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12/05/89 General Motors Corporation v. the Illinois Commerce

December 5, 1989

GENERAL MOTORS CORPORATION ET AL., PETITIONERS

v.

THE ILLINOIS COMMERCE COMMISSION ET AL., RESPONDENTS. -- THE PEOPLE EX REL. THE OFFICE OF PUBLIC COUNSEL, PETITIONER,

v.

GENERAL MOTORS CORPORATION ET



APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT

al., Respondents

547 N.E.2d 1299, 191 Ill. App. 3d 450, 138 Ill. Dec. 678 1989.IL.1879

Petition for review of order of Illinois Commerce Commission.

APPELLATE Judges:

JUSTICE KNECHT delivered the opinion of the court. GREEN, J., concurs. JUSTICE LUND, Dissenting.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE KNECHT

In recent years, there have been drastic changes in the distribution and sale of natural gas in this country. Traditionally, most local distribution companies (LDC's) -- the companies which sell natural gas at retail to consumers -- purchased their natural gas from pipeline companies, which in turn purchased natural gas from other pipeline companies or from natural gas producers. Thus, the main function of most natural gas pipeline companies was to sell natural gas to LDC's. During the period subsequent to 1978, however, many purchasers of natural gas, including LDC's, sought to purchase gas directly from producers at lower rates than those charged by the pipeline companies. An obstacle to this practice was an unwillingness on the part of the pipeline companies to transport natural gas from producers to the LDC's. The pipelines feared transportation to their LDC customers of natural gas which the customers purchased directly from producers would reduce their own sales of natural gas. Re Regulation of Natural Gas Pipeline After Partial Wellhead Decontrol (1987), 52 Fed. Reg. 30, 334, 89 Pub. Utilities Rep. 4th 312 (hereinafter Order 500).

A factor which made natural gas pipelines especially reluctant to incur any reduction in their sales of natural gas was "take or pay" clauses contained in contracts with gas producers into which the pipelines had entered during the natural gas shortages of the late 1970's and early 1980's. These clauses "obligate a pipeline (a) to take a specified quantity of gas over a specific period of time, (b) to make prepayments to the producer for the quantity of gas not so taken, and (c) to 'make up' [take] the volumes not so taken but already covered by such prepayments, also over a specific period of time." C.F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 602 (1984).

In 1985, the Federal Energy Regulatory Commission found the refusal of pipelines to transport natural gas for entities which purchased the gas from third parties was discriminatory and caused increased costs to consumers by denying them access to natural gas at the lowest reasonable prices. Therefore, FERC (1) required all pipelines performing "self-implementing transportation" to provide such transportation on a nondiscriminatory basis and thereby become "open access pipelines," (2) required pipelines which are required to become "open access pipelines" to eliminate rate structures which favor their merchant function over their transportation function, (3) required pipelines to allow their "firm sales customers" to alter the amount of gas they are contractually required to purchase by either reducing that level or converting it from firm sales to firm transportation, (4) adopted procedures designed to ease the entry of pipelines into new markets so that LDC's who had access to only one pipeline would have access to others, and (5) provided for expedited abandonment of gas subject to "reduced takes." Re Regulation of Natural Gas Producers After Partial Wellhead Decontrol (1985), 33 F.E.R.C. par. 61,007, 50 Fed. Reg. 42,408, modified (1985), 50 Fed. Reg. 52,217, modified further (1986), 51 Fed. Reg. 6,398, rehearing denied (1986), 34 F.E.R.C. par. 61,404, rehearing denied (1986), 34 F.E.R.C. par. 61,405, reconsideration denied (1986), 34 F.E.R.C. par. 61,403 (hereinafter Order 436).

In Order 500, FERC addressed a matter which it did not discuss in Order 436 -- the relief to be afforded pipelines which had burdensome take-or-pay contract obligations. FERC stated:

"t is difficult to assign blame for the pipeline industry's take-or-pay problems. In brief, no one segment of the natural gas industry or particular circumstance appears wholly responsible for the pipelines' excess inventories of gas. As a result, all segments should shoulder some of the burden of resolving the problem." (Order 500, 52 Fed. Reg. at 30,337, 89 Pub. Utilities Rep. 4th at 318-19.)

In Order 500, FERC adopted two alternative mechanisms for relief from take-or-pay contract obligations, which enabled pipelines to recover portions of their costs of "buying out" or "buying down" such contracts. Under the first alternative, pipelines may recover in their "sales commodity charges" all such costs which were "prudently incurred." Under the second alternative, pipelines which transport gas on a nondiscriminatory basis under FERC's regulations may elect to assume an equitable share (from 25% to 50%) of the costs of buying out or buying down their take-or-pay contracts and may recover an equal share of such costs through fixed charges to their customers. The remaining amounts of take-or-pay contract buy out and buy down expenses can be recovered through "a commodity surcharge or volumetric surcharge on total pipeline throughput." Order 500, 52 Fed. Reg. at 30,341, 89 Pub. Utilities Rep. 4th at 325.

On April 27, 1988, the Illinois Commerce Commission began an investigation into the manner in which Illinois LDC's may recover the take-or-pay contract buy out or buy down costs which they are required to pay to their pipelines. In an interim order issued July 20, 1988, the ICC noted pipelines are uniformly opting for the second take-or-pay cost

recovery mechanism permitted by FERC, under which they may direct bill a percentage of their take-or-pay costs to their customers. In that order the ICC concluded the doctrine of Federal preemption and the "filed rate" doctrine (see Mississippi Power & Light Co. v. Mississippi ex rel. Moore (1988), 487 U.S. 354, 101 L. Ed. 2d 322, 108 S. Ct. 2428; Nantahala Power & Light Co. v. Thornburg (1986), 476 U.S. 953, 90 L. Ed. 2d 943, 106 S. Ct. 2349) prohibit it from preventing LDC's from recovering the FERC-approved take-or-pay costs which are allocated to them. The ICC further held presentation of evidence was required concerning the questions of whether the LDC's take-or-pay costs can be recovered through the mechanism of the LDC's uniform purchased gas adjustment clauses (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 9-220) and whether the LDC's take-or-pay costs should be recovered through rates applicable to all categories of customers. The ICC also concluded any offsetting decreases in LDC expenses unrelated to take-or-pay costs could not be considered in determining the amount of such costs which LDC's can recover. Re Costs Associated with Take-or-pay Charges (Ill. Com. Comm'n 1988), 95 Pub. Utilities Rep. 4th 5.

In a further order entered on November 22, 1988, the ICC denied a request for reconsideration of its July 20, 1988, interim order. In its November 22, 1988, order, the ICC held take-or-pay charges which are direct billed to LDC's should preferably be recovered through the LDC's uniform purchased gas adjustment clauses and allocated on a "uniform volumetric basis to both sales and transportation classes." LDC's are, however, free to propose recovery vehicles for take-or-pay costs other than recovery of such costs through their uniform purchased gas adjustment clauses. Re Costs Associated with Take-or-pay Charges (Ill. Com. Comm'n 1988), 97 Pub. Utilities Rep. 4th 189, 200.

Petitioners Illinois Industrial Energy Consumers and State of Illinois Office of Public Counsel appeal the ICC's July 20, 1988, and November 22, 1988, orders. Essentially, both the IIEC and the OPC assert neither the Federal preemption doctrine nor the filed-rate doctrine supports the ICC's decision it has no choice but to allow LDC's to recover the full amount of the take-or-pay costs which they must pay to pipeline companies. They assert, rather, the ICC could conduct a prudence review of the purchasing practices of Illinois LDC's as they affect take-or-pay costs and require Illinois LDC's to absorb portions of their take-or-pay costs if deemed appropriate. Also, the IIEC maintains because of the ICC's decision regarding the applicability of the preemption and filed-rate doctrines, it improperly struck testimony concerning the sharing of take-or-pay costs between LDC's and rate payers and factors relevant to a prudence review of the past natural gas purchasing practices of the LDC's as they relate to their take-or-pay costs. Furthermore, the OPC asserts the ICC's Conclusion take-or-pay costs should normally be recovered through the mechanism of purchased gas adjustment clauses is contrary to the Public Utilities Act (Ill. Rev. Stat. 1987, ch. 111 2/3, par. 1-101 et seq.), because take-or-pay charges do not represent amounts which the LDC's pay for natural gas.

The respondents -- the ICC and several LDC's -- maintain the ICC's decision is correct in all respects. The core of the respondents' argument is the ICC properly held the Federal preemption and the filed-rate doctrines preclude it from denying LDC's full recovery of their take-or-pay costs. They further assert (1) the LDC's are obligated to pay the take-or-pay charges which have been billed to them, (2) there was nothing which they could have done to avoid those charges immediately before they were assessed, and (3) there is nothing which they can presently do to avoid payment of those charges. They assert the ICC is thus precluded from considering the prudence of the gas purchases

of the LDC's which resulted in their incurring take-or-pay obligations. They also assert the cost savings of LDC's, which resulted from their purchases of lower priced natural gas, but on the basis of which the take-or-pay charges were subsequently assessed, were passed on to the customers of the LDC's in the form of lower natural gas rates. Respondents assert, contrary to petitioners' contentions, the statements of FERC, as well as the actions of FERC with regard to recovery by pipeline companies of their take-or-pay costs, support the Conclusion State regulatory agencies may not deny LDC's the right to recover all take-or-pay costs for which they are liable. Respondents maintain even if FERC's statements did support this Conclusion, FERC has no power to define the preemptive effect of its regulations. Also, respondents argue the ICC properly concluded LDC's may recover take-or-pay costs through their uniform purchased gas adjustment clauses, since under long-standing ICC practice, charges for items which may not be related to the actual amount of gas purchased, such as minimum gas charges and demand charges, may nevertheless be recovered through uniform purchased gas adjustment clauses.

Respondents Peoples Gas, Light and Coke Company, North Shore Gas Company, and Central Illinois Public Service Company also argue the ICC's July 20, 1988, order was an appealable order. They contend since

this order was not appealed in a timely manner, we may not now consider on review the question of whether the ICC is precluded by the Federal preemption and filed-rate doctrines from denying the LDC's full recovery of their take-or-pay costs. Furthermore, respondent Northern Illinois Gas Company argues the failure of petitioners to appeal an ICC order entered December 21, 1988, allowing it to recover its take-or-pay costs in its rates, precludes petitioners from obtaining review of the ICC's July 20, 1988, and November 22, 1988, orders insofar as they

We first consider whether the ICC's interlocutory order of July 20, 1988, insofar as it addressed the applicability of the Federal preemption and filed-rate doctrines, was an appealable order. The Public Utilities Act provides in pertinent part:

"No appeal shall be allowed from any rule, regulation, order or decision of the Commission unless and until an application for a rehearing thereof shall first have been filed with and finally disposed of by the ...


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