On March 5, 2025, the Indiana Utility Regulatory Commission (IURC) issued an order in a complex tax case filed by Indiana Michigan Power Company (I&M). This case stemmed from a previous rate case where, pursuant to a settlement, I&M agreed to reflect in its capital structure for ratemaking purposes $159 million in cost-free capital related to the impact of a net operating loss carryforward (NOLC) on accumulated deferred federal income taxes (ADFIT), subject to the outcome of a pending Internal Revenue Service (IRS) Private Letter Ruling (PLR). The IRS subsequently ruled on the PLR and confirmed I&M’s position that reducing I&M’s NOLC deferred tax asset by the amount of payments I&M received from its parent under a tax sharing agreement, as an offset to the total excess deferred income taxes available to be amortized, would constitute a violation of the IRS’s normalization rules. Once the IRS ruled in the PLR that I&M could not reflect the $159 million in cost-free capital in its capital structure for ratemaking purposes without violating IRS normalization rules, I&M filed this case to implement the effect of the IRS PLR, consistent with the previous rate case settlement (and a similar settlement in a subsequent rate case that took place while the IRS PLR request was pending).

The Indiana Office of Consumer Counselor and certain industrial customer intervenors, however, objected to I&M’s proposed implementation of the PLR, instead proposing alternative methods of preserving the benefit of the cost-free capital in I&M’s capital structure. The OUCC proposed creation of a regulatory liability account to be used to provide customers with the benefit of the tax sharing agreement payments over time. Industrial customer intervenors proposed that I&M’s return on equity be reduced to reflect a lower level of investment risk due to the IRS PLR. Both the OUCC and industrial customer intervenors also recommended that the IURC consider directing I&M to withdraw from the tax sharing agreement and the parent company’s consolidated tax return filing.

I&M took issue with the OUCC’s and industrial customers’ proposals, contending that these proposals would also violate normalization rules. Specifically, I&M pointed out that the normalization rules prohibit the direct or indirect flow-through to customers of tax benefits from accelerated depreciation that is greater or more rapid than permitted by a normalized method of accounting. I&M emphasized that a violation of normalization rules would have a draconian effect – loss of the ability to use accelerated depreciation for the company’s and its customers’ benefit. This, in turn, would have negative consequences for I&M’s customers, by significantly reducing the company’s cost-free ADFIT included in its capital structure for ratemaking purposes, and by increasing the company’s need to raise debt and equity capital. I&M also noted that the normalization rules require consistency, and the OUCC’s alternative proposal would violate this consistency rule.

The IURC agreed with I&M that the alternatives presented by the OUCC and industrial customer intervenors would present a risk of violating the normalization rules. The IURC agreed with I&M that the alternative proposals would indirectly violate the normalization rules by economically restoring to customers the benefit of ratemaking that was found to violate normalization. The IURC also agreed that the OUCC’s recommendation to adjust I&M’s capital structure while failing to make a corresponding adjustment to its deferred tax asset would violate the consistency rule. In its order, the IURC recognized that affordability is one of the pillars of state energy policy but cautioned that affordability “must not be limited to dollars saved today at the expense of dollars saved tomorrow.” In addition, the IURC rejected the OUCC’s and industrial customer intervenors’ recommendations regarding I&M’s participation in a consolidated tax return, noting that this proposal is complicated and exceeds the scope of the proceeding. In its order, the IURC approved I&M’s proposed rate changes to implement the IRS PLR.