Opinion ID: 853532
Heading Depth: 2
Heading Rank: 2

Heading: Traditional and Alternative Utility Regulation

Text: We turn next to the parties' dispute over whether the ProLiance agreements were a proposal for Alternative Utility Regulation (AUR) and thus could only be permitted by the Commission if offered and approved as an AUR proposal. This requires a brief overview of traditional regulation and the language of the AUR Act. The bedrock principle behind utility regulation is the so-called regulatory compact, which arises out of a bargain struck between the utilities and the state. As a quid pro quo for being granted a monopoly in a geographical area for the provision of a particular good or service, the utility is subject to regulation by the state to ensure that it is prudently investing its revenues in order to provide the best and most efficient service possible to the consumer. At the same time, the utility is not permitted to charge rates at the level which its status as a monopolist could command in a free market. Rather, the utility is allowed to earn a fair rate of return on its rate base. Thus, it becomes the Commission's primary task at periodic rate proceedings 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. Indiana Gas Co., Inc. v. Office of Utility Consumer Counselor ( Indiana Gas I ), 575 N.E.2d 1044, 1046 (Ind.Ct.App.1991) (citations omitted). This fair-rate-of-return concept underlies traditional rate regulation. See Office of Utility Consumer Counselor v. Gary-Hobart Water Corp., 650 N.E.2d 1201 (Ind.Ct.App.1995); Indiana Gas I, 575 N.E.2d at 1046. In determining fair rates, the Commission considers a representative level of anticipated revenues and expenses and the property employed by the utility to provide service to its customers. See City of Evansville v. Southern Indiana Gas & Elec. Co., 167 Ind.App. 472, 478-82, 339 N.E.2d 562, 568-71; Re Northern Indiana Public Serv. Co., No. 40180, 166 PUR4th 213, 224, 1995 WL 795042 (IURC December 28, 1995). The Commission compares the property used and useful for the production of current service to the utility's revenues in order to quantify the return being provided by the existing rates. Id. If the Commission determines that a utility's rates have become unjust and unreasonable, it may modify them by ordering just and reasonable rates to be charged prospectively. Ind.Code § 8-1-2-68. This rate-setting procedure is comprehensive: the Commission must examine every aspect of the utility's operations and the economic environment in which the utility functions to ensure that the data it has received are representative of operating conditions that will, or should, prevail in future years. City of Evansville, 167 Ind.App. at 482, 339 N.E.2d at 570-71. Traditional regulation also allows a gas utility to obtain an adjustment of its rates to reflect fluctuations in gas cost without undergoing a formal rate proceeding. See Ind.Code § 8-1-2-42(g). A gas cost adjustment permits the utility to pass along to its customers on a dollar-for-dollar basis any fluctuations in the gas cost experienced by the utility. Indiana Gas Co., Inc. v. Office of Utility Consumer Counselor ( Indiana Gas II ), 610 N.E.2d 865, 867 (Ind.Ct.App.1993); see Indiana Gas I, 575 N.E.2d at 1046-49. As part of the gas cost adjustment, the Commission applies an earnings test to ensure that the utility's gas costs are not being passed along to the consumer in a way that allows the utility to earn a higher return than that authorized by the Commission in the utility's last rate case. Indiana Gas I, 575 N.E.2d at 1046 (citing Ind.Code § 8-1-2-42(g)(3)(C)). The clear legislative intent here is preventing a utility from overearning. Id. at 1052. For this reason, the earnings test applies when gas costs decrease as well as when they increase. Id. at 1049. When a gas cost adjustment is sought, the OUCC may examine the books and records of the utility to determine the cost of gas on which the adjustment is being sought, and it must make a report to the Commission. Ind.Code § 8-1-2-42(g)(1). In any event, the OUCC must examine a gas utility's books and records pertaining to the cost of gas not less than annually and provide the Commission with a report; if appropriate, the OUCC may request a reduction or elimination of a gas cost adjustment. Ind.Code § 8-1-2-42(g)(2). The Commission found that the index-priced supply arrangement in the ProLiance agreements allowed Citizens Gas and the parent of Indiana Gas an opportunity to profit indirectly from the commodity cost of gas. It characterized this as a result not specifically contemplated in the pertinent subsections of Section 42. (R. at 1641.) The Commission expressed a preference for considering such an arrangement as a proposal under the AUR Act. Nevertheless, it noted that both Utilities had gas cost adjustment proceedings pending, concluded that this situation could be remedied through proper notice, hearing, and findings in connection with the [Utilities'] GCA [gas cost adjustment] filings and that such an alternative measure should be explored in that proceeding. (R. at 1642.) Contrary to Opponents' claim on appeal, the Commission was not constrained to considering the ProLiance agreements as a proposal under the AUR Act. The Act permits a utility to propose, and the Commission to adopt, alternatives to traditional regulation. Citizens Action Coalition, Inc. v. Indiana Statewide Ass'n of Rural Elec. Cooperatives, 693 N.E.2d 1324 (Ind.Ct.App.1998). Our examination of the Act reveals that it is concerned with the regulation of retail service, rates and charges, not wholesale supply arrangements to a utility. The legislative findings prefacing the Act, passed in 1995, refer to the Commission's goal of providing safe, adequate, efficient, and economical retail energy services.... Ind.Code § 8-1-2.5-1(1) (West Supp.1999) (emphasis added). They note that an environment in which Indiana consumers will have available state-of-the-art energy services at economical and reasonable costs will be furthered by flexibility in the regulation of energy services. Id. at (4) (emphasis added). Further, they note the need for the Commission to exercise its authority in a flexible manner to regulate and control the provision of energy services to the public in an increasingly competitive environment, giving due regard to the interests of consumers and the public, and to the continued availability of safe, adequate, efficient, and economical energy service. Id. at (6) (emphasis added). The AUR Act defines retail energy service to mean energy service furnished by an energy utility to a customer for ultimate consumption. Ind.Code § 8-1-2.5-3 (West Supp.1999). The AUR Act allows the Commission two alternatives to traditional regulation. First, the Commission may, after notice and a hearing, commence an orderly process to decline to exercise, in whole or in part, its jurisdiction over either the energy utility or the retail energy service of the energy utility, or both. Ind.Code § 8-1-2.5-5(a) (West Supp.1999). Or, second, (a) [I]n approving retail energy services or establishing just and reasonable rates and charges, or both for an energy utility electing to become subject to this section, the commission may do the following: (1) Adopt alternative regulatory practices, procedures, and mechanisms, and establish rates and charges that: (A) are in the public interest ...; and (B) enhance or maintain the value of the energy utility's retail energy services or property; including practices, procedures, and mechanisms focusing on the price, quality, reliability, and efficiency of the service provided by the energy utility. (2) Establish rates and charges based on market or average prices, price caps, index based prices, and prices that: (A) use performance based rewards or penalties, either related to or unrelated to the energy utility's return or property; and (B) are designed to promote efficiency in the rendering of retail energy services. .... (c) An energy utility electing to become subject to this section shall file with the commission an alternative regulatory plan proposing how the commission will approve retail energy services or just and reasonable rates and charges for the energy utility's retail energy service. Ind.Code § 8-1-2.5-6(a), (c) (West Supp. 1999) (emphasis added). A utility's request for relief under Section 6 shall be limited to approval of its energy services or the establishment of its rates and charges, or both. Ind.Code § 8-1-2.5-4 (West Supp.1999). These repeated references to retail energy services and the establishment of rates and charges persuade us that the legislature did not intend to compel the Commission to exercise jurisdiction over a wholesale gas supply arrangement based on index pricing, even one between a utility and its affiliate, solely under AUR procedures. The Commission found that it had the authority under traditional regulatory practice to consider the ProLiance agreements, including their index-based pricing of wholesale gas supply. We agree. The AUR Act was intended to supplement, not restrict, the authority that the Commission enjoys under traditional regulation. At least two traditional regulatory tools pre-dating the AUR Act allow the Commission to exercise regulatory authority here. The first, discussed above, requires that certain affiliate contracts be filed with the Commission before becoming effective and allows the Commission to disapprove them if they are not in the public interest. See Ind.Code § 8-1-2-49(2). Here, the Opponents themselves invoked Section 49 as authority for the Commission to consider the ProLiance agreements. In the end, the Commission concluded under Section 49 that the ProLiance agreements were in the public interest. The second method, a gas cost adjustment proceeding under Indiana Code § 8-1-2-42(g), has also been discussed above. The Commission found that the ProLiance agreements raised concern because they created the possibility for Citizens Gas and the parent of Indiana Gas to profit from the commodity cost of gas. Yet the Commission was satisfied that those concerns could and should be addressed in the Utilities' pending gas cost adjustment proceedings. (R. at 1642, 1652.) The Commission also expressed a willingness to scrutinize carefully the gas costs associated with ProLiance: it explicitly warned that the actual costs the Utilities pay for gas will not necessarily be allowed as reasonable gas costs under these circumstances because risks and opportunities have been shifted among the Utilities, their investors, and customers. (R. at 1654.) Opponents object to consideration of the ProLiance index-pricing arrangements in a gas cost adjustment proceeding because, they say, the OUCC will not have access to critical ProLiance records and information, including its actual cost of gas. The Opponents' fear is not well founded in light of the provisions in Ind. Code § 8-1-2-49(2) affording the Commission access to records of a utility's affiliated interests while it is pursuing matters within the Commission's jurisdiction. [6] Thus, we conclude that this index-based pricing of wholesale gas supply to the Utilities did not require approval under the AUR Act. [7] We conclude also that the Commission may consider the reasonableness of the transportation credit and the administration fee in the gas cost adjustment proceeding, as it has indicated an intent to do. (R. at 1651.) Gas costs may include the gas utility's costs for gas purchased by it from pipeline suppliers ... and other expenses relating to gas costs as shall be approved by the commission. Ind.Code § 8-1-2-42(g); see Re Northern Indiana Public Serv. Co., 166 PUR4th at 226 (gas costs calculations include commodity, pipeline capacity and storage costs, as well as credits generated against costs, including those received by LDCs from pipeline suppliers and revenues to LDCs from release of capacity); accord Teledyne, 666 N.E.2d at 1282 (gas costs properly included extra expense that gas utility incurred as a result of tariffs imposed by interstate pipelines to cover their transition costs in implementing FERC order to unbundle services). We hold that the Commission was not constrained to considering these agreements only as a proposal under the AUR Act. [8]