Office of Public Counsellor v. Indiana & Michigan Elec. Co., 2-1078A347

• Decision Date: 05 February 1981
• Docket Number: No. 2-1078A347,2-1078A347
• Citation: 416 N.E.2d 161
• Parties: OFFICE OF the PUBLIC COUNSELLOR, Charles W. Cole & Son, Inc. and David P. Schenkel, Appellants, v. INDIANA & MICHIGAN ELECTRIC COMPANY, Appellee.
• Court: Indiana Appellate Court

Page 161

416 N.E.2d 161

OFFICE OF the PUBLIC COUNSELLOR, Charles W. Cole & Son, Inc. and David P. Schenkel, Appellants, v. INDIANA & MICHIGAN ELECTRIC COMPANY, Appellee.

No. 2-1078A347.

Court of Appeals of Indiana, Third District.

Feb. 5, 1981.

Robert L. Thompson, Peebles, Thompson, Rogers & Hamilton, Richard C. Ver Wiebe, Ver Wiebe, Snow, Miller & Gray, Fort Wayne, John J. Metts, Deputy Public Counselor, Indianapolis, for appellants Charles W. Cole & Sons, Inc. and David P. Schenkel.

Thomas W. Yoder, Livingston, Dildine, Haynie & Yoder, Fort Wayne, for appellee; Edward J. Brady, American Electric Power Service Corp., New York City, of counsel.

GARRARD, Judge.

In January 1978, Indiana and Michigan Electric Company (I & M) filed a petition with the Public Service Commission of Indiana (Commission) for authority to increase its rates. After investigation and public hearings, the Commission granted a rate increase in September 1978. Intervenors, Charles W. Cole & Sons, Inc. and David P. Schenkel, ¹ and the Office of the Public Counsellor (OPC) perfected this appeal by timely filing the record of proceedings and assignment of errors pursuant to IC 8-1-3-1 et seq.

Prior to considering the issues in this case, we refer the reader to L. S. Ayres & Company v. Indianapolis Power & Light Company (1976), 169 Ind.App. 652, 657-65, 351 N.E.2d 814, 819-21, wherein Judge Staton extensively reviewed the general rate making process and the appropriate standard of judicial review of Commission decisions. Without duplicating that review, we will address ourselves to those portions of the discussion which are particularly relevant to this case.

Pursuant to IC 8-1-2-4, the Commission has the responsibility in every rate proceeding to determine a level of rates sufficient to permit the utility to meet its operating expenses plus a return on investment which will compensate its investors. In making this determination the Commission adopts a "test year," normally the most recent annual period for which complete financial data is available, and then calculates the utility's revenues, expenses and investment during that test period. The utility's revenues minus expenses constitute the earnings or the "return" that is available to be distributed to the utility's investors. Allowable costs include all types of operating expenses plus annual charges for depreciation and operating taxes. However, the Commission has broad discretion to disallow for rate making purposes any excessive or imprudent expenditures.

After the utility's existing level of "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 used in providing the public with the service for which rates are charged and constitutes the investment upon which the "return" is to be earned. The rate base is usually defined as that property "used and useful" in rendering the particular utility service. IC 8-1-2-6.

After existing levels of "return" and "rate base" are determined, the Commission must decide whether the "rate of return," the ratio of return to rate base, is deficient, adequate or excessive. (See L. S. Ayres, supra at 820 for a discussion of how this determination is made.) This analysis lays the initial foundation for a decision as to a fair rate of return on utility assets. That determination, in turn, is the final issue necessary for resolution of the utility's future revenue requirement. Throughout the process, the Commission's primary objective is to reach a result that is equitable and that will permit continuity of utility services on a sound financial basis. IC 8-1-2-4.

As is evident from the above discussion, rate making is a detailed and highly technical process. It is primarily an exercise in informed regulatory judgment in which the legislature has invested the Commission with a great deal of discretion. OPC and Intervenors allege in their assignments of error that the Commission's order is contrary to law. Pursuant to IC 8-1-3-1, we are provided with a two-step standard of review:

"An assignment of errors that the decision, ruling or order of the commission 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 rendered."

At the first level of review, we require that the Commission's decision contain specific findings on all factual determinations material to its ultimate conclusions. L. S. Ayres & Co., supra, at 822; City of Evansville v. Southern Indiana Gas & Electric Co. (1975), 167 Ind.App. 472, 339 N.E.2d 562, 571. This first level may be termed a "question of law" as we ask whether the Board's ultimate conclusions may be "reasonably" inferred from its findings of basic facts. Id.

The second step in our review requires this court to inquire whether there is substantial evidence in light of the whole record to support the Commission's findings of basic fact. L. S. Ayres, supra; City of Evansville, supra. After analyzing Indiana and federal judicial treatment of the substantial evidence test, the court stated in L. S. Ayres, supra, at 823:

"From a review of these authorities, we conclude that the substantial evidence standard authorizes a reviewing court to set aside Commission findings of fact when a review of the whole record clearly indicates that the agency's decision lacks a reasonably sound basis of evidentiary support. See Universal Camera Corp. v. N.L.R.B. (1951), 340 U.S. 474, 490, 71 S.Ct. 456, 95 L.Ed. 456."

We note, in concluding, that a determination of "substantiality," unlike our usual appellate review, requires us to consider both the evidence in opposition to the challenged finding of basic fact as well as the evidence tending to support the finding. Id.

I. Consolidated v. Corporate Treatment

Appellants contend that the Commission erred in treating I & M and its wholly-owned subsidiary, Indiana and Michigan Power Company (IMP), as a consolidated entity for rate making purposes.

IMP's principal assets are two nuclear power production units located in Bridgman, Michigan. IMP's total output of electric power is sold to I & M pursuant to a "Power Agreement." As this agreement involves the wholesale sale of electricity in interstate commerce, pursuant to the Federal Power Act, regulation of the rates contained therein is within the exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC). 16 U.S.C. § 824 et seq. ² This agreement may be described as a "cost of service contract." It provides that I & M is entitled to all of the energy generated by IMP's units, and, in return, I & M is obligated to compensate IMP for all costs of production of the purchased power, including a return on equity. A fair rate of return under the contract is computed by the FERC.

The Commission concluded that in determining I & M's rates it should treat I & M and IMP as a consolidated entity, combining all of IMP's assets, liabilities, revenues and expenses with those of I & M. Consistent with this approach, the Commission deleted the purchased power expense related to the contract with IMP from I & M's expenses. The Commission's conclusion was based upon its determination that IMP's nuclear plants are "vital to the rendering by I & M of adequate and reliable service to its retail customers in the State of Indiana." The Commission cited cases from other jurisdictions in which it has been held that the property of a subsidiary, "used and useful" in serving the customers of the parent should, when "wholly devoted" to such use, be included in the rate base of the parent. ³

OPC and Intervenors do not contest the fact that IMP's units are "used and useful" in the servicing of Indiana customers. However, they argue that given the FERC's exclusive jurisdiction over the contract rates between I & M and IMP, the Commission is, as a matter of law, precluded from treating the two companies' assets on a consolidated basis. This argument is premised upon the fact that a fair rate of return on IMP assets has already been determined by the FERC and is incorporated in the contract sales price. To include IMP's assets in I & M's rate base would permit the Commission to determine a cost of service and return attributable to the cost of power sold by IMP which is other than the FERC established rate. This, it is argued, constitutes an impermissible collateral attack on the authority of the FERC.

We agree with OPC and Intervenors that the Commission erred as a matter of law in treating I & M and IMP as a consolidated entity for rate making purposes. The contractual and interstate nature of the relationship between the two companies is dispositive. Since I & M has chosen to provide power from the IMP nuclear production units to its customers indirectly through a contractual arrangement with IMP, rather than through actual ownership of the units itself, I & M has chosen to place its purchase arrangement with IMP within the jurisdiction of the FERC. The FERC and the Commission do not share concurrent jurisdiction with regard to the proper rate of return on IMP assets. Rather, the FERC has exclusive jurisdiction over the regulation of wholesale interstate power sales. Any attempt by the Commission to assign a rate of return attributable to IMP's cost of power clearly encroaches upon the FERC's duties and powers.

We conclude that I & M and IMP must be treated as separate entities for retail ratemaking purposes. We therefore remand this issue to the Commission for further proceedings not inconsistent with this opinion.

II. Federal Income Tax Expense

Intervenors next contend that the Commission calculated I & M's federal income tax based upon an erroneous determination of I & M's effective tax rate with the...