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09/22/94 UNITED CITIES GAS COMPANY v. ILLINOIS

September 22, 1994

UNITED CITIES GAS COMPANY, APPELLANT,
v.
ILLINOIS COMMERCE COMMISSION, APPELLEE.



McMORROW

The opinion of the court was delivered by: Mcmorrow

JUSTICE McMORROW delivered the opinion of the court:

This appeal arises from an order entered by the Illinois Commerce Commission (Commission) in a proceeding to reconcile the revenues collected by United Cities Gas Company (United Cities) in 1988 with the actual costs of gas purchased for that year. Following a hearing, the Commission ordered United Cities to refund with interest $260,553 of gas costs allocated to certain of its Illinois customers in 1988. The appellate courtaffirmed the order of the Commission, with one Justice Dissenting. 235 Ill. App. 3d 577.

Background

The Commission has authorized public gas utilities to recover the costs of gas purchases through the Commission's uniform purchased gas adjustment (PGA) clause, promulgated in 83 Ill. Adm. Code § 525 (1982). The Commission's power to authorize such recovery is derived from section 9-220 of the Public Utilities Act (Ill. Rev. Stat. 1989, ch. 111 2/3, par. 9-220). Section 9-220 provides in pertinent part:

"Notwithstanding the provisions of Section 9-201 [regarding changes in rates], the Commission may authorize the increase or decrease of rates and charges based upon changes in the cost of * * * purchased gas through the application of * * * purchased gas adjustment clauses. * * * Cost shall be based upon uniformly applied accounting principles. Annually, the Commission shall initiate public hearings to determine whether the clauses reflect actual costs of * * * gas * * * purchased to determine whether such purchases were prudent, and to reconcile any amounts collected with the actual costs of * * * gas prudently purchased. In each such proceeding, the burden of proof shall be upon the utility to establish the prudency of its cost of * * * gas purchases and costs." (Ill. Rev. Stat. 1989, ch. 111 2/3, par. 9-220.)

Expenses other than gas purchase costs are recovered in base rates, which are set in periodic rate hearings or cases. (See Ill. Rev. Stat. 1989, ch. 111 2/3, pars. 9-101 through 9-212.) Under the PGA clause, a gas utility's gas costs are first estimated and then incorporated into a formula which results in a gas cost rate. This rate, together with the base rate, combine to determine a customer's monthly gas bill.

As set forth in section 9-220 of the Act, gas utilities are required to reconcile the revenues they received in the previous year through the gas cost rate with the actual costs of gas prudently purchased for that year. Because the gas cost rate is based on estimates, and because actual gas prices can change during the year, either an undercollection or an overcollection of gas cost revenues may occur. After reconciling the revenues collected through the gas cost rate with the actual costs incurred, the utility collects any underrecovery from its customers or refunds any overrecovery to its customers. This is accomplished by adjustments to a factor (R4) in a mathematical refund adjustment formula of the PGA clause. Pursuant to section 9-220, the Commission conducts annual proceedings to determine the propriety of the utility's reconciliations of its gas cost rate revenues with actual costs incurred. This reconciliation procedure is also known as a "true-up."

In September 1989, the Commission initiated a reconciliation proceeding and directed United Cities to present evidence confirming its reconciliation of PGA revenues with the actual cost of gas prudently purchased for the calendar year 1988. Evidence adduced at the hearing included the following.

United Cities is an investor-owned retail gas distribution utility which provides natural gas service in five areas of Illinois and, as such, is regulated by the Commission. United Cities is also subject to the regulatory jurisdiction of seven other States in which it provides natural gas service. The service areas relevant to this appeal are Harrisburg, Illinois, and the cities of Franklin and Murfreesboro, Tennessee.

Texas Eastern Transmission Corporation (Texas Eastern) is United Cities' pipeline supplier for both the Harrisburg and Tennessee service areas. The rates charged by pipeline suppliers are subject to regulation by the Federal Energy Regulatory Commission (FERC) and all contracts between gas utilities and pipeline suppliers must be approved by FERC.

The long-term contract between United Cities andTexas Eastern contains a demand/commodity rate schedule under which United Cities is required to pay both a commodity charge, based upon metered volume usage, and a demand charge. The demand charge, which is the charge at issue, consists of two different fees: a contract demand charge and a storage demand charge. In exchange for the contract demand charge, Texas Eastern guaranteed that it would have available gas and the pipeline capacity to deliver that gas up to the contracted maximum daily quantity. In exchange for the storage demand charge, Texas Eastern guaranteed that it would have field or tank storage capacity and actual gas up to the contracted daily maximum quantity. These charges assure that a specified amount of gas is available for use by United Cities' customers. Both charges are fixed amounts that United Cities is required to pay, irrespective of whether it uses the contracted maximum quantity of gas. For purposes of this appeal, we refer to both fees in the singular as the demand charge.

The Texas Eastern demand charge was arrived at by projecting the anticipated maximum daily demand for gas in each of the service areas covered by the contract and then multiplying that figure by the demand rate. United Cities then made its own internal apportionment of the total amount of the demand charge to the customers in the areas served by the Texas Eastern contract proportionate to the estimated maximum peak day demand for gas in each service area. In 1988 United Cities allocated 42% of the total demand charge to the Harrisburg area and 58% to the Tennessee area. The origin of these percentages was a 1984 study of the projected peak day demand requirements for the Harrisburg and Tennessee service areas following United Cities' acquisition of the Franklin, Tennessee, service area. The study was performed for and submittedin a 1984 rate case before the Tennessee Public Service Commission (Tennessee Commission). These same allocation percentages were submitted in a rate filing before the Tennessee Commission in 1986, which was concluded in February 1987. United Cities continued to use these 1984 percentages to establish customer rates for Harrisburg from 1985 through almost all of 1989. In December 1989, in a hearing before the Tennessee Commission, United Cities revised its allocation percentages, lowering Harrisburg's percentage to approximately 28% of the total Texas Eastern demand charge.

Bobby J. Cline, a rate analyst and the sole witness for United Cities, presented United Cities' reconciliation of the revenues billed under the PGA clause with the actual gas costs incurred in 1988. Those computations showed a total underrecovery in the five Illinois service areas of$171,170.88. The amount of the underrecovery attributed to Harrisburg for 1988 was $72,090.57. This amount was reflected in the R4 factor of the PGA clause filed in 1989 and was collected through the monthly billings of Harrisburg customers from April 1, 1989, to March 31, 1990.

John Link, an accountant for the Commission's public utilities division, testified on behalf of the Commission's staff (Staff). Link agreed with the reconciliations submitted by United Cities for each of the Illinois service areas except Harrisburg. Link testified that Harrisburg's actual percentage of peak day demand in 1988 was only 28.69% as compared to the 42% projected and billed by United Cities. Link maintained that an adjustment was necessary because the allocation percentages used by United Cities in its internal apportionment of demand costs between the Harrisburg and Tennessee service areas were outdated and inaccurate. The use of these allocation percentages would have the effect of charging Illinois customers a disproportionateshare of the Texas Eastern demand charge and would result in Harrisburg customers' subsidizing United Cities' Tennessee operation for a portion of the demand charge rightfully chargeable to Tennessee customers. Illinois has a fully-tracking, zero-based uniform PGA clause which allows a gas utility to recover its gas costs no more or less than dollar-for-dollar. Accordingly, Link recommended that United Cities be required to refund to its Harrisburg customers $260,553 plus interest through the R4 factor so as to reconcile the difference between the actual Harrisburg demand and the percentage of demand charges allocated to Harrisburg by United Cities.

Link presented data obtained from United Cities which showed a substantial increase in Tennessee and a corresponding decrease in Harrisburg of customers and sales from 1985 through 1989. Link opined that the increase in Tennessee sales would have yielded sufficient additional revenues to have resulted in United Cities already having recovered from its Tennessee customers the total amount of actual costs incurred for gas purchased in 1988. However, Link testified, irrespective of what amount was recovered from Tennessee, Illinois customers should pay no more or less than gas costs prudently purchased for and properly chargeable to them.

Cline testified that unlike Illinois, Tennessee does not have a PGA cost recovery system whereby there is a reconciliation or "true-up" of gas costs and revenues. Rather, the majority of gas costs are included in the base rate. Thus, there can be no change in the Tennessee demand allocation except in a future general rate case before the Tennessee Commission. United Cities did not review the demand allocation percentages for 1988 because the company had just completed a 1986 rate case in Tennessee in 1987. Cline stated that "to get ademand allocation factor for the coming calendar year, you have to go in and prepare that" and "someone" at United Cities "evidently * * * did not see a need to revise the allocation factors." Moreover, United Cities did not file a 1987 or 1988 rate case in Tennessee. These were the reasons that the allocation set in the 1984 Tennessee rate case was not revised until the 1989 Tennessee rate filing.

Cline took the position that Staffs proposal to adjust demand charges based on historical data for the year was objectionable because demand charges are "forward-looking" by reason of the long-term Texas Eastern contract, and because the actual peak day demand could not be determined until approximately mid-January of the following year. Cline also disputed Link's allegation that an increase in sales necessarily results in an increase in operating revenues, such that United Cities would fully recover or overrecover its total demand charges from Tennessee customers. He asserted that if United Cities had recovered all of its costs through increased revenues, it would not have had to go before the Tennessee Commission for rate increases in 1986 and 1989.

Cline analogized the demand charge to an insurance premium from which the insured benefits by having the security of the insurance whether or not he collects it. Likewise, Cline opined, the Harrisburg customers benefitted from the security that a certain level (42%) of contract demand, i.e., capacity, was reserved for them. Thus, despite that the amount of the projected peak day demand may not have been consumed, Harrisburg customers received the full benefit of the 42% of the Texas Eastern demand charge. Cline acknowledged, however, that the allocation was an internal, company-generated figure, and that if one area needed more than its allocated amount of gas and another required lessgas, the company could distribute the gas as it was needed at will, rather than as the allocation percentages designated.

The Commission issued its order on October 4, 1991. An amendatory order merely correcting a term misusage was filed on October 17, 1991. The order contained the Commission's findings of fact and Conclusions. The Commission determined that the evidence did not establish that there had been an overrecovery of the total demand charge as a result of increased sales in Tennessee. However, the Commission distinguished the lack of evidence of an overrecovery from Tennessee customers from what it determined was an overcollection by United Cities of the demand charge from its Harrisburg customers. The Commission noted that data presented showed a clear shift in sales and customers from Illinois to Tennessee, a steady increase in peak day demand in Tennessee, and a corresponding decrease in peak day demand in Harrisburg from 1985 to 1989. The Commission found that this evidence constituted a change in circumstances that justified rejection of United Cities' allocation of 42% of the total demand charges to the Harrisburg service area. The Commission also found that United Cities' failure to review the allocation percentages in the 1986 Tennessee rate case demonstrated an indifference toward its Harrisburg customers, and that this indifference coupled with the shift in actual sales and customers justified a departure from the Commission's past approval of United Cities' allocations. In Conclusion, the Commission agreed with and adopted Staffs recommended adjustment in this case. The Commission's order stated, in part:

"(4) the evidence indicates that Respondent [United Cities] acted reasonably and prudently in its purchases of natural gas during calendar year 1988;

(5) for calendar year 1988, Respondent's reconciliation evidence indicates that it experienced an undercollectionof gas costs in the amount of $171,170.88; this amount was reflected in Respondent's R4 factor filed in 1989; Staffs proposed adjustment, which reflects a decrease in gas cost in the Harrisburg service area due to a revision in the Texas Eastern demand charge allocation factor, is reasonable and should be approved; Staffs proposed adjustment is necessary to prevent Respondent's customers in the Harrisburg service area from being billed for PGA revenues in excess of the cost of gas prudently purchased; Respondent should refund its overcollection of Texas Eastern demand charges in the ...


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