Consumers Win Round Two of Gas Deregulation Fight

LEGAL BRIEFS

In additional to traditional rate cases, a variety of deregulation and alternative regulation controversies relating to electric, gas and telephone utilities have developed recently. As a result, both the number and the diversity of the Coalition’s active cases are at an all-time high.

Consumers Win Round Two of Gas Deregulation Fight

On October 8, 1998, the Court of Appeals ruled in favor of an appeal by the Coalition, United Senior Action (USA), several individual customers, the Consumer Counselor and an ad hoc group of large industrial customers that Indiana Gas and Citizens Gas had violated state law by not securing prior approval from the Indiana Utility Regulatory Commission (IURC) to form ProLiance, an affiliate created to perform gas supply planning, procurement, and management for the two utilities on a non-regulated basis. The Court held that the arrangement creating ProLiance amounted to an alternative regulation plan requiring prior Commission approval because it permitted ProLiance to earn a profit on the sale of gas to the retail customers of Indiana Gas and Citizens Gas, which the two utilities themselves could not do under traditional regulation.

This is a particularly important decision because it blocks a blatant attempt to circumvent the Alternative Utility Regulation Act by unilaterally deregulating the most critical gas utility function–gas supply–without a public hearing or regulatory approval. The decision could also result in a refund to Indiana Gas and Citizens Gas customers of profits earned by ProLiance on gas sold to the two utilities since ProLiance’s formation in April, 1996.

Indiana Gas and Citizens Gas have petitioned the Indiana Supreme Court to vacate the Court of Appeals’ decision. NIPSCO, SIGECO and Ohio Valley Gas have filed a "friend of the court" brief supporting their fellow utilities. The Coalition and its allies have all filed briefs opposing the petition. The Indiana Supreme Court is expected to rule in late spring or early summer.

Federal Courts Asked to Block Utility Bail-Outs Disguised as "Stranded Cost Recovery"

On October 1, 1998, the Coalition achieved another milestone in its representation of Indiana consumers, filing for the first time an appeal in the U.S. Court of Appeals for the D. C. Circuit of a decision by the Federal Energy Regulatory Commission (FERC). Filed jointly with a number of national consumer groups including Public Citizen, U.S. Public Interest Research Group, and Safe Energy Communication Council, as well as the Indiana Consumer Counselor, Indiana Industrial Energy Consumers (INDIEC), and Indianapolis Power & Light (IPL), this appeal challenges FERC’s authorization in Order 888 of the recovery through transmission rates of the costs of generating facilities (primarily nuclear power plants) rendered uneconomic by the introduction of open access transmission and generation competition, a.k.a. "stranded cost recovery."

This appeal is especially critical for two reasons. First, the Coalition and its allies are challenging not only the amount of stranded cost recovery allowed by FERC (100%), but FERC’s statutory authority to award any recovery at all at the wholesale level, . Second, CAC et al. are contesting FERC’s claim that it has the authority to order stranded cost recovery at the retail level if affected state regulatory commissions do not authorize such recovery. Literally, hundreds of billions of dollars nationally could be at stake in this appeal, either directly or indirectly.

The D.C. Circuit is not expected to rule until late 1999 or early 2000. The Order 888 appeal will undoubtedly end up before the U.S. Supreme Court whichever way the Court of Appeals rules.

Refund Sought for AEP Indiana Customers Due to Safety-Related Shutdown of Cook Nuclear Plant

In September, 1997, Indiana Michigan Power Company d.b.a. AEP Indiana shut down both units of its Cook Nuclear Plant because it was unable to demonstrate to the Nuclear Regulatory Commission (NRC) during an inspection that the units could be safely turned off in the event of a serious accident. Follow-up investigations conducted or required by the NRC showed that at least three critical safety systems of both Cook units were not in compliance with federal regulations, raising serious questions about the overall management of the safety systems. As a result, both Cook units have remained shut down and are not expected to reopen until Spring 1999. Moreover, problems at the plant were determined to be so serious that they resulted in the issuance of a formal Notice of Violation and the assessment of a $500,000 fine by the NRC.

Compared to other baseload generating facilities on the AEP system, the Cook units have high capital but low operating costs. As a result, AEP Indiana has had to purchase replacement power from other plants at considerably higher cost than if both Cook plants had operated as planned. In fact, the Consumer Counselor’s office has calculated that the first twelve months of the outage has caused $43 million in excess purchased power costs.

Together with the Consumer Counselor and an ad hoc group of large industrial customers called the Indiana Coalition for Fair Utility Rates (ICFUR), the Coalition sought an investigation by the IURC as to whether the Cook plant shutdown and related excess purchased power costs were the result of AEP mismanagement. In August, the Commission ordered the requested investigation. In November, the Coalition and ICFUR jointly filed testimony by two independent experts which concluded that the problems which caused the plant shutdown and the related replacement power costs were, indeed, the result of management inefficiency. As a result, the Coalition will request the IURC to order AEP Indiana to refund all charges collected from its customers to pay the excess purchased power costs, perhaps as much as $75 million.

Hearings in the IURC investigation are now scheduled to be held beginning March 15. A commission order determining whether a refund is required and, if so, in what amount is expected by May 31.

Consumer Groups Support IURC Decision to Reduce Ameritech Rates

On December 30, 1997, the IURC ordered Indiana Bell Telephone Company d.b.a. Ameritech Indiana to reduce its basic local exchange rates by 4.6% in conjunction with an extension, on an interim basis, of most of the regulatory flexibility originally afforded the company in 1994 under the alternative regulation plan known as Opportunity Indiana. This was a smaller rate reduction than the Coalition, in alliance with AARP and USA, had asked (5.46%) in order to reflect continuing declines in Ameritech’s cost of providing local service. What is more, Ameritech had earned rates of return on shareholder equity of almost 40% during both 1995 and 1996. Nonetheless, Ameritech appealed the Commission-ordered rate reductions, thereby preventing them from going into effect until its appeal has been decided.

As a result, the Coalition has found itself in the unfamiliar position of defending rather than challenging a Commission order on appeal. A decision by the Court of Appeals is expected late this summer. If the Commission’s order is upheld, Ameritech customers will receive not only the 4.6% rate reduction when the appeal is over, but also a refund of excess amounts collected by Ameritech since December 30, 1997 while the appeal has been pending.

Other Cases

The status of other major cases currently pending is as follows:

The Commission is now considering petitions for rehearing from several telephone companies regarding its recent decision to allocate the costs of the local loop among all services which use it rather than assign all the costs to basic local service, a decision which the Coalition supports.
The IURC should rule this winter on a combination deregulation/alternative regulation plan for a group of approximately fifteen REMCs developed by Indiana Statewide but opposed by the Coalition.
The Coalition has joined with a large number of other "green" groups in supporting EPA’s recently enacted rules requiring significant further reductions in emissions of nitrogen oxide from coal-burning power plants, including those of Indiana utilities.
The Coalition has also joined with other midwestern and national advocates of renewable energy to oppose a utility petition asking FERC to pre-empt state programs which allow "net metering" of electricity produced by home-based solar panels and wind turbines.
The FERC has set for hearing the proposed merger between American Electric Power Co. and Central & Southwest Corp., which the IURC has set for investigation and which the Coalition is opposing at both the state and federal levels as part of a coaliton of midwestern consumer and environmental groups.
The IURC is currently considering the extent of its authority to review, approve, disapprove or approve with conditions the proposed acquisition of Ameritech by SBC Corp., a friendly takeover which the Coalition is opposing in cooperation with AARP and USA.
IPL has proposed that the IURC approve a combination deregulation and alternative regulation plan for what could become the state’s first "merchant" plant for producing electricity, a proposal which the Coalition is currently questioning and evaluating.

(The Coalition’s Counsel for Energy, Utilities and the Environment, Mike Mullett, returned this fall from a year-long sabbatical during which he completed the course work required for a Masters of Environmental and Natural Resources Law at the Northwestern School of Law of Lewis & Clark College in Portland, OR. We welcome Mike back to Indiana and to the pages of Citizens Power.)

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