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
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 ). )
April 3, 2002
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.
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
Towns 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, Speedways 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. See footnote
Krohn also testified that only the Towns 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 Speedways 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 Krohns 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.See footnote 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.See footnote (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 Skomps analysis actually benefited customers outside town.
Both experts were CPAs with extensive public utility experience. Each attacked the others methodology in further testimony. At the end of cross-examination, Krohn conceded that he did not challenge Skomps competence or credentials, only his approach.
After hearing all the evidence, the trial court made findings of fact, including
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.See footnote
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 petitioners 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.
Assn v. Town of Speedway, 747 N.E.2d 1132, 1145 (Ind. Ct. App. 2001).
We granted transfer. 761 N.E.2d 418 (Ind. 2001).
On appeal, we will not set aside a trial courts 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).
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.)
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 courts 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
In short, the testimony at trial amounted to a battle of the experts.
Petitioners offered only minimal evidence that Speedways rate differential was unrelated to
costs, and Speedway effectively refuted Petitioners proffered calculation.
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.See footnote
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. See footnote
Petitioners also complain that they did not receive Skomps 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.See footnote
Brattain v. Herron, 159 Ind. App. 663, 309 N.E.2d 150 (1974).
Dickson, Sullivan, Boehm, and Rucker, JJ., concur.