Indiana’s powerful electric utility companies exited the state’s recent legislative session wielding key legislative victories though it might take years to know the ultimate ramifications.
New laws are set to let the state’s existing utilities get first dibs on a billion-dollar slate of new transmission projects, put natural gas plant costs into rates before construction ends, and more easily recoup other costs. Regulators, meanwhile, will examine new ways of setting rates.
Lawmakers noted that there’s plenty that goes into the rates Hoosiers see reflected in bills, like international trading on fuel, federal regulation on wholesale rates and state regulation on retail rates.
But there’s agreement on what the future holds for ratepayers: higher bills.
Residential customers in Indiana paid $152 for electricity on average in February – 34th in the nation – according to a Save On Energy analysis of U.S. Energy Administration data.
“Utility bills are going to go up. And if somebody says they’re not, they’re smoking something,” said Rep. Ed. Soliday, R-Valparaiso. He chairs the House’s utilities committee.
“At some point, we’re going to reach a breaking point. When that is, I’m not entirely sure,” said Kerwin Olson, who leads utility consumer advocate group Citizens Action Coalition.
The major utilities in the state have contributed more than $600k to state legislators – mostly Republican – since 2018.
Who gets to take on new transmissions
There’s money at stake in a new building spree, and a new law puts Indiana’s electric utility companies first in line to benefit.
A regional grid operator approved a $10.3 billion transmission plan last summer to connect more renewable energy capacity to the grid – and it’s working on a second tranche of funding that could bring the total up to $30 billion.
That means big incentives to build, own and operate the infrastructure.
“That is what that is all about: billions and billions and billions of dollars. And, control of that power,” Olson said.
Utilities currently have rights of first refusal for transmission projects within their own territory, but the Federal Energy Regulatory Commission, or FERC, passed a rule a decade ago eliminating that right for cross-border projects. Soliday’s House Enrolled Act 1420 would return that right of first refusal to Indiana’s major, “incumbent” utilities when it comes to inter-regional transmission projects.
The proposal generated an uproar, uniting traditional liberal-leaning opponents and conservative groups like Americans for Prosperity.
They argued “right of first refusal” legislation was anti-competitive and would lead to higher project costs and electricity rates.
“That bill removed that competitive bidding process and, as a result, removed the most meaningful, if not only, opportunity for ratepayers to save money,” Olson said.
A 2021 study from economic consultant Brattle found that expanding competitive bidding could cut costs 20%-30 percent. But others feared open processes could invite low-ball bids and costly change-orders.
The legislation does require utilities to use competitive bidding when they subcontract out construction portions of their projects. Utilities will still own and operate the infrastructure, however.
“We’ve had experience with [right-of-first-refusal] for 10 years. It’s worked pretty well,” Soliday said. “If it doesn’t work well, the law can get changed. If it winds up that we’re spending more per mile … we’ll change the law.”
The concept has led to legal challenges in Texas and Iowa. Both consumer advocates and Republican lawmakers said they expected a lawsuit in Indiana, likely from the independent companies leading the legal charge in those states.
Disagreement on pay-as-you-go approach
Utilities can already charge ratepayers for coal, solar and windmill power before the infrastructure goes online – and after this legislative session, they’ll be able to do it with natural gas.
Soliday’s House Enrolled Act 1421 expands the use of a financing option known as construction work in progress, in which customers begin paying at the beginning of a project instead of waiting until it comes online. Otherwise, they’d pay through depreciation expenses on the assets, usually over a couple of decades.
Opponents maintain that making utilities take on the upfront financial risks for projects before asking regulators for recoupment encourages cost efficiencies. And they argue the measure makes customers liable for projects so ambitious they spook private investors.
“They’re so risky that the private sector won’t invest in those things if ratepayers aren’t on the hook,” Olson said. “For these really, really expensive, unknown capital projects like small modular reactors, they need assurances that both taxpayers and ratepayers are going to bear that risk.”
Sen. Eric Koch, R-Bedford, sponsored the bill and countered that the law could lower costs for customers. In an example he acknowledged as “on the fly,” he compared the mechanism to making extra payments on a mortgage.
“You’re paying earlier but you’re paying less,” Koch said. He and other supporters have additionally said the mechanism promotes state oversight.
“That’s good for consumers, because if something during the course of construction is going the wrong direction, it will be recognized earlier rather than later,” Koch said. “And there’s an earlier opportunity for corrective measures.”
Mixed results in legal battle worth millions
Duke Energy, one of the state’s “big five” investor-owned utilities, has suffered unexpected court losses in its bid to recoup costs – and met flat refusal when it tried to use a new law to back up its latest legal arguments.
Beginning in 2015, with the roll-out of stricter federal rules, Duke spent more than expected – $212 million more – on toxic coal ash cleanup. In 2019, the company petitioned for a rate increase to recover those costs, to be spread across its 840,000 Hoosier customers over 18 years.
State regulators approved the ask, for pre-2019 expenses, in 2020. The Indiana Supreme Court, however, overturned that in a ruling last year, writing that Duke didn’t get the necessary pre-approval. Lawmakers tackled that decision in House Enrolled Act 1417.
Separately in 2021, regulators approved a request for expenses incurred in 2019 and after. But the state’s Court of Appeals, in a February ruling, overturned that.
Lawmakers took action in a matter of days, amending language into Senate Enrolled Act 9. One day after its signing, Duke cited the law in a petition to have the case re-heard. It didn’t sway judges, who declined the move late last month.
But the legislation and the process behind it enraged consumer advocates, who argued the state tried to enable a bail-out.
“That is [Duke’s] stranglehold on the legislative process in full display,” Olson said.
“Duke Energy owns that building [the Statehouse], and they get what they want,” he added.
The Legislature’s utility heads pushed back.
“[House Enrolled Act] 1417 was a result of a court case that really undid about four decades of commission process and procedure,” Koch said. He said lawmakers wanted to pass the law this session for similar pending petitions.
“None of these utilities were telling us how they’re going to react to an off-nominal event under the Supreme Court decision,” Soliday said, adding that he wanted clear guidance to avoid “utilities making it up as they go along.”
“This myth, this thing, that we were doing it to save Duke – I think they’re gonna pay,” Soliday said.
Under an April settlement on the case involving past costs, Duke is set to refund customers $70 million and provide an additional $23 million in credits. The case involving future costs is marked as pending in the state’s case search, despite the failed petition for rehearing.
Regulators to weigh new rate designs
Lawmakers this session also codified a five-pillar priority framework for electric utility service which balances reliability, resilience, stability, affordability and environmental sustainability – which they repeatedly heralded as the session’s most important related proposal.
Tucked in that bill is language directing regulators to study up on alternative forms of setting rates, especially what a performance-based ratemaking system might look like for Indiana.
Regulators traditionally set rates according to what utilities have spent on capital expenditures, among other elements. But the new system would tie utility revenues and profits to specific performance goals.
Olson, who said he’d advocated for a less “prescriptive” study, was wary of the plan. Others said the study’s results could offer an evaluation of the current system.
“The implications of that could be very significant: if we’re write and if we’re wrong, and if those even fit Indiana,” Koch said. “We thought we were at a moment in time, that it was important, that we at least took a look at those alternatives.”
Numerous studies have found that alternative mechanisms like multi-year rate plans and performance incentive mechanisms could benefit customers by spacing out long and expensive rate cases, stabilizing rates and incentivizing utility efficiency – but that the benefits depend on how they’re structured and executed. Utilities could also gain easier ways to recoup costs.
No one is sure what the future holds. But some fear crisis.
“We’re very fearful of where electricity bills in the state of Indiana are going to go,” Olson said. “… And all of the investor-owned utilities are doing is making sure that all of the risk associated with all of that capital that they’re about to spend falls on the backs of ratepayers.”
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