Opinion and Forefront

MUTZ: Improve our existing utility regulations

January 22, 2011

John MutzThe press has been full of reports about improprieties at the Indiana Utility Regulatory Commission. So far there have been two officials fired by Gov. Mitch Daniels, two Duke Energy officials fired, and one resignation by the company’s second-ranking official. Nobody has been prosecuted or indicted for breaking a law, but letters to the editor and newspaper editorials have condemned the “scandal” surrounding the approval of a cost overrun on an experimental power facility under construction in Edwardsport.

Duke officials were having conversations with an administrative law judge about employment with the utility at the same time he was considering a rate increase for the utility. In addition, the utility’s second-ranking official was having friendly e-mail chats with the commission’s chairman. Both situations are clearly inappropriate communications, and possibly ethics violations. The FBI and the inspector general are investigating. Also criticized is the revolving-door nature of this operation, where individuals move from utilities to the commission and from the commission to utilities.

The question for state officials and the Legislature: Is the system broken or have the people running the process been bad choices to be entrusted with this important responsibility? Both questions are valid.

Before recommending reforms, it is important to note that utility rate-making is a complicated and demanding process. It requires a specific expertise, and having experience is desirable. Setting rates usually involves several parties.

First, the petitioner asks for a rate increase based on Indiana law that allows utilities a reasonable rate of return on capital investments. Second, you have interested parties, such as the Industrial Users Group and a major user such as Nucor Steel. The individual ratepayer is represented by the Utility Consumer Counselor, appointed by the governor.

The actual decision is made by the Indiana Utility Regulatory Commission, consisting of five members appointed by the governor. To provide some transparency, the potential members are interviewed by a nominating commission: Three members are appointed by the governor and four members appointed by the four legislative leaders, two from each party.

The commission’s role is to strike a fair balance between the rate of return needed to borrow money and the interests of ratepayers. In the current controversy, the parties negotiated a settlement and the IURC approved it. The theory is that, with diverse interests represented in the mix, a fair decision will be rendered. In most cases, this is true. However, the actions by utility representatives and the commission chairman and one of his employees created the appearance of impropriety. If not illegal, it is a case of terrible judgment.

The decision that has now been reopened may have been proper and fair. But certainly the behavior of the parties is flawed. Perhaps the commission acted without bias. However, the public has good reason to question the process.

In more than a dozen states, rate-making officials are elected in a statewide election. This process results in large amounts of campaign contributions, with special interests supporting their favorites, and doesn’t often result in qualified individuals filling the posts. Judicial or quasi-judicial offices should not be elected. They should be appointed from a qualified pool of applicants.

Rep. Ed Delaney, D-Indianapolis, has proposed a bill to require legislative review of applicants before they are appointed by the governor. This might give the public a better review of the candidates through public hearings. However, since the Indiana Constitution has a strict clause on separation of powers, it probably would prohibit actual approval by the legislative branch. Maybe the constitution should be amended, but that is a long and complicated process.

For now, the best alternative is to tighten the rules governing the process and possibly give the inspector general more staff to check on all regulatory agencies. Most important, the governor must appoint the right people. Only then will public trust be restored.•

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Mutz has held leadership positions including lieutenant governor and president of Lilly Endowment and PSI Energy. Send comments on this column to ibjedit@ibj.com.

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