Direct Review of Orders of the Illinois Commerce Commission Nos. 090306 090311 Nos. 090306 090307 090308 090309 090310 090311
The opinion of the court was delivered by: Justice Knecht
No. 4-10-0962; Nos. 4-10-0976; 4-11-0075
JUSTICE KNECHT delivered the judgment of the court, with opinion. Presiding Justice Turner and Justice Appleton concurred in the judgment and opinion.
¶ 1 Ameren Illinois Company, d/b/a Ameren Illinois, is a public utility company that distributes electricity and gas to consumers in roughly the lower two-thirds of Illinois. In June 2009, three utility companies, which ultimately merged to form Ameren Illinois, filed the underlying action: Illinois Power Company, d/b/a AmerenIP; Central Illinois Light Company, d/b/a AmerenCILCO; and Central Illinois Public Service Company, d/b/a AmerenCIPS (collec- tively referred to as Ameren Illinois).
¶ 2 In June 2009, Ameren Illinois sought a rate increase for both its electric- and gas-delivery services and the establishment of new riders. Initially, Ameren Illinois sought a rate increase of almost $226 million but later reduced its request to an increase of $130 million. The consolidated appeals follow the orders of the Illinois Commerce Commission (Commission) ultimately granting Ameren Illinois an increase of $44 million and granting Ameren Illinois a rider by which its tax liability under the Public Utilities Revenue Act (Revenue Act) (35 ILCS 620/2a.1 (West 2008)) will be collected from its customers.
¶ 3 Ameren Illinois appeals the orders, arguing the Commission unlawfully changed its rate-making policy and the interpretation of its rules. Ameren Illinois contends the Commission's improper pro forma adjustments for accumulated depreciation reserve (ADR) and accumulated deferred income taxes (ADIT) unlawfully decreased Ameren Illinois's revenue requirement by $26 million.
¶ 4 The Illinois Industrial Energy Consumers (IIEC), which includes large electricity consumers such as the University of Illinois, Air Products and Chemicals Company, Archer-Daniels-Midland Company, Cargill, Inc., Caterpillar, Inc., and ConocoPhillips, appeals the Commission's decision granting Ameren Illinois a rider that allows Ameren Illinois to collect its Revenue Act tax expense through line itemization on the bills of Ameren Illinois customers. Before the Commission, IIEC filed two applications for rehearing and two appeals, appeal Nos. 4-10-0976 and 4-11-0075. In addition to challenging the Commission's decisions regarding the Revenue Act tax, IIEC urges this court to affirm the pro forma adjustments for ADR and ADIT.
¶ 5 The Commission, in addition to defending its decisions in the underlying rate case, contends this court lacks jurisdiction over appeal No. 4-11-0075. We dismiss appeal No. 4-11-0075 for lack of jurisdiction and affirm the Commission's decisions.
¶ 7 A utility initiates a rate case by filing tariffs that provide for a rate increase. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 405 Ill. App. 3d 389, 394, 937 N.E.2d 685, 671 (2010) (citing 220 ILCS 5/9-201 (West 2006)). Upon such filing, the Commission suspends the tariffs and conducts an investigation and hearing. 220 ILCS 5/9-201(b) (West 2010). If the Commission begins a proceeding on the propriety of a utility's proposed rates, the utility bears the burden of showing the proposed rates are just and reasonable. 220 ILCS 5/9-201(c) (West 2010).
¶ 8 When establishing the rates a public utility may charge its customers, the Commission considers the utility's operating costs, rate base, and allowed rate of return. Citizens Utilities Co. of Illinois v. Illinois Commerce Comm'n, 124 Ill. 2d 195, 200, 529 N.E.2d 510, 512 (1988). "A public utility is entitled to recover in its rates certain operating costs" and "earn a return on its rate base, or the amount of its invested capital." Citizens Utilities, 124 Ill. 2d at 200, 529 N.E.2d at 512. "Recovery of the utility's operating costs and the return on its rate base is known as the utility's annual revenue requirement." Commonwealth Edison, 405 Ill. App. 3d at 394,937 N.E.2d at 672. "The components of the ratemaking determination may be expressed in 'the classic ratemaking formula R (revenue requirement) = C (operating costs) Ir (invested capital or rate base times rate of return on capital).' " Citizens Utilities, 124 Ill. 2d at 200-01, 529 N.E.2d at 512-13 (quoting City of Charlottesville, Virginia v. Federal Energy Regulatory Comm'n, 774 F.2d 1205, 1217 (D.C. Cir. 1985)).
¶ 9 As Ameren Illinois states, this appeal involves the rate-base component of the revenue requirement, as well as the treatment of ADR and ADIT. In determining a utility's rate base, the Commission may only include "the value of such investment which is both prudently incurred and used and useful in providing service" to the utility's customers. 220 ILCS 5/9-211 (West 2010). Affecting the value of a utility's rate base are both new investments and the decline in value due to depreciation. Commonwealth Edison, 405 Ill. App. 3d at 395, 937 N.E.2d at 695. When depreciation loss is recorded, two accounts are affected: depreciation expense and accumulated depreciation. Commonwealth Edison, 405 Ill. App. 3d at 395, 937 N.E.2d at 695. Depreciation expense is the decline in value of an asset; it is recovered as part of the utility's operating costs. See Business & Professional People for the Public Interest v. Illinois Commerce Comm'n, 146 Ill. 2d 175, 239-40, 585 N.E.2d 1032, 1059 (1991) (hereinafter BPI II).
¶ 10 Accumulated depreciation is the total of the depreciation expense accrued on an asset since that asset was placed in service. Commonwealth Edison, 405 Ill. App. 3d at 395, 937 N.E.2d at 695. Assets' book values are determined by subtracting accumulated depreciation from the assets' cost. Commonwealth Edison, 405 Ill. App. 3d at 395, 937 N.E.2d at 695. Accumulated depreciation, however, cannot exceed the cost of the assets. Commonwealth Edison, 405 Ill. App. 3d at 395, 937 N.E.2d at 695.
¶ 11 As stated in Ameren Illinois's opening brief, ADIT quantifies "the income taxes that are deferred when the tax law provides for deductions with respect to an item in a year other than the year that the item is treated as an expense for financial reporting purposes." ADIT, for regulated entities, is treated as no-cost capital and reduces rate base.
¶ 12 To determine accurately a utility's revenue requirement, "a utility must present its rate data in accordance with a proposed one-year test year." BPI II, 146 Ill. 2d at 237-38, 585 N.E.2d at 1058. The use of a test year prevents a utility from overstating its revenue requirement by using low revenue data from one year and high expense data from another. BPI II, 146 Ill. 2d at 238, 585 N.E.2d at 1058.
¶ 13 At its option, a utility may propose pro forma adjustments to the test-year data in order to include known and measurable changes that would affect the operating results of the test year. See 83 Ill. Adm. Code 287.40 (2011). Section 287.40 of title 83 of the Illinois Administrative Code (Administrative Code) states the following:
"A utility may propose pro formaadjustments (estimated or calculated adjustments made in the same context and format in which the affected information was provided) to the selected historical test year for all known and measurable changes in the operating results of the test year. These adjustments shall reflect changes affecting the ratepayers in plant investment, operating revenues, expenses, and cost of capital where such changes occurred during the selected historical test year or are reasonably certain to occur subsequent to the historical test year within 12 months after the filing date of the tariffs and where the amounts of the changes are determinable." 83 Ill. Adm. Code 287.40 (2011).
¶ 15 On June 5, 2009, Ameren Illinois filed tariffs proposing rates reflecting an increase in gas and electric delivery service of approximately $226 million. Later, Ameren Illinois revised its proposal for a rate increase of approximately $130 million. Ameren Illinois used the 2008 calendar year as its historical test year and proposed pro forma adjustments, including an adjustment for additional plant investment planned between the end of 2008 and May 2010. During the case, Ameren Illinois changed the latter date to February 2010.
¶ 16 On July 8, 2009, the Commission suspended Ameren Illinois's proposed tariffs and initiated this case. Petitions seeking leave to intervene were filed by a number of entities, including the People of the State of Illinois and IIEC. Evidentiary hearings were held in December 2009.
¶ 17 1. Accumulated Depreciation
¶ 19 Before the Commission, Ameren Illinois maintained the plant-in-service component of the rate base reflected the historical cost of its capital assets used to provide service, less accumulated depreciation on those assets as of the end of the test year, December 31, 2008. In addition, Ameren Illinois maintained the rate base included known and measurable post-test-year pro forma capital additions that would be placed in service by February 2010. Ameren Illinois purported to have included adjustments to accumulated depreciation to reflect additional depreciation associated with the pro forma capital additions. Ameren Illinois maintained its methodology had been endorsed by the Commission.
¶ 20 IIEC maintained Ameren Illinois's approach overstated its net plant and rate base because Ameren Illinois accounted for the plant addition increases to gross utility plant but ignored the contemporaneous offset of changes in accumulated depreciation. IIEC argued plant additions would not increase the net plant because those additions would be offset by increases to ADR and ADIT that would occur during the same post-test-year pro forma time period.
¶ 21 The Commission found the 2008 historical test year was permissible under the Commission's rules. The Commission acknowledged IIEC pointed to evidence distinguishing the record from this case from the recent decisions Ameren Illinois asked the Commission to follow. The Commission held that "[a] fresh look" at the competing proposals, "aided by evidence presented for the first time in this record," shows IIEC's objections are "well founded." The Commission further found it had not in the earlier decisions cited by Ameren Illinois addressed the effect of section 9-211 of the Public Utilities Act (220 ILCS 5/9-211 (West 2008)) in this context. The Commission concluded two parts of the record evidence were "particularly compelling." The first was that of the staff's accounting expert who opined the regulatory accounting required the plant-in-service balance and the accumulated reserve for depreciation balance be representative of the same point in time. The second was IIEC's analysis showing the result of the policy that allowed only one part of net plant in determining rate base. Particularly compelling to the Commission was the evidence showing Commonwealth Edison, in a recent case, benefitted from "a significantly overstated rate base" as a result of not applying ADR.
¶ 22 The Commission mandated Ameren Illinois reflect the balance of ADR and ADIT as of February 2010 in its rate base because Ameren Illinois had included pro forma plant additions in its rate base as of the same date. The Commission concluded, "Section 9-211 essentially requires the Commission to ensure that a utility's approved rate base does not exceed the investment value the utility actually uses to provide service." The Commission continued, "The measure of the amount of investment so dedicated must account for both increases and decreases (over a consistent period) at any point in time." At the conclusion of this part of its ruling, the Commission noted the following for future rate cases: "To avoid confusion respecting proposals in future rate cases, the Commission finds that if a utility has recovered in rates the cost of an asset through depreciation expense, the associated amount of accumulated depreciation should be deducted from rate base."
¶ 23 b. The May 2010 Application for Rehearing
¶ 24 Ameren Illinois filed an application for rehearing, asking the Commission to reconsider the Commission's pro forma adjustments for ADR and ADIT. Ameren Illinois argued the Commission's adjustment violated test-year rules, constituted a reversal in Commission policy, understated significantly Ameren Illinois's actual net plant, calculated an adjustment to the ADR and ADIT that had not been proposed, and contained accounting errors.
¶ 25 The Commission granted Ameren Illinois's application. The IIEC and the State advocated the "roll forward" adjustments for ADR and ADIT, but the two parties disagreed as to methodology and amounts.
¶ 26 c. The Commonwealth Edison September 2010 Decision
¶ 27 On September 30, 2010, the Second District entered its opinion in Commonwealth Edison, reaching the same decision on accumulated depreciation as the Commission did in April 2010. In Commonwealth Edison, the Commission's order, consistent with a stipulation between Commonwealth Edison (ComEd) and the staff, included in ComEd's rate base pro forma capital additions through June 2008 but did not include the increase in the accumulated reserve for depreciation of the embedded or existing plant. Commonwealth Edison, 405 Ill. App. 3d at 404, 937 N.E.2d at 702.
¶ 28 On appeal, IIEC maintained (1) the Commission exceeded its authority because the rate-base increase violated section 9-211 of the Public Utilities Act, (2) the Commission violated the Administrative Code "by mismatching 2008 gross plant investment and 2006 test-year accumulated depreciation," and (3) the Commission was not bound by its earlier decisions to the contrary. Commonwealth Edison, 405 Ill. App. 3d at 404, 937 N.E.2d at 702-03. Regarding section 9-211, the Second District held "[s]section 9-211 essentially requires the Commission to ensure that a utility's approved rate base does not exceed the investment value that the utility actually uses to provide service" and "[t]he measure of the amount of investment so dedicated must account for both increases and decreases over a consistent period." Commonwealth Edison, 405 Ill. App. 3d at 405, 937 N.E.2d at 703. By not including both the increases and decreases, the Commission, according to the Second District, "approved a rate base that exceeds the investment value ComEd actually dedicates to utility services." Commonwealth Edison, 405 Ill. App. 3d at 405, 937 N.E.2d at 703.
¶ 29 The Second District further found section 287.40 of title 83 of the Administrative Code, which governs pro forma adjustments to a historical test year, establishes an "increase in the accumulated depreciation on the existing plant during the post-test-year period, in which the additional plant is being factored into the rate base, is a change that affects ratepayers and *** must be factored into the rate base." Commonwealth Edison, 405 Ill. App. 3d at 406, 937 N.E.2d at 704. In addition, the Second District determined ComEd's position to the contrary is inconsistent with the matching principles of section 287.20 and concluded the Commission abused its discretion in excluding from the rate base the increase in accumulated depreciation during the pro forma period. Commonwealth Edison, 405 Ill. App. 3d at 420, 937 N.E.2d at 715.
¶ 30 d. The Commission's November 2010 Order on Rehearing
¶ 31 In its November 2010 order on rehearing, the Commission remained unpersuaded it was "altering the manner that it adjusts accumulated depreciation reserve" and concluded no additional steps needed to be taken before making "such an adjustment." The Commission observed "Staff has pointed out that multiple orders over the years have reflected an adjustment for accumulated depreciation through the pro forma adjustment period while other orders have not." The Commission stated it had "relied on the record in the various cases in coming to its conclusions."
¶ 32 The Commission further concluded the failure to estimate actual net plant would have been avoided had Ameren Illinois "more accurately estimated its plant additions for this period" and such failure was "not indicative of weakness in the Commission's conclusion." The Commission concluded the order on rehearing "should reflect an aggregated reduction to the reserve for accumulated depreciation of $15.2 million for all six Ameren Illinois utilities." The Commission further concluded the appropriate valuation of aggregated net plant for the six utilities was $3.352 billion.
¶ 33 2. The Revenue Act Tax
¶ 35 In every rate case, the Commission determines what part of the utility's costs each class of customers will be responsible for. Ameren Illinois has five rate classes, ranging from DS-1, residential customers, to DS-5, providers of street lighting and protective lighting service. DS-4 contains the largest customers, with demands exceeding 1,000 kilowatt-hours (kWh). IIEC companies fall within DS-4. According to the April 2010 order, the general preference of the Commission is to allocate costs among these classes "as close to the cost of serving each class as is reasonably possible and/or appropriate." To do this, the Commission typically uses a cost of service study (COSS) that compares the costs of each customer class to revenues produced by each class. At times, certain circumstances warrant allocating costs on non-cost-based criteria.
¶ 36 This case concerns the Commission's decision on how to allocate Ameren Illinois's tax expense under the Revenue Act. Utilities became subject to a tax on invested capital under the Revenue Act shortly after the personal property tax was eliminated in 1970. See 35 ILCS 620/2a.1 (West 1996); see also 35 ILCS 620/1a (West 2010). This tax was initially assessed on utilities at a rate of 0.8% of the utility's invested capital. 35 ILCS 620/2a.1 (West 1996). Effective January 1, 1998, however, the legislature altered section 1a of the Revenue Act by deleting the reference to the tax assessment at a rate of 0.8% and imposing a tax on the utility based on the amount of kWh distributed. See Pub. Act 90-561, art. 3, § 25, eff. Jan. 1, 1998 (1997 Ill. Laws 6302, 6305); see also 35 ILCS 620/2a.1(a) (West 2010).
¶ 37 b. The Commission's April 29, 2010, Order
¶ 38 Here, Ameren Illinois proposed to the Commission that its Revenue Act tax liability be allocated and collected from its customers based on kWh sales. IIEC opposed Ameren Illinois's proposal. Before the Commission, IIEC maintained the Revenue Act tax should be allocated on a demand basis by the same manner it was assessed and collected before the 1997 revisions to the Revenue Act. IIEC contended kWh sales are only one of several factors that determine a utility's Revenue Act tax responsibility. IIEC maintained the main factor determining Revenue Act tax liability was the utility's 1997 level of invested capital. IIEC argued the tier levels set forth in the Revenue Act were created to approximate the same level the utilities had paid based on invested capital.
¶ 39 IIEC further maintained there was a very weak correlation between kWh sales and the utilities' Revenue Act tax liabilities. IIEC also argued most of the current Revenue Act tax was inherited 1997 invested capital tax. IIEC maintained the Revenue Act's language did not express an expectation tax burdens would be shifted from one customer class to another.
¶ 40 Ameren Illinois argued IIEC's approach was improper because, under the new tax structure, as a utility delivers more or less energy, the tax amount will increase or decrease no matter the amount of capital investment. Ameren Illinois also maintained its proposal was consistent with clear legislative intent.
¶ 41 The staff agreed with Ameren Illinois. The staff recognized Ameren Illinois's proposal would shift responsibility for tax costs from smaller to larger customers on the system. The DS-4 customers, who accounted for 43% of the system usage, would be allocated 43% of the Revenue Act tax costs, while those customers at the time accounted for only 8% of the costs. The residential DS-1 customers' allocation would decline from 56% to 30%. Staff maintained plant in service was no longer a part of the Revenue Act tax determination.
¶ 42 The Commission found interesting IIEC's argument invested capital (or plant in service), not kWh, was the primary cost causer. The Commission, however, citing section 1a of the Revenue Act, concluded the legislature intended to replace the plant-in-service tax with a kWh tax "in response to the changing nature of the Illinois electric utility industry," in which utilities had shed much of their plant in service and became regulated distribution utilities.
¶ 43 The Commission determined Ameren Illinois's and the staff's interpretation of the Revenue Act was more reasonable, stating the following:
"In the absence of any clear legislative intent to the con- trary, [Ameren Illinois] should recover [Revenue Act] tax costs in base rates through the kWh-based Distribution Delivery Charge from the DS-1, DS-2, and DS-5 classes. [Ameren Illinois] should create a kWh charge to reflect the [Revenue Act] tax allocation that applies to the DS-3 and DS-4 classes."
¶ 44 The Commission also found, while addressing the issue of rate mitigation for the rate classes, the Revenue Act tax should be recovered as a separate line item on bills. The Commission determined "ratepayers should be made aware of taxes they are being charged."
¶ 45 c. IIEC's June 2010 Application for Rehearing
¶ 46 Following the Commission's April 2010 order and May 6, 2010, corrected order, IIEC filed its first application for rehearing. Attached to IIEC's application is an affidavit by Robert R. Stephens, an expert who testified in the initial hearing. According to Stephens, Ameren Illinois, through its rates that took effect in early May 2010, was not collecting the Revenue Act tax expenses through base rates, but primarily through tax additions riders. Stephens opined Ameren Illinois's rates would collect almost $4 million more than the amount approved by the Commission. IIEC also asked the Commission to reverse its decisions allocating the Revenue Act tax on kWh delivered and collecting the Revenue Act tax on a separate kWh charge for DS-3 and DS-4 classes.
¶ 47 On June 15, 2010, the Commission issued a "Notice of Commission Action," granting in part and denying in part IIEC's application for rehearing. In this notice, the Commission stated it had intended to treat the Revenue Act tax as a pass-through tax, which would appear as a line item on the customer's bill:
"With regard to the [Revenue Act] tax and its recovery, it was the Commission's intent in its Order to exclude the [Revenue Act] tax from the revenue requirement, treat the [Revenue Act] tax as a pass[-]through tax, have the [Revenue Act] tax recovered through a volumetric charge, and have the [Revenue Act] tax separately identified as a line item on the customer's bill as other pass-through taxes are identified."
¶ 48 Subsequently, IIEC sought clarification on the partial grant of its application for rehearing. This request was denied. At the rehearing proceeding, IIEC presented additional evidence to show the Revenue Act tax was not a pass-through tax.
¶ 49 d. The Commission's November 2010 Order on Rehearing
¶ 50 In its November 4, 2010, order on rehearing, the Commission made no findings regarding IIEC's pass-through tax argument. Instead, the Commission noted it had expressed the intent to exclude the Revenue Act tax from the revenue requirement and treat the Revenue Act tax as a pass-through tax.
¶ 51 e. IIEC's December 2010 Application for Rehearing
¶ 52 On December 6, 2010, IIEC filed its second application for rehearing, seeking rehearing on the November 4, 2010, Commission order. IIEC argued, in part, the Commission's notice of commission action contradicted its April 2010 order, in which the Commission found the Revenue Act tax should be recovered in base rates. IIEC further argued no findings or analysis to support the Commission's determination appears in its notice. IIEC asked for a rehearing on these matters. The Commission denied IIEC's rehearing application.
¶ 53 B. Motion To Consolidate Appeals
¶ 54 Three appeals were filed regarding this rate case: case Nos. 4-10-0962, 4-10-0976, and 4-11-0075. In case No. 4-10-0962, on December 6, 2011, Ameren Illinois filed its notice of appeal of the Commission's orders. Two days later, in case No. 4-10-0976, IIEC filed its notice of appeal. After the Commission denied IIEC's December 2010 ...