed on total load.
CONCLUSION
[24] Based on the foregoing, we hold that the Commission failed to comply with
Indiana Code section 8-1-39-9(a)(1), which requires allocation of rate
adjustment to be based on firm load, by approving NIPSCO’s computation
which utilized an allocation based on total load.
[25] Reversed.
[26] May, J. and Mathias, J. concur
Court of Appeals of Indiana | Opinion 93A02-1711-EX-2735 | May 31, 2018 Page 15 of 15