Citizens Action Coalition of Indiana, Inc. v. Northern Indiana Public Service Co., Inc.

• Decision Date: 27 December 1984
• Docket Number: No. 2-1082A357,2-1082A357
• Citation: 472 N.E.2d 938
• Parties: CITIZENS ACTION COALITION OF INDIANA, INC.; City of Gary, Indiana; Bailly Alliance; City of Fort Wayne, Indiana, Appellants, v. NORTHERN INDIANA PUBLIC SERVICE CO., INC., et al., Appellees.
• Court: Indiana Appellate Court

Page 938

472 N.E.2d 938

CITIZENS ACTION COALITION OF INDIANA, INC.; City of Gary Indiana; Bailly Alliance; City of Fort Wayne Indiana, Appellants, v. NORTHERN INDIANA PUBLIC SERVICE CO., INC., et al., Appellees.

No. 2-1082A357.

Court of Appeals of Indiana Second District.

Dec. 27, 1984.

William Julian, II, Michael A. Mullett, Indianapolis, for Citizens Action Coalition of Indiana, Inc.

Arthur A. Daronatsy, Gary, for City of Gary, Ind.

William Drozda, Gary, for Bailly Alliance.

Frederick F. Eichhorn, Jr., William H. Eichhorn, Charles W. Webster, Eichhorn, Eichhorn & Link, Hammond, for appellees.

NEAL, Presiding Judge (writing by designation).

STATEMENT OF THE CASE

This appeal is brought by Citizens Action Coalition of Indiana, Inc.; City of Gary, Indiana; Bailly Alliance; and City of Fort Wayne, collectively referred to as intervenors, from an order of the Public Service Commission of Indiana (Commission) fixing electric rates for Northern Indiana Public Service Company (NIPSCO).

We reverse.

STATEMENT OF THE FACTS AND ISSUES

Commencing in 1970, NIPSCO embarked upon a project to construct a nuclear generating plant designated as Bailly N-1 (Bailly). Because of delays occasioned by litigation, opposition to licensing provisions involving safety, and escalating costs, NIPSCO cancelled the project on August 21, 1981, after expending $205,724,170.00. The facility was never completed and was never placed in service. The Commission permitted an increase in NIPSCO's rates, by which, over 15 years it could recover $190,746,580.00 of the Bailly costs from the rate payers.

The parties agree that the sole issue is whether the Commission acted contrary to law in permitting NIPSCO to collect rates from the rate payers to amortize the sunk costs of the abandoned Bailly Project.

NIPSCO has reminded us of our standard of review. Rate making is a legislative and not a judicial function. The legislature has seen fit to establish the Public Service Commission for the express purpose of hearing evidence determining utility rates, and we are aware that we cannot substitute our judgment in place of that of the Commission. State ex rel. Indianapolis Water Company v. Boone Circuit Court, (1974) 261 Ind. 583, 307 N.E.2d 870; Bethlehem Steel Corporation v. Northern Indiana Public Service Company, (1979) Ind.App. 397 N.E.2d 623.

DISCUSSION AND DECISION

At the onset we shall review applicable Indiana cases and statutes which govern ratemaking. Under IND.CODE 8-1-2-4 a charge made to the consumer is for any service rendered. IND.CODE 8-1-2-6 provides that the Commission "... shall value all property of every public utility actually used and useful for the convenience of the public at its fair value ..." in establishing reasonable rates. In City of Evansville v. Southern Indiana Gas and Electric Company, (1974) 167 Ind.App. 472, 339 N.E.2d 562, Judge Staton set forth the prevailing and well-established methodology of rate making in Indiana. Because of the gravity of this issue, we set out these notions in full:

"The Commission's primary objective in every rate proceeding is to establish a level of rates and charges sufficient to permit the utility to meet its operating expenses plus a return on investment which will compensate its investors. IC 1971, 8-1-2-4 (Burns Code Ed.); Federal Power Comm'n. v. Hope Natural Gas Co. (1944), 320 U.S. 591, 605, 64 S.Ct. 281 , 88 L.Ed. 333. Accordingly, the initial determination that the Commission must make concerns the future revenue requirement of the utility. This determination is made by the selection of a 'test year'--normally the most recent annual period for which complete financial data are available--and the calculation of revenues, expenses and investment during the test year. The test year concept assumes that the operating results during the test period are sufficiently representative of the time in which new rates will be in effect to provide a reliable testing vehicle for new rates.

The utility's revenues minus its expenses, exclusive of interest, constitute the earnings or the 'return' that is available to be distributed to the utility's investors. Allowable operating costs include all types of operating expenses (e.g., wages, salaries, fuel, maintenance) plus annual charges for depreciation and operating taxes. While the utility may incur any amount of operating expense it chooses, the Commission is invested with broad discretion to disallow for ratemaking purposes any excessive or imprudent expenditures. IC 1971, 8-1-2-48 (Burns Code Ed.).

Test-year revenue and expense data, however, may not always provide a suitable basis for determining rates. Because of abnormal operating conditions such as unusual weather or atypical equipment outages, test-year revenues and expenses or both may not faithfully reflect normal conditions. If test-year results are unrepresentative, appropriate adjustments must be made to correct for the effects. This type of adjustment is commonly labeled an 'in-period adjustment'. Since test-year results are relevant for a determination of utility rates only to the extent that past operations are representative of probable future experience, further adjustments are usually necessary to account for changed conditions not reflected in test-year data. For example, if future operations will be required to bear higher tax rates or higher levels of wages and salaries than were incurred during the test year, test-year data must be adjusted to reflect increased costs. This type of an adjustment to test-year data is usually referred to as an 'out-of-period adjustment'.

After the utility's existing level of earnings or 'return' is established, the amount of investment in utility operations--the 'rate base'--is determined by adding the net investment in physical properties to an allowance for working capital. The 'rate base' consists of that utility property employed in providing the public with the service for which rates are charged and constitutes the investment upon which the 'return' is to be earned. Since traditional rate-making methodology utilizes the 'historical' test year, the 'rate base' is usually defined as that utility property 'used and useful' in rendering the particular utility service. IC 1971, 8-1-2-6.

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Under traditional regulatory concepts, utility company shareholders and bondholders, not the consumers, furnish the capital necessary for the operation of the business. See, e.g., Railroad Comm'n. v. Cumberland Tel. & Tel. Co., (1909), 212 U.S. 414, 424, 29 S.Ct. 357 , 53 L.Ed. 577; Lindheimer v. Illinois Bell Tel. Co. (1934), 292 U.S. 151, 169, 54 S.Ct. 658 , 78 L.Ed. 1182. The consumer pays a fair return on the utility's capital and in addition pays the costs of operation including taxes, but it is well-established that the company's investors, not its consumers, must contribute the utility's capital. See, e.g., City of Alton v. Commerce Comm'n. (1960), 19 Ill.2d 76, 165 N.E.2d 513; In re Pacific Gas & Elec. Co. (1961 Cal.Pub.Util.Comm'n), 38 P.U.R.3d 1; In re Public Serv. Co. (1960 Colo.Pub.Util.Comm'n), 34 P.U.R.3d 186; In re Washington Water Power Co., (1960 Idaho Pub.Util.Comm'n), 33 P.U.R.3d 88; In re Columbia Gas, Inc. (1959 Ky.Pub.Serv.Comm'n), 36 P.U.R.3d 401; In re Niagara Mohawk Power Corp. (1961 N.Y.Pub.Serv.Comm'n), 40 P.U.R.3d 401; In re Cincinnati Gas & Elec. Co. (1960 Ohio Pub.Util.Comm'n), 33 P.U.R.3d 1.

Our Public Service Commission Act reflects the traditional notion that the 'fair rate of return' which a regulated utility is permitted to earn must be based upon capital advanced by its investors. IC 1971, 8-1-2-6 (Burns Code Ed.) provides that the Commission '... shall value all property of every public utility actually used and useful for the convenience of the public at its fair value ...' in establishing 'reasonable and just' rates. The Commission's 'used and useful' standard requires: (1) that the utility plant be actually devoted to providing utility service, and (2) that the plant's utilization be reasonable necessary to the provision of utility service. See, e.g., In re Indianapolis Water Co. (1964 Ind.Pub.Serv.Comm'n), Docket No. 30,022, June 17, 1964 (property held for future use was not 'reasonably necessary'); In re Indianapolis Water Co. (1958 Ind.Pub.Serv.Comm'n), 26 P.U.R.3d 270 (plant used only during peak demand period was 'reasonably necessary'; In re Indiana Gas & Water Co., (1952 Ind.Pub.Serv.Comm'n), Docket No. 23,584, Sept. 25, 1952 (property under construction was not 'actually in service')."

339 N.E.2d at 568-569.

Our Indiana Supreme Court has held that customer contributions in aid of construction cannot be included in the fair value of the property upon which the utility rates are determined. Public Service Commission of Indiana v. City of Indianapolis (1956) 235 Ind. 70, 131 N.E.2d 308. In that case the court stated:

"A great amount of time and effort is expended by the City in attacking a former order of the Commission made in 1951 fixing the rates at that time, and attempting to demonstrate that such taxes were unreasonable and exorbitant. The rates fixed in the 1951 order have been adjudicated and the court at this late date has no power or jurisdiction to go back and re-examine such an order. Assuming the Commission had erred in 1951 and granted excessive rates, of which there is no showing, there would not be the slightest justification for the Public Service Commission granting the Company, any rate other than that which would produce a reasonable return upon the present fair value of its used and useful property. The theory propounded by the City cuts both ways. If its contention were true, then a rate established in 1941 which was insufficient or caused a loss to the Company, would entitle the Company at this time to have a rate established by which it could recoup such a loss or deficiency. Past losses of a utility cannot be recovered from consumers nor can consumers...