Articles Posted in Utility Law

A California court of appeals recently held that utility companies operating in rural areas of the state do not collect a higher cost of capital, also referred to as a rate of return, than other utility companies.

In Ponderosa Telephone Co. v. California Public Utilities Commission, several small, rural, privately-owned telephone companies asked the California court of appeals to review a decision of the California Public Utilities Commission (“PUC”).[1]  The PUC’s ruling related to the companies’ cost of capital, “a measurement of the cost of obtaining debt and equity financing, and it reflects the amount investors would demand to compensate them for the risks of investing capital in the company.”[2]  This is also referred to as the rate of return, as it provides the target return on the utility’s capital.[3]  The number is a factor in determining a company’s rate base and is calculated by examining (1) the cost of debt, (2) the cost of equity, and (3) the capital structure.[4]

The companies filed a petition to the PUC proposing that their rates of return be reviewed and altered to approximately 14.6%. The proposed amount represented a significant increase from the previous figure of 10% and reflected special risk factors the companies faced, including their small size, industry risks, and regulatory risks.[5]  However, following its review, the PUC denied the companies’ requests and lowered their rates of return to approximately 9%. The companies sought a review of the ruling, arguing that the PUC’s conclusion was arbitrary and capricious, and was unsupported by substantial evidence.[6]

On June 27, 2019, the Indiana Supreme Court concluded that Indiana utility companies may be estopped from challenging the use of customer class revenue allocation factors under Indiana’s Transmission, Distribution, and Storage System Improvement Charge statute (the “TDSIC Statute”)[1] if such companies demonstrate uncontested support of the factors’ use in prior proceedings and the challenge would cause injury to an opposing party. The TDSIC Statute was enacted in 2013 and encourages energy utilities to replace their aging infrastructures by allowing them (1) to seek IURC pre-approval for certain gas or electric infrastructure projects and (2) to recoup the costs by submitting rate-increase petitions.[2]

Typically, base utility rates are set through a general ratemaking case before the IURC.[3] This type of review allows the IURC to ensure that utility rates are fair to both the utility company and to its customers.[4] However, rates can also be adjusted to reflect certain infrastructure projects and costs through the Commission in what is known as “tracker” or “rider” proceedings.[5]  Specifically, the TDSIC Statute provides two such proceedings under Section 9 and Section 10, both of which are distinct yet still related.[6] Under Section 10, utilities may seek approval of a multi-year plan from the IURC “for eligible transmission, distribution, and storage improvements.”[7]  Based on this multi-year plan, Section 9 subsequently permits utilities to petition the IURC for periodic rate adjustments to recover 80% of approved capital expenditures and TDSIC costs.[8] Section 9 petitions further require that customers use “the customer class revenue allocation factors based on firm load approved in the pubic utility’s most recent retail base rate case order.”[9]

At issue in NIPSCO Industrial Group v. Northern Indiana Public Service Co. was whether the IURC improperly approved of the use of customer class revenue allocation factors based on total load rather than firm load as required by the TDSIC Statute.[10] Initially, NIPSCO Industrial Group (the “Industrial Group”) and the Northern Indiana Public Service Company (“NIPSCO”) agreed to two expansive, multi-year settlements, which specified how rate increases should be calculated and allocated among the utility company’s various rate classes under the TDSIC Statute.[11] Ultimately, the IURC approved the agreements. However, despite being a party and approving the first Section 9 petition, the Industrial Group opposed NIPSCO’s second Section 9 petition. Specifically, the Industrial Group argued that the customer class revenue allocation factors included in NIPSCO’s second Section 9 petition were based not on firm load, but on total load. The IURC rejected the Industrial Group’s argument, leading the Industrial Group to seek judicial review.[12]

The United States Supreme Court recently issued its decision in a case that, on the surface, appears to impact the wine and liquor industry. However, the ruling is promising for out-of-state companies wishing to operate as public utilities in Indiana, as such entities currently face a comparable citizenship hurdle under Indiana law. [1]

In Tennessee Wine and Spirits Retailers Association v. Thomas, the Court held that a Tennessee law, which required a minimum of two years of Tennessee residency for entities wishing to operate retail liquor stores, was an unconstitutional limitation of interstate commerce. Tennessee Wine and Spirits Retailers Association v. Thomas, No. 18-96, slip op. at 36 (2019). Though admittedly deemed “less extreme” than other Sixth Circuit attempts to limit interstate commerce, the law was ultimately found to violate the Commerce Clause due to its express discrimination against nonresidents and its “highly attenuated relationship” to public health or safety. Id. at Syllabus 4.

Under the law at issue in Tennessee Wine, a person and/or company attempting to obtain proper licensure for the first time to operate a retail liquor store must have resided in Tennessee for two or more years at the time of application. Id. at 3. Despite not having been citizens for at least two years, two liquor businesses applied for such licenses in 2016. Id. at Syllabus 4. The Tennessee Alcoholic Beverage Commission recommended that the two applications receive approval; however, the Tennessee Wine and Spirits Retailers Association threatened to sue the Commission if the applications were granted. Id. at 4. The Commissions’ executive director then filed a declaratory judgement action in State court to settle the question of the residency requirements’ constitutionality. Id. The case was removed to federal court, where the district court found the Tennessee law to be unconstitutional. Id. The Sixth Circuit Court of Appeals affirmed the decision of the district court. Id. at 6.

Great River Energy (“GRE”) is a G&T cooperative that services 28 members. Crow Wing Coop. Power & Light (“Crow Wing”) is one of GRE’s 28 members. In 2004, Crow Wing entered into a power purchase contract with GRE. The pertinent parts of power purchase contract are (i) the section which provides the rate making formula and governs GRE’s charges to members for generated electricity, and (ii) the sections governing GRE’s amendment of its rate formula.

The contract obligated Crow Wing to acquire a fixed portion of the total power it purchases from GRE. For members obligated to purchase fixed- portion of power, the member’s rate is calculated in part by accounting for the various power plants (“resources”) that serve that particular member. Thus, each fixed-portion member may be charged a different rate based on the resources associated with that member. In the event that GRE chooses to retire a resource, a fixed-portion member is entitled to reduce the amount of energy it is required to purchase. The contract also provides that when GRE retires a resource, it is entitled to pass on certain costs associated with the retirement.

As to the amendment of rates and charges, the contract allows GRE to amend its rates so long as it obtains sufficient member approval. Specifically, GRE may amend its rates by obtaining approval of (i) 55% of its members, and (ii) members representing 45% of its load. GRE has amended its rate formula twice since 2004, most recently in 2009. Even though Crow Wing voted against the 2009 amendment, GRE obtained sufficient approval for the amendment.

Alcorn County Electric Power Association (“ACE”) began supplying The Door Shop, Inc. (“Door Shop”) with electric service beginning in November 2004. In the course of setting up Door Shop’s account, ACE failed to enter the proper data into their billing system. This error resulted in Door Shop being dramatically under-billed for their electric service. From November 2004 to January 2011, the actual price Door Shop should have paid ACE for electric service was $36,081.86. However, due to the entry error in ACE’s billing system; Door Shop was only charged $10,396.28 for electric service over that period. After Ace discovered this error, it sent Door Shop a supplemental bill for the under-billed amount of $25,685.58. After the Door Shop refused to pay the under-billed amount, ACE filed suit in Mississippi Circuit Court to recover the amount due. Summary judgment was eventually granted in favor of ACE and Door Shop was ordered to pay the under-billed amount. Door Shop appealed to the State Supreme Court.

Door Shop first challenges the trial court’s grant of summary judgment on jurisdictional grounds, claiming that the Mississippi Public Service Commission (“MPSC”) has exclusive jurisdiction over this case. Under the applicable state statute, the MPSC has “exclusive original jurisdiction” over a utility’s intrastate supply of electric service. However, that same statute also states that the MPSC “shall not have jurisdiction to regulate the rates for the sales and/or distribution [of electricity].” Thus, Door Shop’s jurisdictional argument hinges on whether or not the issue presented in this case can be attributed “rates” set by ACE. Door Shop argues that the error in ACE’s billing system presents an issue of “quality of service” rather than “rates.” The Mississippi Supreme Court rejected Door Shop’s argument. The Court stated that Mississippi law defined the term “rate” broadly. Taking this broad definition into account, and considering that the error occurred in ACE’s billing system, the Court held that this case fell squarely within the purview of rates. Thus, the trial court did not err in disposing of ACE’s claim originally rather than referring it to the MPSC.

The Supreme Court then addressed whether granting ACE summary judgment was proper. In affirming the trial court’s decision, the Supreme Court emphasized that ACE’s bylaws specifically address errors in billing. The by-laws provide that, were an error in billing occurs, ACE has the right to issue a sub-bill for the unaccounted for amount owed, regardless of who caused the error or when it was discovered. Because Door Shop agreed to be bound by Ace’s bylaws in the service agreement between the two parties, ACE is entitled to recover the un-billed amount of $25,685.58 as a matter of law.

In an opinion issued on December 31, 2018, the Indiana Court of Appeals upheld Charlestown’s sale of its water utility to the Indiana-American Water Company. See Now!, Inc. v. Indiana-American Water Company, Inc., Case No. 18A-EX-844 (Ind. Ct. App. Dec. 31, 2018). The City of Charlestown owned and operated its water utility for over fifty years. Id. at 3. At the time of the sale, the water utility system served 2,898 metered accounts. Id. Due to the City’s failure to maintain its water distribution system properly, minerals began to build up in the system, causing some customers to see “brown water” flow from their taps. Id. at 4. The estimated cost to remedy Charlestown’s water system was $7.2 million. Id. Concluding that this repair cost was too burdensome for the City to take on, City officials met with Indiana-American in the Spring of 2016 to discuss the sale of Charlestown’s water utility. Id. Appraisers valued the utility’s assets at just under $13.5 million. Id. at 5. Charlestown and Indiana American agreed on a sale price of $13,403,711. Id. This price reflected the appraised value of the water utility minus the value of a few wells/well pumps which Charlestown would retain and lease to Indiana-American. Id. The City held a public meeting to discuss the sale on May 11, 2017. Id. On July 6, 2017, the City adopted an ordinance to sell the utility. Id. A day later, NOW filed a complaint with the IURC asking it to reject the sale. Id. at 6. NOW eventually filed a motion for summary judgment, and the IURC held a three-day evidentiary hearing on the motion. Id. After the hearing, the IURC denied NOW’s motion and approved the sale. Id. at 7.

On appeal, the Court addressed three issues: (i) whether the sales price was reasonable as required by statute, (ii) whether information relating to the sale was properly made available to the public, and (iii) whether the statute requiring a public hearing on the sale was satisfied. Id. at 3. The “reasonableness” of a municipal utility’s sale price is defined by two statutes: Ind. Code § 8-1.5-2-6.1 (applying to the sale of “non-surplus utility property”) and IC §8-1-30.3-5 (applying to the sale of property by “distressed utilities”). Id. at 12. NOW argued that these two statutes present two distinct reasonableness standards and that the IURC applied the wrong standard in its order approving the sale. Id. The Court of Appeals rejected this argument; finding that the two statutes govern similar situations must be read harmoniously. Id. at 20. It determined that, since Charlestown sold its water utility to Indiana-American for its appraised value, the sales price was reasonable under both statutes. Id. at 21.

As to the second issue, NOW argued that Charlestown failed to comply with IC § 8-1.5-2-4 which requires that certain information about the sale be made available to the public “in a written document.” Id. at 21-22. Charlestown made the required information available, but failed to compile it into a single document. Id. at 22. Acknowledging this failure, the Court nonetheless held that Charlestown made the required information available in substantial compliance with § 8-1.5-2-4. Id. at 23. Finally, the Court of Appeals held that the timing of Charlestown’ public hearing to discuss the sale was proper. Id. at 26.

A group of four former cooperative members filed a breach of contract claim against Flathead Electric Cooperative. Wolfe v. Flathead Elec. Coop., Inc., 393 Mont. 312, 314 (Mont. 2018).Plaintiffs were members of the coop during various times, the latest of which was in 2007. Plaintiffs alleged that Flathead violated Montana law when it allocated patronage capital to their accounts, but did not actually refund any capital to the members on an annual basis. The Federal District Court of Montana mentioned that plaintiff’s claim would not likely prevail, as the statute governing capital refunds only requires that refunds be distributed “whenever the revenue exceeds the amount necessary to fund operations.” Id. However, the district court did not ultimately reach this question. Instead, it ruled that Plaintiffs did not file their claim within the applicable 8-year statute of limitations. Id. at 315.

On appeal, the Supreme Court of Montana affirmed. Id. at 313. When bringing a claim under a written contract, the statute of limitations runs from the moment a plaintiff’s claim accrues. Id. at 315. The Court held that Plaintiffs’ claim had accrued in February, 2008, as this was the date of the last board meeting that took place while Plaintiffs were still members of the cooperative. Id. at 315-16. Their complaint was filed in September, 2016 – 8-and-a-half years after their claim had accrued. Thus, the statute of limitations for Plaintiff’s breach of contract claim had expired. Id. at 316.

The court rejected plaintiff’s argument of fraudulent concealment, which would have tolled the statute of limitations until the time of discovery. Id. Flathead had a defined policy regarding patronage capital in their bylaws, and the Court did not find that it took any affirmative action to deceive Plaintiffs. Id. at 317. The Court also rejected the Plaintiff’s assertion that the breach is ongoing, holding that the latest any Plaintiff was a member was up to the board meeting of 2008, and that Plaintiffs had knowledge of the breach from that point onward. Id. at 316.

On September 13, 2018, the Seventh Circuit Court of Appeals upheld an Illinois law, 20 ILSC 3855/1-75(d-5), who provides subsidies to some of the state’s struggling nuclear generation facilities, against a challenge by the Electric Power Supply Association (EPSA), an advocacy group for the electric power industry.

Under the Federal Power Act, the Federal Energy Regulatory Commission (FERC) is authorized to regulate the sale of electricity in interstate commerce while states regulate local distribution of electricity, as well as the facilities used to generate it. In this case, EPSA argued that the Illinois law was preempted by the Federal Power Act because the subsidies indirectly regulated the price of power, which only FERC has the authority to regulate.

The Seventh Circuit explained that the states’ and FERC’s powers under the Federal Power Act often overlap; it would be impossible for states to regulate the local distribution of electricity without at least affecting the price of power within its borders. If a state were to offer subsidies that depended on selling power in interstate auction, then the legislation would be preempted. However, the Illinois law in this case only regulates local generation of power. Thus, the court found no preemption and the law was upheld.