The Indiana Utility Regulatory Commission launched investigations into the profits utilities earn and their use of "trackers" that let them immediately recoup expenses, according to an affordability report released Wednesday. The probes grew out of the commission's recent examination of energy affordability issues and include recommendations to double ratepayer assistance programs and expand energy efficiency efforts. The move signals that Indiana's utilities may face increased scrutiny of their profits, particularly after recent actions by Gov. Mike Braun, who replaced the commission's chairman and called for a rehearing of an AES rate hike approval.
American Electric Power's Indiana Michigan Power subsidiary has an authorized return on equity in Indiana of 9.85%, but the utility actually earned a 12.6% ROE over the 12 months ending March 31, according to the report. That was the highest ROE over that period among AEP's seven utility subsidiaries. The commission recently said that 9.1% to 9.9% is a "reasonable range" for equity returns, likely setting 9.1% as a base for any future changes to ROE levels for Indiana's utilities. Most of Indiana's investor-owned utilities have used TDSIC plans and trackers to recover their costs for ongoing infrastructure projects.
"The increased stability and cadence of filings and multi-year planning lend themselves to a new approach to return on equity (ROE) and trackers," the commission said in the report. The commission plans to consider additional changes to utility regulation, including performance-based incentives and refined benefits and cost justification guidelines for Transmission, Distribution, and Storage System Improvement Charge plans. The commission also urged the Indiana General Assembly to consider ending a 7% sales tax on utility bills and giving the commission the authority to review utility mergers and acquisitions. State lawmakers should require utilities to participate in a regional transmission organization, which would make them ineligible for an extra 0.5% ROE the Federal Energy Regulatory Commission gives them on their transmission assets for voluntary RTO participation, the report said.
In light of a new law shifting utilities to multi-year rate plans, the state's utilities may face reduced risks and therefore require lower ROEs and changes to their tracker mechanisms, according to the report. The tracker review "could tighten rider recovery" and the TDSIC guidance likely "raises the bar on benefits/cost justification for infrastructure plans," Jefferies equity analysts said Thursday. Tracking mechanisms allow utilities to increase bills outside of rate cases and reduce regulators' discretion and flexibility, according to the Citizens Action Coalition of Indiana. Since September, Gov. Braun has been pressing for rate relief from investor-owned companies with utilities in the state, including AES, American Electric Power, CenterPoint Energy, Duke Energy and NiSource. The action in Indiana reflects a focus by utility regulators across the United States on energy affordability issues, which has become a potent political issue.
The ROEs Indiana utilities earn are "unjustly high and disproportionate to the risk that investors face," according to Kerwin Olson, executive director of the Citizens Action Coalition of Indiana. The advocacy group supported the commission's "deep dive into issues that we believe are key drivers that led to the affordability crisis facing Hoosier ratepayers." The commission's investigations represent a potential shift toward more consumer-oriented utility policy in Indiana, creating what one equity analyst called increased risk for utilities operating in the state.