Home Builder's Ass'n of Indiana, Inc. v. Indiana Utility Regulatory Com'n

• Decision Date: 25 September 1989
• Docket Number: No. 93A02-8706-EX-252,93A02-8706-EX-252
• Citation: 544 N.E.2d 181
• Parties: In the Matter of the Investigation, on the Commission's own motion into the Effect of the Tax Reform Act of 1986 Upon Indiana Public Utilities and to Develop Uniform Standards and Procedures for Implementing any Necessary Changes in Accounting Treatment or Adjustments to Rates and Charges. HOME BUILDER'S ASSOCIATION OF INDIANA, INC., Appellant (Intervenor Below), v. INDIANA UTILITY REGULATORY COMMISSION (f/k/a Public Service Commission of Indiana), et al., Appellees (Agency and Respondents Below).
• Court: Indiana Appellate Court

Page 181

544 N.E.2d 181

108 P.U.R.4th 86

In the Matter of the Investigation, on the Commission's own motion into the Effect of the Tax Reform Act of 1986 Upon Indiana Public Utilities and to Develop Uniform Standards and Procedures for Implementing any Necessary Changes in Accounting Treatment or Adjustments to Rates and Charges HOME BUILDER'S ASSOCIATION OF INDIANA, INC., Appellant (Intervenor Below), v. INDIANA UTILITY REGULATORY COMMISSION (f/k/a Public Service Commission of Indiana), et al., Appellees (Agency and Respondents Below).

No. 93A02-8706-EX-252.

Court of Appeals of Indiana Third District.

Sept. 25, 1989.

John M. Reames, Joe N. Van Valer, Van Valer & Williams, Greenwood, for appellant.

William B. Powers, Indianapolis, for Indiana Chapter/National Ass'n of Water Companies.

William F. Welch, Randolph L. Seger, McHale, Cook & Welch, P.C., Indianapolis, for Gary-Hobart Water Corp.

Fred E. Schlegel, Mary M. Stanley, Julie Sommers, Baker & Daniels, Indianapolis, for Indianapolis Water Co.

STATON, Judge.

Home Builders Association of Indiana, Inc. (HBAI), appeals an order of the Indiana Utility Regulatory Commission (Commission), following an investigation into the rates and charges of Indiana public utility corporations in consideration of the reductions in the corporate federal income tax rate resulting from the Tax Reform Act of 1986 (TRA-86). Gary Hobart Water Corp., Indianapolis Water Company and Indiana Chapter/National Association of Water Companies (collectively referred to as "Water Companies") filed Briefs of Appellee. HBAI raises three issues:

1. Whether the Commission was without jurisdiction to issue the June 1 order because it failed to give proper statutory notice of the proceedings.

2. Whether the Commission was without jurisdiction to issue the June 1 order because it established a pre-filing date for evidence only nine (9) days after notice of the formal hearing was given.

3. Whether the Commission's June 1 order in regard to the treatment of contributions in aid of construction is contrary to law.

We affirm.

The Commission instituted an investigation by order on November 26, 1986, pursuant to Indiana Code 8-1-2-58. The purpose of the investigation was to determine the "implications and impact of TRA-86 [which reduces the corporate tax rate from 46% to 34%, effective July 1, 1987] upon Indiana public utilities and to consider the development of uniform standards and procedures for implementing any necessary changes in accounting treatment or adjustments to rates and charges of such public utilities." (R. 3.) The Commission formed an Executive Committee and gave it the duty of preparing a comprehensive report discussing the effect of TRA-86, devising a plan of action by which the Commission might address those effects and recommending a specific course of action. The Executive Committee submitted its report to the Commission on April 15, 1987.

On April 21, 1987, the Commission issued a docket entry determining that a formal hearing should be held to receive evidence pertinent to the implications and impact of TRA-86 and its potential for requiring rate adjustments. By the same entry, the Commission set the time and place for the hearing to be held on May 13, 1987, and determined that all potentially affected utilities should be named as respondents. The entry also provided that all prepared testimony should be prefiled with the Commission by May 4, 1987.

Public notice of the investigation and hearing date was published in accordance with the statutory requirements between April 23rd and May 4th, 1987. HBAI, an association of, among others, residential developers, filed its petition for leave to intervene on May 6, 1987, which the Commission granted on May 11, 1987. The public hearing was held on May 13 and 14, 1987. In addition to evidence presented by several parties, the report and recommendations of the Executive Committee were admitted into evidence without objection. The Commission entered its interim order on June 1, 1987 ("June 1 order").

The portion of the order relevant to this appeal concerns TRA-86's effect on contributions-in-aid-of-construction ("CIAC"). CIAC arise under Rule 25 of the Commission's Rules and Standards for Water Utilities, 170 IAC 6-1-25. Under Rule 25, a water utility must make, free of charge, a main extension if it costs less than three times the estimated annual revenue anticipated to be received from customers connecting to the main. If the cost of the extension exceeds three times such estimated annual revenue, the applicant for the main extension, frequently developers of new residential areas, must advance to the utility funds to cover the excess. During the ten year period following the date the main is placed in service, the utility must refund to the applicant an amount equal to three times the estimated annual revenue from each additional new customer connecting to the main not previously accounted for. After ten years, any unrefunded advances become the utility's property and are accounted for on the books as CIAC.

Prior to 1987, CIAC were not recognized as taxable income to the utility. However, TRA-86 made them so effective January 1, 1987. It appears that the new tax law treats as CIAC even those funds eventually refunded, making them taxable. The utilities have treated the tax as an added cost of construction of the main extension and have passed it (and the tax owing on the collection of the CIAC tax) along to the developer. This practice is known as the "gross up" method of collecting the CIAC tax.

The Executive Committee, in its recommendation report, noted that shifting the tax to the applicant could prohibit economic development, particularly in economically disadvantaged residential areas. As a result, the Executive Committee recommended two alternative methods, in addition to the "gross up" method, for treating the CIAC tax. The three alternatives recommended were:

1. Gross up. Continue applying the existing 170 I.A.C. 6-1-25 to cover the associated tax as a "cost of construction". This tax would allow the utility to collect the tax, and the tax owing on that collection of tax, from applicants for main extensions.

2. Partial Tax Expense. Collect only construction costs of a main extension (excluding tax) and recover, through rates, the income tax, using a 34% rate, on 50% of customer advances (reflecting a compromise percentage of customer advances that have historically become contributions-in-aid-of-construction). Any and all tax owing on the remaining 50% of customer advances shall be permanently absorbed by any utility operating under this alternative.

3. Gross up--No Refund. All applicants for main extensions are given the option to choose one of the following alternatives:

(1) Gross up (see 1 above), or;

(2) No refund ... collect only construction costs of a main extension (excluding tax) from applicants. The utility pays the tax on the contribution-in-aid-of-construction. No refunds based on subsequent connections are made. This approach will require amending 170 I.A.C. 6-1-25.

(R. 291.)

In its June 1 order, the Commission approved and adopted the Executive Committee's recommendations and also ordered that a formal proceeding addressing the potential modifications to Rule 25 shall be initiated. ¹

I. Standing

Water Companies raise the issue whether HBAI is adversely affected by the Commission's order such that it has standing to bring this appeal. Indiana Code 8-1-3-1 establishes that in order to bring an appeal a party must be adversely affected by an order of the Commission. Laborers Local No. 204 v. Public Service Company of Indiana (1988), Ind., 524 N.E.2d 318, 319. Water Companies argue that HBAI benefits from the Commission order because it provides for alternatives to the "gross up" method which may not pass the cost of the tax on to the developers. "Adversely affected" means that a party has sustained or is in immediate danger of sustaining a direct injury as a result of the order. Terre Haute Gas Corp. v. Johnson (1942), 221 Ind. 499, 45 N.E.2d 484, 486, modified, 221 Ind. 499, 48 N.E.2d 455. Although the Commission's order does provide alternatives that would benefit HBAI, it also provides that water and sewer companies may continue to pass the cost of the tax along to the developers as an added cost of construction. This clearly affects HBAI adversely as this method will increase the cost to HBAI to develop areas. The fact that this method was already practiced by the utilities does not make the Commission's reaffirmance of its availability any less adverse to HBAI. Standing is not removed because a party might be better off under a Commission order than it was prior to the order if the effect of the order is nevertheless injurious. See Johnson, supra 48 N.E.2d at 487 (rate payers had standing to appeal Commission order which reduced rates because rate payers may have believed that the reduced rates were exorbitant).

II. Notice

HBAI raises the issue whether the Commission was without jurisdiction to issue the June 1 order because it failed to give notice of the hearing pursuant to statute. The statute at issue is IC 8-1-2-59, which provides:

Sec. 59. If, after making such investigation, the commission becomes satisfied that sufficient grounds exist to warrant a formal hearing being ordered as to the matter so investigated, it shall furnish such public utility interested a statement notifying the public utility of the matters under investigation. Ten (10) days after such notice has been given, the commission may proceed to set a time and place for a hearing and an investigation, as hereinbefore provided.

HBAI contends that the June 1 order is void because the Commission set the date and time of hearing by the same order it determined a hearing was necessary. HBAI argues the Commission was required to wait ten (10) days after informing the utilities of the matter under investigation...