Legal Research AI

Farley Neighborhood Ass'n v. Town of Speedway

Court: Indiana Supreme Court
Date filed: 2002-04-03
Citations: 765 N.E.2d 1226
Copy Citations
10 Citing Cases

ATTORNEYS FOR APPELLANTS                ATTORNEYS FOR APPELLEE

Bette J. Dodd                           James M. Gutting
Todd A. Richardson                      Nicholas K. Kile
Lewis & Kappes, P.C.              Barnes & Thornburg
Indianapolis, Indiana             Indianapolis, Indiana


ATTORNEYS FOR AMICUS CURIAE       ATTORNEYS FOR AMICI CURIAE


INDIANA OFFICE OF UTILITY         INDIANA ASSOCIATION OF


CONSUMER COUNSELOR                      CITIES AND TOWNS; INDIANA

                                        MUNICIPAL LAWYERS ASSOCIATION
Anne E. Becker
Robert M. Glennon                       L. Parvin Price
Daniel M. LeVay                   J. Christopher Janak
Indiana Office of Utility         Bose McKinney & Evans LLP
  Consumer Counselor              Indianapolis, Indiana
Indianapolis, Indiana






                                   IN THE

                          SUPREME COURT OF INDIANA




FARLEY NEIGHBORHOOD ASSOCIATION,  )
THE LAUNDRY CONNECTION OF INDIANA,      )
INC., and WILLIAM and AMY TISCHER,      )
                                        ) Cause No. 49S04-0109-CV-424
      Appellants (Petitioners Below),   )   in the Supreme Court
                                        )
            v.                          ) Cause No. 49A04-0008-CV-328
                                        )   in the Court of Appeals
TOWN OF SPEEDWAY,                       )
                                        )
      Appellee (Respondent Below).      )
















                    APPEAL FROM THE MARION SUPERIOR COURT
                   The Honorable Patrick L. McCarty, Judge
                         Cause No. 49D03-0005-MI-660



                                April 3, 2002

SHEPARD, Chief Justice.

      The Speedway Town Council passed an ordinance to increase sewer  rates
nearly forty percent across the board.  In accordance with a  practice  five
decades old, it set the rate for out-of-town customers fifty percent  higher
than the in-town rate.  Some out-of-town users objected.   The  trial  court
concluded that  they  failed  to  prove  the  Speedway  Council  abused  its
discretion by perpetuating the rate differential.  We affirm.



                        Facts and Procedural History


      In 1950, several real estate  developers  asked  Speedway  to  provide
sewer service for projects they  wished  to  undertake  on  tracts  of  land
outside the Town’s boundaries.  The  Town  was  concerned  that  rate-payers
within its boundaries would end  up  paying  for  additional  treatment  and
collection facilities necessitated by the demand created by the  developers’
activities.

      The solution to this was a differential rate, and  in  1954,  Speedway
began providing service to out-of-town property at 150 percent  of  the  in-
town rate.[1]  This arrangement continued unchallenged for forty-six  years.
 Projections about demand have proven correct:  population inside  the  town
has declined slightly while population in the newly-served areas  has  grown
sixty percent.  (R. at 413,  419.)   The  Town’s  investment  in  new  sewer
facilities over the intervening decades has largely been  driven  by  demand
from outside its boundaries.  (R. at 413.)

      By the year 2000, Speedway needed a system upgrade  to  prevent  storm
water run-off from causing  the  release  of  untreated  sewage  into  Eagle
Creek.  A consulting firm recommended  an  across-the-board  rate  increase.
On April 11, 2000, Speedway notified all its sewage  works  customers  of  a
proposed forty percent increase.

      Objections  came  from  certain   out-of-town   users   (Petitioners),
including a laundromat owner whose resulting annual  sewage  bill  would  be
approximately $7,300 more than  that  of  a  comparable  business  in  town.
After the required public hearing,  Speedway’s  Town  Council   adopted  the
recommended rates over these objections.   See Ind.  Code  Ann.  §  36-9-23-
26(a) (West 2000).


      Petitioners filed written objections as required by statute,  and  the
matter was tried to a court.   See  Ind.  Code  Ann.  §  36-9-23-26.1  (West
2000).  Otto Krohn, CPA, testified on behalf of the Petitioners that a  rate
differential must be based on cost differentials; that only a  formal  cost-
of-service study prepared by a team of accountants,  lawyers  and  engineers
may adequately justify cost differentials; and that  Speedway  must  justify
its rates by obtaining such a study.[2]


      Krohn also testified that only  the  Town’s  collection  system  costs
could justify a rate differential, because the  other  costs  would  be  the
same for all customers.  Because these costs  amounted  to  less  than  five
percent of  total  requested  revenues,  Krohn  concluded,  “inherently  the
disparity of [fifty] percent appears to be unsubstantiated.”  (R.  at  303.)
He later testified that ten  percent  would  be  “a  more  appropriate  rate
disparity.”  (R. at 889.)


      On cross-examination, Krohn conceded that he was unsure what  specific
expenses comprised the collection costs figure he  cited,  which  came  from
the  report  of  Speedway’s  consultants.   He  admitted  that  the   amount
identified as collection costs likely would not include either  depreciation
or investment return on the portion of plant assets used  to  serve  out-of-
town customers.

      Speedway countered with its own expert testimony by John Skomp,  whose
consulting firm recommended the rate increase.   Skomp  testified  that  the
figure Krohn cited as collection system costs included only labor  costs  on
collection lines.  It did not include maintenance of lift stations or  power
purchased to operate them, maintenance  on  outside  lines  and  facilities,
depreciation, or return on capital.


      To  counter  Krohn’s   testimony   further,   Speedway   presented   a
“preliminary” cost-of-service analysis  that  Skomp  prepared  by  following
guidelines in the  American  Water  Works  Association  (AWWA)  Water  Rates
Manual.[3]  This analysis showed that based on the  full  cost  of  service,
out-of-town customers would pay a surcharge as high as 250  percent  of  in-
town rates.[4]  (R. at 444.)

      Krohn asserted that some costs were double-counted in the analysis, so
as to charge  out-of-town  customers  twice  for  these  costs.   Skomp  had
explained otherwise in earlier testimony.  The experts also  disagreed  over
whether certain components of the  in-town  system  charged  to  out-of-town
customers in Skomp’s analysis actually benefited customers outside town.

      Both experts were CPAs with extensive public utility experience.  Each
attacked the other’s methodology in further testimony.  At the end of cross-
examination, Krohn conceded that he did not challenge Skomp’s competence  or
credentials, only his approach.


      After hearing all the evidence, the trial court made findings of fact,
including that:
         ▪  Speedway  adopted  its  revised  rate  schedule  based  on  the
           recommendation of an outside expert consultant.
         ▪ All lift stations are out of town, so  related  maintenance  and
           operations  costs  are   fully   attributable   to   out-of-town
           customers.
         ▪ Nearly all out-of-town customers are on the opposite side of  I-
           465 and Eagle Creek from Speedway, requiring special sewer lines
           with increased maintenance costs and risks to serve the  out-of-
           towners.
         ▪ It is reasonable to charge  out-of-town  customers  for  out-of-
           town  operations,  maintenance,  depreciation,  and  return   on
           invested capital.
         ▪ According to the AWWA Rates Manual, which  offers  a  reasonable
           methodology for setting municipal sewer rates, the fifty percent
           surcharge is a reasonable rate design.[5]


      The trial court concluded:
      It is Petitioners’ burden to show that discretion  was  abused.   This
      burden is not carried merely by  claiming  that  there  are  different
      rates within town and out of  town.   It  is  not  carried  merely  by
      challenging the methodology by which the rate is chosen.  Instead,  it
      is petitioner’s burden to demonstrate that the  rate  differential  is
      not justified by variations in costs, including capital, of furnishing
      services to various locations.


(R. at 165 (citations omitted).)   The court found the proposed  rates  just
and equitable and upheld the ordinance.


      The Court  of  Appeals  reversed,  shifting  the  ultimate  burden  to
Speedway to prove that the surcharge was  reasonably  related  to  increased
costs of service and concluding that  the  fifty  percent  differential  was
“arbitrary, inequitable, and discriminatory.”  Farley Neighborhood Ass’n  v.
Town of Speedway, 747 N.E.2d 1132, 1145 (Ind. Ct. App.  2001).   We  granted
transfer.  761 N.E.2d 418 (Ind. 2001).



                             Standard of Review


      “[R]ate-making is a legislative, not a judicial function.”  Pub. Serv.
Comm’n v. City of Indianapolis,  235  Ind.  70,  81,  131  N.E.2d  308,  312
(1956).  The trial court  may  not  substitute  its  own  judgment  for  the
municipality’s discretionary authority; it may only  determine  whether  the
municipality is acting within its statutory authority.  See id.


      On appeal, we  will  not  set  aside  a  trial  court’s  findings  and
conclusions unless they are clearly erroneous.  Ind. Trial Rule  52(A).   We
disturb a judgment only when there is no evidence to  support  the  findings
or the findings do not support the judgment.  Chidester v. City  of  Hobart,
631 N.E.2d 908 (Ind. 1994).  We do not reweigh  evidence,  and  we  consider
only evidence most favorable to the trial court judgment and all  reasonable
inferences arising from that evidence.  Id. (citations omitted).



                           The Statutory Framework


      Indiana Code chapter 36-9-23 covers municipal sewage  works.   Indiana
Code Ann. § 36-9-23-25(a) (West 2000) requires municipal legislative  bodies
to establish just and equitable fees for sewage works services.

      Indiana Code Ann.  §  36-9-23-25(b)  (West  2000)  defines  “just  and
equitable fees” as those needed “to maintain the sewage works in  the  sound
physical and financial condition necessary to render adequate and  efficient
service.”  Fees must be sufficient  to  cover  all  expenses  incidental  to
operation and to provide a  sinking  fund,  adequate  working  capital,  and
adequate funds for improvements and replacements.  Id.  Section  25(b)  goes
on to say:  “Fees established after notice and hearing  under  this  chapter
are presumed to be just and equitable.”


      Indiana Code Ann. § 36-9-23-25(e) (West 2000) provides  municipalities
“reasonable discretion in adopting different schedules of  fees,  or  making
classifications in schedules of fees, based on variations in (1) the  costs,
including capital expenditures, of furnishing services  to  various  classes
of users or to various locations; or (2) the  number  of  users  in  various
locations.”

      Property owners served by sewage works may  object  to  proposed  rate
changes and challenge the rates in  court.   Indiana  Code  chapter  34-13-6
governs appeals from actions of municipalities.  Indiana Code Ann. §  34-13-
6-4(a) (West 2000) says in relevant part:  “The decision  appealed  from  is
considered prima facie correct and the burden of proof in all appeals is  on
the party appealing.”  (Emphasis added.)



                               An Unmet Burden


      These statutes we have just summarized confirm that  the  trial  court
correctly  placed  the  burden  on  Petitioners  to  prove  that  Speedway’s
proposed rate structure was not reasonably related to either  costs  or  the
number of users.  Presentation of a prima facie case does not suffice.


      Petitioners’ argument that municipalities must justify even across-the-
board rate increases in  advance  via  full-scale,  multi-disciplinary  cost
studies  ignores  the  presumptions  and  burdens   provided   by   statute.
Furthermore, this requirement would allow a  single  protester  to  force  a
municipality to incur such expense.  This scenario  is  distinctly  at  odds
with the statute granting municipalities reasonable discretion, rather  than
requiring absolute precision, in differential rate-setting.

      The question on appeal, then, is whether evidence supports  the  trial
court’s  conclusion  that  Petitioners  failed   to   meet   their   burden.
Chidester, 631 N.E.2d at 910.  Petitioners presented expert  testimony  that
only collection system costs should be  chargeable  exclusively  to  out-of-
town customers, and that such costs supported a differential of  only  about
ten percent.


      Speedway  refuted  this  testimony   with   credible   evidence   that
Petitioners’ calculation included only one  category  of  collection  system
costs, i.e., labor.  Speedway offered further rebuttal  in  the  form  of  a
more detailed calculation supporting a surcharge as great as 250 percent.


      In short, the testimony at trial amounted to a battle of the  experts.
Petitioners offered only minimal evidence that Speedway’s rate  differential
was unrelated  to  costs,  and  Speedway  effectively  refuted  Petitioners’
proffered calculation.[6]

      We therefore agree that Petitioners did  not  carry  their  burden  of
proving that Speedway abused  its  discretion  when,  with  advice  from  an
outside expert with twenty  years’  experience  in  utility  ratemaking,  it
continued a fifty percent surcharge adopted when the town  first  agreed  to
provide out-of-town service nearly half a century ago.[7]



                            Due Process Challenge


      Petitioners claim that  requiring  citizens  to  bear  the  burden  of
presenting a cost-of-service study to rebut a municipality’s rate  structure
at a town council hearing, with only ten days’ prior notice,  deprives  them
of their due process  rights  under  both  the  United  States  and  Indiana
Constitutions.  (Appellants’ Br. at 19-21.)


      This mischaracterizes the task Petitioners faced.  First, Speedway did
not argue (and we do not hold) that Petitioners  could  carry  their  burden
only  by  presenting  such  a  comprehensive  study.   Second,   Petitioners
misstate the sequence of events that  occurs  when  a  municipality  revises
sewer rates.


      As noted above, a  municipal  legislative  body  must  hold  a  public
hearing before revising sewer rates.  Ind. Code Ann. §  36-9-23-26(a)  (West
2000).  After the hearing, it adopts the rates as originally proposed or  as
modified.  Id. at § 36-9-23-26(b).   Petitioners  who  attended  the  public
hearing  may  then  file  a  written  petition  stating  their  grounds   of
objection, which triggers a trial court proceeding.  Ind. Code Ann. §  36-9-
23-26.1 (West 2000).  The rate increase is  held  in  abeyance  pending  the
trial court decision.  Id.


      Speedway does not argue that the grounds in the written  petition  are
limited to concerns expressed at the public hearing.  Petitioners’  argument
that the brief window of time between the notice of a rate  change  and  the
public hearing denied them due process is therefore without merit.[8]


      Petitioners  also  complain  that  they  did   not   receive   Skomp’s
preliminary cost-of-service  analysis  until  8:30  p.m.  the  night  before
trial.  (Appellants’ Br.  at  7;  R.  at  459.)   They  did  not  object  to
admission of the analysis or request a continuance, however,  so  any  claim
of unfair surprise is waived.[9]  See Brattain  v.  Herron,  159  Ind.  App.
663, 309 N.E.2d 150 (1974).




                                 Conclusion

      We affirm the judgment of the trial court.

Dickson, Sullivan, Boehm, and Rucker, JJ., concur.
-----------------------
[1] Before enlarging its water treatment facility and expanding its sewer
infrastructure, Speedway initially adopted an ordinance that imposed a
twenty percent surcharge.  (R. at 395-96.)  After this work was completed
but before any out-of-town customers were connected, the surcharge was
raised to fifty percent.  (Id.)
[2] On appeal Petitioners take this argument even further:  “The only
rational reading of the [municipal sewage works] statute is that the
legislative body must make a finding and have a reasonable basis for
imposing differing rates at the time it adopts the ordinance.”
(Appellants’ Br. at 14 (emphasis in original).)  As Speedway points out,
Petitioners waived any argument that information prepared after the public
hearing but prior to trial should be excluded by failing to object to this
information at trial.  (Appellee’s Br. at 36; R. at 445.)
[3] Krohn testified that water rates methodology is inappropriate when
evaluating sewer rates, (R. at 860-61, 887), but Skomp countered that the
manual has “generally been adopted, also, for doing sewer rates . . . sewer
cost of service studies,” and that he had often used it in sewer
applications.  (R. at 421.)
[4] Petitioners challenged the inclusion of a charge for return on plant
that may have been either contributed or funded by revenue bonds for which
the utility users had already paid.  (Appellants’ Br. at 24.)  However,
they have cited no authority for the proposition that a municipality that
is not subject to Indiana Utility Regulatory Commission rules must exclude
such charges in setting rates.  In any event, Krohn conceded that even
without return on plant taken into account, Skomp’s analysis would still
indicate a 100 percent rate differential.  (R. at 894.)
[5] Each of these findings is supported by testimony in the record.  (See,
respectively, R. at 277, 295, 297; 435-37, 414; 435-37; 439; 421, 445.)
[6] The trial court also reasonably took into  account  the  fact  that  the
fifty  percent  differential  was  established  as  part  of  the   original
agreement to connect out-of-town customers, and has been maintained  without
objection ever since.  (R. at 166.)
[7] Neither have Petitioners proven that Speedway’s rate increase violates
Indiana’s Home Rule Act, Ind. Code Ann. § 36-1-3-8(a)(6) (West 2000), which
withholds from municipalities “[t]he power to impose a service charge or
user fee greater than that reasonably related to reasonable and just rates
and charges for services.”
[8] Petitioners cite Foltz v.  City  of  Indianapolis,  234  Ind.  656,  130
N.E.2d 650 (1955), for the proposition that placing the burden  on  them  to
present a cost-of-service study to challenge the proposed rate structure  is
a denial of due process.  Again, they are assuming  a  requirement  that  is
not  established.   Furthermore,  nothing  in  Foltz,  which  involved   the
condemnation of private property to create  additional  off-street  parking,
supports the argument that  due  process  requires  placing  the  burden  on
municipalities to prove sewage rates reasonable.  See id.
[9] Petitioners also present arguments about the bond they posted against a
potential award of costs and damages arising from their rate challenge.
See Ind. Code Ann. § 36-9-23-26.1(c) (West 2000).  Speedway has withdrawn
its objections to release of the bond.  (Appellee’s Br. at 44; Supp. R. at
4-5.)  Petitioners’ challenge to the bond requirement is therefore moot and
we do not address its merits.