Utilities and Media & Marketing

Critics want IPL answers: Utility cut $10M settlement after agency suggested accounting was misleading

November 7, 2005

Groups representing Indianapolis Power & Light Co. customers want to know if the utility has deliberately underreported income to regulators and overcharged customers.

Their concerns were sparked by a cryptic settlement IPL reached with the Indiana Office of Utility Consumer Counselor on Oct. 28 that took IPL customer groups by surprise.

IPL agreed to provide each residential customer with a $25 credit early next year, "a time when the costs for heating their homes will be at their highest," IPL said in a press release Oct. 31.

The release left the impression the refund, which will cost IPL $10 million, was an act of benevolence. However, the OUCC confirmed it stemmed from "issues" the office had with the way the utility reported its finances when it sought quarterly rate adjustments earlier this year. The adjustments allow utilities to pass on to customers increases in costs for coal and other fuels used to generate electricity.

In a letter to the Indiana Utility Regulatory Commission in July, the OUCC said IPL "may have inappropriately removed revenues without corresponding expenses" in those quarterly fuel proceedings.

Such a move would have the effect of making the utility appear less profitable than it was and would make the company's fuel expenses appear higher than they were.

According to the Oct. 28 settlement document, IPL now will "voluntarily" report all revenue it receives from its so-called Elect Plan program toward the calculation for quarterly fuel-related rate adjustments.

The Elect Plan, approved by the Indiana Utility Regulatory Commission in the late 1990s, gives customers the option of paying a set price for power for a certain period of time.

If costs for coal or other expenses fall during the time, IPL gets to profit from the decline. But if they rise, IPL must shoulder the higher costs, rather than passing them on to customers. In return for accepting that risk, IPL doesn't have to count revenue generated under the plan toward its IURC-imposed earnings cap.

A confidential IPL business plan-filed earlier this year in Marion Superior Court as part of a wrongful-dismissal lawsuit by former IPL Vice President Dwane Ingalls-showed Elect Plan revenue has grown rapidly, from $31 million in 2002 to $60 million in 2003. Total revenue that year was $832 million.

The 2-year-old business plan recommends that IPL "continue to provide mechanisms like Elect Plan ... and operate in a manner that does not attract the negative attention of the IURC."

IPL said in a statement Nov. 3 that it has handled rate matters appropriately.

However, the vague and sudden settlement between IPL and the OUCC has attracted the attention of customer groups, who say they're going to press their concerns with the IURC.

Their key questions: Should IPL have been counting Elect Plan revenue in its calculations for quarterly rate adjustments? And if so, how long has it not met that requirement?

"My impression from reading [the settlement] is that from day one they haven't been," said Timothy Stewart, an attorney at Lewis & Kappes representing a group of IPL's largest industrial customers. "As you might expect, we're curious about it ... . I can assure you it will be reviewed."

In its statement, IPL said it has "consistently and correctly applied and accounted for Elect Plan since the plan was approved in 1998," adding "the results have been reviewed and approved in open regulatory proceedings since that time."

The company added that its electric rates continue to be among the lowest in the nation, "while offering creative service options to our customers through Elect Plan."

Stewart said he will press for why the refund negotiated by the OUCC included only residential-not industrial-customers.

OUCC officials declined to elaborate on the settlement, which now must be approved by the IURC. But the OUCC did say the agreement resolves issues the agency had with how the utility treated Elect Plan revenue in two filings this year for fuel-cost adjustments.

That's a red flag to IPL watchdogs.

"IPL has been sheltering a big chunk of revenue under the Elect Plan ... . The question is, how much money have they pocketed over the last several years?" said Jerry Polk of Mullett Polk & and Associates, a law firm representing the Citizens Action Coalition.

Polk blasted the OUCC for "striking a settlement with limited public scrutiny," instead of seeking input from IPL customer groups. "It's arrogant and disrespectful to my clients," he said.

As part of the settlement, IPL and the OUCC agreed to discuss a new alternative regulation plan to replace Elect Plan, which expires in late 2006.

In the 2003 confidential business plan, IPL executives had expressed concern the utility might be earning too much and have to refund money to customers. The plan said the company generated a 25-percent return on equity that year compared with an average 11-percent return among electric utilities nationwide.

In a filing late last month with the U.S. Securities and Exchange Commission, IPL said it does not expect to exceed its earnings cap this year but likely will in the future.

If it does, IPL wouldn't immediately face the possibility of refunds. When utilities earn less than their cap, they're permitted to bank the difference-an amount that's now reached $774 million, according to IPL's filing. That amount can be used to offset over-earnings.
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