Illinois Power Company v. Illinois Commerce Commission ( 2008 )

No. 3-06-0879
consolidated with No. 3-07-0569
_________________________________________________________________
Filed April 11, 2008
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
A.D., 2008
ILLINOIS POWER COMPANY, )
d/b/a/ AMERENIP, )
) Petition for Review of an
Petitioner-Appellant, ) Order of the Illinois
) Commerce Commission in
v. ) Docket No. 03-0699 and
) Docket No. 04-0677.
ILLINOIS COMMERCE COMMISSION )
and DYNEGY, INC., )
)
Respondents-Appellees. )
_________________________________________________________________
JUSTICE LYTTON delivered the opinion of the court:
_________________________________________________________________
The petitioner, Illinois Power Company, d/b/a AmerenIP
(Illinois Power), seek review of two orders issued by the Illinois
Commerce Commission (Commission), finding that Illinois Power did
not act prudently in remediating deliverability issues at its
natural gas storage facility in Hillsboro, Illinois. As a result,
the Commission concluded that the costs Illinois Power incurred to
obtain natural gas to reinject the field in 2003 and 2004 could not
be recovered from its customers. On appeal, Illinois Power argues
that (1) the Commission’s findings are not supported by substantial
evidence in the record, and (2) the Commission improperly applied
the prudence standard. We affirm.
I. Commerce Commission Proceedings
This consolidated appeal concerns Illinois Power’s Hillsboro
natural gas storage facility. The Hillsboro facility is an
underground reservoir that contains two different storage layers.
The top layer of the reservoir contains working gas. Working gas
is the volume of gas in the reservoir that is injected for storage
during the summer months and then withdrawn to be supplied to
customers in the winter months. The bottom layer houses base gas
which is the volume of gas required to provide adequate pressure to
cycle the working gas. Generally, a utility does not remove the
base gas from a reservoir field.
Following an expansion project in 1993, Illinois Power began
experiencing reduced inventory and deliverability problems at the
Hillsboro plant and inadvertently began removing base gas from the
field. After years of investigation, the company determined that
the problems were caused by improper metering. In 2003, they began
reinjecting the field to restore the depleted natural gas
inventory. The reinjection process was not completed until the
spring of 2004. Pursuant to the Public Utilities Act (Act) (220
ILCS 5/10-201 et seq. (West 2002)), Illinois Power passed
$6,879,109 in 2003 and $2,979,849 in 2004 onto its customers in the
form of purchase gas adjustment (PGA) tariffs to recover the costs
of the reinjection process.
In November of 2003, the Commission commenced reconciliation
hearings in accordance with section 9-220 of the Act and directed
Illinois Power to present evidence showing its reconciliation of
PGA tariff revenues with the actual cost of gas supplies prudently
incurred for the 12 month period ending December 31, 2003 (Docket
No. 03-0699). One year later, the Commission initiated a second
reconciliation proceeding directing Illinois Power to present
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evidence for the 12 month period ending December 31, 2004 (Docket
No. 04-0677). The evidence presented at both proceedings was
substantially the same.
Illinois Power engineers and expert witnesses testified that
the expansion of the Hillsboro field increased the working gas
inventory from 3.1 billion cubic feet (Bcf) to 7.6 Bcf and
increased the peak day capacity (the amount of gas to be withdrawn
per day) from 50,000 million cubic feet (Mcf) to 125,000 Mcf. The
company operated Hillsboro at those levels for the 1993-1994
season. In subsequent winters, however, Illinois Power was unable
to withdraw the full amount of gas that had been previously
injected into the field.
Given the actions taken to expand the storage reservoir, the
possibility existed that the reservoir was physically breached
during the expansion process, thereby allowing the newly injected
gas to escape or migrate into other areas of the reservoir from
which the gas could not be accessed. Other potential causes
involved gas migration, gas leaks to the surface, or damage to the
intake and withdrawing wells, which would have prevented efficient
production of gas inventory. Illinois Power conducted numerous
tests in an attempt to determine the cause of the problem. The
company was concerned about taking corrective action without first
properly identifying the cause of the problem.
The company’s experts testified that because of the expansion,
it was logical and appropriate to focus initially on a reservoir or
structural defect. Thus, Illinois Power decided to pursue an
extensive structural investigation beginning in 1997. Illinois
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Power had a vertical seismic profile of the reservoir field
prepared by outside consultants. This study concluded that a more
detailed three dimensional seismic analyses was necessary. The
preliminary results of the 3-D seismic study indicated that
approximately 3.5 Bcf of gas had migrated to another structure
northeast of the field. In November 2000, based on the results of
this study, Illinois Power drilled a new well but found no
substructure below. In light of these inconsistent findings,
Illinois Power asked the consultants to reevaluate the 3-D seismic
analysis. After collecting additional information and reprocessing
the 3-D seismic data, the firm concluded that the additional
structure that had been thought to exist to the northeast of the
Hillsboro field did not exist. This conclusion was reached in the
fall of 2001.
While investigating the possibility of structural causes or
reservoir problems, Illinois Power also retained Peterson
Engineering to conduct an audit of the metering instruments at
Hillsboro. Peterson was retained in August of 1999 and issued its
finding in December of 1999. In its report, Peterson identified
two problems with the Hillsboro meters. First, two new turbine
injection meters were over-registering gas volumes under certain
operating conditions. Specifically, when the nearby plant
compressors operated at certain levels, they caused the meters to
over-spin, thereby recording a greater amount of gas as having been
injected than was actually passing through the meter. The turbine
meter over-registration was calculated to be 26% when the
compressors were operating at 50% but only 1.7% when the
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compressors were operating at 100% loadings. Second, the orifice
meter on one of the four withdrawal wells had an opening that was
smaller than the size value stamped on the orifice plate. The
diameter stamped on the plate was 10% larger than its actual
diameter. This meant that less gas was being withdrawn from the
field that had been believed. In basic terms, there was less gas
going in and less gas coming out than the meters were indicating.
According to Illinois Power, the amount of error on the
withdrawal meter could be easily calculated based on the different
sized orifice measurements. However, the company maintained that
the injection meter over-registration could not be as easily
determined. Illinois Power attempted to calculate the loss by
estimating when the compressors were operating at certain levels.
Using this estimation method, Illinois Power initially determined
that the two metering errors offset each other. It was
subsequently discovered that the injection metering error was much
larger than the withdrawal metering error. Illinois Power made
several meter operating corrections to the facility to eliminate
both meter measurement error. These changes were implemented in
May 2000.
In early spring 2003, Illinois Power conducted another
exhaustive set of structural analyses of the reservoir, including
(1) neutron log analyses, (2) flame ionization surveys, (3) field
metering versus plant metering comparisons, (4) reservoir
performance tests, and (5) volumetric analyses. These tests
indicated that the working gas and base gas volumes in the
Hillsboro field had been significantly depleted over time due to
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the injection metering problem.
As a result, Illinois Power developed an estimate of the total
gas inventory shortfall that had resulted from the metering error
and created a plan to reinject gas to restore the Hillsboro base
gas volume and working gas volume to the original post-expansion
amounts. Illinois Power commenced reinjection in the spring of
2003.
Commission Staff presented evidence in response to Illinois
Power’s position. Eric Lounsberry, an engineer in the engineering
department of the Commission’s energy division, testified that the
information available to Illinois Power in 1999 pointed to metering
errors as the most likely cause of the deliverability problems.
Lounsberry stated that if Illinois Power had used existing
information and available well data, it would have discovered that
an inventory shortfall was the primary problem.
First, Lounsberry testified that Illinois Power was aware of
problems with its storage field metering equipment as early as
1996 and was also aware of similar deliverability issues at another
Illinois Power field, the Shanghai storage field. The Peterson
study noted that the company was aware in 1996 that computed
volumes from the plant metering and well metering instruments had
not been satisfactorily reconciled at Hillsboro or the Shanghai
plant. Lounsberry stated that these two similar situations
indicated that Illinois Power’s ability to identify the root cause
of the problem was inadequate.
Second, Lounsberry asserted that the 1994 well data from the
intake/withdrawal wells at Hillsboro could have been accurately
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extrapolated and would have quickly determined that the intake
metering error was much larger than the withdrawal error. He
testified that Illinois Power had actually integrated some of the
daily well measurement to calculate the volume of gas injected and
that the company could have used that data to integrate all of the
measurements between 1994 and 1999. He stated that the integrated
volume measurements would have been more accurate than the
estimation method used by Illinois Power and would have immediately
alerted the company that the injection meter error was the source
of the deliverability issue. Lounsberry concluded that if Illinois
Power had conducted a more thorough review of the metering issues
after the Peterson study was completed, it would have discovered
the true magnitude of the injection metering error and could have
started replacing the gas in the Hillsboro field during the 2000
season.
II. The Commission Orders
The Commission issued orders finding Illinois Power’s actions
imprudent in both cases. In docket No. 03-0699, the Commission
defined prudence as "that standard of care which a reasonable
person would be expected to exercise under the same circumstances
encountered by utility management at the time decisions had to be
made." Applying this standard, the Commission determined that the
delay in discovering the meter error and Illinois Power’s decision
to delay reinjecting the Hillsboro storage field were imprudent.
The Commission agreed with the Staff’s assessment that Illinois
Power should have started replacing the inventory in the Hillsboro
field during the 2000 season.
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The Commission was also persuaded that the Staff’s "overall
storage concerns" were indications that Illinois Power was less
than prudent at the Hillsboro site. The Commission order provided:
"In the Commission’s view, [Illinois Power]
imprudently selected the easy path when it discovered
there might be a problem at Hillsboro. It appears that
with inadequate thought, [Illinois Power] decided the
problems at Hillsboro must be structural and began hiring
consultants to identify the exact nature of the problem.
This followed the ineffective pattern established for the
Shanghai Storage Field. *** [C]learly something is amiss
in [Illinois Power’s] operations and management of
storage fields."
In conclusion, the Commission held that Illinois Power was
imprudent in its operation of the Hillsboro field because it "(1)
failed to conduct a thorough study of the injection error at the
time it was identified, (2) failed to conduct any inspections to
assure that the orifice meters were working properly, [and] (3)
failed to begin returning the inventory to the field when the
working gas volumes fell below the pre-expansion volume of 3.1 Bcf
after the 1999-2000 winter season." Consequently, the Commission
ruled that $6,870,109 of incurred costs related to Illinois Power’s
remediation of the Hillsboro depleted gas levels could not be
recovered from its customers through PGA tariffs.
The order in docket No. 04-0677 reiterated most of the
findings contained in the 2003 case. Based on the evidence adduced
at the 2004 hearings and premised upon the Commission’s order
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entered in docket No. 03-0699, the Commission found that Illinois
Power imprudently incurred $2,979,849 in additional gas costs in
2004.
III. STANDARD OF REVIEW
An appellate court’s jurisdiction of direct appeals from the
Commission is governed by section 10-201 of the Act (220 ILCS 5/10-
201 (West 2002)). Section 10-201(e)(iv) states that we may only
reverse a Commission order if we conclude that "[t]he findings of
the Commission are not supported by substantial evidence based on
the entire record of evidence presented to or before the Commission
for and against such *** order." 220 ILCS 5/10-201(e)(iv) (West
2002). The Commission’s findings of fact are to be accepted as
prima facie true. Business and Professional People for Public
Interest v. Illinois Commerce Comm’n, 146 Ill. 2d 175 (1991); 220
ILCS 5/10-201(d) (West 2002). Merely showing that the evidence
presented would support a different conclusion than the one reached
by the Commission is not sufficient. Rather, the appellant must
affirmatively demonstrate that the opposite conclusion is "clearly
evident." Continental Mobile Telephone Co. v. Illinois Commerce
Comm’n, 269 Ill. App. 3d 161 (1994).
IV. ANALYSIS
The General Assembly allows utilities to recover their gas
cost directly from the consumer through purchase gas adjustments
(PGA) clauses. See 220 ILCS 5/9-220 (West 2002). The Act clearly
places upon those utilities taking advantage of a PGA clause the
burden of proving the prudence of their gas purchases during the
course of yearly reconciliation proceedings. 220 ILCS 5/9-220
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(West 2002). Prudence is not defined within the Act. Commerce
Commission proceedings and our court have defined prudence as "that
standard of care which a reasonable person would be expected to
exercise under the same circumstances encountered by utility
management at the time decisions had to be made." Illinois
Commerce Comm’n v. Commonwealth Edison Co., Docket No. 84-0395, p.
17 (1987); Illinois Power Co. v. Commerce Comm’n, 339 Ill. App. 3d
425, 428 (2003). In determining whether a judgment was prudently
made, only those facts available at the time judgment was exercised
can be considered. Illinois Power Co. v. Commerce Comm’n, 245 Ill.
App. 3d 367 (1993).
A.
Illinois Power claims that the Commission’s order should be
reversed because the record demonstrates that it met the imposed
burden by showing that the gas costs it incurred in 2003 and 2004
as a result of the reduction of the withdrawal capacity were
prudent. First, Illinois Power argues that substantial evidence in
the record shows that its decisions and actions were reasonable
when made based on the information known to management at the time.
Second, Illinois Power claims that to begin reinjecting replacement
gas into Hillsboro in 2000, when the company was still
investigating structural and geological issues, would have been
imprudent. Finally, Illinois Power complains that the order must
be reversed because the Commission’s prudence determination was
based, in part, on unsupported concerns at the Shanghai storage
facility.
The Commission’s findings of fact are to be accepted as prima
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facie true, and the burden of proof on all issues raised on appeal
is on the party appealing the Commission’s order. See Business and
Professional People, 146 Ill. 2d 175 (1991); see also 220 ILCS
5/10-201(d) (West 2002). Here, nothing in the record in docket No.
03-0699 or docket No. 04-0677 demonstrates that an opposite
conclusion is clearly evident.
Initially, the record indicates that Illinois Power failed to
promptly pursue potential metering problems that were plainly
stated and thoroughly analyzed in the 1999 Peterson report. The
Peterson study further noted that the company was aware in 1996
that computed volumes from the facility metering and well metering
had not been satisfactorily reconciled since 1994. At that time,
Illinois Power was also aware of injection metering instrument
errors at the Shanghai station.
Evidence further indicated that Illinois Power had accurate
injection well data from 1994. That information could have been
integrated to determine an accurate estimate of the total amount of
gas that had been injected into the field between 1994 and 1999.
Illinois Power claims that all of the data from those years had not
been extrapolated and was therefore unrealiable. However, no one
on behalf of Illinois Power testified that it would have been
unduly burdensome to integrate the data to use as a comparison. As
a means of verification, the data was available and was
sufficiently reliable. In addition, Illinois Power neglected to
use those years for which it actually had integrated values. Given
the extent to which it tested the structural integrity of the
reservoir, it seems unreasonable to have ignored the 1994 well data
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as a means of testing the metering measurements of the reservoir.
In light of these facts, the Commission’s decision that Illinois
Power acted imprudently based on the information known to the
company at the time is sufficiently supported by the records.
Next, we disagree with Illinois Power’s assertion that it
would have been imprudent to reinject the field with natural gas
inventory in 2000 when working gas volumes fell below pre-expansion
levels. The record demonstrates that Illinois Power pursued the
potential structural and geological issues vigorously beginning in
1996 and even repeated and reassessed numerous geological tests
based on their assumption that the problem was caused by the
structural identity of the reservoir. However, beginning in 1999,
several reports and analyses indicated that the deliverability
issue was caused by a field metering error rather than a structural
one. Thus, the Staff claimed that once Illinois Power corrected
the metering errors in 2000, testing those corrections during the
2000 injection season would have been appropriate. Lounsberry’s
testimony showed that many, if not most, of Illinois Power’s
concerns with reinjecting the field too soon were unfounded based
on a review of the 1999 Petersen report and the inconsistent 3-D
seismic data on hand. Thus, the Commission position that Illinois
Power should have attempted to reinject the field in 2000 to test
the metering corrections is not unreasonable. By waiting three
more years before even attempting to begin replacement efforts,
Illinois Power unnecessarily depleted the base gas volumes of the
reservoir and exponentially increased the cost of injection. Based
on the entire record in both proceedings, a conclusion that
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Illinois Power was prudent is not clearly evident.
Last, we find that the Commission properly considered the
deliverability issues at Illinois Power’s Shanghai storage
facility. We noted that the Act does not prohibit the Commission
from considering power utilities’ actions beyond the specific
conduct in question. See 220 ILCS 5/9-201 et seq. (West 2002).
Thus, when the Staff provided testimony of a similar metering error
that arose at the Shanghai field, the Commission did not err in
reviewing those "concerns" in its decision. Further, we believe
Commission consideration was appropriate based on the similar
deliverability issues in the Shanghai case.
In Illinois Commerce Comm’n v. Illinois Power Co., Docket No.
01-0701, 2004 Ill. Puc Lexis 101 (2004), the Commission filed a
reconciliation proceeding involving Illinois Power’s Shanghai field
for the year ending in December of 2001. As in this case, there
was a deliverability issue which was eventually associated with an
injection metering problem. The error in that case caused Illinois
Power to withdraw approximately 743,313 Mcf of natural gas above
the meter indications. The error existed from 1995 until it was
identified in January 2000. In that case, the Commission found
that Illinois Power’s actions "were not imprudent." The decision
in that case indicates that by early 2000, Illinois Power had
discovered a metering error was the cause of the company
withdrawing 20.6% more gas above what its meters reflected from the
Shanghai storage field.
While the Commission was unwilling to find Illinois Power’s
conduct at the Shanghai facility imprudent in 2001, the issue here
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is whether Illinois Power acted prudently by reserving its decision
to reinject the Hillsboro field until the summer of 2003. Here, by
early 2000, Illinois Power had not only the information from the
Peterson study regarding metering problems at Hillsboro, but the
knowledge that there had been nearly identical metering problems at
Shanghai. This information, coupled with the information from the
well chart data, would have allowed Illinois Power to calculate the
magnitude of the metering problems in 2000 to the extent necessary
to begin reinjection much in advance of the 2003-2004 season. In
essence, the metering error identified at the Shanghai field in
2000 undercuts the argument that it was prudent for Illinois Power
to concentrate its investigation on structural as opposed to
metering causes beyond the 2000 injection season. Thus, the
"overall concerns" presented by the Staff were properly utilized as
additional support for the Commission’s finding of imprudence.
B.
Illinois Power also asks us to consider the Commission’s
application of the prudence standard. Illinois Power maintains
that the Commission created an "after-the-fact" standard of care
that a reasonable person should have followed in 2000 when deciding
whether to reinject the Hillsboro field. We disagree.
The Commission has stated that in utility cases the prudence
standard conforms to the dictionary definition of prudence.
Business & Professional People for the Public Interest v. Commerce
Comm’n, 279 Ill. App. 3d 824 (1996). In Business & Professional
People, the court noted that prudence is commonly defined as "skill
or good judgment in the use of resources." 279 Ill. App. 3d at 831
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(citing Webster’s Ninth Collegiate Dictionary 949 (1985)). When we
apply the prudence standard, only those facts available at the time
judgment was exercised can be considered, and imprudence cannot be
sustained by substituting one’s judgment for that of another.
Illinois Power Co., 339 Ill. App. 3d at 428.
As discussed, the record suggests that the Peterson report
presented a clear indication that the deliverability issues at
Hillsboro were due to injection metering problems. That report was
issued in the fall of 1999. Illinois Power took the necessary
actions in 2000 and corrected the metering issues outlined in the
report. Thus, the Staff’s position that Illinois Power could have
reinjected the field as early as 2000 is based on facts available
to Illinois Power in 2000. Accordingly, the Commission’s decision
that it was imprudent to wait to reinject the field for three more
years is not based on an after-the-fact record. It is supported
by substantial evidence in the record dating back to 1996 and is
based on information known to Illinois Power during the 2000
injection season.
V. CONCLUSION
For the above reasons, we affirm the Commission finding that
Illinois Power’s decision to forego reinjecting the Hillsboro
storage field until 2003 was imprudent. The Commission orders in
case No. 03-699 and case No. 04-677 are therefore affirmed.
No. 3-06-879 -- Affirmed.
No. 3-07-569 -- Affirmed.
CARTER, J., and MCDADE, PJ., concurring.
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