People ex rel. Madigan v. Illinois Commerce Comm'n

• Decision Date: 30 September 2011
• Docket Number: 1–10–0936,1–10–0655,Nos. 1–10–0654,1–10–1846,1–10–1852.,1–10–1790,s. 1–10–0654
• Parties: The PEOPLE ex rel. Lisa MADIGAN, Attorney General of the State of Illinois, Petitioner, v. ILLINOIS COMMERCE COMMISSION; North Shore Gas Company, Peoples Gas Light & Coke Company; Vanguard Energy Services, LLC; Prairie Point Energy, LLC d/b/a Nicor Advanced Energy LLC; United Workers Union of America, AFL–CIO, Local No. 18007; Constellation New Energy, Inc., Gas Division; Citizens Utility Board; The City of Chicago; and Retail Gas Suppliers, Respondents.
• Court: United States Appellate Court of Illinois

2011 IL App (1st) 100654

354 Ill.Dec. 662

958 N.E.2d 405

The PEOPLE ex rel. Lisa MADIGAN, Attorney General of the State of Illinois, Petitioner,

v.ILLINOIS COMMERCE COMMISSION; North Shore Gas Company, Peoples Gas Light & Coke Company; Vanguard Energy Services, LLC; Prairie Point Energy, LLC d/b/a Nicor Advanced Energy LLC; United Workers Union of America, AFL–CIO, Local No. 18007; Constellation New Energy, Inc., Gas Division; Citizens Utility Board; The City of Chicago; and Retail Gas Suppliers, Respondents.

Nos. 1–10–0654

1–10–0655

1–10–0936

1–10–1790

1–10–1846

1–10–1852.

Appellate Court of Illinois, First District, Fifth Division.

Sept. 30, 2011.

John P. Ratnaswamy, Carla Scarsella, Rooney Rippie & Ratnaswamy LLP, Chicago, Bradley D. Jackson, Foley & Lardner LLP, Madison, WI, Mary Klyasheff, Integrys Energy Group, Inc., Theodore Eidukas, Foley & Lardner LLP, Chicago, for Appellants–North Shore Gas Company and The Peoples Gas Light and Coke Company.

Kristin Munsch, Christie R. Hicks, Citizens Utility Board, Chicago, Lisa Madigan, Attorney General, Michael A. Scodro, Solicitor General, Paul Berks, Janice A. Dale, Karen L. Lusson, Assistant Attorneys General, for Joint Petitioners for the People of the State of Illinois and the Citizens Utility Board.

John P. Kelliher, James E. Weging, Special Assistant Attorneys General, Chicago, for Respondent–Illinois Commerce Commission.

OPINION

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

[354 Ill.Dec. 665] ¶ 1 This consolidated appeal arises from the filing of an action by North Shore Gas Company (North Shore) and Peoples Gas Light and Coke Company (Peoples Gas) (together referred to as the Utilities) with the Illinois Commerce Commission (Commission), which sought to restructure the rates the gas utility companies charged residential customers for the delivery of natural gas and approve a special rider for infrastructure improvements to the utilities' gas delivery system. The Commission entered its final order on January 22, 2010, and a subsequent order on rehearing on June 2, 2010. Several parties involved in the proceedings objected to certain aspects of the Commission's final order and filed appeals, which have been consolidated into the present action before this court.

¶ 2 For the reasons that follow, we affirm the Commission's order in part, reverse in part, and remand the cause for further proceedings consistent with this opinion.

¶ 3 BACKGROUND

¶ 4 On February 25, 2009, North Shore and Peoples Gas each filed tariffs with the Commission that consisted of a proposed general increase in natural gas distribution rates, certain new tariff riders, and other tariff revisions. The tariff requests were supported by “prefiled” direct testimony and other material. On March 25 and July 8, 2009, the Commission suspended the proposed rates and initiated contested rate cases to examine the proposed rates and revisions. Several parties intervened, including the parties to this appeal, and an evidentiary hearing was held.

¶ 5 The Commission entered its final dispositive order on January 21, 2010, permanently cancelling previous gas rates and ordering the filing of new tariff sheets. In doing so, the Commission authorized Peoples Gas to file new tariff sheets designed to produce annual revenues of $530,633,000, which represented a gross increase of $69,803,000; and North Shore to file new tariff sheets to produce annual revenues of $79,067,000, which represented a gross increase of $13,867,000. The Commission determined the “just and reasonable” return which Peoples Gas should be allowed to earn on its net original cost rate base is 8.05%, which incorporated a return on common equity of 10.23% and costs of long-term debt of 5.28% with a just and reasonable capital structure of 56% common equity and 44% long-term debt. North Shore's rate of return was set at 8.19%, which incorporated a return on common equity of 10.33% and costs of long-term debt of 5.48% with a just and reasonable capital structure of 56% common equity and 44% long-term debt. In calculating those rates, the Commission denied the gas utilities recovery of certain employee incentive compensation and pension costs. The Commission also approved an “Infrastructure Cost Recovery Rider” (Rider ICR) proposed by Peoples Gas, which consisted of a monthly surcharge on customer bills designed to allow Peoples Gas to recover costs associated with replacing certain additional cast iron and ductile iron gas mains and connecting facilities.

¶ 6 Several parties, including the State of Illinois (the People), the Citizens Utility Board (the CUB) and the Utilities, filed timely applications for rehearing. The Commission granted rehearing to the People and the CUB solely on the limited issue of whether Rider ICR's “baseline” was improperly set. The Commission denied all of the other parties' applications for rehearing. The Commission ultimately approved the Rider ICR baseline that was agreed to by its staff (hereafter, staff) and Peoples Gas, making only small changes to Rider ICR's audit provisions in its revised order. Several parties filed separate appeals from the Commission's final order, which have been consolidated into the present action pending before this court.

¶ 7 ANALYSIS

¶ 8 I. Standard of Review

¶ 9 It is well settled that we are required to give substantial deference to the Commission's decisions, in light of its expertise and experience in this area. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 398 Ill.App.3d 510, 514, 338 Ill.Dec. 539, 924 N.E.2d 1065 (2009); Alhambra–Grantfork Telephone Co. v. Illinois Commerce Comm'n, 358 Ill.App.3d 818, 821, 295 Ill.Dec. 419, 832 N.E.2d 869 (2005). The Commission's findings of fact are to be considered prima facie true; its orders are considered prima facie reasonable; and the burden of proof on all issues raised in an appeal is on the appellant. United Cities Gas Co. v. Illinois Commerce Comm'n, 163 Ill.2d 1, 11, 205 Ill.Dec. 428, 643 N.E.2d 719 (1994). Such deference is “especially appropriate in the area of fixing rates.” Iowa–Illinois Gas & Electric Co. v. Illinois Commerce Comm'n, 19 Ill.2d 436, 442, 167 N.E.2d 414 (1960). Therefore, our review is generally limited to the following matters: (1) whether the Commission acted within its authority; (2) whether it made adequate findings to support its decision; (3) whether the decision was supported by substantial evidence; and (4) whether state or federal constitutional rights were infringed. Commonwealth Edison Co., 398 Ill.App.3d at 514, 338 Ill.Dec. 539, 924 N.E.2d 1065 (citing Commonwealth Edison Co. v. Illinois Commerce Comm'n, 322 Ill.App.3d 846, 849, 256 Ill.Dec. 143, 751 N.E.2d 196 (2001)). We will not reevaluate the credibility or weight of the evidence, nor substitute our judgment for that of the Commission. Commonwealth Edison Co., 398 Ill.App.3d at 514, 338 Ill.Dec. 539, 924 N.E.2d 1065.

¶ 10 II. The People's and the CUB's Appeal

¶ 11 Both the People and the CUB appeal from the Commission's decision to approve Rider ICR. The People and CUB contend the Commission abused its discretion by allowing Peoples Gas to recoup what amount to discretionary infrastructure investments through a rider. Specifically, the People and the CUB contend the Commission misunderstood the legal standard that governs its authority to engage in “single issue rulemaking” through a rider. The People and the CUB also contend the record lacks substantial evidence to support the extraordinary rate recovery mechanism of a rider in this case.

¶ 12 The evidence adduced below established Peoples Gas' service territory covers an area of about 237 square miles with a population of approximately 3 million people, serviced by 4,025 miles of gas distribution mains. At the time of the Commission proceeding, approximately half of Peoples Gas' distribution main system was still comprised of cast iron and ductile iron gas mains, which are only able to provide low-pressure gas service. Peoples Gas presented evidence that these aging cast iron ductile iron mains require a higher level of risk management, generate a larger number of leaks and cause a larger number of service outages than modern mains made from polyethylene pipe material would cause.

¶ 13 In 1981, Peoples Gas decided to begin replacing its outdated main system. Peoples Gas estimated the replacement program would not be completed until sometime between 2050 and 2080. Under the current replacement program, Peoples Gas had successfully replaced 1,568 of 4,031 miles of old mains, with an average replacement rate of 45 miles per year through 2008. However, the average annual replacement rate of 45 miles had dropped to 20 miles for 2009 and an estimated 10 miles for 2010 due to the “harsh economic climate,” which caused Peoples Gas to decide to preserve its capital rather than expend it on an accelerated main replacement program.

¶ 14 Peoples Gas first sought an infrastructure cost recovery rider in a previous rate case filed in 2007; however, the Commission rejected the request. Although the Commission determined it was within its discretionary powers to authorize the rider, it noted Peoples Gas had failed to establish there was a “need” for such a rider. The Commission's final decision filed on March 25, 2009, identified six standards Peoples Gas had to demonstrate in order for the Commission to find there is a need for an infrastructure cost recovery rider: (1) a detailed description and cost analysis of the proposed system modernization; (2) an identification, evaluation and justification of the technology involved; (3) a detailed identification and description of the improved functionalities of the modernized system both for the company and for customers; (4) an analysis of the benefits of the system modernization in terms of reduced operating and maintenance costs, enhanced system safety, improved customer safety and reliability, reduced greenhouse gas...