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.

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 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

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 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

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 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,

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 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

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 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.

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[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.

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 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)

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 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

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 (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

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 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

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 “[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

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 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

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 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

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 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

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