Majority justices rule Duke can’t retroactively recover coal-ash cleanup costs

Indiana Supreme Court justices were divided on an issue of first impression brought by Duke Energy and the Indiana Utility Regulatory Commission, ultimately ruling that the utility cannot recover past coal-ash cleanup costs adjudicated under a prior rate order by treating the costs as a capitalized asset.

Duke Energy produces electricity using coal, which creates coal ash. But things had to change when the Environmental Protection Agency enforced new rules for treating coal ash and remediating ash ponds in 2015.

When Duke learned that some of its ash-management areas violated Indiana’s solid waste management rules, it began trying to bring them into compliance with state and federal law.

To cover those costs, Duke asked the Indiana Utility Regulatory Commission in 2019 to increase its rates for retail consumers. It specifically sought to recover roughly $212 million for coal-ash site closures, remediation and financing costs it incurred from 2010-2018 and expected to incur during 2019 and 2020, with the bulk of the coal-ash costs having been incurred from 2015-2018.

Duke proposed amortizing the costs across an 18-year span, prompting objections from the utility consumer counselor on behalf of ratepayers and several other parties. But the IURC partially granted Duke’s petition in a June 2020 order that permitted Duke to recover its coal-ash costs.

The Court of Appeals of Indiana affirmed, rejecting two issues on appeal: whether the IURC erred in accepting Duke’s jurisdictional separation study allocating costs between Duke’s retail and wholesale electricity customers, or by granting in full Duke’s request to recover operating and maintenance costs at its Edwardsport power plant.

However, a split panel of the Indiana Supreme Court reversed in a Thursday order after concluding that a utility cannot recoup its past costs adjudicated under a prior rate case.

Justices in Indiana Office of Utility Consumer Counselor, et al. v. Duke Energy Indiana, LLC, et al., 21S-EX-432, affirmed on the issues before the COA regarding the separation study and the Edwardsport plant, but found differently on a third issue of approving the coal-ash recovery costs.

The court concluded that Duke’s attempt to recover coal-ash costs from 2010-2020 was retroactive ratemaking “insofar as it permitted Duke to recover the costs it incurred before the June 2020 order.”

Justice Christopher Goff, concurring in part on the separation study and Edwardsport issues, parted ways with the majority on the third issue. He opined that Duke’s accounting method was reasonable under the circumstances and that the IURC had the statutory discretion to approve a utility’s accounting practices.

The dissenting justice found that the consumers failed to show the IURC’s order stands contrary to law, or that its conclusion that Duke’s remediation costs were “properly deferred” and recoverable was “a reasonable one entitled to deference.”

“Finally, it’s worth noting that environmental-remediation costs may run into the hundreds of millions of dollars, as the evidence here clearly shows,” Goff wrote. “If Duke were forced to absorb such a significant cost alone, it could actually hurt consumers in the long run.

“It makes sense, then, in my view, to allocate those costs among thousands — if not millions — of customers over a period of years,” Goff continued. “… After all, the purpose of the IURC is to balance ‘the public’s need for adequate, efficient, and reasonable service with the utility’s need for sufficient revenue to meet the cost of furnishing service and to earn a reasonable profit.’”

But the high court majority disagreed with both Duke and the dissent’s assertion that the Supreme Court should give deference to the IURC.

“The issue here is not whether Duke used a proper accounting method to track its remediation costs in its balance sheet,” Justice Geoffrey Slaughter wrote. “The issue is whether the commission can approve reimbursement for a deferred asset, even one properly accounted for, without violating the statutory bar against retroactive ratemaking. This question — whether the commission’s order was retroactive ratemaking under (Indiana Code) section 8-1-2-68 — is a question of law.”

The majority noted the dissenting justice argued that the commission order did not violate the law because the appellate court in NIPSCO v. Indiana Office of Utility Consumer Counselor, 826 N.E.2d 112 (Ind. Ct. App. 2005), held that accounting decisions fall within the commission’s discretion.

“But even assuming we agreed with the appellate decision, NIPSCO simply said that reasonable accounting practices are left to the commission’s discretion,” Slaughter wrote. “It did not say that anytime accounting is implicated in a commission order, a reviewing court cannot consider whether the order violates other laws.”

After applying the principle that a utility cannot recover unforeseen past losses, the majority held that the commission violated the bar against retroactive ratemaking by readjudicating in 2020 coal-ash costs governed by its 2004 rate order.

“Thus, the commission exceeded its statutory authority,” the court concluded.

It therefore held that absent specific statutory authorization, a utility cannot recoup its past costs adjudicated under a prior rate case. The high court reversed the portion of the commission’s June 2020 order that approved those costs and remanded to the commission for proceedings.

Also, the justices summarily affirmed the COA on the separation study and Edwardsport plant issues.