Commonwealth Edison Co. v. Ill. Commerce Comm'n

16 N.E.3d 713

COMMONWEALTH EDISON COMPANY, Petitioner

v.ILLINOIS COMMERCE COMMISSION ; the People of the State of Illinois ex rel. The Attorney General of the State of Illinois; AARP; Building Owners and Managers Association of Chicago; Citizens Utility Board ; City of Chicago, Respondents.

Nos. 1–13–0302

1–13–0493.

Appellate Court of Illinois, First District, Third Division.

June 30, 2014.

Rehearing Denied Sept. 15, 2014.

Barry Levenstam, of Jenner & Block LLP, and E. Glenn Rippie, of Rooney Rippie & Ratnaswamy LLP, both of Chicago, and David W. DeBruin and Matthew E. Price, both of Jenner & Block LLP, of Washington, D.C., for petitioner.

Lisa Madigan, Attorney General, of Chicago (John P. Kelliher and Thomas R. Stanton, Special Assistant Attorneys General, of counsel), for respondent Illinois Commerce Commission.

No brief filed for respondent Citizens Utility Board.

OPINION

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

¶ 1 This is a consolidated case for review of the rulings of the Illinois Commerce Commission in Commonwealth Edison's (ComEd) 2012 statutory rate update and reconciliation case (2012 Rate Case), applying 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) ), which amended the Public Utilities Act (220 ILCS 5/1–101 et seq. (West 2012)). ComEd seeks review of three issues in the 2012 rate update order: (1) the billing determinants; (2) the allocation of certain common costs that ComEd incurs in connection with its interstate transmission service and its local delivery service; and (3) the denial of most of ComEd's 2011 Rate Case attorney fees and expenses as costs. ComEd argues that the Commission's errors on these issues, taken together, prevent ComEd from recovering millions of dollars in its actual costs to provide electric service to its customers. We hold ComEd has failed to sustain its burden on appeal of establishing error by the Commission.

¶ 2 BACKGROUND

¶ 3 The Public Utilities 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 they sell. Under section 16–108 of the Electric Service Customer Choice and Rate Relief Law of 1997, a utility is required to file a delivery services tariff (DST) with the Commission at least 210 days prior to the date on which the utility is to begin supplying such services. 220 ILCS 5/16–108(a) (West 2012). The Commission is then required to enter an order approving or approving as modified the utility's DST no later than 30 days prior to the date on which the utility is to begin supplying such services. 220 ILCS 5/16–108(b) (West 2012).

¶ 4 In 2011, the legislature enacted the Energy Infrastructure Modernization Act, which is section 16–108.5 of the Public Utilities Act (220 ILCS 5/16–108.5 (West 2012) ), to stimulate new investments by utilities in the State's energy infrastructure. The Act provides for guaranteed payment of utilities' costs and a rate of return for its investments in infrastructure. “A public utility is entitled both to recover in its rates certain operating costs and to earn a return on its rate base (i.e., the amount of its invested capital).” Commonwealth Edison Co. v. Illinois Commerce Comm'n, 322 Ill.App.3d 846, 849, 256 Ill.Dec. 143, 751 N.E.2d 196 (2001) (citing Citizens Utilities Company of Illinois v. Illinois Commerce Comm'n, 124 Ill.2d 195, 200, 124 Ill.Dec. 529, 529 N.E.2d 510 (1988) ).

¶ 5 In exchange for this legislative guarantee of payment, the utility must commit to making very substantial investments in updating and improving its facilities, and in hiring new employees. 220 ILCS 5/16–108.5(b) (West 2012). A public utility's participation in the Act is voluntary. 220 ILCS 5/16–108.5(b) (West 2012). ComEd is a participating utility and committed to invest an estimated $2.6 billion in infrastructure on top of its normal annual capital investment program over the next ten years. 220 ILCS 5/16–108.5(b)(2) (West 2012). Under the Act the formula to establish rates enables ComEd to make planned substantial investment increases in its capital commitment by providing it with greater certainty of timely cost recovery than it would have received under previous rates.

¶ 6 To understand the issues in this case, it is necessary to first explain the Act's formula and define certain terms used under the Act and in rate-setting generally. We therefore explain these terms and then we summarize the procedural history and rulings in the 2011 Rate Case, which is the first rate case under the Act, as well as the issues now presented in this case, before providing our analysis and holding. We explain the revenue requirement formula and explain the terms common cost “allocation,” “billing determinants,” and “rate case expenses.” The issues presented in this case regarding the Commission's 2012 Rate update order concern billing determinants, allocation, and rate case expenses.

¶ 7 Revenue Requirement Formula

¶ 8 The Act sets forth a performance-based formula to set a rate for electricity delivery services. See 220 ILCS 5/16–108.5(b) (West 2012). “The components of the revenue requirement have frequently been expressed in the formula ‘R (revenue requirement) = C (operating costs) + Ir (invested capital or rate base times rate of return on capital).’ ” Business & Professional People for the Public Interest v. Illinois Commerce Comm'n, 146 Ill.2d 175, 195, 166 Ill.Dec. 10, 585 N.E.2d 1032 (1991) (quoting Citizens Utilities Company of Illinois v. Illinois Commerce Commn., 124 Ill.2d 195, 200–01, 124 Ill.Dec. 529, 529 N.E.2d 510 (1988) ).

¶ 9 In establishing the rates that a public utility can charge its customers, the Commission considers the company's operating costs, rate base, and allowed rate of return. Commonwealth Edison Co. v. Illinois Commerce Commn., 322 Ill.App.3d 846, 849, 256 Ill.Dec. 143, 751 N.E.2d 196 (2001) (citing Citizens Utilities Company of Illinois, 124 Ill.2d at 200, 124 Ill.Dec. 529, 529 N.E.2d 510 ).

¶ 10 In this formula the cost of capital equals the rate base times the rate of return on capital. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 2014 IL App (1st) 122860, ¶ 3, 380 Ill.Dec. 343, 8 N.E.3d 513 (citing Business & Professional People for the Public Interest v. Illinois Commerce Comm'n, 146 Ill.2d 175, 195, 166 Ill.Dec. 10, 585 N.E.2d 1032 (1991) ). The rate base is defined as the total value of all invested capital. Id. Invested capital includes investments in projected plant additions. The Commission practice in rate proceedings is to make adjustments to account for the effects of pro forma projected plant additions to the rate base.

¶ 11 “The rate of return is typically established with reference to what would be a reasonable return on the present value of a utility's property.” Commonwealth Edison Co. v. Illinois Commerce Comm'n, 398 Ill.App.3d 510, 515, 338 Ill.Dec. 539, 924 N.E.2d 1065 (2009) (citing Villages of Milford v. Illinois Commerce Comm'n, 20 Ill.2d 556, 562, 170 N.E.2d 576 (1960) ). “The return is the product of the allowed rate of return and the rate base.” Commonwealth Edison Co., 322 Ill.App.3d at 849, 256 Ill.Dec. 143, 751 N.E.2d 196 (citing Citizens Utilities Co., 124 Ill.2d at 200, 124 Ill.Dec. 529, 529 N.E.2d 510 ). The company's revenue requirement comprises the sum of operating costs and the return on the rate base. Id.

¶ 12 Costs

¶ 13 The Act provides that participating utilities recover their prudent and reasonable “actual costs of delivery services.” 220 ILCS 5/16–108.5(c)(1) (West 2012). These are the “operating costs” part of the revenue requirement formula.

¶ 14 The Act specifies many of the “cost components” that form the basis of the rate, including the “costs of delivery services that are prudently incurred and reasonable in amount consistent with Commission practice and law,” year-end capital structure, cost of equity, incentive compensation expense,¹ and pension and other post-employment benefits expense and severance costs. 220 ILCS 5/16–108.5(c) (West 2012). Generally, a utility's costs are recoverable if they are reasonable and prudent. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 398 Ill.App.3d 510, 516, 338 Ill.Dec. 539, 924 N.E.2d 1065 (2009) (citing Business & Professional People for the Public Interest, 146 Ill.2d at 247, 166 Ill.Dec. 10, 585 N.E.2d 1032 ). “[T]o be recoverable, in addition to being reasonable and prudent, a cost must also pertain to operations or service delivery * * *.” Commonwealth Edison Co. v. Illinois Commerce Comm'n, 398 Ill.App.3d 510, 516, 338 Ill.Dec. 539, 924 N.E.2d 1065 (2009).

¶ 15 The Act provides that a utility's costs shall include the “final data based on [the utility's] most recently filed [Federal Energy Regulatory Commission] FERC Form 1.” 220 ILCS 5/16–108.5(c) (West 2012). The FERC regulates and has exclusive jurisdiction of interstate transmission of electricity, and it sets rates for the interstate transmission. See 16 U.S.C. § 824(b)(1) (2012). The FERC Form 1 is an annual report filed by major private utilities with the FERC. Thus, the Commission bases a utility's costs, in part, on the “final historical data” of “the actual costs for the prior rate year” on the FERC Form 1. 220 ILCS 5/16–108.5(d)(1) (West 2012).

¶ 16 The Act requires that the rate formula “shall specify the cost components that form the basis of the rate charged to customers with sufficient specificity to operate in a standardized manner and be updated annually with transparent information that reflects the utility's actual costs to be recovered during the applicable rate year.” 220 ILCS 5/16–108.5(c) (West 2012). The charges are to be “just and reasonable and shall take into account customer impacts.” 220 ILCS 5/16–108(d) (West 2012).

¶ 17 Allocation

¶ 18 ComEd uses its power lines to both distribute power to customers within Illinois and also to...