The Indiana Court of Appeals ruled in favor of a Hamilton County public utility seeking to have affiliate expenses included in its sewer utility rate calculation.
Hamilton Southeastern Utilities Inc. provides sewage collection and treatment services. It relies on affiliate company Sanitary Management & Engineering Co. to carry out the maintenance, operation, and engineering functions of HSE’s sewage operations, and the two companies operate pursuant to a utility services agreement.
HSE had an approved rate increase of 9.8 percent in 2010, but because of maintenance and repair costs, it got a rate of return just below 2 percent for 2009-2015. The company sought to increase its rates and charges for sewage disposal service by 8.42 percent. It also sought an increase to its system development charge that new development pays.
After a hearing with the Indiana Utility Regulatory Commission, the commission authorized a rate increase of 1.17 percent and approved a $450 increase for all service areas regarding its system development charge for new development. At the hearing, the Office of Utility Consumer Counselor testified it believed HSE’s rates should instead be reduced and the utility could save money by having in-house employees handle necessary tasks instead of contracting with SAMCO to perform those duties.
Instead of waiting for the IURC to rule on HSE’s petition for reconsideration and clarification, the utility filed a notice of appeal. The IURC did not rule on the petition before the COA assumed jurisdiction.
The judges first ruled that the IURC is not a proper party on appeal from its own decision and should be dismissed, granting HSE’s motion.
In addressing the issues raised on appeal, the COA found the IURC acted arbitrarily in excluding HSE’s affiliate expenses from HSE’s rate calculation by relying on National Association of Regulatory Utility Commissioners guidelines without explanation. The utility services agreement between SAMCO and HSE includes a 10 percent management fee and 3 percent increase to contracted billing rates. In HSE’s prior rate case, the IURC found SAMCO’s rates to be reasonable without regard to evidence of SAMCO’s fully allocated costs, as required under the guidelines.
The judges upheld the IURC’s consideration of evidence and to exclude the paid-in-arrears affiliate expenses from HSE’s calculation of working capital, as well as the IURC’s conclusion regarding HSE’s system development charge based on the evidence presented.
The judges also found the IURC properly permitted S-Corporation HSE to recover its passed-through income tax liability in its rates, which the OUCC had challenged on cross-appeal.
“[E]vidence was presented that the shareholders of HSE actually paid income taxes at their personal rates for income attributable to HSE. The Commission clearly recognized that ratepayers would be subjected to higher rates to compensate for increased operating costs if the utility had to pay the higher tax rates of a C Corporation. The Commission exercised its discretion to calculate a just and reasonable rate,” Judge Patricia Riley wrote in remanding the matter for further proceedings.
The case is Hamilton Southeastern Utilities, Inc. v. Indiana Utility Regulatory Commission; Indiana Office of Utility Consumer Counselor; and Apartment Association of Indiana, Inc., 93A02-1612-EX-2742.