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Illinois-American Water Company v. Illinois Commerce Commission

June 28, 2002

ILLINOIS-AMERICAN WATER COMPANY, AS SUCCESSOR IN INTEREST TO CITIZENS UTILITIES COMPANY OF ILLINOIS, D/B/A CITIZENS WATER RESOURCES, PETITIONER-APPELLANT,
v.
ILLINOIS COMMERCE COMMISSION, RESPONDENT-APPELLEE.
NATIONAL ASSOCIATION OF WATER COMPANIES, ILLINOIS-MISSOURI CHAPTER, PETITIONER-APPELLANT,
v.
ILLINOIS COMMERCE COMMISSION, RESPONDENT-APPELLEE.



Petition for Review of an Order of the Illinois Commerce Commission. ICC Docket No. 00--0194 ICC Docket No. 00--0194

The opinion of the court was delivered by: Justice McLAREN

UNPUBLISHED

Petitioners, Illinois-American Water Company, as successor in interest to Citizens Utilities Company of Illinois, d/b/a Citizens Water Resources (Citizens), and National Association of Water Companies, Illinois-Missouri Chapter (Association), appeal a decision by respondent, Illinois Commerce Commission (the Commission), disapproving of an agreement between Citizens and a developer, Terra Cotta Company.

We affirm.

Citizens was the original petitioner in case No. 2--01--0746. On February 19, 2001, we granted the motion of Citizens to substitute Illinois-American Water Company as the petitioner in this proceeding. For reasons of simplicity and the accuracy of historical fact, we will continue to refer to the petitioner in case No. 2--01--0746 as Citizens.

The following facts are taken from the record. Citizens is a public utility that provides water and sewer service in six counties in northeastern Illinois. Terra Cotta is the owner and developer of 1,400 acres to be developed with single-family homes, town homes, and a business park in Prairie Grove. On this property, Terra Cotta built a 500,000-gallon elevated water storage tank, two wells, a well house and lift station, water and sanitary mains, and a 100,000-gallon-per-day water reclamation facility.

On February 16, 2000, Terra Cotta and Citizens entered into an agreement for the sale of Terra Cotta's water and sewer facilities. Citizens petitioned the Commission for a certificate of public convenience and necessity (certificate) to provide water and sanitary sewer services to a new development in McHenry County. The Commission granted the certificate. Citizens also requested approval of the agreement between it and Terra Cotta. The agreement between Terra Cotta and Citizens provided that Citizens would receive the water facilities for no money down and then would reimburse Terra Cotta for these facilities as new customers were added. However, regarding the sewer facilities, Citizens would receive the existing facilities for approximately $1.4 million, without any reimbursement as new customers were added. Terra Cotta also agreed to finance all future expansions of the sewage treatment plant.

Under the Commission's regulations, when water service is extended to new customers, the utility is required to provide all water supply (backbone) plants at its own cost and without contribution from developers or customers. 83 Ill. Adm. Code §600.370(a) (1996). However, if "extensive" plant additions need to be constructed before customers can be attached to the system, the utility can require advance funding from a developer. 83 Ill. Adm. Code §600.370(a) (1996). In such a case, the utility is required to refund the developer's advances over time as new customers are attached. 83 Ill. Adm. Code §600.370(a) (1996). Utilities and developers can negotiate agreements regarding the advances, but such agreements must be approved by the Commission. 83 Ill. Adm. Code §600.370(a) (1996). At the hearing before the Commission, Reed T. Scheppmann, Citizens' vice president and general manager, testified that the parties negotiated at arm's length and Terra Cotta did not object to the terms of the agreement. Scheppmann stated that, if the agreement was approved, the rates charged for sewer service to Terra Cotta customers would be lower than they would be if Citizens had to make an investment in new sewer facilities in the development.

Roy King, a utility engineer for the Commission, testified that the provision in the agreement relating to the sewer facilities was not reasonable because it did not provide for a refund to Terra Cotta for the cost of constructing the sewer facilities. King explained that the purpose of a public utility is to permit a group of investors to make an investment in a utility service, provide that service, and then recover reasonable operating expenses and a reasonable return. The regulations serve as a substitute for competition, since competition is not practical for most public utilities because of the cost of building a system. The regulations serve to insure that utilities do not amass significant assets with little or no investment. Rather, utilities should bear the cost of the facilities they use to provide service. King stated that the agreement at issue would give Citizens over $1.4 million worth of sewer facilities without Citizens' making any investment. King opined that the potential for such gain, while decreasing an investor's liability in the operation, would increase the likelihood for poor service. Yet, King acknowledged that "Citizens has consistently demonstrated that they can provide adequate, reliable and efficient service to their customers" and that Citizens' purchase of Terra Cotta's water and sewer facilities was the "least-cost method of providing service to the customers."

In rebuttal testimony, Scheppmann testified that there was no regulation requiring a refund to developers for sewer facilities. Further, a refund by Citizens to Terra Cotta customers would result in higher rates.

The Commission denied the petition seeking approval of the agreement because it did not provide for a refund to Terra Cotta for the cost of the sewer plant facilities. The Commission interpreted section 600.370(a) (which did not expressly pertain to sewer facilities) as requiring reimbursement, applicable to both water and sewer facilities. The Commission reasoned:

"[It] [h]ad no difficulty interpreting Section 600.371(a) as also pertaining to sewer supply plant [sic] to protect against the same unjust enrichment and to protect the same consumer interests as would result if refunds were not provided for water supply plant [sic]. To interpret Section 600.370(a) otherwise would permit [Citizens] or any other utility to amass sewer facilities entirely risk free, obviously frustrating at least part of the purpose for which the Section was enacted."

The Commission stated that it did not regard the findings of an unrelated 1995 Citizens' case to be controlling.

Following the Commission's decision, the National Association of Water Companies, Illinois-Missouri Chapter, sought leave to intervene. Both Citizens and the Association filed applications for a rehearing. The Commission denied these applications. Both Citizens and the ...


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