Hamilton Southeastern Utilities, Inc. v. Indiana Utility Regulatory Commission

FILED
Jun 27 2018, 3:31 pm

CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court

IN THE

Indiana Supreme Court
Supreme Court Case No. 18S-EX-49

Hamilton Southeastern Utilities, Inc.
Appellant (Petitioner below),

–v–

Indiana Utility Regulatory Commission, et al.
Appellees (Respondents below).

Argued: March 15, 2018 | Decided: June 27, 2018

Appeal from the Indiana Utility Regulatory Commission, No. 44683
The Honorable Aaron A. Schmoll, Senior Administrative Law Judge

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

Opinion by Justice David
Chief Justice Rush, Justice Massa, Justice Slaughter, and Justice Goff concur.
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 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

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 2 of 10
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; and (4) the
Commission properly permitted HSE to recover its passed-through
income tax liability in its rates. Id.

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 3 of 10
 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 interest in defending the order. We agree
with the Commission and refrain from disturbing long-standing custom
and practice that have treated the Commission as a proper party on
appeal for over a century.

A. The Legislature has remained silent on whether the
Commission may appear on appeal.
Chapter 1, Article 1, Title 8 of the Indiana Code establishes the
Commission, but sheds little light on the Commission’s role on appeal. It
instructs the Commission to “be an impartial fact-finding body” in all
hearings it conducts and to “make its orders in such cases upon the facts
impartially found by it.” Ind. Code § 8-1-1-5(a). It also explains that

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 4 of 10
“[t]he [C]ommission shall in no such proceeding, during the hearing, act
in the role either of a proponent or opponent on any issue to be decided
by it.” Ind. Code § 8-1-1-5(a). But these mandates set forth the
Commission’s impartiality in its own proceedings, not when defending its
orders on appeal.

Of course, absence of legislative guidance on the Commission’s role on
appeal does not create a presumption that the Commission’s participation
in defending its own rulings is permitted. So, we turn to other factors to
be sure that the Commission should remain a named party. Specifically,
we examine custom, practice, and public policy.

B. Long-standing custom and practice persuades us that
the Commission should continue appearing on appeal
as it deems necessary.
The legislature may not have yet weighed in on whether the
Commission may appear on appeal, but custom and practice favor the
Commission’s position. For over a century, the Commission and its
predecessor, the Public Service Commission, have defended appeals from
its final order on numerous occasions. See generally Winfield v. Pub. Serv.
Comm’n, 118 N.E. 531 (Ind. 1911) (defending an order increasing telephone
company rates); Kosciusko County Rural Electric Membership Corp. v. Pub.
Serv. Comm’n, 77 N.E.2d 572 (Ind. Ct. App. 1948) (defending an order
granting a certificate of public convenience and necessity to a service
company); Sizemore v. Public Service Comm’n, 177 N.E.2d 743 (Ind. Ct. App.
1961) (defending an order modifying interstate telephone rates); Stucker
Fork Conservancy Dist. v. Ind. Util. Regulatory Comm’n, 600 N.E.2d 955 (Ind.
Ct. App. 1992) (defending an order classifying a district as a “public
utility”); Nextel W., Corp. v. Ind. Util. Regulatory Comm'n, 831 N.E.2d 134
(Ind. Ct. App. 2005) (defending an order establishing and administering
an Indiana Universal Service Fund). The Commission has ordinarily
appeared on appeal to argue one of several positions: (1) that its order was
in the public interest, (2) that it was based on the record evidence, or (3)
that the Commission’s decision is entitled to deference. Dismissal of the
Commission runs counter to a long-standing practice of allowing it to

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 5 of 10
defend its own orders—a practice that the legislature has left intact by
remaining silent throughout the past one hundred years.

Moreover, similarly situated executive branch agencies enjoy the ability
to defend their decisions on appeal, both through explicit legislative
directive and as a result of legislative acquiescence to custom and practice.
Unlike in appeals from other Indiana administrative agencies, appeals of
the Commission’s final orders skip the trial court and are taken directly to
the Court of Appeals. Ind. Appellate Rule 9(A)(3). Indiana has three
other administrative agencies for which judicial review bypasses the trial
court and is heard in the first instance by the Court of Appeals; those
agencies are the Workers Compensation Board, the Indiana Civil Rights
Commission (“the ICRC”), and the Review Board of the Department of
Workforce Development (“the Review Board”). Ind. Appellate Rules
2(A), 9(A)(3). Two of the three agencies—the ICRC and the Review
Board—appear regularly to defend their orders on appeal. 1 While the
Review Board appears on all appeals of its orders because appellants are
statutorily mandated to name it as an appellee, Ind. Code § 22-4-17-12(b),
statutes governing the ICRC are silent on whether the ICRC is a proper
party to an appeal of its own order. Yet, like the Commission, the ICRC
regularly appears on appeals and we summarily affirmed the ICRC’s
ability to challenge its own orders, finding that the ICRC has an interest in
ensuring that its orders are enforced. Filter Specialists, Inc. v. Brooks, 879
N.E.2d 558, 570 (Ind. Ct. App. 2007), vacated in part and summarily affirmed
in part, 906 N.E.2d 835, 845 (Ind. 2009). We find that the Commission also
has an interest in ensuring that its orders are enforced. That interest is
critical to its mission, and favors permitting the Commission’s
participation in defending challenged orders.

1The Workers Compensation Board has no statute regulating its appearance on appeal, but it
does not routinely appear as an appellee in appeals from its orders.

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 6 of 10
 C. Public policy also supports a finding that the
Commission should not have been dismissed.
As the Commission noted in its briefing, sometimes in cases involving
issues for which no parties with opposed interests come forward, the
Commission ends up being the only appellee. In other cases where parties
with opposed interests do challenge the appellant, the Commission may
still be the only appellee to submit a brief. Although the case at bar
involves opposing parties advocating for competing interests, we worry
that a holding as broad as HSE suggests and the Court of Appeals has
issued—dismissing the Commission as an improper party by virtue of its
role as a neutral fact finder—would not only do away with long-standing
practice that the legislature has not disturbed in over one hundred years,
but would also frustrate the effectiveness of challenges to appeals given
that other parties seldom represent the entirety of the Commission’s
interests. And in those instances where the Commission concludes that its
interests are adequately represented, it can simply choose not to
participate in the appeal. We find that the Commission’s collective
expertise puts it in a favorable position to determine whether its interests
are being adequately represented. 2 Requiring the Commission to petition
to intervene promotes inefficiencies and the potential for unnecessary
litigation and/or appeals. The Commission’s ability to determine when its
participation is necessary to defend its orders on appeal promotes a more
efficient appeals process and upholds a century of accepted practice in the
courts.

2 The Commission does not defend all, or even most, of its orders on appeal, but does so when
it determines the public interest is at stake.

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 7 of 10
II. Neither the Commission’s administrative role nor
the existence of competing parties on appeal
persuade us that the Commission should be
deemed an improper party.
HSE makes several arguments against allowing the Commission to
appear as a party, but we do not find those arguments sufficiently
persuasive.

In response to the Commission’s petition, HSE frames the
Commission’s role in its initial proceedings as judicial in nature, but that
is far from accurate. The Commission’s main function in this proceeding
was not adjudicative; rather, it was legislative in nature. The Commission
carries broad authority for regulatory oversight of all public utilities and,
in doing so, it sets rates for HSE. “[R]ate-making is a legislative, not a
judicial function . . . .” Pub. Serv. Comm’n v. City of Indianapolis, 131 N.E.2d
308 (Ind. 1956). When HSE filed a petition with the Commission, it was
not to settle a dispute with another party. It sought permission to increase
its rates. The Commission uses its technical expertise to set rates that are
reasonable for ratepayers while also allowing a reasonable profit for the
utility, which incentivizes it to remain in business. As such, the
proceedings that the Commission held were not akin to those before a trial
court.

HSE further claims that the Commission is an unnecessary party
because, even without the Commission, there are “clearly opposing
parties advocating for competing interests.” Consol. Brief of Hamilton
Southeastern Utilities in Response to Petitions to Transfer at 19. As
explained above, while there certainly are opposing parties with
competing interests involved here, that is not always the case. Sometimes
the Commission is the only appellee. And even where other appellees
participate in an appeal, the participating parties’ interests do not
necessarily encompass the entirety of the Commission’s interest in
defending the order.

Here, two appellees opposed HSE’s appeal: the OUCC and the
Commission. The Commission’s dismissal left only the OUCC as an

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 8 of 10
appellee, but the OUCC and the Commission’s interests did not align
perfectly. While the OUCC is tasked with protecting consumers in utility
matters—an interest that overlaps with the Commission—the
Commission’s interests are much broader than those of the consumer
protection agency (and in some instances, the interests conflict with one
another). The Commission’s role “is to insure [sic] that the public utilities
provide constant, reliable, and efficient service to the citizens of Indiana.”
N. Indiana Pub. Serv. Co. v. U.S. Steel Corp., 907 N.E.2d 1012, 1015 (Ind.
2009). The OUCC even argued against portions of the Commission’s
order; specifically, the OUCC challenged the Commission’s determination
to include in HSE’s rate calculation federal and state income tax paid by
HSE’s shareholders.

The Commission’s administrative role was not adjudicative in nature.
And, at least in some cases, only the Commission can fully defend its own
orders on appeal. Accordingly, we are not persuaded by HSE’s arguments
and find that the Commission was a proper party to the appeal.

Conclusion
We reverse the Court of Appeals’ dismissal of the Commission as a
party and now hold that the Commission was a proper party to the
appeal. Because the Court of Appeals found that the Commission acted
arbitrarily in excluding SAMCO-related expenses from HSE’s rate
calculation without giving the Commission an opportunity to defend its
order, we also reverse on that issue and remand to the Court of Appeals
with instructions to permit the Commission an opportunity to brief the
issue. As for the rest of the Court of Appeals’ opinion, we summarily
affirm.

Rush, C.J., and Massa, Slaughter, and Goff, JJ., concur.

ATTORNEYS FOR APPELLANT
Randolph L. Seger
Brian W. Welch

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 9 of 10
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

Indiana Supreme Court | Case No. 18S-EX-49 | June 27, 2018 Page 10 of 10