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The People Ex Rel. Lisa Madigan v. Illinois Commerce Commission; North

September 30, 2011

THE PEOPLE EX REL. LISA MADIGAN,
PETITIONER,
v.
ILLINOIS COMMERCE COMMISSION; NORTH SHORE GAS COMPANY, PEOPLES GAS LIGHT & COKE COMPANY; VANGUARD ENERGY SERVICES, LLC; PRAIRIE POINT ENERGY, LLC D/B/A NICOR ADVANCED ENERGY LLC; UNITED WORKERS UNION OF AMERICA, AFL-CIO, LOCAL) NO. 18007; CONSTELLATION NEW ENERGY, INC., GAS DIVISION; CITIZENS UTILITY BOARD; THE CITY OF CHICAGO; AND RETAIL GAS SUPPLIERS, RESPONDENTS.



On Direct Review of Attorney General of the State of Orders of the Illinois, Illinois Commerce Commission Docket Nos. 09-0166 and 09-0167

The opinion of the court was delivered by: Justice Howse

JUSTICE HOWSE delivered the judgment of the court, with opinion.

Presiding Justice Epstein and Justice Joseph Gordon concurred in the judgment and opinion.

OPINION

¶ 1 This consolidated appeal arises from the filing of an action by North Shore Gas Company (North Shore) and Peoples Gas Light and Coke Company (Peoples Gas) (together referred to as the Utilities) with the Illinois Commerce Commission (Commission), which sought to restructure the rates the gas utility companies charged residential customers for the delivery of natural gas and approve a special rider for infrastructure improvements to the utilities' gas delivery system. The Commission entered its final order on January 22, 2010, and a subsequent order on rehearing on June 2, 2010. Several parties involved in the proceedings objected to certain aspects of the Commission's final order and filed appeals, which have been consolidated into the present action before this court.

¶ 2 For the reasons that follow, we affirm the Commission's order in part, reverse in part, and remand the cause for further proceedings consistent with this opinion.

¶ 3 BACKGROUND

¶ 4 On February 25, 2009, North Shore and Peoples Gas each filed tariffs with the Commission that consisted of a proposed general increase in natural gas distribution rates, certain new tariff riders, and other tariff revisions. The tariff requests were supported by "prefiled" direct testimony and other material. On March 25 and July 8, 2009, the Commission suspended the proposed rates and initiated contested rate cases to examine the proposed rates and revisions. Several parties intervened, including the parties to this appeal, and an evidentiary hearing was held.

¶ 5 The Commission entered its final dispositive order on January 21, 2010, permanently canceling previous gas rates and ordering the filing of new tariff sheets. In doing so, the Commission authorized Peoples Gas to file new tariff sheets designed to produce annual revenues of $530,633,000, which represented a gross increase of $69,803,000; and North Shore to file new tariff sheets to produce annual revenues of $79,067,000, which represented a gross increase of $13,867,000. The Commission determined the "just and reasonable" return which Peoples Gas should be allowed to earn on its net original cost rate base is 8.05%, which incorporated a return on common equity of 10.23% and costs of long-term debt of 5.28% with a just and reasonable capital structure of 56% common equity and 44% long-term debt. North Shore's rate of return was set at 8.19%, which incorporated a return on common equity of 10.33% and costs of long-term debt of 5.48% with a just and reasonable capital structure of 56% common equity and 44% long-term debt. In calculating those rates, the Commission denied the gas utilities recovery of certain employee incentive compensation and pension costs. The Commission also approved an "Infrastructure Cost Recovery Rider" (Rider ICR) proposed by Peoples Gas, which consisted of a monthly surcharge on customer bills designed to allow Peoples Gas to recover costs associated with replacing certain additional cast iron and ductile iron gas mains and connecting facilities.

¶ 6 Several parties, including the State of Illinois (the People), the Citizens Utility Board (the CUB) and the Utilities, filed timely applications for rehearing. The Commission granted rehearing to the People and the CUB solely on the limited issue of whether Rider ICR's "baseline" was improperly set. The Commission denied all of the other parties' applications for rehearing. The Commission ultimately approved the Rider ICR baseline that was agreed to by its Staff and Peoples Gas, making only small changes to Rider ICR's audit provisions in its revised order. Several parties filed separate appeals from the Commission's final order, which have been consolidated into the present action pending before this court.

¶ 7 ANALYSIS

¶ 8 I. Standard of Review

¶ 9 It is well settled that we are required to give substantial deference to the Commission's decisions, in light of its expertise and experience in this area. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 398 Ill. App. 3d 510, 514 (2009); Alhambra-Grantfork Telephone Co. v. Illinois Commerce Comm'n, 358

Ill. App. 3d 818, 821 (2005). The Commission's findings of fact are to be considered prima facie true; its orders are considered prima facie reasonable; and the burden of proof on all issues raised in an appeal is on the appellant. United Cities Gas Co. v. Illinois Commerce Comm'n, 163 Ill. 2d 1, 11 (1994). Such deference is "especially appropriate in the area of fixing rates." Iowa-Illinois Gas & Electric Co. v. Illinois Commerce Comm'n, 19 Ill. 2d 436, 442 (1960). Therefore, our review is generally limited to the following matters: (1) whether the Commission acted within its authority; (2) whether it made adequate findings to support its decision; (3) whether the decision was supported by substantial evidence; and (4) whether state or federal constitutional rights were infringed. Commonwealth Edison Co., 398 Ill. App. 3d at 514 (citing Commonwealth Edison Co. v. Illinois Commerce Comm'n, 322 Ill. App. 3d 846, 849 (2001)). We will not reevaluate the credibility or weight of the evidence, nor substitute our judgment for that of the Commission. Commonwealth Edison Co., 398 Ill. App. 3d at 514.

¶ 10 II. The People's and the CUB's Appeal

¶ 11 Both the People and the CUB appeal from the Commission's decision to approve Rider ICR. The People and CUB contend the Commission abused its discretion by allowing Peoples Gas to recoup what amount to discretionary infrastructure investments through a rider. Specifically, the People and the CUB contend the Commission misunderstood the legal standard that governs its authority to engage in "single issue rulemaking" through a rider. The People and the CUB also contend the record lacks substantial evidence to support the extraordinary rate recovery mechanism of a rider in this case.

¶ 12 The evidence adduced below established Peoples Gas' service territory covers an area of about 237 square miles with a population of approximately 3 million people, serviced by 4,025 miles of gas distribution mains. At the time of the Commission proceeding, approximately half of Peoples Gas' distribution main system was still comprised of cast iron and ductile iron gas mains, which are only able to provide low-pressure gas service. Peoples Gas presented evidence that these aging cast iron ductile iron mains require a higher level of risk management, generate a larger number of leaks and cause a larger number of service outages than modern mains made from polyethylene pipe material would cause.

¶ 13 In 1981, Peoples Gas decided to begin replacing its outdated main system. Peoples Gas estimated the replacement program would not be completed until sometime between 2050 and 2080. Under the current replacement program, Peoples Gas had successfully replaced 1,568 of 4,031 miles of old mains, with an average replacement rate of 45 miles per year through 2008. However, the average annual replacement rate of 45 miles had dropped to 20 miles for 2009 and an estimated 10 miles for 2010 due to the "harsh economic climate," which caused Peoples Gas to decide to preserve its capital rather than expend it on an accelerated main replacement program.

¶ 14 Peoples Gas first sought an infrastructure cost recovery rider in a previous rate case filed in 2007; however, the Commission rejected the request. Although the Commission determined it was within its discretionary powers to authorize the rider, it noted Peoples Gas had failed to establish there was a "need" for such a rider. The Commission's final decision filed on March 25, 2009, identified six standards Peoples Gas had to demonstrate in order for the Commission to find there is a need for an infrastructure cost recovery rider: (1) a detailed description and cost analysis of the proposed system modernization; (2) an identification, evaluation and justification of the technology involved; (3) a detailed identification and description of the improved functionalities of the modernized system both for the company and for customers; (4) an analysis of the benefits of the system modernization in terms of reduced operating and maintenance costs, enhanced system safety, improved customer safety and reliability, reduced greenhouse gas emissions and increased options for energy efficient appliances, new products and services; (5) an analysis of regulatory mechanisms to allow companies to both recover their costs of system modernization as well as to flow reduced system costs back to customers; and (6) an identification and analysis of legal and regulatory barriers to the implementation of system modernization.

¶ 15 In the rate case at issue here, Peoples Gas again sought an infrastructure cost recovery rider through "Rider ICR." Peoples Gas argued the rider did not violate the rule against single-issue ratemaking because it merely facilitates the direct recovery of particular costs in a manner that either has no direct impact on or accounts for any corresponding changes to the components underlying the utility's rate of return so that there is no under or over recovery. In support of its position, Peoples Gas noted the proposed rider included a factor for offsetting any savings generated by the accelerated program, thus preventing any overstatement of the utility's overall revenue requirements by Ride ICR. Peoples Gas also noted the rider had been modified, at the Staff's suggestion, to require recalculation of the savings factor no less than every three years, with the Commission and other parties retaining the right to initiate proceedings to do so more frequently if deemed necessary.

¶ 16 In support of Rider ICR, Peoples Gas also presented a substantial amount of expert testimony regarding the cost analysis and benefits the improved functionality of the new system would provide to the utility and its customers. Specifically, Peoples Gas provided testimony from Salvatore Marano, a licensed professional engineer, indicating that system modernization would provide several benefits to customers, including enhanced system safety, reduced system costs, potential new products and significant environmental benefits. Marano testified that the new distribution system would provide substantial savings to Peoples Gas' ongoing operations and maintenance costs by reducing the number of leak repairs and safety inspections the utility had to conduct, which would generate a total of $244 million in cost savings. Marano also estimated Peoples Gas net construction cost savings from accelerating the main replacement program construction through the use of the rider would be $273 million.

¶ 17 Marano further noted that an additional benefit to the City of Chicago (City) and its residents of accelerating the main replacement program through the use of a rider would be the creation of a substantial number of jobs in the community. Peoples Gas' witness James Schott explained a rider would allow the Utility to proceed with an accelerated main replacement program much more quickly, without the financial uncertainty that accompanies having to wait until the next rate case to recover costs associated with modernizing the system.

¶ 18 The Union representing Peoples Gas' employees who work on the mains on a daily basis and the City of Chicago also intervened in support of Rider ICR. Although the City recognized Peoples Gas' expert witnesses had not testified the current gas main system was unsafe or in immediate danger, the City noted the magnitude of potential safety issues presented by the antiquated system supported replacing the system as expeditiously as reasonably possible. While the City noted the increased use of riders by utilities threatens effective and thorough regulation of monopoly services, the City argued replacing the old mains as expeditiously as reasonable to ensure public safety presented an extraordinary situation justifying the use of a rider.

¶ 19 The People, the CUB and the Commission's Staff objected to Rider ICR. The People argued the proposed rider should be rejected by the Commission because it constituted improper single-issue ratemaking. The People noted that instead of considering costs and earnings in the aggregate, where potential changes in one or more items of expense or revenue may be offset by increases and decreases in other such items, the Rider ICR proposal only considered changes in infrastructure investment in isolation---ignoring the totality of circumstances. The People noted the capital costs associated with an accelerated main replacement were neither "unexpected, volatile or fluctuating expenses;" nor were the costs authorized by statute.

¶ 20 The People also noted that Peoples Gas had refused to commit to a specific accelerated main replacement plan, that Peoples Gas would not commit to any certain start date on acceleration, and that Peoples Gas would retain control over the schedule of acceleration. The People argued the 2030 completion date Marano testified to was both impractical and unrealistic as a timeline for main replacement. The People also argued Marano's 2030 completion date for main replacement would cost ratepayers over $3 billion more than Peoples Gas' existing 2059 completion date.

¶ 21 Although the CUB did not specifically address the operational need for an accelerated modernization program, it also argued the rider should be rejected given the legal proscriptions against single-issue ratemaking. In support, the People and the CUB's expert witness, Scott Rubin, noted Peoples Gas had failed to show that the existence or absence of Rider ICR would affect its cost of capital, impact its capability to finance necessary improvements, or jeopardize its ability to provide safe and reliable service. The People and the CUB argued Peoples Gas' own historical rate of main replacement investment suggested Rider ICR is simply not needed.

¶ 22 The Staff also argued to the Commission that Rider ICR should be rejected. Although the Staff recognized the Commission has the discretion to approve riders in proper cases as an alternative to the traditional approach of setting rates, the Staff argued Peoples Gas had failed to provide adequate justification for Rider ICR. Although Peoples Gas presented expert testimony that the proposed rider was consistent with the points raised by the Staff and the six standards outlined by the Commission in the last rate case, the Staff's witness explained the Staff's primary position in the previous case was to reject the proposed rider because the need and justification for rider recovery had not been established. The Staff noted the need for an accelerated infrastructure replacement program and the cost recovery mechanism for such a program are two different issues. While the Staff recognized Marano's testimony addressed the need for an accelerated program to replace the current network of cast iron and ductile iron mains, the Staff noted Marano's testimony did not explain why the use of a rider mechanism to recover costs for that goal would be justified over traditional recovery through base rates.

¶ 23 The Staff's expert witnesses, Sheena Knight-Garlisch and Peter Lazare, both agreed Peoples Gas had not adequately explained why traditional rate case fillings would not allow a prompt and fair rate recovery for the costs associated with modernizing the system. The Staff's witnesses also noted Peoples Gas is seeking funding for an accelerated replacement program that has yet to be developed, which makes it difficult to assess the need for a special recovery mechanism without knowing the Utility's funding needs.

¶ 24 The Commission determined the rule against single-issue ratemaking was not a bar to its adoption of Rider ICR. The Commission also determined the Utility's proposed rider complied with the six standards it had outlined in the earlier rate case. Accordingly, the Commission exercised its legal authority to approve Rider ICR. However, the Commission adopted several of the Staff's recommendations intended to ensure proper regulatory oversight and implementation of the rider.

¶ 25 In reaching its conclusion, the Commission stated "[i]mmediate safety concerns are not what drive our concern."

However, the Commission highlighted a more accelerated approach to upgrading the system is needed to prevent or mitigate a foreseeable future risk of system failure, and noted that "accelerated system improvement has become for the Commission a matter of the public interest more so than just a Company proposal." Although the Commission recognized section 8-503 of the Public Utilities Act (Act) (220 ILCS 5/8-503 (West 2008)) would authorize it to require Peoples Gas to undertake and accelerated main replacement program through traditional ratemaking procedures, the Commission noted that to pursue such an action would require it to initiate a new formal proceeding and employ all of its traditional processes to arrive at a decision. Because a burdensome and time-consuming series of rate ...


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