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06/16/87 the People Ex Rel. Neil F. v. the Illinois Commerce

June 16, 1987

AL., APPELLEES

v.

THE ILLINOIS COMMERCE COMMISSION ET AL., APPELLANTS



SUPREME COURT OF ILLINOIS

THE PEOPLE ex rel. NEIL F. HARTIGAN, Attorney General, et

510 N.E.2d 865, 117 Ill. 2d 120, 109 Ill. Dec. 797 1987.IL.817

Appeal from the Circuit Court of Cook County, the Hon. Richard L. Curry, Judge, presiding

APPELLATE Judges:

JUSTICE MILLER delivered the opinion of the court. GOLDENHERSH and SIMON, JJ., took no part in the consideration or decision of this case.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MILLER

In October 1985 Commonwealth Edison Company (Edison) was granted a rate increase by the Illinois Commerce Commission (the Commission). The Commission's order, with three Commissioners Dissenting, disallowed a relatively small percentage of the rate increase requested by Edison. A number of intervenors opposing the rate increase appealed the Commission's order to the circuit court of Cook County, which consolidated the intervenors' appeals. Finding that the audit relied upon by the Commission in evaluating the rate increase did not comply with section 30.1 of the Public Utilities Act (Ill. Rev. Stat., 1985 Supp., ch. 111 2/3, par. 30.1), the circuit court ordered the Commission to conduct a new rate making proceeding. The court also instructed the Commission to disallow all or part of certain expenses that Edison sought to include in its new rate base. The Commission and Edison appealed the circuit court's order to the appellate court. The intervenors, however, petitioned for leave to appeal directly to this court, pursuant to Rule 302(b) (103 Ill. 2d R. 302(b)), and we allowed the request for a direct appeal.

Edison filed a two-stage rate increase request with the Commission in October 1983. In the rate request, Edison sought to include in its rate base the costs of construction of Unit 1 of Edison's nuclear power plant near Byron, Illinois (Byron 1), which was approaching completion. Seventeen organizations and associations filed briefs with the Commission as intervenors. Following the Atomic Safety Licensing Board's denial of an operating license for Byron 1 in January 1984, the Commission appointed a committee to recommend an auditor to conduct an audit of the costs associated with the construction of Byron 1. The Commission subsequently approved the hiring of Arthur D. Little, Inc. , to conduct the audit. The Commission determined that the audit should comply with House Bill 2615 (codified as Ill. Rev. Stat., 1985 Supp., ch. 111 2/3, par. 30.1, effective January 22, 1985), which had recently passed both houses of the General Assembly and was then awaiting the Governor's signature; the Commission ordered its staff to supervise the performance of the audit.

ADL submitted its audit report to the Commission during March 1985, and the authors of the report were cross-examined at Commission hearings on the report during late April and early May 1985. Although the intervenors claimed that ADL's audit was deficient under section 30.1, the Commission's hearing officer denied intervenors' motion to suspend the hearings to improve the audit.

During July 1985, the Commission held trial-type hearings on the rate request. Both Edison and the intervenors presented the testimony of a number of experts concerning the audit and the proposed increase. On October 24, 1985, the Commission issued its order granting Edison an annual rate increase of $494.8 million; this amount reflects Edison's costs of over $2 billion incurred in the construction of Byron 1, minus $101.5 million that the Commission excluded from the rate base. The Commission excluded the $101.5 million from the utility's new rate base because the Commission found that Edison was responsible for one-half of the costs of the delay in obtaining an operating license from the Atomic Safety Licensing Board. Two Commissioners joined in a written Dissent criticizing the audit report and the majority's finding that virtually all Byron 1 costs were reasonable. A third Commissioner Dissented without opinion.

Twelve of the intervenors appealed the Commission's order to the circuit court of Cook County. The circuit court consolidated the appeals. After considering the record, the briefs, and extended oral argument, the circuit court reversed the Commission order and remanded the cause to the Commission for a new ratemaking proceeding. In a lengthy written opinion, the court found, as a matter of law, that the ADL audit report of Byron 1 had not been conducted under "generally accepted auditing standards" as required by section 30.1 of the Public Utilities Act (Ill. Rev. Stat., 1985 Supp., ch. 111 2/3, par. 30.1) and that the Commission's interpretation of the term "generally accepted auditing standards" was clearly erroneous. The court also ruled that the Commission had improperly placed the burden of proof with the intervenors to show that Edison's costs were unreasonable, rather than requiring Edison to prove that the costs were reasonable. The court declared that section 30.1, rather than allowing the exclusion of costs from rate base when the costs were proved unreasonable, prohibited the Commission from including costs in a utility's rate base until the utility established that the costs were reasonable. The court also found that the Commission's allowance of one-half of the costs related to the delay in obtaining an operating license into the rate base of Byron 1, and the allowance of 100% of the costs of the physical plant common to Byron Units 1 and 2, was contrary to the manifest weight of the evidence. The court ordered the Commission to exclude from the rate base all the costs of the licensing delay and ordered the Commission to exclude some portion of the costs of the plant common to Byron 1 and 2 from the costs of Byron 1. The court instructed the Commission to roll back the $494.8 million annual rate increase ordered by the Commission in October 1985 and to set revised rates for Edison within 30 days. The court ruled that none of the costs incurred in the construction of Byron 1 could be included in the revised rates; apparently, the revised rates were to remain in effect until the Commission considered, in further proceedings, which of Byron 1's costs could be included in Edison's rate base.

Section 30.1 of the Public Utilities Act provides in part:

"The cost of new electric utility generating plants and significant additions to electric utility generating plants shall not be included in the rate base of any utility unless such cost is reasonable. Prior to including the cost of plants or additions to utility plants in the rate base, the Commission shall conduct an audit of such costs in order to ascertain whether the cost associated with the new generating plant . . . is reasonable. If the Commission is unable to conduct such an audit, the Commission shall arrange for it to be conducted by persons independent of the utility and selected by the Commission. . . . Any such audit shall be conducted in accordance with generally accepted auditing standards and shall include but not be limited to costs associated with materials, labor, equipment, professional services and other direct and interest costs." (Ill. Rev. Stat., 1985 Supp., ch. 111 2/3, par. 30.1.)

Section 30.1 also defines "reasonable," and it provides that in determining the reasonableness of costs the Commission is to consider "the knowledge and circumstances prevailing at the time of each relevant utility decision or action."

Effective January 1, 1986, subsequent to the date of the Commission order in the case before us, Public Acts 84-617 and 84-1025 substantially revised and restructured the Public Utilities Act (Ill. Rev. Stat. 1985, ch. 111 2/3, pars. 1-101 through 11-302). The statute as amended expressly provides, however, that it does not affect actions pending at the time the amendments took effect. (Ill. Rev. Stat. 1985, ch. 111 2/3, par. 4-402.) Although section 30.1 of the former statute has been renumbered as section 9-213 of the amended act, its language has not been altered except in referring to another similarly renumbered section. For purposes of this appeal, we shall refer to the statute as section 30.1.

The Commission and Edison now suggest that section 30.1 does not apply to the present case because it became effective January 22, 1985, after the audit had begun and some evidence of construction costs had been presented. The circuit court noted the question, but found that it was not presented -- no party had raised the issue, and the parties had briefed and argued the case in that court as if section 30.1 applied.

By not contesting the applicability of section 30.1 in the circuit court, the Commission and Edison waived any challenge in this court to the application of the statute. Failure to raise an issue in the trial court waives the issue for purposes of appeal. (See, e.g., Shell Oil Co. v. Department of Revenue (1983), 95 Ill. 2d 541.) We note further that it is not unfair to apply section 30.1 to the instant proceeding, since the proceedings were conducted with section 30.1 in mind and the Commission had advised the parties and ADL that the audit was to comport with the requirements of House Bill 2615 (subsequently codified as section 30.1). We conclude that section 30.1 governs the instant case. I. Burden of Proof Under Section 30.1

Noting that intervening events caused drastic increases in Edison's 1972 estimates of the time required to complete Byron and the project's total cost, the Commission identified the principal issue in the case as "whether any part of the cost of Byron 1 should be excluded from Edison's rate base." The Commission Dissenters, however, submitted that the majority had adopted the wrong approach in setting Edison's rate base under section 30.1; they contended that, rather than excluding from the total amount submitted by Edison only those costs proved to be unreasonable, the Commission could allow costs to be included in rate base under section 30.1 only when the costs were proved to be reasonable. The circuit court agreed with the Commission Dissenters and ruled that the majority had improperly presumed the reasonableness of Edison's costs.

Edison points out that before section 30.1 was enacted, costs incurred by a utility were presumed to be reasonable (see, e.g., City of Chicago v. Illinois Commerce Com. (1985), 133 Ill. App. 3d 435, 442-43), and Edison argues that the enactment of section 30.1 did not eliminate that presumption. The Commission majority agreed with Edison that the historic presumption of reasonableness had survived the enactment of section 30.1. The majority believed that once a utility demonstrated the amounts that it had actually invested in the construction of a power plant, the investment was presumed to ...


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