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Hamilton Southeastern Utilities, Inc. v. Indiana Utility Regulatory Commission

Court of Appeals of Indiana

September 28, 2017

Hamilton Southeastern Utilities, Inc., Appellant-Petitioner,
Indiana Utility Regulatory Commission; Indiana Office of Utility Consumer Counselor; and Apartment Association of Indiana, Inc., Appellees-Respondents/Statutory Parties and Intervenors.

         Appeal from the Indiana Utility Regulatory Commission The Honorable Aaron A. Schmoll, Senior Administrative Law Judge Trial Court Cause No. 44683

          FOR 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 Indianapolis, Indiana.

          RILEY, JUDGE


         [¶1] 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.

         [¶2] We affirm in part, reverse in part, and remand.


         [¶3] 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.

         [¶4] 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.


         [¶5] 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.

         [¶6] 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.

         [¶7] 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).

         [¶8] 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.

         [¶9] 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.[1]

         [¶10] 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%.

         [¶11] 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.

         [¶12] 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 as necessary.[2]


         I. Motion to Dismiss

         [¶13] 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).

         [¶14] 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 asserted that

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 ...

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