On February 21, 2023, the Indiana Court of Appeals reversed an Indiana Utility Regulatory Commission (“Commission”) order granting Duke Energy Indiana (“Duke”) recovery of costs pursuant to federal Environmental Protection Agency (“EPA”) rules for treating coal ash and remediating ash ponds because the Commission had not yet approved the project, which constituted impermissible retroactive ratemaking. The central issue before the court was whether the Commission’s order allowing Duke to recover costs incurred “before or during the pendency of the proceeding, [and] prior to the issuance of the [o]rder” violated the prohibition against retroactive ratemaking. Ind. Office of Utility Consumer Counselor v. Duke Energy Indiana, LLC, 21A-EX-2702 at 2 (Ind. Ct. App. 2023) (“Duke Energy”). The Commission’s order grating cost recovery was pursuant to Indiana’s Federal Mandate Statute, which permits utilities, subject to Commission approval, to “track and cover 80% of such federally mandated costs via periodic rate adjustments, with recovery of the remaining 20% deferred to the utility’s next general rate case.” Duke Energy, 21A-EX-2702 at 11. The court determined that this was a question of law because the focus of the challenge was “whether the Commission can approve the reimbursement of already incurred costs without violating the perceived prospective language of the Federal Mandate Statute.” Id. at 7-8.
The “perceived prospective language” was recognized by the Indiana Supreme Court in Duke’s traditional rate case, Ind. Off. Of Util. Consumer Couns. V. Duke Energy Ind. LLC., 183 N.E.3d 266 (Ind. 2022) (“DEI”), where it noted that the Federal Mandate Statute “is framed in the future tense and speaks of ‘projected’ costs for ‘proposed’ projects which would seem to require [C]omission approval before a utility incurs the cost.” DEI, 183 N.E.3d at 270 (internal citations omitted). While agreeing with Duke that the above language was ditca, the court viewed it as “an indication that our supreme court believes a utility can only recoup certain expenses incurred under the Statute after gaining authorization from the Commission to track the expenses.” Duke Energy, 21A-EX-2702 at 14. According to the court, this position “is grounded in the principle that ratemaking is prospective in nature, not retroactive, with the demarcation between retroactive and prospective costs being the date of the Commission’s order, not the filing date of the utility’s petition.” Id. at 9 (internal citations omitted). As such, because the Federal Mandate Statue does not specifically authorize the recovery costs prior to a utility receiving a certificate of public convenience and necessity (“CPCN”), id., permitting recovery of costs “incurred prior to the Commission’s authorization would undo the purpose of Commission oversight and would present a disservice to the utility’s customers.” Id. at 17.
Therefore, because the Federal Mandate Statute serves as an exception to the general prohibition against retroactive ratemaking and is only effective after a utility receive a CPCN from the Commission for the project, permitting Duke to recover costs it had incurred prior to the Commission’s order “failed to follow the prospective strictures of the Federal Mandate Statute,” requiring reversal. Id.