Hamilton Souetheastern Utilities, Inc. v. Indiana Utility Regulatory Commission Indiana Office of Utility Consumer Counselor and Apartment Association of Indiana, Inc.
85 N.E.3d 612
| Ind. Ct. App. | 2017Background
- Hamilton Southeastern Utilities, Inc. (HSE) is an investor‑owned sewer utility that contracts most operations to an affiliated company, SAMCO, and sought a rate increase after substantial repair and operating cost increases.
- HSE initially requested an 8.42% rate increase (later reduced to 6.27%) and a $450 increase to its system development charge (SDC); OUCC recommended a 14.01% rate reduction mainly by challenging affiliate costs.
- The Indiana Utility Regulatory Commission approved a 1.17% increase (yielding a 9.60% return), excluded a 3% SAMCO contract increase and a 10% SAMCO management fee from rates, removed SAMCO charges from working capital, and allowed a $450 SDC increase (but its order used a higher Flatfork SDC figure based on the record).
- HSE appealed arguing the Commission improperly excluded affiliate expenses and working‑capital treatment and objected to the Flatfork SDC; OUCC cross‑appealed the Commission’s inclusion of S‑corporation passthrough income tax in rates.
- The Court of Appeals dismissed the Commission as an appellate party, affirmed inclusion of passed‑through income taxes and exclusion of SAMCO from working capital, reversed the exclusion of the SAMCO fee increases (finding the Commission acted arbitrarily by relying on an unapplied NARUC standard), and remanded for recalculation or further explanation.
Issues
| Issue | HSE's Argument | OUCC's Argument | Held |
|---|---|---|---|
| Exclusion of SAMCO affiliate charges (3% contract increase and 10% management fee) | Commission lacked basis to exclude customary SAMCO charges; prior approval of SAMCO market rates supports reasonableness | SAMCO charges should be adjusted downward and must meet fully‑allocated cost or market standard; HSE failed to prove fully allocated cost | Court: Reverse exclusion — Commission acted arbitrarily by invoking NARUC lower‑of‑cost‑or‑market standard without explanation; remand for further support or recalculation |
| Exclusion of SAMCO charges from working capital allowance | SAMCO costs properly included under FERC 45‑day working capital methodology; HSE needs funds to pay expenses before collection | SAMCO charges are billed/paid in arrears concurrent with revenues, so they should be removed from working capital | Court: Affirm — substantial evidence supports that SAMCO charges are paid in arrears and exclusion from working capital was within Commission discretion |
| System Development Charge for Flatfork area (SDC amount) | Commission erred by approving $3,650 SDC for Flatfork when HSE requested uniform $2,850 (post‑commitment) | Record contained evidence of earlier commitments supporting the higher SDC; HSE’s briefing change after hearing was not evidence | Court: Affirm — Commission may rely only on record evidence; HSE’s post‑hearing exception was not record evidence to compel a different result |
| Inclusion of passthrough income taxes (S‑Corp shareholders’ taxes) in revenue requirement (OUCC cross‑appeal) | OUCC: HSE shouldn’t recover income taxes it never pays (taxes are paid by shareholders) | HSE: Denying passthrough taxes would force conversion to C‑corp and increase taxes borne by customers; shareholders actually paid taxes during test year | Court: Affirm — Commission reasonably allowed recovery of actual taxes paid by shareholders and applied appropriate shareholder‑specific tax rate adjustment |
Key Cases Cited
- Duke Energy Ind., Inc. v. Office of Util. Consumer Counselor, 983 N.E.2d 160 (Ind. Ct. App. 2012) (explains Commission’s role as impartial fact‑finder and deference in rate‑making)
- Citizens Action Coal. of Ind., Inc. v. Indianapolis Power & Light Co., 74 N.E.3d 554 (Ind. Ct. App. 2017) (discusses agency role and appellate party status)
- City of Terre Haute v. Terre Haute Water Works Corp., 180 N.E.2d 110 (Ind. Ct. App. 1962) (Commission is a quasi‑judicial fact‑finding tribunal and not a party on appeal)
- United States Gypsum, Inc. v. Ind. Gas Co., 735 N.E.2d 790 (Ind. 2000) (rate‑setting requires examining representative future operating conditions)
- Cellco Partnership v. Ind. Util. Regulatory Comm’n, 810 N.E.2d 1137 (Ind. Ct. App. 2004) (agency may change precedent but must explain rationale)
- South Haven Waterworks v. Office of Util. Consumer Counselor, 621 N.E.2d 653 (Ind. Ct. App. 1993) (treatment of S‑corporation taxes in utility rate calculations)