Veolia Water Indianapolis, which manages the city’s water utility, has appealed an order issued by state utility regulators that limited a major rate increase sought by the city.

In a filing with the Indiana Court of Appeals, French-owned Veolia said it has been “adversely affected” by the June 30 emergency rate order of the Indiana Utility Regulatory Commission granting a 12.3-percent rate increase--far less than the 17.5-percent hike requested by the city’s Department of Water Works.

The city sought the emergency rate hike after a variable-rate bond financing soured, boosting the water utility’s debt obligations by about $26 million annually.

In its appeal, Veolia cites a portion of the IURC’s emergency-rate order requiring the city to hold at 2008 levels management fees paid to Veolia. The city had planned on a 5-percent increase in fees to Veolia.

According to commission records, Veolia is paid fees representing about 80 percent of the water department’s annual operation and maintenance expenses, which total $63.2 million.

Veolia also noted in its appeal that the commission ordered the city not to pay $1.7 million in additional payments owed Veolia under the management agreement, pending further review.

The IURC had previously pressed city officials as to why they had not attempted to renegotiate management fees paid to Veolia, given the water department’s financial problems.

City officials testified during the rate case that Veolia would likely argue it was not responsible for the city’s decisions to refinance its bond debt, which blew up when financial markets collapsed late last year.

In 2005, in what looked like a smart way to free up $45 million in extra cash for capital projects, the department, through the Indianapolis Bond Bank, refinanced fixed-rate bonds into variable-rate bonds with such abandon that, today, variable debt amounts to nearly 60 percent of its $845 million in outstanding bonds.

Bond swaps intended to mitigate the risk of interest-rate variations failed to backstop the risk as financial firms involved in the deal saw their credit ratings plunge.

Neither Veolia nor its attorneys could be reached for comment this morning regarding the appeal, which was filed July 30.

The city said it also intends to file for a general rate increase next year to cover costs of system upgrades and service extensions.