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Amax Zinc Co. v. Illinois Commerce Com.

OPINION FILED MAY 2, 1984.

AMAX ZINC COMPANY, INC., ET AL., PLAINTIFFS-APPELLANTS,

v.

ILLINOIS COMMERCE COMMISSION ET AL., DEFENDANTS-APPELLEES. (UNION ELECTRIC COMPANY, PLAINTIFF-APPELLEE,

v.

ILLINOIS COMMERCE COMMISSION, DEFENDANT-APPELLEE).



Appeal from the Circuit Court of Madison County; the Hon. Edward C. Ferguson, Judge, presiding.

JUSTICE JONES DELIVERED THE OPINION OF THE COURT:

This is an appeal of an order of the circuit court of Madison County that affirmed two orders of the Illinois Commerce Commission establishing revised power rates charged the appellants and other customers of the system. The appellants are Amax Zinc Company, Inc., Cerro Cooper Products, a Member of the Marmon Group, Chemetco, Inc., Clark Oil and Refining Corporation, Laclede Steel Company, Monsanto Company and Owens-Illinois, Inc. All are industrial customers purchasing electric power from Union Electric Company (UE) and were intervenors before the Illinois Commerce Commission (Commission) in UE's rate revision proceeding and will be referred to as Intervenors. The rate revision proceeding was begun on May 22, 1980, when UE filed a tariff of proposed increased rates with the Commission. Pursuant to section 36 of "An Act concerning public utilities" (Ill. Rev. Stat. 1979, ch. 111 2/3, par. 36), the Commission suspended the proposed rates and conducted hearings to inquire into their reasonableness. Appellants and others were granted permission to intervene. On April 15, 1981, the Commission issued an order approving certain increases, though not as requested by UE, and directed UE to file a revised tariff consistent with its order, to become effective for service rendered on and after the day subsequent to the date of filing of the revision. That date was April 18, 1981.

The orders that were before the circuit court, and that are the subject of this appeal, were those of April 15, 1981, which granted UE a rate revision and increase, and October 14, 1981, which denied the Intervenors' applications for rehearing. The single issue presented to the circuit court, and in this appeal, is whether the two orders of the Commission constituted the approval of retroactive rates for primary service (applicable to all Intervenors except Amax) and interruptible power rates (applicable to Amax only) by implementing a 100% ratchet based upon the highest electric consumption demands made by Intervenors in the months of June through September 1980, as to primary service customers, and in 1977, as to interruptible power customers.

Essential to an understanding of the issues of the case is some acquaintance with the term "ratchet." The term "ratchet" is a metaphor, idiomatic to the utility ratemaking industry, used to describe a rate device that ties a monthly billing for "demand cost" to the customer's highest historical consumption for a given period. "A ratchet provision serves to put a floor under the maximum demand for billing purposes, and may hold the billing demand to no less than the highest demand recorded in some stated past period or some percentage thereof." P. Garfield and W. Lovejoy, Public Utility Economics 157 (1964).

According to a publication of the United States Department of Energy, A Consumer's Guide to the Economics of Electric Utility Ratemaking 124-25 (1980), the costs that an electric utility incurs are of three basic types:

"1) Energy Costs: The operating expenses incurred by a utility on behalf of an individual customer in providing that customer with a kilowatt hour (KWH) of electric energy. Energy costs vary directly with KWH usage and are primarily fuel costs.

2) Customer Costs: The capital and operating expenses incurred by the utility on behalf of an individual customer relating primarily to the number and size (usage) of customers. Customer cost does not vary significantly with the amount of energy used.

3) Demand/Capacity Cost: The capital and operating expenses incurred by a utility on behalf of an individual customer in providing sufficient capacity (a large enough generation, transmission and distribution system) to meet the maximum demand of that customer when needed."

Roughly paralleling this classification is language from section 32 of "An Act concerning public utilities" (Ill. Rev. Stat. 1979, ch. 111 2/3, par. 32) providing that as a basis of the charges made by it, a utility may classify its service "according to the amount used, the time when used, the purpose for which used, and other relevant factors."

The ratchet provision in question relates to the charge of the utility for providing sufficient electric generating capacity to meet the peak demand, or consumption rate, of an individual customer. That capacity is the element of rates described in number 3 of the Department of Energy publication set forth above. The cost to the utility for its plant, its equipment and other of its capital outlays required to be made on behalf of individual customers, such as the Intervenors here, is passed on to those customers by a rate that is based upon what the maximum need of that customer for electricity has been. That portion of the total rate is termed a demand charge. Our supreme court expressly approved a demand charge as an element of an electric rate in Antioch Milling Co. v. Public Service Co. (1954), 4 Ill.2d 200, 207, 123 N.E.2d 302, 306, as follows:

"A demand charge is designed to allocate to a utility's customers their fair portion of those fixed costs which must be incurred by the utility regardless of the amount of power which is actually supplied. It is the price which must be paid for the construction and maintenance of a plant with sufficient capacity to satisfy its customers' demands. Such a charge for the utility's readiness to serve is proper."

The October 14, 1981, order of the Commission discusses the purpose of a ratchet provision in ratemaking:

"The use of the 100% ratchet, proposed by the company [UE] for its primary service rate customers, is in fact a device which promotes conservation and the efficient use of energy. * * * In addition, ratchet provisions historically have been utilized to ensure that each customer within the class contributes a fair share of the costs incurred by the utility in providing the capacity or demand required."

The Intervenors do not attack the ratchet or its use as a component of rates, for they state in their brief:

"The purpose of a demand ratchet provision is to provide a prospective price signal to a customer and to minimize the demand for electric energy during an on-peak period when the utility's reserve margins are generally the slimmest and to encourage the demand for electric energy during the off-peak period when the utility has a sufficient generating capacity already in place. When the price signal is given prospectively through a demand ratchet, the customer can take power without regard to cost or make the choice of minimizing his electric energy costs by either reducing his on-peak demand or by increasing his off-peak demand. The result desired is a more ...


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