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The People Ex Rel. v. Illinois Commerce Commission

December 9, 2011

THE PEOPLE EX REL.
LISA MADIGAN, THE ATTORNEY GENERAL OF THE STATE OF ILLINOIS,
PETITIONER,
v.
ILLINOIS COMMERCE COMMISSION, ILLINOIS-AMERICAN WATER COMPANY, CITIZENS UTILITY BOARD, MELODY FLISS, HAROLD C. MENGER, ROSEMARY KATONA, EILEEN AND TIM NELSON,
THE CITY OF CHAMPAIGN, THE VILLAGE OF PRAIRIE GROVE,
THE VILLAGE OF MOUNT PROSPECT, THE VILLAGE OF HOMER GLEN,
THE CITY OF DES PLAINES, THE VILLAGE OF TINLEY PARK, THE CITY OF PEORIA,
THE CITY OF PEKIN, THE VILLAGE OF BOLINGBROOK, THE ILLINOIS INDUSTRIAL WATER CONSUMERS,
THE VILLAGE OF WOODRIDGE, THE VILLAGE OF LEMONT, THE CITY OF ELMHURST,
THE CITY OF URBANA, AND THE VILLAGE OF ST. JOSEPH, THE VILLAGE OF SAVOY AND THE VILLAGE OF SIDNEY, RESPONDENTS
ILLINOIS-AMERICAN WATER COMPANY, CROSS-PETITIONER,
v.
ILLINOIS COMMERCE COMMISSION; THE PEOPLE EX REL. LISA MADIGAN, ATTORNEY GENERAL OF THE STATE OF ILLINOIS; CITIZENS UTILITY BOARD; MELODY FLISS;
HAROLD C. MENGER; ROSEMARY KATONA; EILEEN AND TIM NELSON; THE CITY OF CHAMPAIGN;
THE VILLAGE OF PRAIRIE GROVE; THE VILLAGE OF MOUNT PROSPECT; THE VILLAGE OF HOMER GLEN;
THE CITY OF DES PLAINES; THE VILLAGE OF TINLEY PARK; THE CITY OF PEORIA; THE CITY OF PEKIN;
THE VILLAGE OF BOLINGBROOK; THE ILLINOIS INDUSTRIAL WATER CONSUMERS; THE VILLAGE OF WOODRIDGE;
THE VILLAGE OF LEMONT; THE CITY OF ELMHURST; THE CITY OF URBANA; THE VILLAGE OF ST. JOSEPH; THE VILLAGE OF SAVOY; AND THE VILLAGE OF SIDNEY, CROSS-RESPONDENTS.



On Direct Review of Orders of the Illinois Commerce Commission. Docket No. 09-0319

The opinion of the court was delivered by: Justice McBRIDE

JUSTICE McBRIDE delivered the judgment of the court, with opinion. Justices J. Gordon and Howse concurred in the judgment and opinion.

OPINION

¶1 This is an appeal from a decision of the Illinois Commerce Commission (Commission) setting new rates for customers of Illinois-American Water Company (IAWC). Several parties intervened, including the People of the State of Illinois (the Attorney General) and numerous municipalities affected by the proposed increases.

¶2 The Attorney General appeals, arguing that (1) the Commission erred in allowing IAWC to include the unamortized portion of $657,530 from a prior rate case expense in its present costs because the inclusion of prior rate case expense violates certain rate setting rules, more specifically, the test-year rule, retroactive ratemaking and single-issue ratemaking; and (2) the Commission failed to properly assess and address IAWC's expenditures for attorney and expert fees in its written order, pursuant to section 9-229 of the Public Utilities Act (220 ILCS 5/9-229 (West 2010)). Additionally, IAWC filed a cross-appeal, arguing that the Commission erred in its findings related to the management fee expense for its affiliate, American Water Works Service Company, Inc. (Service Company), by failing to award the full amount requested and supported by evidence on the record. The Village of Homer Glen and the Village of Bolingbrook submitted response briefs related only to the issue raised in the cross-appeal.

¶3 IAWC is a wholly owned subsidiary of American Water and is a public utility that provides water and wastewater distribution service to over 300,000 customers in Illinois. IAWC provides commercial, industrial, fire protection, and sale-for-resale water to numerous communities in various rate areas in Illinois. IAWC also provides public utility wastewater service in the Chicago area. In May 2009, IAWC filed proposed tariffs with the Commission seeking to increase its revenue by approximately $59 million through increases in customers' water and sewer bills.

¶4 During the course of the proceedings before the Commission, the parties submitted written direct and responsive testimony, exhibits, and briefs. The Commission held evidentiary hearings in December 2009. In February 2010, the administrative law judge issued a proposed order. In April 2010, the Commission entered its final order and amended order was entered in May 2010. The Commission's decision raised IAWC's revenue by $42 million and set new rates accordingly. We will discuss any additional facts as necessary in the analysis of the issues.

¶5 The Attorney General has appealed the Commission's decision. First, the Attorney General argues that the Commission erred in allowing IAWC to recover the $657,530 unamortized portion of the prior rate case expense with the current rate case expense because it violated the test-year rule and constituted retroactive ratemaking and single-issue ratemaking. We will discuss these rate case concepts below.

¶6 The setting of utility rates is a legislative function, not judicial, with the Commission acting as the fact-finding body. Business & Professional People for the Public Interest v. Illinois Commerce Comm'n (BPI II), 146 Ill. 2d 175, 196 (1991). "Administrative regulations have the force and effect of law, are presumed valid, and will be construed under the same standards that apply in construing statutes." City of Chicago v. Illinois Labor Relations Board, Local Panel, 396 Ill. App. 3d 61, 73 (2009) (citing Granite City Division of National Steel Co. v. Illinois Pollution Control Board, 155 Ill. 2d 149, 162 (1993)). When reviewing an order from the Commission, we give deference to the Commission's decision, 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). The Commission's factual findings 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." Commonwealth Edison, 398 Ill. App. 3d at 514; see also 220 ILCS 5/10-201(d) (West 2010). While we are not bound by the Commission's conclusion on questions of law, we " 'will give substantial weight and deference to an interpretation of an ambiguous statute by the agency charged with the administration and enforcement of the statute.' " Commonwealth Edison, 398 Ill. App. 3d at 514 (quoting Illinois Consolidated Telephone Co. v. Illinois Commerce Comm'n, 95 Ill. 2d 142, 152 (1983)). The Commission's interpretation of "its own standards and regulations is accorded deference as ' "courts appreciate that agencies can make informed judgments upon the issues, based upon their experience and expertise" ' and this policy is consistent with the principle that administrative agencies must have wide latitude to adopt regulations reasonably necessary to effectuate their statutory functions." City of Chicago, 396 Ill. App. 3d at 73-74 (quoting Water Pipe Extension, Bureau of Engineering v. Illinois Local Labor Relations Board, 252 Ill. App. 3d 932, 936 (1993) (quoting Illinois Consolidated Telephone Co. v. Illinois Commerce Comm'n, 95 Ill. 2d 142, 153 (1983))).

¶7 "The standard of review, 'which determines the degree of deference given to the agency's decision,' turns on whether the issue presented is a question of fact, a question of law, or a mixed question of law and fact." Comprehensive Community Solutions, Inc. v. Rockford School District No. 205, 216 Ill. 2d 455, 471 (2005) (quoting AFM Messenger Service, Inc. v. Department of Employment Security, 198 Ill. 2d 380, 390 (2001)).

¶8 "A mixed question of law and fact asks the legal effect of a given set of facts." Comprehensive Community, 216 Ill. 2d at 472. Stated another way, a mixed question is one in which the historical facts are admitted or established, the rule of law is undisputed, and the issue is whether the facts satisfy the statutory standard, or whether the rule of law as applied to the established facts is or is not violated. AFM Messenger, 198 Ill. 2d at 391. A mixed question of law and fact is reviewed under the clearly erroneous standard. Comprehensive Community, 216 Ill. 2d at 472.

¶9 The clearly erroneous standard of review lies between the manifest weight of the evidence standard and the de novo standard, and as such, it grants some deference to the agency's decision. AFM Messenger, 198 Ill. 2d at 392. "[W]hen the decision of an administrative agency presents a mixed question of law and fact, the agency decision will be deemed 'clearly erroneous' only where the reviewing court, on the entire record, is 'left with the definite and firm conviction that a mistake has been committed.' " AFM Messenger, 198 Ill. 2d at 395 (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)). Nonetheless, that the clearly erroneous standard is largely deferential does not mean, however that a reviewing court must blindly defer to the agency's decision. AFM Messenger, 198 Ill. 2d at 395.

¶10 Under section 10-201(e)(iv) of the Public Utilities Act, we will reverse the Commission's order only if: (1) the Commission's findings are not supported by substantial evidence based on the record; (2) the Commission acted outside the scope of its statutory authority; (3) the Commission issued findings in violation of the state or federal constitution or law; (4) 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) (West 2010); see also Citizens Utility Board v. Illinois Commerce Comm'n, 166 Ill. 2d 111, 120-21 (1995). "Substantial evidence" means more than a "mere scintilla," but it does not have to reach the level of a preponderance of the evidence. Commonwealth Edison, 398 Ill. App. 3d at 514. "It is evidence that a 'reasoning mind would accept as sufficient to support a particular conclusion.' " Commonwealth Edison, 398 Ill. App. 3d at 514 (quoting Citizens Utility Board v. Illinois Commerce Comm'n, 291 Ill. App. 3d 300, 304 (1997)). "In making adequate findings, the Commission is not required to provide findings on each evidentiary claim; its findings are sufficient if they are specific enough to enable the court to make an informed and intelligent review of its order." Commonwealth Edison Co. v. Illinois Commerce Comm'n, 405 Ill. App. 3d 389, 398 (2010); see also 220 ILCS 5/10-201(e)(iii) (West 2010).

¶11 A rate case is started when a utility, such as IAWC, "files tariffs providing for a rate increase and the Commission suspends those tariffs to conduct an investigation and hearing." Commonwealth Edison, 405 Ill. App. 3d at 394; see also 220 ILCS 5/9-201 (West 2010). "The Commission may approve, reject, or modify the proposed tariffs. Section 9-201(c) of the Act provides that, "if the Commission initiates a proceeding concerning the appropriateness of a utility's proposed rates, the utility has the burden of proving that the proposed rates are just and reasonable." Commonwealth Edison, 405 Ill. App. 3d at 394; see also 220 ILCS 5/9-201(c) (West 2010).

¶12 "In establishing the rates that a public utility is permitted to charge its customers, the Commission must first determine the utility's revenue requirement. The components of the revenue requirement have frequently been expressed in the formula 'R (revenue requirement) = C (operating costs) Ir (invested capital or rate base times rate of return on capital).' " BPI II, 146 Ill. 2d at 195-96 (quoting Citizens Utilities Co. v. Illinois Commerce Comm'n, 124 Ill. 2d 195, 200-01 (1988), citing City of Charlottesville, Virginia v. Federal Energy Regulatory Comm'n, 774 F.2d 1205, 1217 (D.C. Cir. 1985)).

¶13 Illinois courts have allowed utilities to recover rate case expense because "[t]he costs incurred by a utility to prepare and present a rate case are properly recoverable as an ordinary and reasonable cost of doing business." Central Illinois Public Service Co. (CIPS) v. Illinois Commerce Comm'n, 243 Ill. App. 3d 421, 432 (1993) (citing Du Page Utility Co. v. Illinois Commerce Comm'n, 47 Ill. 2d 550 (1971)). IAWC's requested rate case expense included the attorney fees and expenses, the revenue requirement which was comprised of the costs of IAWC, the Service Company and temporary personnel to prepare the rate case, review by a certified public accountant, and the use of a rate of return consultant in preparing the rate case as well as the costs of any studies conducted in support of the rate case. The Attorney General is not challenging IAWC's right to recover the rate case expense incurred in the present rate case, but contends that the Commission erred in allowing IAWC to recover the unamortized portion of the prior rate case expense from Docket No. 07-0507.

¶14 In Docket No. 07-0507, the Commission allowed IAWC to recover $1,482,020 in rate case expense. This amount included two studies which were to be amortized over five years, and the remaining $1.3 million cost to litigate the rate case was to be amortized over three years. However, IAWC filed its tariffs for the current rate case before the full amount of the prior rate case expense had been fully amortized and recovered. The unrecovered amount was $657,530. In its order, the Commission allowed IAWC to recover this unamortized rate case expense over a new three-year amortization period, rolled into the same amortization period as the current rate case expense. The Attorney General argues that this action by the Commission violates Illinois law under the test-year rule, constitutes impermissible retroactive ratemaking and violates the concept of single-issue ratemaking.

¶15 The Commission asserts that amortization of rate case expense has long been the method allowed for the recovery of such operating expenses of public utilities. See Du Page Utility, 47 Ill. 2d at 561 (amortization over a five-year period); Candlewick Lake Utilities Co. v. Illinois Commerce Comm'n, 122 Ill. App. 3d 219, 226 (1983) (amortization over two years); CIPS, 243 Ill. App. 3d at 432 (amortization over five years). "Because rate case expenses do not routinely occur every year, such expenses are ordinarily amortized over an appropriate period of time." CIPS, 243 Ill. App. 3d at 432. As the Commission argues, "if the rate case expense was not to be amortized, then the public utility would recover its rate case expense every 12 months that the new rates were in effect." The time frame of the amortization is an important consideration for the Commission because "if the amortization period is too short, the utility over-recovers its expenses; whereas, if it is too long, the remaining unamortized expenses can be recovered in a subsequent rate case." Central Illinois Light Co. v. Illinois Commerce Comm'n, 252 Ill. App. 3d 577, 583 (1993). The recovery of the ratable portion of the prior rate case expense in a subsequent rate case has long been the practice of the Commission. See Commonwealth Edison Co., Ill. Commerce Comm'n, No. 07-0566, at 74 (Sept. 10, 2008) (final order) (finding it was appropriate for utility to recover amortized portion of previously approved rate case expense); Central Illinois Light Co., Ill. Commerce Comm'n, No. 07-0585, at 113 (Sept. 24, 2008) (final order) (rejecting the Attorney General's argument "to totally exclude from rates the unamortized rate case expenses approved in [the utility's] last rate"); Illinois Power Co., Ill. Commerce Comm'n, No. 01-0432, at 27 (Mar. 28, 2002) (final order).

¶16 The Commission in Central Illinois Light Co. further held:

"Contrary to [the Attorney General and Citizens Utilities Board's] argument, the Commission does not establish a 'normal' level of rate case expenses as it does for other types of cost that are prone to variation over time. Instead, the Commission typically allows a utility to capitalize those costs and amortize them over some reasonable period of time. The [the Attorney General and Citizens Utilities Board's] proposal would deny [the utility] the opportunity to recover reasonable, prudently incurred costs. To the extent [the utility] was authorized to recover rate case expenses in its last rate case and there remain unamortized balances of such authorized costs, [the utility] will be allowed to reflect such costs in rates in this proceeding." Central Illinois Light Co. v. Ill. Commerce Comm'n, No. 07-0585, at 113.

¶17 As previously stated, we give deference to the Commission's interpretation of its own rules and regulations, based on its experience and expertise in the subject matter. City of Chicago, 396 Ill. App. 3d at 73-74. Moreover, "where the Commission's decisions drastically depart from past practices, they are entitled to less deference." Citizens Utility Board, 166 Ill. 2d at 132. In Citizens Utility Board, the Commission was reviewing the costs involved for coal-tar cleanup costs at gas plants. In this case, the Commission decided that the utilities should share the statutorily imposed cost of the cleanup expenses with the ratepayers by amortizing the costs over five years but excluded recovery of the interest on the unrecovered amount. The supreme court pointed out that in two previous decisions, the Commission had specifically rejected proposals to amortize the costs over five years and to deny carrying costs on the unrecovered balance and instead allowed recovery of all prudently incurred coal-tar cleanup costs. Citizens Utility Board, 166 Ill. 2d at 131-32. The supreme court noted that the Commission "failed to articulate a reasoned basis for its sudden departure" from the previous decisions and "without substantial evidence in the record to support its decision, the Commission [departed] from its longstanding precedent regarding treatment of mandatory operating expenses." Citizens Utility Board, 166 Ill. 2d at 132. In the absence of evidence to support its policy change, the supreme court concluded that the Commission's decision would be accorded no deference. Citizens Utility Board, 166 Ill. 2d at 132.

¶18 Here, in contrast, the Commission adhered to its past practice of permitting amortization of the unrecovered prior rate case expense with the current rate case expense. Nevertheless, the Attorney General asserts that this past practice is erroneous and the Commission should not allow IAWC to recover the prior rate case expense because it violates test-year rules and constitutes retroactive ratemaking and single-issue ratemaking.

¶19 "In order to accurately determine the utility's revenue requirement, the Commission established filing requirements under which a utility must present its rate data in accordance with a proposed one-year test year. The purpose of the test-year rule is to prevent a utility from overstating its revenue requirement by mismatching low revenue data from one year with high expense data from a different year." BPI II, 146 Ill. 2d at 237-38 (citing Business & Professional People for the Public Interest v. Illinois Commerce Comm'n (BPI I), 136 Ill. 2d 192, 219 (1989)). According to the Illinois Administrative Code, the test year can be set as either a future or historical year. 83 Ill. Adm. Code 287.20 (2010). Here, IAWC used the 2010 calendar year, ending December 31, 2010, as a future test year. A future test year must be "[a]ny consecutive 12 month period of forecasted data beginning no earlier than the date new tariffs are filed and ending no later than 24 months after the date new tariffs are filed." 83 Ill. Adm. Code 287.20(b) (2010).

¶20 The Attorney General argues that allowing the recoupment of unamortized prior rate case expense violates the test-year rule because these costs were not incurred during the test year and it significantly increases the annual rate case expense. The Attorney General asserts that "Illinois law simply does not authorize a utility or the Commission to roll one expense, in this case the rate-case expense, into future test years after the prior rates have been 'permanently canceled and annulled' by the Commission." We note that the Attorney General does not cite any authority to support this statement. According to the Attorney General, prior costs cannot be recovered and the Commission must only consider costs for the test year.

¶21 The Attorney General relies on the testimony of its witness Ralph Smith as support for its argument that the inclusion of the prior rate case expense violates Illinois law and that the amortization approach for recovery should not be followed. According to the Attorney General, the rate case expense should be "normalized" to ensure recovery without overpayment. Smith testified that the normalization approach should be used "prospectively, beginning with the cost for IAWC's current rate case." Smith recommended that the Commission treat the "annual allowance for rate case expense as a normalized amount, rather than an amortization" with the "purpose of the rate case allowance [to] include in rates a representative and normal annual level of reasonably and prudently incurred regulatory expense." Contrary to the Attorney General's argument, Smith did not advocate normalization as the correct way to recover rate case expense, but instead testified that he believed normalization was a better approach to be used prospectively. Regardless, Smith's testimony advocating the normalization of rate case expense did not involve the prior rate case expense, which is the only form of rate case expense being challenged by the Attorney General on appeal.

¶22 Moreover, Smith did not testify that the prior rate case expense should be denied for any reason. In fact, Smith recommended that the Commission-approved unamoritzed amounts "be amortized over the same amortization period that is applied to [IAWC's] expense for the current rate case." Smith then recommended a three-year amortization period for these costs. Further, we point out no witness testified that the inclusion of the prior rate case expense should be denied on any basis.

¶23 The Commission and IAWC maintain that the approved prior rate case expense is not outside of the test year because the Commission would not have approved the recovery if it was outside of the test year. The Commission points out that "the approved prior rate case expense is an expense already authorized by the Commission to be collected by the utility from its customers which is within the test year of the newer rate case." Meaning, the amortization period for the prior rate case expense would have included the test year, regardless of the filing of the current rate case.

¶24 We agree with the Commission and IAWC. We point out that the amortization of prior rate case expense in a new rate case has been included in the guidelines for a rate case in the Illinois Administrative Code. Section 285.3085(d) states, "If amortization of previous rate case expenses are included within test year jurisdictional operating expense at proposed rates on Schedule C-1, provide the amount of amortization expense associated with each rate case by docket number." 83 Ill. Adm. Code 285.3085(d) (2010). This section lends support to the longstanding practice of the Commission. During the 2010 test year, IAWC was due to receive approximately $471,000*fn1 of the annual amortization amount approved in the prior rate case. This amount of recovery has been included and reamortized with the current rate case expense. The Attorney General has failed to show how the test-year rule was violated when a portion of the prior rate case expense was due to be recovered during the test year. ...


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