from the Indiana Utility Regulatory Commission The Honorable
Aaron A. Schmoll, Senior Administrative Law Judge Trial Court
Cause No. 44683
APPELLANT Randolph L. Seger Brian W. Welch Michael T.
Griffiths Bingham Greenebaum Doll, LLP Indianapolis, Indiana.
ATTORNEYS FOR APPELLEES William Fine Daniel M. LeVay Scott C.
Franson Abby Gray Indiana Office of Utility Consumer
Counselor Indianapolis, Indiana Beth E. Heline Jeremy Comeau
Patricia C. McMath Indiana Utility Regulatory Commission
OF THE CASE
Appellant/Cross-Appellee-Petitioner, Hamilton Southeastern
Utilities, Inc. (HSE), appeals the Order of the Indiana
Utility Regulatory Commission (Commission), in which the
Commission authorized a 1.17% increase in HSE's rate for
sewer utility service.
We affirm in part, reverse in part, and remand.
HSE raises six issues on appeal, which we consolidate and
restate as the following two issues:
(1) Whether the Commission erred by excluding certain
expenses from the calculation of HSE's utility rate; and
(2) Whether the Commission erred by approving an excessive
system development charge in one of HSE's service areas.
On cross-appeal, Appellee/Cross-Appellant-Respondent, the
Indiana Office of Utility Consumer Counselor (OUCC), raises
one additional issue, which we restate as: Whether the
Commission erred by including income tax liability in its
calculation of HSE's utility rate.
AND PROCEDURAL HISTORY
HSE was founded in 1988 and is a for-profit public utility
that provides "sewage collections and treatment
services." (HSE Exh. 4-Non-Conf. Exh. Vol. II, p. 5).
HSE "is the largest investor owned sewer utility
in" Indiana and currently serves more than 20, 000
customers in Hamilton County, Indiana. (OUCC Exh. 2-Non-Conf.
Exh. Vol. IV, p. 57). As a public utility, HSE is subject to
regulation by the Commission.
Since its inception, HSE has relied on an affiliate company,
Sanitary Management & Engineering Company, Inc. (SAMCO),
to carry out the operation, maintenance, and engineering
functions of HSE's sewage operations. HSE and SAMCO are
governed by the same set of board members and have the same
shareholders. HSE itself has only seven full-time employees
to perform management and billing tasks. HSE and SAMCO
operate pursuant to a Utility Services Agreement, which has
been filed with the Commission as required by statute for
affiliate contracts. Under the Utility Services Agreement,
SAMCO bills HSE an hourly rate for services, which rates are
annually negotiated by HSE and SAMCO. The Utility Services
Agreement also provides that SAMCO is entitled to a 10%
management fee for procuring equipment, supplies, and
subcontractors on behalf of HSE. In addition to HSE, SAMCO
services nineteen other clients. However, maintaining and
operating HSE's sewage system comprises approximately 50%
to 60% of SAMCO's business, and some SAMCO employees
spend all of their time working on HSE's system.
In a 2010 rate case, the Commission authorized HSE to charge
a ¶at monthly rate of $34.63 per single family
equivalent dwelling unit (EDU). In establishing this rate,
the Commission approved a 9.8% rate of return for HSE. At
some point, largely due to aging equipment, HSE began to
experience "operational issues" that resulted in
significant increased maintenance and operating expenses.
(HSE Exh. 4-Non. Conf. Exh. Vol. II, p. 9). In 2013, a sewage
overflow situation necessitated involvement by the Indiana
Department of Environmental Management (IDEM). As a result,
HSE entered into an agreed order with IDEM, which required
HSE to implement a maintenance and operation plan for its
entire system. Since the establishment of its current rates,
HSE has expended "more than $11 million on system
repairs and maintenance." (HSE Exh. 4-Non-Conf. Exh.
Vol. II, p. 8). In order "to ensure a safe and reliable
system, " HSE anticipates that the increased maintenance
and operating costs will continue for the foreseeable future.
(HSE Exh. 4-Non-Conf. Exh. Vol. II, p. 10).
Because of the added expenses, HSE "achieved an average
rate of return of just 1.9%" between 2009 and 2015, even
though the Commission had approved a 9.8% rate of return.
(HSE Exh. 4-Non-Conf. Exh. Vol. II, p. 10). Accordingly, on
September 24, 2015, under Cause No. 44683, HSE filed a
Verified Petition and Notice of Intent to File in Accordance
with Minimum Standard Filing Requirements, seeking authority
from the Commission "to increase its rates and charges
for the sewage disposal utility service it renders to the
public and for other related relief." (Appellant's
App. Vol. II, p. 36). Specifically, HSE sought an
across-the-board rate increase of 8.42% to produce additional
revenues of $997, 041 per year. This increase would amount to
a monthly rate increase of $2.92 per EDU, for a monthly
wastewater treatment bill of $37.55 per EDU.
HSE also requested, in relevant part, an increase to its
system development charge (SDC) of $450 in all of its service
areas. "All new development pays $2, 400 [or $3, 200 in
the Flatfork Creek area, which is subject to an additional
surcharge, ] per EDU" to help fund the costs of capital
projects. (HSE Exh. 3- Non-Conf. Exh. Vol. I, p. 172). Thus,
HSE requested the approval of a $2, 850 SDC for all areas
except Flatfork Creek, where it requested an SDC of $3, 650.
"SDCs provide a reasonable means of ensuring that
existing retail customers do not subsidize the cost of new
development." (HSE Exh. 3-Non-Conf. Exh. Vol. I, p.
173). A portion of each SDC that HSE collects is also paid to
either the City of Fishers or the City of Noblesville for a
wastewater treatment plant capacity fee.
On February 24, 2016, the Commission conducted a hearing. HSE
presented evidence from various accounting/utility experts,
as well as the president of the company, to support its
proposed rate increase. In response, the OUCC, which is a
state agency that represents the interests of
"ratepayers, consumers, and the public" in utility
matters, presented its own calculations and requested that
the Commission decrease HSE's existing rates by 14.01%.
Ind. Code §§ 8-1-1.1-4, -5.1(e). While the OUCC
agreed with some of HSE's proposed adjustments, it
advocated for a rate reduction based on, in large part, its
belief that HSE could operate more economically by
eliminating its relationship with SAMCO in lieu of performing
those necessary tasks with in-house employees. After reaching
certain stipulations with the OUCC, HSE ultimately reduced
its requested rate increase to 6.27%.
On November 9, 2016, the Commission issued its Order,
authorizing HSE "to increase its rates and charges for
sewer utility service by 1.17%, or $139, 305."
(Appellant's App. Vol. II, p. 34). According to the
Commission, such an increase would result in a monthly charge
to customers of $35.04 per EDU and would provide a 9.60% rate
of return to HSE. In relevant part, the Commission based its
rate determination on a finding that expenses related to
SAMCO should be eliminated from HSE's working capital
allowance; the Commission also declined to include
SAMCO's 10% management fee and a 3% increase to
SAMCO's contracted operating costs. However, contrary to
the proposal advanced by the OUCC, the Commission determined
that HSE could recover its income tax liability (which is
passed through to and paid by its shareholders) in its rates.
As to HSE's request regarding its SDC, the Commission
approved a $450 increase for all service areas.
On November 29, 2016, HSE filed a Petition for
Reconsideration and Clarification. However, rather than
waiting for the Commission to rule on this petition, on
December 9, 2016, HSE filed a Notice of Appeal. The
Commission never ruled on HSE's reconsideration petition
prior to this court assuming jurisdiction. HSE now appeals,
and the OUCC cross-appeals. Additional facts will be provided
Motion to Dismiss
In its Notice of Appeal, HSE identified the Commission as an
appellee/statutory party. However, on May 9, 2017, HSE filed
a motion to dismiss the Commission from this appeal,
clarifying that it had "mistakenly identified the
Commission as a party on appeal." (HSE's Motion to
Dismiss, p. 4). HSE argued that the Commission was an
improper party as it "acted as a fact-finding
administrative tribunal, hearing evidence from the opposing
parties, and rendering its Order purportedly based on the
evidence." (HSE's Motion to Dismiss, p. 2).
Nevertheless, on June 9, 2017, the Commission filed an
appellate brief, in which it responded to HSE's claims of
error and argued that the findings of its final Order were
justified. In response to HSE's motion to have it
dismissed as a party to the appeal, the Commission contended
that it is a proper party because this "case is not akin
to a controversy between two parties." (Commission's
Br. p. 16). Rather, the Commission claimed to have been
acting in a legislative, not judicial, capacity in
determining a proper utility rate. Thus, the Commission
as an executive branch administrative agency acting in the
public interest[, ] [it] should be able to defend that its
orders are in the public interest. It therefore brings a
perspective useful to the Court of Appeals that may be
helpful to proper resolution of the ...