Indiana-American Water v. Utility Consumer

• Decision Date: 10 March 2006
• Docket Number: No. 93A02-0412-EX-1067.,93A02-0412-EX-1067.
• Citation: 844 N.E.2d 106
• Parties: INDIANA-AMERICAN WATER COMPANY, INC., Appellant-Petitioner, v. INDIANA OFFICE OF UTILITY CONSUMER COUNSELOR, Town of Schererville, Indiana-American Industrial Group, Appellees-Statutory Party Intervenors.
• Court: Indiana Appellate Court

844 N.E.2d 106

INDIANA-AMERICAN WATER COMPANY, INC., Appellant-Petitioner, v. INDIANA OFFICE OF UTILITY CONSUMER COUNSELOR, Town of Schererville, Indiana-American Industrial Group, Appellees-Statutory Party Intervenors.

No. 93A02-0412-EX-1067.

Court of Appeals of Indiana.

March 10, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Daniel W. McGill, Nicholas K. Kile, P. Jason Stephenson, Barnes & Thornburg LLP, Indianapolis, for Appellant.

Susan L. Macey, Utility Consumer Counselor, Randall C. Helmen, Deputy Consumer Counselor for State Affairs, Daniel M. LeVay, J. David Agnew, Assistant Consumer Counselors, Indianapolis, for Appellee Indiana Office of Utility Consumer Counselor.

L. Parvin Price, Christopher C. Earle, Bose McKinney & Evans LLP, Indianapolis, David Austgen, Austgen & Decker, P.C., Crown Point, for Appellee Town of Schererville.

Bette J. Dodd, Lewis & Kappes, P.C., Indianapolis, for Appellee Indiana-American Industrial.

OPINION

CRONE, Judge.

Case Summary

Indiana-American Water Company, Inc. ("IAWC"), appeals the order of the Indiana Utility Regulatory Commission ("the Commission") on its petition to increase rates and charges for water and sewer service. We affirm.

Issues

IAWC raises seven issues, which we reorder and restate as follows:

I. Whether the Commission properly excluded one high-service pump from rate base;

II. Whether the Commission properly excluded most of the cost of a customer information system from rate base;

III. Whether the Commission properly disallowed the cost of relocating IAWC's customer call center from Indiana to Illinois;

IV. Whether the Commission properly disallowed IAWC's Internal Audit Department expenses;

V. Whether the Commission properly disallowed a certain portion of IAWC's pension expense;

VI. Whether the Commission properly calculated the cost of common equity; and

VII. Whether the Commission properly calculated IAWC's federal income tax expense at the existing rates.

Facts and Procedural History¹

IAWC is an Indiana corporation regulated by the Commission that provides water utility service to approximately 272,000 customers in twenty-one counties. IAWC is a subsidiary of American Water Works Company, Inc. ("American"). In 2003, American was acquired by Thames Water Aqua Holdings GmbH, a subsidiary of RWE AG, an international multi-utility service provider based in Germany. On September 30, 2003, IAWC petitioned the Commission to increase its rates and charges for water and sewer service. On November 6, 2003, IAWC and the Indiana Office of Utility Consumer Counselor ("OUCC") attended a prehearing conference. The Town of Schererville, Indiana-American Industrial Group ("Industrial Group"), and the Town of Merrillville subsequently intervened.² An evidentiary hearing was held on various dates between January and April 2004. On November 18, 2004, the Commission issued an order in which it found that IAWC's rate base was approximately $663,400,000 and that IAWC was entitled to a return of 5.38%. The Commission authorized IAWC to increase its rates and charges by approximately 0.4%, "designed to produce total annual operating revenues of $139,945,004 which, after annual operating expenses of $104,275,376, are expected to result in annual net operating income of $35,669,628." Appellant's App. at 134. IAWC now appeals certain portions of the Commission's order. Additional facts will be provided as necessary.

Discussion and Decision

Our review of the Commission's order is two-tiered:

we inquire if specific findings exist as to all factual determinations material to the ultimate conclusions, and we inquire if substantial evidence exists within the record as a whole to support the Commission's basic findings of fact. When reviewing the Commission's order, we give great deference to its rate making methodology. In determining whether the evidence supports the Commission's decision, we neither reweigh the evidence nor substitute our judgment for that of the Commission. We set aside the Commission's finding of facts only when a review of the whole record clearly indicates that the agency's decision lacks a reasonably sound basis of evidentiary support.

In addition, we inquire to see if the Commission's order is contrary to law, that is, whether the order is the result of considering or failing to consider some factor or element which improperly influenced the final decision. The Commission must remain within its jurisdiction and conform to all relevant statutes, standards and legal principles.

Lincoln Utils., Inc. v. Office of Util. Consumer Counselor, 661 N.E.2d 562, 564 (Ind.Ct.App.1996) (citations omitted), trans. denied.

I. Exclusion of Pump from Rate Base

"The Commission's primary objective in every rate proceeding is to establish a level of rates and charges sufficient to permit the utility to meet its operating expenses plus a return on investments which will compensate its investors." City of Evansville v. S. Indiana Gas & Elec. Co., 167 Ind.App. 472, 478, 339 N.E.2d 562, 568 (1975). In so doing, the Commission must determine the utility's rate base, which "consists of that utility property employed in providing the public with the service for which rates are charged and constitutes the investment upon which the `return' is to be earned." Id. at 479, 339 N.E.2d at 569. The rate base "is usually defined as that utility property `used and useful' in rendering the particular utility service." Id. (citing Ind.Code § 8-1-2-6).³ "The Commission's `used and useful' standard requires: (1) that the utility plant be actually devoted to providing utility service, and (2) that the plant's utilization be reasonably necessary to the provision of utility service." Id. at 516, 339 N.E.2d at 589. More specifically, this Court has stated that "[u]nnecessary plant capacity is not used and useful for rate making purposes and should not be included." L.S. Ayres & Co. v. Indpls. Power & Light Co., 169 Ind.App. 652, 683, 351 N.E.2d 814, 834 (1976), trans. denied.

In previous rate proceedings, the Commission had included in IAWC's rate base five high-service pumps at its Southern Indiana Operations and Treatment Center ("SIOTC"). In this proceeding, the OUCC proposed that one of those pumps be removed from IAWC's rate base as excess capacity. The OUCC presented evidence that pursuant to the Recommended Standards for Waterworks (also known as Ten State Standards), only four "pumps were necessary to meet peak demand with the largest pumping unit out of service." Appellant's App. at 20. On rebuttal, IAWC's Alan J. DeBoy presented evidence that three of the five pumps serve one million-gallon reservoir compartment, and two of the pumps serve another million-gallon reservoir compartment, either of which could be removed from service for maintenance or rehabilitation. DeBoy testified that all five pumps are necessary to ensure that IAWC can meet its peak demand with one of the reservoir compartments out of service. DeBoy acknowledged, however, that the reservoir-isolation technique had "not yet been used but will be needed `at some point in the future.'" Id. at 22.

On this issue, the Commission found as follows:

The non-contradicted evidence established that [IAWC], with the largest unit out of service, has 15.7 MGD [million gallons per day] more capacity than the required 22 MGD. Since [IAWC's] case to reject the alleged excess capacity is founded on justifying the need to have this reservoir-isolation technique, we thus need to determine whether this feature is used and useful. Mr. DeBoy's testimony on this point is limited to testifying that reservoir maintenance will be needed at some point in the future. We note that this is the first time this specific feature has been brought to our attention and has not been a contested issue in [IAWC's] previous cases. Therefore, we shall make our decision based on the evidence of record that we now have before us. We find that [IAWC] did not provide evidence to support the time frame within which this engineering feature will be used and useful. Further, we find [IAWC's] evidence lacked information that we deem necessary in order to allow this plant⁴ in rate base, this information includes but is not limited to:

• the frequency that the reservoir maintenance occurs,

• the amount of time necessary to carry out the maintenance of the reservoir,

• the time of year when [IAWC] plans to carry out the maintenance of the reservoir,

• whether [IAWC] could implement the reservoir maintenance during non-peak months, and

• whether [IAWC] needs five (5) pumps at the SIOTC if the reservoir's maintenance could be implemented during non-peak months.

We find that [IAWC's] rate base should be reduced by $753,378 for excess capacity at the SIOTC and that the accumulated depreciation should be also reduced by $232,248.

Id. at 22-23.

IAWC challenges the Commission's finding of excess capacity, noting that "the OUCC's challenge was to the number of pumps and not the number of reservoir compartments[,]" i.e., the reservoir's two-compartment design. Appellant's Br. at 20.⁵ We must decline IAWC's invitation to separate these clearly interrelated issues. It is undisputed that IAWC's asserted need for the fifth pump's capacity is based on the closing of one of the two reservoir compartments for maintenance or rehabilitation, which IAWC's own witness admitted had not yet been done and would not be done until some unknown future date.⁶ Thus, the fifth pump represents unnecessary capacity that is not used and useful for ratemaking purposes.⁷ We acknowledge that the Commission's order specifically addresses the use and usefulness of the reservoir's two-compartment design, rather than the fifth pump itself, but in view of their obvious interrelationship, we find this to be a distinction without a substantive difference. The Commission's findings are supported by substantial evidence, and therefore we affirm its exclusion of the...