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08/25/95 CITIZENS UTILITY BOARD AND PEOPLE COOK

August 25, 1995

CITIZENS UTILITY BOARD AND PEOPLE OF COOK COUNTY EX REL. JACK O'MALLEY, PETITIONERS-APPELLANTS,
v.
ILLINOIS COMMERCE COMMISSION AND COMMONWEALTH EDISON COMPANY, RESPONDENTS-APPELLEES.



APPEAL FROM THE ILLINOIS COMMERCE COMMISSION. I.C.C. No. 93-425.

As Modified on Denial of Rehearing October 6, 1995. Rehearing Denied October 6, 1995. Released for Publication October 13, 1995. Petition for Leave to Appeal Denied January 31, 1996.

The Honorable Justice T. O'brien delivered the opinion of the court: Cousins, P.j., and McNulty, J., concur.

The opinion of the court was delivered by: O'brien

MODIFIED UPON DENIAL OF REHEARING

The Honorable Justice T. O'BRIEN delivered the opinion of the court:

Petitioners, Citizens Utility Board (CUB) and the People of Cook County (Cook County), appeal from an order of the Illinois Commerce Commission (Commission) approving a tariff filed by Commonwealth Edison (Edison). Petitioners contend inter alia that the tariff, commonly referred to as Rate CS, fails to set forth a schedule of rates, charges or contracts and therefore violates the publication requirements of the Illinois Public Utilities Act. (220 ILCS 5/9-102 (West 1992).) They further argue that, as a result, the tariffcontravenes the Act's prohibition against (i) changing rates without 45 days' prior notice to the Commission and the public (220 ILCS 5/9-201 (West 1992)); (ii) charging rates different from the published rates (220 ILCS 5/9-240 (West 1992)); and (iii) providing services at less than the published rates. (220 ILCS 5/9-243 (West 1992).) We agree and reverse.

BACKGROUND *fn1

On October 15, 1993, Edison filed with the Commission a proposed "load retention" tariff designated as Rate CS Contract Service, Ill. C.C. No. 4, Original Sheet No. 55.50. The purpose of the tariff, as with load retention tariffs generally, was to maintain existing "load" by inducing customers to remain with Edison rather than utilize an alternative source of energy. Under the terms of the tariff, Edison would achieve load retention by offering discounted rates to a limited number of commercial and industrial users vis-a-vis negotiated contracts.

Specifically, Rate CS applied only to those non-residential customers who were currently taking service under Rate 6L, Large General Service, and who could otherwise engage in uneconomic bypass. *fn2 The record indicates that there were approximately 1700 Rate 6L customers at the time Edison filed its proposed tariff with the Commission. In order to qualify for Rate CS, these customers would have to file a written application with Edison as well as an affidavit stating the customer's intent to bypass Edison's system. They would also have to provide Edison with evidence verifying (i) the receipt of competitive bids from other suppliers of electricity, (ii) the necessary investment on the part of the customer in order to accomplish the bypass, and (iii) the ability to actually engage in the bypass.

Rate CS further provided that Edison could enter into no more than 25 contracts at any given time, each limited to ten-years in duration. In addition, Edison retained sole discretion in determining whether a customer would have engaged in a bypass absent the negotiated rate. The determination of which customers would be awarded contracts under the proposed tariff likewise rested exclusively with Edison.

With respect to specific rates and charges, the tariff merely indicated that revenues from the discounted rate could not be less than the incremental cost of providing service to the customer, thereby ensuring a positive contribution to the utility's fixed costs. *fn3 The actual charges for service under Rate CS would be contained in the customer contract. Edison would then submit each contract - and the "work papers deriving the charges under the contract" - to the Commission Staff for its "review." The tariff itself, however, did not contemplate further Commission approval of each separate contract. Rather, Edison would only file each contract with the Commission "for informational purposes."

Finally, and most important, the Commission would automatically treat both the contract and the supporting work papers on a proprietary basis regardless of content. Thus, any rates or charges set forth in the contract, and the information used in determining those rates or charges, would not be published or open to public inspection.

On November 23, 1993, the Commission suspended the proposed tariff prior to its effective date in order to conduct an investigation into whether its terms were "just and reasonable." (220 ILCS 5/9-201(c) (West 1992).) On March 9, 1994, the Commission continued the suspension a second time up to and including September 13, 1994. During that period, a hearing was held in which CUB and Cook County were granted leave to intervene. The hearing officer also granted motions to intervene on behalf of the following parties: Attorney General of the State of Illinois; Central Illinois Light Co.; City of Chicago; Commission Staff; Duraco Products, Inc.; Illinois Industrial Energy Consumers; Illinois Power Co.; Midwest Cogeneration Association, Inc.; Northern Illinois Gas Co.; and Peoples Gas, Light and Coke Co. and North Shore Gas Co. *fn4

At the hearing, Edison presented the testimony of Arlene Juracek, Edison's Assistant Vice President, who testified as to the background and rationale of the proposed tariff. *fn5 Juracek claimed that developers of cogeneration projects and other independent cogeneration facilities posed a serious threat of competition to Edison's service. In particular, she pointed out that approximately 50 former Rate 6L customers had replaced Edison service with some form of their own cogeneration.

Juracek also addressed Edison's methodology in determining the rates to be charged under the proposed tariff. As previously noted, Rate CS merely indicated that "revenues from service to the customer under such contract ... shall be greater than the incremental costs to serve such customer, ensuring a positive contribution to fixed costs." Juracek explained that "the costs we are proposing to analyze are the variable or out of pocket costs of serving the load of Rate CS customers. Such costs would be the short run marginal costs of service plus any necessary out of pocket costs for additional capacity resources which may be necessary to serve the load." *fn6 In short, "revenues from Rate CS customers should be sufficient to recover these out of pocket costs, and make some contribution towards the recovery of fixed costs."

In the final analysis, Juracek opined that Rate CS, if approved, would curb the number of large customers leaving the system. This, in turn, would benefit Edison's remaining customers who would otherwise have to bear the burdens associated with the defection of a large user of electricity. *fn7

Paul R. Werther, Edison's Energy Services Manager, testified as to how Edison would evaluate the applications for service under Rate CS. Werther explained that Edison personnel would review the applications to determine which customers could in fact bypass the system. Edison would then negotiate with these customers to securethe best possible rate pursuant to Rate CS. Once the parties reached an agreement, both the contract (including the rate or rates to be charged) and the supporting work papers would be filed with the Commission on a confidential basis. This would allow Edison to negotiate the highest possible rate with each customer without having to divulge the prices charged other customers. It would also prevent Edison's competitors from gaining a unfair advantage from the unnecessary disclosure of service and pricing information.

Dennis L. Sweatman, Director for the Economic Development Program, appeared on behalf of the Commission Staff. Sweatman indicated that Rate CS is similar in form and substance to numerous other load retention tariffs previously approved by the Commission. *fn8 Consistent with those other tariffs, Sweatman recommended that Edison submit additional information to the Commission Staff for its review, including a detailed breakdown of the demand and energy charges in the proposed contract as well as calculations demonstrating the amount by which the rates under the proposed contract will be discounted from standard rates.

George R. Edgar, Executive Director of Wisconsin Energy Conservation Corporation, testified on behalf of the City of Chicago. Contrary to Sweatman, Edgar maintained that Rate CS was more sweeping than previous load retention tariffs approved by the Commission and represented a "significant departure from traditional regulation." Edgar pointed out that several short term and long term rate issues still needed to be addressed. For example, he noted that potential Rate CS customers will have even more bypass options in the future as the alternative energy industry continues to develop. If these bypass options are exercised, then captive ratepayers will have to bear the burden of having large customers leave the system which, by then, will have already been equipped to handle new capacity. In other words, Rate CS would simply defer until tomorrow that which it is designed to prevent today; namely, the loss of a large consumer of electricity.

As a remedy to these shortcomings, Edgar offered a number of recommendations to improve Rate CS. First, he suggested reducing the length of the contracts from ten-years to five-years. As he explained, "the ten-year term proposed by Edison is beyond the forecast date, based on current projections, when Edison would need to commit to new intermediate power capacity." Permitting Edison to contract for service beyond the date in which it must commit to new capacitywould, in his opinion, simply increase the risk of repeating the process of discounting rates. As a result, captive ratepayers would be forced to confront the same dilemma they now face, i.e., the loss of a large consumer of electricity, except that more fixed costs will be at risk.

Edgar also cautioned the Commission to be mindful of "the potential changes in the regulatory and market environments that may occur in the industry in the next five years." He warned that "these changes could radically change the nature of how business will be done, including the role of regulation. The likely volatility of the industry makes shorter contracts ...


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