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04/20/95 CITIZENS UTILITY BOARD v. ILLINOIS

April 20, 1995

THE CITIZENS UTILITY BOARD, APPELLANT,
v.
THE ILLINOIS COMMERCE COMMISSION ET AL., APPELLEES.



The Honorable Justice Miller delivered the opinion of the court: Justice Harrison, dissenting: Justice Freeman joins in this dissent.

The opinion of the court was delivered by: Miller

JUSTICE MILLER delivered the opinion of the court:

Citizens Utility Board (CUB) appeals from an order of the appellate court, affirming an order of the Illinois Commerce Commission (Commission) in an industrywide proceeding the Commission initiated on its own motion. The order appealed from addressed the ratemaking treatment of expenses Illinois gas and electric utilities will be liable for under existing Federal and State environmental law, particularly the Comprehensive Environmental Response, Compensation, and liability Act (CERCLA), (42 U.S.C. § 9601 et seq. (1988)) and similar State environmental legislation (Ill. Rev. Stat. 1991, ch. 111 1/2, par. 1022.2 et seq.).

The costs at issue have been or will be incurred to remediate environmental damage, specifically coal-tar residue found at former manufactured gas plant sites. Following lengthy hearings on the nature and treatment of the expenses, the Commission found that Illinois utilities have prudently operated manufactured gas plants (MGP) plants. The Commission also held that utilities could recover the cost of the statutorily mandated coal-tar cleanup expenses from ratepayers. The Commission ruled that the preferable recovery method was by means of a rate mechanism known as a rider. The Commission also ordered utilities to amortize coal-tar cleanup costs over five years, but did not allow utilities to recover carrying charges on the unamortized portion of the costs. Several intervenors in the industrywide coal-tar case, including CUB, and most of the utilities, petitioned the Commission for rehearing. After the Commission denied all petitions for rehearing, the utilities filed petitions for review in various appellate districts. CUB and the Office of Public Counsel (OPC) also filed an appeal in the Appellate Court, Fourth District. We denied CUB/OPC's motion for a supervisory order to consolidate the appeals in the Fourth District, but ordered all appeals transferred to the Third District. The appellate court confirmed the Commission's order, with one justice dissenting (255 Ill. App. 3d 876). It is from this order that CUB appeals and the utilities seek cross-relief.

BACKGROUND

In the late 1800s and early 1900s, many MGPs operated in Illinois to produce gas for Illinois utility customers. Depending on the type of operation, the manufactured gas process produced a variety of waste by-products, including coal tar. In many cases the coal tar was stored in underground tanks at the MGP site. By the 1950s, the MGP process became obsolete, and MGP operations ceased.

In the 1960s and 1970s, Federal and State governments enacted legislation and established environmental protection agencies (see, e.g., 42 U.S.C. § 7401 et seq. (1970) (Clean Air Act); 42 U.S.C. § 6901 (1965) (Solid Waste Disposal Act); 33 U.S.C. § 1251 et seq. (1976) (Water Pollution Control Act)) to address environmental concerns. Following passage of the Resource Conservation and Recovery Act (42 U.S.C. § 601 et seq. (1988)) and CERCLA (42 U.S.C. § 9601 et seq. (1988)), the Federal government accelerated the campaign to clean up hazardous wastes.

CERCLA mandates that responsible parties remediate contaminated sites, and potential liability is broad. (42 U.S.C. § 9601 et seq. (1988).) CERCLA imposes liability on current or past owners or operators of a site from which there has been or is a substantial threat of a release of a hazardous substance. Parties who generate wastes that come to be present at a particular site may also be held responsible. (42 U.S.C. § 9607 (1988).) Illinois has enacted legislation imposing similar liability. See Ill. Rev. Stat. 1991, ch. 111 1/2, par. 1022.2(f) et seq.

Under environmental statutes, gas and electric utilities face potential liability for site cleanup, even where MGP plants were operated with the attendant care and proper procedures of the day. A utility's liability may be based on operation of the MGP by a predecessor utility, ownership of land where a MGP plant operated, or prior operation of a MGP plant. Under Federal and State statute, a utility may be liable for coal-tar cleanup even if the utility no longer owns the MGP site or never operated the plant at the site.

In cooperation with the Illinois Environmental Protection Agency (Agency), utilities began analyzing the extent and cost of MGP site remediation. Evidence suggests that the scope of the problem and the associated cleanup cost each utility will face varies.

As the coal-tar remediation problem became evident, three Illinois utilities sought recovery for expenses associated with coal-tar cleanup through the ratemaking process. Central Illinois Public Service Co. (June 12, 1991), Ill. Commerce Comm'n Rep. , ICC No. 90-0072 (order on rehearing); Central Illinois Light Co. (August 2, 1991), Ill. Commerce Comm'n Rep. , ICC No. 90-0127 (order on rehearing); North Shore Gas Co. (November 8, 1991), Ill. Commerce Comm'n Rep. , ICC No. 91-0010.

While the Central Illinois Public Service, Central Illinois Light, and North Shore cases were pending, the Commission initiated a generic proceeding to examine coal- tar cleanup issues common to Illinois utilities. The purposes of the generic proceeding were to determine whether utility operation and retirement of MGPs had been prudent; whether prudent cleanup expenditures should be recovered from ratepayers; and, if any portion of the expenses were recoverable, what means should be employed to recoup those costs. The generic proceeding did not evaluate individual companies' cleanup expenditures, but did determine as a preliminary matter how to allocate costs for the cleanup between utilities and ratepayers and how these costs were to be recovered.

Prior to the order in the generic proceeding, the Commission reached conclusions in the company-specific cases. (See Central Illinois Public Service Co., Ill Commerce Comm'n Rep. , ICC No. 90-0072; Central Illinois Light Co., Ill. Commerce Comm'n Rep. , ICC No. 90-0127; North Shore Gas Co., Ill. Commerce Comm'n Rep. , ICC No. 91-0010.) In each of those cases the Commission found that the remediation costs associated with coal-tar cleanup were completely recoverable from ratepayers. Central Illinois light Company and North Shore Gas Company were allowed to recover expenses by means of a rider, and Central Illinois Power Company was allowed to include the deferred balance of remediation costs in its rate base.

On September 30, 1992, the Commission issued an order in the generic case. As it had in two of the company-specific cases, the Commission again allowed cost recovery from ratepayers by means of a rider. However, in contrast to the complete recovery allowed in the earlier cases, the Commission concluded in the generic case that the recovery of remediation costs should be amortized over a period of five years. The Commission also ordered that the utilities should not be allowed to recover carrying costs on the unrecovered balance of the expenses.

The Commission denied all parties' petitions for rehearing, and the appellate court confirmed the Commission's order. (255 Ill. App. 3d 876.) The appellate court concluded that the evidence was sufficient to support the Commission's finding that utilities in general had prudently operated and decommissioned MGP plants. The appellate court also found that, given the nature and circumstances of coal-tar remediation expenses, the Commission did not abuse its discretion in holding that a rider is the preferable recovery mechanism. The final issue before the appellate court concerned sharing of the cost of the cleanup between shareholders and ratepayers, which the Commission achieved by denying the utilities recovery of carrying charges during the five-year amortization period. The appellate court held that the Commission's order requiring amortization without recovery of carrying charges was not in error. The appellate court cited the uniqueness of the expenses in question, and the need for the Commission to have some flexibility in fashioning a solution. One justice dissented, on the basis that current customers should not be charged for remediating past practices.

In this appeal, CUB contends that coal-tar remediation costs are not recoverable from current ratepayers. If they are recoverable, CUB argues that the Commission may not use a rider for that purpose. Seeking cross-relief, the utilities cross-challenge the portion of the Commission's order that requires the utilities to amortize coal-tar cleanup costs and denies recovery of interest on the unrecovered portion of the expenses. This appeal involves the Commission's order in the generic coal-tar order, but not the orders in the company-specific cases.

STANDARD OF REVIEW

The Public Utilities Act (Act) (220 ILCS 5/1-101 et seq. (West 1992)) defines the Commission's powers and duties in setting the rates a public utility may charge its customers. Because the Commission is an administrative agency, we will reverse its orders only if the Commission's findings are not supported by substantial evidence based on the record; the Commission acted outside the scope of its statutory authority; the Commission issued findings in violation of the State or Federal Constitution or law; or the proceedings or the manner in which the Commission reached its findings violates the State or Federal Constitution or laws, to the prejudice of the appellant. (220 ILCS 5/10-201(e)(iv)(A) through (e)(iv)(D) (West 1992)); see also United Cities Gas Co. v. Illinois Commerce Comm'n (1994), 163 Ill. 2d 1, 205 Ill. Dec. 428, 643 N.E.2d 719.) While the Commission's interpretation of statutory standards is entitled to deference ( United Cities Gas Co. v. Illinois Commerce Comm'n (1994), 163 Ill. 2d 1, 205 Ill. Dec. 428, 643 N.E.2d 719), we are not bound by the Commission's interpretation of law ( People ex rel. Hartigan v. Illinois Commerce Comm'n (1992), 148 Ill. 2d 348, 367, 170 Ill. Dec. 386, 592 N.E.2d 1066).

I. RECOVERY OF CLEANUP EXPENSES

A public utility is entitled to recover in its rates certain operating costs. ( Citizens Utilities Co. v. Illinois Commerce Comm'n (1988), 124 Ill. 2d 195, 200-01, 124 Ill. Dec. 529, 529 N.E.2d 510.) In setting rates, the Commission must determine that the rates accurately reflect the cost of service delivery and must allow the utility to recover costs prudently and reasonably incurred. (220 ILCS 5/1-102(a)(iv) (West 1992).) In the industrywide coal-tar case, the Commission found that the utilities had operated and decommissioned MGP sites prudently, and CUB does not contest this determination. The reasonableness of any aspect of the total cleanup expense for any specific utility or site is also not at issue in this appeal.

The first question we examine is whether, and to what extent, coal-tar remediation expenses are recoverable from ratepayers. CUB contends that ratepayers are not obligated to bear any coal-tar cleanup expense. CUB relies upon Illinois Bell Telephone Co. v. Illinois Commerce Comm'n (1973), 55 Ill. 2d 461, 303 N.E.2d 364, to support its argument that operating costs are recoverable from ratepayers only if the utility demonstrates that the expense provides a direct benefit to customers or to the services supplied to customers. In Illinois Bell, this court addresseda utility's ability to recover certain operating expenses. The Illinois Bell court held that licensing fees paid to a parent company could not be recovered from ratepayers absent a showing that the expense directly benefits the ratepayers or the services the utility renders. Illinois Bell, 55 Ill. 2d at 483.

Citing the holding in Illinois Bell, CUB contends that because the utilities have not proven that coal-tar cleanup costs provide a direct benefit to current utility customers, the cleanup costs are not recoverable. CUB's argument that ratepayers should not pay for any coal-tar remediation costs is also based on the Commission's finding that "any benefit ratepayers ...


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