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Appeals court remands Hamilton Southeastern rate case to IURC

December 5, 2018

A Hamilton County sewer utility rate increase case that went all the way to the Indiana Supreme Court is going back to the state agency where it originated after an Indiana Court of Appeals ruling Wednesday.

At issue in the case is whether Hamilton Southeastern Utilities’ expenses of its operations contractor, Sanitary Management & Engineering Co. (SAMCO), entitled the utility to a rate increase it seeks, or whether the utility is overcharging customers by contracting for work it could do itself, as the state’s ratepayer advocate argues.

Hamilton Southeastern brought the rate case in 2015 to the Indiana Utility Regulatory Commission in response to a low rate of return. The utility petitioned for an 8.42 percent rate hike, citing SAMCO’s expenses to operate, maintain and perform engineering functions for the utility. The Office of Utility Consumer Counselor, on the other hand, lobbied for a 14 percent rate reduction, arguing the utility could more efficiently use in-house staff to perform the contracted functions.

The case wound up in court after the IURC approved a rate increase of just 1.17 percent, ruling in part that SAMCO expenses should be eliminated. After the Court of Appeals dismissed the IURC as a party to the case, the Indiana Supreme Court reversed, sending the case back to the Court of Appeals.

After hearing the case anew on remand from the Indiana Supreme Court, the COA again reversed the commission’s order on Wednesday in 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.

The heart of the case appears to be which guidelines are applied to the reasonableness of costs SAMCO passed on to the utility. The IURC applied those of the National Association of Regulatory Utility Commissioners, as recommended by the Office of Utility Consumer Counselor, while Hamilton Southeastern offered market study evidence to back up its requested increase.

“The 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,” Judge Patricia Riley wrote for the panel.

“The Commission’s lack of findings was particularly unreasonable given that the effect of the Commission’s future application of the NARUC guidelines to HSE and SAMCO will apparently have the effect that SAMCO will no longer operate as an entity which can charge HSE a profit, which represents a dramatic change in its business model,” Riley wrote for the panel. “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 appropriate circumstances, prices could be based on incremental cost, or other pricing mechanisms as determined by the regulator.’”

“… We again reverse the Commission on the SAMCO expenses issue and remand for it to make additional findings to support its decision or for a recalculation of HSE’s rate,” the panel concluded.

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