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Commonwealth Edison Co. v. Illinois Commerce Commission

Court of Appeals of Illinois, Second District

September 27, 2013

ILLINOIS COMMERCE COMMISSION; THE PEOPLE ex rel. LISA MADIGAN, Attorney General; AARP; AARP ILLINOIS; BLUESTAR ENERGY SERVICES, INC.; BUILDING OWNERS AND MANAGERS ASSOCIATION OF CHICAGO; CHICAGO TRANSIT AUTHORITY; CITIZENS UTILITY BOARD; CHRYSLER, LLC; THE CITY OF CHICAGO; THE COMMERCIAL GROUP (styled as such collectively from the following petitioners: Best Buy Company, Inc.; J.C. Penney Corporation, Inc.; Macy's, Inc.; Walmart Stores, Inc.); CONSTELLATION ENERGY COMMODITIES GROUP, INC.; CONSTELLATION NEWENERGY, INC.; UNITED STATES DEPARTMENT OF ENERGY; INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL UNION NO. 15, AFL-CIO; ILLINOIS INDUSTRIAL ENERGY CONSUMERS, a/k/a IIEC (styled as such collectively from the following petitioners: Abbott Laboratories, Inc.; Arcelormittal USA; Caterpillar, Inc.; Citgo, Inc.; Corn Products International, Inc.; Daimler Chrysler Corporation; Enbridge Energy, LP; Exxonmobil; Ford Motor Company; Merchandise Mart; Sterling Steel Company, LLC; Thermal Chicago Cooling, Inc.; Citco Inc.; General Iron Industries, Inc.); NORTHEAST ILLINOIS REGIONAL COMMUTER RAILROAD CORPORATION, d/b/a Metra; NUCOR STEEL KANKAKEE, INC.: THE KROGER COMPANY; THE COALITION TO REQUEST EQUITABLE ALLOCATION OF COSTS TOGETHER, a/k/a "REACT" (styled as such collectively from the following petitioners: A. Finkl and Sons Company; Alsip Paper Condominium Association; Aux Sable Liquid Products, LP; The City of Chicago; Commerce Energy, Inc.; Flint Hills Resources, LLC; Integrys Energy Services, Inc.; Metropolitan Water Reclamation District of Greater Chicago; PDV Midwest Refining, LLC; United Airlines, Inc.; Wells Manufacturing, Inc.); RETAIL ENERGY SUPPLY ASSOCIATION, a/k/a "RESA" (styled as such collectively from the following petitioners: Commerce Energy, Inc.; Consolidated Edison Solutions, Inc.; Direct Energy Services, LLC; Gexa Energy; Hess Corporation; Intergrys Energy Services, Inc.; Liberty Power Corporation; Reliant Energy Retail Services, LLC; Sempra Energy Solutions; Strategic Energy, LLC; Suez Energy Resources NA, Inc.; U.S. Energy Savings Corporation); and UNIVERSITY OF ILLINOIS, Respondents.

On Petition for Administrative Review from the Illinois Commerce Commission. No. 07-0566

Justices Hutchinson and Spence concurred in the judgment and opinion.



¶ 1 Commonwealth Edison Company (ComEd) is a public utility company that distributes electricity to consumers in northern Illinois. ComEd petitioned the Illinois Commerce Commission (Commission) to restructure and alter the rates ComEd charges, seeking a $360 million increase (2007 Rate Case). ComEd calculated its revenue requirement using 2006 as an historical "test year" and included certain new distribution assets, referred to as "plant." The Commission entered an order granting an increase of about $274 million (2007 Rate Order), and ComEd collected those rates from customers between September 2008 and May 2011.

¶ 2 ComEd appealed the order, and we held that the Commission, in approving the rates, had employed an erroneous methodology that overstated the value of ComEd's plant in service. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 405 Ill.App.3d 389, 392 (2010) (ComEd). We remanded the cause to the Commission to make a finding on the propriety of including third-quarter 2008 plant additions in the pro forma adjustments. On remand, the Commission determined that the 2007 Rate Order implicitly denied inclusion of the plant additions. In a "Refund Order, " the Commission ordered ComEd to refund to customers nearly $37 million that ComEd collected between September 30, 2010, when this court issued its ruling in ComEd, and May 30, 2011, when new rates took effect (the refund period).

¶ 3 ComEd appeals the Commission's Refund Order. First, ComEd argues that the Commission exceeded its jurisdiction in ordering the refund. Second, ComEd argues that a refund is unnecessary because ComEd's actual costs during the refund period were greater than projected, and therefore the error in the 2007 Rate Order did not actually result in an overstatement of the value of ComEd's plant in service. Third, ComEd asserts that, even if a refund were appropriate, the Commission did not review and weigh the previously-presented evidence on the third-quarter 2008 plant additions and therefore failed to comply with this court's mandate in calculating the amount to be refunded.

¶ 4 We hold that (1) the Commission had jurisdiction to order the refund; (2) allowing ComEd to introduce new evidence on actual costs during the refund period would have been improper retroactive ratemaking in that it would have required reopening the proceedings to all parties for evidence on actual costs and savings on the entire 2007 Rate Order, and therefore, the Commission properly determined that the refund should be the difference between the actual rates collected pursuant to the 2007 Rate Order and the rates that would have been charged if they had been set in accordance with our views expressed in ComEd; and (3) the Commission sufficiently followed our mandate on remand, and substantial evidence supports the Commission's exclusion of the third-quarter 2008 plant additions from the rate base. We affirm the Refund Order.


¶ 6 The Commission entered the Refund Order, which is a final order, on February 23, 2012. On March 2, 2012, ComEd filed a timely application for rehearing concerning the issues raised in this appeal. On March 22, 2012, the Commission denied ComEd's application for rehearing. Four days later, ComEd filed a petition for review in this court.

¶ 7 This court has jurisdiction to consider the appeal pursuant to Illinois Supreme Court Rule 335 (eff. Feb. 1, 1994) and section 10-201(a) of the Public Utilities Act (Act) (220 ILCS 5/10-201(a) (West 2010) (appeal allowed within 35 days of denial of rehearing to the appellate court of any district where the subject matter is situated)).


¶ 9 ComEd delivers electricity to more than 3.7 million retail consumers in northern Illinois. In response to the enactment of the Electric Service Customer Choice and Rate Relief Law of 1997 (Rate Relief Law) (220 ILCS 5/16-101 et seq. (West 2006)), ComEd divested itself of its electricity generating assets (see 220 ILCS 5/16-111(g) (West 2006)) and became an "integrated distribution company, " also known as a "wires company." ComEd's costs as a "wires company" do not vary appreciably over time, as they did when costs were driven by generating electricity. ComEd, 405 Ill.App.3d at 393-94.

¶ 10 The rates for delivering electricity are calculated separately from the rates for the electric supply itself. 220 ILCS 5/16-109A, 16-111.5 (West 2006). An electric utility like ComEd is entitled to rates that allow it to recover fully its prudent and reasonable costs of service. 220 ILCS 5/16-108(c) (West 2006) (rates "shall allow the electric utility to recover the costs of providing delivery services through its charges").

¶ 11 A rate case is initiated when a utility files tariffs providing for a rate increase and the Commission suspends those tariffs to conduct an investigation and hearing. 220 ILCS 5/9-201 (West 2006). 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. 220 ILCS 5/9-201(c) (West 2006).

¶ 12 In establishing the rates that a public utility is to charge its customers, the Commission considers the utility's operating costs, rate base, and allowed rate of return. ComEd, 405 Ill.App.3d at 394 (citing Citizens Utilities Co. v. Illinois Commerce Comm'n, 124 Ill.2d 195, 200 (1988)). Recovery of the utility's operating costs and the return on its rate base is known as the utility's annual revenue requirement. Generally speaking, a utility determines its revenue requirement by adding operating costs to invested capital multiplied by the rate of return. ComEd, 405 Ill.App.3d at 394 (citing Business & Professional People for the Public Interest v. Illinois Commerce Comm'n, 146 Ill.2d 175, 195 (1991) (BPI II). " '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)." ' " ComEd, 405 Ill.App.3d at 394 (quoting BPI II, 146 Ill.2d at 195-96, quoting Citizens Utilities Co., 124 Ill.2d at 200-01.)[1]

¶ 13 The utility's return, or profit, is the product of the utility's allowed rate of return and its rate base. Both factors are determined by the Commission. Section 9-211 of the Act provides that a utility's rate base may include " 'only the value of such investment which is both prudently incurred and used and useful in providing service to public utility customers.' " ComEd, 405 Ill.App.3d at 394-95 (quoting 220 ILCS 5/9-211 (West 2006)).

¶ 14 The Illinois Administrative Code (Administrative Code) provides that a utility's revenue requirement may be calculated by beginning with costs incurred during a 12-month period known as a "test year, " which may be either an historical or a future period. 83 Ill. Adm. Code 287.20 (2003). If an historical test year is used, it can be any consecutive 12-month period, beginning no more than 24 months before the utility's filing new tariffs, for which actual data are available at the time of filing. 83 Ill. Adm. Code 287.20 (2003). "The supreme court has explained that the purpose of the test year rules 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.' " ComEd, 405 Ill.App.3d at 395-96 (quoting BPI II, 146 Ill.2d at 238).

¶ 15 The historical data might be subject to "pro forma" adjustments, which are estimated or calculated adjustments that reflect certain known and measurable changes in post-test-year data as specified in the rules. 83 Ill. Adm. Code 287.20, 287.40 (2003). The pro forma adjustments must 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 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 (2003); ComEd, 405 Ill.App.3d at 396.

16 A. 2007 Rate Case

¶ 17 On October 17, 2007, ComEd filed tariffs that incorporated a general increase in rates for delivering electricity and revised other terms and conditions of service. See 220 ILCS 5/9-201 (West 2006). ComEd proposed no change in the price of the electricity itself. ComEd asserted that a $360 million increase in its delivery rates was necessary because the existing rates were based on costs that were years out of date.

¶ 18 ComEd used the 2006 calendar year as an historical test year and included certain pro forma adjustments. ComEd proposed to increase its 2006 rate base investment amount by $1, 498, 317, 000 based on new plant that had been or would be implemented over a 21-month period from January 2007 through September 2008.

¶ 19 On November 28, 2007, the Commission suspended ComEd's proposed tariffs and initiated the 2007 Rate Case. The Commission assigned two administrative law judges (ALJs) to take evidence and issue a proposed order. Several parties, including the Attorney General (AG) and the Citizens Utility Board (CUB), intervened to protect their interests. Testimony and documentary exhibits were submitted, and evidentiary hearings were held from April 28, 2008, to May 5, 2008. ComEd, 405 Ill.App.3d at 396.

¶ 20 ComEd asserted that its delivery costs included the costs of its investment in new infrastructure placed into service since the last rate case. ComEd sought a pro forma adjustment to the rate base to include certain new plant that had entered or would enter service after the 2006 test year but before the end of the third quarter of 2008. ComEd argued that the costs it sought to recover were prudently incurred and reasonable in amount and that the plant it included in the rate base was used and useful and necessary to provide delivery services. ComEd, 405 Ill.App.3d at 396.

¶ 21 ComEd and the Commission's staff (Staff) submitted a joint recommendation to the Commission. First, based on the evidence, the Commission's rules, and relevant decisions in earlier rate cases, ComEd and the Staff recommended excluding from ComEd's rate base accumulated depreciation and certain taxes. ComEd and the Staff opined that the Commission should not reduce the rate base further by subtracting extra depreciation and deferred taxes, as the intervenors might propose. Second, ComEd and the Staff recommended that, if the Commission approved the joint recommendation as a whole, the rate base should include plant placed in service through only the second quarter of 2008. ComEd's "conditional withdrawal" of its request to include plant additions from the third quarter of 2008 reduced its requested rate base by about $175 million. ComEd, 405 Ill.App.3d at 397.

¶ 22 On September 10, 2008, the Commission issued the 2007 Order, which authorized ComEd to file new tariffs to implement a $273, 573, 000 rate increase. The new rates were designed to recover an annual revenue requirement of $1, 961, 065, 000, based in part on the Commission's determination that the value of ComEd's rate base investment was $6, 694, 039, 000. The Commission concluded that the value of ComEd's test-year rate base investment should be increased by the amount of its planned post-test-year plant additions, without recognizing identified post-test-year decreases in existing investment value. Consistent with the recommendation of ComEd and the Staff, the Commission also excluded from the rate base the value of the plant placed in service in the third quarter of 2008. ComEd, 405 Ill.App.3d at 397.

¶ 23 B. ComEd

¶ 24 ComEd appealed the 2007 Rate Order, arguing that the Commission did not grant ComEd full recovery of prudent and reasonable costs of certain employees' salaries and wages. ComEd further asserted that, if we ruled against it on issues raised by the intervenors, it would be denied the benefit of the bargain that it struck with the Staff. Specifically, ComEd argued that it would be manifestly unfair to modify the agreement without allowing ComEd to add to its rate base the plant placed in service in the third quarter of 2008.

¶ 25 The AG, the CUB, and the Illinois Industrial Energy Consumers (IIEC), including Abbott Laboratories, Inc., and other large electricity consumers, were among certain intervenors that also appealed the 2007 Rate Order. The AG, CUB, and IIEC argued that the Commission erred in allowing for post-test-year plant additions in the rate base without also recognizing a setoff for post-test-year changes in accumulated depreciation in the existing plant. IIEC argued that the 2007 Rate Order unlawfully inflated ComEd's rate base, violated test-year requirements as set forth in case law and the Commission's own rules, and misapprehended the Commission's duty to decide a case exclusively on the record before it, regardless of how the Commission decided the same issue in the past.

¶ 26 We ruled in favor of the intervenors on this issue, holding that the Commission abused its discretion in excluding from the rate base the increase in accumulated depreciation of existing plant during the post-test-year period. ComEd, 405 Ill.App.3d at 420. We concluded that ComEd's reading of the test-year rules to exclude accumulated depreciation for the pro forma period would create an incentive for the utility to always seek upward pro forma adjustments, regardless of any decline in actual net plant, so the utility could recover an amount that ignores accompanying depreciation accumulating over the same period. Such an interpretation would result in a consistently and unavoidably inflated rate base and an inescapably inaccurate picture of the utility's finances. We deemed ComEd's interpretation to be ...

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