Hamilton Se. Utilities, Inc. v. Ind. Util. Regulatory Comm'n

• Decision Date: 27 June 2018
• Docket Number: Supreme Court Case No. 18S–EX–49
• Citation: 101 N.E.3d 229
• Parties: HAMILTON SOUTHEASTERN UTILITIES, INC., Appellant (Petitioner below), v. INDIANA UTILITY REGULATORY COMMISSION, et al., Appellees (Respondents below).
• Court: Indiana Supreme Court

101 N.E.3d 229

HAMILTON SOUTHEASTERN UTILITIES, INC., Appellant (Petitioner below),
v.
INDIANA UTILITY REGULATORY COMMISSION, et al., Appellees (Respondents below).

Supreme Court Case No. 18S–EX–49

Supreme Court of Indiana.

Filed June 27, 2018

ATTORNEYS FOR APPELLANT: Randolph L. Seger, Brian W. Welch, Michael T. Griffiths, Bingham Greenebaum Doll, LLP, Indianapolis, Indiana

ATTORNEYS FOR APPELLEES: Curtis T. Hill, Jr., Attorney General of Indiana, Thomas M. Fisher Solicitor General, Patricia C. McMath, Lara Langeneckert, Julia C. Payne, Deputy Attorneys General, Beth E. Heline, Jeremy Comeau, Indiana Utility Regulatory Commission, Indianapolis, Indiana, William Fine, Daniel M. Le Vay, Scott C. Franson, Abby R. Gray, Indiana Office of Utility Consumer Counselor, Indianapolis, Indiana

On Petition to Transfer from the Indiana Court of Appeals, No. 93A02–1612–EX–2742

David, Justice.

In response to a low rate of return over a six-year period, Hamilton Southeastern Utilities, Inc. ("HSE") petitioned the Indiana Utility and Regulatory Commission ("the Commission") to approve an 8.42% increase in its rates. The Commission, in several findings of fact, authorized a rate and charges increase much lower than HSE requested. HSE appealed the Commission's decision and named the Commission as a respondent. Upon HSE's motion, and over the Commission's objection, the Court of Appeals dismissed the Commission, concluding that it was not a proper party to the appeal. We now address

101 N.E.3d 230

whether the Commission was a proper party on appeal. As for the issue raised in the Indiana Office of Utility Consumer Counselor's ("the OUCC") petition—whether the Commission may include in HSE's revenue requirement the state and federal income taxes paid by HSE's individual shareholders—we summarily affirm the Court of Appeals.

Facts and Procedural History

HSE is a for-profit public utility that provides sewage collection and treatment services to customers in Hamilton County, Indiana. HSE relies on an affiliate company, Sanitary Management & Engineering Company, Inc. ("SAMCO"), to carry out the operation, maintenance, and engineering functions of HSE's sewage operations. As a public utility, HSE is subject to regulation by the Commission.

In a 2010 order, the Commission approved HSE to charge a flat monthly rate of $34.63 per single family unit and, in establishing that rate, it authorized a 9.8% rate of return. Since then, largely due to an aging system and sewage overflows, HSE incurred significant maintenance and operating costs, totaling over $11 million. These increased costs affected HSE's profitability; HSE averaged a 1.9% rate of return between 2009 and 2015—much lower than the Commission-approved 9.8%.

On September 24, 2015, HSE filed a rate case with the Commission requesting, in relevant part, approval of an 8.42% increase to its rates. The increase would produce just under $1 million of additional yearly revenue. The Commission conducted a hearing to consider HSE's petition. The OUCC, a state agency tasked with representing the interests of consumers in utility matters, advocated for a 14.01% rate reduction. The OUCC argued that HSE could operate more efficiently by ending its relationship with SAMCO and performing those tasks outsourced to SAMCO with in-house employees. After reaching certain agreements with the OUCC, HSE reduced its rate increase request to 6.27%.

The Commission ultimately approved an increase much lower than HSE had hoped for; it issued an order authorizing only a 1.17% increase in HSE's rates and charges. The Commission reasoned, in part, that expenses related to SAMCO should be eliminated from HSE's working capital allowance. The Commission did, however, authorize HSE to include in its rates the state and federal income tax liability that is passed through to, and paid by, HSE's shareholders.

HSE appealed, arguing that the Commission erred in excluding some expenses from its rates. The OUCC cross-appealed, arguing that HSE should not be permitted to recover income tax liability in its utility rate because, as an S Corporation, HSE has no tax liability of its own as a matter of law. Hamilton Southeastern Utils., Inc. v. Ind. Util. Regulatory Comm'n , 85 N.E.3d 612, 617, 625 (Ind. Ct. App. 2017). HSE initially named the Commission as an appellee-respondent, but then moved to dismiss the Commission, claiming that it had mistakenly identified the Commission as a party. Id. Over the Commission's objection, the Court of Appeals granted HSE's motion to dismiss the Commission. Id. at 626.

The Court of Appeals then made the following determinations: (1) the Commission acted arbitrarily in excluding SAMCO-related expenses (the 3% contract increase and 10% management fee) from HSE's rate calculation; (2) the Commission was within its discretion to exclude the paid-in-arrears SAMCO expenses from HSE's calculation of working capital; (3) the Commission did not err in its conclusion regarding HSE's system development charge based on the evidence presented;

101 N.E.3d 231

and (4) the Commission properly permitted HSE to recover its passed-through income tax liability in its rates. Id.

The OUCC and the Commission filed separate petitions seeking transfer. We granted both petitions, thereby vacating the Court of Appeals' opinion. Ind. Appellate Rule 58(A).

Discussion and Decision

The OUCC and the Commission challenge separate portions of the Court of Appeals' decision. While the OUCC argues that the Commission erred in allowing HSE to include in its rate calculation federal and state income tax paid by shareholders—a determination that the Court of Appeals affirmed—the Commission argues that the Court of Appeals erred in granting HSE's motion to dismiss the Commission as an improper party on appeal. We elect to address only the Commission's question: whether the Commission was a proper party on appeal. As for the Commission's inclusion of income taxes in HSE's rate calculation, we summarily affirm the Court of Appeals.

I. The Commission was a proper party on appeal.

The Commission seeks to appear as a party on appeal to defend its own order, arguing that while other parties sometimes intervene to challenge the appellant's position, those third parties may not always represent the entirety of the Commission's...