ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEE/
SUE E. STEMEN ANNE E. BECKER
Ameritech Indiana TIMOTHY M. SEAT
Indianapolis, Indiana Indiana Office of Utility Consumer
TERESA E. MORTON
STANLEY C. FICKLE ATTORNEY FOR APPELLEES:
MARK A. LINDSEY
Barnes & Thornburg MICHAEL A. MULLETT
Indianapolis, Indiana Mullett & Associates
INDIANA BELL TELEPHONE COMPANY, ) INCORPORATED d/b/a AMERITECH INDIANA, ) ) Appellant, ) ) vs. ) ) OFFICE OF UTILITY CONSUMER ) COUNSELOR, ) ) Appellee/Cross-Appellant, ) ) vs. ) No. 93A02-9801-EX-22 ) ) INDIANA UTILITY REGULATORY ) COMMISSION, SMITHVILLE TELEPHONE )
Indiana Bell Telephone Company, Inc. d/b/a Ameritech Indiana (Ameritech) appeals the Final Order on Interim Relief entered by the Indiana Utility Regulatory Commission (the Commission) on December 30, 1997. The Office of Utility Consumer
Counsel (the OUCC)See footnote
This case requires our interpretation of the
Commission's authority and responsibility under Ind. Code § 8-1-2.6-1 et seq. (the
Alternative Regulation Statute), which was enacted to promote competition in the provision
of telephone services. We consolidate and restate the issues raised on appeal as follows:
1. Whether the Commission erred by adopting a new alternative ratemaking method without providing the required notice and hearing to interested parties and without finding that the alternative ratemaking method meets specific statutory requirements;
2. If the Commission erred by adopting a new alternative ratemaking method, how Ameritech's interim rates should be determined following the expiration of an earlier alternative regulation agreement;
3. Whether the Commission erred in denying the OUCC's request to make Ameritech's interim rates subject to retroactive change and possible refund upon further review; and
4. Whether the Commission's Final Order requiring Ameritech to provide certain telecommunications infrastructure investments as it agreed to do under an earlier alternative regulation agreement is contrary to law.
We affirm in part and reverse and remand in part.
to introduce new services and corresponding rules in the Other Services category. Prices in
the Other Services category were not made subject to regulatory oversight, as it was assumed
that competitive market forces would regulate the prices for these new service offerings.
The Opportunity Indiana settlement required Ameritech to cut its revenue by $57 million per year for the term of the agreement through a series of reductions in specified charges. Ameritech agreed to invest $20 million per year for the years 1994 through 1999 to provide digital switching and transport facilities to every interested school, hospital, and major government center in its service area on a non-discriminatory basis. Ameritech also agreed to invest $5 million per year for the years 1994 through 1999 in the Corporation for Educational Technology or a similar non-profit corporation to fund information processing and telecommunications equipment.
Under Opportunity Indiana, the reduced level of Commission regulation was limited to a term of three and a half years. The plan specifically provided for a transitional regulatory framework with a definite expiration date of December 31, 1997. The plan also provided an eight-month window between May 1, 1997 and December 31, 1997 for Ameritech to petition the Commission to establish a new alternative regulatory structure to take effect following the expiration of Opportunity Indiana. The agreement was silent as to what would happen to Ameritech's rates upon the expiration of the agreement.
hearing for November 17, 1997 and provided the parties the opportunity to file additional
testimony and post-hearing briefs.See footnote
On October 29, 1997, Ameritech declined to file another request for interim relief, arguing that it had not requested a rate change in its petition and that the issue of a change in price caps for BLS was significant and could not be addressed properly in the expedited time frame provided. Ameritech also suggested that evidence concerning the appropriate level for BLS price caps could be presented in the main case on permanent relief, with the result that Ameritech would be subject to traditional regulation under Ind. Code § 8-1-2-1 et seq. until the Commission issued a final order on its request for permanent alternative regulatory relief.
On November 7, 1997, various parties prefiled testimony which was to be presented at the November 17 hearing. On November 12, 1997, Ameritech filed a motion to strike the prefiled testimony. Ameritech also sought termination of all Commission proceedings on Ameritech's request for interim relief. On November 19, 1997, the Commission denied Ameritech's motion to terminate interim relief proceedings. On November 25, 1997, the Commission issued an entry in which it vacated its previous procedural schedule, including the scheduled November 17, 1997 hearing,See footnote 8 and granted Ameritech's motion to strike the
prefiled testimony. The Commission also directed the parties to file briefs and/or proposed
orders based on the current evidence of record and taking into account the Commission's
findings in its Preliminary Order.
On December 30, 1997, the Commission entered its Final Order on Interim Relief, in which it:
1. Adopted a new ratemaking concept using a productivity offset to determine the appropriate level of a price cap for the interim alternative regulatory structure;
2. Found that a productivity factor of 6.5%, less an inflation factor of 1.9%, should be used to reduce Ameritech's BLS price caps 4.6% from the levels in effect under Opportunity Indiana; and
3. Ordered Ameritech to reduce its rates for both residential and business BLS by 4.6%.
Id. at 2724-28. The Commission also found that Ameritech had not made the full amount of infrastructure investments required under Opportunity Indiana. Ameritech had presented evidence to the Commission that it had been unable to generate sufficient interest for the required investments among the schools, hospitals and government centers it served. The Commission ruled that if Ameritech was unable to generate sufficient interest to absorb the full amount of the infrastructure investment obligations in Opportunity Indiana, Ameritech should propose some other means for its shareholders to provide infrastructure improvements consistent with [the terms of Opportunity Indiana]. Id. at 2731. The Commission's Final Order provides, in pertinent part:
Ameritech appeals this Final Order. The OUCC cross-appeals, asserting that, among
other things, the Commission failed to give adequate notice under Ind. Code § 8-1-2.6 et seq.
Notwithstanding any other statute, the [C]ommission may:
(1) on its own motion;
(2) at the request of the utility consumer counselor;
(3) at the request of one (1) or more telephone companies; or
(4) at the request of any class satisfying the standing requirements of [Ind. Code§] 8-1-2-54;
adopt rules or by an order in a specific proceeding provide for the development, investigation, testing, and utilization of regulatory procedures or generic standards with respect to telephone companies or services. The [C]ommission shall adopt the rules or enter an order only if it finds, after
notice and hearing, that the regulatory procedures or standards are in the public
interest and promote one (1) or more of the following:
(1) Telephone company cost minimization to the extent that a telephone company's quality of service and facilities are not diminished.
(2) A more accurate evaluation by the [C]ommission of a telephone company's physical or financial conditions or needs, as well as a less costly regulatory procedure for either the telephone company, its consumers, or the [C]ommission.
(3) Development of depreciation guidelines and procedures that recognize technological obsolescence.
(4) Increased telephone company management efficiency beneficial to consumers.
(5) Regulation consistent with a competitive environment.
These statutory sections grant two types of authority to the Commission. Under Section 2, the Commission may find that the public interest requires it to decline to exercise, in whole or in part, its jurisdiction over telephone companies or certain telephone services. Section 3 authorizes the Commission to use alternative regulatory procedures and generic standards, provided that it finds those procedures or standards serve the public interest and also promote one or more of the additional criteria given. Both sections require notice and hearing prior to Commission action.
v. Southern Ind. Gas & Elec. Co., 167 Ind. App. 472, 478-82, 339 N.E.2d 562, 568-71
(1975). Under that traditional ratemaking methodology, the Commission must first find that
a utility's existing rates are unjust and unreasonable; if it does, the Commission may then
order just and reasonable rates to be charged in the future. Ind. Code § 8-1-2-68; Indiana Tel.
Corp. v. Public Serv. Comm'n of Ind., 131 Ind. App. 314, 340, 171 N.E.2d 111, 124 (1960).
In this case, the Commission did not purport to find that existing rates were unjust and unreasonable under traditional ratemaking methodology. Rather, the Commission proceeded under the Alternative Regulation Statute, which does not by its language specifically grant ratemaking authority to the Commission. Any Commission authority to change a telephone utility's rates using the Alternative Regulation Statute must derive from Ind. Code § 8-1-2.6- 3, which gives the Commission authority to develop and use alternative regulatory procedures or generic standards with respect to telephone companies or services.
The Alternative Regulation Statute contains safeguards which must be observed before the Commission can override traditional utility regulation statutes and substitute alternative procedures or standards. First, before using or imposing an alternative standard, the Commission must provide notice of the alternative ratemaking or other standard which it is considering adopting and then conduct a hearing on that alternative standard. Second, the Commission must make two types of specific findings: 1) the Commission must, upon consideration of certain factors, find that the proposed alternative regulation standard or procedure is in the public interest; and 2) the Commission must find that the proposed
alternative regulation standard or procedure promotes one or more of the additional criteria
enumerated in Section 3 of the Alternative Regulation Statute.
a. Notice and Hearing
Both Ameritech and the OUCC contend that the Commission did not comply with the notice and hearing requirements of the Alternative Regulation Statute before entering its Final Order on Interim Relief. We agree.
Ameritech's original petition did not request rate changes or use of any new alternative ratemaking standards other than those previously adopted in Opportunity Indiana. R. at 31-41. The scope of Ameritech's request for interim relief was even narrower. Ameritech requested the Commission to maintain the maximum price caps already in place under Opportunity Indiana and to continue both its declination of jurisdiction and the alternative procedures in place under Opportunity Indiana until the Commission could enter an order on Ameritech's petition for permanent relief. Id. at 871-81. Public notices published by the Commission in early September indicated that a hearing would be conducted September 30, 1997 on Ameritech's petition for interim relief. Id. at 1040-86.
In its Preliminary Order issued on October 15, 1997, the Commission rejected the suggestion that it was proceeding on its own motion and confirmed that it was proceeding on Ameritech's request for interim relief. Id. at 1340. It then proceeded to determine that some form of interim relief was appropriate and established a procedural schedule, including deadlines for parties to submit additional testimony and an evidentiary hearing scheduled for November 17, 1997. However, before this hearing was held, the Commission issued an entry
which vacated the hearing and the procedural schedule. Parties were directed to file briefs
and/or proposed orders based on the then current record taking into account the
Commission's findings in its Preliminary Order. Id. at 2287-88, 2291.
In its petition that the Commission reestablish the vacated procedural schedule, the OUCC made the following argument that the Commission had violated various parties' rights to due process and to present evidence regarding the appropriate form of interim relief for Ameritech:
No party could have properly responded to the infinite number of possible reasonable alternative regulatory plans prior to the Commission's critical determination in its October 15, 1997 Order that some form of interim relief was appropriate . . . . Additionally, no party, including the OUCC could or should have been expected to anticipate the Commission's determination that interim relief should also take the form of an alternative regulatory plan, and not a return to rate of return regulation.
Id. at 2446-47.
We find this argument compelling. The Alternative Regulation Statute permits the Commission to adopt alternative regulatory procedures only after notice and hearing. We interpret this statute as requiring the Commission to give notice of the specific alternative regulatory procedure it is considering with sufficient specificity to allow interested parties to present evidence and participate in a hearing on that procedure. It is not sufficient for the Commission to give notice that it is considering some undecided form of alternative regulatory procedure.
In Blue & White Serv., Inc. v. Public Serv. Comm'n of Ind., we held that if a party in a proceeding before the Commission does not have proper notice of the issues to be
decided by the Commission as provided by law, then that party cannot be said to have had
an opportunity to meet those issues with rebuttal evidence. 137 Ind. App. 112, 117, 205
N.E.2d 552, 554 (1965). In Blue & White, Wilbur Harris filed an application with the
Commission requesting authority to transport property via intrastate commerce. Blue &
White appeared as a protestant in that proceeding and appealed after the Commission granted
Harris more extensive authority than he had requested in his application. We held that such
a variance between the requested relief and the relief actually granted by the Commission had
effectively denied Blue & White its legal right to offer evidence to the Commission in
explanation of or in rebuttal to Harris' application. Id.
In this case, interested parties were given notice and a hearing was conducted only on the issue of whether interim relief for Ameritech was appropriate. The Commission did not identify any of the alternative regulatory procedures it was considering with sufficient specificity to allow interested parties to present evidence and be heard concerning the alternative procedures. The Commission did not give notice at any time that it was considering the new ratemaking standard using price caps linked to a productivity offset, which standard it eventually adopted in its Final Order. Further, the Commission did not conduct a hearing to consider evidence on this new standard before adopting it.
Further, the Commission's own actions effectively precluded interested parties from presenting evidence on what form the interim alternative regulatory structure for Ameritech should take. After a hearing on Ameritech's request for interim relief, the Commission informed parties it would enter an order by October 15, 1997 to set a schedule for parties to
file briefs and proposed orders on Ameritech's request. Instead, the Commission proceeded
to enter a preliminary order in which it decided the issue of whether interim relief was
In the preliminary order, the Commission set a hearing and a procedural schedule for parties to submit testimony and file briefs and proposed orders on what form interim relief should take. However, the Commission subsequently vacated that order, struck prefiled testimony of interested parties from the record, canceled a scheduled hearing, and restricted interested parties to using evidence already in the record to make their arguments.
The Commission exceeded its authority under the Alternative Regulation Statute by adopting an alternative ratemaking procedure without affording interested parties sufficient hearing and notice to present evidence relevant to that procedure. As such, the Commission lacked authority to issue its Final Order.
b. Unsupported by Findings
Ameritech further argues that the Commission's Final Order is unsupported by the findings required by the Alternative Regulation Statute.See footnote 9 We agree. The requirement of detailed findings covering all material basic and ultimate facts is essential, as it enables the court to review intelligently the Commission's decision and thereby ensure that the agency has stayed within its legal authority and jurisdiction. See General Tel. Co. of Ind., Inc. v.
Public Serv. Comm'n of Ind., 238 Ind. 646, 653, 150 N.E.2d 891, 895 (1958); Perez, 426
N.E.2d at 31-32. There is no finding in the Commission's Final Order that the price cap
linked to a productivity offset concept adopted by the Commission is in the public interest
under the factors set forth in Ind. Code § 8-1-2.6-3.
Further, the Commission's Final Order includes no finding that either the productivity offset ratemaking procedure or the specific price cap index adopted by the Commission promotes any of the additional criteria set forth in Ind. Code § 8-1-2.6-3. There is no finding or explanation why adoption of the price cap ratemaking standard using a productivity offset would provide a more accurate evaluation by the Commission of a telephone company's physical or financial conditions or needs. Neither is there a finding that the price cap linked to a productivity offset would promote a less costly regulatory procedure for the telephone company, its consumers, or the Commission. Similarly, there is no finding or explanation of why the Commission's use of a price cap linked to a productivity offset and BLS rate reductions are consistent with a competitive telecommunications environment. The Commission's Final Order is not adequately supported by the basic findings of fact required by the Alternative Regulation Statute. As such, its Final Order is contrary to law.
In its Final Order, the Commission noted that without interim alternative regulation, there would be no immediate effect on Ameritech's rates when Opportunity Indiana expired and that it would need to proceed to traditional rate-of-return regulation to review whether Ameritech's rates resulted in unreasonable returns. R. at 2725. Although it noted that reducing BLS rates by some alternative mechanism would be in keeping with the Alternative
Regulation Statute, the Commission did not provide notice, conduct a hearing, or make the
statutorily-required findings to support the alternative mechanism it used to reduce BLS
rates. As such, the Commission's Final Order exceeded its authority under the Alternative
Regulation Statute. We reverse and remand for proceedings consistent with this opinion.
2. Which Rate is Appropriate?
Having decided the Commission's Final Order reducing Ameritech's rates was contrary to law, we now decide what rates the Commission should put in place on a temporary basis until it makes a determination consistent with this opinion on Ameritech's petition for interim relief.See footnote 10 In its Final Order, the Commission ruled that unless we approve some form of alternative regulation Ameritech Indiana would revert to rate of return regulation. R. at 2725. The Commission stated that a return to traditional regulation after the expiration of Opportunity Indiana would not immediately [a]ffect the rates Ameritech Indiana may charge and that Ameritech's lawful rates under Opportunity Indiana would continue to be its lawful rates . . . . Id.
We agree. That conclusion is directly compelled by Ind. Code § 8-1-2-44, which requires a public utility to charge the rates contained in its schedules on file with the Commission and provides that such rates are the utility's only lawful rates unless they are changed as provided in [the Public Service Commission Act]. As discussed previously, the Commission can change Ameritech's rates only through traditional ratemaking
methodology or after the notice and hearing required by the Alternative Regulation Statute.
The rates which were on file with the Commission upon the expiration of Opportunity
Indiana are Ameritech's lawful rates and remain in place until the Commission changes those
rates through a proceeding which complies with the Alternative Regulation Statute or
traditional ratemaking procedures.
3. Refund of Interim Rates
The OUCC argues that the Commission erred in denying its request to make the interim rates subject to further review and refund.See footnote 11 We disagree. Ind. Code § 8-1-2-68 permits the Commission to set new rates only after finding, pursuant to proper notice and hearing procedures, that existing rates are unjust, unreasonable or otherwise unlawful. That statute permits the Commission to establish just and reasonable rates to be imposed, observed and followed in the future . . . . (emphasis added).
Our courts have repeatedly held that the Commission may not engage in retroactive ratemaking by entering orders retroactively setting rates:
We find nothing in the statute giving the Commission the power to cancel, or to fix, rates retroactively. The statute provides the Commission with the power to fix rates for the future if it finds the rates in effect to be unreasonable or unjust; but we look in vain to find statutory authority for the Commission to fix rates for the past . . . .
We are satisfied that no utility could attract capital for expansion or replacement of its property and facilities, or for any other purpose, if the
Commission could at one time fix rates for that utility and then at some later
time rescind those rates retroactively, fix lower rates retroactively and require
the difference to be refunded to the ratepayers. The law of Indiana was not
designed or intended to create chaotic conditions in the market where utilities,
as well as other businesses go to obtain capital for their legitimate business
Indiana Tel. Corp., 131 Ind. App. at 340-41, 171 N.E.2d at 124 (citations omitted); accord Airco Indus. Gases v. Indiana Mich. Power Co., 614 N.E.2d 951, 953 (Ind. Ct. App. 1993); Public Serv. Ind., Inc. v. Nichols, 494 N.E.2d 349, 353 (Ind. Ct. App. 1986); Indiana Tel. Corp. v. Indiana Bell Tel. Co., Inc., 171 Ind. App. 616, 638, 358 N.E.2d 218, 224 (1976); Sizemore v. Public Serv. Comm'n, 133 Ind. App. 51, 61, 177 N.E.2d 743, 748 (1961).
Past losses of a utility cannot be recovered from consumers nor can consumers claim a return of profits and earnings which may appear excessive. Public Serv. Comm'n of Ind. v. City of Indianapolis, 235 Ind. 70, 88, 131 N.E.2d 308, 315 (1956). The Commission had no authority to fix Ameritech's rates on an interim basis, rescind those rates after further review and require any overcharges to be returned to consumers. We thus decline the OUCC's invitation to find the Commission erred by not making Ameritech's rates subject to refund. It is not within the Commission's authority to allow a utility to engage in retroactive ratemaking.
4. Infrastructure Investments
Ameritech argues that the Commission's Final Order is contrary to law because it rewrites Ameritech's infrastructure obligations under Opportunity Indiana. We disagree. Section 10 of the 1994 Opportunity Indiana agreement provides:
advice and assistance of other parties to the Settlement Agreement or of Indiana's Intelenet
Commission, to generate interest in its provision of digital switching and transport facilities,
or to otherwise propose some other means for its shareholders to provide infrastructure
improvements consistent with [the terms of Opportunity Indiana]. Id. at 2731.
Opportunity Indiana did not state that Ameritech would make investments up to a maximum amount. Nor is there anything in Opportunity Indiana which suggests Ameritech's infrastructure investments were to be optional. It is clear from the language of the Opportunity Indiana settlement agreement that Ameritech undertook an unconditional commitment to make certain infrastructure investments that would be in effect for the six- year period of 1994 through 1999. Ameritech has not fulfilled that commitment. Therefore, we find no error with the Commission's Final Order requiring it to do so.See footnote 12
maximum allowable price increase for the service.
R. at 4150-57.
Ameritech asserts that, in the Opportunity Indiana proceeding, it originally proposed a price-cap plan linked to an index, which plan other parties rejected as being too complicated. Instead, Opportunity Indiana substituted basic price caps, which guaranteed certain price reductions, for the traditional regulation based on rates of return. Appellant's Brief at 10 n.5; R. at 4885.
the Commission to issue an order by the end of the year. R. at 2288.
Indiana could be seen as a breach of the settlement agreement. See Strodtman v. Integrity Builders, Inc., 668
N.E.2d 279, 282 (Ind. Ct. App. 1996) (A party breaches a contract either by placing itself in a position
where it is unable to perform its contractual obligations, or by failing to perform all of its contractual
obligations.). The measure of damages in a breach of contract case is the loss actually suffered as a result
of the breach. Sammons Communications of Ind., Inc. v. Larco Cable Const., 691 N.E.2d 496, 498 (Ind. Ct.
App. 1998), trans. denied. Thus, if the Commission determines that Ameritech has breached its obligations
under Opportunity Indiana, Ameritech could be liable for the damages which resulted from that breach of
the agreement (i.e., return to the public of over $100 million in funds which were supposed to be made
available for infrastructure improvements as well as any damages which might be proven by other settling
parties under Opportunity Indiana).
If Ameritech is indeed unable to complete its obligations in accordance with the terms of Opportunity Indiana, it might wish to consider the possible effects of its breach when deciding whether it should voluntarily formulate alternative methods by which it could fulfill its infrastructure investment obligations.
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