Case Name: 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: Court of Appeals of Indiana
Jurisdiction: Indiana
Decision Date: 1984-12-27
Citations: 472 N.E.2d 938
Docket Number: No. 2-1082A357
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.
Judges: YOUNG, J., concurs.
Reporter: North Eastern Reporter 2d
Volume: 472
Pages: 938–963

Head Matter:
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.
Rehearing Denied Feb. 7, 1985.
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 Alli ance.
Frederick F. Eichhorn, Jr.. William H. Eichhorn, Charles W. Webster, Eichhorn, Eichhorn & Link, Hammond, for appellees.

Opinion:
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 interve-nors, 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, NIP-SCO 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. 588, 307 N.E.2d 870; Bethlehem Steel Corporation v. Northern Indiana Public Service Company, (1979) Ind.App. 397 N.E.2d 628.
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 [289], 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 ratemak-ing purposes any excessive or imprudent expenditures. IC 1971, 8-1-2-48 (Burns Code Ed.). '
Testyear 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.
# * # *
Under traditional regulatory concepts, utility company shareholders and bondholders, not the consumers, furnish the eapital 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 [361], 53 L.Ed. 577; Lindheimer v. Illinois Bell Tel. Co. (1934), 292 U.S. 151, 169, 54 S.Ct. 658 [665], 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, eg., 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. 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 claim a return of profits and earnings which may appear excessive. 78 C.J.S., Public Utilities,, Sec. 25(d), p. 1045; 43 Am.Jur., Public Utilities and Services, Sec. 162, 163, p. 678.
The chances of a loss or profit from operations is one of the risks a business enterprise must take. The Company must bear the loss and is entitled to the gain depending upon the efficiency of its management and the economic uncertain'ties of the future after a rate is fixed. Were it not so, a premium would be placed upon inefficiency, waste and negli-genee in management. It is better policy to encourage thriftiness, saving and frugality on the part of a utility management. Such incentive inures eventually to the benefit of the consumers in succeeding rate hearings."
235 Ind. at 87-88, 131 N.E.2d 308.
L.S. Ayres & Company v. Indianapolis Power and Light Company, (1976) 169 Ind.App. 652, 351 N.E.2d 814, is also instructive. Relative to the function of the test year the court stated:
"'The theory underlying the use of any test-year and adjustment method in the rate-making process demands that the data used provide an accurate picture of the utilitys operations during the period in which the proposed rates will be in effect. The test year may be analogized to the technique of stopping a film to examine one isolated frame. By freezing the action of the utility's operations in a convenient time frame, the Commission can observe the inherent interrelationships among rate base, expenses and revenues. This observation is crucial to the concept of the test period because a complete picture of these dynamic interrelationships can only be obtained when the rate base, expense and revenue components are examined in phase. Thus, rate base, expense and revenue data for an historical test year are meaningful for a determination of utility rates only insofar as past operations are representative of probable future experience. Significant changes in a utility's operating structure, such as rapid plant expansion, may render even the most current historical data inadequate as a basis for predicting the results of future operations."
351 N.E.2d at 828-829.
The court went on to rule that unnecessary plant capacity is not used or useful property for rate purposes and should not be included in the rate base. Bad business judgment in that regard is a risk of the utility and must not be shouldered by the ratepayers. Before any tangible plant property can become used and useful for the convenience of the public it must be efficiently integrated into a functioning system. However, certain costs related thereto, including additional plant developmental costs such as training, records, procedures, tune-up, and customer loan growth, are allowable.
On the other hand, deferred tax reserve accounts cannot be placed in the rate base because they are customer contributed capital. Where generating plants are used partly for retail service and partly for wholesale purposes, costs and the rate base must be allocated. City of Evansville v. SIGECO, supra. Past losses cannot be recouped in the form of a 48% federal tax rate as a cost which would never be paid because of a loss carry back. Citizens Emergy Coalition, Inc. v. Indiana & Michigan Electric Company, (1979) Ind.App., 396 N.E.2d 441 (transfer denied). A rate may not be imposed to operate retroactively. Indiana Telephone Corp. v. Public Service Commission of Indiana, (1960) 131 Ind.App. 314, 171 N.E.2d 111. Even excessive depreciation above and beyond capital consumption used to build additional plan facilities is prohibited as capital contributed by ratepayers. Lindheimer v. Illinois Bell Telephone Co., (1984) 292 U.S. 151, 54 S.Ct. 658, 78 L.Ed. 1182.
The issue here of charging consumers for abandoned capital projects has not been directly approached in Indiana. The following are authorities from other jurisdictions which purport to have dealt with this problem. Nepco Municipal Rate Committee v. Federal Energy Regulatory Commission, (D.C.Cir.1981) 668 F.2d 1827, cert. denied; New England Power Company v. Federal Energy Regulatory Commission, (1982) 457 U.S. 1117, 102 S.Ct. 2928, 78 L.Ed.2d 1329; Union Electric Company v. Federal Energy Regulatory Commission, (8th Cir.1981) 668 F.2d 389; San Diego Gas & Electric Co., (Cal.Pub.Util.Comm'n 1979) 31 P.U.R.4th 485; Re Central Illinois Light Co., (Ill. Commerce Comm'n 1983) 57 P.U.R.4th 351; Re Boston Edison Co., 46 P.U.R.4th 431; Re Detroit Edison Co., (Mich.Pub.Serv.Comm'n 1983) 52 P.U.R.4th 318; Atlantic City Electric Co., (N.J.Bd.Pub.Util.1983) 51 P.U.R.4th 109; Re Rockester Gas & Electric Corp., (N.Y.Pub.Serv.Comm'n 1982) 45 P.U.R.4th 386; Duke Power Co., (N.C.Util.Comm'n 1982) 49 P.U.R.4th 483; mod. (1983) 51 P.U.R.4th 141; Central Vermont Public Service Corp., (Vt.Pub.Serv.Bd.1982) 49 P.U.R.4th 372; contra, Arizona Public Service Co., (Ariz.Corp.Comm'n 1980) 38 P.U.R.4th 547; Re Union Electric Co., (Mo.Pub.Serv.Comm'n 1983) 57 P.U.R.4th 169; Office of Consumers' v. Public Utilities Commission, 67 Ohio St.2d 153, 423 N.E.2d 820; Pacific Power & Light Company v. Public Service Commission, (1984) Wyo., 677 P.2d 799.
The following rulings of regulating bodies were cited in footnotes in the case of Office of Consumers Counselor v. PUC, supra:
"Re San Diego Gas & Electric Co. (Cal.Pub. 29 P.U.R. 4th 613; Re Potomac Electric Power Co. (Md.Pub.Ser.Comm.1977), Order No. 6999; Re Consumer Power Co. (Mich.Pub.Ser.Comm.1975), Case No. F-700; Re Northern States Power Co. (Minn.Pub.Ser.Comm.1977), Dkt. E-0021 GR-76-984; Re Public Service Electric and Gas Co. (N.J.Dept. of Energy Bd. of Pub.Util. 1980), Dkt. No. 794-310; Re Consolidated Edison Co. of New York (N.Y.Pub.Ser.Comm.--), Case No. 9187; Re Carolina Power & Light Co. (N.C.Util.Comm.1979), Dkt. No. E-2, Sub 8352; Re Gulf States Utilities Co. (Pub.Util.Comm. of Texas 1979), Dkt. No. 2677; Re Virginia Electric & Power Co. (Va.Corp.Comm.1978) 29 P.U.R. 4th 65; Re Wisconsin Electric Power Co. (Pub.Ser.Comm. of Wis.1980), Case No. 05-01-38; Re Potomac Electric Power Co. (D.C.Pub.Ser.Comm.1979), 29 P.U.R. 4th 517; Re Arizona Public Service Co. (Ariz.Corp.Comm.1980), Decision No. 31009; Re Northern States Power Co. (Pub.Ser.Comm. of N.D.1980), Case No. 10,097."
423 N.E.2d 826.
It is to be noted that only four of the above authorities are cases decided by courts of review and the remainder are rulings by a regulatory body. We will treat specifically those four.
The case of Office of Consumers' Counsel v. P.U.C., supra, is a case from the Supreme Court of Ohio which is directly on point. There, the question was whether the P.U.C. acted lawfully and reasonably in permitting the utility to treat its investment in four cancelled nuclear generating plants as amortized costs. The arguments put forth by the utility and the consumers were the same as those made here. The P.U.C. argued that an expenditure can be considered a cost of service if it fails in fact to achieve its intended purpose, if that expense was logically calculated to provide utility service at a reasonable cost. Authority for such, P.U.C. claimed, is found in those statutes which require utilities to provide adequate service.
While noting that the overwhelming weight of authority from other jurisdictions supports the position of the Commission, the Ohio court observed that none of the rulings on this precise issue represented the opinion of the highest court of the jurisdiction, but were derived from regulatory decisions. The court, treating the foreign regulatory decisions as advisory only, addressed Ohio law. Under Ohio law, R.C. 4909.15(A)(4), the service related costs that a utility may recover from its ratepayers is determined as follows:
"'The public utilities commission, when fixing and determining just and reasonable rates, fares, tolls, rentals, and charges shall determine:
"k u
The cost to the utility of rendering the public utility service for the test period
The court viewed the situation as a request to treat as service related, costs of investment that never provided any service whatsoever to the utility customer. The court stated: >
"We seriously question whether the General Assembly contemplated that the commission would treat the type of expenditures controverted herein as costs under R.C. 4909.15(A)(4). The now terminated nuclear plants represented a major capital investment that ultimately would have been included in the rate base under R.C. 4909-15(A)(1), had the projects not been cancelled. It is our opinion that R.C. 4909-15(A)(4) is designed to take into account the normal, recurring expenses incurred by utilities in the course of rendering service to the public for the, test period. A non-exhaustive list of such expenses would include reasonable expenditures for repairs, maintenance, personnel-related costs, administrative expenses and taxes.
The extraordinary loss sustained by CEI in connection with the terminated nuclear plants cannot be transformed into an ordinary operating expense pursuant to R.C. 4909.15(A)(4) by commission fiat. The commission's statement that '[clan-cellation does not create a past loss, but gives rise to a current cost' is unpersua-give. Under this rationale we question whether there could ever be a 'past loss' the return of which would not be recoverable in future rate- making proceedings notwithstanding the commission's assertion to the contrary. The commission's characterization of the investment in the four terminated plants as 'cost' under R.C. 4909.15(A)(4) in light of what we perceive to be the legislative intention underlying that section is unreasonable."
423 N.E.2d at 827.
The case of Pacific Power and Light Company v. Public Service Commission, (1984) Wyo., 677 P.2d 799 affirmed an order of the regulatory commission denying amortization of the cost of a cancelled nuclear plant by means of a rate to be paid by consumers. The statutes which the court construed were W.S.1977, See. 37-1-102(a), which reads:
"'The term rate when used in this act shall mean and include . every . charge or other compensation for service rendered or to be rendered . and every . practice, act, requirement or privilege in any way relating to such . charge or other compensation."
and W.S8.1977, Section 87-2~119 of Wyoming Act. This latter provision states the commission may value:
"... the property and business of any public utility, used and useful for the convenience of the public, and all matters affecting or influencing such cost or value ."
Emphasizing the used and useful language the Wyoming Commission found that the investment in an abandoned nuclear plant could not properly be considered in fixing rates. The court agreed, stating:
"If the projects had been successful and had gone on line for production of electricity for public convenience, the cost or value would have been properly considered in establishing a rate base. Since they were not successful and were only partially constructed, they could never become 'property' of a 'used and useful' nature. Although the project undertakings might conceivably be part of the 'business of PP & L, we need not determine such inasmuch as the business activity relating to the projects was not current so as to meet the 'used and useful requirement, as the 'used and useful' status must be as of the time of rate consideration.
Although the investment, expenses and obligations resulting from the projects do not conform to the 'used and useful' concept, PP & L contends that they could still qualify for consideration in establishing a rate base if they are a prudent, reasonable and proper expense of operation. Other jurisdictions have dealt with the obligations herein considered as operating expenses and not as property under the 'used and useful' principle.
We cannot accept the investment expenses, and obligations incurred in construction, or intended construction of property which would normally qualify as 'used and useful for inclusion in a rate base as an operating expense. An operating expenses includes:
'In general, various particular expenses of a public utility are properly chargeable to expense of operation, including any legitimate expense contributing to the better management or greater efficiency of the utility, a reduction of its investment, or an increase in its operating return. * 783B C.J.S. Public Utilities, See. 86, p. 284.
# # *
In contending that the charges were 'operating expenses," PP & L argues that a reasonable and prudent test should be allowed. We need not consider this test insofar as it applies to 'operating expenses' since these charges were not 'operating expenses' as that term is generally considered.
It is probable that PP & L would not contend these expenses to be 'operating' ones if the projects were completed. PP & L would then own a percentage of property; and it would expect to have the cost of the project included in the amount attributed to its 'used and useful' property in establishing a rate base.
The argument in this case results from the situation in which PP & L suffers financial loss due to failure of a project intended to become 'used and useful' in the service of the public. PP & L wants to include the loss in its financial picture whereby an increase in rates will eventually pay for the loss, ie., the loss will be borne by the consumers. PP & L believes this proper inasmuch as service rendered by an electric power utility is limited by the availability of the supply of the product it furnishes. The same can be said of some other utilities. A prudent and reasonable attempt to secure or preserve such supply could well be considered a service rendered on behalf of the consumers. When the life of a utility is limited by such supply, amortization of an entire plant investment has been allowed. PP & L contends that successful effort in this endeavor would rebound to the benefit of the consumers by furnishing a more abundant and cheaper supply of the product and, thus, the failure of the effort should be at the expense of the consumers.
(On the other hand, PSC considers the failure of the projects as one of the risks incurred by PP & L when it entered into them. PSC would have the stockholders of PP & L bear the loss since the decision to embark upon the project was made by their representatives who had an opportunity to calculate the risk and to be governed by such calculation. If PP & L gauged the risk with the intention that the loss would be borne by the consumers, there would be no risk at all for PP & L (the stockholders). This fact might encourage PP & L to venture into activities having a very small chance of economic success with the knowledge of no loss to it should the activity fail and of great gain should the small chance of success occur.
If the consumers are to take the risk, it would seem that they should have some say as to whether or not the projects are to be undertaken. Only PSC is properly in a position to be concerned with the consumer interest in consideration of the propriety of the risk activity and to balance the interests of the consumer and the utility.
677 P.2d 805-806 (citations omitted).
The court concluded that in Wyoming, as well as in other states, statutory authority exists whereby if prior approval is obtained from the commission based upon prior determination of the risks involved, costs might be passed on to the ratepayers. However, such was not done in this case.
The cases of Nepco and Union Electric, supra, concern actions of the Federal Energy Regulatory Commission, which was cere-ated by and operates according to federal statutes and regulations as opposed to state law. In these cases, rulings of the FERC which allowed the recovery, over time, of expenditures made on abandoned nuclear plants, were affirmed. In neither case were these costs allowed to be added into the rate base to be paid by consumers in the form of higher utility rates. In Nepco, the costs were amortized over a five year period, while in Union Electric the expenses were paid by wholesale customers and investors were denied a return on the abandoned plant.
In Nepco arguments were made by the appealing utility that such action of the FERC denied it an opportunity to earn a return on prudent investments in a can-celled project and thus denied it just compensation in violation of the Fifth Amendment. The court, while noting that property is includable in the rate base only when it is used and useful, and thus in service, reasoned that it was inequitable to place the entire loss of expenditures on the utility and that a balancing approach was proper. The court distinguished that case from one where property was once used and useful but later retired from service. It likewise noted that expenditures for research on alternative fuels are properly includable in the rate base.
In Union Electric, the court determined that penalizing the utility for a decision which appeared rational at the outset would discourage construction of needed facilities. Putting the risk of cancellation solely on investors would increase the cost of money for projects because the risk would demand a higher return. Both courts concluded that while contrary arguments could be made, FERC's decision, based on the underlying assumption that the original outlay was reasonably prudent, justified the utilities' recovery of expenditures lost when changing conditions made the completion and operation of the nuclear facilities unfeasible.
As seen, and as argued by the inter-venors, the present order of the Commission violates the traditional concepts of rate making as they exist in Indiana. In exchange for the monopoly, a utility is subject to regulations.
First, the project was, at its inception, a capital expenditure and capital must be furnished by investors. City of Evansville v. SIGECO, supra. Consumption of capital can be reimbursed to the utility by the ratepayers only by way of depreciation once the property is in service. NIPSCO attempts to convert the capital loss to a future expense by declaring, by accounting fiat, that once the Bailly Project was abandoned it became a future expense. Such argument is unpersuasive. See Office of Consumers' Counsel v. PUC, supra. This imposition of a rate amounts only to a replenishment of capital; an obligation of utility stockholders and investors.
Secondly, even if the loss was an expense it was an expense incurred between 1970 and 1981. As shown above, old losses cannot be recouped through future rates. PSC. v. Indianapolis, supra. Nor can rates be imposed to operate retroactively. NIPSCO argues that since the loss was realized in the test year, 1981, and adopted by the Commission, it became a current expense which could be considered in determining future rates. NIPSCO misrepresents the office of the test year which is merely that of an historical study. See L.S. Ayres, supra; City of Evansville v. SIGECO, supra. Losses incurred in the test year are relevant only to determine the adequacy of rates for operating costs in future years.
Thirdly, an asset cannot be considered in the rate base until it has been placed in service and this includes property under construction, property held for future use, property which exceeds capacity, and property used for wholesale, not retail purposes.
One of NIPSCO's subsidiary arguments is that since the result was not prohibited by IND.CODE 8-1-2-6(c) (prohibiting costs for image building, charitable and political contribution) or IND.CODE 8-1-2, 48 (authorizing the Commission to disallow excessive rates) the rate can be charged. The Commission is a body possessing delegated powers and unless power and authority to act is found in a statute, it must be concluded that there is none. General Telephone Co. of Indiana v. Public Service Commission, (1959) 238 Ind. 646, 150 N.E.2d 891; See Office of Consumers' Counsel v. PUC, supra, footnote 8.
NIPSCO's principal argument adopted by the Commission, the wording and phrasing of which is gleaned from arguments made in the four foreign cases discussed above, is an equitable one. A brief outline of the utility's rationale is as follows.
NIPSCO is mandated under IND.CODE 8-1-2-4 to furnish adequate service, and to that end it must commence construction of generating facilities 8 to 10 years in advance. It is the Commission's responsibility to assure that the risk of such construction is not so great as to discourage an endeavor which was prudently commenced, and subsequently judiciously cancelled, by refusing the recovery of the costs after the project is terminated. The purpose of the Bailly Project was to provide abundant low-cost electricity beneficial to ratepayers. However, as a result of delays occasioned through no fault of NIPSCO; through litigation initiated to oppose its permit and the escalation of costs, the project became unfeasible. If the NIPSCO shareholders are forced to bear the entire risk, the officers will become ultra-conservative; users will be deprived of modern technology, the company will persevere on uneconomical projects, and the cost of capital will increase, which expense would in turn be borne by the ratepayers once the facility is placed in service.
NIPSCO then contends the financial soundness of the utility must be considered by the Commission as well as the protection of the ratepayers from unreasonable rates. Thus, the Commission must reach an overall result which is equitable, and strike a balance between these interests of the utility and the ratepayers. The entire loss, it concludes, should not be placed on NIPSCO.
NIPSCO's argument which is essentially a collection of bald assertions, amounts to a request that we dramatically transcend and expand the traditional rate making concepts in Indiana without statutory authority. We first note that NIPSCO's logic could be applied to any loss, any property under construction, or any situation where the utility felt threatened. It could even be used to support the utility's stock on the market. NIPSCO commenced the Bailly
Project with its own capital and capital raised for that purpose by the sale of securities. The prospectus warned of risk. We presume that NIPSCO was aware of the state's rate methodology. Had the project been completed, it would have been computed in the rate base at which time the investors would commence receiving a return on it. Ratepayers would not have shared in that return. Only after the project failed did NIPSCO desire to make the ratepayers a partner in the venture, which belated partnership would include only the loss. While NIPSCO, in its brief, uses such carefully chosen and more palita-ble words as "sharing the risk", the share of Bailly's loss it suggests should be shouldered by the unconsulted, unrepresented and captive ratepayers is all of the loss. NIPSCO emphasizes that this loss was not occasioned by its fault. However, we hasten to add the record does not disclose the failure to be the fault of the ratepayers either. As stated in PSC v. City of Indi-amapolis, supra, "The chances of a loss or profit from operations is one of the risks a business enterprise must take. The company must bear the loss and is entitled to the gain .". 235 Ind. at 88, 131 N.E.2d 308. Bad business judgment is not a risk of the ratepayers, but a risk of the utility. LS. Ayres, supra.
We accept the rationale stated by the Ohio Supreme Court, and the Wyoming Supreme Court as being most nearly akin to our statutes and methodology, and rule accordingly.
In conclusion, nothing in Indiana rate methodology envisions the result reached by the Commission, and we question whether the legislature ever contemplated such result. Permitting a utility to recover from the ratepayers the cost of a failed project, while at the same time denying a rate increase to recover the cost of plants with excess capacity, plants under construction, property held for future use, and losses from operation is illogical and incongruous to the extreme. Essentially NIPSCO requests a total replenishment of its lost capital, or a subsidy from the ratepayers. While subsidies to businesses in order to benefit the public at large are familiar, such are ordinarily created in legislative halls, and not by court decision or administration fiat.
For the above reasons, this cause is reversed and the Public Service Commission of Indiana is ordered to vacate any rate increase occasioned by Bailly N-1.
Judgment reversed."
YOUNG, J., concurs.
MILLER, P.J., dissents with opinion.
Appellants contend that the 'direct, primary benefit' test enunciated in Cleveland v. Pub. Util. Comm. (63 Ohio St.2d 62, 406 N.E.2d 1370), supra, is applicable to the case at bar. We disagree. The direct primary benefit standard should not be wrenched from the institutional advertising expenses and charitable contributions context in which it arose.
(Original footnote).