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Hamilton Southeastern Utilities Inc. v. Indiana Utility Regulatory Commission

Supreme Court of Indiana

June 27, 2018

Hamilton Southeastern Utilities, Inc. Appellant (Petitioner below),
Indiana Utility Regulatory Commission, et al. Appellees (Respondents below).

          Argued: March 15, 2018

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

          On Petition to Transfer from the Indiana Court of Appeals, No. 93A02-1612-EX-2742

          ATTORNEYS FOR APPELLANT Randolph L. Seger Brian W. Welch Michael T. Griffiths Bingham Greenebaum Doll, LLP Indianapolis, Indiana

          ATTORNEYS FOR APPELLEES Curtis T. Hill, Jr. Attorney General of Indiana Thomas M. Fisher Solicitor General Patricia C. McMath Lara Langeneckert Julia C. Payne Deputy Attorneys General Beth E. Heline Jeremy Comeau Indiana Utility Regulatory Commission Indianapolis, Indiana William Fine Daniel M. Le Vay Scott C. Franson Abby R. Gray Indiana Office of Utility Consumer Counselor Indianapolis, Indiana


          DAVID, JUSTICE.

         In response to a low rate of return over a six-year period, Hamilton Southeastern Utilities, Inc. ("HSE") petitioned the Indiana Utility and Regulatory Commission ("the Commission") to approve an 8.42% increase in its rates. The Commission, in several findings of fact, authorized a rate and charges increase much lower than HSE requested. HSE appealed the Commission's decision and named the Commission as a respondent. Upon HSE's motion, and over the Commission's objection, the Court of Appeals dismissed the Commission, concluding that it was not a proper party to the appeal. We now address whether the Commission was a proper party on appeal. As for the issue raised in the Indiana Office of Utility Consumer Counselor's ("the OUCC") petition-whether the Commission may include in HSE's revenue requirement the state and federal income taxes paid by HSE's individual shareholders-we summarily affirm the Court of Appeals.

         Facts and Procedural History

         HSE is a for-profit public utility that provides sewage collection and treatment services to customers in Hamilton County, Indiana. HSE relies on an affiliate company, Sanitary Management & Engineering Company, Inc. ("SAMCO"), to carry out the operation, maintenance, and engineering functions of HSE's sewage operations. As a public utility, HSE is subject to regulation by the Commission.

         In a 2010 order, the Commission approved HSE to charge a flat monthly rate of $34.63 per single family unit and, in establishing that rate, it authorized a 9.8% rate of return. Since then, largely due to an aging system and sewage overflows, HSE incurred significant maintenance and operating costs, totaling over $11 million. These increased costs affected HSE's profitability; HSE averaged a 1.9% rate of return between 2009 and 2015-much lower than the Commission-approved 9.8%.

         On September 24, 2015, HSE filed a rate case with the Commission requesting, in relevant part, approval of an 8.42% increase to its rates. The increase would produce just under $1 million of additional yearly revenue. The Commission conducted a hearing to consider HSE's petition. The OUCC, a state agency tasked with representing the interests of consumers in utility matters, advocated for a 14.01% rate reduction. The OUCC argued that HSE could operate more efficiently by ending its relationship with SAMCO and performing those tasks outsourced to SAMCO with in-house employees. After reaching certain agreements with the OUCC, HSE reduced its rate increase request to 6.27%.

         The Commission ultimately approved an increase much lower than HSE had hoped for; it issued an order authorizing only a 1.17% increase in HSE's rates and charges. The Commission reasoned, in part, that expenses related to SAMCO should be eliminated from HSE's working capital allowance. The Commission did, however, authorize HSE to include in its rates the state and federal income tax liability that is passed through to, and paid by, HSE's shareholders.

         HSE appealed, arguing that the Commission erred in excluding some expenses from its rates. The OUCC cross-appealed, arguing that HSE should not be permitted to recover income tax liability in its utility rate because, as an S Corporation, HSE has no tax liability of its own as a matter of law. Hamilton Southeastern Utils., Inc. v. Ind. Util. Regulatory Comm'n, 85 N.E.3d 612, 617, 625 (Ind.Ct.App. 2017). HSE initially named the Commission as an appellee-respondent, but then moved to dismiss the Commission, claiming that it had mistakenly identified the Commission as a party. Id. Over the Commission's objection, the Court of Appeals granted HSE's motion to dismiss the Commission. Id. at 626.

         The Court of Appeals then made the following determinations: (1) the Commission acted arbitrarily in excluding SAMCO-related expenses (the 3% contract increase and 10% management fee) from HSE's rate calculation; (2) the Commission was within its discretion to exclude the paid-in-arrears SAMCO expenses from HSE's calculation of working capital; (3) the Commission did not err in its conclusion regarding HSE's system development charge based on the evidence ...

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