*1 judg- obligation of the final reason mean that the created destroyed. isment finding

(cid:127)Thus, correct was hold the trial court we that granting disallowing Bette’s claim erred in White judgment on said claim. only trial appeal, the effect purposes of this

For lien on could have court’s failure create a Jack’s estate general press now her claim as a is that Bette must estate, rather than creditor of Jack’s as secured Ed.) See, creditor. 29-1-14-9 Code conclusions, it we further hold that Based on the above grant trial court to Bette’s not error for the motion was summary Judgment judgment. affirmed. J.,

Robertson, Lybrook, concur. C.J. Reported at N.E.2d 749. NOTE.— and AFL-CIO Central Labor Council Evansville Posey Vanderburgh, & Warrick Counties Southern v. Corpora Company, Electric Indiana Indiana Gas and an Hill, Indiana, W. W. tion, Service Commission Public Allen, members David J. as William B. Powers Dorn, Indiana, Carl E. Publc Service Van of the State of Indiana. Public Counselor December Filed [No 1975.] 272A89. *5 McCarty, of Virginia Hirsch, Indianapolis, Dill of

Paul Schroeder, Evansville, Cox, Berger, Indianapolis, Sydney L. Evansville, appellants. for Dodd, Mitchell, Staser & General, Duvall, of Attorney Leslie Sendak, Theodore L. Indianapolis, Fred P. Indianapolis, Dorn, of E. Carl Van Foreman, Bamberger, Os- Bamberger, Heathcotte, R. Bruce appellees. Indianapolis, Hahn, for wald and Electric Com- Indiana Gas and P.J. —The Southern Staton, May 7, pany proceeding on instituted this [Petitioner] for before the Public Service Commission [Commission] obtaining rates. service purpose of an increase in its electric sale engaged production, in distribution and Petitioner portion of power in of electric to consumers the southwestern proposed rate schedules electric Indiana. The Petitioner’s by designed operating revenue were its electric increase $4,898,060.00, provide return investment of and on aggregate in- proposed $8,150,429.00. The amount of rate percent. all crease for classes was 16.8 City hearings increase, on rate

Before the formal [City] Labor and the Central Council Evansville AFL-CIO Posey peti- Vanderburgh, and Warrick Counties [council] proceeding. for to intervene Petitioner’s rate tioned leave granted petitions, and both intervention The Commission actively participated hearings formal con- in the Intervenors during by the Commission October November ducted January 1972, Commission issued On of 1971. order, which Petitioner’s rate income increased final aggre- in an $8,021,405.00 The Commission’s order resulted percent. gate approximately 16 rate increase joined initiating have this Council Appellate of the Commission’s order. appeal for a review upon predicated (Burns 8-1-3-1 to -12 jurisdiction is “[a]ny association, person, firm, Ed.), authorizes Code city, public adversely town or affected corporation, any decision, ruling, final or order . . of the Commission judicial to seek in this review Court. IC 8-1-3-1 Ed.). Code part

We affirm in with remand instructions proceedings opinion. further consistent with this

I. RATE METHOD place To appeal perspective, issues raised this necessary it provide background the reader with some *6 methodology on the regulation. of rate The Commission’s primary objective every proceeding is to establish charges utility level of rates permit and sufficient to operating expenses meet its plus a return on investment compensate which will 1971, its investors. IC 8-1-2-4 Ed.) ; Hope Code Federal Power Comm’n v. Natural Gas Co. 591, 605, 320 U.S. 64 S.Ct. 88 L.Ed. 333. Accord- ingly, the initial determination that the Commission must make requirement concerns the utility. future revenue of the This year”— determination is made the selection of a “test normally period the most recent annual complete for which financial revenues, data are available —and the calculation of expenses during year.1 year investment the test The test concept operating assumes that during results test period sufficiently representative are time which new provide rates will testing be in effect to a reliable for vehicle new rates. utility’s expenses, revenues minus its of exclusive

interest, earnings constitute the or the “return” that is avail- utility’s able to be distributed to the investors.2 Allowable operating types costs include all operating expenses (e.g., wages, salaries, fuel, maintenance) plus charges annual for BONBRIGHT, 1. J. OF PRINCIPLES PUBLIC UTILITY RATES (cid:127) (cid:127) (1961). 149-51 (cid:127). BONBRIGHT, supra 149; J. note PRIEST, 1 A. PRINCI- OF PLES PUBLIC UTILITY 45-46 REGULATION (1969). may utility operating depreciation taxes. While chooses, Com- any operating expense it incur amount of for disallow discretion to with broad mission is invested expendi- imprudent any rate-making purposes excessive or Ed.). (Burns Code tures. 8-1-2-48 however, may not data, Test-year expense revenue and determining Be- rates. always provide basis for a suitable unusual as such operating conditions cause of abnormal test-year outages, typical equipment revenues weather or a con- may faithfully normal expenses reflect or both not unrepresentative, appropriate test-year If are ditions. results This adjustments correct for the effects.3 must be made to adjust- commonly “in-period adjustment type labeled an test-year relevant for a determination results are ment.” Since past operations are only extent to the rates experience, further ad- representative probable future changed necessary condi- justments usually to account are test-year example, future if data. For reflected in tions not higher higher or required tax rates operations will to bear during the wages were incurred and salaries than levels of adjusted increased year, test-year to reflect data must be test usually test-year adjustment data is type an This costs. adjustment.” “out-of-period to as an referred existing earnings utility’s “return” level After the *7 utility operations— established, in of investment the amount adding by the net investment determined “rate base” —is the working capital.4 properties an allowance for physical in property employed utility consists of “rate base” The are for which rates public with service providing the the upon which “re- the charged the investment and constitutes rate-making traditional method- to be earned. Since turn” is year, test the “rate is ology the “historical” base” utilizes utility property usually “used and useful” defined as utility 1971, rendering particular service.. the IC 8-1-2-6 supra 2, PRIEST, at note 47-51. 1 A. 3. See 1, supra BONBRIGHT, at note 173-74. 4. J.

(Burns Ed.). property included in the Code “rate-base” may by (1) methods: the one of two standard valued (the “original method, book cost” which is based on value public service), or cost of an asset when first devoted to (2) method, the “fair value” which takes into account declining through purchasing power “reproduc- of the dollar price utilizing tion cost new” studies indices or other measure- ments of an investment’s current value.5 The Indiana statu- tory scheme authorizes the use of either valuation method. 1971, Ed.). 8-1-2-6 Code existing are

After “rate base” levels of “return” determined, “rate the Commission must whether decide deficient, return,” base,” “return” ratio of to “rate adequate, generally accepted method excessive. The establishing adequacy comparative basis to determine the existing utility’s or excessiveness of “return” capital” approach. examines “cost of first The Commission utility’s capital identify structure to the sources of utility’s capital; capital average structure of an electric utility might pre- percent debt, percent consist of 50 percent ferred stock and 35 common stock.6 The Commission (1) capital component: then ascertains the cost of each debt, by comparing utility’s the cost of determined annual requirements proceeds interest with the from bond sales; preferred stock, by (2) the cost of determined com- paring requirements outstanding pre- the stated on dividend sales; proceeds preferred ferred with from stock stock stock, (3) return the cost of common determined required prevailing capital to sell such stock markets. preliminary made, these determinations are After the Com- composite capital” taking calculates a “cost of mission average weighted capital component. cost of each capital, composite expressed percentage cost of when as a utility’s equity accounts, combined debt and is then PRIEST, supra note at 156-66. 1 A. 5. BONBRIGHT, supra note J. at 243-44.

481 existing return, utility’s thus compared of with rate establishing “fair point an initial serves as of reference utility operations. The United States rate of return” for Supreme legal has Court delineated criteria determin for ing In Im a ‘‘fair rate return.” Watemvorks & Bluefield 679, provement (1923), Co. v. Public 262 U.S. Serv. Comm’n 692-93, 675, 679, 1176, the Court stated: 43 S.Ct. L.Ed. 67 compensation just de- annual rate will constitute “What

pends upon many circumstances and must be determined having, judgment, enlightened A the exercise fair utility regard public to to all relevant is entitled facts. permit the value such rates as will it to earn a return on property employs of the which it for the convenience equal in being public generally same made at the to that general country part on time and investments the same undertakings at- which are other business uncertainties; by corresponding it risks and but tended has no right profits to as realized constitutional such are highly profitable enterprises specula- anticipated in or reasonably The return should be tive ventures. sufficient confidence, in the financial soundness of the assure adequate, maintain and utility under efficient economi- and should be support management, its credit and cal money necessary proper for it raise enable discharge public may duties. rate of A return high and become at one time too or too low reasonable changes money affecting opportunities investment, generally.” conditions and business market subsidiary usually “fair rate of return” final utility’s determining resolves issue that the Commission many considering issues, other requirement. After all revenue agencies frequently employ the of return regulatory margin provide a limited as a wheel” component “balance Jones, of error for the resolution other issues. See JUDI- CRI- OF UTILITY RATES: A CIAL DETERMINATION 873, TIQUE, (1964). The Commis- B.U.L. REY. 875-83 54 objective primary is to reach an overall result sion’s. permit continuity équitable and will services 8-1-2-4 financial basis. Code

on a sound Ed.) ; Hope Federal Power Comm’n v. Natural Gas Co. U.S. 88 L.Ed. 333. *9 S.Ct. summary determining may

While this brief indicate that utility’s requirement simple, revenue almost is a mechanical task, process actually requires of extensive examination utility’s operations continuing and exercises of informed judgment.7 Throughout administrative of this remainder opinion, rate-making methodology two crucial facts about the First, utility’s should be observed. the determination of a requirement primarily revenue is an exercise in informed regulatory judgment. Second, judgment if that is to properly, the every exercised aspect must examine utility’s operations of the and the economic environment which the functions to ensure that has data it representative will, operating received are conditions that should, years. prevail or in future

II.

STANDARD OF REVIEW appropriate judicial The standard of review for the Com factual prescribed

mission’s determinations is 1971, statute. Ed.) provides 8-1-3-1 Code a two-tier standard of review: assignment decision, “An ruling errors that the or order contrary of the commission to law shall be sufficient present sufficiency both the of the facts found to sustain ruling decision, order, sufficiency and findings upon evidence rendered.” sustain of facts which was it Phillips, economist, simple 7. Professor Charles an has constructed a expression utility’s mathematical formula revenue total requirement: (V-D)r = “R 0 + required, where R Is the total revenue operating costs, O is the gross tangible V intangible value of the property, depreciation D tangible is the accrued repro- property, ducible r is the rate of return.” PHILLIPS, C. THE ECONOMICS (1965). OP REGULATION 131

483 requires review, statutory standard At the first level findings on specific decision contain the Commission’s to its ultimate material all the factual determinations Serv. Comm’n Tel. v. Public conclusions. Co. General 891; 646, Fred J. N.E.2d (1958), Ind. 238 150 Trucking, Trucking (1972), Inc. v. Bunn Co. Stewart County 310; App. Daviess-Martin Rural 278 N.E.2d Ind. App. Corp. (1961), Comm’n 132 Ind. v. Public Serv. Tel. requirement an The administrative 63. N.E.2d decision-making process specific agency with illuminate its upon findings the basic facts which its decision is based extensively opinions in recent discussed of this Court. has been Corp. App. Radecki See, e.g., v. 158 Ind. Bendix underlying findings” policies the “basic N.E.2d apply special requirement with force to Commission rate delegates legislative scheme which Commis orders. *10 rate-making authority merely requires rates sion its 1971, just.” charges be “reasonable and established IC and Ed.). operates (Burns Since Commission Code 8-1-2-4 legislative guidance, attempt it the benefit of must without general rate-making policy on ad standards an formulate Moreover, rate-making case-by-case function in basis. hoe pe determinations which technical are innumerable volves competence expertise. culiarity within reviewing provides the court with basic Commission When decision, expert findings all issues material to its on of fact policy judgments provide reasoning process subtle an judicial non-expert. for intelligible framework Since findings” a afford rational informed basis “basic danger judicial judgment review, substitution of on evidentiary policy issues and determinations complex is sub Corp. Hancock stantially Rural Tel. reduced. See v. Public App. 14, Ind. (1964), 201 137 N.E.2d 573. Comm’n Serv. formulating findings on basic all process of material avoiding to aid the Commission in serve can also issues strong impression “Often arbitrary ill-considered action. or 484

that, evidence, on the basis of the the facts are thus-and-so gives way expressing impression when on it comes to paper.” DAVIS, 2 K. TREATISE ADMINISTRATIVE LAW 16.05, quoting Judge (1958), at 477 Frank United States § 1942), (2d Forness Cir. 928, F.2d 942. There little 125 v. agency assurance that an administrative has amade reasoned analysis only findings if need it state ultimate conclusions. prescribed by

The second level of factual review Ed.) reviewing requires inquire 8-1-3-1 Code court light

whether there substantial evidence support findings whole record to the Commission County fact. Membership basic Boone Rural Elec. Corp. (1959), v. Public Serv. Ind. Comm’n 239 159 N.E.2d 121; City Corp. Terre Haute v. Terre Haute Water Works (1962), App. 133 Ind. N.E.2d 110. While IC 8-1-3-1 specific contains no reference to the “substantial evidence” test, consistently the statute has interpreted been to authorize reviewing courts to set aside findings of fact unsupported, are on record, whole substantial See, e.g., Pennsylvania evidence. R. R. v.Co. Town Board of App. 216, Trustees Ind. 171; 218 N.E.2d Knox County Membership Corp. Rural Elec. v. Public Serv. Co. App. 547, (1966), 139 Ind. Moreover, N.E.2d 714. clearly Supreme has Court Indiana indicated that the “sub encompassed by stantial evidence” test the statute is not a hybrid specifically formulated standard review of Public for. decisions, but it Service Commission is a standard from principles governing judicial federal and state common law of administrative action. In review Public Serv. Comm’n v. *11 Indianapolis (1956), 70, 80-81, 235 Ind. N.E.2d 131 of 312, 308, explained Justice Arterburn the derivation of Indiana’s judicial “substantial evidence” standard of review: regarding “This rule ‘substantial evidence’ adopted is one

by Supreme Court of the United States in Florida v. 1, (1934), 12, United 292 Sup. 603, States 608, U.S. 54 Ct. 1077, L.Ed. where court said: 78

485 findings supported (commission’s) of fact ‘. . . its not not-subject is It review. evidence are substantial judgment for their substitute province of the court to ” the commission.’ meaning attempts of substantial evi- to define the Judicial principal unqualified met success. A dence with less than have concept state- guide has been a elusive to the content this , Hughes: ment Chief Justice means a It is than scintilla.

“Substantial such evidence more might accept relevant as a reasonable mind a conclusion.” evidence Edison adequate support Consolidated as 206, 217, 197, 229, (1938), U.S. v. NLRB 305 59 S.Ct. Co. 83 L.Ed. 126. pro- Supreme Court

Another statement of the United States evidence some Substantial vides additional clarification: affording substantial, is, a “means which is evidence can fact in issue fact from which the basis of substantial Enameling reasonably ...” v. Columbian inferred. NLRB 505, 501, 292, 299, Stamping (1939), S.Ct. U.S. 59 Co. 306 & perhaps provided the best L.Ed. Professor Davis has 83 analysis: meaning clear “The of ‘substantial is about as evidence’ vague be; inquiry as as it should the main about agency reasonably on record make whether could theory, finding. Despite judges . . . as a matter vary practical good fact have a deal elbow room they necessary intensity desirable of review as deem DAVIS, particular cases.” 4 K. ADMINISTRATIVE 29.01, (1958). at LAW TREATISE § authorities, conclude that

From a review of these we reviewing court .to evidence standard authorizes substantial findings of set aside Commission fact when a review clearly agency’s the whole record indicates that the evidentiary reasonably decision lacks sound basis Corp. support. v. Universal Camera NLRB See 95 L.Ed. 456. U.S. S.Ct. additional clarification our standard of review

Some .of. formula is necessary. It well established that the sub *12 486 assay

stantial evidence test cannot be utilized to “reasonableness” the conclusions ultimate fact findings agency of basic fact. inferred an from its 105, See, e.g., (1956), v. 351 NLRB Babcock Wilcox U.S. & Co. 112, 679, 975; Mfg. v. Truitt 76 L.Ed. NLRB Co. S.Ct. 100 (1956), 149, 753, Ultimate U.S. 100 L.Ed. 1027. 351 76 S.Ct. may generally facts de be described as factual conclusions they facts; expressed rived from the basic are often in terms statutory criteria “fair such as value” “used and useful.” findings represent Since of ultimate fact inferences drawn agency, they evidentiary susceptible scrutiny are not for support record, agency’s in the the reasonableness of the but question appropriate judicial inference is for determina “question tion —a of law.” equally

It determining well settled that the- “substan tiality” evidence, reviewing court must consider opposition challenged

the evidence in finding to the of basic fact as well as the evidence which tends support finding. As Justice Frankfurter substantiality “The said: of evidence must take into account fairly whatever in the weight.” record detracts from its Uni Corp. versal 474, Camera v. 488, NLRB U.S. 464, 456, L. S.Ct. 95 Ed. 456.

III. OUT-OF-PERIOD AND ADJUSTMENTS

FUTURE TEST YEAR 25, 1971, On prehearing June the Commission held a purpose establishing for conference test-period for accounting engineering evidence. At close of prehearing conference, the Commission entered an order ending period established a twelve month on June appropriate period determining 1971 as an test for revenues, expenses prehearing rate base. The provided order also that: accounting

“The method be preparation utilized of financial statements to introduced into in this evidence basis, further ‘going computed level’ cause shall be on the known, adjustments and measurable fixed limited to that are real except within twelve months of June may two include personal calculations property and pro tax years expense determination.” forma this interpreted Throughout proceeding this “out-of-period” provision prehearing to authorize of its order *13 “known, and test-year on fixed adjustments data based within presumed occur events that could be measurable” While test-period date. the termination twelve months of order prehearing nor its the final order neither Commission’s actually specify “out-of-period” adjustments which were the requirement, determining revenue Petitioner’s utilized the adjustments all appear it the record that the would from by the accepted were contained Petitioner’s Exhibit D-I (1) projected fu- adjustments These included: Commission. salary tax ex- wage expense, ture FICA increases in employee group pense, expense, postal expense and insurance operating expense; (2) projected increase in medical future 340,991,000 replacement expense resulting of kilowatt from power, partially purchased wholesale at hours of which was during generated by partially the Turbine Gas generated year, power by No. new with to be Warrick test resulting from (3) rate base plant; and increases in future generating portion of Petitioner’s addition of substantial the non-jurisdictional (whole- plant which had been devoted to during year. These and other operations the test sale) however, test-year later; data will be discussed adjustments to types adjustments are illustrative of the out-of-period these authorized adjustments which were Commission. challenged validity City has The grounds. First, City argues on two adjustment method adjustments “estimates,” made were mere and could that arriving require- at Petitioner’s revenue considered not be comply prehearing they with failed order’s ment since adjustments “known, on based fixed mandate Thus, improper contends it that was events. measurable” testimony for the Commission to consider the Petitioner’s expert concerning projected expense witnesses data uti- adjustments. lized to formulate the City’s import true first contention can be specific example. with illustrated The Petitioner’s Warrick Plant, Power No. did not Unit commence commercial operations December, 1970, only prior until six months period test operating termination date on June 1971. Since expense only and maintenance data were available for six year, expert pro- months test witnesses jected expense year using operations data for a full predictions estimates derived from both the historical data and operations. argument Acceptance City’s of future require ignore particular would the Commission to item this operating expense partially of future because it was at least expenses. based on estimates of future imposes requirement Public Service Commission Act no wholly the data utilized the Commission be derived from contrary, historical information. On the discretionary Act invests the with broad *14 authority systems accounting the formulate and adjustment particular methods best suited to its needs. IC 1971, 8-1-2-47; County Membership Corp. Boone Rural Elec. (1959), 525, v. Public Serv. Ind. Comm’n 239 159 N.E.2d challenge City’s adjustment 121. adopted The to the method by propriety the Commission constitutes an attack on the agency’s regulatory policy-making authority delegated of the challenge by evidentiary presents the Act. Such a no issue for review; appropriate “questions the standard of review for concerning regu of law” standards of Commission-formulated latory policy is one of reasonableness. Public Comm’n Serv. (1956), 467; Tel. Ind. v. Indiana Bell Co. 235 130 N.E.2d City Indianapolis Public Comm’n Serv. Ind. 235 v. reject City’s N.E.2d We must 308. the assertion adjustment adoption allowing of an method that the the use of reasonably not data related estimated to the Commission’s representa- obtaining primary objective most accurate expert use operations. The tion Petitioner’s future The integral rate-making process. part estimates is an of the Court, recognizing for estimated Supreme the need Indiana data, has stated: only can reasonable “Estimates Commission what approximations. No can know with exactitude one making process involves holds. The rate

the future including general many factors, balancing weighing of and period and of the future and business conditions economic its County Elec. Boone Rural on other estimates.” affect supra, Ind. Corp. Comm’n, Membership v. Public Serv. 535, 159 at N.E.2d at Therefore, to include such estimated decision the Commission’s per data is not se unreasonable. challenge test-year ad- City’s and the second

The justment by the Commission is broader method selected test-year essence, scope. City and contends In adjustment method were established reasonably primary statutory duty not related to its de- just” termining rates. “reasonable and 8-1-2-4 City Ed.). test-year The asserts that Code adjustment used the Commission in an method resulted misleading representation oper- inaccurate Throughout proceedings, City urged ations. the Com- projected revenue, expense employ base mission to rate operations. from of future data estimates derived year-end accepted by rate base contended that the Com- adjustments mission, with additional increased coming plant reflect “on line” within twelve base wholly negated year, predictive the test after months test-period City pointed data. the historical value of large portion resulting of Petitioner’s out rate base recently new composed of devoted to was *15 operation for which accurate jurisdictional historical revenue City Furthermore, were data unavailable. expense alleged inadequacy revenue, expense of argued that rendered its the Commission data utilized and rate base changes ineffective as adjustment future method of City contended that The measurement device. reliable adjust- piecemeal making or of isolated method changes future improper the effect of since ments was in. reliably historical predicted from the operations could not be test-year data. projected test City the use of a future or advocated

The “year-end” year, year historical test as an alternative to the changes, adopted adjusted for known Commission. changing rapidly nature of Petitioner’s that the asserted by rapid expansion, jurisdictional operations caused wide efficiency, projected con- increases in variances required year projected test be sumer demand representative period. future into a more forward underlying any year theory the use of test rate-making adjustment process any in the demands method picture provide an the data used accurate during utility’s period operations in which year proposed rates will be effect. The test technique analogized stopping may a motion be utility in action to examine one isolated frame. picture of a utility’s operations in a con By stopping the action of frame, can the inherent the Commission observe venient time among base, expenses interrelationships and revenues. rate concept period crucial to the test This observation dynamic interrelationships picture complete of these because base, expense and revenue only when the rate obtained can Thus, base, expense phrase. components are examined year meaningful for an historical test are data and revenue only past rates insofar as for a determination probable experience. representative of future are operations utility’s operating structure, changes Significant in a such as may render even the expansion, most current rapid plant inadequate predicting as a basis for the results data historical operations. future *16 test-year adjusting technique Even ameliorative occur changes or will figures occurred that have to reflect may period be inade subsequent test to an historical fun themselves quate test-period are when the data adjustments, damentally unrepresentative. These be meeting ing by accomplish piecemeal, little definition often expansion significant shifts rapid or overall effects of adjustment complexity of the The sheer consumer demand. achieved; reliability an of the results process can affect the invariably necessi adjustment plant will for new to rate base expense adjustments complicated to revenue further tate discouraged many regulators from alone has data. This factor requested make authorizing any adjustments all. When at test-year reflect adjustment utility’s revenues to an in a customer, Public large the Colorado of a industrial the loss Commission stated: Utilities adjusted “Normally, year is care of known the test take changes changes year these for within said test to reflect something year. period occurs

the entire of the test When year, company or the the test it is unfair to the after adjusted customer, single particular a few are if a items adjustments changes making all oc- for have without year. words, if subsequent In other an to the test curred period, perhaps fairest adjustment is to be made out is, effect, test to move date method to follow year again adjustments period make all of time and to a new changes period.” In re in the new Southern known Comm’n), (1963 P.U.R.3d Pub. Util. 50 Colo. Union Gas Co. 350, 360. rejected regulatory methods commissions have Other ground changes such on the adjust only for selected year destroy the test as a vehicle adjustments usefulness of interrelationships between observation for simultaneous e.g., base, See, In re expenses Rochester and revenues. Comm’n), Corp. (1971 N.Y. Pub. Elec. Serv. &Gas 271; (1970 Pub. re New Haven Co. Conn. In Water P.U.R.3d Comm’n), 84 P.U.R.3d Util. may pro- circumstances historical data under some

While vide approximation utility’s operations, distorted of a

reliability projected test-year or future method widely disputed. advocated has been regulatory pro accepted Some commissions have jected determining propriety data and future estimates in proposed See, e.g., (1970 rates. In re Powell Tel. Co. Tenn. Comm’n), Pub. 124; Serv. P.U.R.3d re In Elizabethtown (1969 Water Comm’rs), Co. Bd. N.J. of Pub. Util. 77 P.U.R.3d 515; Corp. re (1961 In Jacksonville Gas Fla. R.R. Util. & Pub. Comm’n), 37 P.U.R.3d 433. But even those commissions utilizing year expressed test future have concern about reliability projected data, many *17 have limited existing use to cases in which unusual circumstances rendered clearly inadequate. e.g., historical data See In re Mountain Comm’n), (1969 States Tel. Tel.& Co. Co. Utah Pub. Serv. 429; Michigan (1958 78 P.U.R.3d In re & Elec. Co. Mich. Gas Comm’n), Pub. year Serv. 24 P.U.R.3d 278. The future test involving frequently has most proceedings been in rate used undergone rapid capital expansion utilities which have have or experienced some operating substantial shift structure. See, e.g., (1971 Corp. In re Rochester Gas & Elec. N.Y. Pub. Comm’n), percent (50 Serv. P.U.R.3d 88 271 increase in rate base) ; Corp., In re (1961 Jacksonville Gas Fla. R.R. Pub.& Comm’n), (conversion Util. P.U.R.3d 37 433 manufac from gas gas). hand, regulatory tured to natural theOn other some agencies have decided that the data forecasts of the future test-year inherently they method so are unreliable that should proceedings. See, e.g., never be considered in rate In re South (1969 ern Comm’n), Co. Connecticut Gas Conn. Pub. Util. 289; In (1969 81 re Pennichuck P.U.R.3d Water Works N.H. Comm’n) 77 P.U.R.3d Pub. Util. analysis, year

In final selection of a test and the adjustment adoption complex of an method are issues regulatory policy which light must be resolved special facts of each statutory case. The scheme legislative policy ques- the basic reflects that these

493 consigned methodology rate-making are best tions of 8-1-2-47. expert judgment. Commission’s therefore of review Ed.). appropriate standard Code case, whether, facts of this inquiry on the limits our Com adjustment test-year selected method reasonably purpose they were related were mission just” fixing of “reasonable and rates. to serve —the intended (1956), Indianapolis Ind. 235 Comm’n Public Serv. v. 308; Comm’n v. Indiana Bell Tel. Public Serv. N.E.2d N.E.2d 467. This standard of Ind. Co. judicial judg substitution of authorize the does not review Commission discretion does nor matters committed ment on reviewing in the tribunal concur wisdom require that it decision. function Our of the Commission’s correctness choice a determination the actual is limited to of review on was based a consideration of by the Commission made reasonably discharge was related to the relevant factors duty. words, statutory In other must determine we of its judgment, error in no clear has been that there upon is founded a reasonable basis of action support the whole record. requirement previously discussed that an

We have agency decision-making process illuminate administrative findings upon specific all material issues. The with “questions fact,” “questions legal concepts of *18 “materiality” cannot, however, law,” and furnish guidance adequate in the review of Commission rate decisions. (legal decisions) are policy determinations The Commission’s basis, and, necessity, case-by-case of are inextrica made on evidentiary (factual bly conclusions deci with intertwined regulatory subject process too of the sions). matter The judicial insight non-expert any complex permit the clear concerning legal issues which and factual the Commission the light In of thought to its decision. these difficulties “material” proceedings, judicial we com review are inherent require policy the articulate the Commission to and pelled underlying evidentiary issues factors its resolution of all put by dispute parties. Indianapolis which are & (1953), Express, Inc. v. Public Serv. Comm’n Southern Motor 377, 112 Ind. N.E.2d 864. test-year amply The treatment issue necessity explanation illustrates for some minimal prehearing The conference its decision. order did not contain any policy statement of the considerations or evidence which test-year selection of motivated the Commission’s and challenged by adjustment City. portion method prehearing conference devoted to these issues was conducted only record, speculate we can off on what evidence and considered was received Commission. dur- Neither hearings ing the nor in the formal Commission’s final written any attempt made to order was articulate underly- the reasons test-year ing rejection the future method advanced City. required minimal record is Some on review for the Commission’s test-year determination historical de- reasonably discharge related to the statutory cision of its duty. e.g., See, American Products Co. v. Public Vitrified App. 131 Ind. Serv. Comm’n 176 N.E.2d 145. We porion proceedings must remand this to the Commission policy a clear evidentiary statement of the considera- underlying test-year adjustment tions method de- terminations.

IV. PUBLIC NOTICE hearing, City objected At the formal to the admission E, of Petitioner’s Exhibit support was offered of a proposed upward revision in depreciation Petitioner’s rates. contended that the authority Commission lacked the any to consider alteration in existing rates depreciation statutorily required because public notice of proceedings specifically did not state that the Petitioner *19 The commis- rates.8 requested any change depreciation in had objection Petitioner’s City’s and admitted overruled the sion final request; the support its Commission’s in evidence depreciation rates. granted in proposed increase the order contention, asserted rejecting City’s the Commission In the depreciation inherent and change rates was “an in that a proceeding, general integral rate increase part” aof by required not statute need public notice therefore applying a for the Petitioner is or disclose that “reflect 1349. change depreciation rates.” Record at in provides Act that: Commission The Public Service complaint or utility a any public file shall “Whenever concerning any own petition an increase of its to matter as county such rates, patrons any in affecting which pub- utility utility service, public public lish shall renders complaint a filing petition or a of such notice of county.” general published in newspaper such circulation Ed.). Code 8-1-2-61 by Petitioner, published approved public notice Commission, stated: in advance the Petition Indiana of Southern Gas “In the Matter Approval Company for of New Schedules and Electric Electric Service.” of Rates for explicit apparent is IC 8-1-2-61 contains no it

While governing specificity required guidelines the content City argues guideline implicit notice, such public given public notice be when- statutory mandate that in the any “petition concerning as to files a matter ever a City pro- rates.” The of its own construes this an increase specific public notice of all require to matters con- vision premised assumption argument “juris City’s on the that the only attaches those matters set Commission] forth [of diction Appellant’s light at [public] 1251. In notice.” of our con in the Brief unnecessary 1971, 8-1-2-61, we find it to consider whether of IC struction requirement independent public constitutes an notice Act’s limitation authority grant regulatory requested relief on the after hearing petitioner’s on the merits demonstrates entitlement City Serers, New Haven v. Indiana Suburban Inc. relief. such Cf. (similar statutory pro 2d 861 277 N.E. notice 257 Ind. subject-matter jurisdiction). to Commission’s unrelated held vision might ultimately an sidered effect Therefore, increase in Petitioner’s rate structure. request an contends- that increase *20 depreciation rates; independently rates could increase IC requires specific attempt public 8-1-2-61 notice of Petitioner’s depreciation expense. to increase the authorized of amount its The Public Act the Service Commission invests Commission authority adopt publish “to with broad reasonable govern proper proceedings.” rules to Ed.). 8-1-2-47 Code rule- Pursuant to its making authority, adopted the Commission has Rule (b) Practice Procedure 8 : caption petition general “The of the shall describe in terms being sought petition.” all the relief Rules & in the Ind. Admin. Regs. (54-401)-8 (b) (Burns Supp. 1975). § 8(b) specifically Rule caption does not state While that the petition public of a will the determine content of notice the Act, required the the record discloses that it the is Com- general practice proceedings mission’s publish the caption adequate public petition’s as notice of the contents. Thus, adopted position has cap- Commission petition specificity requirement tion of satisfies the 8(b) adequate will also public its Rule serve as notice petition purposes of the contents of the for of the Act’s requirement. notice practice Commission’s established proceeding; caption was followed in this of Petitioner’s general request rate increase was used as the sole criterion determining public for content of given. notice statutory clearly A review of the scheme indicates that case-by-case determination of what adequate constitutes public legislatively notice has been committed to the Commission’s informed discretion. It well agency’s established that an interpretation statutory judicial it administers scheme is entitled to defer legislative ence, especially when the plan necessarily con-

497 ex See, e.g., State templates rule elaboration. administrative 161; N.E.2d Gettinger Ind. rel. Blair v. We N.E. 790. Wimberg Ind. (1891), 130 Parvin v. 8-1-2-61, the that, general of IC construction conclude as basic 8(b) reasonably related Commission’s Rule notice ratepayers with objective legislative providing consequences possible of the adverse sufficient to inform them Public proposed action. ex rel. Serv. State 202, 138 Ind. (1956), 236 v. Boone Circuit Comm’n Court regulatory complexity and 4. The varied nature N.E.2d against partic adoption of a more proceedings militate 8(b) pro standard; Rule ularistic notice case-by-case necesary flexibility determinations vides the public published. appropriate of the notice to be content must, reject City’s 8-1-2-61 contention that IC We all cases, specific public notice of require *21 all be construed to independ- might regulatory resolution whose ultimate issues utility’s to If were ently rates. we an in a effect increase interpret require specific public notice that the Act to de- propriety of a Petitioner’s will consider the give compelled to rates, preciation the Commission would be determine public of its intention to additional notice operating equipment, plant and of Petitioner’s “fair value” needs, revenues, working capital capital, expenses, cost City’s degree particularity inherent etc. While public requirement does of the statute’s notice construction unreasonable, per interpretation our se review not render determining the reasonableness of the standard to is limited Moreover, highly by particularized adopted a the Commission. might legislative purpose obstruct public notice standard utility patrons knowledge with a providing basic proposed consequences of de- possible Commission action. A of all material public statement issues raised a tailed petition, utility’s general rate increase and couched in the might public utility field, convey jargon of the technical average ratepayer information to the significantly less than a succinct notice of the Commission’s intention consider to general holding increase in rates. Our deter- is limited (b) mination that Commission Rule 8 constitutes a reasonable interpretation public required administrative of the notice challenged the Act. The has not reasonableness applied notice standard as to the facts of this particular case.

V. USED AND USEFUL PLANT A. Interconnection Plant

The Public requires Service Commission Act all utility’s jurisdictional included in a rate base constitute property which providing is “used useful” service ratepayers. Ed.). portion 8-1-2-6 Code A utility plant maintaining Petitioner’s utilized “inter- arrangements connection” neighboring with electric systems. joining An “interconnection” is a transmission line power flowing two electric networks so that current in either system can be diverted into other. inter- Petitioner’s engage connection allows it to in both the wholesale purchase power. and sale of power electric Some of the purchased through grid the interconnection serve used to jurisdictional customers, retail or re- and the power mainder of purchased at wholesale is at resold wholesale rates to other utilities, electric interconnected such utility systems. municipally as owned The Petitioner also arrangements gen- power utilizes its interconnection sell system neighboring erated within its electric utilities. Since *22 authority the Federal Power Commission exercises the to power establish rates for wholesale transfers in interstate commerce, employs accounting Commission an to method jurisdictional separate plant (facilities interconnection in- system within the interconnection serving cluded devoted re- non-jurisdictional customers) from plant tail interconnection wholly power (plant transfers). devoted to wholesale The “separation” technique adopted by utilized the Commission identify designed complex process cost-allocation non-jurisdictional intercon- jurisdictional of each or nature expenses at- plant component. revenues nection The plant utilized jurisdictional were interconnection tributed to by determining the Petitioner’s revenue Commission requirement. portion City finding that a attacks the Commission’s plant Petitioner

of the interconnection maintained provision service and useful” in the of electric “used grounds. First, ratepayers jurisdictional retail on two any City argues portion that the inclusion jurisdictional base rate in Petitioner’s interconnection usurpation Power of the Federal constitutes inter- jurisdiction power transfers which affect over wholesale Second, City the Com- contends commerce. state support findings inadequate to of fact are mission’s basic portion of the interconnection that a ultimate determination jurisdic- providing service to and useful” in is “used validity challenge the ratepayers. The did not tional method utilized cost-allocation non-jurisdictional interconnec- jurisdictional separate plant. tion argument misapprehends complex inter City’s first systems of electric and state the federal between

action grants Power Act utility regulation. The Federal regulate authority to Power Commission the Federal energy in interstate wholesale at of electric sales 824(a) Act, (a), 16 U.S.C. Power Federal § commerce. §201 statutory the sole basis standard (1970). broad This interconnection share City’s an allocable conclusion jurisdictional in Petitioner’s be included cannot facilities regula however, Act, the federal extends The Federal base. only limited certain commerce to interstate tory power over e.g., operations. See, Federal Power interconnection aspects of *23 201(b), (exempts “facilities (1970) Act 824(b) 16 U.S.C. § § generation energy” “facilities used and for the of electric jurisdiction.). inter- The used local distribution” from FPC regulation locking and nature of federal and state concurrent analysis by of Petitioner’s can be a functional illustrated purchases operations. Petitioner interconnection When the power neighboring utility, price from a wholesale purchased power by by is determined fixed a rate purchased power is Federal Power After Commission. system transferred to the local for Petitioner’s distribution consumption by utility patrons, regulatory in- retail federal charged volvement is terminated. rate jurisdictional retail or consumers is established the Public of Indiana. The Service Commission retail fixed designed provide a fair return on the portion plant providing of the interconnection devoted to power purchased retail consumers with the at wholesale. light regulatory scheme, In of this the Federal Power Com- authority supervise mission’s power wholesale transfers preempt does not the Public Service Commission from allocat- ing appropriate portion an of Petitioner’s interconnection plant jurisdictional to the rate base. challenged adequacy has also of the Commis- findings supporting

sion’s factual its determination that a portion plant of the interconnection and “used useful” in serving jurisdictional ratepayers. findings The Commission’s concerning the “used and useful” status of the interconnec- tion state that: reliability “In order to maximize the of Petitioner’s service customers, arrangements

to its Petitioner maintains with neighboring provide emergencies other exchange nection completely with participate utilities to power. Through . . reserve . these intercon- arrangements give the Petitioner is enabled to economically, service more reliable coordinate companies scheduling repairs other in the and to large single system in the economies which a arrangements impose These interconnection affords. do not any provide on Petitioner’s customers but burden instead standpoint substantial benefits from economies reliability of service.” Record at 2474. Although concerning findings “used the Commission’s and useful” somewhat status of the interconnection are ambiguous conclusory, they minimally ade are quate support The Commission its determination. essentially found that Petitioner’s interconnections *24 jurisdictional by lowering benefit its customers the cost generating electricity by increasing reliability and independent record, From service. our review con we findings concerning clude that Commission’s basic plant “used and useful” status of the interconnection are supported Op substantial evidence. Director of Electric erations, Warmack, testified John that Petitioner’s inter improved reliability facilities connection of service to electricity jurisdictional generated customers because in a system neighboring compensate be can utilized to for break downs, out of service for overloads normal mainte explained nance. Mr. Warmack also that the interconnection generating electricity plant permitted a reduction the cost of jurisdictional for Petitioner’s customers. neighboring interconnections allow

Since utilities to share generating existing capacity, equipment operated can be at comparatively low unit cost and can be utilized on a continuous that, operating Mr. testified under certain basis. Warmack conditions, cheaper purchase power would be to meet it to generate requirements load than to it within incremental system. explained was also less It total Petitioner’s system, capacity required in so is an interconnected reserve generating plant. pay jurisdictional less for idle consumers some own and maintain all electric utilities This because they rarely, ever, generating equipment if full use at See, e.g., COMM’N, capacity. 1 FEDERAL POWER NA- (1964). equipment 175-77 POWER SURVEY Some TIONAL normally kept operation electricity being with no fed this idle Utilities maintain it to the lines. from transmission loads, peak demand capacity to them meet enable replace regularly generating used back-up units provide or are idled maintenance. When down units that break capacities generating utility systems independent with two interconnect, capacity. peak they require reserve If their less timing predicted which can extent of with loads—the times, accuracy units at different reserve reasonable —come system. up operating system units in other back can in one finding that the inter- The Commission’s id. at 182-97. See jurisdictional pro- rate base allocated connection ratepayers “. . with benefits of . econ- Petitioner’s vides large single system affords” has substantial which a omies support in the record. Record at 2475. Allocation Plant of Common

B. operations, electric In addition to its service Petitioner selling engages gas. the business natural Since the gas enterprises separate electric and constitute rate-making purposes, the entities for Commission must allo- *25 plant” gas opera- cate certain “common between electric and determining portion plant” the of “common tions which is providing ratepayers. and useful” in to “used service electric plant” plant which pro- “Common constitutes is utilized in gas viding services, and electric both such as administrative trucks, equipment, space, allocating office etc. In “common gas plant” operations, between and electric the Commission adopted separation technique “super- denominated as the expense” method. This method vised allocates the electric gas components plant by application of common and of the gas expenses ratio of total and total electric certain com- separate Thus, plant. and elements of common bined the approximately seventy-seven percent found that Commission plant jurisdic- properly common was the allocated to the seventy-seven percent tional electric rate base because

503 op- expenses were incurred in its electric Petitioner’s total erations. com- Commission’s allocation of has attacked the by finding ground supported is not

mon on the City’s sole contention is that substantial evidence. adequate explanation contain an record does not “supervised expense” allocation. method of It asserts that “supervised from the of common derived allocation expense” technique provide evidentiary support cannot for finding because the record no contains accounting explanation principles underlying of the detailed by City’s method utilized the allocation the Commission. The wholly upon following excerpt contention is based from Supreme opinion in Public Court’s Serv. Comm’n v. In- (1956), 25-26, diana Bell Tel. Ind. Co. 235 N.E.2d 130 467, 478: equally “The law is well settled that ‘an order of the upon Commission must be founded facts found upon Commission based substantial evidence.’ Public Serv. Wayne Ry. Comm. v. N.E.2d (1953), Ft. 232 Ind. U. Co. 719, 726; County, Kosciusko etc. v. Public Service 666, 672, Comm. Ind. 77 N.E.2d and cases

there cited “Finding pertaining number of the Commission separation method, is as follows: original ‘Since order was entered in cause this the National Association of Railroad and Utilities Com- together Committee, System, missioners’ with the Bell agreed upon what is now known has as the “Charleston Separation,” appears produce Method of only a result slightly produced by different from that the method previously set forth No. 1.” This described as “Honaker Method opinion is now yet Method” is the new best that “Charleston has been gives equitable promulgated, and a more result public, has, therefore, to the

petitioner and it been separation prop- the Commission used erties pany in this order.’ expenses Telephone of the Indiana Bell Com- *26 its interstate and operations as between intrastate concerning the no record “There is evidence the con Method’, careful nor are we able from a ‘Charleston finding, what such to determine sideration of method entire the is; interstate classification of what is its formula of expenses property; properties and intrastate what to system by allocation applied, what it was or or how and property appellee’s intrastate the fair value of division finding is not $94,792,091. This was determined to be clearly inadequate by evidence, only unsupported and but nor improper Circuit Court in that neither Marion the finding fair the how this court can ascertain from such property determined. appellee’s was intrastate value supra (1953), Wayne Ry. Co., v. Ft. Public Serv. Comm. 232 U. 82, 96, Ind. 111 N.E.2d 719.” finding plant on the amount of common The Commission’s providing based and useful” in electric service was “used A-III, Exhibit which on Petitioner’s contained summary plant under “su of common allocated the expense” technique. sponsor pervised of Exhibit City Clifford, length by A-III, was cross-examined at the Mr. concerning “supervised expense” technique the nature the by application its Petitioner’s allocation obtained to and the no plant account. The Commission’s order contains .common finding plant the dollar amount of common allocated specific on base, jurisdictional electric rate but from the context to the appear accepted it would the order seventy-seven percent allocation advanced City objection raised no A-III. the admission Exhibit disputed accuracy It Exhibit A-III. neither of Petitioner’s validity “supervised expense” questioned method nor particular items of the common ac application right City’s expert to cross-examine Petitioner’s count. The concerning accounting principles underlying witnesses expense” manner method “supervised applied Petitioner’s common was account method was City Commission. Since the impaired failed not validity hearing, of the allocation method dispute the at challenge, appeal, for the first time on cannot *27 adequacy findings of the on its choice of Commission’s basic plant duty common The methods. Commission’s allocation findings only requires specific formulate basic of “. . . a fact finding theory every sincerely of the facts relevant to asserted seriously presented of claim or defense which . . .” at the hearing. Corp. (1973), formal Bendix Radecki Ind. v. 158 App. 847, 851-52. 302 N.E.2d independent of the

Our review record reveals that the adoption “supervised expense” of the Commission’s method plant upon of common allocation was based sub Clifford, Comp stantial evidence.9 Mr. Petitioner’s sponsor A-III, engaged and the of troller Exhibit lengthy explanation underlying principles in a of the the “supervised expense” method and the manner in which it applied plant to Petitioner’s common account. Mr. was “supervised expense” method is Clifford stated that hearing, requested 9. At the formal the Petitioner that the Com- prior mission take notice of administrative certain Commission orders adopted “supervised expense” fixing which had method rates for gas operations. purpose request The Petitioner’s demonstrate of Petitioner’s was to consistently accepted that “super- Commission had prior proceedings expense” concerning vised method both gas operations. and electric willing- When the Commission indicated its prior orders, ness to take administrative notice of the counsel for City stated: authority by “To the extent that the Commission has the law to proceedings files, take administrative notice of own its I would objection.” have no at Record 1977. City argues authority now the Commission has no to take prior City administrative notice of right orders. The has waived its appellate ruling. City’s objection to not mission’s review of was sufficiently specific present any intelligible challenge to the Com ruling. See, e.g., County Dep’t Morningstar Pub. v. of Welfare (1958), Ind.App. 688, 150; 128 151 N.E.2d Dorozinski v. Review Bd. of Employment (1951), App. 367, Ind. Div. Sec. Ind. 98 N.E.2d 911 Moreover, City’s seventy-two assignments none of the of error contain any specific allegation taking concerning of error the Commission’s action in prior any event, administrative notice of its orders. In our deter adoption “supervised expense” mination that method is the administrative notice issue the Commission’s supported by substantial evidence renders our consideration of unnecessary. It is well established that the incompetent justify setting admission of immaterial evidence will not agency aside administrative support Evansville action if there is substantial evidence agency’s Byers decision. State etc rel. v. School of (1941), 934; 219 Ind. 2d 37 N.E. Warren v. Tel. Indiana Co. 217 Ind. N.E. 2d of com- separation technique of items allocation utilizing cri- gas operations plant

mon between and electric accurately separation the amount reflect of which most teria It operations. employed respective plant of common separation was explained primary criterion of was at- gas” expense the amount “total of “total electric” and individual items tributable certain classifications or plant. the allocation common Mr. Clifford testified that components gas” expense to the “total electric” and “total company accounts common was on a based review types designed were amount both to reflect during test expense incurred common items *28 year. explained method Mr. how the allocation Clifford also as applied particular common such was to items of garage space equipment. and office holding v. Supreme in Public Comm’n Service Court’s City’s support Co., supra, asser- Indiana Bell does not the Tel. “supervised ex- adoption the tion that the Commission’s In pense” upon substantial evidence. method was not based case, legality order the rate Indiana Bell the of a Commission challenged County under in the Circuit Court was Marion statutory prescribed novo prior procedure the de which judicial rate decisions. See Ind. Ann. review of Commission repealed Repl.), by ch. to -438 1951 Stat. §§54-429 189, ^[1957] Ind. Acts 395, § The Circuit Court heard materially presented the evidence different from to Commission, by the the rate established determined that invalid, the new evidence and transmitted was Commission redetermination the issue. the for a on rate to any hearing, further Commission entered Without the reviewing new In order which established a rate. revised order, finding revised number three of Commission’s the “Charleston method” Indiana Bell noted Court employed initial not been in the Commission’s had allocation had been utilized the Circuit proceeding not Court. revised order was issued without the Commission’s Since

507 hearing, a total there was further the Court determined that adoption supporting absence of evidence concluded: “Charleston method.” Court “In at bar the Commission a matter such as action information, must independent on own but cannot act case, with findings presented upon base its evidence docu witnesses, inspect to opportnuity an to cross-examine explanation or exhibits, offer evidence ments or nothing has can be treated as rebuttal and evidence Ft. v. introduced as such. Public Serv. Comm. not been 96, 82, Wayne Ry. Co., supra (1958), 111 232 Ind. U. 719; Atchison, Ry. Commerce Com T. & S.F. Co. v. N.E.2d 831, 837; 624, Bell (1929), Ill. N.E. Ohio mission 335 167 292, Teleph. U.S. v. Comm. 301 Co. Public Utilities Ind. at L.Ed. 1099.” 57 S.Ct. N.E.2d at 479 properly proceeding,

In this Petitioner’s Exhibit A-III was objection. The and admitted into evidence without offered testimony ample opportunity inspect prefiled had expert hearing, prior to the to cross-examine Petitioner’s concerning “supervised witnesses, and to rebut evidence application expense” common method and its account Expense Reserve Account Deferred Tax

C. system, of return” “rate base —rate Under the Commission’s regulated utility pay a rate sufficient ratepayers of a plus specified cost service return to utility’s capital are investment. Taxes on the return *29 component utility’s cost be of of reimbursed the service a practice petitioner adopted by ratepayers. The has depreciating purposes an accelerated rate for its at of by income tax as authorized section of of federal 167 (1970). 167 Section 167 Internal Revenue Code. 26 U.S.C. § depreciated by plant to methods permits cost of be depreciation early years generate expense in the more life, years, property’s less useful in later than straight-line generated by depreciation traditional would also The Petitioner utilizes investment tax methods. provided by credit computing section its Code in liability. federal (1970). tax 26 U.S.C. Section §38 permits percentage depreciable certain of new and used utility plant directly against to be credited the Petitioner’s liability year federal tax for the tax which the acquired. options operate Both of these tax to reduce the expense during years Petitioner’s federal tax the first its plant’s life, expense years. useful and to increase tax in later purposes regulatory accounting,

For the Commission has allowed the only Petitioner to claim expense as a current not actually the federal paid, taxes but equal also an amount the difference actually between the paid taxes and the taxes which would been have due if the adopted Petitioner had straight-line depreciation. The permitted Commission also has saving Petitioner to amortize the tax by obtained investment tax credit depreciable over the useful life plant. expense When Petitioner’s tax is “normalized” in manner, ratepayers charged this are not the actual income paid hypothetical taxes larger figure but a for Petitioner’s expense computed depreciation tax if as were determined on straight-line basis, and as if the investment credit were equal distributed plant’s amounts over the useful life. The paid difference between by the actual taxes the Petitioner larger hypothetical and the charged amount for taxes to the ratepayers is accumulated in a “deferred tax” reserve account. The funds in this reserve account are-utilized the Petitioner working- capital any as free charges for interest and divi- dends. The traditionally Commission has permitted the Peti- tioner to include balance of its “deferred tax” reserve jurisdictional account in the rate base and to obtain its normal “fair return” on these funds. City contends that the Petitioner should not be entitled any upon return its accumulated “deferred tax” funds. capital represented asserts that for deferred

reserve federal income taxes is available to the charge company without because the normalizing funds for

509 expense accumulating en- the tax reserve constitute “consumer these forced contributions from consumers. Since any free of contributed” funds are utilized the Petitioner they charges interest, City argues that for dividend or jurisdictional electric excluded from should be final order does not discuss rate base. The Commission’s challenge City’s accumulated to the inclusion of Petitioner’s in the rate base. “deferred tax” reserve regulatory utility concepts, company traditional Under bondholders, consumers, shareholders and not the furnish the capital necessary operation See, e.g., for the of the business. (1909), Railroad v. Tel. Tel. 212 Comm’n Cumberland & Co. 414, 424, 357, 577; U.S. 29 S.Ct. 53 L.Ed. Lindheimer v. 151, 169, (1934), Illinois Bell Tel. 292 S.Ct. Co. U.S. 54 pays L.Ed. The consumer a fair return on the 78 1182. utility’s operation capital pays and in addition the costs of including taxes, company’s it but is well-established that investors, utility’s consumers, not must contribute capital. See, e.g., Alton v. Commerce Comm’n 513; Ill.2d 19 N.E.2d In re 165 & Elec. Co. Gas Pacific (1961 Comm’n), 1; Cal. Pub. Util. In re Public 38 P.U.R.3d (1960 186; Comm’n), Co. Serv. Colo. Pub. Util. P.U.R.3d 34 Washington (1960 re In Power Idaho Pub. Water Co. Util. (1959 Comm’n), 88; Gas, 33 P.U.R.3d In re Inc. Columbia Ky. Comm’n), 401; Niagara In re Pub. Serv. 36 P.U.R.3d Corp. Comm’n), (1961 Mohawk Power N.Y. Serv. Pub. (1960 401; In re Cincinnati Gas Elec. Ohio P.U.R.3d & Co. Comm’n), Pub. P.U.R.3d Util. Public

Our Service Act reflects traditional Commission regulated notion that the “fair rate of return” which a permitted capital upon earn must be based advanced Ed.) provides its investors. 8-1-2-6 Code property every “. . . all shall value actually public utility useful for used and convenience establishing public . .” in at its fair value . “reasonable statutory just” rates. Consistent with principle, contributions Supreme that customer held Indiana Court has fair value in the be included in aid of construction cannot utility’s is determined. property upon return which the *31 Indianapolis (1956), Ind. 235 Public Sen. Comm’n v. 70, 93, 308, 131 N.E.2d 317. by accumulated represented Petitioner’s the

The funds clearly consumer constitute reserve account “deferred tax” funds these capital. it is true that contributed While ratepayers in reserve and held from the are extracted liabilities,10 enjoys Petitioner the meet future tax to any interest fund free of reserve use of the the unrestricted actually paid. expenses are charge tax deferred until the fund tax” reserve revolving the “deferred nature of capital; contributed steady of consumer in-flow ensures total more tax” reserves “deferred combined the Under million dollars. and one-half than six argue early Supporters that lower of normalization in taxes 10. compensated by higher years years. must be for an asset taxes in later See, e.g., Paso Natural Gas Co. v. Federal Power El Comm’n 567, 1960), cert. denied sub (5th 281 F.2d nom. Cir. v. Fed California 912, 1083, (1961), 366 U.S. 81 S.Ct. 6 L.Ed.2d 236. eral Power Comm’n Supreme and Court of Indiana Both the Public Service Commission County argument. Membership accepted Boone Elec. this Rural have 525, Corp. Ind. Comm’n 239 159 N.E.2d v. Public Serv. regulatory “flow-through” accounting Proponents method of long decrease, point not investment in does out that so as years higher depreciation assets in future will offset lower on new depreciation so that the deferred taxes will never be on older assets See, e.g., paid. v. Federal Power Alabama-Tennessee Natural Gas Co. denied, 847, (5th Cir.), F.2d cert. 385 U.S. 87 S.Ct. 359 Comm’n “flow-through” (1966). treatment of Under L.Ed.2d 78 17 utility depreciation, ratepayers reimburse accelerated tax the federal actually regulated utility pays. utility income taxes the are, effect, capital funds that enforced contribu accumulate not does anticipated higher satisfy tax liabilities. Pro to from consumers tions argue by permitting deprecia ponents that accelerated normalization encourage investment, Congress tion, not benefit rate intended to “flow-through” lowering payers, a Experience intent the rates defeats this and that e.g., See, Armour, The Flittie & Natural Gas can receive. Regulatory Aggression Congressional Study Fail —A Process, Legislative (1965). L.J. 495-99 SW. ure Control reply regulated not Opponents industries need of normalization growth regulated, encouraged conclude by definition their to invest since only higher normalization to collect rates effect of ratepayers provide present for a tax burden See, e.g., Swiren, future rate from payers bear. Accelerated Tax have to will never (1961). Making, Utility U. L. REV. 629 CHI. Rate Benefits man- method, in the same employs funds the Petitioner these bene- reaps double capital, ner as investor contributed cost, capital but fit—the funds are obtained at zero upon same these “fair of return” Petitioner earns a Bon- by employing Professor funds them in its business. economics, ex- bright, authority regulatory has a noted on pressed a similar criticism: adopted by the has the method [the Commission] “[I]t charm of deferred-tax allowances obligation pay imposing upon the consumers the which, being instead of transmitted Treasury, are to be treated

forthwith to the United States indefinitely enjoyment investments, capital entitled to the as of a ‘fair rate corporate of return’ for the benefit Support position the in- . . for this . stockholders. dustry forthcoming Com- from the Federal Power has been But commissions. have and from a few state I mission enjoyment claim to the plausible defense of this seen a never of a corporate in- not contributed profit on funds BONBRIGHT, PUBLIC PRINCIPLES OF J. vestors.” *32 omitted).11 (footnotes (1961) 220-21 RATES UTILITY agencies regulatory majority overwhelming state An agencies Bonbright’s position; these accepted Professor have consistently denied have Power Commission the Federal “deferred reserves any accumulated tax” on the return regulated utilities.12 Bonbright’s regard has statement become Professor inaccurate in position permitting Commission’s current Power on the Federal regulated to obtain a return on “deferred tax” utilities reserve funds. (1956), Amere 760, in In re Gas Util. Co. The FPC’s decision 15 F.P.C. However, a return on utilities obtain these funds. did allow 928, 933, Natural Gas Co. position 31 Alabama-Tennessee F.P.C. In re the prior held that: reversed FPC gas companies similarly natural “. . . and other Alabama-Tennessee any upon return such are not entitled consumer-contributed situated capital.” (1964 F.P.C.), Natural re Alabama-Tennessee Gas Co. In 31 12. See Light 118; In re Alaska Elec. 52 P.U.R.3d & Power F.P.C. .Co. Comm’n), 481; (1967 P.U.R.3d In re Pub. Serv. 70 Alas. Arkansas Comm’n), (1972 209; Pub. 96 Co. Ark. Serv. P.U.R.3d

Louisiana Gas In re Tax Depreciation (1961 Treatment Accelerated Cal. Pub. Util. 322; (1960 Comm’n), In re Public Co. 40 P.U.R.3d Pub. Serv. Colo. 186; Chesapeake (1964 Comm’n), re 34 In & P. Tel. P.U.R.3d Co. Util. 1; Light Comm’n), P.U.R.3d In re Florida Power Pub. 57 & D.C. Serv. Fla. Comm’n), 113; (1966 Accounting re 67 P.U.R.3d In Serv. Co. Pub. 512 adopted by hold that the method Commission'

We results “deferred tax” reserves the treatment of Petitioner’s not “reasonable in a of rates which are schedule permits the just” method to the extent funds contributed a return on Petitioner to obtain However, Ed.). 8-1-2-4 Code consumers. reject City’s the Public Com we contention that Service requires consumer contributed the exclusion of mission Act Our-holding all focuses capital rate base in cases. from the permit solely unreasonableness of consumer rates on the capital on not advanced to obtain return the Petitioner portion or not all or a of the accumu its investors. Whether should be included in Petitioner’s tax” reserves lated “deferred consigned best to the Commission’s is a decision base light significant capital of Petitioner’s In discretion. informed may preferable find in- it requirements, (1963 Comm’n), Investment Tax Credit In re Honolulu Ga. Pub. Serv. Hawaii Pub. Procedure for 47 (I960 Gas Co. 171; Comm’n), Util. P.U.R.3d 36 Util. Washington 309; (1960 Power In re Water Co. Idaho Pub. P.U.R.3d 88; (1960 re Alton Water In Co. Comm’n), Ill. 33 P.U.R.3d Com 284; re Iowa Pub. (1972 In Serv. Co. Comm’n), 35 P.U.R.3d Iowa merce 1; In re South Central Comm’n), Bell Tel. Co. 96 P.U.R.3d Commerce parte Comm’n), 493; Ex Ky. South (1972 P.U.R.Sd Pub. 96 Serv. (1973 Comm’n), 185; Tel. Co. Pub. Serv. Bell La. 98 P.U.R.3d Central Chesapeake (1964 Comm’n), & P. Tel. Co. Pub. re Md. Serv. In 56 England (1973 & Tel. Co. 91; Dep’t In re New Tel. Mass. P.U.R.3d Accounting 189; re Rate In & Case Treatment Util.), 100 P.U.R.3d Pub. Depreciation (1963 Mich. Pub. Serv. Comm’n), Liberalized 49 P.U.R. (1972 Comm’n), Bell Tel. Co. In re Southwestern 1; Mo. Pub. Serv. 3d 96 Comm’n), (1965 Power 148; In re Sierra Co. Pub. P.U.R.3d Nev. Serv. Pacific (1959 477; In re Public Serv. Co. N.H. 58 P.U.R.3d Pub. re Blackwood 113; (1966 In Water Comm’n), Co. 27 P.U.R.3d N.J. Serv. 477; In re Southwestern Commr’s), Pub. P.U.R.3d Bd. of Pub. Util. Comm_n), 1070, April 1973; Corp. (1973 Docket No. Co. Serv. In re N.M. Corp. Niagara (1961 Comm’n), Power Mohawk N.Y. Pub. Serv. (1963 401; In re Tail Power Co. Otter N.D. Pub. Serv. P.U.R.3d 305; (1960 In re Cincinnati Gas & Elec. Co. Comm’n), P.U.R.3d 1; In re Portland Comm’n), Gen. Elec. Co. 33 P.U.R.3d Pub. Util. Ohio *33 Pennsylvania 497; Pa. Pub. Util. Pub. (1960 Comm’r), 32 P.U.R.3d Pub. Util. Ore. Pennsylvania Comm’n), Power (1960 Co. Util. Comm’n v. England (1973 177; In re New Tel. & Co. Tel. R.I. Pub. 33 P.U.R.3d 228; (1972 In re Northwestern Bell Tel. Co. Comm’n), 99 P.U.R.3d Util. S.D. 476; In re Inter-Mountain Tel. Comm’n), P.U.R.3d Pub. Util. 337; Washington Comm’n), Pub. (1965 Co.. 59 P.U.R.3d Tenn. Pub. Serv. Light (1960 Power & Comm’n Co. Pub. Serv. Wash. Serv. v. Pacific Kansas-Nebraska In re Natural Gas Co. Comm’n), 433; 33 P.U.R.3d Comm’n), 100 Pub. (1973 Wyo. P.U.R.3d Serv. base, elude the reserves in the rate and reduce to zero plant rate of return allowed on constructed with reserve might funds. The Commission choose to allow the Petitioner working assign- capital, the use of the reserve funds as while ing capital computing the funds a zero cost of the Peti- “fair tioner’s rate of return.” The will have ample opportunity efficacy to consider the of these methods on remand.

D. Termination of Wholesale to Transfers REMC and ALCOA

During year, the test the Petitioner made substantial non-jurisdictional power or wholesale sales of electric to membership corporations several rural (REMCs). electric year, to the end Prior of the test the Petitioner was notified purchases that the REMCs would discontinue their of whole- power completion sale because of the of a new “Statewide generating facility. prior REMC” Also to the end of the year, agreement Petitioner test executed an to sell certain plant of its transmission to the group. “Statewide REMC” employed providing These transmission facilities had been power longer with wholesale and were no useful REMCs operations. in Petitioner’s Since the plant transmission had been utilized operations, Petitioner’s wholesale electric disposal jurisdictional had effect no on the rate base. The final order concluded portion Peti- generating plant tioner’s which had supplying been devoted to power with REMCs wholesale should be the. transferred' jurisdictional rate base. The Commission’s conclusion upon that, although generat- its determination was based ing non-jurisdictional operations had been devoted year, generating during test these facilities would satisfy jurisdictional the needs of available retail rate- very future. payers in the near generating during contends that used provide year power- the REMCs with test wholesale jurisdic- transferred not have been to the Petitioner’s

should *34 correctly City points the tional The out that rate base.13 generating plant employed in Peti- was not REMC-related during year, and jurisdictional operations test tioner’s the the decision to shift these facilities to the Commission’s adjust- “out-of-period” jurisdictional required rate base an City “out-of-period” that the The asserts Commission’s ment. year jurisdictional not adjustment to test rate base was the “known, was fixed and measur- a future event that based on III, able,” by prehearing required the order. Section as See supra. 486, p. propriety of use the the Commission’s

We have discussed rate-making process. in and forecasts the See of estimates 486, supra. III, City’s the p. To extent that the chal- Section adjust- validity particular “out-of-period” lenge of this to the on the an attack “reasonableness” of the ment also constitutes year, adjusted of an historical test for use Commission’s events, ample already feel that attention has been we future weakness the given that broader Commission’s order. to 486, supra. III, p. Therefore ( the narrow issue Section See City’s by contention is whether the the Commis- presented power year, During wholesale test sales were the made the to Company (ALCOA) Mr. of America under “one-time” block Aluminum witness, Larson, Petitioner’s testified that the contract sale contract. during on December ended which was ALCOA sales to determining property juris- year. the amount of allocable to In test base, portion the Commission transferred the Peti- dictional rate generating plant supplying which had been devoted ALCOA to tioner’s with jurisdictional operations. power to Petitioner’s wholesale decision; challenged it contends that there is no has generating plant to that the ALCOA-related will be available evidence jurisdictional provide to Petitioner’s electric service customers. suggest generating City’s argument plant to that the Petitioner’s seems providing power purpose sole for for the wholesale was constructed the “one-time” ALCOA fied that under witness, Larson, contract. Petitioner’s Mr. testi- very power generated sold to little of electric ALCOA was system; explained power Larson Mr. that most of within Petitioner’s purchased from other electric utilities to ALCOA was under Peti- sold agreements. any the extent interconnection To that tioner’s generating actually decision power plant provide used to was for Petitioner’s sale, to include the ALCOA the Commission’s undetermined jurisdictional supported such was amount of substantial evidence. base that, It is obvious since the ALCOA contract generating December, provide “used” terminated to year power was at the the ALCOA sales available end the test for provide jurisdictional power customers. for

SIS generating- plant sion’s conclusion that REMC-related reasonably jurisdictional operations in the would be devoted to supported evidence. foreseeable future is substantial support the Commission’s There is substantial evidence generating plant would REMC-related conclusion future, power available, provide in the foreseeable expert wit jurisdictional customers. Petitioner’s ness, Larson, whole Mr. testified future due end in the near sale to the would sales REMCs *35 completion generating fa the a new of “Statewide REMC” explained cility. executed Mr. Larson also that Petitioner had agreement an the sale of certain used transmit power had the wholesale to the The sale contract REMC’s. REMC” been executed the Petitioner and the “Statewide City prior year. the the The that end of test contends supported not the decision was substantial Commission’s proof exact when there was no of the date evidence because generating plant would commence the REMC” “Statewide the operations, for the sale of transmission and the contract actually performed the at the end of had not been facilities City’s year. reject that contention Commis test We concerning impending prediction termination sion’s speculative. no There is sales was too the REMC wholesale suggests continuation of in the record evidence inability, of the Commission’s at time sales. The REMC precise upon hearing, pinpoint date which the sales deprive decision of evi not substantial would end does dentiary support.

E. and Useful” Standard The “Used provides “the

The Public Act that Service every utility property public all commission shall value actually useful for used and convenience . .” public its fair value. . at 8-1-2-6 prior Ed.). A review rate orders indicates Code developed a bifurcated has test for deter- that the Commission 516

mining utility’s property.' the “used and useful” status of a requires: (1) “used useful” standard utility actually utility service, providing devoted to necessary plant’s reasonably (2) utilization be provision See, Indianapolis e.g., In service. re the. Comm’n), 30,022, (1964 Ind. Pub. Docket Water Co. Serv. No. (property held for June future use was not “reason- ably necessary”) ; Indianapolis (1958 In Ind. Water re Co. during Comm’n), only (plant Pub. used Serv. P.U.R.Sd “reasonably necessary”) ; peak period re demand was In Comm’n), (1952 Indiana Gas & Water Co. Ind. Pub. Serv. 23,584, 25,1952 Sept. (property under construction Docket No. “actually service”). was not Requirement

1. The “In Service” generating facility The Petitioner’s Ohio River been had twenty-five years prior in continuous actual use for at least year. plant’s 121,000 capability to the test total net of' part kilowatts constitutes substantial of' total generating capacity. September 18, 1970, On facility notified the Petitioner that the Ohio Evansville River City’s pollution air control ordinance. was violation *36 complete Petitioner determined that a modification of the existing necessary permit use of boilers was the oil gas The modification work was natural rather than coal. substantially begun January, 1971,' completed at and was hearing. As a of the modification the time of the formal result facility work, during was in actual the River not úse Ohio the year. of the test The Commission last six months determined plant during “used was and useful” the that the Ohio River properly year, “fair was and that its value” included in test jurisdictional spent base. The amount for .rate facility during yéar the the was denomi- of modification test juris- progress,” and was excluded from the nated “work in. the Commission found that because the rate dictional base end actually completed-at project-had not been conversion ye'ar. of the test City traditional the Commission’s

The contends that under facility “used not was -a.nd “in test the River- service”- Ohio included not have been useful” and should City’s conclusion The jurisdictional base. rate' solely service” is plant not “in was the Ohio River facility in actual -use was not based on fact (cid:127) year. the Ohio during Since of the test the last six months during plant use six months was in actual River first of sweeping City’s-challenge, into the year, the devolves the test should,- as a “in service” test that the Commission’s assertion matter, law, require the actual utilization an item of of of year. during utility test plant the entire City’s challenge of The to the Commission’s construction “in test constitutes an attack on the reasonableness service” policy regulatory hold that the Commission’s of a decision. We reasonably primary objective related to its “in test is service” n utility obtaining accurate determination the most actually Petitioner’s electric service which is devoted interpretation City’s “in service” operations. Under actually any plant not em- was requirement, -item automatically year during would ployed test be the entire approach inflexible an from the rate base. Such excluded require from presumably exclusion base of would. n for out of .service routine maintenance or which was year. . during any repair time the test “in service” at the exclusion proposed would also necessitate test actually opera- utility which are devoted to new facilities -after the commencement of few weeks- or months tions a apparent year. unreasonableness the test While necessarily does not establish the City’s test “in service” standard, it does demon- of the Commission’s reasonableness approach. pragmatic flexible and need strate the focus on whether test seeks to “in service”- actually employed continue to existing plant'will *37 operations. future approach While Commission’s eschews any classification, fixed scheme of we not feel this do that certainty lack of renders the method Commission’s unreason- ultimately always able. The “in service” will issue almost be regulatory resolved judgment. exercise of informed proceeding clearly The facts in this demonstrate ra- tionality approach. of the Commission’s The Ohio River facility significant portion constitutes of the Petitioner’s generating capacity. facility temporarily was down shut modifying purpose plant for the sole so that it could operated compliance municipal be in with clean air standards. There was no evidence project that the modification would facility, necessitate the indefinite closure of the or that plant operated compliance could never be in with the Evans- ville ordinace. “Reasonably Necessary” Requirement

2. The requires, Commission’s “used and useful” standard in determination, utility addition to the “in service” plant “reasonably included in the base be neces utility sary” provision to the efficient and reliable service. The final order concluded jurisdictional all of the Petitioner’s “in service” plant and equipment “reasonably necessary” was to the continued main operations. tenance of electric service The Commission’s find concerning ings “reasonably necessary” of basic fact equipment status of the Petitioner’s and state that: utility system “The on demands Petitioner’s electric have substantially during years past increased continue to increase. ten will order In to meet de- increased mands for electric it service has been necessary and will be Petitioner immediate future for the enlarge generation, extend trans- requiring expenditure mission and distribution facilities and investment money of substantial sums of equipment. addition, properties In will Petitioner outlays required capital expendi- to make substantial comply require- with tures in order the environmental *38 having pollution regulatory jurisdiction ments bodies over of capital outlays in- control in its These of various forms. generating facilities and will modifications of volve involve equipment. prices for new The well as or additional as major equipment plant property of and have risen items substantially 2475-7.6. Record at and continue to escalate.” findings of basic The contends that the Commission’s that wholly inadequate support conclusion are fact to equipment any plant and is fixed amount of Petitioner’s contention; City’s “reasonably necessary.” agree with the We “findings” generality effec- sweeping of the Commission’s tively preclude any principled of useful” review its “used and statutory previously determination. We have discussed the findings requirement specific that formulate Commission to on all the factual determinations material its ultimate II, supra. patent 482-486, pp. The conclusion. See Section findings in demonstrate deficiencies the Commission’s necessity analysis intelligible why liow for some and agency The does at decision. Commission’s order arrived projected how current demands for electric not disclose and area were determined. service in the Petitioner’s service on that “demands Petitioner’s observations Commission’s utility system substantially” and that electric have increased these demands “will continue to increase” do not indicate attempted quantify the Commission ever the Petitioner’s growth, any demand to establish historical fixed estimates concerning growth. Moreover, the rate of future demand re- conclusion that these “increased demands” Commission’s money plant quire “the investment substantial sums enlightenment equipment” provides properties and little as necessary” plant equipment “reasonably how much and growth. existing projected satisfy and suggest appear to that “substantial” increases would order any justify level investment for electric service in demand to under- equipment which the Petitioner chooses in the Commission’s final order imprecision This sort take. legislatively imposed implicit of its abdication an constitutes 8-1-2-23, (cid:127)rate-making 1971, 8-1-2-48,' See, e.g., function.14 Ed.). 8-1-2-6 Code remand, required

On will be formulate findings specific adequately explain basic fact which underlying all material considerations its determination equipment “rea- Petitioner’s “in service” sonably necessary.”

VL AUTOMATIC FUEL COST ADJUSTMENT PROVISION proposed partially were rates based on the adjustment provision inclusion of an automatic fuel cost the rate schedules for industrial commercial customers. *39 adjustment essentially The automatic mechanism constitutes prospective up- for Commission authorization an automatic adjustment ward or downward in rates: weighted average the greater “Whenever or cost of fuel per than any amount, less million BTU there 27.0$ corresponding a per shall be increase decrease kilowatt- hour rate of billed at the . . . per for each 0.0121$ 1.00$ departure cost, adjusted million from said BTU standard nearest the Record at 2487. 0.0005$.” review of record Our the indicates that the “find- Commission’s actually ings” testimony. excerpts pre-filed are mere from the expert Petitioner’s following portions testimony Warmack, The two the of of Mr. Operations, clearly great Petitioner’s Director of Electric were accorded weight in Commission’sdeliberations:

“Q. respect What is the situation with to the demands on Peti- utility system? tioner’s electric utility system “A. The demands on electric Petitioner’s have in- substantially during past years creased ten and it is esti- mated that the demand will continue to increase. In order meet the increased demands Petitioner’s electric necessary it has enlarge service been for the Petitioner generation, extend its requiring of transmission and distribution facilities expenditure and investment of substantial sums money plant properties equipment. in : “Q. required outlays theWill Petitioner be to make in substantial capital expenditures comply requirements in order to with the regulatory having jurisdiction pollution bodies over control in its various forms? Yes.” “A. Record at adjustment provision, Petitioner this Under automatic at close to re-evaluate base fuel cost was authorized propriety of operations to each month of determine adjustment of the automatic a rate revision. The net effect structure is to increase provision on Petitioner’s rate overall any hour rate in the 0.0121 or decrease the kilowatt amount fuel per from the base cost cent million BTU variation adjustment would per mechanism million BTU. The 27.0 cents automatically by any upward fluc- triggered or downward expense on fuel determined fossil tuation adjustment provision month-by-month automatic basis. The resi- schedules for Petitioner’s was included in the rate not lighting customers. and street dential City adjustment contends the automatic fuel cost approved by

formula contravenes the Public Commission grounds. First, separate Act on Commission two Service formula, City argues adjustment prior rate revision without authorizes automatic legislative sub-delegation approval, an unlawful constitutes rate-making authority non-governmental entity to a —the Second, any regulated utility. City rate contends that single expense premised upon a results element revision unjust per schedule which is se unreasonable statutory, under standard. asserts that “reason- only just” rates can be determined able and after the Com- scrutinized, hearing, opera- a formal all has mission affecting utility’s totál factors financial condition. tional *40 City’s assumption on second contention based the that The statutory provision which mandates the to Commission just” implied rates contains an “reasonable establish utility’s consider requirement the Commission total that formulating experience in rate schedules. operating expressly authorize the use of an auto does not The Act statutory adjustment provi mechanism. matic procedure modification prescribes the for sion existing provides: rate schedules of 522

thirty mission and all such effect. “No existing cluding days’ change notice to . . .” ^[30] schedules schedules days prior to shall thereafter the commission and 1971, of changes joint 8-1-2-42(a) filing rates, shall be new time the made in except upon schedules approval plainly same any Supp. indicated in lieu thereof schedule, by are to take thirty 1975). upon com- ^[30] in- The Petitioner asserts that automatic Commission’s adjustment requirement formula does not contravene the Act’s express regulatory approval any prior of in exist- to revision ing argued require rates. It not that the Act does price per Commission formulate rate schedules on a fixed basis, adjustment unit automatic fuel cost merely provides formula a concrete method determina- “existing tion of rates” based on a measurable fluctuation of cost fossil fuel. argument adequate provide The Petitioner’s does an refuta City’s adjustment tion of the the fuel contention that cost provision sub-delegation an constitutes unconstitutional regulatory authority. The adjustment use of an automatic unilaterally does authorize mechanism not the Petitioner upon subjective rates based revise its in determinations requires creased fuel cost. The Commission’s formula Petitioner to demonstrate a fixed minimum fluctuation in fuel period prior any cost for fixed minimum rate revision. adjustment employment kind adopted formula complete not does constitute a abdication regulatory function and sub-delega of its does not offend the v. Accord, City Chicago tion Illinois doctrine. Commerce 607, (1958), City 776; Ill.2d N.E.2d 13 150 Comm’n Cleve land v. Public Util. (1965), Comm’n 82, Ohio St.2d denied, 982, cer. 382 U.S. 86 S.Ct. N.E.2d 15 L.Ed.2d v. Virginia ; (1966) Elec. & Power Co. Norfolk 90 S.E.2d 197 Va. City’s reject contention also We rates pursuant adjust- the established automatic *41 unjust. per ment are se unreasonable formula which statutory City argues provision, The that establish expressly mandates the Commission Commis rates, impliedly just” mandates “reasonable and opera affecting sion to all relevant factors consider Ed.). kernel of The tions. 8-1-2-4 Code pro adjustment City’s argument fuel cost is that automatic increased, previously permit what has above visions rates to be just” level, without a “reasonable and been determined to be examined of all factors which should be consideration City’s determining spite In of the the reasonableness a rate. challenge adjustment attempt formula to frame its to the statutory scheme, we are in terms of a conflict with any requirement special the Act’s to ascribe content to unable just” rates. establish “reasonable and that the Commission challenge City’s merely a to the constitutes The contention regulatory a method. Since there Commission’s choice of adoption prohibits of an provision no of the Act mechanism, adjustment standard of review our automatic rate reasonably only requires decision be that the Commission’s just” of “reasonable and rates. establishment related adjustment adopt a fuel cost Commission’s decision industrial and commercial rate sched- formula for Petitioner’s upon expense fuel con- ules was determination that based providing forty percent of approximately the cost stitutes and commercial customers. electric service to industrial consistently fuel cost refused to extend has adjustment for the reason that to residential rate schedules substantially expense percentage fuel constitutes smaller cost of service residential customers. of the total While argued may downward trends in other elements it may partially expense operating at least increased offset has, principle, costs, rejected the Commission this fuel position is that The Commission’s fuel-related contention. proportion a substantial of the expenses such total constitute expenses materially will these not be of service cost expenses. prospective offset downward trends other regulators validity may While informed differ to the as adoption justifications, policy the Commission’s *42 adjustment not constitute automatic mechanism does policy an unreasonable decision.

Although adjustment we hold that the method proscribed by Act, is not the manner in Com which the adjustment may provision

mission administers its spirit nevertheless violate letter and statutory provides scheme. The Act that “[n]o change schedule, any except shall be in thereafter made . . . upon thirty ^[30] days’ notice to the commission approval by the .” (Burns commission. . . Supp. IC 8-1-2-42 1975). argues adjust The Petitioner that the Commission’s complies ment mechanism prior approval with the Act’s re quirement because approved rate schedule revisions are pursuant advance to a fixed fuel cost formula. The Petitioner’s adjust contention overlooks the fact the Commission’s provision ment does in an result actual alteration of the utility’s rate schedule based on the redetermination of its key fuel component adjustment current cost. of the rate formula —the fuel any base cost—is apparent revised without procedure approval for prior Commission date the effective of the revised rate. prior approval requirement

The Act’s reflects a broader legislative purpose effectively to ensure that the Commission investigatory performs supervisory its functions. “inquire manage- Act mandates the Commission to into public ment of business of all utilities” “keep and to itself informed as to manner and method which the same . . .” Ed.). is conducted. 8-1-2-48 Code Moreover, provides section 8-1-2-48 that: “If, inquiry management any public in its into the

utility, paid the commission finds that the amount for the officers, any employees, them, of its or services exces- is sive, any expense being or that other item of ... is in- unnecessary utility ex- either curred which is items, cessive, designate item or commission shall such designated . . . shall not be taken item or items so and such into fixing determining rates consideration charge which it utility permitted for the service such renders.” authority to provides the with the

The Act “upon regulated utilities records of examine the books and with Act invests the Commission demand.” Id. 8-1-2-49. The also Act sweeping subpoena to -52. The power. Id. 8-1-2-50 provides that: any rate or the commission shall believe “Whenever discriminatory charge may unjustly unreasonable or or or obtained, any inadequate, or cannot be service that that an relating any investigation any public matters may, made, any it on reason be should investigate same,

motion, summarily without with or notice.” Id. 8-1-2-58. *43 proscribe an provisions the Act of that these believe

We to adjustment which functions mechanism rate automatic any procedure prior for Commission rates without revise Act approval. The Public Commission scrutiny Service and continuing regulatory supervision ex- and clearly mandates changes; recent to the amendments press approval of rate strengthen requires conviction that the Act our 8-1-2-42 IC approve any proposed scrutinize and to Commission the change in rates.15 ments prior adjustment effective to the time changes filing of reduction cluding fuel IC any public “ this section the same (a) cost new 1971, commission mechanism schedules approval, shall be date may made. adjustment No schedules 8-1-2-42 of change are. utility, contain of any rate revision under plainly through to take adopted by the Commission. The recent and joint rates, in lieu rate (Burns Supp. shall thereafter be made in may approval no indicated The effect. revisions. The section prescribe provision thereof summary hearing except upon by upon existing thirty 1975), the commission which commission, a less time within which a the automatic thirty ^[30] expressly provides retroactively procedure, prior provides days prior any upon ^[30] schedules and all schedule, days’ application fuel cost validates amend- full: notice or such in- to

However, we are unable to determine from the of record proceeding historically this whether or not the Commission has practice examining approving followed the of and cost fuel adjustment proceed- revisions. Since record in this ing any ap- contains no evidence that formal or informal proval procedure employed by Commission, has been we compelled require are the Commission to submit a written procedures approving of the it has statement followed in adjustment fuel cost rate revisions. realize We supplementation of ad hoe this sort of the record not hearing. included hold the hold a 8-1-2-59; filing, printing for charge. report or fuel municipally-owned days request for the fuel cost an the without IC authorizes such IC shall examine approves 1971, cooperatively-owned generating utility electric giving cost apply “(b) upon which the after a fuel cost rate summary hearing 8-1-2-39; summary hearing and any changes 8-1-2-54; notice it to such a fuel utility, any changes No schedule fuel to receives approval of public commission 1971, 8-1-2-60; cost books IC or changing of IC hearing counselor shall conduct his review and make a proposed changes generate electricity 1971, change cooperatively-owned in the 1971, purchased electricity, public within of generates adjustment on the the commission. Before 8-1-2-42 adjustment records rates, charges becomes and IC 8-1-2-55; schedule counselor’s rate schedules and the time twenty (20) days order within issue its requiring publication sole issue of the fuel [this tolls and and of the is filed. The commission shall based effective, are based. In of IC clause or such a sells section]; rates, or public, municipally-owned to determine the cost of report. 1971, 8-1-2-56; 8-1-2-61 upon upon electricity, charges the commission shall tolls and which includes or IC after the costs the cost of fuel public the commission addition, concerning 1971, 8-1-2-43; of notice does provisions of a twenty based adjustment charges summary counselor IC required effective utility’s public, before upon ^[20] “(c) Regardless pendency any request for a cost fuel by any adjustment utility, pertaining electric the books and records public, municipally-owned cooperatively- to cost of fuel of all generate electricity owned utilities shall be examined public records of all electric cooperatively-owned quarterly counselor not less often than and the books and *44 nongenerating public, municipally-owned or public utilities shall be examined coun- annually. public provide selor not less often than The counselor shall report the commission with a and as to the examination of said books records, following within a reasonable time said examination. public may, appropriate, request counselor if of the commission adjustment. Upon a reduction or request, of the elimination fuel cost such hearing the commission shall hold a forthwith in the manner provided 1971, 8-1-2-58; 1971, 8-1-2-59; in 1971, IC IC and IC 8-1-2-60. only method practical unusual, it is the but we feel somewhat dis- has determining whether the Commission for available remand charged statutory procedure This function. statutory by the is authorized supplement the record decisions, judicial governing review Commission provisions will conduct these that the Commission are confident and we adequately protects manner which proceedings in a further Ed.). parties. 8-1-3-7 Code rights of the with further part and remanded instructions for Affirmed opinion. with this proceedings consistent Sullivan, Buchanan, concurs; P.J., part and J., concurs in opinion part to follow. with dissents Dissenting Opinion Concurring in Part in Part holdings majority opinion, handed of the J. —The Sullivan, through in Parts III are contained December down my separate parts address these that I It VI thereof. opinion. STATEMENT

PRELIMINARY tenor of unhesitatingly in the thrust and concur I Findings, requires in its majority opinion with provide court this must Commission Public Service meaningful judicial review. tools for effective sufficient exper- the technical judiciary blessed with are not We itself. expected the Commission tise ably legislature points not majority out that has guidelines to be followed forth set rejecting applications. sub- approving or increase A adjudicative function portion of the stantial to the Commission’s discretion which committed has been however, exercised within a sound must, framework of policy Herein lies the determinations. dilemma. reasonable Commission, by legislative Since, unfortunately, au- inaction, thorization, implication, formulates its rate- *45 528

making (Part , policies II, p. 482) on an basis mean ad hoe ingful judicial has been rendered at review best. difficult given If we are to decide whether a rea rate increase is sonable, through require we must the Commission its factual findings reasonableness, prima to disclose such at least facie. making legislative, judicial a Rate not function. P.S.C. City Indianapolis (1956), 81, Ind . at N.E.2d 235 131 v. of And, transgress upon at 308 we are not to' permitted 312. policy making Yet, prerogatives.- we-of judiciary required legality. are to-review for may seriously questioned be

It may whether we review illegal reasonableness a rate increase order unless it is unconstitutionally confiscatory or precluded for we are from striking legislative down other acts even if we deem them may, unreasonable. Be that as it the review for reasonableness state, is fixed the case law of this as elsewhere. v. P.S.C. City Indianapolis, supra, 84-85, 235 Ind. at at 131 N.E.2d 315-16; City P.S.C. v. LaPorte Ind. 207 N.E. And that review includes whether Com- mission considered or failed to consider elements or factors essential to reasonable order. P.S.C. Indianapolis, v. supra, 84-85,131 Ind. at N.E.2d at 315-16. n however, happens, What if the par- reasonableness aof depends upon ticular rate increase decisions which the Com- may “policy”? May term mission we policy review that merely or must we avoid such a clash and stamp” “rubber my the decision the Commission? It belief that we are required “policy” to review such if such review is essential enlightened for an determination as to the reasonableness I majority the rate established. read the opinion to so findings hold. It states that “basic on all material issues” necessary II, (Part p. 482). are issues, my Material estimation, involving “policy” include those determinations purely those which are as well as long- factual so as rea- application policy depends upon presence sonable varying absence of certain factual considerations. there- We - evidentiary must, basis, or a state- fore whether- it have a can -Commission, we -policy- before ment of reasons -the determine, must, rate order is reasonable we as under the law. overly complicates our majority my

It is belief that inconsistent extremely by making and somewhat review 'fine “factual “policy determinations” distinctions between *46 Commission by subjecting certain some determinations” and findings requirement basic that contain conclusions to a subjecting conclusion, other supportive facts of the while not finding requirement. to the same conclusions similar nature or stated light above, comment I concur without In of the VI; concur III, (A),V (D) I and reservation as to Parts V IV, Parts as to herein contained separate with as comment respect to Parts V(E) (2) ; I dissent with (C) V (1). (B) .(E) V V

!V PUBLIC NOTICE majority rate increase concur in the view that use of a I per requisite public se petition caption not as the notice is language however; fear, certain I broad unreasonable. subjected by my colleague's may to unwarranted'con- used . . language follows: struction. That is as statutory clearly “A scheme review of indicates that the case-by-case adequate determination what constitutes legislatively public notice has been committed to the Com- mission’s.informed, discretion. It is an Well'established that statutory ...agency’s interpretation scheme'it admin- judicial deference, when, especially is entitled to isters legislative plan elaboration.” necessarily contemplates administrative rule (p.496). “statutory

Certainly, scheme” which commits “informed discretion” the determination - adequate notice” is limited con- “what constitutes .may process. due dictates stitutional correctly determine in particular public its discretion adequate only notice is reasonably if that notice is calculated apprise public of the matters to be considered. Mullane v. Central Hanover Trust Co. 339 U.S. 70 S.Ct. Subject caveat, process 94 L.Ed. I due this majority concur in Part opinion. IV of the

(B)V ALLOCATION OF PLANT COMMON “Used and useful” ais determination of ultimate fact. facts which render the components its severable “in “reasonably necessary” service” and and thus “used and use- ful” are basic facts which must be found the Commission. (B) majority

PartV opinion recites that: allocating “In operations, plant’ gas ‘common between and electric separation adopted technique the Commission Thus, ‘supervised expense’ denominated as the . . method . the percent approximately seventy-seven Commission found that properly of the common was allocated to jurisdictional seventy-seven electric rate per- base because cent of expenses total were in its incurred operations.” (p. 502). electric *47 finding I locate in findings. the record no such or in Nowhere findings its does the “adopt separation a tech- findings nique” nor do the mention a 77 allocation to electric % finding respect service. The sole with plant to common alloca- tion is as follows: addition, petitioner

“... In operates owns and plant, common materials and facilities allocated to electric plus service supplies properly part included utility as a plant of its in service.” City in its brief appropriately has called attention to the finding absence of a respecting definitive common allocation. sure, testimony

To be by Petitioner, exhibits and submitted unobjected by City, “supervised expense” utilized might support allocation an method and well the evidence However, percentage allocation under that method. 77% by findings give the Commission did not its us review by attack, might City’s evidentiary tools which we test except may finding as be surmised from the Commission fair properties “the value of Petitioner’s electric used and useful . . . $125,334,454”, was not less than or finding from jurisdictional original that “the net cost utility plant Petitioner’s electric in service and used and public (excluding useful for the convenience of the Broad- way plant, $4,814,511) $95,000,441. turbine amounted to Contributions in aid of construction afore- attributable to the jurisdictional plant said net $364,863 amounted to are original jurisdictional not to be in included Petitioner’s net purposes.” A-III, cost evidentiary for fair value Exhibit by upon majority relied as the basis for the conclusion adopt that the Commission did in fact allocation does 77% inescapably not lead to such conclusion. That the Commission adopt did not Exhibit toto is A-III seen from the Com- Broadway mission’s exclusion of the turbine exclusion of certain contributions aid of construction. Even considering A-III, such exclusions or modifications to Exhibit appear it does not to me as a matter of arithmetic that jurisdictional original by net cost as found the Commission comports with A-III. Exhibit The variance line bottom figures may may explained not be other determinations made may Commission. The Commission in fact have adopted the important thing allocation. The we 77% findings. cannot tell from the We cannot even tell from a comparison findings with the exhibit for if the Com- accepted figure mission $2,435,655, allocation % original variance in net cost explained must be elsewhere. explanation by slightest not made Such even hint in the findings. *48 of precise this nature is futility Surmise the exercise in sought which we have to avoid for future rate reviews. n very require-the make It is the reason we- issues. findings respect to material complete more other with independent -of improper review for us make an It findings have support record to search for evidence to y of Accordingly, (B) Part I dissent from never been made. the test majority opinion with reference-to as we did thereto, require I adjustments would year selected and made respect findings specific with Commission to make -and in its- “used reflected as such is common allocation- useful” determination.

(C)V TAX ACCOUNT DEFERRED EXPENSE RESERVE holding (C) find certain I concur in V but Part unacceptable. dictum therein to be utility prop- majority “that has defined “rate base” as erty public employed providing service with the charged upon are and constitutes which rates the investment n (p. (Emphasis 479) ‘return’ to be earned.’’ which the supplied). incongruous majority appears

It to me that content circumstances, con- plates, under inclusion of consumer some capital tributed in the form deferred tax reserves within the rate but to “reduce zero allowed base return funds”, (p. 513). constructed the reserve on with might Likewise, contemplation per- the Commission working capital, “assigning mit use funds as but computing capital funds zero the Petitioner’s cost .... 513). (p. “fair rate of return.” may Certainly, the reserve funds be utilized Petitioner contemplated majority, i.e., for purpose for either working capital, capital but construction as should not in the rate base. be includable myself from the dictum at therefore disassociate contained

I majority simply preclude opinion and would p. Peti- *49 expense utilizing unless tionér deferred taxes current from as base. Alton v. such fund is excluded from the rate N.E.2d 513. Ill.2d Commerce Commission unnecessarily complicate process. do the otherwise is To Utility Swiren, Depreciation Accelerated Tax See Benefits Making, L. Rev. 629 at 649. Rate 28 U. Chi. (E) (1)

V REQUIREMENT THE SERVICE” “IN (E)(2) V REQUIREMENT THE NECESSARY” “REASONABLY reference to the “In facet of the and Service” “Used With test, majority Useful” considers inclusion of Petitioner’s facility. majority notes, As the River the Commission Ohio found that the River was used and useful. Ohio Such by only finding respect the Commission with to the Ohio plant. River majority opinion categorized at the outset the “used

. one (p. useful” determination to be of ultimate 486). and fact respect conclusion Yet the naked with to the Ohio River facility unsupported findings of basic fact. I fail might intelligently judicial see ho wwe make review with- findings. out such The “used and useful” conclusion is respect year similar in this to the test selection and ad- justment required treated in Part wherein III we the Com- policy evidentiary mission to articulate for basis its ultimate fact conclusion. I would remand the “material findings issue” of “in service” as to the Ohio River Plant for findings, truly of basic fact. such we Without cannot address City’s evidentiary upon attack conclusion. ultimate majority correctly, believe, breaks I the “used use- components (1) ful” fact determination into two ultimate — reasonably (2) necessary. Interspersed in-service and majority’s words which “in denote the consideration’are of.“policy”. designation determination as one Such service” presumably majority’s acceptance accounts findings requisite as River “in service” without Ohio of basic fact. however, “reasonably considering

Inconsistently, when necessary” test, majority useful” facet of the “used and actually finding fact basic holds a made necessary” “reasonably sub-test, respect too to the with review, (p. 519). our Whether imprecise to allow both “reasonably necessary” components “in service” whether, appro- “policy” more determinations or as is are they my view, they determinations, priate in are factual both *50 judicial respect like examination our should receive with to enough say It is not to the ultimate fact review. adequately supported by naked con- and useful” “used necessary” “reasonably even of “in service” and clusions may disguised though since not ultimate such conclusions “finding (B), supra. dissent Part fact”. See V of basic as regard “policy” “fact”, I versus to the semantics Without findings support only not require of basic fact would “used useful” but also to conclusion is in support the conclusions that service and that necessary. reasonably isit reasons, (E) I (2) concur Part V which re-

For these specific findings more Commission for with mands “reasonably necessary”. Such respect concurrence neces- my (E) (1). compels from sarily dissent Part V Reported at N.E.2d Note. — Freeling Irving State Indiana. v. 31, 1975.] Filed December 2-374A67.

[No.