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

Court of Appeals of Indiana

October 15, 2019

Hamilton Southeastern Utilities, Inc., Appellant,
v.
Indiana Utility Regulatory Commission, et al., Appellees.

          Appeal from the Indiana Utility Regulatory Commission IURC Cause No. 44683 The Honorable James F. Huston, Chairman, The Honorable David E. Ziegner, Sarah E. Freeman, Stefanie Krevda, and David L. Ober, Commissioners, The Honorable Carol Sparks Drake, Senior Administrative Law Judge

          Attorneys for Appellant Randolph L. Seger Brian W. Welch Michael T. Griffiths Bingham Greenebaum Doll LLP Indianapolis, Indiana

          Attorneys for Appellee Indiana Utility Regulatory Commission Curtis T. Hill, Jr. Attorney General of Indiana Aaron T. Craft Deputy Attorney General Indianapolis, Indiana Beth E. Heline General Counsel Jeremy R. Comeau Assistant General Counsel Indiana Utility Regulatory Commission Indianapolis, Indiana

          Attorneys for Appellee Indiana Office of Utility Consumer Counselor William I. Fine Daniel M. Le Vay Scott C. Franson Indianapolis, Indiana

          BAILEY, JUDGE.

         Case Summary

         [¶1] Following a previous order of this Court remanding this case to the Indiana Utility Regulatory Commission ("Commission"), Hamilton Southeastern Utilities, Inc. ("HSE") appeals the February 20, 2019, Commission's order on remand in which the Commission disallowed both HSE's requested 3% increase in the hourly billing rate for its affiliate, Sanitary Management & Engineering Company, Inc. ("SAMCO"), and a 10% management fee for SAMCO.

         [¶2] We affirm.

         Issues

         [¶3] HSE raises five issues which we consolidate and restate as follows:

1. Whether the Commission's order on remand satisfies the Court of Appeals instructions to support its order with substantial evidence by either making additional findings supporting the Commission's decision to disallow HSE's requested 3% rate increase for SAMCO billing charges and 10% SAMCO management fee (collectively, "SAMCO-related expenses") or recalculating HSE's rate.
2. Whether the Commission exceeded its statutory authority when it ordered HSE to provide evidence of its affiliate's costs.
3. Whether the Commission improperly promulgated a rule in its order on remand.

         Facts and Procedural History

         [¶4] HSE is a for-profit public utility that provides sewage collection and treatment services to customers in Hamilton County, Indiana. HSE relies upon its affiliate, SAMCO, to carry out all operation, maintenance, and engineering functions of HSE's sewage operations. SAMCO charges HSE pursuant to a utility services agreement ("affiliate contract"). HSE's officers and directors all own shares of SAMCO.

         [¶5] As a public utility, HSE is subject to regulation by the Commission. In 2009, HSE sought approval from the Commission for a base rate increase. The Indiana Office of Utility Consumer Counselor ("OUCC"), a state agency tasked with representing the interests of consumers in utility matters, [1] argued against HSE's proposed rate increase based in part on the National Association of Regulatory Utility Commissioners ("NARUC") guidelines. In its 2010 order ("2010 Order"), the Commission approved an increase to HSE's revenues of 3.22% and a rate of return of 9.8%. The 2010 Order-which approved SAMCO-related expenses-was based on HSE's market study evidence indicating that SAMCO charged rates and markups that were at or below the regional market, and it did not rely upon the NARUC guidelines. The Commission found that SAMCO's total contract charge to HSE for the test year 2009 was $3, 280, 990.

         [¶6] Due largely to aging equipment, HSE began to experience operational issues that resulted in spills and overflow. In 2013, a sewage overflow led the Indiana Department of Environmental Management ("IDEM") to issue a Notice of Violation to HSE. HSE and IDEM subsequently entered into an Agreed Order under which HSE was required to develop and implement additional maintenance and operations programs. The requirements of the Agreed Order significantly increased HSE's maintenance and operating costs and will continue to do so for the foreseeable future. SAMCO is carrying out the actions required in the Agreed Order, and SAMCO's resulting total contract charge to HSE in test year 2014 was over $5 million.[2]

         [¶7] Because of the added expenses, HSE achieved an average rate of return of 1.9% between 2009 and 2015, even though the Commission had approved a 9.8% rate of return in the 2009-10 rate case. Therefore, on September 24, 2015, HSE filed a petition seeking authority from the Commission to increase its rates and charges. Specifically, HSE sought an across-the-board rate increase of 8.42% which included, in relevant part, a 3% increase in SAMCO's billing rate and a 10% management fee.[3] OUCC advocated for a 14.01% rate reduction for HSE. HSE ultimately reduced its rate increase request to 6.27%.

         [¶8] On February 24, 2016, the Commission conducted an evidentiary hearing on HSE's petition and, on November 9, 2016, issued an order ("2016 Order") authorizing a rate increase of 1.17%. The 2016 Order noted that the NARUC guidelines call for affiliate pricing to be at market price or the fully allocated cost, [4] whichever is lower. Because HSE failed to demonstrate SAMCO's fully allocated costs, the 2016 Order disallowed a rate increase for the requested SAMCO-related expenses. The Commission reached that decision despite finding that "HSE presented evidence that shows SAMCO's rates are at or below the rates charged by other similar firms," and "the 10% management fee may be customary in the industry." App. Vol. II at 27. The Commission also ordered HSE to provide evidence regarding SAMCO's fully allocated costs in HSE's next rate case. Id.

         [¶9] HSE appealed to this Court, and we held, in relevant part, that the Commission acted arbitrarily in excluding the SAMCO-related expenses from HSE's rate calculation because it "failed to explain its decision to now adhere to the standard advocated by NARUC that the test for reasonableness is the lower of fully allocated costs or prevailing market prices." Hamilton Southeastern Utils., Inc. v. Ind. Util. Regulatory Comm'n, 85 N.E.3d 612, 626 (Ind.Ct.App. 2017) ("HSE I"). We also dismissed the Commission as a party to the case. Id. HSE sought transfer, which our Supreme Court granted. On transfer, the Supreme Court held that the Commission was a proper party, reversed the Court of Appeals holding on the SAMCO-related expenses issue, and remanded the case to this Court "with instructions to permit the Commission an opportunity to brief the [SAMCO-related expenses] issue." Hamilton Southeastern Utils., Inc. v. Ind. Util. Regulatory Comm'n, 101 N.E.3d 229, 234 (Ind. 2018) ("HSE II").

         [¶10] On remand, following additional briefing by the Commission, this Court noted that, although HSE submitted "the same type of evidence" the Commission had found acceptable in the 2010 Order, this time the Commission applied the NARUC guidelines and found HSE's evidence insufficient "because it had not supplied information regarding SAMCO's fully allocated costs." Hamilton Southeastern Utils., Inc. v. Ind. Util. Regulatory Comm'n, 115 N.E.3d 512, 515 (Ind.Ct.App. 2010) ("HSE III"). We noted that

[t]he Commission implicitly found that the NARUC guidelines were reasonable and applicable to HSE in this rate case, but it did not enter any specific findings regarding why it had reached this conclusion, and, thus, the Commission's order on this issue was not supported by substantial evidence, was not reasonable, and was arbitrary. … In addition, the Commission's findings shed no light on why it chose to apply the portion of the NARUC guidelines pertaining to fully allocated costs when the NARUC guidelines themselves provide that "[u]nder ...

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