                                                                Apr 08 2015, 10:25 am




ATTORNEYS FOR APPELLANT,                                   ATTORNEYS FOR APPELLEE,
NIPSCO INDUSTRIAL GROUP                                    INDIANA UTILITY REGULATORY
Todd A. Richardson                                         COMMISSION
Bette J. Dodd                                              David Lee Steiner
Jennifer W. Terry                                          Deputy Attorney General
Joseph P. Rompala                                          Office of the Indiana Attorney General
Lewis & Kappes, P.C.                                       Indianapolis, Indiana
Indianapolis, Indiana
                                                           Beth Krogel Roads
ATTORNEYS FOR APPELLANT,                                   Andrew J. Wells
INDIANA OFFICE OF UTILITY                                  Indiana Utility Regulatory Commission
CONSUMER COUNSELOR                                         Indianapolis, Indiana

A. David Stippler                                          ATTORNEYS FOR NORTHERN
Randall C. Helman                                          INDIANA PUBLIC SERVICE
Lorraine Hitz-Bradley                                      COMPANY
Jeffrey Reed
Indianapolis, Indiana                                      Brian J. Paul
                                                           Kay E. Pashos
ATTORNEYS FOR AMICUS CURIAE,                               Kelly S. Earls
INDIANA ENERGY ASSOCIATION                                 Ice Miller, LLP
                                                           Indianapolis, Indiana
Wayne C. Turner
Patrick Z. Ziepolt                                         Claudia J. Earls
Bingham Greenebaum Doll, LLP                               Erin Casper Borissov
Indianapolis, Indiana                                      NiSource Corporate Services – Legal
                                                           Indianapolis, Indiana

                                                           ATTORNEYS FOR NLMK, INDIANA,
                                                           A DIVISION OF NLMK USA

                                                           Richard E. Aikman, Jr.
                                                           Anne E. Becker
                                                           Lewis & Kappes, P.C.
                                                           Indianapolis, Indiana




Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015                   Page 1 of 31
                                                  IN THE
          COURT OF APPEALS OF INDIANA

      NIPSCO Industrial Group, and,                              April 8, 2015
                                                                 Court of Appeals Cause No.
      Indiana Office of Utility                                  93A02-1403-EX-158
      Consumer Counselor,                                        Appeal from the Indiana Utility
                                                                 Regulatory Commission
      Appellants-Intervenor and Statutory                        Cause No. 44370 & 44371

      Party below,                                               The Honorable James D. Atterholt,
                                                                 Chairman; The Honorable Carolene
                                                                 R. Mays; The Honorable David E.
                                                                 Ziegner, Commissioners
              v.

      Northern Indiana Public Service
      Company, et al.,
      Appellees-Petitioner and Parties below.




      Barnes, Judge.


                                               Case Summary
[1]   In this consolidated appeal, the Indiana Office of Utility Consumer Counselor

      (“OUCC”) and the NIPSCO Industrial Group (“Industrial Group”) appeal the

      decision of the Indiana Utility Regulatory Commission (“Commission”)

      regarding two petitions filed by Northern Indiana Public Service Company




      Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015                       Page 2 of 31
      (“NIPSCO”) to establish increased rates under a new statute, Indiana Code

      Chapter 8-1-39. We affirm in part, reverse in part, and remand.1


                                                       Issues
[2]   The Industrial Group raises three issues, which we consolidate and restate as:


                         I.       whether the Commission erred by allowing
                                  NIPSCO to specifically identify the proposed
                                  projects for only the first year of the seven-year
                                  plan and by establishing a presumption that the
                                  proposed projects for years two through seven
                                  of the plan were eligible for special ratemaking
                                  treatment; and

                         II.      whether the Commission erred by approving
                                  costs allegedly in excess of a statutory cap on
                                  aggregate increases.

[3]   The OUCC raises two issues, which we restate as:


                         III.     whether the Commission erred by allowing
                                  NIPSCO to continue rate recovery of retired
                                  equipment while also recovering for
                                  replacement assets; and

                         IV.      whether the Commission erred by approving
                                  NIPSCO’s     proposed    rate   allocation
                                  methodology.




      1
          We held oral argument on this matter on February 26, 2015. We commend counsel for their presentations.


      Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015                         Page 3 of 31
                                                       Facts
[4]   NIPSCO is a public electric and gas utility that services over 457,000 customers

      in northern Indiana. The OUCC is the statutory representative of the public

      before the Commission. See Ind. Code § 8-1-1-5(c). The Industrial Group is a

      group of some of NIPSCO’s largest industrial customers.


[5]   Traditionally, a utility’s rates charged to customers are adjusted through

      periodic rate cases, which are expensive, time consuming, and sometimes result

      in large, sudden rate hikes for customers. NIPSCO’s last rate case was finalized

      in December 2011. There, the Commission issued an order in Cause No. 43969

      and approved a settlement regarding NIPSCO’s proposed general rate increase.

      See In Re Petition of NIPSCO to Modify its Rates, Cause No. 43969, 2011 WL

      6837714 (Ind. U.R.C. Dec. 21, 2011).


[6]   Another way to set rates is through “tracker” proceedings, which allow smaller

      increases for specific projects and costs between general rate case proceedings.

      The General Assembly has authorized several trackers, including a fuel charge

      tracker, see Ind. Code § 8-1-2-42(d), a tracker for qualified pollution control

      projects under construction, see Ind. Code § 8-1-2-6.8, a tracker for federally

      mandated costs, see Ind. Code § 8-1-8.4-7, and a tracker for clean energy

      projects, see Ind. Code §§ 8-1-8.8-11 and 8-1-8.8-12. In 2013, the General

      Assembly enacted Indiana Code Chapter 8-1-39, which allows a utility to

      petition for a tracker for certain proposed new or replacement electric or gas




      Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015     Page 4 of 31
      transmission, distribution, or storage projects. The new statute is referred to as

      the “TDSIC” statute.


[7]   In July 2013, NIPSCO filed two petitions with the Commission under the new

      TDSIC statute. In Cause No. 44370, NIPSCO sought approval of a seven-year

      plan pursuant to Indiana Code Section 8-1-39-10. The plan included over $1

      billion in improvements and replacements to NIPSCO’s transmission and

      distribution systems. In Cause No. 44371, NIPSCO sought approval of the rate

      increases associated with the seven-year plan. The two petitions were treated as

      companion cases. The parties prefiled evidentiary submissions, and an

      evidentiary hearing was held in November 2013.


[8]   On February 17, 2014, the Commission issued its final orders. In Cause No.

      44370, the Commission substantially approved NIPSCO’s seven-year plan.

      However, the Commission found that NIPSCO had provided sufficient detail of

      the plan for only the first of the seven years. For years two through seven, the

      Commission established a “presumption of eligibility” and required NIPSCO to

      annually update the plan through an informal process. Industrial Group’s App.

      pp. 25-26.


[9]   In Cause No. 44371, the Commission also substantially approved NIPSCO’s

      proposed rate increases. The Commission approved NIPSCO’s adjustments to

      the customer class revenue allocation factors based on firm/non-firm load and

      distribution/transmission considerations. The Commission rejected the

      OUCC’s argument that NIPSCO should be required to reduce its return and


      Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015    Page 5 of 31
       depreciation so that it was not recovering on both replaced assets and the new

       replacement assets. Finally, the Commission rejected the Industrial Group’s

       interpretation of the two-percent cap found in Indiana Code Section 8-1-39-14.


[10]   The OUCC filed a petition to reconsider in Cause No. 44371. The OUCC

       argued that “the recoverable TDSIC costs should be adjusted to reflect the

       removal of any return and depreciation expenses embedded in base rates that

       are associated with original transmission and distribution investments that will

       be retired as a result of new TDSIC investments.” Id. at 34. The OUCC also

       argued that “NIPSCO’s request to apply adjusted customer class allocation

       factors should be denied and they should be required to apply the customer

       class revenue allocators from the Commission’s Order in Cause No. 43969.”

       Id. The Commission did “not find statutory support for the netting of

       investment in determining the appropriate investment to be afforded cost

       recovery” and declined “to require NIPSCO to adjust TDSIC costs to reflect

       the removal of any return and depreciation expenses embedded in base rates

       that are associated with original transmission and distribution investments that

       will be retired as a result of new TDSIC investments.” Id. at 34-35. As for the

       allocation factors, the Commission found that its original order addressed the

       issue adequately. Consequently, the Commission denied OUCC’s petition to

       reconsider.


[11]   The OUCC appealed the Commission’s order in Cause No. 44371, and the

       Industrial Group appealed the Commission’s order in Cause No. 44370. We

       granted NIPSCO’s motion to consolidate the appeals. In addition to filing an

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015   Page 6 of 31
       appellant’s brief, the Industrial Group also filed an appellee’s brief addressing

       the rate allocation issue raised by the OUCC. The Commission and NIPSCO

       also filed appellee’s briefs. Finally, we granted the Indiana Energy Association

       permission to file an amicus curiae brief.


                                                     Analysis
[12]   The OUCC and the Industrial Group appeal the Commission’s order regarding

       NIPSCO’s TDSIC petitions. The General Assembly created the Commission

       primarily as a fact-finding body with the technical expertise to administer the

       regulatory scheme devised by the legislature. N. Indiana Pub. Serv. Co. v. U.S.

       Steel Corp., 907 N.E.2d 1012, 1015 (Ind. 2009); I.C. § 8-1-1-5. The

       Commission’s assignment is to ensure that public utilities provide constant,

       reliable, and efficient service to the citizens of Indiana. Id. The Commission

       only can exercise power conferred upon it by statute. Id. Its authority also

       “includes implicit powers necessary to effectuate the statutory regulatory

       scheme.” United States Gypsum, Inc. v. Indiana Gas Co., 735 N.E.2d 790, 795

       (Ind. 2000). Any doubts regarding the Commission’s statutory authority must

       be resolved against the existence of such authority. U.S. Steel Corp. v. N. Indiana

       Pub. Serv. Co., 951 N.E.2d 542, 550 (Ind. Ct. App. 2011), trans. denied.


[13]   An order of the Commission is subject to appellate review to determine whether

       it is supported by specific findings of fact and by sufficient evidence, as well as

       to determine whether the order is contrary to law. United States Gypsum, 735

       N.E.2d at 795. On matters within its jurisdiction, the Commission enjoys wide


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015     Page 7 of 31
       discretion. Id. The Commission’s findings and decision will not be lightly

       overridden just because we might reach a contrary opinion on the same

       evidence. Id. We first review the entire record to determine whether there is

       substantial evidence to support the Commission’s findings of basic fact. U.S.

       Steel Corp., 951 N.E.2d at 551. Next, we review ultimate facts, or mixed

       questions of fact and law, for their reasonableness with the amount of deference

       owed depending on whether the issue falls or does not fall within the

       Commission’s expertise. Id. Finally, legal propositions are reviewed for their

       correctness. Id. More precisely, “an agency action is always subject to review

       as contrary to law, but this constitutionally preserved review is limited to

       whether the Commission stayed within its jurisdiction and conformed to the

       statutory standards and legal principles involved in producing its decision,

       ruling, or order.” Id.


[14]   Many of the issues here involve the interpretation of the new TDSIC statute.

       Generally, an agency’s reasonable interpretation of a statute it is charged with

       enforcing is entitled to great weight. Id. In statutory construction, our primary

       goal is to ascertain and give effect to the intent of the legislature. Id. at 552.

       The language of the statute itself is the best evidence of legislative intent, and

       we must give all words their plain and ordinary meaning unless otherwise

       indicated by statute. Id. Furthermore, we presume that the legislature intended

       statutory language to be applied in a logical manner consistent with the statute’s

       underlying policies and goals. Id. However, we will not interpret a statute that




       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015       Page 8 of 31
       is clear and unambiguous on its face; rather, we will give such a statute its

       apparent and obvious meaning. Id.


                                                I. Plan Sufficiency


[15]   The Industrial Group argues that the Commission erred by allowing NIPSCO

       to specifically identify the proposed projects for only the first year of the seven-

       year plan. The Industrial Group also argues that the Commission erred by

       establishing a presumption that the proposed projects for years two through

       seven of the seven-year plan were eligible for special ratemaking treatment.


[16]   Indiana Code Section 8-1-39-10(a) requires a utility’s TDSIC petition to contain

       a “seven (7) year plan for eligible transmission, distribution, and storage

       improvements.” The Commission’s order on the petition must include the

       following:

              (1)       A finding of the best estimate of the cost of the eligible
                        improvements included in the plan.
              (2)       A determination whether public convenience and necessity
                        require or will require the eligible improvements included in the
                        plan.
              (3)       A determination whether the estimated costs of the eligible
                        improvements included in the plan are justified by incremental
                        benefits attributable to the plan.
       I.C. § 8-1-39-10(b). “If the commission determines that the public utility’s

       seven (7) year plan is reasonable, the commission shall approve the plan and

       designate the eligible transmission, distribution, and storage improvements

       included in the plan as eligible for TDSIC treatment.” Id.


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015            Page 9 of 31
[17]   The Commission found that NIPSCO’s seven-year plan included “general

       categories of spending, separated primarily by function rather than specific

       projects in Years 2 through 7, with the specific projects for Year 1 better

       defined.” Industrial Group App. pp. 20-21. Despite the lack of specificity

       regarding the projects beyond the first year of the plan, the Commission

       approved the plan as follows:

               Based upon our review of the evidence of record, and the foregoing
               considerations of each component of Ind. Code § 8-1-39-10, we find
               that NIPSCO’s 7-Year Electric Plan is reasonable under the conditions
               as applied by this Order. . . . We find there is sufficient evidence to
               approve the Year 1 projects as eligible for TDSIC treatment.
               However, we are concerned that the project specific detail of Years 2
               through 7 does not rise to the same level of confidence. Thus, in the
               context of our 7-Year Plan approval we will presume the categories of
               spending identified in the 7-Year Electric Plan for Years 2 through 7
               are eligible for TDSIC treatment. Because we expect these eligible
               project categories will become better defined in terms of specificity as
               their respective investment year comes of age, this presumption of
               eligibility will be assigned to specific projects in the annual updating
               process as further described below.
       Id. at 25. The Commission then established an informal bi-annual update to the

       plan and anticipated that NIPSCO would provide details on specific projects,

       similar to what it provided for Year 1. The Commission found that “this

       process will reasonably balance the needs of NIPSCO for investment recovery

       confidence and customers for prudent investment assurance.” Id. at 26. The

       Commission noted:

               Clearly, a 7-Year Plan for any public utility must necessarily include
               some level of flexibility to address changing circumstances. It would
               not be reasonable for a public utility to submit a 7-Year Plan that does


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015        Page 10 of 31
               not acknowledge that unforeseen events and changes in circumstances
               do occur and may require changes to the 7-Year Plan.
       Id. at 22.


[18]   On appeal, the Industrial Group argues that the statutes require the

       improvements to be “designated” in the plan and that the Commission did not

       have enough information to determine whether the plan was “reasonable” or to

       determine a “best estimate of the cost” of the improvements. See I.C. § 8-1-39-

       10(b). The Commission argues that approval of the plan was a matter within its

       expertise and discretion. NIPSCO contends that the plan is reasonable because

       the Commission found NIPSCO had an “overarching goal,” included a

       “defined roadmap,” and had a “reasonably detailed overview of what types of

       projects need to be undertaken.” NIPSCO’s Appellee’s Br. pp. 29-30.


[19]   NIPSCO’s seven-year plan included cost estimates for projected direct capital

       expenses, which included estimates for both transmission and distribution

       projects, and projected indirect capital expenditures. The plan also provided

       detailed information on the improvements for the first year of the plan.

       Specifically, for 2014 only, NIPSCO provided details on the type of

       improvement, reason for the improvement, the project title and location, and a

       project cost for each category. However, detailed information on the projects

       was not provided for years two through seven of the plan. For the remaining

       years, NIPSCO only provided “expected annual total spends for major project

       categories.” Tr. p. 624.




       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015   Page 11 of 31
[20]   NIPSCO argues that another exhibit, TAD-R1, is part of the plan. TAD-R1 is

       a list of all of NIPSCO’s major transmission and distribution assets and that

       TAD-R1 identifies the name of each asset to be replaced, the cost of each asset

       to be replaced, and the year in which the asset is to be replaced. However,

       NIPSCO’s argument conflicts with the Commission’s finding regarding the

       plan. See Industrial Group App. p. 25 (“[W]e are concerned that the project

       specific detail of Years 2 through 7 does not rise to the same level of

       confidence.”). NIPSCO also did not identify TAD-R1 as part of the “plan.” In

       fact, in the verified rebuttal testimony of Timothy Dehring, NIPSCO’s senior

       vice president of transmission and engineering, he acknowledged the OUCC’s

       concerns with the plan’s lack of detail, noted that TAD-R1 was provided during

       discovery to address the OUCC’s concerns, and stated that the OUCC “makes

       a valid recommendation that in the future this type of information should be

       provided with the 7-Year Electric Plan.” Tr. p. 589. Consequently, we

       conclude that TAD-R1 was not part of the “plan.”


[21]   We further conclude that the plan provided to the Commission simply did not

       contain enough detail for the Commission to determine whether NIPSCO’s

       plan for years two through seven was “reasonable” or to determine a “best

       estimate of the cost” of the improvements. I.C. § 8-1-39-10(b). We

       acknowledge the arguments on appeal that a utility needs some flexibility to

       deal with changing conditions. Clearly, NIPSCO requires some flexibility in

       completing the seven-year plan because some equipment may need to be




       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015    Page 12 of 31
       replaced earlier or later than initially planned. Even the OUCC acknowledged

       that some flexibility is required, and its representative testified:

               The OUCC appreciates that over the course of 7 years project priorities
               will likely change. Unforeseen events will occur and assets may fail
               sooner than anticipated. . . . The OUCC does not object to this
               shifting as long as the utility (NIPSCO) is transparent with the
               [Commission], OUCC and Intervenors regarding the reasons for the
               shift. . . . NIPSCO should not be locked into a specific set of projects
               today that in the future would not provide the greatest benefit to the
               T&D system and its users. Conversely, the OUCC does not believe
               the Statute permits NIPSCO to make wholesale substitutions of
               projects as it sees fit.
       Tr. pp. 842-43. The OUCC proposed that NIPSCO submit an updated plan

       annually “concurrent with its Fall TDSIC tracker filing” and that the parties

       would have the opportunity to contest the revised plans. Id. at 843. We believe

       that the legislature anticipated the necessity of flexibility when it enacted the

       updating process of Indiana Code Section 8-1-39-9. The updating process does

       not, however, relieve the utility of providing an initial seven-year plan that

       meets the statutory requirements. Allowing for flexibility in a plan is not the

       same thing as not having a plan at all. We conclude that the Commission erred

       by approving NIPSCO’s seven-year plan given its lack of detail regarding the

       projects for years two through seven.


[22]   The Industrial Group also takes issue with the Commission establishing a

       presumption of eligibility for years two through seven. The Commission found

       that, even though NIPSCO provided insufficient detail of the plan for years two

       through seven, a presumption of eligibility would be established that the

       projects would be eligible for TDSIC treatment. See Industrial Group’s App. p.
       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015       Page 13 of 31
       25 (“[W]e will presume the categories of spending identified in the 7-Year

       Electric Plan for Years 2 through 7 are eligible for TDSIC treatment. . . . [T]his

       presumption of eligibility will be assigned to specific projects in the annual

       updating process . . . .”). The Industrial Group points out that we have held

       that the Commission may not create legal presumptions. See S. Indiana Gas &

       Elec. Co. v. Indiana Farm Gas Prod. Co., 540 N.E.2d 621, 625 (Ind. Ct. App.

       1989), vacated on reh’g on other grounds, 549 N.E.2d 1063 (Ind. Ct. App. 1990),

       trans. denied. The Industrial Group also asserts that, by creating a presumption

       of eligibility, the Commission has shifted the burden from NIPSCO to

       intervening parties to demonstrate that the proposed projects are eligible for

       TDSIC treatment. NIPSCO counters that the presumption is permissible

       because the Commission was exercising its expertise and inherent authority and

       the presumption “balanced the relationship between NIPSCO and its

       customers.” NIPSCO’s Appellee’s Br. p. 41. The Commission argues that it

       did not shift the burden of proof and did not establish a rebuttable presumption.


[23]   We conclude that the Commission’s order did establish a presumption of

       eligibility regarding the undefined projects for years two through seven. There

       does not appear to be any statutory support for establishing such a presumption.

       We agree with the Industrial Group that such a presumption inappropriately

       shifts the burden of showing a project’s eligibility for TDSIC treatment from

       NIPSCO to other intervening parties. On remand, the Commission may not

       establish such a presumption.




       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015   Page 14 of 31
                                                II. Statutory Cap

[24]   The Industrial Group also argues that the Commission erred by approving costs

       in excess of a statutory cap on aggregate increases. Because this issue and the

       issues raised by the OUCC are likely to be relevant on remand, we will address

       them.


[25]   Indiana Code Section 8-1-39-14 provides:

               (a)      The commission may not approve a TDSIC that would result
                        in an average aggregate increase in a public utility’s total retail
                        revenues of more than two percent (2%) in a twelve (12) month
                        period. For purposes of this subsection, a public utility’s total
                        retail revenues do not include TDSIC revenues associated with
                        a targeted economic development project.
               (b)      If a public utility incurs TDSIC costs under the public utility’s
                        seven (7) year capital expenditure plan that exceed the
                        percentage increase in a TDSIC approved by the commission,
                        the public utility shall defer recovery of the TDSIC costs as set
                        forth in section 9(b) of this chapter.
[26]   Before the Commission, the Industrial Group argued that, under the statute,

       NIPSCO was limited to a two-percent increase over the course of the seven-

       year plan. The Commission disagreed and found:

               NIPSCO and the Industrial Group have presented two different
               interpretations of Ind. Code § 8-1-39-14. NIPSCO’s calculation
               compares the increase in TDSIC revenue in a given year with the total
               retail revenues for the past 12 months whereas the Industrial Group
               compares the total TDSIC revenue in a given year with the total retail
               revenues for the base 12 months. Since this is a case of first
               impression, we must interpret and apply this statutory language for the
               first time based on the express language of the statute and the general
               rules of statutory interpretation.
                        Section 14(a) states as follows:

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015            Page 15 of 31
                        The commission may not approve a TDSIC that would
                        result in an average aggregate increase in a public utility’s
                        total retail revenues of more than two percent (2%) in a
                        twelve (12) month period. For purposes of this
                        subsection, a public utility’s total retail revenues do not
                        include TDSIC revenues associated with a target
                        economic development project.
               Based on the unambiguous language of Section 14, we find that
               NIPSCO’s proposed calculation that compares the increase in TDSIC
               revenue in a given year with the total retail revenues for the past 12
               months is consistent with the TDSIC statute. Under the Industrial
               Group’s interpretation, a utility would be capped at an amount of
               TDSIC revenue that would have the effect of being a cumulative 2%
               increase. However, the average aggregate increase language of the
               statute allows a utility to increase its TDSIC revenues by 2% a year, on
               a year over year basis. Thus, we find that NIPSCO’s proposed
               calculation is consistent with Section 14 and should be approved.
       OUCC App. p. 29.


[27]   On appeal, the Industrial Group argues that the statute is ambiguous regarding

       the two-percent cap. According to the Industrial Group, the “aggregate”

       increase over the entire seven-year plan cannot exceed two percent. NIPSCO

       asserts that the statute is unambiguous. According to NIPSCO, the Industrial

       Group is ignoring the “twelve (12) month period” language in the statute.

       NIPSCO argues that the statute allows a two-percent increase every twelve

       months based on the prior twelve months’ total retail revenues. The

       Commission agreed with NIPSCO and argues that its interpretation was

       reasonable and that the statute is unambiguous. The Commission points out,

       “If the Legislature intended to apply the 2% cap to the entirety of a seven-year

       plan, why would it specifically confine the 2% increase to a twelve-month

       period?” Commission’s Appellee’s Br. p. 20. Additionally, the Indiana Energy

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015           Page 16 of 31
       Association argues that the Industrial Group’s interpretation would “cripple the

       TDSIC statute.” Indiana Energy Association’s Br. p. 3.


[28]   The statute does not allow “an average aggregate increase in a public utility’s

       total retail revenues of more than two percent (2%) in a twelve (12) month

       period.” I.C. § 8-1-39-14(a). The plain language of the statute allows an

       average two-percent increase in a twelve month period, not during the entire

       seven-year plan. We must give the statute its apparent and obvious meaning.

       U.S. Steel Corp., 951 N.E.2d at 551. The Commission did not err in interpreting

       the two-percent cap of Indiana Code Section 8-1-39-14(a).


                                                III. Retired Assets

[29]   The OUCC argues that the Commission erred by allowing NIPSCO to

       continue rate recovery of retired equipment while also recovering for

       replacement assets. According to the OUCC, under the rate increases proposed

       by NIPSCO, NIPSCO will continue recovering on assets no longer in use until

       the next general rate case, which could result “in utility rate payers paying

       millions of dollars for up to seven years for assets no longer providing them any

       service.” OUCC’s Reply Br. p. 10. The OUCC asserts that NIPSCO will

       receive a double recovery, i.e., a return on the new assets at the same time as it

       is receiving a return on the old, replaced asset.


[30]   This argument has two facets—the calculation of NIPSCO’s “return on” the

       investments and depreciation. In general, “the end purpose of the function of

       the Commission is to establish a rate sufficient to meet the operating expenses


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015   Page 17 of 31
       of the company plus a fair return which will compensate the investors.”

       Citizens Energy Coal., Inc. v. Indiana & Michigan Elec. Co., 396 N.E.2d 441, 445

       (Ind. Ct. App. 1979). “Utility’s revenues, minus expenses, constitute the return

       on investments.” Id. (emphasis added). On the other hand, depreciation

       accounts for a reduction in value of an asset as it ages; depreciation is

       sometimes called “return of” the investment. OUCC’s Reply Br. p. 10. The

       OUCC does not “oppose NIPSCO collecting any remaining amounts for

       undepreciated plant, but advocated for adjustments to the TDSIC to prevent

       NIPSCO from earning a ‘return on’ an investment that was no longer in

       service.” OUCC’s Appellant’s Br. p. 25 n.8.


[31]   The OUCC challenged NIPSCO’s proposed rate increase for the TDSIC

       improvements based on this issue. The Commission allowed NIPSCO to

       recover for TDSIC projects without subtracting for returns or depreciation

       already being recovered for the assets being replaced. Specifically, the

       Commission found:

               The OUCC recommended that NIPSCO should only be permitted to
               recover the incremental capital, depreciation and operating and
               maintenance costs of replacement TDSIC projects because ratepayers
               are already paying for the replaced assets in basic rates. Similarly,
               U.S. Steel recommended NIPSCO should be required to produce
               adjustments in its updated 7-Year Electric Plan and in the calculation
               of the periodic TDSIC trackers to account for and eliminate the
               recovery of costs and depreciation associated with the early retirement
               and replacement of assets replaced and recovered in the TDSIC
               charges. U.S. Steel argued that by recovering carrying costs and
               depreciation expense for assets that are retired early and replaced
               through the 7-Year Electric Plan, NIPSCO will be recovering for assets
               that are no longer used and useful. U.S. Steel argued to allow such

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015       Page 18 of 31
               double recovery is not in the public interest or consistent with
               fundamental ratemaking principles.
               The statutory definition of eligible improvements at Ind. Code § 8-1-
               39-2 authorizes recovery of investment for replacement projects and
               the definition of pretax return at Ind. Code § 8-1-39-3 provides that
               revenues should provide for such investments, notably without
               suggesting any deduction or netting of the replaced asset. Further,
               TDSIC costs as defined at Ind. Code § 8-1-39-7 includes this
               unadjusted pretax return. While acknowledging that Ind. Code § 8-1-
               39-13(a) allows the Commission to consider other information in
               setting the appropriate pretax return, we read this section to be
               addressing the weighted cost of capital rate rather than the investment
               amount so as to reconcile the statutory language of Sections 13 and 3.
               Accordingly, we do not find statutory support for the netting of
               investment in determining the appropriate investment to be afforded
               cost recovery. In addition, the TDSIC statute requires a general rate
               case before the expiration of the utility’s 7-year plan which provides a
               built in mechanism to update the net investment of the utility. Thus,
               we decline to require NIPSCO to recognize the replaced asset
               investment cost already embedded in base rates because Ind. Code ch.
               8-1-39 does not support it outside of the required rate case.
       OUCC App. pp. 26-27.


[32]   The Commission found that the TDSIC statutes do not specifically address this

       issue, and we agree. The TDSIC statute allows a utility to recover, through

       “the periodic automatic adjustment of the public utility’s basic rates and

       charges,” eighty percent of “approved capital expenditures and TDSIC costs.”

       I.C. § 8-1-39-9(a). Recovery of the remaining twenty percent of approved

       capital expenditures and TDSIC costs is deferred to the next general rate case

       filed by the utility. I.C. § 8-1-39-9(b). Although TDSIC costs are defined by the

       statutes, the statutes do not mention depreciation or return on the replaced

       equipment. See I.C. § 8-1-39-7 (defining TDSIC costs, including pretax returns,


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015        Page 19 of 31
       among other things); I.C. § 8-1-39-3 (defining pretax returns). The statute does,

       however, allow the Commission to consider “[o]ther information that the

       commission determines is necessary” in calculating pretax returns. I.C. § 8-1-

       39-13.


[33]   Despite the lack of a specific statute addressing the OUCC’s concern here, the

       OUCC argues that Indiana Code Section 8-1-2-6(a) requires the Commission to

       “value all property of every public utility actually used and useful for the

       convenience of the public at its fair value.” (Emphasis added). The OUCC

       argues that the Commission allowed NIPSCO to continue recovering a return

       on assets that will be replaced through the TDSIC proceeding and will no

       longer be “used and useful.”


[34]   NIPSCO argues that the “used and useful” principle applies only to

       determining whether the cost of new investments should be passed onto

       consumers. NIPSCO’s Appellee’s Br. p. 70. In support of this argument,

       NIPSCO relies on Citizens Action Coal. of Indiana, Inc. v. N. Indiana Pub. Serv. Co.,

       485 N.E.2d 610 (Ind. 1985), cert. denied, where NIPSCO sought to recover costs

       for a cancelled nuclear power plant. Our supreme court did not allow NIPSCO

       to recover the costs of a project that was never used and useful. However, our

       supreme court differentiated that situation from the “long-adhered to

       administrative interpretation of allowing amortization of abandoned plants, i.e.

       plants that were ‘used and useful’ property and then retired from service.”

       Citizens Action Coal., 485 N.E.2d at 616. The court noted: “Allowance of

       amortization of cancelled plants would encourage uneconomical or

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015     Page 20 of 31
       unproductive ventures; whereas, allowance for amortization of abandoned or

       retired plants encourages utilities to remove obsolete plants and property from

       the ratebase. This treatment also benefits consumers because obsolete and

       inefficient property is removed from the ratebase.” Id.


[35]   The OUCC argues that the language from Citizens Action Coal. of Indiana is dicta

       and that more recent Commission orders have reached contrary results. The

       OUCC notes that, in other contexts, the Commission has refused to allow a

       utility to earn such a double recovery even where the statutes do not directly

       address the issue. The OUCC cites the Commission’s determination in In Re

       Petition of NIPSCO, Cause No. 42150 ECR 21, 2013 WL 5740184 (Ind. U.R.C.

       Oct. 16, 2013), where NIPSCO sought to replace pollution control equipment.

       The Commission allowed NIPSCO to recover “a return of its investment” on

       the original and replacement catalyst layers. OUCC Appellant’s Addendum p.

       13. However, the Commission noted that “should we grant full recovery of

       NIPSCO’s return on its investment in the replacement layer when it already

       receives a return on its investment in the original layer through its base rates

       and charges, then until its next base rate case, NIPSCO would receive a return

       on investment for two catalyst layers, while only one layer is in service.” Id.

       The Commission concluded that NIPSCO would “be allowed to seek recovery

       of its full depreciation expense (return of investment) for the replacement

       layer,” but it would “only be allowed to seek recovery of the incremental

       amount of the return on its investment for the replacement catalyst layer that




       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015    Page 21 of 31
       exceeds the return on investment currently included in its base rates and charges

       for the original catalyst layer.” Id.


[36]   The OUCC also cites In Re Indiana-American Water Co., Inc., Cause No. 42351

       DSIC-1 (Ind. U.R.C. Feb. 27, 2003). There, the Commission was considering a

       water utility’s petition under the Distribution System Improvement Charge

       (“DSIC”) statute and refused to allow a water utility to earn both a return on a

       replaced asset and a return on the replacement asset. The Commission held:

               Petitioner’s rate base is based on the fair value of its assets. When any
               asset with a positive fair value is retired that will reduce the utility’s
               fair value rate base. Thus, if retirements are ignored and a utility is
               allowed to earn a return on new plant through a DSIC and on the
               retired asset through its return on the fair value rate base determination
               from the utility’s last rate case.
       Id. at 32.


[37]   NIPSCO responds that the Commission is not bound by its prior rulings and

       that the rulings concern different statutes. According to NIPSCO, if the

       Commission adopted the OUCC’s “netting” proposal, “NIPSCO’s common

       equity holders would not only lose their return on common equity, they would

       be required to pay NIPSCO’s long-term debt.” NIPSCO’s Appellee’s Br. p. 73.


[38]   Under the TDSIC statutes, the Commission “may consider . . . [o]ther

       information that the commission determines is necessary” in calculating pretax

       returns. I.C. § 8-1-39-13 (emphasis added). The Commission could, under this

       statute, address the OUCC’s concern; the Commission, however, is not required

       to do so. We give “great deference” to the Commission’s rate-making

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015         Page 22 of 31
       methodology. Office of Util. Consumer Counselor v. Citizens Tel. Corp., 681 N.E.2d

       252, 255 (Ind. Ct. App. 1997). This subject is “within the Commission’s special

       competence,” and “courts should give it greater deference.” Duke Energy

       Indiana, Inc. v. Office of Util. Consumer Counselor, 983 N.E.2d 160, 170 (Ind. Ct.

       App. 2012). Although we have significant concerns over the allegedly

       inconsistent treatment of this subject by the Commission, in light of the

       deference owed to the Commission, we cannot say that its methodology is

       erroneous given the lack of specificity in the statutes regarding this calculation.


                                         IV. Rate Allocation Factors

[39]   The OUCC next argues that the Commission erred in calculating the rate

       allocation factors to be applied here. NIPSCO charges different rates to

       different customer classes based on the cost to serve each customer class. For

       example, Rates 610, 611, and 612 govern residential customers, while Rates

       632, 633, and 634 govern industrial customers. Some customers receive “firm

       load,” which is basically the amount of electricity that is guaranteed by the

       utility; while some customers also receive “non-firm load” (also known as

       “interruptible load”), which is electrical service that can be interrupted. See

       NIPSCO’s Appellee’s Br. p. 9.


[40]   Another issue here is whether the customer is a distribution or transmission

       customer. Transmission is the transfer of electric energy from its sources of

       generation across high-voltage lines to either a local distributor, a substation, or

       a large-scale industrial customer. See id. at 77. Distribution involves the


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015    Page 23 of 31
       transfer of electric energy through a retail delivery system to smaller-scale

       industrial, commercial, and residential customers. See id.


[41]   In NIPSCO’s most recent retail base rate case order in December 2011 in Cause

       No. 43969, the revenue allocation factors were based on a settlement

       agreement, not a typical cost-of-service study. When the parties reached the

       settlement in Cause No. 43969, one of the most contentious issues was the rate

       allocation. See In Re Petition of NIPSCO to Modify its Rates, Cause No. 43969,

       2011 WL 6837714 (Ind. U.R.C. Dec. 21, 2011). Basically, the Order allowed

       NIPSCO to move all customers to “firm” rates. Id. (allowing NIPSCO to

       “migrat[e] customers from special contracts to firm service”). Industrial

       customers were then allowed a credit for interruptible, or “non-firm,” usage

       through Rider 675. Id. The Commission noted in Cause No. 43969 that

       “revenue allocation and Rider 675 were interrelated and reflected difficult and

       painstaking negotiations to reach a balanced outcome and resolution which was

       acceptable to the Settling Parties.” Id. The Commission gave “substantial

       weight to the Settling Parties’ agreement with respect to revenue allocation.”

       Id.


[42]   The allocation factors are again an issue in this litigation. The TDSIC statute

       requires the petition to “use the customer class revenue allocation factor based

       on firm load approved in the public utility’s most recent retail base rate case

       order.” I.C. § 8-1-39-9(a). Rather than use the allocation factors reached in the

       December 2011 settlement agreement, NIPSCO sought to adjust the revenue

       allocation factors from the settlement agreement because it claimed that those

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015   Page 24 of 31
       allocation factors: (1) included non-firm load; and (2) included distribution

       costs for customers that only used transmission facilities. See Petitioner’s Exh.

       DJI-1, Exh. 2, Schedule 4; Tr. pp. 923-24. NIPSCO’s proposed allocation

       factors are favorable to large industrial customers and unfavorable to residential

       customers. See Tr. p. 1308.


[43]   The Commission agreed with NIPSCO and found the following with respect to

       the rate allocation factors:

               Petitioner is requesting approval to use modified versions of its
               customer class revenue allocation factor based on firm load that was
               approved as Joint Exhibit C to the settlement agreement approved in
               the 43969 Order. Mr. Shambo testified that for transmission costs the
               revenue allocation factor should be adjusted for Rider 675 interruptible
               credit in order to remove the non-firm portion of revenues from Rates
               632 and 634. Mr. Shambo noted that for distribution costs the revenue
               allocation factor from Joint Exhibit C should be adjusted to exclude
               revenue from Rates 632, 633, and 634, which are transmission and
               sub-transmission rates.
               OUCC witness Mr. Hand argued that NIPSCO’s request to apply
               adjusted customer class allocation factors should be denied and they
               should be required to apply the customer class revenue allocators from
               the 43969 Order.
               The 43969 Order allocated revenue to customer classes based on a
               settlement agreement rather than a cost of service study. A cost of
               service study would have included separate allocation factors for
               distribution and transmission. However, the 43969 Order includes all
               costs in one factor. Further, the approved customer class revenue
               allocation factors included non-firm load, which was effectively
               adjusted out of the revenue allocation in a subsequent ratemaking step.
               Ind. Code § 8-1-39-9(a) requires NIPSCO to use the customer class
               revenue allocation factor based on firm load developed in the most
               recent base rate case. The evidence shows that many of the same
               customers currently taking interruptible service under Rider 675 were
               interruptible prior to the date the 43969 Order was issued. However,

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015        Page 25 of 31
               the evidence shows that pursuant to the 43969 Order, NIPSCO’s old
               interruptible rates were terminated and replaced by the new firm rates
               plus an interruptible Rider 675 which established a different method to
               designate load as non-firm or interruptible. Thus, in order for the Joint
               Exhibit C allocation factors to properly reflect the customer class
               revenue allocation factors based on firm load, they must be adjusted to
               reasonably reflect non-firm load that was treated as firm under the
               construct of the settlement agreement as approved in the 43969 Order.
               Based on our review of the TDSIC statute and the evidence in this
               Cause, we find that NIPSCO’s proposal that the revenue allocation
               factor be adjusted for the Rider 675 interruptible credit in order to
               remove the non-firm portion of the revenues from Rates 632 and 634 is
               consistent with Ind. Code § 8-1-39-9(a)(1) and should be approved.
               Further, NIPSCO’s proposal to exclude Rates 632, 633 and 634 is a
               reasonable method to accomplish the alignment of the cost causation
               with cost allocation, under the evidence specific conditions presented
               in this proceeding together with the 43969 Order, for the purpose of
               allocating distribution costs in a manner that comports with Ind. Code
               § 8-1-39-9(a)(1). We find it is appropriate to adjust the 43969 Order
               approved Joint Exhibit C allocation factors by removing Rates 632,
               633 and 634 from the calculation for purposes of allocating
               distribution-related TDSIC costs so that rate classes that do not use the
               distribution system are not allocated distribution costs.
       OUCC App. pp. 24-25.


[44]   On appeal, the OUCC argues that the Commission’s order is erroneous because

       it failed to use the allocation factors approved in the last rate case as required by

       Indiana Code Section 8-1-39-9(a). The OUCC also argues that it would be bad

       public policy to allow the parties to engage in protracted negotiations to

       establish the rate allocation factors and then allow NIPSCO to immediately

       argue that it is not bound by the settlement. NIPSCO argues that the allocation

       factors in the last rate case were established by a settlement agreement, not

       through a cost-of-service study, and that, if the allocation factors has been


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015         Page 26 of 31
       established through a cost-of-service study, the large industrial customers would

       have been allocated only transmission costs, not distribution costs. NIPSCO

       also argues that the statute required it to use allocation factors based on firm

       load and that the allocation factors established by the settlement agreement

       included non-firm load. Consequently, according to NIPSCO, the allocation

       factors had to be adjusted. NIPSCO contends that “[a]ll [it] did was to adjust

       these allocation factors to square them with traditional ratemaking principles,

       which are based on simple fairness.” NIPSCO’s Appellee’s Br. p. 78.


[45]   The Commission also briefly addresses this issue in its Appellee’s Brief. The

       Commission only addresses the non-firm adjustment and does not mention the

       transmission/distribution adjustment. According to the Commission, the

       statute requires only allocation factors based on firm load and it was reasonable

       to allow NIPSCO to make the adjustments.


[46]   The Industrial Group also filed an appellee’s brief responding to the allocation

       factor argument. The Industrial Group supports the allocation factors

       advocated by NIPSCO. In its reply brief, the OUCC argues that the evidence

       does not support the Commission’s finding that the settlement agreement’s

       allocation factors included non-firm load.


[47]   At the hearing before the Commission, Frank Shambo, vice president of

       regulatory and legislative affairs for NIPSCO, testified that “NIPSCO proposes

       that the customer class revenue allocation factor be adjusted for the Rider 675

       interruptible credit in order to remove the non-firm portion of revenues from


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015   Page 27 of 31
       Rates 632 and 634.” Tr. pp. 956, 1017. Shambo also testified: “For distribution

       TDSIC costs, NIPSCO proposes that the customer class revenue allocation

       factor be adjusted to exclude revenues from Rates 632, 633 and 634 which are

       transmission and subtransmission service rates.” Id. at 1017; see also id. at 956.

       OUCC witness Eric Hand testified that the proposed allocation factors did not

       match the factors approved in the settlement agreement and that allowing

       NIPSCO to make the proposed adjustments to the allocation factors would

       undercut the settlement agreement. Although the OUCC argues that non-firm

       load was not included in the settlement agreement’s allocation factors, it seems

       clear that non-firm load was included and that a credit was given to the

       customers using non-firm load.


[48]   In support of its argument, NIPSCO relies on Citizens Action Coalition of Indiana,

       Inc. v. NIPSCO, 804 N.E.2d 289 (Ind. Ct. App. 2004). In Citizens Action

       Coalition, NIPSCO sought to increase rates to implement pollution control

       equipment. A regulation required: “A utility’s jurisdictional revenue

       requirement that results from the ratemaking treatment of qualified pollution

       control property under construction under this rule shall be allocated among the

       utility’s customer classes in accordance with the allocation parameters established by the

       commission in the utility’s last general rate case.” 170 IAC 4-6-15 (emphasis added).

       Despite the regulation’s requirement that the allocations used in the utility’s last

       general rate case be utilized, NIPSCO sought to use an allocation methodology

       from a later cost study. The Commission allowed NIPSCO to do so, and on

       appeal, we affirmed.


       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015          Page 28 of 31
[49]   NIPSCO argued that “the purpose of the rule requiring that allocation among

       customer classes be governed by the utility’s last general rate case is to allow

       utilities to avoid the necessity of preparing a costly cost of service study every

       time they seek authorization for QPCP investments.” Citizens Action Coalition,

       804 N.E.2d at 303. “It argue[d] that the rule is not intended to preclude use of

       newer and more accurate studies in situations where they have already been

       prepared for other reasons.” Id. We concluded that, given the evidence of the

       benefits of using the more recent study, the Commission’s decision was not

       erroneous. Id. at 304. We noted that “[e]nforcing strict compliance with 170

       IAC 4-6-15 by requiring the Commission to use the 1987 study would produce

       the illogical result of having NIPSCO allocate costs based on outdated data

       when a more recent study is available.” Id. Emphasizing “our preference to

       place substance over form,” we could not conclude that the Commission erred

       by using the later study rather than the allocations from the last general rate

       case. Id.


[50]   We reach a similar conclusion here. The TDSIC statute requires the use of “the

       customer class revenue allocation factor based on firm load approved in the

       public utility’s most recent retail base rate case order.” I.C. § 8-1-39-9(a). The

       allocation factors from the December 2011 settlement agreement were based on

       both firm and non-firm load. Consequently, the adjustment to remove the non-

       firm load portion was within the Commission’s discretion and expertise.


[51]   The statute, however, did not require an adjustment for transmission versus

       distribution considerations. The adjustment of the allocation factors to account

       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015    Page 29 of 31
       for differences between transmission and distribution customers would conflict

       with the clear language of the statute, which requires the use of the allocation

       factors approved in the December 2011 settlement agreement. We recognize

       that the Commission has “the technical expertise to administer regulatory

       schemes devised by the legislature.” Indiana Office of Util. Consumer Counselor v.

       Lincoln Utilities, Inc., 834 N.E.2d 137, 145 (Ind. Ct. App. 2005), trans. denied.

       “We also give great deference to the [Commission’s] rate-making

       methodology.” Id. However, the Commission’s “authority is limited to that

       which is granted to it by statute.” Id. at 142. We conclude that the

       Commission exceeded its statutory authority by allowing the adjustment of the

       allocation factors based on transmission and distribution considerations.


                                                   Conclusion
[52]   We conclude that the Commission improperly approved NIPSCO’s seven-year

       plan under the TDSIC statute because it lacked detail regarding the proposed

       projects for years two through seven. We also conclude that the Commission

       improperly established a presumption of eligibility for the projects in years two

       through seven. However, we conclude that the Commission properly

       interpreted the two-percent cap language in the TDSIC statute, and we give

       deference to the Commission’s decision regarding the rate recovery of retired

       assets. Finally, we conclude that the Commission was within its discretion to

       adjust the rate allocation factors to remove non-firm load; however, the

       Commission exceeded its statutory authority when it adjusted the allocation



       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015     Page 30 of 31
       factors based on transmission and distribution considerations. We affirm in

       part, reverse in part, and remand.


[53]   Affirmed in part, reversed in part, and remanded.


       May, J., and Pyle, J., concur.




       Court of Appeals of Indiana | Opinion 93A02-1403-EX-158 |April 8, 2015   Page 31 of 31
