Under traditional rate regulation, an energy utility must first make improvements to its infrastructure before it can recover their cost through regulator-approved rate increases to customers. The process for recouping these costs, sometimes not until years after they were incurred, is an expensive, onerous ratemaking case, which involves a comprehensive review of the utility's entire business operations.
In 2013 the legislature authorized utilities to obtain regulatory preapproval for "designated" improvements to their infrastructure. Under the so-called "TDSIC"
At issue here is the Indiana Utility Regulatory Commission's preapproval of approximately $20 million in infrastructure investments for which the Commission authorized increases to NIPSCO's natural-gas rates under the TDSIC mechanism. NIPSCO is an energy utility with more than 800,000 customers in northern Indiana. Some of NIPSCO's largest industrial customers-represented here by the NIPSCO Industrial Group-oppose NIPSCO's entitlement to favorable rate treatment under the TDSIC Statute, contending the disputed projects do not comply with the Statute's requirements.
The Commission's holding below, which divided our Court of Appeals, approved various categories of improvements-referred to variously as "project categories", "multiple-unit-project categories", and "multiple-unit projects"-that describe broad parameters for identifying future improvements but do not designate those improvements with specificity. NIPSCO defends these categorical designations by arguing it does not, and cannot, know in advance which specific segments of natural-gas pipes throughout its system will fail each year. But it does know, based on historical performance, that a certain percentage of its system will need to be replaced annually. NIPSCO contends the TDSIC Statute permits the Commission to approve a seven-year plan that describes future investments in terms of ascertainable planning criteria, although when its plan was approved, NIPSCO did not know which specific segments of its system would need to be replaced.
The Industrial Group, in contrast, interprets the TDSIC Statute more narrowly. It argues the Statute requires the utility and the Commission to designate specific projects upfront, rather than to rely on categories of projects not identified with specificity until later years. For the Industrial Group, the traditional ratemaking case is still the primary process for seeking reimbursement, subject to occasional use of the TDSIC procedure in the limited band of investments to which it applies.
The stakes are much larger than just the roughly $20 million at issue between NIPSCO and the Industrial Group. The Commission, we are told, has approved billions of dollars of utility-infrastructure investments through the TDSIC process. Given the favorable regulatory treatment, utilities are likely to funnel increasing amounts of infrastructure investments through this reimbursement mechanism. How we resolve these competing visions of the TDSIC Statute will likely have enormous financial consequences for utilities and their customers.
We conclude the TDSIC Statute permits periodic rate increases only for specific projects a utility designates, and the Commission approves, in the threshold proceeding and not for multiple-unit projects using ascertainable planning criteria. In other words, a utility must specifically identify the projects or improvements at the outset in its seven-year plan and not in later proceedings involving periodic updates. There is an appreciable difference between designating specific "projects" and "improvements" up front, which the Statute requires, and describing the criteria for selecting them later, which the Commission approved. We agree with the Court of Appeals' dissenting opinion that Commission approval of "broad categories
Because we find that preclusion principles do not bar our consideration of this important legal issue of first impression, we grant transfer, reverse the Commission's order in part, and remand.
Factual and Procedural History
A. Traditional utility regulation
Utility regulation is premised on a "regulatory compact" in which the State sanctions a utility's monopoly within a defined service area and subjects the utility to various regulatory restrictions and responsibilities.
As a quid pro quo for being granted a monopoly in a geographical area for the provision of a particular good or service, the utility is subject to regulation by the state to ensure that it is prudently investing its revenues in order to provide the best and most efficient service possible to the consumer.
United States Gypsum, Inc. v. Ind. Gas Co. ,
The State regulates utilities through the Commission, which is authorized by statute to act with "technical expertise to administer the regulatory scheme designed by the legislature ... to insure that public utilities provide constant, reliable, and efficient service to the citizens of Indiana." N. Ind. Pub. Serv. Co. v. United States Steel Corp. ,
Traditionally, utility rates are adjusted through general ratemaking cases. General ratemaking is a "comprehensive" process, requiring the Commission to "examine every aspect of the utility's operations and the economic environment in which the utility functions to ensure that the data [the Commission] has received are representative of operating conditions that will, or should, prevail in future years." United States Gypsum ,
B. The TDSIC process
Over the years, the legislature has supplemented traditional ratemaking with various "tracker" procedures that allow utilities to ask the Commission to adjust their rates to reflect various costs without having to undergo a full ratemaking case. The TDSIC Statute, I.C. ch. 8-1-39, enacted in 2013, is one such procedure. It encourages energy utilities to replace their aging infrastructure by modernizing electric or gas transmission, distribution, and storage projects. This TDSIC procedure, pronounced "tee-DEE-zick", is a process for utilities to assess a distinct charge-a Transmission, Distribution, and Storage System Improvement Charge-for completed projects deemed eligible improvements under the Statute. In contrast to traditional ratemaking, the TDSIC procedure permits a utility to seek preapproval of designated
(1) a public utility undertakes for purposes of safety, reliability, system modernization, or economic development ... ; (2) were not included in the public utility's rate base in its most recent general rate case; and (3) [were] designated in the public utility's seven (7) year plan and approved by the commission under section 10 of this chapter as eligible for TDSIC treatment".
I.C. § 8-1-39-2.
The TDSIC Statute contemplates two distinct types of proceedings. First, under Section 10, the utility may seek regulatory approval of a seven-year plan for designated improvements to transmission, distribution, and storage systems. See
Second, under Section 9, once the Commission has approved a seven-year plan, the utility may petition every few months for periodic rate adjustments to recover "eighty percent (80%) of approved capital expenditures and TDSIC costs" for the system improvements designated as eligible and actually completed.
C. NIPSCO's TDSIC litigation
1. Designated vs. described
The parties dispute what qualifies as an eligible project under Section 2, which requires both designation and approval of the project in a seven-year plan the Commission approves under Section 10. I.C. § 8-1-39-2(3)(A). The Industrial Group claims the Commission can designate and approve projects identified only during the initial Section 10 process, and not during subsequent Section 9 petitions. It also claims that the TDSIC process is an extraordinary mechanism, applicable only in limited circumstances, and that the general ratemaking case remains the presumptive process for utilities to recover their investment costs.
NIPSCO, in contrast, argues the Commission can properly designate and approve multiple-unit projects , described using ascertainable planning criteria, as TDSIC-eligible. NIPSCO characterizes these multiple-unit projects, generally, as planned undertakings that include component parts that need to be improved, but without knowing in advance which specific parts will require replacement. Here, the United States Department of Transportation mandates that NIPSCO annually inspect thousands of units of natural-gas
2. Current procedural posture
Shortly after the TDSIC Statute was enacted, NIPSCO filed two Section 10 petitions, seeking approval of separate, but substantially similar, seven-year plans: one each for its electric system and its gas system. The Commission approved NIPSCO's Electric Plan in February 2014 and, in a separate proceeding, approved its Gas Plan in April 2014. The plans identified specific projects for the first year and described "project categories" for years two through seven. NIPSCO subsequently filed periodic Section 9 tracker petitions, seeking rate increases associated with completed matters referenced in the approved seven-year plans.
In 2015, the Court of Appeals reversed in part the Commission's order approving NIPSCO's Electric Plan. NIPSCO Indus. Grp. v. N. Ind. Pub. Serv. Co. ,
When the Electric Plan appeal was decided, NIPSCO had already completed its first Gas Plan Section 9 tracker petition, TDSIC-1, and the second, TDSIC-2, was pending. Given the legal problems with its Electric Plan, NIPSCO voluntarily dismissed its TDSIC-2 Gas Plan petition with the understanding that its next Section 9 tracker petition, TDSIC-3, would seek TDSIC-2 reimbursement and modification of its Gas Plan to comply with the appellate ruling.
In TDSIC-3, NIPSCO again sought approval of an "updated" seven-year Gas Plan. Although NIPSCO provided additional information for the proposed projects for all seven years of its revised seven-year Gas Plan, its TDSIC-3 petition continued to include projects identified with specificity as well as yet-to-be-identified projects. NIPSCO said it would identify specific instances of completed improvements within certain project-group categories in subsequent Section 9 plan updates. The Commission found that TDSIC-3 presented "a unique situation" because it had already approved NIPSCO's initial Section 10 Gas Plan in a final order. And it generally endorsed NIPSCO's proposal to establish objective ascertainable criteria for selecting specific projects within "project group" categories. The Industrial Group did not challenge the Commission's TDSIC-3 order approving NIPSCO's petition.
In February 2016, NIPSCO filed its fourth Section 9 petition-TDSIC-4-the subject of this appeal. This filing included another update to the Gas Plan, seeking an increase of approximately $20 million in the previously approved "Inspect & Mitigate" category. This category included both additional distinct projects and an increased number of projects within previously
The Industrial Group intervened at the Commission and opposed this petition for $20 million in rate relief. Particularly, the Industrial Group objected to NIPSCO's multiple-unit-projects approach, arguing that project groups described using objective ascertainable-standard criteria are not permitted under the TDSIC Statute. Despite this challenge, the Commission approved NIPSCO's TDSIC-4 petition. Relying on its TDSIC-3 order, the Commission found NIPSCO's multiple-unit-project categories were supported by sufficient ascertainable planning criteria for later identifying eligible improvements, and the roughly $20 million increase was based on "further identification of the specific projects or asset replacements within the approved project groups."
The Industrial Group appealed the Commission's TDSIC-4 order, and a divided Court of Appeals affirmed. The majority held that NIPSCO's updated seven-year plan was lawful "because the improvements included in the update were not new projects as they were chosen by utilizing the ascertainable planning criteria previously approved by the Commission and contained in NIPSCO's 7-year plan."
Standard of Review
When reviewing Commission decisions, we conduct three levels of review: one for factual findings; another for mixed questions of law and fact; and a third for questions of law. At issue here is the last category. This case does not implicate the Commission's ratemaking expertise but presents a pure question of law: Does the TDSIC Statute authorize the Commission to approve "project categories" or "multiple-unit projects" described using ascertainable planning criteria?
We review questions of law de novo, Ind. Bell Tel. Co. v. Ind. Util. Regulatory Comm'n ,
Separation-of-powers principles do not contemplate a "tie-goes-to-the-agency" standard for reviewing administrative decisions on questions of law. In discharging our constitutional duty, we pronounce the statutory interpretation that is best and do not acquiesce in the interpretations of others. Deciding the scope of the Commission's authority under the TDSIC Statute falls squarely within our institutional charge. Crafting our State's utility law is for the legislature; implementing it is for the executive acting through the Commission; and interpreting it is for the courts.
I. Multiple-unit projects described using ascertainable criteria are not eligible for TDSIC treatment.
We conclude the TDSIC Statute does not apply to project categories or multiple-unit projects described using ascertainable criteria. The Statute requires the Commission to "designate" eligible projects in a threshold seven-year plan under Section 10. The only interpretation of "designate" that satisfies the dual statutory requirements of particularity and cost justification is one requiring projects to be identified with specificity from the outset. In addition, Section 9 "update" petitions enable the utility to obtain rate adjustments as it completes the approved projects and incurs the additional budgeted costs. The only projects consistent with Section 10's preapproval requirement are those the utility specified at the beginning of the plan, and not "new" projects or those requiring the passage of time to specify later. The Commission erred when it authorized multiple-unit-project categories in a Section 10 proceeding and approved NIPSCO's later specification of projects under Section 9.
A. The TDSIC Statute requires the Commission to "designate" eligible projects in a threshold seven-year plan.
A utility seeking favorable rate treatment under the TDSIC Statute for eligible infrastructure improvements must file with the Commission a proposed seven-year plan that designates the planned projects. I.C. §§ 8-1-39-2(3)(A), 8-1-39-10(a). The Commission must approve the plan if it is reasonable.
If the Commission finds the plan reasonable considering the cost-benefit analysis, it must designate and approve projects as TDSIC-eligible.
(1) a "utility undertakes for purposes of safety, reliability, system modernization, or economic development";
(2) "were not included in the utility's rate base in its most recent general rate case"; and
(3) were "designated" in the utility's seven-year plan that the Commission approved under Section 10.
"Designate" is an undefined statutory term. When interpreting a statute, we presume the legislature uses undefined terms in their common and ordinary meaning. In re S.H. ,
We conclude that "designate" in Sections 2 and 10 requires both the utility and the Commission to identify the TDSIC-eligible projects with particularity in the threshold proceeding and does not allow the approval of project categories that require a later specification based on ascertainable planning criteria. This interpretation is consistent with the further requirement that the Commission meaningfully apply the Statute's cost-benefit guideposts during the Section 10 proceeding and approve the project(s) submitted in the seven-year plan. Because Section 2 requires the Commission to designate and approve TDSIC-eligible projects only after finding a plan reasonable under Section 10, the Commission's reasonableness determination necessarily sets the budget and defines the scope of a seven-year plan to what the Commission considered and approved in the threshold proceeding. Thus, the Commission order approving the Section 10 plan must define the plan's scope with particularity and establish a best-estimate budget for effectuating the plan. The Commission's order does not satisfy these statutory requirements.
Our view of what "designate" means in the TDSIC Statute is illustrated by Major League Baseball's designated-hitter rule. The rule, which was first implemented in the American League in 1973, allows a team to add a tenth player to the traditional nine-player lineup who will bat for the pitcher, typically the weakest hitter on the field. Before a game, each manager's lineup card must "designate" which player is to serve as the designated hitter. Major League Baseball, OFFICIAL BASEBALL RULES , Rule 4.03(c) & 5.11 (2018). The rule requires naming a specific player as the DH from the team's 25-man roster. Anything less than a player-specific identification at the outset of the game will not suffice. It is inadequate, for example, for the lineup card to describe the DH anonymously or generically as one of the fifteen (or so) remaining players on the roster. Waiting until the DH's turn at bat to identify a player doesn't comport with the rule. Such "player-to-be-named-later" designations in the lineup card don't work in baseball. And neither do "project-to-be-named-later" designations suffice under the TDSIC Statute.
B. Section 9 update petitions cannot add new projects beyond those initially approved under Section 10 and cannot revise the seven-year-plan's budget.
After the Commission has approved the foundational seven-year plan under Section 10, the utility may file petitions every few
With each Section 9 petition a utility files, it must also "update" its seven-year plan.
Because the Statute neither explicitly nor implicitly authorizes the Commission to approve multiple-unit projects as eligible for TDSIC treatment, NIPSCO cannot use the TDSIC mechanism to recover the multiple-unit-project portions of its Section 10 plan that either were identified with particularity for the first time in its TDSIC-4 petition or remain unspecified.
II. Preclusion principles do not bar the Industrial Group's appeal.
Finally, we reject NIPSCO's argument that principles of claim and issue preclusion bar the Industrial Group from challenging the Commission's TDSIC-4 order. Merely because the Industrial Group could have challenged the TDSIC-3 order, but did not, does not mean the legal methodology that order embraced is immune from legal challenge thereafter.
We look to the Restatement (Second) of Judgments to guide our preclusion analysis. See Sullivan v. Am. Cas. Co. of Reading, Pa. ,
Our Court will not foreclose review of a legal issue of first impression "when other litigants are free to urge that the rule should be rejected. Such preclusion might unduly delay needed changes in the law and might deprive a litigant of a right that the court was prepared to recognize for other litigants in the same position."
To be sure, the Industrial Group's failure to appeal the TDSIC-3 order does mean, as the Group acknowledges, that specific projects identified and approved in TDSIC-3 are beyond challenge. But the Group's failure to challenge TDSIC-3 does not bar the Group from challenging previously undesignated and unapproved projects for which NIPSCO sought and obtained rate adjustments from the Commission in TDSIC-4.
The Commission's legal methodology of approving multiple-unit-project categories described using ascertainable planning criteria is a pure issue of law, of general interest, that we have not previously resolved. And we conclude its methodology remains subject to challenge here. Indiana courts have long held that agencies remain free to correct their own erroneous interpretations of statutes in later proceedings. Adkins v. City of Tell City ,
Conclusion
We hold that periodic rate increases are available only for specific projects a utility designates in the threshold TDSIC proceeding and not for multiple-unit-project categories it describes using ascertainable planning criteria. The Commission thus erred in approving various proposed categories of unspecified improvements that NIPSCO did not identify with particularity until it filed subsequent periodic Section 9 petitions. For these reasons, we grant the Industrial Group's petition to transfer. We reverse the portions of the Commission's TDSIC-4 Order that approved previously unspecified improvements. And we remand to the Commission with instructions to identify such project categories that were not identified with specificity in TDSIC-3. The costs for all multiple-unit projects as to which particular improvements were identified for the first time in TDSIC-4 are disallowed for TDSIC recovery to the extent those projects were not properly designated in the previously approved seven-year plan.
Rush, C.J., and David, Massa, and Goff, JJ., concur.