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May 13, 1994


Appeal from the Order of the Illinois Commerce Commission. Docket No. 92-0176

Released for Publication June 15, 1994.


The opinion of the court was delivered by: PECCARELLI

JUSTICE PECCARELLI delivered the opinion of the court:

Metro Utility Company (Metro), a public utility under the PublicUtilities Act (Utilities Act) (220 ILCS 5/1-101 et seq. (West 1992)), appeals from two orders issued by the Illinois Commerce Commission (Commission). The orders granted Metro smaller increases in its utility rates than Metro had sought. Metro contends that the Commission erred when it: (1) determined to exclude certain items from Metro's test year expenses and rate base, and (2) altered Metro's capital structure by substituting a lower interest rate for a loan. Chickasaw Homeowners Association (CHA), an intervenor, submitted an answering brief in addition to the Commission's brief.

Metro provides water and sewer services to approximately 5,000 customers in six counties in northeastern Illinois. On April 16, 1992, Metro filed proposed revised tariff sheets with the Commission seeking a general increase in water and sewer service rates designed to produce approximately $1,025,000 in increased annual revenues. Metro calculated that the increased rates would produce an annual increase in water revenues of approximately $350,000, and an annual increase in sewer revenues of approximately $675,000, increases of approximately 32% and 87% respectively. Metro had not sought Commission approval for a rate increase since 1984. Metro selected the 1990 calendar year as its historic test year.

The Commission conducted hearings on the matter. The hearings began on June 17, 1992, and took place periodically until December 1, 1992. During the hearing process, Commission staff (Staff) proposed numerous adjustments to Metro's test year levels of expenses and rate base. CHA participated in the hearings and primarily addressed quality of service issues which are not part of this appeal.

After some give and take between Metro and Staff, Metro reduced its rate increase request to a level which would have resulted in increased aggregate revenues of approximately $725,000. Staff's final rate increase recommendations would have resulted in an aggregate revenue increase of approximately $340,000.

On March 10, 1993, the Commission issued an order on the matter, and on April 7, 1993, the Commission issued an amendatory order. The amendatory order corrected certain mathematical errors in the schedules attached to the first order. The narrative text of both orders (the ratemaking orders) are identical. The ratemaking orders granted Metro rate increases which would result in annual aggregate increases in revenues of approximately $402,000. Metro contends that the Commission erred when it adopted three Staff adjustments to Metro's test year level of expenses and rate base and when it determined that an interest rate on a Metro loan should be lowered. Metro maintains that these adjustments to its proposed rateincreases resulted in lower projected revenues of approximately $323,000.

Metro filed a timely application for a rehearing on these matters. The Commission denied Metro's application for a rehearing. This appeal followed.

Our supreme court recently set out the principles governing the role of the Commission and the standards for reviewing courts in administrative ratemaking proceedings. The court stated:

"The Commission is the administrative agency responsible for setting rates that public utilities may charge their customers. (Ill. Rev. Stat. 1985, ch. 111 2/3, pars. 9-102 through 9-202; Hartigan I, 117 Ill. 2d at 142.) The Commission is the fact-finding body in the ratemaking process. ( Hartigan I, 117 Ill. 2d at 142.) It is governed by the Public Utilities Act (Act) (Ill. Rev. Stat. 1985, ch. 111 2/3, par. 1-101 et seq. [now 220 ILCS 5/1-101 et seq. (West 1992)]). The Commission's powers are limited to those granted by the legislature in the Act. Business & Professional People I, 136 Ill. 2d at 201.

Because the Commission is an administrative agency, judicial review of its orders is limited. ( Business & Professional People I, 136 Ill. 2d at 204.) Although the Commission is not required to make findings regarding every step, its findings of fact must be sufficient to allow for informed judicial review and will be affirmed if they are based on substantial evidence in the record. (See Ill. Rev. Stat. 1985, ch. 111 2/3, pars. 10-201(e)(iii) through (e)(iv); Yowell v. Cleveland, Cincinnati, Chicago & St. Louis Ry. Co. (1935), 360 Ill. 272, 275-76, 195 N.E. 667.) The Commission's findings of fact are prima facie correct and will not be overturned by a reviewing court unless they are against the manifest weight of the evidence, beyond the Commission's statutory authority, or violative of constitutional rights. ( Citizens Utilities Co. v. Illinois Commerce Comm'n (1988), 124 Ill. 2d 195, 206, 124 Ill. Dec. 529, 529 N.E.2d 510; Independent Voters v. Illinois Commerce Comm'n (1987), 117 Ill. 2d 90, 95, 109 Ill. Dec. 782, 510 N.E.2d 850.) Moreover, the burden of proof is on the party appealing the Commission's order. Ill. Rev. Stat. 1985, ch. 111 2/3, par. 10-201(d).

The Commission's interpretation of a question of law, however, is not binding on a reviewing court. ( Business & Professional People I, 135 Ill. 2d at 204.) Upon review of a Commission order, the court may, in whole or in part, reverse and set aside the order, affirm the order, or remand the cause to the Commission for further proceedings. ( Hartigan I, 117 Ill. 2d at 142.) Although the reviewing court cannot direct the Commission to take a specific action ( Hartigan I, 117 Ill. 2d at 142) or judicially set utility rates ( Hartigan I, 117 Ill. 2d at 142), the court may suspend rates whichit has found to be illegal (Ill. Rev. Stat. 1985, ch. 111 2/3, par. 10-20(a))." ( People ex rel. Hartigan v. Illinois Commerce Comm'n (1992), 148 Ill. 2d 348, 366-67, 170 Ill. Dec. 386, 592 N.E.2d 1066.)

We will apply these principles to each of Metro's contentions of error.

Metro first contends that the Commission erred when it made a determination in the ratemaking orders to exclude from Metro's test year expenses all heavy maintenance and construction expenses incurred by Metro for work performed by a Metro affiliate, Midwest Construction Company (Midwest). Metro asserts that the exclusion of these expenses resulted in a reduction in Metro's contractual service expenses for the test year in the amount of $199,349, and a denial of Metro's right to recover, through prospective rates based on the test year expenses, such normal and recurring expenses in the future.

The ratemaking orders explained the Commission's determination that it would not recognize test year expenses that originated from unapproved contracts between Metro and its affiliate, Midwest. Metro admits that the test year expenses in question arose from contracts for which it had not obtained prior Commission approval as required by the Utilities Act. Nevertheless, Metro maintains that the Commission erred when it decided to exclude the expenses.

Metro first argues that collateral estoppel precluded the Commission from reviewing the expenses arising from the contracts in question because the propriety of the contracts was adjudicated by the Commission in a prior order (Docket No. 90-0026), and a related stipulation and agreement. Docket No. 90-0026 concerned a citation order issued by the Commission on January 18, 1990, which required Metro to show cause why the Commission should not impose penalties on Metro for alleged violations of the Utilities Act, including violations related to the provision of heavy maintenance and construction services to Metro by Midwest. The stipulation and agreement which was approved by the Commission in conjunction with Docket No. 90-0026 stated that its terms were the "final Disposition of all the matters raised in this proceeding." The Docket No. 90-0026 order dated February 6, 1991, dismissed the January 18, 1990, citation of Metro with prejudice.

In the ratemaking orders, the Commission directly addressed the preclusion issue. The Commission determined that Docket No. 90-0026 did not preclude it from considering whether Metro's failure to obtain prior approval for the contracts in question impacted the rate case. The Commission stated:

"The dismissal of Docket 90-0026 has no impact on this rate case. Docket 90-0026 was a citation proceeding wherein Metro was required to show cause why the Commission should notimpose a civil penalty on Metro. That docket, by its very nature, focused on Metro's activities prior to the Docket's inception. Neither the Order nor the stipulation stated that Metro no longer had to seek approval of the heavy maintenance and construction contract. Rather, Metro was no ...

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