ATTORNEYS FOR APPELLANTS ATTORNEYS FOR APPELLEES
UNITED STATES GYPSUM, ET AL. INDIANA GAS
John F. Wickes, Jr. Ronald E. Christian
Todd A. Richardson Robert E. Heidorn
Pamela H. Sherwood Daniel W. McGill
Indianapolis, IN Stanley C. Fickle
Indianapolis, IN
OFFICE OF UTILITY CONSUMER COUNSELOR
Anne E. Becker CITIZENS GAS & COKE
Christopher C. Earle Harry V. Huffman
Timothy Stewart Michael B. Cracraft
Indianapolis, IN Philip B. McKiernan
Indianapolis, IN
CITIZENS ACTION COALITION, ET AL.
C. Kirby Mullen PROLIANCE ENERGY
Michael A. Mullett Wayne C. Turner
Reed W. Cearley Steven M. Sherman
Indianapolis, IN Indianapolis, IN
ENRON CAPITAL & TRADE AMICI CURIAE OHIO VALLEY
L. Parvin Price GAS CORP., ET AL.
George T. Patton, Jr. George A. Porch
Jeffrey M. Reed Evansville, IN
Indianapolis, IN
Peter L. Hatton
Merrillville, IN
IN THE
SUPREME COURT OF INDIANA
UNITED STATES GYPSUM, INC.; GENERAL )
MOTORS CORP.; REID HOSPITAL & )
HEALTHCARE SERVICES; BELDEN WIRE & )
CABLE CO.; ELI LILLY & CO.; KNAUF )
FIBER GLASS GMBH; DANA CORP.; ALUMINUM )
CO. OF AMERICA; HAYES WHEELS INT’L; )
THOMPSON CONSUMER ELECTRONICS; VISY )
PAPER, INC.; JEROME E. POLK; GRANT )
SMITH; JULIA L. VAUGHN; MARK S. BAILEY; )
WILLIAM G. SIMMONS; TIMOTHY E. PETERSON;)
ROBERT V. BENGE; CITIZENS ACTION )
COALITION OF INDIANA, INC.; UNITED ) Supreme Court
SENIOR ACTION, INC.; INDIANA OFFICE OF ) No. 93S02-9904-EX-251
UTILITY CONSUMER COUNSELOR; and ENRON )
CAPITAL & TRADE RESOURCES CORP., )
) Court of Appeals
Appellants (Petitioners and ) No. 93A02-9710-EX-667
Intervenors below) ) v.
)
)
INDIANA GAS CO., INC.; BOARD OF )
DIRECTORS FOR UTILITIES OF THE DEPT. )
OF PUBLIC UTILITES OF THE CITY OF )
INDIANAPOLIS, AS SUCCESSOR TRUSTEE OF )
A PUBLIC CHARITABLE TRUST, d/b/a )
CITIZENS GAS & COKE UTILITY; AND )
PROLIANCE ENERGY, LLC, )
)
Appellees (Respondents below). )
APPEAL FROM THE INDIANA UTILITY REGULATORY COMMISSION
Cause No. 40437
September 22, 2000
SHEPARD, Chief Justice.
Affiliates of two Indiana natural gas utilities created ProLiance
Energy for the purpose of procuring wholesale natural gas supply for the
utilities. Opponents complained that ProLiance was an improper attempt to
avoid state regulation and petitioned the Indiana Utility Regulatory
Commission to disapprove ProLiance as against the public interest. The
Commission concluded that ProLiance was in the public interest, however,
and denied the opponents’ petition. We affirm.
Facts and Procedural History
Indiana Gas Company, Inc., and Citizens Gas & Coke Utility
(collectively “the Utilities”) provide natural gas to retail customers
through their intrastate pipelines at rates regulated by the Commission.
The Utilities, known as local distribution companies (“LDCs”), receive gas
at city gates where interstate pipelines connect to the LDCs’ intrastate
pipelines.
Historically, LDCs purchased both gas and transportation of that gas
as a single “bundled” product from interstate pipelines. Beginning in
1978, Congress and the Federal Energy Regulatory Commission (“FERC”) took
steps to stimulate competition, leading interstate pipelines to offer
transportation as a separate service. This created a competitive market
for the gas itself and allowed customers to sell or “release” pipeline
capacity that they did not need. With these changes emerged interstate
marketers who sell gas to LDCs and large volume consumers. These large
volume consumers are known as transportation customers because they buy gas
directly from the marketer but rely on LDCs to provide local, intrastate
pipeline transportation.[1]
Against this background, IGC Energy, Inc. (Indiana Gas’s sister
company)[2] and Citizens By-Products Coal Co. (a wholly owned subsidiary of
Citizens Gas) entered into a Fundamental Operating Agreement in March 1996
creating ProLiance Energy, a limited liability company. ProLiance was
designed to allow the Utilities to benefit from the synergistic effects of
combined gas supply and planning functions, including enhanced leverage in
the wholesale gas marketplace and non-duplication of resources previously
devoted by each Utility to those functions. Each of ProLiance’s creators
owns 50% of ProLiance and, through a board, maintains 50% control over it,
thus allowing the Utilities the advantages of dealing with an affiliate
rather than a third-party marketer.
ProLiance, in turn, entered into separate Gas Sales and Portfolio
Administration Agreements with each of the Utilities, covering four and a
half years. These agreements made ProLiance responsible for procuring
wholesale gas supply and interstate pipeline transportation service for the
Utilities. To that end, ProLiance took over the Utilities’ existing gas
supply contracts and pipeline capacity and assumed responsibility for
negotiating new supply contracts when current ones expire. ProLiance also
became responsible for scheduling gas delivery to the Utilities and for
developing future supply plans, subject to the Utilities’ approval. These
agreements were filed with the Commission.
The agreements provide that the Utilities will purchase gas from
ProLiance at index prices established in trade publications, although the
price that ProLiance actually pays for gas may differ from the index price.
Additionally, the agreements say the Utilities will pay ProLiance an
annual administration fee for performing gas-supply and planning services
that the Utilities previously performed themselves. ProLiance also
provides the Utilities with a transportation credit in exchange for
ProLiance’s right to sell off any unused pipeline capacity available once
ProLiance has met the gas needs of the Utilities and their gas customers.
The transportation credit and the administration fee are partially based on
historic benchmarks.
Some of the Utilities’ transportation customers petitioned the
Commission to disapprove the ProLiance agreements. Ten residential
customers of Citizens Gas filed “joinders” purporting to add themselves as
petitioners. The Office of Utility Consumer Counselor (“OUCC”) appeared on
behalf of the public and opposed the ProLiance agreements. Some citizen
groups and gas marketers also intervened and opposed the agreements. We
refer to these customers and groups adverse to the ProLiance agreements
collectively as “Opponents.”
The Commission conducted a five-day hearing. On September 12, 1997,
the Commission concluded, in lengthy findings, that the ProLiance
agreements were in the public interest, so it refused to disapprove them.
The Court of Appeals reversed and instructed the Commission to
disapprove the agreements. United States Gypsum, Inc. v. Indiana Gas Co.,
705 N.E.2d 1017 (Ind. Ct. App. 1998). It concluded that ProLiance’s index-
based pricing arrangement was an attempt by the Utilities to circumvent
traditional regulation and that their failure to offer a proposal under the
Alternative Utility Regulation Act, Indiana Code Chapter 8-1-2.5, required
the Commission to disapprove the ProLiance agreements. 705 N.E.2d at 1021-
22.
After hearing oral argument, we granted transfer at the request of the
Utilities and ProLiance.
Our Standard of Review
An order of the Commission is subject to appellate review to
determine whether it is supported by specific findings of fact and by
sufficient evidence, as well as to determine whether the order is contrary
to law. Citizens Action Coalition of Indiana, Inc. v. Public Serv. Co.,
582 N.E.2d 330 (Ind. 1991). On matters within its jurisdiction, the
Commission enjoys wide discretion. See In re Northwestern Indiana
Telephone Co., 201 Ind. 667, 171 N.E. 65 (1930). The Commission’s findings
and decision will not be lightly overridden just because we might reach a
contrary opinion on the same evidence. Public Serv. Comm’n v. City of
Indianapolis, 235 Ind. 70, 131 N.E.2d 308 (1956).
I. Jurisdiction
The General Assembly created the Commission primarily as a “fact-
finding body with the technical expertise to administer the regulatory
scheme devised by the legislature.” United Rural Elec. Membership Corp. v.
Indiana & Mich. Elec. Co., 549 N.E.2d 1019, 1021 (Ind. 1990) (“UREMC”).
Its authority “includes implicit powers necessary to effectuate the
statutory regulatory scheme.” Office of Utility Consumer Counselor v.
Public Serv. Co., 608 N.E.2d 1362, 1363-64 (Ind. 1993). Still, as a
creation of the legislature, the Commission may exercise only that power
conferred by statute. UREMC, 549 N.E.2d at 1021.
Opponents petitioned under a statute that allows the Commission to
investigate a complaint by a sufficient number of complainants “against any
public utility” that “any regulation . . . practice or act whatsoever
affecting or relating to the service of any public utility, or any service
in connection therewith, is in any respect unreasonable, unsafe,
insufficient or unjustly discriminatory. . . .” Ind. Code § 8-1-2-54[3]
(emphasis added). A “public utility” is defined, in pertinent part, as any
“corporation, company, partnership, [or] limited liability company . . .
that may own, operate, manage, or control any plant or equipment within the
state for the . . . production, transmission, delivery, or furnishing of
heat, light, water, or power. . . .” Ind. Code § 8-1-2-1(a).
Opponents named both Utilities and ProLiance as respondents to their
petition and believe that all three are subject to investigation under
Section 54. It is undisputed that Indiana Gas is a public utility.
However, the Commission granted ProLiance’s motion to dismiss, in part,
after finding that ProLiance is not a public utility. The Commission found
that ProLiance does not own, operate, manage, or control any plant or
equipment for producing, transmitting, delivering or furnishing gas, and
that the Utilities retained control over their facilities. (R. at 1603.)
It found that all distribution functions remained with the Utilities.
Consequently, the Commission concluded that Section 54 did not provide it
with jurisdiction over ProLiance itself.
Opponents attack this conclusion on two grounds. First, they say that
the Commission construed “public utility” too narrowly. They argue that
ProLiance’s integral role in gas supply planning and procurement makes it a
public utility. Nonetheless, we agree with the Commission because the
functions performed by ProLiance do not constitute operation, management,
or control of a plant or equipment for transmitting or delivering gas;
ProLiance performs services for the Utilities, not for the Utilities’
retail customers. We decline Opponents’ invitation to equate office
equipment and clerical supplies, such as telephones and computers that
ProLiance uses, with a “plant or equipment” for distributing gas within the
meaning of Ind. Code § 8-1-2-1(a)(2).[4]
Second, Opponents say that the Commission had jurisdiction because
ProLiance is an “affiliated interest” within the meaning of Indiana Code §
8-1-2-49(2). Subsection 49(2) allows the Commission access to the records
of affiliated interests involving transactions with the public utility
related to matters within the Commission’s jurisdiction, not including
ownership of stock. See id. Further, Subsection 49(2) provides that “[n]o
management, construction, engineering, or similar contract, made after
March 8, 1933, with any affiliated interest” is effective until it is filed
with the Commission, and the Commission has authority to disapprove such
contracts if they are not in the public interest. Id.
Despite granting ProLiance’s motion to dismiss in part, the Commission
ordered ProLiance to remain a party to this proceeding, pursuant to Indiana
Code § 8-1-2-49, for the purposes of answering the other parties’ discovery
requests and providing information to the Commission. (R. at 1597, 1602.)
Furthermore, the Commission squarely decided under Subsection 49(2) that
the ProLiance agreements were in the public interest. Although Subsection
49(2) may have given the Commission access to certain affiliate records and
accounts and the authority to review affiliate contracts, we find no error
in the Commission’s determination that it lacked plenary jurisdiction over
ProLiance itself under Section 54.
Next, we consider whether the Section 54 petition gave the Commission
jurisdiction over Citizens Gas. Indiana Code § 8-1-2-1(a) specifically
exempts municipally owned facilities from the definition of “public
utility.” The Commission concluded that Citizens Gas is a municipal
utility and therefore not a public utility subject to investigation under
Section 54. See Cities & Towns of Anderson v. Public Serv. Comm’n, 397
N.E.2d 303, 310 (Ind. Ct. App. 1979) (Commission’s authority to investigate
complaints against public utilities under Section 54 does not extend to
municipal utilities); Citizens Gas & Coke Util. v. Sloan, 136 Ind. App.
297, 196 N.E.2d 290, (en banc), reh’g denied, 136 Ind. App. 311, 311-12,
197 N.E.2d 312, 313 (1964) (Section 54’s similarly-worded predecessor, § 54-
408 (Burns' 1951 Replacement) did not allow Commission general authority to
investigate Citizens Gas, a municipal utility).
Opponents agree that Citizens Gas is a municipal utility. Despite the
earlier Court of Appeals opinions, Opponents argue that the Commission may
investigate Citizens Gas under Section 54. Opponents reason that the rules
of service and rates adopted by Citizens Gas’s board of directors take
effect
only after the rules and rates have been filed with and approved
by the commission and such approval shall be granted by the
Commission only after notice of hearing and hearing as provided
by IC 8-1-1 and IC 8-1-2, and only after determining compliance
of the rates of service with IC 8-1.5-3-8 and IC 8-1.5-3-10 and
only after determining compliance of the rules of service with
IC 8-1-1 and IC 8-1-2, along with the rules and standards of
service for municipal utilities of Indiana approved by the
commission.
Ind. Code § 8-1-11.1-3(c)(9). Opponents say that these cross-references to
Chapter 8-1-2 necessarily make a complaint about Citizens Gas the proper
subject of a petition under Section 54. In addition, symmetry favors
treating municipal utilities like public utilities, Opponents contend.
We are not persuaded. The legislature explicitly exempted municipal
utilities from the definition of “public utility.” Other statutes’
explicit references to municipal utilities in conjunction with public
utilities show that the legislature knows how to say and include municipal
utilities when it so desires. See, e.g., Ind. Code § 8-1-2-42(a),(g);
accord Stucker Fork Conservancy Dist. v. Indiana Utility Regulatory Comm’n,
600 N.E.2d 955, 957-58 (Ind. Ct. App. 1992) (municipal utilities are
subject to Commission’s jurisdiction “only when specifically provided for
by statute”). Thus, we hold that the Commission correctly determined that
its jurisdiction under Section 54 did not extend to Citizens Gas.[5]
In sum, we affirm the Commission’s conclusion that it lacked plenary
jurisdiction over ProLiance and Citizens Gas in this Section 54 proceeding.
In any event, Indiana Gas is a public utility, so we address the remaining
issues.
II. Traditional and Alternative Utility Regulation
We turn next to the parties’ dispute over whether the ProLiance
agreements were a proposal for Alternative Utility Regulation (AUR) and
thus could only be permitted by the Commission if offered and approved as
an AUR proposal. This requires a brief overview of traditional regulation
and the language of the AUR Act.
The bedrock principle behind utility regulation is the so-called
“regulatory compact,” which
arises out of a “bargain” struck between the utilities and the
state. 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. At the same time, the utility is not permitted to
charge rates at the level which its status as a monopolist could
command in a free market. Rather, the utility is allowed to
earn a “fair rate of return” on its “rate base.” Thus, it
becomes the Commission’s primary task at periodic rate
proceedings 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.
Indiana Gas Co., Inc. v. Office of Utility Consumer Counselor (“Indiana Gas
I”), 575 N.E.2d 1044, 1046 (Ind. Ct. App. 1991) (citations omitted).
This fair-rate-of-return concept underlies traditional rate
regulation. See Office of Utility Consumer Counselor v. Gary- Hobart Water
Corp., 650 N.E.2d 1201 (Ind. Ct. App. 1995); Indiana Gas I, 575 N.E.2d at
1046. In determining fair rates, the Commission considers a
representative level of anticipated revenues and expenses and the property
employed by the utility to provide service to its customers. See City of
Evansville v. Southern Indiana Gas & Elec. Co., 167 Ind. App. 472, 478-82,
339 N.E.2d 562, 568-71; Re Northern Indiana Public Serv. Co., No. 40180,
166 PUR4th 213, 224 (IURC December 28, 1995). The Commission compares the
property used and useful for the production of current service to the
utility’s revenues in order to quantify the return being provided by the
existing rates. Id. If 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. Ind. Code § 8-1-2-68.
This rate-setting procedure is comprehensive: “the Commission must examine
every aspect of the utility’s operations and the 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.” City of Evansville, 167 Ind. App. at 482, 339 N.E.2d at 570-
71.
Traditional regulation also allows a gas utility to obtain an
adjustment of its rates to reflect fluctuations in gas cost without
undergoing a formal rate proceeding. See Ind. Code § 8-1-2-42(g). A gas
cost adjustment permits the utility to pass along to its customers on a
dollar-for-dollar basis any fluctuations in the gas cost experienced by the
utility. Indiana Gas Co., Inc. v. Office of Utility Consumer Counselor
(“Indiana Gas II”), 610 N.E.2d 865, 867 (Ind. Ct. App. 1993); see Indiana
Gas I, 575 N.E.2d at 1046-49. As part of the gas cost adjustment, the
Commission applies an earnings test to ensure that the utility’s gas costs
are not being passed along to the consumer in a way that allows the utility
“to earn a higher return than that authorized by the Commission in the
utility’s last rate case.” Indiana Gas I, 575 N.E.2d at 1046 (citing Ind.
Code § 8-1-2-42(g)(3)(C)). The clear legislative intent here is preventing
a utility from overearning. Id. at 1052. For this reason, the “earnings
test” applies when gas costs decrease as well as when they increase. Id.
at 1049.
When a gas cost adjustment is sought, the OUCC may examine the books
and records of the utility to determine the cost of gas on which the
adjustment is being sought, and it must make a report to the Commission.
Ind. Code § 8-1-2-42(g)(1). In any event, the OUCC must examine a gas
utility’s books and records pertaining to the cost of gas not less than
annually and provide the Commission with a report; if appropriate, the OUCC
may request a reduction or elimination of a gas cost adjustment. Ind. Code
§ 8-1-2-42(g)(2).
The Commission found that the index-priced supply arrangement in the
ProLiance agreements allowed Citizens Gas and the parent of Indiana Gas an
opportunity to profit indirectly from the commodity cost of gas. It
characterized this as “a result not specifically contemplated in the
pertinent subsections of Section 42.” (R. at 1641.) The Commission
expressed a preference for considering such an arrangement as a proposal
under the AUR Act. Nevertheless, it noted that both Utilities had gas cost
adjustment proceedings pending, concluded that “this situation could be
remedied through proper notice, hearing, and findings in connection with
the [Utilities’] GCA [gas cost adjustment] filings” and that “such an
alternative measure should be explored in that proceeding.” (R. at 1642.)
Contrary to Opponents’ claim on appeal, the Commission was not
constrained to considering the ProLiance agreements as a proposal under the
AUR Act. The Act permits a utility to propose, and the Commission to
adopt, alternatives to traditional regulation. Citizens Action Coalition,
Inc. v. Indiana Statewide Ass’n of Rural Elec. Cooperatives, 693 N.E.2d
1324 (Ind. Ct. App. 1998). Our examination of the Act reveals that it is
concerned with the regulation of retail service, rates and charges, not
wholesale supply arrangements to a utility.
The legislative findings prefacing the Act, passed in 1995, refer to
the Commission’s goal of providing “safe, adequate, efficient, and
economical retail energy services. . . .” Ind. Code § 8-1-2.5-1(1)(West
Supp. 1999)(emphasis added). They note that “an environment in which
Indiana consumers will have available state-of-the-art energy services at
economical and reasonable costs will be furthered by flexibility in the
regulation of energy services.” Id. at (4) (emphasis added). Further, they
note the need for the Commission to exercise its authority in a flexible
manner to “regulate and control the provision of energy services to the
public in an increasingly competitive environment, giving due regard to the
interests of consumers and the public, and to the continued availability of
safe, adequate, efficient, and economical energy service.” Id. at (6)
(emphasis added). The AUR Act defines “retail energy service” to mean
“energy service furnished by an energy utility to a customer for ultimate
consumption.” Ind. Code § 8-1-2.5-3 (West Supp. 1999).
The AUR Act allows the Commission two alternatives to traditional
regulation. First, the Commission may, after notice and a hearing,
“commence an orderly process to decline to exercise, in whole or in part,
its jurisdiction over either the energy utility or the retail energy
service of the energy utility, or both.” Ind. Code § 8-1-2.5-5(a)(West
Supp. 1999). Or, second,
(a) [I]n approving retail energy services or establishing just
and reasonable rates and charges, or both for an energy utility
electing to become subject to this section, the commission may
do the following:
(1) Adopt alternative regulatory practices, procedures, and
mechanisms, and establish rates and charges that:
(A) are in the public interest . . .; and
(B) enhance or maintain the value of the energy utility's
retail energy services or property;
including practices, procedures, and
mechanisms focusing on the price, quality,
reliability, and efficiency of the service
provided by the energy utility.
(2) Establish rates and charges based on market or average
prices, price caps, index based prices, and prices that:
(A) use performance based rewards or penalties, either
related to or unrelated to the energy utility's return or
property; and
(B) are designed to promote efficiency in the rendering of
retail energy services.
. . . .
(c) An energy utility electing to become subject to this section
shall file with the commission an alternative regulatory plan
proposing how the commission will approve retail energy services
or just and reasonable rates and charges for the energy
utility's retail energy service.
Ind. Code § 8-1-2.5-6(a), (c)(West Supp. 1999)(emphasis added). A
utility’s request for relief under Section 6 “shall be limited to approval
of its energy services or the establishment of its rates and charges, or
both.” Ind. Code § 8-1-2.5-4 (West Supp. 1999).
These repeated references to retail energy services and the
establishment of rates and charges persuade us that the legislature did not
intend to compel the Commission to exercise jurisdiction over a wholesale
gas supply arrangement based on index pricing, even one between a utility
and its affiliate, solely under AUR procedures. The Commission found that
it had the authority under traditional regulatory practice to consider the
ProLiance agreements, including their index-based pricing of wholesale gas
supply. We agree. The AUR Act was intended to supplement, not restrict,
the authority that the Commission enjoys under traditional regulation.
At least two traditional regulatory tools pre-dating the AUR Act allow
the Commission to exercise regulatory authority here. The first, discussed
above, requires that certain affiliate contracts be filed with the
Commission before becoming effective and allows the Commission to
disapprove them if they are not in the public interest. See Ind. Code § 8-1-
2-49(2). Here, the Opponents themselves invoked Section 49 as authority
for the Commission to consider the ProLiance agreements. In the end, the
Commission concluded under Section 49 that the ProLiance agreements were in
the public interest.
The second method, a gas cost adjustment proceeding under Indiana Code
§ 8-1-2-42(g), has also been discussed above. The Commission found that
the ProLiance agreements raised concern because they created the
possibility for Citizens Gas and the parent of Indiana Gas to profit from
the commodity cost of gas. Yet the Commission was satisfied that those
concerns could and should be addressed in the Utilities’ pending gas cost
adjustment proceedings. (R. at 1642, 1652.) The Commission also expressed
a willingness to scrutinize carefully the gas costs associated with
ProLiance: it explicitly warned that the actual costs the Utilities pay for
gas will not necessarily be allowed as reasonable gas costs under these
circumstances because risks and opportunities have been shifted among the
Utilities, their investors, and customers. (R. at 1654.)
Opponents object to consideration of the ProLiance index-pricing
arrangements in a gas cost adjustment proceeding because, they say, the
OUCC will not have access to critical ProLiance records and information,
including its actual cost of gas. The Opponents’ fear is not well founded
in light of the provisions in Ind. Code § 8-1-2-49(2) affording the
Commission access to records of a utility’s “affiliated interests” while it
is pursuing matters within the Commission’s jurisdiction.[6] Thus, we
conclude that this index-based pricing of wholesale gas supply to the
Utilities did not require approval under the AUR Act.[7]
We conclude also that the Commission may consider the reasonableness
of the transportation credit and the administration fee in the gas cost
adjustment proceeding, as it has indicated an intent to do. (R. at 1651.)
Gas costs “may include the gas utility's costs for gas purchased by it from
pipeline suppliers . . . and other expenses relating to gas costs as shall
be approved by the commission.” Ind. Code § 8-1-2-42(g); see Re Northern
Indiana Public Serv. Co., 166 PUR4th at 226 (gas costs calculations include
commodity, pipeline capacity and storage costs, as well as credits
generated against costs, including those received by LDCs from pipeline
suppliers and revenues to LDCs from release of capacity); accord Teledyne,
666 N.E.2d at 1282 (gas costs properly included extra expense that gas
utility incurred as a result of tariffs imposed by interstate pipelines to
cover their transition costs in implementing FERC order to unbundle
services).
We hold that the Commission was not constrained to considering these
agreements only as a proposal under the AUR Act.[8]
III. Transfer or Merger of Utility Works
A public utility may not “sell, assign, transfer, lease, or encumber
its franchise, works, or system to any other person, partnership, limited
liability company, or corporation, or contract for the operation of any
part of its works or system by any other person, partnership, limited
liability company, or corporation, without the approval of the Commission
after hearing.” Ind. Code § 8-1-2-83(a). In this section, we decide
whether the Commission was required to disapprove the ProLiance agreements
because transfers associated with them had not been preapproved by the
Commission.
The Commission rejected the Opponents’ arguments that the ProLiance
agreements required preapproval as a transfer of Indiana Gas’s works or
system to ProLiance. It construed “works” and “system” in light of
Illinois-Indiana Cable Television Ass’n v. Public Service Comm’n, 427
N.E.2d 1100, 1108 (Ind. Ct. App. 1981). In Illinois-Indiana Cable, the
Court of Appeals determined that the Commission lacked jurisdiction under
Section 83 over a public utility’s lease of part of its poles to
accommodate attachments by a cable television company. Id. The court
construed a utility’s franchise, works or system to mean “an entire
operational unity of a utility.” Id.
Applying Illinois-Indiana Cable here, the Commission found that the
agreements provide for Indiana Gas to retain ownership, management and
“complete unilateral control of its physical [g]as delivery, distribution
transportation and storage facilities.” (R. at 1606.) Likewise, the
Commission concluded that Indiana Gas remains the certified provider of gas
to customers in its service area and has not contracted with ProLiance for
the operation of any part of its franchise, works or system. (R. at 1606.)
The Commission also noted that Indiana Gas will continue to develop demand
forecasts, review and approve supply plans developed by ProLiance, operate
gas storage fields, etc. (R. at 1606.)
On appeal, the Opponents argue that the Commission erred by reading
the words “works” and “system” too narrowly to include only physical
facilities. They claim that Indiana Gas’s assignment of existing gas supply
contracts and transfer of pipeline capacity and some gas-supply and
planning personnel to ProLiance constituted a transfer of a part of Indiana
Gas’s works or system.
The statutes do not define the terms “works” and “system.”[9] For our
purposes, it is important that the legislature has defined a “utility” as
any “plant or equipment” in the state used for, inter alia, the
transmission, delivery, or furnishing of power. Ind. Code § 8-1-2-1(g)
(emphasis added). A public utility is an entity that may “own, operate,
manage, or control any plant or equipment” in the state for the same
purposes. Ind. Code § 8-1-2-1(a)(emphasis added). In another utility
statute, the legislature refers to a “franchise to own, operate, manage, or
control any plant or equipment of any public utility. . . .” Ind. Code § 8-
1-2-91 (emphasis added). More generally, the primary focus of public
utility regulation is ensuring that the utilities provide “reasonably
adequate service and facilities.” Ind. Code § 8-1-2-4. “This service
includes the product itself, the use or accommodation afforded the
customers and the equipment employed by the utility in performing the
service.” Prior v. GTE North, Inc., 681 N.E.2d 768, 773 (Ind. Ct. App.
1997), trans. denied.
Where statutes address the same subject, they are in pari materia, and
we harmonize them if possible. See Citizens Action Coalition v. Northern
Indiana Public Serv. Co., 485 N.E.2d 610, 617 (Ind. 1985), cert. denied,
476 U.S. 1137 (1986). Consequently, we agree with the Commission that
Indiana Gas did not transfer ownership or control over its works or system.
Indiana Gas did not transfer to ProLiance any plant or equipment for
distributing gas. And although wholesale gas supply and the planning and
scheduling thereof are unquestionably important to Indiana Gas, none of the
matters relied upon by the Opponents constitute an indivisible part of
Indiana Gas’s system or works absent some closer nexus with the Utilities’
customer service or distribution functions.[10]
Opponents also claim that certain prohibitions in Indiana Code § 8-1-2-
84 regulating mergers between two public utilities prohibited the
agreements between Indiana Gas and ProLiance absent prior approval by the
Commission. However, as we previously held, the Commission properly
determined that ProLiance is not a public utility. Still, Opponents insist
that Indiana Gas violated at least Indiana Code § 8-1-2-84(f), which
applies to a single public utility and reads, “No such public utility shall
encumber its used and useful property or business or any part thereof
without the approval of the Commission and the consent, authority, and
approval of the owners of three-fourths (3/4) of its voting stock.” The
term “encumber” usually means “to charge, or burden with financial
obligations or mortgages.” Underwood v. Fairbanks, Morse & Co., 205 Ind.
316, 334, 185 N.E. 118, 124 (1933). Opponents do not argue, much less
demonstrate, how these transfers were an encumbrance.
IV. Earlier Settlement
The Commission also rejected the Opponents’ argument that the
ProLiance agreements should be disapproved because they violated earlier
settlements that Indiana Gas made with some transportation customers and
the OUCC in 1994-95. In those settlements, Indiana Gas agreed not to
request “sharing” of revenues from its capacity releases and to “reduce its
gas costs with all amounts realized from capacity release.” (R. at 1624.)
Indiana Gas also agreed that its customers could negotiate for pre-arranged
capacity releases on a long-term basis, based on Indiana Gas’s
“determination of available capacity,” and that capacity would be awarded
by “determining the greatest economic value among offers available for that
capacity.” (R. at 1624.) The Commission approved these settlements. (R.
at 1618, 2772, 3098-99.)
The Commission rejected the Opponents’ argument that Indiana Gas
breached the settlements by transferring its pipeline capacity to ProLiance
or by arranging for the “sharing” of revenue from capacity releases through
transportation credits. The Commission explained that the releases
contemplated in the settlements would be based on Indiana Gas’s own
determination of what capacity became available after its needs were met.
The Commission reasoned that ProLiance did not receive from Indiana Gas
capacity “available” for release because ProLiance was bound to use that
capacity first to meet the needs of the Utilities. Only after those needs
are met will capacity become “available” for release within the meaning of
the settlements. (R. at 1628-29.)
Moreover, it pointed out that Indiana Gas receives the transportation
credit in advance of the release of any capacity by ProLiance and will pass
along that entire credit to reduce gas costs. (R. at 1626.) The Commission
also found that Indiana Gas’s release of capacity to ProLiance was
consistent with the settlements long-term release provision because it
occurred at “maximum pipeline rates” and created an “unequalled economic
value.” (R. at 1629, 1631.) The Commission estimated that ProLiance will
allow Indiana Gas to reduce its winter service cost over four years by $16
million, a figure far exceeding the $1.8 million it received from capacity
releases in 1995. (R. at 1630.) These considerations led the Commission
to conclude that Indiana gas did not breach the settlements. (R. at 1630.)
On appeal, Opponents repeat their claim that Indiana Gas breached the
settlements by transferring its capacity to an affiliate that has the
potential for profiting by selling capacity releases. They also claim
that, at the least, Indiana Gas breached the settlements by rendering
itself unable to perform its contractual obligations, relying on Strodtman
v. Integrity Builders, Inc., 668 N.E.2d 279 (Ind. Ct. App. 1996), trans.
denied.
The Opponents’ arguments have some allure. It is apparent that what
the settling parties anticipated from the settlement is different from what
they will now receive. On the other hand, settlements were not ordinary
contracts. In proposing the settlements to the Commission, the parties
cited Indiana Code §§ 8-1-2-24 8-1-2-25. Indiana Code § 8-1-2-24 allows a
public utility to enter an arrangement with its customers or consumers,
subject to the Commission’s finding that the arrangement is reasonable,
just and consistent with the purposes of Indiana Code Chapter 8-1-2. Such
settlements are under the Commission’s supervision and regulation. See
Ind. Code § 8-1-2-24. The Commission may order rates and regulations
as may be necessary to give effect to such arrangement, but the
right and power to make such other and further changes in rates,
charges and regulations as the Commission may ascertain and
determine to be necessary and reasonable, and the right to
revoke its approval and amend or rescind all orders relative
thereto, is reserved and vested in the Commission,
notwithstanding any such arrangement and mutual agreement.
Ind. Code § 8-1-2-25. In other words, a settlement approved by the
Commission “loses its status as a strictly private contract and takes on a
public interest gloss.” Citizens Action Coalition v. PSI Energy, Inc., 664
N.E.2d 401, 406 (Ind. Ct. App. 1996).
Here, the Commission found not only that the settlements were not
breached, but also that the ProLiance agreements were in the public
interest and that the reasonableness of the transportation credit can be
explored in pending gas cost adjustment proceedings. (R. at 1651, 1653.)
In light of the Commission’s factual findings and the substantial deference
owed to the Commission in supervising settlements and even modifying or
revoking orders entered attendant thereto, we find no error.
V. The Public Interest
The Opponents finally claim that the Commission used the wrong legal
standard to evaluate the public interest under Section 49. They argue that
the Commission’s public interest analysis focused almost exclusively on the
immediate cost impact to customers without sufficiently considering the
public interest in preventing abuses associated with affiliate
transactions, including excessive charges, lack of arm’s-length bargaining
and restraint on free competition. Yet the Commission began its analysis
by acknowledging that the public interest is not confined to customer
interests and that it encompasses “a wide range of considerations”
including the concerns that the Opponents identify. (R. at 1613.)
The Commission accordingly considered much more than just the cost
effect to consumers. It examined Indiana Gas’s earlier settlements and the
negotiations surrounding ProLiance’s formation. It considered the lack of
competitive bidding in the formation of what became ProLiance, but it found
that the Utilities would be unable to match ProLiance’s benefits by using a
non-affiliated supplier. (R. at 1616, 1618-19.) It noted too that anti-
competitive price patterns have not emerged, that ProLiance has not
detrimentally affected the gas transportation market, and that ProLiance
has left “the affected markets . . . as robust after the formation of
ProLiance as they were prior to its formation.” (R. at 1636-37, 1650.)
Regarding its continuing ability to monitor the effects of ProLiance,
the Commission found, as we do, that gas cost adjustment proceedings will
allow the Commission to ensure that charges for gas, as well as the
transportation credit and administration fee, are reasonable. Similarly,
the Commission explained that it could scrutinize any unreasonable rate
impact resulting from ProLiance in a rate proceeding. (R. at 1615.)
These findings dispel the Opponents’ argument that the Commission’s
public interest determination was too limited.
Conclusion
We affirm the Commission’s order.
Dickson, Sullivan, and Boehm, JJ., concur.
Rucker, J., not participating.
-----------------------
[1] For more background on these changes, see General Motors Corp. v.
Tracy, 519 U.S. 278, 283-84 (1997); Teledyne Portland Forge v. Ohio Valley
Gas Corp., 666 N.E.2d 1278, 1280 (Ind. Ct. App. 1996).
[2] IGC Energy, Inc., is a wholly-owned subsidiary of Indiana Energy,
Inc., the parent, holding company of Indiana Gas.
[3] All statutory citations are to the 1998 version of the Indiana
Code unless otherwise indicated.
[4] We agree with the Commission that ProLiance does not own, operate,
manage or control a plant or equipment for transmitting or delivering gas,
and thus see little statutory support for Opponents’ additional argument
that the definition of “public utility” includes an entity that indirectly
furnishes gas to the public.
[5] Early in the proceeding, Citizens Gas presented evidence that only
three of the petitioning Opponents were its customers (not ten as required
by Indiana Code § 8-1-2-54) and moved to dismiss on that ground. (R. at
162-166.) The Opponents responded by filing “joinders” that cited Indiana
Trial Rule 20(A) and were signed by ten residential customers of Citizens
Gas. (R. at 306-14.) This, in turn, prompted Citizens Gas to move to
strike the joinders on the ground that they purported to add petitioners
without seeking the necessary permission from the Commission to intervene.
(R. at 353-57.) By the parties’ agreement, the Commission deferred its
ruling on Citizen Gas’s motion to dismiss until the case’s conclusion. (R.
at 1597-98.) Opponents acknowledge that the final order contained the
finding that “an insufficient number of Citizens Gas’s customers are among
the Petitioners and, therefore Petitioners have not satisfied the standing
requirement in Section 54.” (R. at 1600.) Opponents argue that, to the
extent this granted Citizens Gas’s motion to dismiss, it is void without
adequate findings or evidentiary support. But evidence that only three of
the original petitioners were Citizens Gas customers appears to support
Commission’s finding and conclusion. Although Opponents have asserted in a
reply brief something akin to an argument that the Commission abused its
discretion if it did not allow joinder, an argument raised for the first
time in a reply brief is waived. Gray v. State, 593 N.E.2d 1188, 1191
(Ind. 1992). In any event, we need not decide this issue where the
Commission properly found another reason why it lacked jurisdiction over
Citizens Gas.
[6] When asked at oral argument about the Opponents’ contention that
the OUCC would not have access to ProLiance’s data in gas cost adjustment
proceedings, counsel representing ProLiance stated that he disagreed.
[7] Our conclusion is bolstered by the Commission’s approval of
another gas utility’s recovery of gas costs, prior to the AUR Act, based in
part on index-based pricing of gas sold by a marketer to the gas utility.
See Re Ohio Valley Gas Corp., No. 37354-GCA41, 1994 WL 121361 (IURC March
4, 1994). Indeed, the Commission noted that Opponents did not appear to
object to an LDC’s use of indexes in gas cost adjustment filings or to
marketers profiting from the sale of commodity gas to an LDC; instead, the
Commission noted, Opponents objected to an affiliate profiting from the
commodity sale of gas to an affiliated LDC. (R. at 1642.)
[8] Our resolution of the AUR issue as a matter of state statutory
interpretation, as well as our affirmance of the Commission’s ruling that
it has no plenary jurisdiction over ProLiance under Section 54, make it
unnecessary to address ProLiance’s argument that federal law preempts state
regulation of ProLiance’s gas purchases and sales. See Schneidewind v. ANR
Pipeline Co., 485 U.S. 293, 300-01 (1988) (The National Gas Act of 1938
confers upon FERC “exclusive jurisdiction over the transportation and sale
of natural gas in interstate commerce for resale”).
[9] As pertinent here, common definitions of “works” include “[a]
factory, plant, or similar building or complex of buildings where a
specific type of business or industry is carried on” or “[i]nternal
mechanism: the works of a watch.” The American Heritage Dictionary of the
English Language 2056 (3d ed. 1996). A system is “[a] group of
interacting, interrelated, or interdependent elements forming a complete
whole . . . functionally related groups of elements, especially . . . [a]
network of structures and channels, as for communication, travel or
distribution. . . .” Id. at 1823.
[10] In recently holding that a transfer of outstanding stock by a
utility or its parent does not constitute a transfer of a franchise, works
or system under Subsection 83(a), a majority of this Court declined to use
an operation-and-control test that was based on language from Illinois-
Indiana Cable. See Indiana Bell Tel. Co. v. Indiana Utility Regulatory
Comm’n, 715 N.E.2d 351, 359 (Ind. 1999). The Court agreed, however, that
the Court of Appeals in Illinois-Indiana Cable had correctly determined
that Subsection 83(a) confers no jurisdiction in the Commission where the
utility leases a “‘divisible part of a utility’s works’” to a third party.
Id. (quoting Illinois-Indiana Cable, 427 N.E.2d at 1108). The result here
is consistent with Indiana Bell inasmuch as Indiana Gas has not transferred
ownership or control over any indivisible part of its utility system or
works to ProLiance.
United States Gypsum, Inc. v. Indiana Gas Co.
Combined Opinion