People ex rel. Madigan v. Ill. Commerce Comm'n, No. 116005.

• Court: Supreme Court of Illinois
• Writing for the Court: Justice THEIS delivered the judgment of the court, with opinion.
• Citation: 25 N.E.3d 587
• Parties: The PEOPLE ex rel. Lisa MADIGAN et al., Appellants, v. ILLINOIS COMMERCE COMMISSION et al., Appellees.
• Docket Number: No. 116005.
• Decision Date: 23 January 2015

25 N.E.3d 587

The PEOPLE ex rel. Lisa MADIGAN et al., Appellants
v.
ILLINOIS COMMERCE COMMISSION et al., Appellees.

No. 116005.

Supreme Court of Illinois.

Jan. 23, 2015.

25 N.E.3d 588

Lisa Madigan, Attorney General, of Springfield (Carolyn E. Shapiro, Solicitor

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General, and Brett E. Legner and Karen L. Lusson, Assistant Attorneys General, of Chicago, of counsel), for the People.

Julie Soderna, of Citizens Utility Board, of Chicago, for appellant Citizens Utility Board.

Foley & Lardner LLP (Theodore T. Eidukas, of Chicago, and Bradley D. Jackson, of Madison, Wisconsin), John P. Ratnaswamy and Carla Scarsella, of Rooney Rippie & Ratnaswamy LLP, and M. Gavin McCarty and Mary Klyasheff, all of Chicago, for appellees Peoples Gas Light and Coke Company and North Shore Gas Company.

John P. Kelliher, Special Assistant Attorney General, of Chicago, for appellee Illinois Commerce Commission.

John E. Rooney and Anne W. Mitchell, of Rooney Rippie & Ratnaswamy LLP, of Chicago, for amicus curiae Northern Illinois Gas Company.

John E. Rooney and Anne W. Mitchell, of Rooney Rippie & Ratnaswamy LLP, of Chicago, for amicus curiae Northern Illinois Gas Company.

Whitt Sturtevant LLP (Albert D. Sturtevant, of Chicago, Andrew J. Campbell, of Columbus, Ohio) and Edward C. Fitzhenry, of St. Louis, Missouri, for amicus curiae Ameren Illinois Company.

Gerard T. Fox, of Chicago, and Kevin Belford and Michael Murray, of Washington, D.C., for amicus curiae American Gas Association.

OPINION

Justice THEIS delivered the judgment of the court, with opinion.

¶ 1 Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas) serve millions of residential and commercial customers in the Chicagoland area. The companies not only sell natural gas, but also deliver it through their lines. Thus, the companies' operating costs include the costs of the gas itself and the costs of the gas distribution. This case involves distribution costs, and a ratemaking proceeding that resulted in a change as to how the companies recover those costs.

¶ 2 The central issue is whether the Illinois Commerce Commission (Commission) abused its discretion when it approved a volume-balancing-adjustment rider, or Rider VBA, which imposed so-called “revenue decoupling” on the companies' customers. In 2008, the Commission approved a similar rider as a four-year pilot program. In 2012, the Commission approved the rider on a permanent basis. The Attorney General and the Citizens Utility Board (CUB) challenged that decision, and the appellate court affirmed it. 2013 IL App (2d) 120243, 370 Ill.Dec. 370, 988 N.E.2d 146.

¶ 3 For the reasons that follow, we agree with the appellate court and likewise affirm the Commission's decision.

¶ 4 BACKGROUND

¶ 5 The Public Utilities Act (Act) opens with a statement of intent:

“The General Assembly finds that the health, welfare and prosperity of all Illinois citizens require the provision of adequate, efficient, reliable, environmentally safe and least-cost public utility services at prices which accurately reflect the long-term cost of such services and which are equitable to all citizens. It is therefore declared to be the policy of the State that public utilities shall continue to be regulated effectively and comprehensively.” 220 ILCS 5/1–102 (West 2010).

One of the stated goals of such regulation is efficiency, or “the provision of reliable

25 N.E.3d 590

energy services at the least possible cost to the citizens of the State.” 220 ILCS 5/1–102(a) (West 2010).

¶ 6 The Act creates the Illinois Commerce Commission, the administrative agency responsible for setting rates that public utilities may charge their customers. 220 ILCS 5/2–101 (West 2010) ; People ex rel. Hartigan v. Illinois Commerce Comm'n, 148 Ill.2d 348, 366, 170 Ill.Dec. 386, 592 N.E.2d 1066 (1992). Under the Act, all rates and charges by public utilities, as well as all rules and regulations pertaining to those charges, must be “just and reasonable.” 220 ILCS 5/9–101 (West 2010). A public utility may not alter its rates and charges, unless it provides notice to the Commission and the public by, inter alia, filing with the Commission a new “schedule” describing any proposed changes. 220 ILCS 5/9–201(a) (West 2010). When the Commission receives a new schedule, it may conduct “a hearing concerning the propriety” of the changes, and the changes are suspended for some time pending the outcome of that hearing. 220 ILCS 5/9–201(b) (West 2010). The Act further provides:

“(c) If the Commission enters upon a hearing concerning the propriety of any proposed rate or other charge, classification, contract, practice, rule or regulation, the Commission shall establish the rates or other charges, classifications, contracts, practices, rules or regulations proposed, in whole or in part, or others in lieu thereof, which it shall find to be just and reasonable. In such hearing, the burden of proof to establish the justness and reasonableness of the proposed rates or other charges, classifications, contracts, practices, rules or regulations, in whole and in part, shall be upon the utility. * * * No rate or other charge, classification, contract, practice, rule or regulation shall be found just and reasonable unless it is consistent with Sections of this Article.” 220 ILCS 5/9–201(c) (West 2010).

¶ 7 In establishing rates, the Commission initially must determine the utility's “revenue requirement.” Business & Professional People for the Public Interest v. Illinois Commerce Comm'n (BPI II), 146 Ill.2d 175, 195, 166 Ill.Dec. 10, 585 N.E.2d 1032 (1991). The Act acknowledges “utilities are allowed a sufficient return on investment so as to enable them to attract capital in financial markets at competitive rates,” and it authorizes public utility rates for various services that “accurately reflect the cost of delivering those services and allow utilities to recover the total costs prudently and reasonably incurred.” 220 ILCS 5/1–102(a)(iii), (iv) (West 2010). As we have explained:

“A public utility is entitled to recover in its rates certain operating costs. A public utility is also entitled to earn a return on its rate base, or the amount of its invested capital; the return is the product of the allowed rate of return and rate base. The sum of those amounts—operating costs and return on rate base—is known as the company's revenue requirement. 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).’ [Citation.] The same formula is used by the Commission in ratemaking determinations for Illinois.” Citizens Utilities Co. of Illinois v. Illinois Commerce Comm'n, 124 Ill.2d 195, 200–01, 124 Ill.Dec. 529, 529 N.E.2d 510 (1988).

¶ 8 In the context of natural gas, the “C” in that equation, operating costs, includes distribution costs. To some extent, those costs are fixed. Utility companies incur them regardless of the volume of gas that

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they deliver because they must be prepared to provide adequate, reliable, and safe service. Traditionally, however, volume has played a major role in setting gas rates, and companies have recovered part of their distribution costs through “volumetric distribution charges” based on statistical forecasts of the amount of gas their customers will use. The forecasts, in turn, rest upon several variables, some of which are wildly unpredictable like the weather. Consequently, gas companies have recovered more than their fixed distribution costs when demand for gas has been high, and less than that when it has been low.

¶ 9 In 2007, Peoples Gas and North Shore Gas petitioned the Commission to approve Rider VBA. “A rider is a cost recovery method. It generally alters an otherwise applicable rate and recovers a specific cost under particular circumstances. * * * [A rider] often include[s] a reconciliation formula, designed to match revenue recovery with actual costs.” Citizens Utility Board v. Illinois Commerce Comm'n, 166 Ill.2d 111, 133, 209 Ill.Dec. 641, 651 N.E.2d 1089 (1995) ; see Central Illinois Light Co. v. Illinois Commerce Comm'n, 255 Ill.App.3d 876, 883, 193 Ill.Dec. 418, 626 N.E.2d 728 (1993). Rider VBA was designed with not only revenue recovery, but also revenue disgorgement, in mind. That is, Rider VBA prevents under-recovery of fixed distribution costs, as well as over-recovery of them, by “decoupling” the revenue for those costs that the companies receive from the volume of gas that they deliver. Revenue decoupling essentially maintains a utility company's revenue at or around the revenue requirement. If actual revenues dip below a level set by the Commission due to decreased delivery volume, the company issues customers a surcharge for the difference. If revenues tick above that level due to increased delivery volume, the company issues customers a credit. See Sandy Glatt & Myka Dunkle, Natural Gas Revenue Decoupling Regulation: Impacts on...