Citizens Action Coalition of Indiana, Inc. v. Public Service Co. of Indiana, Inc., 93S02-9111-EX-940

• Decision Date: 27 November 1991
• Docket Number: No. 93S02-9111-EX-940,93S02-9111-EX-940
• Citation: 582 N.E.2d 330
• Parties: , Util. L. Rep. P 26,152 CITIZENS ACTION COALITION OF INDIANA, INC., City of Terre Haute, Save the Valley, Inc. and Virgil and Sara Bowling, Appellants, v. PUBLIC SERVICE COMPANY OF INDIANA, INC. and Office of the Utility Consumer Counselor.
• Court: Indiana Supreme Court

Page 330

582 N.E.2d 330

129 P.U.R.4th 448, Util. L. Rep. P 26,152

CITIZENS ACTION COALITION OF INDIANA, INC., City of Terre Haute, Save the Valley, Inc. and Virgil and Sara Bowling, Appellants, v. PUBLIC SERVICE COMPANY OF INDIANA, INC. and Office of the Utility Consumer Counselor.

No. 93S02-9111-EX-940.

Supreme Court of Indiana.

Nov. 27, 1991.

Michael A. Mullett, Columbus, for Citizens Action Coalition of indiana, inc.

Max E. Goodwin, Mann, Chaney, Johnson, Goodwin & Williams, Robert F. Hellmann, Terre Haute, for City of Terre Haute.

Jon D. Noland, Duejean C. Garrett, Ronald J. Brothers, Public Service Com. of Indiana, Inc., Virgil L. Beeler, Fred E. Schlegel, Mary M. Stanley, Ronald D. Gifford, Baker & Daniels, Indianapolis, for Public Service Co. of Indiana, Inc. DeBRULER, Justice.

In 1984, Public Service Company of Indiana (PSI) abandoned the construction of its Marble Hill nuclear power generating station, which resulted in a net operating loss to PSI of $1.4 billion. In March of 1986, the Public Service Commission (Commission) ¹ entered a rate order which was designed to allow PSI to maintain operations, regain access to long and short term capital markets at reasonable rates, and avoid insolvency. One of the provisions of this order allowed PSI to record a so-called "regulatory asset" of $475 million dollars, which consisted of the federal income tax savings to be realized by PSI by deducting its loss from its taxable income. The March 1986 order was based on the 46% federal corporate tax rate in effect at that time. The rates set by this order would provide PSI with sufficient revenues, ergo taxable income, to exhaust the regulatory asset during the time period of 1986-1989. This four-year period coincided with the period for which the Commission had set emergency rates for PSI and during which a moratorium was imposed on PSI restricting its ability to seek further rate increases.

An appeal of the March 1986 order was taken by Citizens Action Coalition of Indiana, Inc., the City of Terre Haute, Save the Valley, Inc., and Virgil and Sara Bowling (collectively referred to herein as CAC). The Indiana Court of Appeals upheld the Commission's order in Citizens Action Coalition v. Public Serv. Co. of Ind. (1990), Ind.App., 552 N.E.2d 834 (PSI I). In regard to CAC's claim that the Commission erred in its treatment of the regulatory asset, the Court of Appeals held:

Because the deductions were associated with the Marble Hill nuclear project, the Commission assigned the tax benefits to the shareholders who funded the construction.

....

The value of [a cancelled] nuclear project may not be included in the utility's rate base, as the property never achieved the status of property actually used and useful for the convenience of the public. See Citizens Action Coalition v. Northern Indiana Public Service Co. (1985), Ind., 485 N.E.2d 610, 614. In addition, the customer may not be asked to contribute to the costs of the failed project. See id. The customer, therefore is not entitled to the tax benefits associated with the cancellation of a nuclear project....

Id. at 839-40. By virtue of a split vote by the members of this Court, CAC's petition for transfer was denied (2-2, Krahulik, J., not participating), which had the effect of making the decision of the Court of Appeals the law of the case. Matter of Lemond (1980), 274 Ind. 505, 413 N.E.2d 228.

After the Commission's entry of its March 1986 order, Congress enacted the Tax Reform Act of 1986 and, in order to assess its impact on Indiana utilities, the Commission established an executive committee to conduct an investigation and to file a report of its conclusions with the Commission. The executive committee concluded that because the Tax Reform Act reduced the federal corporate tax rate from 46% to 34%, the Act would effect an overall reduction of federal tax expenses for Indiana utilities as a whole. Upon the recommendation of the committee, the Commission adopted a procedure by which it would determine whether and to what extent the retail rates of each individual utility in Indiana should be altered in light of the Tax Reform Act.

The Commission scheduled a series of public hearings and established a separate sub-docket for each utility, at which time the Commission was to receive the committee's recommendation as to that utility as well as any other evidence pertinent to its decision. If the Commission determined that the Tax Reform Act effected a reduction in a utility's operating expenses, by virtue of reduced tax expenses, that utility could then petition for a second hearing at which it would be afforded an opportunity to show cause why its retail rates ought not be concurrently reduced. Relevant to this appeal, the committee also recommended that utilities which had received a general rate order subsequent to January 1, 1986, in which the Commission had considered the effects of the Tax Reform Act be excepted from this procedure. The following provision from the March 1986 order brought PSI within the purview of the recommended exception:

In the event that Federal or State income tax rates decrease during the 1986-1989 time period from the combined Federal and State Income tax rate of 48.16% utilized in establishing the rates herein, no adjustment in PSI's retail rates will be made for such a reduction; however a charge to cost of service in lieu of tax expense shall be recorded as a further reduction of the regulatory asset in each applicable year. Such charge shall be equal to the difference between the tax benefits realized by PSI in such year and the tax benefits which would have been realized if computed at the combined statutory tax rate of 48.16%.

On May 13, 14, and 15, 1987, the public hearings were conducted. The sole issue addressed by the Commission in its consideration of each sub-docket of these hearings was whether the Tax Reform Act necessitated an adjustment of the retail rates charged by that sub-docket's utility. Prior to the hearing, PSI filed a motion that the Commission take administrative notice of its March 1986 order for purposes of incorporation into the record of the present proceeding. During the PSI sub-docket, that motion was granted. At that time, PSI submitted a memorandum of law which argued that the provision of the March 1986 order quoted above had addressed the possibility of a reduction in tax rates and had precluded any alteration in PSI's retail rates based on such a reduction in order to assure that PSI had taxable income sufficient to exhaust the regulatory asset, that the March 1986 order was still in effect and controlled the outcome of the present proceeding, and that therefore its rates should not be altered. PSI also cited to the recommendation of the executive committee that the Commission forego further review of the impact of the Tax Reform Act on utilities already subject to 1986 rate orders in which the possibility of a tax rate reduction had been considered. CAC was neither a party to nor an intervenor in this cause. Ratepayers were represented at the hearing by the Office of the Utility Consumer Counselor (UCC). It appears from the record submitted to this Court that the UCC offered no testimony, evidence, or exhibits whatsoever either in favor of or in opposition to the arguments made by PSI. The UCC's brief in opposition to CAC's petition to transfer indicates that the UCC "acquiesced" in PSI's position.

On June 1, 1987, the Commission entered a rate order covering each Indiana utility in the wake of the Tax Reform Act. The following provision of the order was made in regard to PSI:

5. No reduction in Public Service Indiana's retail electric rates, as a result of the Tax Reform Act of 1986, shall be directed. However, Public Service Indiana shall abide by the terms and conditions of our [March 1986 order] and reduce the regulatory asset in the fashion mandated by that Order to reflect the reduction in the applicable Federal Income Tax rate.

CAC filed a timely appeal of this ruling in the Indiana Court of Appeals pursuant to I.C. 8-1-3-1, which accords a right to judicial review of actions taken by the Commission to "[a]ny person, firm, association, corporation, city, town or public utility adversely affected by any final decision, ruling, or order of [the Commission.]" CAC's assignment of errors alleged that the Commission's decision not to reduce PSI's retail rates in response to the Tax Reform Act was contrary to law, and in its brief before the Court of Appeals, CAC set out that its allegation of error was premised on a negative answer to the following two questions:

1. Whether the Public Service Commission may authorize an investor-owned public utility to include in customer rates a charge in lieu of tax expense equal to the difference between tax expense calculated at the former federal income tax rate and tax expense calculated at the new federal income tax rate, where the charge corresponds to no actual expense incurred or to be incurred by the utility?

2. Whether the Public Service Commission may lawfully adopt in a current order a conclusion from a prior order entered fifteen months earlier that a public utility not reduce its rates in the event of a decrease in the state or federal income tax rate without any evidence being introduced in the current cause to show the conclusion was currently just and reasonable?

The Court of Appeals, however, did not reach the merits of CAC's appeal, finding that CAC was precluded from attacking the Commission's order on the grounds asserted because those arguments had not been presented to the Commission by any party or intervenor below. Citizens Action Coalition of Ind. v. Public Serv. Co. of Ind. (1990), Ind.App., 556 N.E.2d 328 (PSI II). We now grant CAC's petition for transfer and vacate the decision of the Court of Appeals.

Judicial review of decisions of the Commission is guaranteed both by statute and by case law. I.C. 8-1-3-1...