On Petition for Administrative Review from the Illinois Commerce Commission. ICC Case Nos. 01-0705, 02-0067, 02-0725 (cons.).
Julie L. Soderna and Christie R. Hicks, both of Citizens Utility Board, of Chicago, for petitioner.
James E. Weging, of Illinois Commerce Commission, of Chicago, for respondent Illinois Commerce Commission.
John E. Rooney, John P. Ratnaswamy, and Anne W. Mitchell, all of Rooney Rippie & Ratnaswamy LLP, of Chicago, for respondent Northern Illinois Gas Company.
Hutchinson and Burke,
Justices concurred in the judgment and opinion.
SCHOSTOK, PRESIDING JUSTICE.
[¶1] On June 5, 2013, following review of an alternative rate regulation program pursuant to section 9-244(c) of the Public Utilities Act (Act) (220 ILCS 5/9-244(c) (West 2012)), the Illinois Commerce Commission (Commission) ordered Northern Illinois Gas Company, d/b/a Nicor Gas Company (Nicor), to refund $72,149,519 to its customers based on certain improprieties that occurred during the pendency of the program. On appeal, the Citizens Utility Board (CUB) argues that the Commission applied an improper standard of proof and that Nicor customers are entitled to an additional $155 million in damages based on alleged manipulation of storage withdrawals in 2001. We affirm the Commission's decision.
[¶3] On March 1, 1999, Nicor filed a verified petition seeking the Commission's approval, under section 9-244 of the Act (220 ILCS 5/9-244 (West 1998)), of an alternative rate regulation program, which it termed the " Gas Cost Performance Program" (GCPP). The Commission approved the GCPP with modifications in an order entered on November 23, 1999. The GCPP was in effect from January 1, 2000, until December 31, 2002.
[¶4] Under the GCPP, each calendar year, Nicor's total actual annual purchased gas costs were compared with an annual gas cost " benchmark," which was meant to approximate the gas costs that Nicor would have incurred under traditional rate regulation. The benchmark reflected the market price for the gas when it was sold to customers. It incorporated the market index cost of gas less certain adjustments, to reflect other factors impacting the costs Nicor incurred to provide gas to its customers. One such adjustment was a storage credit adjustment (SCA), which accounted for the seasonal price differential
between lower-cost summer months and higher-cost winter periods. The withdrawal percentages under the SCA were based on Nicor's historic storage withdrawal activity during the years 1994-98. By withdrawing less than it had historically, Nicor could raise the benchmark. By withdrawing more than it had historically, Nicor could lower the benchmark.
[¶5] Under the GCPP, savings or losses experienced by Nicor based on the actual cost of gas in comparison to the benchmark were to be shared on a 50-50 basis between Nicor and its customers. If the benchmark exceeded actual gas costs over a given year, Nicor and its customers each received 50% of the difference. If the benchmark was less than the actual gas costs, Nicor and its customers each had to pay 50% of the difference.
[¶6] Natural gas utility companies typically withdrew gas from storage during the winter when the demand and cost for gas were higher, and replenished the storage supply during the summer when gas prices generally declined. Nicor had significant underground storage of natural gas. Nicor used a last-in, first-out (LIFO) method of accounting for gas storage inventory. Under this method, the inventory was considered to exist in layers, with each layer priced at its cost in the year it was added to storage. When gas was withdrawn from storage, the most recent layer added was considered the layer withdrawn for accounting purposes. Whether a layer was added was always determined at the end of the year, by considering overall storage additions versus withdrawals. If more gas was added than withdrawn from storage, a LIFO storage layer was created. Over time, Nicor had accumulated large stores of low-cost LIFO gas on its books, which were estimated to be worth several hundred million dollars.
[¶7] Before applying for the GCPP, Nicor created an " inventory value team" to investigate how Nicor could benefit from the low-cost gas in storage. Under traditional rate regulation, referred to as purchased gas adjustment (PGA) regulation, ratepayers would have received 100% of the benefit of the low-cost LIFO gas. In the middle of 1998, the inventory value team issued a report recommending that Nicor pursue a performance-based regulatory program (PBR), such as the GCPP, which would allow Nicor to share in the benefit of the low-cost LIFO gas. In the Commission's proceedings that resulted in the approval of the GCPP, Nicor failed to reveal this information when it was questioned as to the extent to which it would profit under the GCPP.
[¶8] On January 24, 2002, the Commission entered an initiating order (Docket No. 02-0067) to review the GCPP, pursuant to section 9-244(c) of the Act, which required that the Commission review any approved program two years after its implementation to determine whether it was meeting its objective. On June 10, 2002, following the submission of testimony and an evidentiary hearing, the record was marked " Heard and Taken." CUB then received an anonymous " whistleblower" fax containing allegations about the operation of the GCPP. Thereafter, Nicor and all other parties agreed to reopen the case and resume discovery. On July 16, 2002, the Commission entered an interim order allowing discovery to proceed.
[¶9] In response to the whistleblower fax, Nicor formed a special committee to investigate its GCPP activities. The committee hired Scott R. Lassar of Sidley, Austin, Brown and Wood (Sidley) to investigate Nicor's GCPP activities. On October 28, 2002, Sidley filed with the committee a report, authored by Lassar (the Lassar report), presenting its findings and conclusions.
The Lassar report concluded that Nicor's GCPP activities had adverse consequences for customers and it recommended certain adjustments to eliminate those consequences. In the report, Lassar noted that Nicor's 2001 storage withdrawals were well below historic estimates. However, he " did not find evidence indicating that this was because of improper attempts to manipulate the storage cycle." He noted that December 2000 was exceedingly cold. In January 2001, based upon Nicor's concerns that it would be another exceedingly cold month, Nicor obligated itself to buy large quantities of gas at historically high prices so that it would ensure service to customers for the rest of the winter. However, January 2001 was warm. Lassar also noted that due to high gas prices in the fall/winter of 2001, when Nicor would normally have sold its storage gas to ratepayers, it instead provided cheaper, flowing gas to customers.
[¶10] On December 9, 2002, the parties filed a joint motion to reopen the record in docket No. 02-0067 and expand the scope of the proceeding. On December 17, 2002, in a second interim order, the Commission reopened the record and decided that additional issues related to the PGA regulation for the years 1999-2000 would be reviewed based on new and relevant information. The Commission also declared that " this proceeding is the appropriate formal mechanism to consider the totality of issues currently before this Commission as a result of the operation of the GCPP program, including the transactions occurring in 1999." The Commission further stated that it was reopening the record to consider:
" all issues relating to the operation of the [GCPP] Nicor Gas implemented *** in accordance with the Commission's order entered November 23, 1999, in Docket 99-0127, and all issues relating to any refunds that may be owing to Nicor customers *** as a result of the operation of the [GCPP] in 1999, 2000, 2001, and 2002, and for ordering such other and further relief as deemed equitable and just."
[¶11] The Commission was required to conduct annual hearings (" reconciliation proceedings" ) to (1) examine whether Nicor's rates reflected the costs of purchased gas, in order to determine whether such purchases were prudent, and (2) reconcile any amounts collected with the actual costs of gas. 220 ILCS 5/9-220(a) (West 2002). The Commission consolidated docket No. 02-0067 with Nicor's then-pending reconciliation proceedings of its actual gas costs, for the years ending December 31, 2001 (docket No. 01-0705), and December 31, 2002 (docket No. 02-0725).
[¶12] Thereafter, evidentiary hearings in this case were suspended pending litigation in the circuit court of Cook County to obtain copies of materials related to the GCPP that were in the possession of a Texas-based entity. The materials were ultimately produced in December 2006. Proceedings in this case then resumed.
[¶13] Commencing in August 2009, CUB, the Illinois Attorney General (AG), the staff of the Commission (Staff), and Nicor each sponsored direct and surrebuttal testimony. Relevant to this appeal, Dr. Paul Carpenter, David Moes, and Christopher Gulick testified on behalf of Nicor. David Effron testified on behalf of the AG. James Mierzwa testified on behalf of CUB. CUB identified 11 different issues that required refunds to correct Nicor's inappropriate actions under the GCPP. The refunds were intended to adjust the benchmark to place customers in the position they would have been absent the improper ...