Indiana-Kentucky Elec. Corp. v. Indiana Dept. of State Revenue, INDIANA-KENTUCKY

• Decision Date: 19 August 1992
• Docket Number: Nos. 02T10-9104-TA-00014,INDIANA-KENTUCKY,02T10-9104-TA-00015,s. 02T10-9104-TA-00014
• Citation: 598 N.E.2d 647
• Parties: ELECTRIC CORPORATION, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent. OHIO VALLEY ELECTRIC CORPORATION, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

Page 647

598 N.E.2d 647

INDIANA-KENTUCKY ELECTRIC CORPORATION, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

OHIO VALLEY ELECTRIC CORPORATION, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Nos. 02T10-9104-TA-00014, 02T10-9104-TA-00015.

Tax Court of Indiana.

Aug. 19, 1992.

Milford M. Miller, Philip L. Carson, Miller Carson & Boxberger, Fort Wayne, for petitioner.

Linley E. Pearson, Atty. Gen., Marilyn S. Meighen, Deputy Atty. Gen., Indianapolis, for respondent.

FISHER, Judge.

Indiana-Kentucky Electric Corporation and Ohio Valley Electric Corporation appeal the Indiana Department of State Revenue's (Department) assessment of gross income tax, adjusted gross income tax, and supplemental net income tax, including interest and penalties for the years 1985, 1986, and 1987, on sales of electricity to two Indiana purchasers. The cases were heard and decided together because the relevant facts are substantially the same. Furthermore, this opinion is decided on the same day as two other cases ¹ that dispose of similar issues.

FACTS

The Ohio Valley Electric Corporation (OVEC) is an Ohio corporation engaged in the business of generating and selling electrical energy. OVEC's general offices are located in Piketon, Ohio. OVEC has generating facilities in Gallipollis, Ohio (Kyger Creek) and transmission lines and other related equipment located in Ohio and Kentucky, but none in Indiana. OVEC is not a resident or domiciliary of Indiana, and has no office, sales activities, inventory, or physical presence in Indiana.

Indiana-Kentucky Electric Corporation (IKEC) is an Indiana corporation, wholly owned by OVEC. IKEC's generating facilities are located near Madison, Indiana (Clifty Creek) and its transmission lines and other related equipment are located exclusively in Indiana.

OVEC was formed by fifteen sponsoring companies, all public electric utility companies, for the sole purpose of supplying the United States Atomic Energy Commission, currently the Department of Energy (DOE), with all the electrical energy needed for the operation of its uranium enrichment plant located near Portsmouth, Ohio. The large amount of energy required for the process of uranium enrichment, however, is beyond the capacity of OVEC alone. To ensure that it could meet its obligations under the power agreement with the DOE, OVEC entered separate power agreements with IKEC and the fifteen sponsoring companies.

According to the IKEC-OVEC power agreement, the entire output of power IKEC generates is sold to OVEC. Under OVEC's power agreement with the fifteen sponsoring companies, the companies sell electricity to OVEC when the demands of the DOE exceed the amount OVEC can generate and purchase from IKEC. Additionally, the agreement permits the sponsoring companies to purchase surplus electricity from OVEC, when the demands of the DOE fall below the total amount OVEC can generate and purchase from IKEC.

A provision designating the points at which title passes, i.e., the points of delivery, is a standard term in electric utility industry power agreements because the seller of power cannot direct the power it sells to a specific point of delivery. Provisions designating the point of delivery additionally assure that utilities buying and selling power have sufficient transmission facilities to carry the power being sold. The title to IKEC's electricity passes upon delivery, as defined by the power agreement, at the Indiana-Kentucky state line. The title to electricity purchased from or sold to OVEC by the sponsoring companies passes upon delivery, as defined by the power agreement, at one of thirteen interconnection points, none of which are in Indiana.

OVEC's power agreements with both IKEC and the sponsoring companies also contain a "wheeling agreement," an agreement by an intermediate electric utility permitting its transmission facilities to be used to transmit power when there is a sale between two utilities that are not directly interconnected. The wheeling agreements provide that IKEC and the sponsoring companies will "wheel" supplemental power to or from OVEC as necessary when OVEC is not directly interconnected with the seller or purchaser. Wheeling agreements are standard provisions in power agreements to guarantee that adequate transmission capacity is always available to meet the variable demands for electricity by permitting utilities that do not directly interconnect to connect indirectly using the facilities of other utility companies.

OVEC's general offices in Ohio house the teletype equipment used to communicate with the sponsoring companies as well as sophisticated computer control equipment used to regulate the level of electric generation at both the Clifty Creek and Kyger Creek plants under the direction of OVEC's load coordinator. The load coordinator must coordinate on an hourly basis the electrical supply available to OVEC with its delivery commitments to ensure OVEC's supply of power is equal to its contractual sale obligations.

Two of OVEC's sponsoring companies are domiciled in Indiana. The first, Indiana Michigan Power Company (IM), formerly Indiana & Michigan Electric Company, is one of four of OVEC's sponsoring companies that is a subsidiary of the American Electric Power Company (AEP). Teletype communications between OVEC and the four AEP subsidiaries, including IM, take place between Piketon and the AEP system control center in Columbus, Ohio. The second, Southern Indiana Gas & Electric Company (SIGECO) is located near Evansville, Indiana where it receives and sends teletype communications to OVEC in Piketon.

IKEC, OVEC, IM, and SIGECO are four of over two thousand (2,000) electric utilities in the Eastern Interconnection, an interconnected grid system covering much of the eastern two-thirds of the United States. An interconnected grid system is a complex assemblage of transmission lines and power plants that are all directly or indirectly connected to one another. The Eastern Interconnection includes virtually all the electric facilities east of the Rocky Mountains, fourteen hundred (1400) generating facilities, and over two hundred and forty thousand (240,000) miles of transmission lines. Electric utility companies form interconnected grid systems to provide economical and reliable transmission of electricity where and when it is needed.

Electricity cannot be stored, therefore, it must be produced the moment it is demanded. If more electricity were produced than was actually demanded, the power frequency on the system would exceed 60 megahertz (60 cycles), and the result would be catastrophic. Both utility companies and consumers purchase equipment designed to operate at 60 cycles; a deviation from that frequency would damage the equipment.

Although generation and transmission are temporally successive events, transmission so instantaneously follows generation they seem simultaneous. Thus, when electricity is produced by one of the 1400 generating plants in the Eastern Interconnection, it is almost simultaneously introduced onto the interconnected grid system. The path electricity travels cannot be directed; it will flow over any path available to it, according to the laws of physics. Although the impedance or resistance of the various pathways determines how much power flows over one particular line, some power flows over every part of the interconnected grid system and is instantaneously commingled with all the electricity present. Consequently, electricity present at any individual interconnection within the Eastern Interconnection system is a combination of all the electricity produced at all the generating plants within the Eastern Interconnection.

Bernard Pasternack, manager of the Bulk Transmission Planning Division of the AEP, conducted several studies related to OVEC's sales to IM and SIGECO. Pasternack used computer simulated power flow studies to produce mathematical models that would replicate the behavior of electricity in transmission systems, including the Eastern Interconnection. Pasternack developed two models to examine the percentage of the electricity OVEC sold to IM and SIGECO that is "produced, transmitted, delivered and consumed in Indiana." The results of the first model showed that in 1985 0.50%, in 1986 0.48%, and in 1987 0.47% of the annual energy actually consumed by IM and SIGECO was generated by IKEC at Clifty Creek. Pasternack's second study was based on the false assumption that all the energy transmitted on the interconnected grid system was generated by either IKEC or OVEC. The results showed that in 1985, 1986, and 1987, only about 3.5% of the power sold by OVEC to IM was "produced, transmitted, delivered and consumed in Indiana."

In 1971, IKEC and the Department negotiated an agreement that neither IKEC or OVEC owed gross income tax. In addition, for purposes of the adjusted gross income tax, the Department agreed to an apportionment formula based on a three factor formula in which the sales factor was zero, indicating IKEC did not make Indiana sales. In 1976, following an audit and subsequent protest by IKEC, the Department reaffirmed the 1971 findings and apportionment formula. In 1982, the Department audited IKEC again to redetermine taxability based on the requirement that OVEC and IKEC file Indiana returns on a unitary basis. The 1982 agreement did not assess gross income tax on either OVEC or IKEC, and the adjusted gross income tax apportionment formula indicated a sales factor of zero for both OVEC and IKEC.

In 1986, the Department audited IKEC and OVEC and assessed gross income tax against both on the same grounds as in the instant case. Furthermore, the Department increased the apportionment formula sales factor for adjusted gross income tax from zero, indicating IKEC and OVEC made sales within Indiana. Following the denial of their protests, OVEC and IKEC filed original tax appeals in this court. Five days prior to...