Court of Appeals of Illinois, First District, Third Division
Petition for Review of Orders of the Illinois Commerce Commission. Docket No. 11-0721.
On appeal from the Illinois Commerce Commission's application of what is commonly known as the Energy Infrastructure Modernization Act, the appellate court affirmed the Commission's rulings requiring an adjustment to utility rates charged petitioner's customers to reflect an expected increase in customers served, allocating certain costs between distribution to ratepayers and transmission to out-of-state purchasers, restricting the recovery from ratepayers of performance bonuses paid to employees, denying the recovery from ratepayers of part of the amount paid to an affiliate because the affiliate used the payment to give its employees bonuses based on net income, and denying the recovery from ratepayers for compensation paid to managers in the form of stock in petitioner's parent corporation, since petitioner failed to establish any error in those rulings.
Commonwealth Edison Company (Thomas S. O'Neill, Anastasia M. O'Brien, and Richard G. Bernet, of counsel), and Jenner & Block LLP (Barry Levenstam, of counsel), both of Chicago, and Jenner & Block LLP (David W. DeBruin, Katherine A. Fallow, and Matthew E. Price, of counsel), of Washington, D.C., for petitioner.
Illinois Commerce Commission, of Chicago (John P. Kelliher and Thomas R. Stanton, of counsel), for respondent Illinois Commerce Commission.
Lisa Madigan, Attorney General, of Chicago (Michael A. Scodro, Solicitor General, and Jane Elinor Notz, Clifford W. Berlow, Janice A. Dale, and Karen L. Lusson, Assistant Attorneys General, of counsel), Lueders, Robertson & Konzen, of Granite City (Eric Robertson and Andrew Rankin, of counsel), Conrad R. Reddick, of Wheaton, and Schuchat, Cook & Werner, of St. Louis, Missouri (Marilyn S. Teitelbaum and Rochelle G. Skolnick, of counsel), for other respondents.
Whitt Sturtevant LLP, of Chicago (Albert D. Sturtevant, of counsel), Whitt Sturtevant LLP, of Columbus, Ohio (Mark A. Whitt, of counsel), and Ameren Services Company, of St. Louis, Missouri (Edward C. Fitzhenry, of counsel), for amicus curiae .
JUSTICE NEVILLE delivered the judgment of the court, with opinion. Presiding Justice Hyman and Justice Pucinski concurred in the judgment and opinion.
[¶1] This case involves the Illinois Commerce Commission's application section 16-108.5 of the Public Utilities Act, commonly known as the Energy Infrastructure Modernization Act (220 ILCS 5/16-108.5 (West 2012)). After Commonwealth Edison (ComEd) filed its appeal in this case, the General Assembly further amended the Act in a way that resolved some of the issues on appeal. ComEd now challenges the Commission's rulings (1) requiring an adjustment to rates charged to ComEd customers to reflect the expected increase in the number of customers served; (2) allocating certain general costs between distribution to ratepayers and transmission to out-of-state purchasers; (3) restricting ComEd's recovery from ratepayers for certain performance bonuses paid to ComEd employees; (4) denying ComEd recovery from ratepayers for part of the amount ComEd paid to an affiliate, because the affiliate used the payment to give its employees bonuses based on net income; and (5) denying ComEd recovery from ratepayers for compensation paid to ComEd managers in the form of stock in ComEd's parent corporation. We find that ComEd did not meet its burden of showing error in any of the contested rulings.
Accordingly, we affirm the Commission's order.
[¶3] The Act, as amended, permits electric utilities to use a " performance-based formula" (220 ILCS 5/16-108.5(b) (West 2012)) to set rates for delivery of the electricity it sells. To use the formula, the utility must first establish its revenue requirement for a calendar year, subject to the Commission's approval, using the formula: revenue requirement = operating expenses cost of capital. See Business & Professional People for the Public Interest v. Illinois Commerce Comm'n, 146 Ill.2d 175, 195, 585 N.E.2d 1032, 166 Ill.Dec. 10 (1991). In this formula the cost of capital equals the rate base, defined as the total value of all invested capital, times the rate of return on capital. See Business & Professional People, 146 Ill.2d at 195. The utility must then allocate the revenue requirement to several established classes of ratepayers, and set rates, based on historical data, which the utility expects to generate the required revenues.
[¶4] To project its revenue requirement for a calendar year, say 2020, in 2019 the utility will use its actual expenses for 2018 plus the cost of projected capital additions and depreciation expenses for 2019, as an approximation of the 2020 expenses to recover through its 2020 rates. The utility will also include in its revenue requirement for 2020 the sum needed to reconcile its projected revenue requirement for 2018 with its actual costs (including the cost of capital) incurred in 2018. The Act permits the utility to collect interest on the reconciliation amount for the time between the payment of the costs, in 2018, and its subsequent collection of the reconciliation amount from ratepayers. 220 ILCS 5/16-108.5(c)(6) (West 2012). In exchange for the legislative guarantee of payment, the utility must commit to making very substantial investments in updating and improving its facilities, and hiring new employees. 220 ILCS 5/16-108.5(b) (West 2012).
[¶5] In 2011, ComEd chose to file a new rate tariff using the performance-based formula set out in the Act. ComEd promised to invest $1.1 billion over 5 years in system upgrades, modernization projects, and training facilities, plus an additional $1.5 billion within 10 years in further technological upgrades. ComEd also promised to create 2,000 new, full-time jobs. See 220 ILCS 5/16-108.5(b) (West 2012).
[¶6] The Commission staff and a number of other ratepayers opposed parts of the proposed rate tariff. The Commission permitted several of the ratepayers to intervene in proceedings on the proposed tariff. The Commission accepted transcripts of testimony from a number of witnesses for ComEd, the staff, and the intervenors. After the written submissions narrowed the issues, the Commission heard live testimony from several witnesses.
[¶7] The disputed issues centered on the reconciliation process. In particular, the parties disagreed about when to include new capital additions in the rate base, and how much interest ratepayers needed to pay on the reconciliation amount.
[¶8] Rate Base
[¶9] In its proposed tariff, ComEd included in its rate base for a given year all additions to the rate base it made that year. That is, under its formula, it will include in the rate base for 2018 all of the additions to the rate base that it makes in 2018, and recover a cost of capital for 2018 as though it used all of the capital additions throughout the year.
[¶10] Witnesses for the staff and intervenors pointed out that with ComEd's methods, it will start earning its return on capital on January 1, 2018, for all investments it makes during 2018, even if it does not make the investment until December 2018. ComEd will start earning its rate of return on all of its investments before it makes those investments, sometimes earning the rate of return for several months prior to the investment. The staff and intervenors recommended instead a formula that would have the Commission use an average of the rate base as of December 31, 2017, and December 31, 2018, to determine the rate base on which ComEd would earn its return on capital for 2018. The witnesses explained that ComEd's data, and the Act, constrained them to use only year-end data to determine the rate base in effect for a calendar year. The Act does not permit adjustments to make each investment start earning a return as part of the cost of capital on the date that ComEd makes the investment.
[¶11] If the Commission adopted the staff's recommendation, ratepayers would pay as the cost of capital for 2018 the established rate of return for all capital equipment in use for the entire year, plus that same rate for half of the capital investments made during the year. The staff's recommendation effectively gives ComEd its full return on its new investments at the rate set for that year if ComEd distributes its new investments evenly throughout the year. If ComEd makes most of its investments before July 1, it would earn somewhat less than the set rate of return on capital for its new investments; if it makes the bulk of its new investments after July 1, it would earn more than the set rate of return on its new investments. But under the staff's proposal, ComEd would not get the consistent overpayment it sought through the formula it used, by which it never would make a new investment before the investment started earning its rate of return, and all new investments would consistently earn a rate of return in excess of the rate of return set for the year. Witnesses estimated that, because of the capital investments ComEd promised to make as a prerequisite for using the Act's performance-based formula for rates, ComEd's method for calculating its rate base would overstate its revenue requirement by about $15 million to $20 million per year.
[¶12] The Commission adopted the recommendation of the staff and most of the intervenors, setting the rate base for each year as the average of the rate base at the end of the prior year and the rate base as of the end of the year at issue.
[¶14] ComEd sought to earn interest on the reconciliation amount at the rate of return set for its total capital. The Act sets forth a formula for determining the cost of equity as a part of return on capital, and then the Commission uses that number and appropriate rates of return for long-term and short-term debt to find an overall cost of capital. The parties agreed that the formula permits ComEd to recover as part of its revenue requirement for 2010, for recovery through 2012 rates, a 10.05% return on equity, calculated as the average yield on United States Treasury bonds (4.25% in 2010) plus 580 basis points (4.25% 5.80% = 10.05%). 220 ILCS 5/16-108.5(c)(3) (West 2012). The parties further agreed that the Commission should allow about a 6.4% return on long-term debt, and 0.72% return on short-term debt. About 46% of ComEd's capital comes from equity, more than 53% comes from long-term debt, and the remainder, about 0.5%, comes from short-term debt. Using the statutory formula yields an overall cost of capital of about 8.1%, computed
approximately as (.46 x 10.05%) (.535 x 6.4%) (.005 x 0.72%).
[¶15] The staff argued that the overall rate of return on capital compensates ComEd for the risk it incurs by investing in capital assets needed to produce electricity for a long period of time. If it invests unwisely, in assets that do not warrant their cost, the Commission may not permit ComEd to recover from ratepayers for the investments. If other energy sources replace electricity before the assets have exhausted their productive lives, ComEd may have excess production capacity and an insufficient market from which to recover its costs. Because of such risks, the Act requires ratepayers to give ComEd a return on equity far in excess of the rate of return for very safe investments. The Act systematically requires the cost of equity to exceed the return on Treasury bonds by 580 basis points. 220 ILCS 5/16-108.5(c)(3) (West 2012).
[¶16] The staff observed that under the Act ComEd will recover the reconciliation amount without facing any risk similar to the risks that justify the rate of return for equity. ComEd's own witness testified that the reconciliation amount " [i]n essence *** represents a loan to customers for services already provided." The reconciliation amount differs from a conventional loan in that the legislature mandated payment of the reconciliation amount through rates charged two years after ComEd makes the advance payments. The rates even compensate ComEd for uncollectible debts, so ComEd does not face even the risks of a conventional loan to the state. The staff's witness recommended setting interest at the rate of a AAA-rated bond for a period of two years.
[¶17] The Commission said:
" Regarding our review of the various positions on this issue the Commission shares the concern raised by Staff that using the [cost of capital] as ComEd proposes would treat the reconciliation amount like a rate base investment rather than a reconciling item. We also find cred[ible] the point raised by the Company that the reconciliation adjustments will represent significant investments and operating expenses funded by the participating utility.
The Commission recognizes that the due to the [Act's] timeline for the reconciliation period the interest rate is both short term and long term in nature. *** The Commission believes there is value in setting an interest rate based upon debt that is relevant to the Company for the time duration of the reconciliation. In order to capture the unique aspects of the relevant period we find that a hybrid approach should be utilized to determine the appropriate interest rate. Such a hybrid calculation would take the weighted costs of short-term debt and long-term debt and exclude the weighted cost of common equity as the methodology in calculating the interest rate. This results in an interest rate of ...