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COA strikes down 57 percent water rate increase

December 20, 2017

The city of Washington cannot impose a 57 percent rate increase on a local nonprofit water utility after the Indiana Court of Appeals determined Wednesday that increase was not reflected by an actual increase in costs.

More than 25 years ago, the city of Washington and Daviess County Rural Water System, Inc. executed a contract for the city to sell DCRW up to 30 million gallons of water. The contract allowed for rate adjustments if there was a demonstrable increase or decrease in the costs of performance.

Then in July 2016, a cost-of-service study was completed that recommended increasing water rates. The study used the city’s “depreciation expense” to calculate the city’s revenue requirements and the cost of servicing DCRW, and determined the revenue requirement had increased by more than $400,000.

The city subsequently approved an ordinance that raised rates 57 percent increase for DCRW and 14.8 percent for individual customers living outside Washington. DCRW responded by filing two complaints in the Daviess Superior Court, one alleging the ordinance violated the contract, and the other seeking declaratory judgment that the ordinance was void, both as applied to DCRW.

The trial court granted a motion to consolidate the two cases, then ruled in January 2017 the ordinance’s rate increase to DCRW breached the contract because it was not based on a “demonstrable increase in costs.”  The court further determined the provisions of the contract regarding rate increases to DCRW could not be severed from those related to individual rate increases on non-city residents, so the ordinance was invalid.

On appeal in City of Washington, Indiana v. Daviess County Rural Water System, Inc., 14A01-1702-PL-316, the city argued the trial court erred in determining its rate increase breached the contract. But the Indiana Court of Appeals upheld that ruling Wednesday, with Judge Cale Bradford writing first that the city’s decision was not entitled to legislative deference because it was bound by the terms of the contract.

The appellate court then went on to uphold the trial court’s finding that because the city used the depreciation expense method to calculate its 2016 rate increase – as opposed to the “detailed extension and replacement” or “capital improvement program” methods used in previous years – the increase in revenue requirements did not reflect an actual increase in costs. That’s because there was evidence the increase would have only been 5.89 percent between 2012 and 2016 had Washington not switched to the depreciation method, Bradford said.

“We have little trouble concluding that a 57 percent rate increase cannot be based on a 5.89 percent increase in the cost of performance,” he wrote.

Thus, the ordinance was null and void as it related to DCRW, the appellate court concluded. However, the panel also concluded the ordinance can remain in effect as it relates to individual out-of-city customers because there was no evidence to support the finding that all rates in the ordinance were interrelated to the point of nonseverability.  

Finally, the appellate court determined the trial court did not err by consolidating both of DCRW’s causes of actions or by denying the city’s motion to dismiss the declaratory judgment action.

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