United Cities Gas Co. v. Illinois Commerce Com'n

• Decision Date: 22 September 1994
• Citation: 205 Ill.Dec. 428,163 Ill.2d 1,643 N.E.2d 719
• Parties: , 205 Ill.Dec. 428, Util. L. Rep. P 26,431 UNITED CITIES GAS COMPANY, Appellant, v. ILLINOIS COMMERCE COMMISSION, Appellee.
• Court: Illinois Supreme Court

Page 719

643 N.E.2d 719

163 Ill.2d 1, 205 Ill.Dec. 428, Util. L.

Rep. P 26,431

UNITED CITIES GAS COMPANY, Appellant, v. ILLINOIS COMMERCE COMMISSION, Appellee.

Supreme Court of Illinois.

Sept. 22, 1994.

Rehearing Denied Dec. 5, 1994.

Daniel J. Kucera, and Christopher J. Townsend, Chapman and Cutler, Chicago, IL, for appellant.

Carmen L. Fosco, Sp. Asst. Atty. Gen. ICC, Chicago, IL, for appellee.

Justice McMORROW delivered the opinion of the court:

This appeal arises from an order entered by the Illinois Commerce Commission (Commission) in a proceeding to reconcile the revenues collected by United Cities Gas Company (United Cities) in 1988 with the actual costs of gas purchased for that year. Following a hearing, the Commission ordered United Cities to refund with interest $260,553 of gas costs allocated to certain of its Illinois customers in 1988. The appellate court affirmed the order of the Commission, with one justice dissenting. 235 Ill.App.3d 577, 176 Ill.Dec. 316, 601 N.E.2d 1014.

Background

The Commission has authorized public gas utilities to recover the costs of gas purchases through the Commission's uniform purchased gas adjustment (PGA) clause, promulgated in 83 Ill.Adm.Code § 525 (1982). The Commission's power to authorize such recovery is derived from section 9-220 of the Public Utilities Act (Ill.Rev.Stat.1989, ch. 111 2/3, par. 9--220). Section 9--220 provides in pertinent part:

"Notwithstanding the provisions of Section 9--201 [regarding changes in rates], the Commission may authorize the increase or decrease of rates and charges based upon changes in the cost of * * * purchased gas through the application of * * * purchased gas adjustment clauses. * * * Cost shall be based upon uniformly applied accounting principles. Annually, the Commission shall initiate public hearings to determine whether the clauses reflect actual costs of * * * gas * * * purchased to determine whether such purchases were prudent, and to reconcile any amounts collected with the actual costs of * * * gas prudently purchased. In each such proceeding, the burden of proof shall be upon the utility to establish the prudency of its cost of * * * gas purchases and costs." (Ill.Rev.Stat.1989, ch. 111 2/3, par. 9-220.)

Expenses other than gas purchase costs are recovered in base rates, which are set in periodic rate hearings or cases. (See Ill.Rev.Stat.1989, ch. 111 2/3, pars. 9-101 through 9-212.) Under the PGA clause, a gas utility's gas costs are first estimated and then incorporated into a formula which results in a gas cost rate. This rate, together with the base rate, combine to determine a customer's monthly gas bill.

As set forth in section 9-220 of the Act, gas utilities are required to reconcile the revenues they received in the previous year through the gas cost rate with the actual costs of gas prudently purchased for that year. Because the gas cost rate is based on estimates, and because actual gas prices can change during the year, either an undercollection or an overcollection of gas cost revenues may occur. After reconciling the revenues collected through the gas cost rate with the actual costs incurred, the utility collects any underrecovery from its customers or refunds any overrecovery to its customers. This is accomplished by adjustments to a factor (R4) in a mathematical refund adjustment formula of the PGA clause. Pursuant to section 9-220, the Commission conducts annual proceedings to determine the propriety of the utility's reconciliations of its gas cost rate revenues with actual costs incurred. This reconciliation procedure is also known as a "true-up."

In September 1989, the Commission initiated a reconciliation proceeding and directed United Cities to present evidence confirming its reconciliation of PGA revenues with the actual cost of gas prudently purchased for the calendar year 1988. Evidence adduced at the hearing included the following.

United Cities is an investor-owned retail gas distribution utility which provides natural gas service in five areas of Illinois and, as such, is regulated by the Commission. United Cities is also subject to the regulatory jurisdiction of seven other States in which it provides natural gas service. The service areas relevant to this appeal are Harrisburg, Illinois, and the cities of Franklin and Murfreesboro, Tennessee.

Texas Eastern Transmission Corporation (Texas Eastern) is United Cities' pipeline supplier for both the Harrisburg and Tennessee service areas. The rates charged by pipeline suppliers are subject to regulation by the Federal Energy Regulatory Commission (FERC) and all contracts between gas utilities and pipeline suppliers must be approved by FERC.

The long-term contract between United Cities and Texas Eastern contains a demand/commodity rate schedule under which United Cities is required to pay both a commodity charge, based upon metered volume usage, and a demand charge. The demand charge, which is the charge at issue, consists of two different fees: a contract demand charge and a storage demand charge. In exchange for the contract demand charge, Texas Eastern guaranteed that it would have available gas and the pipeline capacity to deliver that gas up to the contracted maximum daily quantity. In exchange for the storage demand charge, Texas Eastern guaranteed that it would have field or tank storage capacity and actual gas up to the contracted daily maximum quantity. These charges assure that a specified amount of gas is available for use by United Cities' customers. Both charges are fixed amounts that United Cities is required to pay, irrespective of whether it uses the contracted maximum quantity of gas. For purposes of this appeal, we refer to both fees in the singular as the demand charge.

The Texas Eastern demand charge was arrived at by projecting the anticipated maximum daily demand for gas in each of the service areas covered by the contract and then multiplying that figure by the demand rate. United Cities then made its own internal apportionment of the total amount of the demand charge to the customers in the areas served by the Texas Eastern contract proportionate to the estimated maximum peak day demand for gas in each service area. In 1988 United Cities allocated 42% of the total demand charge to the Harrisburg area and 58% to the Tennessee area. The origin of these percentages was a 1984 study of the projected peak day demand requirements for the Harrisburg and Tennessee service areas following United Cities' acquisition of the Franklin, Tennessee, service area. The study was performed for and submitted in a 1984 rate case before the Tennessee Public Service Commission (Tennessee Commission). These same allocation percentages were submitted in a rate filing before the Tennessee Commission in 1986, which was concluded in February 1987. United Cities continued to use these 1984 percentages to establish customer rates for Harrisburg from 1985 through almost all of 1989. In December 1989, in a hearing before the Tennessee Commission, United Cities revised its allocation percentages, lowering Harrisburg's percentage to approximately 28% of the total Texas Eastern demand charge.

Bobby J. Cline, a rate analyst and the sole witness for United Cities, presented United Cities' reconciliation of the revenues billed under the PGA clause with the actual gas costs incurred in 1988. Those computations showed a total underrecovery in the five Illinois service areas of $171,170.88. The amount of the underrecovery attributed to Harrisburg for 1988 was $72,090.57. This amount was reflected in the R4 factor of the PGA clause filed in 1989 and was collected through the monthly billings of Harrisburg customers from April 1, 1989, to March 31, 1990.

John Link, an accountant for the Commission's public utilities division, testified on behalf of the Commission's staff (Staff). Link agreed with the reconciliations submitted by United Cities for each of the Illinois service areas except Harrisburg. Link testified that Harrisburg's actual percentage of peak day demand in 1988 was only 28.69% as compared to the 42% projected and billed by United Cities. Link maintained that an adjustment was necessary because the allocation percentages used by United Cities in its internal apportionment of demand costs between the Harrisburg and Tennessee service areas were outdated and inaccurate. The use of these allocation percentages would have the effect of charging Illinois customers a disproportionate share of the Texas Eastern demand charge and would result in Harrisburg customers' subsidizing United Cities' Tennessee operation for a portion of the demand charge rightfully chargeable to Tennessee customers. Illinois has a fully-tracking, zero-based uniform PGA clause which allows a gas utility to recover its gas costs no more or less than dollar-for-dollar. Accordingly, Link recommended that United Cities be required to refund to its Harrisburg customers $260,553 plus interest through the R4 factor so as to reconcile the difference between the actual Harrisburg demand and the percentage of demand charges allocated to Harrisburg by United Cities.

Link presented data obtained from United Cities which showed a substantial increase in Tennessee and a corresponding decrease in Harrisburg of customers and sales from 1985 through 1989. Link opined that the increase in Tennessee sales would have yielded sufficient additional revenues to have resulted in United Cities already having recovered from its Tennessee customers the total amount of actual costs incurred for gas purchased in 1988. However, Link testified, irrespective of what amount was recovered from Tennessee, Illinois customers should pay no more or less than gas costs prudently purchased for and properly chargeable to them.

Cline testified that unlike Illinois, Tennessee does not have a PGA cost recovery system whereby there is a reconciliation or "true-up" of gas costs and revenues....