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Illinois Power Company v. Illinois Commerce Commission

May 09, 2003


APPELLATE COURT OF ILLINOIS Petition for the Review of an Order of the Illinois Commerce Commission. No. 00-0714

The opinion of the court was delivered by: Justice Maag


Rule 23 order filed April 1, 2003; Motion to publish granted May 9, 2003.

Illinois Power Company (Illinois Power), the petitioner, seeks the review of an order that the Illinois Commerce Commission (Commission), the respondent, issued on November 27, 2001, finding that Illinois Power was imprudent in retiring its Freeburg, Illinois, propane plant. As a result of this finding, the Commission determined that the costs that Illinois Power incurred to obtain pipeline transportation capacity of the propane plant cannot be recovered from its customers. Illinois Power appeals. We reverse.

Pursuant to the Public Utilities Act (Act) (220 ILCS 5/1-101 et seq. (West 2000)), Illinois Power is statutorily required to reconcile revenues collected under its purchased-gas adjustment tariff with the actual cost of gas supplies prudently purchased for the 12 months ended December 31, 2000 (reconciliation period). The tariff clause provides for increases or decreases of the rates or charges of a public utility such as Illinois Power based on changes in Illinois Power's cost of purchased gas. 220 ILCS 5/9-220 (West 2000). Although the tariff clauses allow for automatic changes in rates without prior Commission approval, the General Assembly requires that the Commission initiate annual hearings to determine whether the clauses reflect the "costs of fuel, gas, power, or coal transportation purchased to determine whether such purchases were prudent." 220 ILCS 5/9-220(a) (West 2000). In each proceeding, the burden of proof is on the utility to establish the prudence of its fuel, power, gas, or coal transportation purchases and costs. The standard under which the Commission assesses the prudence of a utility's gas purchases, pursuant to section 9-220 of the Act, is as follows: "Prudence is that standard of care which a reasonable person would be expected to exercise under the same circumstances encountered by utility management at the time decisions had to be made." Illinois Power Co. v. Illinois Commerce Comm'n, 245 Ill. App. 3d 367, 371, 612 N.E.2d 925, 929 (1993). When a court considers whether a judgment was prudently made, only those facts available at the time judgment was exercised can be considered. Hindsight review is impermissible. Illinois Power Co., 245 Ill. App. 3d at 371, 612 N.E.2d at 929.

In the instant case, the Commission determined, in relevant part, that the evidence showed that, for the reconciliation period, Illinois Power acted reasonably and prudently in its purchase of natural gas, except with regard to its decision to retire the Freeburg propane plant.

In Illinois Power's case before the Commission, Frank Starbody, Illinois Power's director for gas supply, testified that he is responsible for the procurement of Illinois Power's natural-gas supply and pipeline capacity, the transportation of customer-owned natural gas, and Illinois Power's storage and transmission assets. Starbody testified that in 2000, Illinois Power purchased 55.2 million MMBtu of natural gas from various producers and marketers. Illinois Power also leased transportation and storage capacity via five interstate pipelines. Starbody stated that Illinois Power began the reconciliation period with eight underground gas-storage fields. One field was retired during the reconciliation period. Starbody said that Illinois Power designs its supply portfolio so that firm natural-gas supply is sufficient to meet requirements on a peak day. For 2000, Illinois Power reserved sufficient pipeline capacity and firm winter natural-gas supply to serve, along with the gas deliverable from Illinois Power's storage fields, the gas load expected in weather conditions equivalent to the coldest in the previous 20 years. Starbody also testified that Illinois Power began the reconciliation period with one propane plant facility with a peak-day deliverability equivalent to 20,000 MMBtu of natural gas. This facility was retired in 2000. As a result, during the reconciliation period, Illinois Power used existing propane inventory to operate the propane plant prior to its retirement and did not need to acquire additional supplies of propane during the reconciliation period.

Starbody claimed that in order to continue operating the Freeburg propane plant, substantial capital expenditures would have been required. The plant had obsolete compressor controls and switchgear, the fire-protection and gas-detection equipment did not conform to current standards, and the insulation in the refrigerated sphere that holds the propane inventory required replacement. Starbody opined that regulatory requirements applicable to propane facilities could become more strict, thereby raising the concern that the substantial expenditures that would have been necessary to renovate the propane plant could prove insufficient within a few years. Starbody stated that the facility was grandfathered under earlier provisions of various codes and standards but that major upgrades to the facility, including those that were needed in 2000, could cause the facility to become subject to current versions of applicable codes and standards. This would require the propane plant to be brought into compliance with current codes and standards that would require additional capital expenditures.

Starbody was also concerned because the area around the Freeburg propane plant was experiencing significant growth in residential development. Starbody stated that the risks and consequences associated with gas leakage or fires that are inherent to propane facilities were a matter of increasing concern. Starbody claimed that the safety issues associated with the residential areas that were developing around the plant site were a significant factor in the decision to retire the plant.

Starbody also testified that operating a propane facility requires specialized training and experience that is unique to Illinois Power's system. The Freeburg facility was more complex than the types of propane plants described in the Commission staff's testimony because it included refrigeration, compression, and control equipment not present in other types of propane facilities. The need for specialized training and expertise, the infrequency with which the plant actually needed to be operated, and the resulting lack of hands-on experience for Illinois Power personnel were additional factors leading to the closing of the Freeburg facility. Starbody stated that Illinois Power had closed its four other propane plants prior to 2000, which left the Freeburg facility as the sole remaining propane plant. This provided fewer opportunities for hands-on operating experience and meant that operator training would be conducted solely to operate the Freeburg facility.

Starbody opined that even with extensive upgrades to the Freeburg facility, the reliability of the plant was a concern. The Freeburg plant was placed in service in 1971 in order to provide additional assurance of supply within Illinois Power's service area under conditions of high demand. At that time, natural-gas supplies and transportation were not readily available. Starbody stated that propane facilities are used only in extreme weather conditions and so have typically been operated only a few days each winter season. With normal maintenance, there is a concern about the ability of equipment that is relied on only sporadically to operate reliably when called upon. Starbody said that from a reliability standpoint, firm transportation and supply contracts are preferable to maintaining propane plants.

Starbody testified that the cost of the capital improvements that would have been necessary in 2000 in order to renovate the Freeburg propane plant for continued use was $1.873 million and included work on the plant's control system, motor control center, insulation, and fire protection systems and a new glycol heater, and new pumps.

Eric Lounsberry, the Commission's gas-section supervisor of the engineering department's energy division, testified that Illinois Power failed to provide sufficient documentation to support its decision to retire the Freeburg propane facility. Lounsberry stated that Illinois Power had failed to provide any information showing that it had performed an analysis necessary to make a prudent decision regarding the retirement of its propane facility. Lounsberry stated that absent such information, he was unable to determine that Illinois Power had made a prudent decision.

Lounsberry explained that a propane plant is a facility used by many gas utilities to provide peak capacity during periods of extremely cold temperatures. Propane plants generally consist of a large number of propane tanks and the associated equipment that allows for a propane and air mixture to be injected into a utility's natural-gas system. Lounsberry stated that Illinois Power had reported that its facility was installed in 1971 and that it now had obsolete refrigeration compressor controls and switchgear. Additionally, Illinois Power reported that the plant's fire-protection and gas-detection equipment did not conform to current standards and that the refrigerated sphere insulation was failing and needed to be replaced. Assuming the full operation of the plant, Illinois Power maintained a three-day supply of propane at the facility. Lounsberry stated that Illinois Power last used the Freeburg facility on December 21, 2000, for the purpose of depleting the propane inventory in order to allow for the abandonment of the facility. Lounsberry stated that although he requested that Illinois Power provide studies and analyses supporting its decision to retire the Freeburg plant, Illinois Power responded with "nothing but a list of the problems at its facility." Illinois Power reported that the cost to serve 20,000 MMBtu of firm gas transportation capacity on the Natural Gas Pipeline Company of America (NGPC), an amount equal to the daily capacity of the Freeburg propane plant, on an annual basis would be $1.273 million.

Lounsberry opined that almost all machinery can be repaired and kept in service if the owners and operators are willing to make the necessary capital improvements and perform the necessary maintenance. He believed that Illinois Power's propane plant was such a project. Lounsberry testified that Illinois Power had not provided him with the cost of repairing the propane plant to keep it in service, even though he had requested the information. Lounsberry stated that since Illinois Power had failed to provide such information, he recommended that the Commission find Illinois Power's decision to retire the Freeburg propane plant to be imprudent and that the Commission disallow $1.273 million of the costs. This amount was the figure that Illinois Power had provided to ...

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