Court Opinion

ID: 2725421
Source: CourtListenerOpinion
Date Created: 2014-09-08 20:48:59.155524+00
Date Added: 2024-06-11T09:16:03.489949
License: Public Domain

Pursuant to Ind. Appellate Rule 65(D),
this Memorandum Decision shall not be
regarded as precedent or cited before
any court except for the purpose of                             Mar 11 2014, 10:08 am
establishing the defense of res judicata,
collateral estoppel, or the law of the case.

ATTORNEYS FOR APPELLANT/                       ATTORNEYS FOR APPELLEE
CROSS-APPELLEE INDIANA                         INDIANA MICHIGAN POWER
OFFICE OF UTILITY CONSUMER                     COMPANY:
COUNSELOR:
                                               PETER J. RUSTHOVEN
RANDALL C. HELMEN                              TERESA MORTON NYHART
DANIEL M. LE VAY                               Barnes & Thornburg LLP
LORRAINE HITZ-BRADLEY                          Indianapolis, Indiana
Indianapolis, Indiana

ATTORNEY FOR CROSS-APPELLANT
STEEL DYNAMICS, INC.:

ROBERT K. JOHNSON
Greenwood, Indiana

                               IN THE
                     COURT OF APPEALS OF INDIANA

INDIANA OFFICE OF UTILITY                      )
CONSUMER COUNSELOR,                            )
                                               )
       Appellant/Cross-Appellee/               )
       Statutory Party,                        )
                                               )
               vs.                             )   No. 93A02-1303-EX-233
                                               )
INDIANA MICHIGAN POWER COMPANY,                )
                                               )
       Appellee/Petitioner,                    )
                                               )
               and                             )
                                               )
STEEL DYNAMICS, INC.,                          )
                                               )
       Cross-Appellant/Intervenor.             )
         APPEAL FROM THE INDIANA UTILITY REGULATORY COMMISSION
           The Honorable James D. Atterholt, Kari A.E. Bennett, Larry S. Landis,
                Carolene R. Mays, and David E. Ziegner, Commissioners
                                Cause IURC No. 44075

                                      March 11, 2014

               MEMORANDUM DECISION - NOT FOR PUBLICATION

BRADFORD, Judge

                                   CASE SUMMARY

       On or about September 23, 2011, Appellee-Petitioner Indiana Michigan Power

Company (“I&M”) requested permission from the Indiana Utility Regulatory Commission

(the “Commission”) to raise its rates for electrical service.             Appellant/Cross-

Appellee/Statutory Representative the Indiana Office of Utility Consumer Counselor (the

“OUCC”) objected to I&M’s request. Following an evidentiary hearing that was conducted

over the course of approximately sixteen days, the Commission granted I&M’s request.

       The OUCC appeals the Commission’s decision on I&M’s requested rate increase. On

appeal, the OUCC contends that the Commission erred in including I&M’s prepaid pension

asset in the rate base amount, using an end-of-test-year method to determine the value of

I&M’s inventory of materials and supplies rather than a thirteen-month average, and applying

an allegedly outdated capital structure. Cross-Appellant/Intervenor Steel Dynamics, Inc.

(“SDI”) also challenges the Commission’s order, arguing that the Commission erred in

failing to adopt a voltage-differentiated fuel adjustment charge (“FAC”). We affirm.

                       FACTS AND PROCEDURAL HISTORY

                                             2
       I&M is a subsidiary of American Electric Power Corporation (“AEP”), which

provides electric utility service to customers in certain areas of Indiana and Michigan. On

September 23, 2011, I&M filed a petition with the Commission seeking authority to increase

its rates and charges. During a November 2, 2011 prehearing conference, the Commission

issued an order establishing that the twelve months that ended on March 31, 2011,

represented the “test year” to be used for rate determinations. The Commission’s order also

established December 31, 2011, as the “rate base cutoff” date.

       On February 2, 2012, I&M updated its rate base to reflect plant additions as of

December 31, 2011. In February through June of 2012, the Commission conducted an

evidentiary hearing over the course of approximately sixteen days. Both parties and multiple

intervenors presented evidence and testimony during the evidentiary hearing. On February

14, 2013, the Commission issued its final order in which it granted I&M’s request to increase

its rates and charges. Soon thereafter, both I&M and the OUCC filed motions to reconsider.

The Commission subsequently granted I&M’s motion and denied the OUCC’s motion. This

appeal follows.

                            DISCUSSION AND DECISION

                  I. Background Information and Standard of Review

        A. Background Information on the Methodology of Rate Regulation

       “[R]atemaking is a legislative rather than judicial function.” Office of Util. Consumer

Counselor v. Pub. Serv. Co. of Ind., 463 N.E.2d 499, 503 (Ind. Ct. App. 1984). “Toward this

end the complicated process of ratemaking is more properly left to the experienced and

                                              3
expert opinion present in the Commission.” Id. As such, the Commission is “imbued with

[the] broad discretion necessary for it to perform its function and arrive at its goals.” Id.

               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, 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 rate-making purposes any excessive or imprudent expenditures.
        IC 1971, 8-1-2-48 (Burns Code Ed.).
               Test-year 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 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

                                               4
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 (Burns Code Ed.). The property
included in the “rate base” may be valued by one of two standard methods: (1)
the ‘original cost’ method, which is based on book value (the cost of an asset
when first devoted to public service), or (2) the “fair value” method, which
takes into account the declining purchasing power of the dollar through
“reproduction cost new” studies utilizing price indices or other measurements
of an investment’s current value. The Indiana statutory scheme authorizes the
use of either valuation method. IC 1971, 8-1-2-6 (Burns Code Ed.).
        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. The generally accepted
method for establishing a comparative basis to determine the adequacy or
excessiveness of the utility’s existing ‘return’ is the ‘cost of capital’ approach.
The Commission first examines the utility’s capital structure to identify the
sources of the utility’s capital; the capital structure of an average electric utility
might consist of 50 percent debt, 15 percent preferred stock and 35 percent
common stock. The Commission then ascertains the cost of each capital
component: (1) the cost of debt, determined by comparing the utility’s annual
interest requirements with the proceeds from utility bond sales; (2) the cost of
preferred stock, determined by comparing the stated dividend requirements on
outstanding preferred stock with the proceeds from preferred stock sales; (3)
the cost of common stock, determined by the return required to sell such stock
in prevailing capital markets. After these preliminary determinations are
made, the Commission calculates a composite “cost of capital” by taking a
weighted average of the cost of each capital component. The composite cost
of capital, when expressed as a percentage of the utility’s combined debt and
equity accounts, is then compared with the utility’s existing rate of return, and
thus serves as an initial point of reference in establishing a “fair rate of return”
for utility operations. The United States Supreme Court has delineated the
legal criteria for determining a “fair rate of return.” In Bluefield Waterworks
& Improvement Co. v. Public Serv. Comm’n (1923), 262 U.S. 679, 692-93, 43
S.Ct. 675, 679, 67 L.Ed. 1176, the Court stated:
        “What annual rate will constitute just compensation depends
        upon many circumstances, and must be determined by the
        exercise of a fair and enlighted judgment, having regard to all
        relevant facts. A public utility is entitled to such rates as will
        permit it to earn a return on the value of the property which it

                                          5
               employs for the convenience of the public equal to that generally
               being made at the same time and in the same general part of the
               country on investments in other business undertakings which are
               attended by corresponding risks and uncertainties; but it has no
               constitutional right to profits such as are realized or anticipated
               in highly profitable enterprises or speculative ventures. The
               return should be reasonably sufficient to assure confidence in
               the financial soundness of the utility and should be adequate,
               under efficient and economical management, to maintain and
               support its credit and enable it to raise the money necessary for
               the proper discharge of its public duties. A rate of return may be
               reasonable at one time and become too high or too low by
               changes affecting opportunities for investment, the money
               market and business conditions generally.”
               The “fair rate of return” is usually the final subsidiary issue that the
       Commission resolves in determining the utility’s revenue requirement. After
       considering all other issues, many regulatory agencies frequently employ the
       rate of return component as a “balance wheel” to provide a limited margin of
       error for the resolution of other issues. See Jones, Judicial Determination of
       Utility Rates: A Critique, 54 B.U.L. REV. 873, 875-83 (1964). The
       Commission’s primary objective is to reach an overall result that is equitable
       and that will permit continuity of utility services on a sound financial basis. IC
       1971, 8-1-2-4 (Burns Code Ed.); Federal Power Comm’n v. Hope Natural Gas
       Co. (1944), 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333.

L. S. Ayres & Co. v. Indpls. Power & Light Co., 169 Ind. App. 652, 657-61, 351 N.E.2d 814,

819-21 (1976) (footnotes omitted); see also City of Evansville v. S. Ind. Gas & Elec. Co., 167

Ind. App. 472, 478-82, 339 N.E.2d 562, 568-71 (1975).

       “While this brief summary may indicate that determining a utility’s revenue

requirement is a simple, almost mechanical task, the process actually requires extensive

examination of the utility’s operations and continuing exercises of informed administrative

judgment.” L. S. Ayers & Co., 169 Ind. App. at 660, 351 N.E.2d at 821. Throughout the

remainder of this memorandum decision, two crucial facts about the rate-making

methodology should be observed. Id. at 660-61, 351 N.E.2d at 821. “First, the determination

                                               6
of a utility’s revenue requirement is primarily an exercise in informed regulatory judgment.”

Id. at 661, 351 N.E.2d at 821. “Second, if that judgment is to be exercised properly, 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.” Id., 351

N.E.2d at 821.

                                   B. Standard of Review

       Indiana Code section 8-1-2-1 provides statutory authority for this court to review

Commission orders, stating:

       Any person, firm, association, corporation, limited liability company, city,
       town, or public utility adversely affected by any final decision, ruling, or order
       of the commission may, within thirty (30) days from the date of entry of such
       decision, ruling, or order, appeal to the court of appeals of Indiana for errors of
       law under the same terms and conditions as govern appeals in ordinary civil
       actions, except as otherwise provided in this chapter and with the right in the
       losing party or parties in the court of appeals to apply to the supreme court for
       a petition to transfer the cause to said supreme court as in other cases. 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.

       Our standard of review has been well-defined. See Indpls. Water Co. v. Pub. Serv.

Comm’n of Ind., 484 N.E.2d 635, 637 (Ind. Ct. App. 1985). Under the two-tier level of

review mandated by Indiana Code section 8-1-3-1, “this court first determines whether the

Commission included in its decision specific findings on all factual determinations material

to the ultimate conclusions.” Gary-Hobart Water Corp. v. Ind. Util. Regulatory Comm’n,

591 N.E.2d 649, 652 (Ind. Ct. App. 1992) (citing Citizens Action Coal. of Ind., Inc. v. N. Ind.

                                               7
Pub. Serv. Co., 555 N.E.2d 162, 165 (Ind. Ct. App. 1990)).

       Our supreme court has stated that “[the] findings of basic fact must reveal the
       [Commission’s] analysis of the evidence and its determination therefrom
       regarding the various specific issues of fact which bear on the particular
       claim.” Perez v. United States Steel Corp. (1981), Ind., 426 N.E.2d 29, 33.
                Next, this court must determine whether there is substantial evidence in
       the record to support the Commission’s findings of fact. [Citizens Action
       Coal., 555 N.E.2d at 165]. We are not free, however, to reweigh or reanalyze
       the evidence presented or substitute our judgment for that of the Commission.
       Id. The substantial evidence standard authorizes this court to set aside the
       Commission’s findings of fact only when a review of the whole record clearly
       indicates the agency’s decision lacks a reasonably sound base of evidentiary
       support. Id.
                In addition to the limited review imposed by the substantial evidence
       test, this court must also determine whether the Commission’s decision, ruling,
       or order is contrary to law. [Indpls. Water Co., 484 N.E.2d at 637].
       Specifically, the Commission must stay within its jurisdiction and conform to
       the statutory and legal principles which must guide its decision, ruling, or
       order. Id.

Id. at 652 (first two sets of brackets in original, all others added).

                              II. Claims Presented on Appeal

                A. Whether the Commission Erred by Including I&M’s
                   Prepaid Pension Asset in the Rate Base Amount

       The OUCC contends that the Commission erroneously included I&M’s prepaid

pension asset in I&M’s rate base, arguing that it was error to do so because the pension asset

did not amount to tangible property, and also because it was not previously included in the

base rate. Initially, we recognize that this court has previously noted that the “subject matter

of the regulatory process is too complex to permit the judicial non-expert any clear insight

concerning the legal and factual issues which the Commission thought ‘material’ to its

decision.” L.S. Ayres, 169 Ind. App. at 676, 351 N.E.2d at 830. As such, the applicable

                                               8
standard of review “does not authorize the substitution of judicial judgment on matters

committed to Commission discretion nor does it require that the reviewing tribunal concur in

the wisdom or correctness of the Commission’s decision.” Id. “Our function of review is

limited to a determination that the actual choice made by the Commission was based on a

consideration of the relevant factors and was reasonably related to the discharge of its

statutory duty.” Id.

       Again, the “rate base” is calculated from the net investment in physical properties plus

an allowance for working capital. Gary-Hobart Water Corp., 591 N.E.2d at 652-53; Indpls.

Water Co., 484 N.E.2d at 637. The physical property is valued in accordance with the

guidelines set forth in Indiana Code section 8-1-2-6, which provides, in relevant part, as

follows:

               (a) The commission shall value all property of every public utility
       actually used and useful for the convenience of the public at its fair value,
       giving such consideration as it deems appropriate in each case to all bases of
       valuation which may be presented or which the commission is authorized to
       consider by the following provisions of this section. As one of the elements in
       such valuation the commission shall give weight to the reasonable cost of
       bringing the property to its then state of efficiency. In making such valuation,
       the commission may avail itself of any information in possession of the
       department of local government finance or of any local authorities. The
       commission may accept any valuation of the physical property made by the
       interstate commerce commission of any public utility subject to the provisions
       of this act.
               (b) The lands of such public utility shall not be valued at a greater
       amount than the assessed value of said lands exclusive of improvements as
       valued for taxation. In making such valuation no account shall be taken of
       presumptive value resting on natural resources independent of any structures in
       relation thereto, the natural resource itself shall be viewed as the public’s
       property. No account shall be taken of good will for presumptive values
       growing out of the operation of any utility as a going concern, all such values
       to rest with the municipality by reason of the special and exclusive grants

                                              9
       given such utility enterprises. No account shall be taken of construction costs
       unless such costs were actually incurred and paid as part of the cost entering
       into the construction of the utility. All public utility valuations shall be based
       upon tangible property, that is, such property as has value by reason of
       construction costs, either in materials purchased or in assembling of materials
       into structures by the labor or (of) workers and the services of superintendents,
       including engineers, legal and court costs, accounting systems and
       transportation costs, and also including insurance and interest charges on
       capital accounts during the construction period. As an element in determining
       value the commission may also take into account reproduction costs at current
       prices, less depreciation, based on the items set forth in the last sentence hereof
       and shall not include good will, going value, or natural resources.

(footnote omitted).

       The parties spend considerable time arguing why the prepaid pension asset should be

found to be tangible property that is “used” or “useful” to I&M in providing its consumers

with electrical power. However, we note that upon review of the relevant authority cited by

the parties, it appears that the requirements that property be tangible and either “used” or

“useful” applies only to physical property that is included in the rate base and not to the

allowance for working capital that is included in the rate base.

       The need for working capital arises from day to day expenses which accrue during the

period between the time of billing and the time customers actually pay for their utility

service. Bd. of Dir. for Utils. of the Dept. of Pub. Utils. of the City of Indpls. v. Office of Util.

Consumer Counselor, 473 N.E.2d 1043, 1050 (Ind. Ct. App. 1985). “Under traditional

regulatory concepts, utility company shareholders and bondholders, not the consumers,

furnish the capital necessary for the operation of business.” City of Evansville, 167 Ind. App.

at 509, 339 N.E.2d at 585. When “determining the amount of allowable operating expenses

of a utility, the [C]omission may not take into consideration or approve any expense for

                                                 10
institutional or image building advertising, charitable contributions, or political

contributions.” Ind. Code § 8-1-2-6(c).

      With respect to the prepaid pension asset, the Commission found as follows:

      (2)     Prepaid Pension Asset.
              (a)    I&M Case-in-Chief. I&M’s proposed rate base includes
      prepaid pension expense in the amount of $61,691,738 (Indiana Jurisdictional)
      as of March 31, 2011. I&M removed the balance applicable to non-utility
      operations costs from the Total Company amount but did not otherwise adjust
      the end of test-year level of this investment.
              (b)    OUCC Case-in-Chief. Margaret A. Stull, Senior Utility Analyst
      for the OUCC, opposed the inclusion of prepaid pension expenses in rate base.
      She testified that I&M’s voluntary pension contributions do not represent an
      investment in used and useful utility plant and are not required to provide
      quality, reliable utility service to Indiana ratepayers. Ms. Stull recommend that
      if the Commission determines that I&M should receive some benefit from its
      voluntary pension contributions, it should only receive a debt return as a
      component of its revenue requirement based on the actual cost of debt incurred
      to fund the prepayments. Based on Ms. Stull’s recommendation, Mr. [Michael
      D.] Eckert removed $91,758,368 of prepaid pension expense on a total
      company basis and $61,691,738 on an Indiana jurisdictional basis from rate
      base.
              Ms. Stull stated that prepaid pension expense refers to certain voluntary
      pension contributions Petitioner elected to make in addition to the annual
      pension contributions required by the Employee Retirement Income Security
      Act (“ERISA”). She noted the prepaid pension expense payments that
      Petitioner desires to include in rate base were substantially made in 2005 and
      2010. Through discovery, Ms. Stull ascertained the dates and amounts of each
      year’s pension contributions along with Petitioner’s calculation of the prepaid
      pension expenses proposed to be included in rate base. Her review of this
      information led her to conclude that I&M did not make any contributions to its
      pension fund from 1993 through 2002 despite collecting funds for pension
      expense from ratepayers as part of I&M’s revenue requirement during this
      same period. Ms. Stull also provided a table indicating no payments made in
      the years 2006, 2007, 2008, and 2009 despite the inclusion of funds in base
      rates for pension expense.
              Ms. Stull asserted that including this proposed asset in rate base would
      require customers to pay a much higher interest rate (i.e., I&M’s full cost of
      capital) than the much lower interest rate actually incurred by AEP to borrow
      the funds. She stated that I&M is allowed to earn a return on its investments in

                                             11
utility plant to insure safe, reliable utility service for Indiana ratepayers. She
asserted that I&M should not be allowed to borrow funds at a low commercial
paper rate, invest this cash into its pension fund, earn a full return on these
additional pension contributions from its ratepayers, and then pocket the
difference for its shareholders.
        (c)     SDI Case-in-Chief. Mr. [Ralph C.] Smith also opposed I&M’s
proposed inclusion of prepaid pension expense as an asset in rate base. Mr.
Smith asserted that because I&M’s 2011 FERC Form 1 shows that its pension
benefit obligation is currently underfunded, I&M has a pension liability, which
contradicts the Company’s proposal to include in rate base the pension asset
that resulted from voluntary management decisions. Claiming a pension asset
in rate base when the Company’s FERC Form 1 shows that the defined benefit
plan is underfunded is inappropriate. Mr. Smith testified that there is a trend
away from defined benefit plans and that including I&M’s proposed pension
asset in rate base could provide a disincentive for making reasonable reforms
to the Company’s pension plans that would reduce costs.
        He stated pension funding levels are the result of discretionary AEP
management decisions, and were anticipated to produce net savings based on
AEP top management’s assumption that the additional pension funding
contributions would be financed using low-cost short term debt. Frequently,
there is a wide range between the minimum funding required under ERISA
and the maximum annual funding, the range typically limited by the maximum
tax-deductible funding contribution limitations placed by the Internal Revenue
Service (“IRS”). Increasing funding of a defined pension plan (pension trust
contributions) would earn a return, which would then reduce future pension
expense. Mr. Smith testified that making additional discretionary funding
payments into the pension trust in amounts beyond ERISA requirements could
potentially benefit employees and shareholders and result in additional costs to
ratepayers.
        Mr. Smith contended that pension expense associated with defined
benefit pension plans should only be reflected in rate base as part of cash
working capital based on a properly prepared lead-lag study, which has not
been presented in this case. Mr. Smith argued that if the prepaid pension asset
is to be included in the revenue requirement it should be based on a debt rate,
preferably the rate for commercial paper. Mr. Smith testified that in 2011,
I&M paid an average monthly interest rate of 0.407% on commercial paper,
while its parent AEP (where the pension funding decisions were made) paid a
weighted average interest rate of 0.51%. In comparison, the Company is
requesting a pre-tax cost of capital of approximately 10.48%, which is 23.7
times higher than the 2011 commercial paper interest rate of 0.41%. Allowing
the pension asset to be included in rate base would cost ratepayers $6.565
million. The discretionary decisions by AEP executive management to make

                                       12
additional contributions to the pension plan, which has led to the pension asset,
increases the revenue requirement because the financing cost to ratepayers
exceeds the pension savings, and are contrary to the rationale for the
discretionary funding that was presented to the AEP board.
        (d)    I&M Rebuttal. Mr. Huge E. McCoy, Director of Accounting
Policy and Research for the American Electric Power Service Corporation
(“AEPSC”) stated that the prepaid pension asset is not a new item but has been
reflected on the Company’s books since 2005 in accordance with the
governing accounting standard. Mr. McCoy testified regarding the history and
purpose of the prepaid pension asset as well as the associated accounting and
ERISA standards. Mr. McCoy stated that the prepaid pension asset is properly
defined as the cumulative amount of cash contributions to the pension trust
fund beyond the cumulative amount of pension cost included in the cost of
service used for ratemaking purposes. He disagreed with Ms. Stull’s
characterization of the additional pension contributions as voluntary or
discretionary. He explained that although the additional pension contributions
were not absolutely required as ERISA minimum contributions at the times
they were made, if the additional contributions had not yet been made, ERISA
would have required the Company to make the contributions. He explained
that the Company began making contributions somewhat before they were
absolutely required in order to even out such required contributions over
several years and to minimize the total required contributions during this
period because investment income on early contributions reduces the total
funding requirement. Mr. McCoy pointed out that customers have benefited
because these additional contributions resulted in additional investment
income in the pension trust and this in turn reduced pension cost that is
recognized for ratemaking purposes.
        Renee V. Hawkins, AEPSC Assistant Treasurer and Managing Director,
Corporate Finance, explained that when the additional contributions were
initiated, the Company was looking at mandatory pension contributions
through the decade and chose to manage them with some discretion on the
timing of the contributions. Ms. Hawkins identified the reasons that the
pension fund contributions were made prior to the mandatory contribution
date. The first reason was to manage the timing in order to fund when the cash
is available to make the contributions instead of delaying until the
contributions were mandatory under ERISA rules, at which point the company
would have had no discretion on the timing of the funding. She explained
either way, the contributions are necessary to meet the pension obligations.
Second, having just experienced the 2008 and 2009 credit market freeze, Ms.
Hawkins stated the Company preferred to be contributing to the pension when
funds were available to avoid being in the position of having to fund the
pension when either capital is not readily available or when the cost of capital

                                       13
is high. The third reason was to reduce the overall pension cost, as discussed
by Mr. McCoy.
        Mr. McCoy disagreed that the contributions should not be included in
rate base. He stated that while the most obvious rate base item may be plant in
service, rate base typically includes other property, such as working capital,
fuel inventory, materials and supplies, and prepayments. Mr. McCoy
explained his view that management should be encouraged to keep the pension
plan operating smoothly so that it can legally meet its promised obligations.
Mr. McCoy testified that as a result of additional pension contributions made
after March 31, 2011, the pension plan was approximately 86% funded as of
December 31, 2011. He explained that the additional pension contributions to
the trust fund result in additional trust fund investment income that directly
reduces annual Financial Accounting Standard (“FAS”) 87 pension cost. He
showed that the prepaid pension asset reduced 2011 pension cost by
approximately $7.1 million versus the actual 2011 pension cost. He stated that
if the Commission were to exclude the prepaid pension asset from rate base,
the related $7.1 million pension cost savings also should be removed from cost
of service so that customers will not receive the benefit from the additional
contributions in the ratemaking process without the costs incurred by the
Company to create that benefit also being reflected in the revenue requirement.
        Mr. McCoy rebutted Ms. Stull’s suggestion that the Company did not
appropriately fund the pension trust from 1993 through 2002. He explained
the final order in Cause No. 39314 was issued on November 12, 1993, so only
a small portion of the year 1993 would apply to any analysis of historical
ratemaking versus funding. Mr. McCoy also explained that pension cost is
determined under FAS 87 for ratemaking purposes. In contrast, pension
contributions are subject to ERISA and IRS requirements. As a result, it is
unreasonable to expect the amount of pension cost and the amount of pension
contributions to be equal. With regard to the 1993 through 2002 period to
which Ms. Stull refers, Mr. McCoy stated that while it is true that the Company
made no pension contributions, it is also true that total qualified pension plan
cost for the period was slightly negative for this period.
        Mr. McCoy clarified that I&M financed the pension contributions for its
employees and retirees through cash payments that are reflected in I&M’s
capital structure. I&M’s 2010 pension contribution was funded not with short-
term debt but instead with available cash and neither the 2010 contribution nor
the 2005 contribution were funded with commercial paper on an ongoing
basis. He explained that the pension cost savings realized from the 2010
contribution were mainly due to reduced pension cost in subsequent years as a
result of additional investment income on the 2010 trust fund contribution.
According to Mr. McCoy, this pension cost savings and reducing the pension
funding shortfall were the real reasons for making the 2010 contribution.

                                      14
        In response to Mr. Smith’s claim that the Company has not
demonstrated that it has a prepaid pension asset and that instead it has a net
liability, Mr. McCoy explained that Mr. Smith has confused two separate items
which properly are treated differently for ratemaking purpose: (1) the prepaid
pension asset (accounted for in accordance with the provisions of FAS 87),
which is the cumulative difference between cash pension contributions and
pension cost included in the cost of service used to establish rates, and (2) the
net funded position (accounted for in accordance with the provisions of FAS
158), which is the difference between the balance of pension plan trust assets
and the pension benefit obligation. I&M’s prepaid pension asset represents the
cumulative amount of actual cash pension contributions beyond the cumulative
amount of pension cost included in cost of service, which should be included
in rate base in order to reflect the Company’s cost of funds on the additional
cash contributions.
        Mr. McCoy also disagreed with Mr. Smith’s claims that funding is
discretionary and the inclusion of the prepaid pension asset in rate base could
provide a disincentive for making reasonable reforms to the Company’s
pension plan. He explained that a prudent cash investment should not be
excluded from rate base just because it was made before it was absolutely
required. In addition, he testified that the prepaid pension asset represents
contributions that, although they were discretionary at the time of the
contributions, would have been required by now under ERISA without the
earlier contributions. Mr. McCoy also pointed out that while Mr. Smith
provided evidence that many companies have made changes to their pension
plans, Mr. Smith did not claim that the Company’s pension plan is too costly.
Mr. McCoy stated that while Mr. Smith claims that including prepaid pension
in rate base would provide a disincentive to making changes such as adopting a
cash balance formula, he failed to recognize that the Company already made
just such a change. He stated that since January 1, 2011, all Company
employees have been earning their pension benefits only under the cash benefit
formula.
        Mr. McCoy responded to Mr. Smith’s suggestion that the Company
should eliminate or severely restrict its defined pension benefit plan. He stated
that the Company’s pension plan is a significant component of total employee
compensation. He noted that the U.S. Government Accountability Office
report GAO-09-291, which Mr. Smith quotes, acknowledges that defined
benefit pension plans are an important source of retirement income for millions
of Americans. In Mr. McCoy’s view, Mr. Smith’s recommendation to
eliminate the prepaid pension asset from rate base would increase
unpredictability and would restrict management’s ability to prudently manage
its pension plan in the best interest of customers.
        Mr. McCoy addressed Mr. Smith’s recommendation that financing costs

                                       15
       of the pension contributions should be included at a debt rate based on low-
       cost commercial paper as an alternative to including the prepaid pension asset
       in rate base. He explained that I&M’s 2010 pension contribution was funded
       not with short-term debt but instead with available cash and neither the 2010
       contribution nor the 2005 contribution were funded with commercial paper on
       an ongoing basis. Mr. McCoy pointed out that, like Ms. Stull, Mr. Smith
       incorrectly identified the savings that justified the Company’s 2010 pension
       contribution as being based upon how the contribution was financed, when
       actually the savings mainly were due to reduced pension cost that resulted
       from the additional investment income produced by the 2010 trust fund
       contribution. Ms. Hawkins explained that cash flow from deferred income
       taxes was used to fund I&M’s pension contribution. She explained that even if
       short term debt had been used to fund the contributions (as other subsidiaries
       across the AEP system initially did), this would not justify the exclusion of the
       prepaid asset from rate base. She explained that short-term debt is sometimes
       used to fund capital expenditures until a debt issuance or cash flows from
       operations are available to fund the asset. Because such assets are reflected in
       rate base, the prepaid pension asset should not be treated differently even if it
       had been initially funded with short term debt.
               (e)    Commission Discussion and Findings. The record reflects that
       the prepaid pension asset was recorded on the Company’s books in accordance
       with governing accounting standards. The record also reflects that the prepaid
       pension asset has reduced the pension cost reflected in the revenue requirement
       in this case and preserves the integrity of the pension fund. Petitioner made a
       discretionary management decision to make use of available cash to secure its
       pension funds and reduce the liquidity risk of future payments. In addition, the
       prepayment benefits ratepayers by reducing total pension costs in the
       Company’s revenue requirement. Therefore, we find that the prepaid pension
       asset should be included in Petitioner’s rate base.

Appellant’s App. pp. 31-35.

       The above-stated findings include detailed references to the testimony of the parties’

witnesses. Neither party alleges that these references do not accurately recount the testimony

given before the Commission. The Commission appeared to weigh this testimony in favor of

I&M in finding that the prepaid pension benefits should be included in the rate base. The

Commission determined that the prepaid pension asset amounted to working capital that

                                              16
benefited the ratepayers by reducing the total pension costs needed in I&M’s revenue

requirement. The Commission, acting as the trier of fact, was free to believe or disbelieve

witnesses as it saw fit, and we will not reweigh or reanalyze the evidence presented or

substitute our judgment for that of the Commission. See Thompson v. State, 804 N.E.2d

1146, 1149 (Ind. 2004); McClendon v. State, 671 N.E.2d 486, 488 (Ind. Ct. App. 1996);

Moore v. State, 637 N.E.2d 816, 822 (Ind. Ct. App. 1994), trans. denied; Gary-Hobart Water

Corp., 591 N.E.2d at 652.

       In addition, the OUCC also argues that the prepaid pension asset was not included in a

prior rate base and that there is no precedent for the inclusion of the prepaid pension asset in

the base rate. We observe that generally, the Commission is not bound by its prior rulings.

See Ind. Bell Telephone Co. v. Ind. Util. Regulatory Comm’n, 715 N.E.2d 351, 358 (Ind.

1999). Further, the OUCC has failed to point to any Indiana authority stating that the prepaid

pension asset should not be included in I&M’s rate base. The OUCC merely points to a

portion of a decision by the State Corporation Commission of the Commonwealth of

Virginia1 in which the Virginia Commission rejected a company’s request to include a pre-

paid pension asset in the company’s rate base. (Tr. 5990-91) The decision of the Virginia

Commission does not cite to any authority that is binding in Indiana, and the OUCC has

failed to establish why the decision of the Virginia Commission should be followed by the

Commission in the instant case. As such, we conclude that the Commission was not bound to

follow the decision of the Virginia Commission.

       1
         The State Corporation Commission of the Commonwealth of Virginia appears to be the
Commission’s equivalent in Virginia.

                                              17
   B. Whether the Commission Erred by Using an End-of-Test-Year Method to
  Determine the Value of I&M Inventory of Materials and Supplies Rather Than a
                            Thirteen-Month Average

       The OUCC also contends that the Commission erred by using the end-of-test-year

method to determine the value of I&M’s inventory of materials and supplies rather than using

a thirteen-month average to determine the value of I&M’s inventory of materials and

supplies. This court has previously noted that ratemaking decisions do not adhere to rigid,

set procedures. Office of Util. Consumer Counselor, 463 N.E.2d at 503. The relevant body

of ratemaking decisions seems to illustrate this point. The OUCC cites to a number of cases

where the Commission adopted a thirteen-month average for determining the value of a

company’s inventory of materials and supplies. Meanwhile, I&M acknowledges the cases

cited by the OUCC but cites to a number of cases where the Commission adopted the end-of-

test-year method for determining the value of a company’s inventory of materials and

supplies.

       With respect to materials and supplies, the Commission found as follows:

       (3)     Materials & Supplies.
               (a)    I&M Case-in-Chief. I&M adjusted its proposed rate base to
       eliminate $3,828,761 of materials and supplies (“M&S”) applicable to non-
       utility operations, i.e., River Transportation Division. Otherwise, I&M’s
       proposed revenue requirement used the end-of-test-year M&S amount of
       $186,556,239 (Total Company) or $121,493,195 (Indiana Jurisdictional).
               (b)    OUCC Case-in-Chief. Mr. Eckert did not oppose I&M’s
       proposed rate base adjustment to eliminate the M&S applicable to non-utility
       operations, but disagreed with I&M’s proposal to use the M&S amount as of
       March 31, 2011, as the pro forma test year amount. He testified that he
       reviewed the M&S balances for the six-year period April 2006 through
       February 2012 and determined that the March 31, 2011 balance was the second
       highest amount and therefore was not representative of the test year. Using a
       13-month average for the period March 2010 through March 2011, Mr. Eckert

                                            18
       recommended the M&S balance to be included in rate base should be
       $178,075,379 (Total Company).
               (c)    I&M Rebuttal. Jeffrey L. Brubaker, AEPSC Director –
       Regulatory Accounting Services, testified that Mr. Eckert’s proposal to use a
       13-month average balance instead of the end-of-period balance in rate base is
       arbitrary. In Mr. Brubaker’s view the13-month average does not show that the
       end of period balance for the test year is unreasonable. Mr. Brubaker
       highlighted certain errors in Mr. Eckert’s calculation of his proposed M&S
       Indiana jurisdictional adjustment. Mr. Brubaker noted that while Mr. Eckert
       indicated that the test year included four of the highest months over a six-year
       period, Mr. Eckert failed to recognize that the test year also contains five of the
       seven lowest monthly M&S balances in the 25-month period December 2009
       through December 2011, and five of twelve lowest monthly balances in the 33-
       month period April 2009 through December 2011. Based on this evidence,
       Mr. Brubaker concluded that Mr. Eckert’s 13-month average balance results in
       an unreasonably low balance of M&S to be included in rate base. Mr.
       Brubaker explained that if the Commission uses a 13-month average balance,
       the appropriate period would be from December 2010 through December 2011
       as this period would correspond with the rate base cutoff date in this Cause.
       Mr. Brubaker calculated the 13-month average balance of M&S in rate base
       for December 2010 through December 2011 to be $180,987,920, to produce a
       M&S Indiana jurisdictional adjustment of ($3,549,664). Nevertheless, Mr.
       Brubaker recommend the Commission reject Mr. Eckert’s proposal to use a
       13-month average and instead include the actual March 31, 2011 balance of
       M&S in rate base.
               (d)    Commission Discussion and Findings. We find that the
       appropriate M&S balance to include in rate base is the actual balance as of
       March 31, 2011, as adjusted to eliminate amounts applicable to non-utility
       operations. Traditionally, we rely upon actual end of test year or pro forma
       period balances to estimate a utility’s expenses. The OUCC has not provided a
       sufficient basis for us to deviate from that practice. Thus, the amount of
       materials and supplies included in rate base is $186,556,239 (Total Company)
       or $121,493,195 (Indiana Jurisdictional).

Appellant’s App. pp. 35-36.

       The Commission’s findings again include detailed references to the testimony of the

parties’ witnesses and neither party alleges that these references do not accurately recount the

testimony given before the Commission. The Commission appeared to weigh this testimony

                                               19
in finding that it was more appropriate to use the end-of-test-year method for determining the

value of I&M’s inventory of materials and supplies. Again, the Commission, acting as the

trier of fact, was free to believe or disbelieve witnesses as it saw fit, and we will not reweigh

or reanalyze the evidence presented or substitute our judgment for that of the Commission.

See Thompson, 804 N.E.2d at 1149; McClendon, 671 N.E.2d at 488; Moore, 637 N.E.2d at

822; Gary-Hobart Water Corp., 591 N.E.2d at 652.

                  C. Whether the Commission Erred by Applying an
                       Allegedly Outdated Capital Structure

       The OUCC also contends that the Commission’s application of an outdated capital

structure is at odds with its precedent and practice. The capital structure used by the

Commission reflected the capital structure of I&M at the end of the test year period.

       The theory underlying the use of any test year and of any adjustment method in
       the rate-making process demands that the date used provide an accurate picture
       of the utility’s 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
       motion picture of a utility in action to examine one isolated frame. By
       stopping 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.

City of Evansville, 167 Ind. App. at 490, 339 N.E.2d at 575.

       “A utility’s capital structure may be based on the latest information available at the

                                               20
time of the final hearing.” 170 IAC 1-5-5(6) (emphasis added). However, we note that “the

selection of a test year and the adoption of an adjustment method involve complex

determinations best suited to the expertise of the Commission.” Office of the Pub. Counselor

v. Ind. & Mich. Elec. Co., 416 N.E.2d 161, 175 (Ind. Ct. App. 1981). “The appropriate

standard of review therefore limits our inquiry to whether, on the facts of this case, the test-

year and adjustment method selected by the Commission were reasonably related to the

purpose they were intended to serve—the fixing of ‘reasonable and just’ rates.” L.S. Ayres,

169 Ind. App. at 676, 351 N.E.2d at 830. “This standard of review does not authorize the

substitution of judicial judgment on matters committed to Commission discretion nor does it

require that the reviewing tribunal concur in the wisdom or correctness of the Commission’s

decision.” City of Evansville, 167 Ind. App. at 493, 339 N.E.2d at 576. “In other words, we

must determine that there has been no clear error in judgment and that the Commission’s

action is founded upon a reasonable basis of support in the whole record.” Id., 339 N.E.2d at

576.

        The Commission’s findings regarding I&M’s capital structure demonstrate that the

Commission heard a considerable amount of testimony regarding the parties’ positions

relating to capital structure. This testimony included statements regarding the various

valuation methods2 that could be used when determining a company’s capital structure. We

will highlight some of this testimony below:

        (1) I&M Case-in-Chief. William E. Avera, Ph.D., President of FINCAP,

        2
           These methods include an examination of comparable risk proxy group, a DCF analysis, a CAPM
analysis, the risk premium approach, the expected earnings approach, and examination of flotation costs, and
an examination of the impact of rate adjustment mechanisms.

                                                    21
Inc., presented his assessment of rate of return on equity (“ROE”) for I&M.
He also addressed the reasonableness of I&M’s capital structure, considering
both the specific risks faced by I&M and other industry guidelines, and
supported a fair return on fair value rate base that is consistent with underlying
regulatory standards and the guidance of the Commission. Dr. Avera
conduced various quantitative analyses to estimate the current cost of equity,
including: alternative applications of the [discounted cash flow (“DCF”)] and
the Capital Asset Pricing Model (“CAPM”); an equity risk premium approach
based on allowed rates of return; and reference to expected earned rates of
return for utilities.
                                       ****
        Dr. Avera noted that currently, I&M is assigned a corporate credit
rating of “BBB” by Standard & Poor’s Corporation (“S&P”), Baa2 by with
Moody’s Investors Service (“Moody’s”), and BBB- by Fitch Ratings Ltd.
(“Fitch). The S&P and Moody’s ratings are identical to those assigned to
I&M’s parent, AEP, and the Fitch rating for AEP is one notice higher at BBB.
                                       ****
        Dr. Avera also evaluated the reasonableness of I&M’s requested capital
structure and examined the implications of cost adjustment mechanisms for the
Company’s ROE. He concluded that a common equity ratio of approximately
52% represents a reasonable capitalization for I&M. He explained that the
common equity ratio implied by I&M’s capital structure is consistent with the
range of book value capitalizations maintained by the proxy group of electric
utilities, and falls below the average market value equity ratios for the proxy
group, based on data at year-end 2010 and near-term expectations. He added
that his conclusion is reinforced by the investment community’s focus on the
need for a greater equity cushion to accommodate higher operating risks and
the pressures of funding significant capital investments, as well as the impact
of off-balance sheet commitments such as I&M’s obligations under operating
leases.
                                       ****
        (h) Recommended ROE. Dr. Avera said that considering the relative
strengths and weaknesses inherent in each method, and conservatively giving
less emphasis to the upper- and lower-most boundaries of the range results, he
concluded that the cost of common equity indicated by his analyses is in the
range of 10.5% to 11.5%. After incorporating a minimum adjustment for
flotation costs of 15 basis points to his cost of equity range, he concluded that
a fair rate of return on equity for the proxy group of electric utilities is
currently in the range of 10.65% to 11.65%.
        Dr. Avera recommended a ROE for I&M at the midpoint of his
reasonable range, or 11.15%. He stated recent challenges in the economic and
financial market environment highlight the imperative of maintaining the

                                       22
Company’s financial strength in attracting the capital needed to secure reliable
service at a lower cost for customers. Dr. Avera explained that I&M faces
significant risk due to its use of nuclear generation, the ongoing uncertainties
related to future emissions legislation, and the need to provide an ROE that
supports I&M’s credit standing while funding necessary system investments.
Dr. Avera testified that these considerations indicated that an ROE from the
middle of his recommended range is reasonable. Dr. Avera added that I&M
has distinguished itself in numerous measures of operating efficiency and
effectiveness while maintaining moderate electric rates. Considering the
Company’s superior performance, Dr. Avera concluded that establishing a
ROE of 11.15% for I&M is entirely consistent with regulatory economics.
                                       ****
(2) OUCC Case-in-Chief. Edward R. Kaufman presented the OUCC’s
proposed cost of equity (“COE”) analysis.
                                       ****
        (h) Recommended ROE. Mr. Kaufman explained that he gave
additional weight to his Value Line DCF and CAPM analyses based on
historical risk premiums. This produced an overall range of 6.58% to 9.51%.
He believes that I&M’s COE is near the high end of his range and
recommended a COE of 9.20%. A COE of 9.20% results in a weighted cost of
capital of 6.35%. He made no company-specific business risk adjustment. He
made no adjustment to his estimated. Mr. Kaufman pointed to low inflation
rates, a Duke University survey of estimated annual returns, and other
forecasts as support for the reasonableness of his recommendation. Mr.
Kaufman also argued that his estimated COE is supported by the expected
average long-term rate of return on equities for Petitioner’s Pension, OPEBs,
and nuclear decommissioning study.
(3) Industrial Group Case-in-Chief. Mr. [Michael P.] Gorman presented a
rate of return analysis on behalf of the Industrial Group.
                                       ****
        (h) Recommended ROE. Mr. Gorman recommended the Commission
award Petitioner a ROE of 9.50%, based primarily on his DCF analysis, and an
overall rate return of 6.68%. Mr. Gorman explained that he placed less weight
on his CAPM return estimates because he is concerned about the reliability of
the results based on extremely low Treasury bond yields in today’s
marketplace. Mr. Gorman reviewed the S&P credit rating review for I&M.
He testified that using the Company’s proposed capital structure and assuming
I&M earns his recommended 9.50% return, I&M’s financial credit metrics are
supportive of its current “BBB” utility bond rating.
(4) South Bend Case-in-Chief. Mr. Reed W. Cearley, an independent
contractor, did not perform a DCF, CAPM or other COE analysis but offered
his opinion that I&M’s return on equity should be lower than, and certainly no

                                      23
higher than the ROE approved in its last rate case and suggested that I&M and
its investors should tighten their belts by accepting a lower ROE.
(5) I&M Rebuttal Evidence. Dr. Avera explained that Mr. Kaufman’s and
Mr. Gorman’s analyses and their resulting recommendations are flawed and
should be rejected.
                                       ****
        Dr. Avera explained that Mr. Kaufman and Mr. Gorman recognize that
I&M has relatively greater investment risk than other utilities. He showed that
S&P ranks I&M as considerably higher in risk compared to other utilities. He
noted that his direct testimony discussed the fundamental risk exposures that
drive investors to regard I&M as a relatively risky utility, including its
exposure to nuclear power and large capital needs. The end result is that I&M
must offer investors a higher return than its peers to compete for capital. He
explained that if the utility is unable to offer a return similar to that available
from other opportunities of comparable risk, investors will become unwilling
to supply the capital on reasonable terms. He added that for existing investors,
denying the utility an opportunity to earn what is available from other similar
risk alternatives prevents them from earning their opportunity cost of capital.
He said in this situation the government is effectively taking the value of
investors’ capital without adequate compensation.
                                       ****
(6) Commission Discussion and Findings. The record contains a number of
different methods of estimating Petitioner’s cost of common equity, resulting
in COE recommendations ranging from 6.58% to 12.3%. Petitioner
recommended an ROE of 11.15%, the OUCC recommended and ROE of
9.2%, and the Industrial Group recommended and ROE of 9.5%. The
midpoint of the Parties’ recommendations is 10.175%.
                                       ****
        Based on our discussion above, we find that a reasonable range for
Petitioner’s cost of equity is 9.5% to 10.5%, and when considering the quality
of the company’s management of its electric utility franchise, we conclude that
a 10.2% ROE is fair and reasonable.
B.      Overall Weighted Cost of Capital. Based on these findings and after
giving effect to the ROE we authorized above, we find that Petitioner’s capital
structure and weighted cost of capital is as follows:

                      Total Company          Percent Of     Cost Weighted Cost
Description           Capitalization         Total          Rate Of Capital

Long Term Debt        $1,563,320,246         38.74%          6.33%         2.45%
Preferred Stock       $    8,072,400          0.20%          4.58%         0.01%
Common Equity         $1,721,707,204         42.67%         10.20%         4.35%

                                        24
       Customer Deposits $ 28,745,633               0.71%          6.00%         0.04%
       ACC. DEF. FIT     $ 658,660,139             16.32%          0.00%         0.00%
       ACC. DEF. JDITC $ 54,720,445                 1.36%          8.35%         0.12%

       Total                 $4,035,226,067        100.00%                       6.97%

       Based on the record we further find that the foregoing capital structure
       properly reflects the target capital structure for the period the rates authorized
       herein will be in effect. We accept I&M’s proposal to establish its authorized
       net operating income by multiplying the overall weighted average cost by the
       original cost rate base and find that the overall weighted cost of capital should
       be considered, along with other factors, in deriving a fair return for Petitioner.

Appellant’s App. pp. 46-47, 48, 54, 56-57, 59, 67-69.

       Again, the capital structure used by the Commission reflected the undisputed capital

structure of I&M at the end of the test year period. The OUCC does not claim that the

numbers contained in the capital structure were inaccurate as of the end of the test year on

March 31, 2011.      Instead, the OUCC claims that the capital structure used by the

Commission was outdated as it did not reflect I&M’s actual capital structure at the time of

the final hearing. In support, the OUCC points to 170 IAC 1-5-5(2), “[a]ccounting data shall

be adjusted for changes that: (A) for ratemaking purposes, are: (i) fixed; (ii) known; and (iii)

measurable; and (B) will occur within twelve (12) months following the end of the test year,”

claiming that the alleged changes should have been reflected in the capital structure used by

the Commission because the redemption of over $8,000,000 of preferred stock and the

increase in deferred income tax were known and measurable.

       Specifically, the OUCC argues that the capital structure used by the Commission

failed to reflect that I&M had redeemed over $8,000,000 of its preferred stock and had

announced that it had no plans to issue new preferred stock. The OUCC, however, does not

                                              25
point to any evidence on appeal suggesting that I&M no longer had the proceeds from the

redemption of the preferred stock available to it as an asset as of December 31, 2011. The

OUCC also argues that the capital structure used by the Commission failed to reflect an

increase in I&M’s deferred income tax. The OUCC, however, does not point to any evidence

on appeal outlining the impact that the alleged increase in I&M’s deferred income tax had on

I&M’s corporate structure.

       Given the deference we grant to the Commission, the OUCC’s failure to point to

evidence that I&M no longer had the funds connected to the sale of the preferred stock as a

corporate asset, the OUCC’s failure to point to evidence demonstrating the impact that the

alleged increase in the deferred income tax will have on I&M’s corporate structure, and

because 170 IAC 1-5-5(b) provides that “[a] utility’s capital structure may” and not must “be

based on the latest information available at the time of the final hearing,” we conclude that

the Commission did not err by failing to update I&M’s capital structure to reflect the change

relating to its preferred stock at the time of the final hearing. (Emphasis added). Moreover,

we observe that the Commission’s findings, in their entirety, reflect that the Commission

carefully considered the detailed testimony presented to the Commission by each of the

parties. The Commission weighed this testimony in determining the proper capital structure.

Again, the Commission, acting as the trier of fact, was free to believe or disbelieve witnesses

as it saw fit, and we will not reweigh or reanalyze the evidence presented or substitute our

judgment for that of the Commission. See Thompson, 804 N.E.2d at 1149; McClendon, 671

N.E.2d at 488; Moore, 637 N.E.2d at 822; Gary-Hobart Water Corp., 591 N.E.2d at 652.

                                              26
                         III. Claim Presented on Cross-Appeal

       SDI filed a cross-appeal, in which it argued that the Commission erred in failing to

adopt a voltage-differentiated FAC. Specifically, SDI claims that the Commission erred in

determining that the adoption of a voltage-differentiated FAC would add unnecessary

complexity and would produce no material change.

A. Whether the Evidence Is Sufficient to Support the Commission’s Determination
    that a Voltage-Differentiated FAC Would Add Unnecessary Complexity

       SDI claims that the Commission traditionally recognizes voltage level cost distinctions

in allocating fuel costs in rate base cases. In support, SDI points to a recently approved

voltage-differentiated FAC in a case involving Vectren. However, the Commission’s

approval of a voltage-differentiated FAC in the Vectren case is distinguishable from the

instant matter because, unlike I&M, Vectren requested the proposed voltage-differentiated

FAC. Petition of S. Ind. Gas & Elec. Co. d/b/a Vectren Energy Delivery of Ind., Inc., 289

P.U.R.4th 9, 2011 WL 1690057 *91 (April 27, 2011). Accordingly, the Commission’s

approval of a voltage-differentiated FAC in the Vectren matter does not require approval of a

voltage-differentiated FAC in the instant matter.

       SDI also points to the testimony of OUCC witness Eckert, who stated that while he

was not conceptually opposed to voltage-differentiated FACs, that adoption of a voltage-

differentiated FAC in the instant matter would likely require additional submissions by I&M

as well as require the OUCC and the Commission to devote an unknown amount of

additional time and resources to the instant matter. SDI attempts to refute Eckert’s testimony

by pointing to the testimony of SDI witness Dr. Dennis W. Goins, who testified that Eckert

                                             27
had not identified what additional information I&M would need to submit relating to a

voltage-differentiated FAC. SDI also points to the testimony of I&M witness Mr. Scott M.

Krawec, who stated that I&M could, without much additional time, provide the OUCC with

the necessary additional information.

       The record demonstrates that the Commission considered the above-mentioned

testimony in determining that adoption of a voltage-differentiated FAC would add

unnecessary complexity. Again, the Commission, acting as the trier of fact, was free to credit

witness testimony as it saw fit. See Thompson, 804 N.E.2d at 1149; McClendon, 671 N.E.2d

at 488; Moore, 637 N.E.2d at 822.        SDI’s claim in this regard effectively amounts to an

invitation to reweigh the evidence, which we will not do. See Gary-Hobart Water Corp., 591

N.E.2d at 652.

 B. Whether the Evidence Is Sufficient to Support the Commission’s Determination
that Adopting a Voltage-Differentiated FAC Would Not Produce a Material Change

       SDI also claims that the record is devoid of any evidence supporting the

Commission’s determination that adopting a voltage-differentiated FAC would not produce a

“material change in the outcome.” Appellant’s App. p. 144. This court has previously noted

that “[r]ates for different classes of service need not be uniform or equal or equally profitable

to the utility; the prohibition is against unreasonable or undue discrimination in the

application of the rates.” L. S. Ayres, 169 Ind. App. at 692 n.31, 351 N.E.2d at 839 n.31.

“[H]owever, some rationale, principled reason or statement of policy must be given for the

different application for any meaningful judicial review of reasonableness.” Id., 351 N.E.2d

at 839 n.31.

                                               28
       In challenging the Commission’s determination, SDI relies on the testimony of Dr.

Goins, who testified that the current use of a non-voltage-differentiated FAC forces high-

voltage/transmission customers, like SDI, to subsidize low-/secondary-voltage customers.

Dr. Goins also testified that the average loss for energy delivered is greater for low-

/secondary-voltage customers than it is for high-voltage/transmission customers. As a result,

Dr. Goins opined that high-voltage/transmission customers could potentially be charged

thousands of dollars in above-cost fuel charges per year. SDI also points to the testimony of

I&M witness David M. Roush, which indicates that high-voltage/transmission customers

could potentially be overcharged because of the variations in rate of return. Accordingly,

SDI argues that the evidence shows that the evidence demonstrates that including line-losses

by voltage level is a more accurate matching of fuel cost than the current method.

       However, we observe that, even assuming SDI’s argument that the adoption of a

voltage-differentiated FAC would result in a more accurate matching of fuel costs is true,

SDI has failed to demonstrate that the record does not support the Commission’s

determination that the adoption of a voltage-differentiate FAC would not result in a material

change in the outcome. As the Commission noted in its detailed findings, the parties failed to

submit any evidence regarding what different outcome would be accomplished by the

adoption of a voltage-differentiated FAC. Both I&M and the OUCC indicated that they

would need more time to compile and review the necessary information. In addition, the

Commission noted that the OUCC recommended against the adoption of such a change at

this time. Even SDI’s expert, Dr. Goins, seemed to acknowledge that evidence presented

                                             29
before the Commission provided an outline of an approach for determining voltage-

differentiated FAC fuel factors in future FAC cases rather than actual numbers which the

Commission could rely upon in this case. The Commission’s findings provide adequate

rationale to allow for meaningful review of the reasonableness of the Commission’s

determination.

       Again, the Commission, acting as the trier of fact, was free to credit witness testimony

as it saw fit. See Thompson, 804 N.E.2d at 1149; McClendon, 671 N.E.2d at 488; Moore,

637 N.E.2d at 822. The Commission considered the evidence presented by SDI regarding the

adoption of a voltage-differentiated FAC and determined that the evidence did not establish

that the adoption of such method would result in a material change. SDI’s claim to the

contrary effectively amounts to an invitation for this court to reweigh the evidence, which we

will not do. See Gary-Hobart Water Corp., 591 N.E.2d at 652.

                                      CONCLUSION

       In sum, we conclude that the Commission did not err in including I&M’s prepaid

pension asset in the rate base amount, using an end-of-test-year method to determine the

value of I&M’s inventory of materials and supplies rather than a thirteen-month average, and

applying the end-of-test-year capital structure. We also conclude that the Commission did

not err in determining that the adoption of a voltage-differentiated FAC would add

unnecessary complexity and would produce no material change.

       The judgment of the Commission is affirmed.

MATHIAS, J., and PYLE, J., concur.

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