First TDSIC tracker petition short circuits, but power turned on

Three months after legislation was approved at the Indiana Statehouse allowing utility companies to pass along the costs of upgrading their infrastructure to consumers, Northern Indiana Public Service Co. took the new law out for a test drive.

The natural gas and electric provider headquartered in Merrillville petitioned to recover more than a billion dollars in system improvements planned for the next seven years. NIPSCO filed its request to recoup the costs through the state’s new Transmission, Distribution and Storage System Improvement Charges statute, also known as a rate adjustment mechanism, or tracker.

With some reservation, the Indiana Utility Regulatory Commission approved the petition. But an appeal by consumer groups sent NIPSCO’s proposal to the Indiana Court of Appeals, where the seven-year plan was found to be too opaque.

The decision, handed down in April 2015, halted other test drives. Subsequently, the state rejected similar petitions from Duke Energy and Indiana Michigan Power.

Residential and industrial consumer advocates were able to tap the brakes on NIPSCO’s attempt to increase monthly electric bills. The success is likely temporary, but the test drive illuminated a complex regulatory scheme and showed that consumers are paying for more than they know.

Replacing infrastructure

The Transmission, Distribution and Storage System Improvement Charges statute, referred to as the TDSIC tracker, was included in a utility regulation bill passed during the 2013 session of the Indiana General Assembly. Under Indiana Code 8-1-39, a utility can propose a seven-year plan for system improvements with TDSIC recovery capped at 2 percent of the company’s annual revenues.

Power companies maintain the tracker is necessary because the state’s utility infrastructure, installed mostly during the 1950s, 1960s and 1970s, is aging and needs to be replaced.

TDSIC encourages power companies to invest in system upgrades, said Mark Maassel, president of the Indiana Energy Association. In addition, the tracker enables utilities to recover the money paid out and pay back the loan for the improvements more quickly. This reduces the amount of interest that accumulates, which cuts the overall costs to customers, he said.

Critics counter that keeping transmission and distribution operations running is part of the cost of doing business and should not be passed off to ratepayers. Especially for electric companies, said Kerwin Olson, executive director of the Citizens Action Coalition, maintaining the infrastructure is part of the utility’s obligation to serve the public. Investment in the equipment is expected, he said.

By adding a tracker that covers everything between the power plant and the light switch, utilities have no incentive to watch costs, Olson said. The financial risk of the investment shifts to the customers.

Utility analysts also characterize the TDSIC as being more expansive than the other trackers in the Indiana Code. The statute is seen as allowing utilities to get the costs covered for everything except the kitchen sink, and power companies seemed to respond by taking a liberal view of what could be included.

In its petition for a TDSIC to collect $1.87 billion for infrastructure improvements, Duke Energy intended to use some of the money to replace its radio communications system, remodel its operation center and build a $3 million energy learning center in Plainfield.

TDSIC is a “sea change in the regulatory paradigm,” said Bose McKinney & Evans LLP attorney Nikki Gray Shoultz. This tracker is addressing the costs that utilities would pay for and then request a rate increase to cover when the current revenue did not compensate for the expenses created by the new infrastructure.

The TDSIC tracker allows power companies to short circuit the normal process to raise the base rates, Shoultz said.

Without the TDSIC, the Northern Indiana Public Service Co. would still be required to upgrade its infrastructure by doing such things as replacing transformers, laying new underground cable and building new substations. But it would be done at a much slower pace, said company spokesman Nick Meyer.

Parts of the utility’s system is over 50 years old, and making the needed replacements will require a huge capital expenditure, Meyer said. Even NIPSCO’s proposed $1.07 billion TDSIC request would have addressed just about 10 percent of its entire electric system.

Details and flexibility

Still, NIPSCO hit resistance over the level of detail loaded into its seven-year plan. While it identified the individual projects scheduled to be undertaken during the first year, the subsequent years in the plan were less clear.

The NIPSCO Industrial Group, a collection of the utility’s industrial customers, cried foul. It said NIPSCO’s spending projections for subsequent years allowed the scheduled work to be moved around across almost the entire distribution system. That, the group claimed, did not meet the statutory requirement for detail.

Dodd

Bette Dodd, a Lewis & Kappes attorney who helped represent the NIPSCO Industrial Group, described the plan as a “blank check.” The power company would get the money and then determine how to use the funds later.

Even the utility regulatory commission had some concerns about the plan. It required NIPSCO to return and provide more detail as the plan progressed.

Still, mandating the utility give more specifics at future summary proceedings did not meet the statute and only shifted the burden to the ratepayers. Dodd explained that the consumers would have to show the proposed projects were not eligible rather than NIPSCO having to prove its plan was appropriate under the new law.

Paul

Brian Paul, an attorney on the team representing NIPSCO before the Court of Appeals, said providing a high level of detail for seven years is difficult for utilities because unexpected changes could lead to a reprioritization of projects. At the time Paul represented NIPSCO he was with Ice Miller LLP; he is now a partner at Faegre Baker Daniels LLP.

Changes brought about by the amount of capital available, cost of material and labor, and environmental regulations make the electric industry particularly dynamic and difficult to predict, Paul said. NIPSCO was giving details while still leaving room to keep its seven-year plan fresh and responsive to current needs.

The Court of Appeals agreed with the industrial group and overturned NIPSCO’s plan, finding it lacked the detail required by the statute. However, the unanimous panel disagreed with the Office of the Utility Consumer Counselor’s argument regarding the calculation of the 2 percent cap.

Both the state agency and the industrial group contended the amount recoverable could be no more than 2 percent of the utility’s revenue over the entire seven-year period. The Court of Appeals upheld NIPSCO’s reading of the statute as allowing the 2 percent cap to be recalculated every 12 months based on the prior year’s total retail revenues.

Settlement

The parties said they are satisfied with the ruling from the appellate court. As the OUCC explained, the opinion gives clear guidance that the seven-year plan must contain sufficient details for all projects and provide the “best cost estimates” of all those projects. In addition, it reminds all the participants that the utility has the burden to prove the projects are eligible under the statute.

Maassel of the Indiana Energy Association said providing more specifics in a seven-year plan will be a challenge for power companies, but not impossible. At this point, he does not anticipate returning to the Legislature and trying to get the statute amended. Utilities, he said, can comply with the law as it has been interpreted by the court.

Since the reversal in the Court of Appeals, NIPSCO and the consumer counselor, along with some of the utility’s largest industrial customers, reached a settlement agreement which is pending before the Indiana Utility Regulatory Commission.

Terms of the settlement include having NIPSCO stop collecting fees under the TDSIC tracker and return the money plus 6 percent interest to customers. The utility will also reimburse the industrial group and U.S. Steel for attorney fees.

In addition, NIPSCO will file an electric base rate case by the end of 2015 and will file another petition to use the TDSIC tracker following that.•