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

ILLINOIS OFFICIAL REPORTS
Appellate Court
People ex rel. Madigan v. Illinois Commerce Comm’n, 2013 IL App (2d) 120243Appellate Court THE PEOPLE ex rel. LISA MADIGAN, Attorney General of the State
Caption of Illinois, Petitioner, v. ILLINOIS COMMERCE COMMISSION;
NORTH SHORE GAS COMPANY; PEOPLES GAS LIGHT AND
COKE COMPANY; VANGUARD ENERGY SERVICES, LLC;
INTEGRYS ENERGY GROUP, INC.; INTEGRYS ENERGY
SERVICES, INC.; PRAIRIE POINT ENERGY, LLC, d/b/a Interstate Gas
Supply of Illinois, Inc.; ILLINOIS INDUSTRIAL ENERGY
CONSUMERS; CITIZENS UTILITY BOARD; and THE CITY OF
CHICAGO, Respondents.–CITIZENS UTILITY BOARD, Petitioner, v.
ILLINOIS COMMERCE COMMISSION; NORTH SHORE GAS
COMPANY; PEOPLES GAS LIGHT AND COKE COMPANY;
VANGUARD ENERGY SERVICES, LLC; INTEGRYS ENERGY
GROUP, INC.; INTEGRYS ENERGY SERVICES, INC.; PRAIRIE
POINT ENERGY, LLC, d/b/a Interstate Gas Supply of Illinois, Inc.;
ILLINOIS INDUSTRIAL ENERGY CONSUMERS; THE PEOPLE ex
rel. LISA MADIGAN, Attorney General of the State of Illinois; and THE
CITY OF CHICAGO, Respondents.
District & No. Second District
Docket Nos. 2-12-0243, 2-12-0349 cons.
Filed March 29, 2013
Held The Illinois Commerce Commission’s approval of a volume-balancing-
(Note: This syllabus adjustment rider, commonly known as Rider VBA, a rate design used to
constitutes no part of delink a utility’s revenues from the volume of natural gas delivered to
the opinion of the court customers and intended to adjust customer prices in order to hold the
but has been prepared revenues constant despite changes in consumption, did not violate the
by the Reporter of rules against retroactive ratemaking or single-issue ratemaking; therefore,
Decisions for the the Commission’s order was affirmed.
convenience of the
reader.)
Decision Under Petition for review of orders of Illinois Commerce Commission, Nos. 11-
Review 280, 11-281.
Judgment Affirmed.
Counsel on Lisa Madigan, Attorney General, of Chicago (Michael A. Scodro,
Appeal Solicitor General, and Paul Berks, Janice A. Dale, and Karen L. Lusson,
Assistant Attorneys General, of counsel), for petitioner People ex rel. Lisa
Madigan.
Julie L. Soderna, of Citizens Utility Board, of Chicago, for petitioner
Citizens Utility Board.
John P. Kelliher, of Illinois Commerce Commission, of Chicago, for
respondent Illinois Commerce Commission.
Theodore T. Eidukas, of Foley & Lardner LLP, Mary Klyasheff, of
Integrys Energy Group, Inc., and John P. Ratnaswamy and Carla
Scarsella, both of Rooney Rippie & Ratnaswamy LLP, all of Chicago,
and Bradley D. Jackson, of Foley & Lardner LLP, of Madison,
Wisconsin, for respondents Integrys Energy Group, Inc., North Shore Gas
Company, and Peoples Gas Light & Coke Company.
Panel JUSTICE HUTCHINSON delivered the judgment of the court, with
opinion.
Justices Birkett and Spence concurred in the judgment and opinion.
OPINION
¶1 In this consolidated appeal, petitioners, Attorney General Lisa Madigan and the Citizens
Utility Board (CUB), challenge the decision of the Illinois Commerce Commission (the
Commission) approving a volume-balancing-adjustment rider with respect to the delivery
of natural gas to residences and businesses in and around Chicago by respondents Peoples
Gas Light & Coke Company (Peoples Gas) and North Shore Gas Company (North Shore)
(collectively, the Utilities). Specifically, petitioners challenge the Commission’s authority
to impose revenue decoupling on the consumers of respondents’ product, natural gas.
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¶2 In March 2007, the Utilities petitioned the Commission to approve a new “tracker” rider,
the volume-balancing-adjustment rider, called “Rider VBA.” See In re North Shore Gas Co.,
Nos. 07-0241, 07-0242, 2008 WL 631214, at *1. The Commission stated, “[i]n simplest
form, Rider VBA would adjust customer prices *** in a way that the Utilities[’] revenues
are held constant despite changes in customer consumption.” Id. at *127. The Commission
reasoned:
“Such changes in consumption are brought about by rising natural gas prices, the call for
conservation measures, warming weather trends, the involvement of the Utilities in gas
efficiency programs, and other events. The proposed monthly adjustments under Rider
VBA are symmetrical meaning that they are based on both the over-recovery as well as
the under-recovery of target revenues. Implementing Rider VBA imposes some
additional administrative expenses and, among other things called for by Staff, there
would be annual internal audits.” Id.
Following an evidentiary hearing and a review of the materials, in 2008 the Commission
approved Rider VBA as a four-year pilot program. Id. at *141.
¶3 The Attorney General appealed the Commission’s decision; however, the Appellate
Court, First District, determined that it lacked jurisdiction to consider the appeal and
transferred the case to the Second District. See People ex rel. Madigan v. Illinois Commerce
Comm’n, 407 Ill. App. 3d 207, 224 (2010). On January 10, 2012, and during the pendency
of the appeal in the Second District, the Commission issued an order approving Rider VBA
on a permanent basis. Thereafter, the parties moved to dismiss the appeal as moot, and this
court allowed the motion. See People ex rel. Madigan v. Illinois Commerce Comm’n, No.
2-11-0380 (2012) (minute order).
¶4 In its January 2012 decision, the Commission set out the positions of the Utilities, the
Commission’s staff, and the Attorney General, and the response of the Utilities to the
Attorney General’s position. It then set out its analysis and conclusions. The Commission
reflected that among the problems that Rider VBA was originally intended to protect the
Utilities from were the revenue losses attributable to a diminishing customer base and to the
implementation of aggressive energy efficiency programs. The Commission next expounded
on the reasons to continue Rider VBA: it was “a symmetrical and transparent formula for
collecting the approved distribution revenue requirement”; it would reduce reliance on
forecasting, which was predictive and “inevitably incorrect”; and it would influence the
Utilities to pursue fewer rate cases, because Rider VBA would make underrecovery of their
revenue requirement less likely. The Commission addressed the criticism that questioned
whether decoupling would prompt the Utilities to spend more on energy efficiency programs.
It responded that its original approval of Rider VBA as a pilot program was not centered on
energy efficiency factors and that energy efficiency was not the only reason it approved the
decoupling mechanism. The Commission explained:
“[O]ur rationale then and now is appropriately multi-faceted to address the many
components that such a mechanism seeks to resolve. For example, weather affects
customer usage and decoupling means that customers do not overpay when weather is
colder than normal or underpay when weather is warmer than normal. Decoupling also
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addresses load changes, including declining load attributable to energy efficiency.
Whether Rider VBA prompts the [Utilities] to spend more on energy efficiency is
immaterial. The [Utilities’] forecast showed declining load on their systems. Section 8-
104 of the Act requires them to offer energy efficiency programs to meet ever-increasing
load reductions through energy efficiency measures. Decoupling will take the effects of
efficiency into account together with other factors, notably weather, that affects load and
promote distribution rate stability for customers and the [Utilities].”
¶5 The Commission concluded that the benefits of “distribution rate stability for customers
and the [Utilities]” justified approving the Rider VBA on a permanent basis. The Attorney
General and CUB timely filed their notices of appeal.
¶6 Petitioners challenge the validity of Rider VBA and the Commission’s discretion in
authorizing it. Petitioners argue that the deferential standard that generally applies to the
Commission’s exercise of its discretion does not apply here because it “expressly departed
from past practice” and it “necessarily abused its discretion if it made an error of law by
approving a rider absent ‘exceptional circumstances.’ ” In support of their argument,
petitioners assert that (1) Rider VBA violates fundamental ratemaking principles by
retroactively modifying consumer charges to meet revenue forecasts, and (2) Rider VBA
violates the prohibition against single-issue ratemaking.
¶7 Contrary to petitioners’ request for a more stringent review, our scope of review is
governed by section 10-201 of the Public Utilities Act (the Act) (see 220 ILCS 5/10-201
(West 2010)). Section 10-201 provides in relevant part that a reviewing court shall reverse
a Commission’s order or decision, in whole or in part, if it finds that (a) the findings of the
Commission were not supported by substantial evidence based on the entire record of
evidence presented to or before the Commission for and against such order or decision; (b)
the order or decision was without the jurisdiction of the Commission; (c) the order or
decision was in violation of the state or federal constitution or laws; or (d) the proceedings
or manner by which the Commission considered and entered its order or decision were in
violation of the state or federal constitution or laws, to the prejudice of the appellant. 220
ILCS 5/10-201(e)(iv) (West 2010). This court gives “substantial deference to the decisions
of the Commission, in light of its expertise and experience in this area.” Commonwealth
Edison Co. v. Illinois Commerce Comm’n, 405 Ill. App. 3d 389, 397 (2010) (ComEd).
“Accordingly, on appeal, the Commission’s findings of fact are considered prima facie true;
its orders are considered prima facie reasonable; and the appellant bears the burden of proof
on all issues raised.” ComEd, 405 Ill. App. 3d at 397.
¶8 “ ‘In making adequate findings, the Commission is not required to provide findings on
each evidentiary claim; its findings are sufficient if they are specific enough to enable the
court to make an informed and intelligent review of its order.’ ” People ex rel. Madigan v.
Illinois Commerce Comm’n, 2012 IL App (2d) 100024, ¶ 39 (quoting ComEd, 405 Ill. App.
3d at 398). “ ‘In other words, it must state the facts essential to its ruling so that the court can
properly review the basis for the decision.’ ” Id. (quoting ComEd, 405 Ill. App. 3d at 398).
“On review, this court can neither reevaluate the credibility or weight of the evidence nor
substitute its judgment for that of the Commission.” Id. ¶ 40 (quoting ComEd, 405 Ill. App.
3d at 398).
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¶9 Section 9-101 of the Act requires the Commission to establish “just and reasonable” rates
for consumers. 220 ILCS 5/9-101 (West 2010). In so doing, the Commission must also
ensure that all of its rules and regulations affecting or pertaining to its rates are “just and
reasonable.” Id. With respect to ratemaking, at least two types are prohibited: those that
constitute retroactive ratemaking and those that constitute single-issue ratemaking. See, e.g.,
Illinois Bell Telephone Co. v. Illinois Commerce Comm’n, 203 Ill. App. 3d 424 (1990)
(retroactive ratemaking); Citizens Utility Board v. Illinois Commerce Comm’n, 166 Ill. 2d
111 (1995) (single-issue ratemaking). Retroactive ratemaking occurs when a utility
establishes a scheme whereby it provides refunds to its consumers when its rates are too high
and surcharges when its rates are too low. See Illinois Bell Telephone Co., 203 Ill. App. 3d
at 435 (citing Citizens Utilities Co. of Illinois v. Illinois Commerce Comm’n, 124 Ill. 2d 195,
207 (1988)). Single-issue ratemaking occurs when a utility considers changes to components
of its revenue requirement in isolation in setting rates; this type of ratemaking is prohibited
because considering any one item in a revenue formula in isolation risks understating or
overstating the revenue requirement. See Citizens Utility Board, 166 Ill. 2d at 137.
Petitioners assert that Rider VBA constitutes both retroactive ratemaking and single-issue
ratemaking and that therefore the Commission’s order should be reversed.
¶ 10 In the analysis and decision section of its 2008 decision, the Commission noted that the
Rider VBA was “fundamentally different from any other rider that the Commission has
authorized thus far and which the courts have approved.” In re North Shore Gas Co., 2008
WL 631214, at *128. Accordingly, prior to reaching the arguments, and relying on
information from United States Department of Energy research reports and the testimony
from the Commission’s hearing, we provide a brief overview of natural gas revenue
decoupling.
¶ 11 Some of a natural gas utility’s expenses are for its “assets,” such as distribution pipelines,
mains, facilities, and equipment to maintain the utility’s physical presence. See, e.g., People
ex rel. Madigan v. Illinois Commerce Comm’n, 2011 IL App (1st) 100654, ¶ 5 (describing
infrastructure in relation to an “ ‘Infrastructure Cost Recovery Rider’ ”). Using our own
hypothetical, we will say that this is 75% of its expenses. Then the remaining 25% of its
expenses is the actual cost of preparing and distributing gas to its customers. Citizen “A”
should not have to pay as much for natural gas to maintain the house at 65 degrees as Citizen
“B,” who maintains the house at 75 degrees. See, e.g., 220 ILCS 5/1-102(d)(iii) (West 2010)
(finding equitable that “the cost of supplying public utility services is allocated to those who
cause the costs to be incurred”). For this policy reason, among others, rates traditionally have
been structured so that citizens are paying a lesser fixed fee and a higher rate for their
consumption of natural gas. However, if everyone in the service area suddenly uses only a
fraction of the natural gas they used to use, the utility still has 75% of its expenses.
Therefore, to continue to operate and profit, the utility must necessarily raise rates.
¶ 12 Ideally, the variable cost for citizens should equal the utility’s cost to prepare and
distribute the natural gas they consume, while the fixed cost should equal the total
maintenance costs for the entire infrastructure divided equally among its customer base.
Thanks to conservation and energy efficiency programs, the variable cost should be falling.
As citizens become more energy conscious, consumption declines. In turn, the utility requests
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a rate change. See, e.g., 220 ILCS 5/9-201 (West 2010) (procedures relating to changing rates
and hearings). In this hypothetical, the Commission approves the change, which effectively
increases the fixed charge and lowers the variable consumption charge. Understandably then,
the citizens are paying for infrastructure, not the consumption of natural gas. Legislative
policies allowing this reaction to less demand essentially created little incentive for utility
companies to shift their business model to invest in more energy efficient technology or
programs to deal with less demand for their conventional service. To summarize then,
revenue decoupling has not happened despite supply and demand; it has happened because
of supply and demand.
¶ 13 In enacting section 8-104 of the Act, our legislature implemented a policy requiring
natural gas utilities to use cost-effective energy efficiency measures to reduce direct and
indirect costs to consumers. See 220 ILCS 5/8-104 (West 2010). Under traditional
ratemaking, utilities are told to do one thing (promote energy efficiency) while they typically
make more money when they do the opposite (increase sales). With traditional ratemaking,
therefore, utilities experience a financial conflict of sorts when their efforts to reduce energy
consumption are successful.
¶ 14 Revenue decoupling is a type of rate design that public utility commissions use to delink
a utility’s revenues from the volume of gas distributed (sales). With this type of regulation,
a utility’s revenues are essentially fixed by the public utility commission. If a utility’s actual
revenues are above the fixed level due to a larger volume of sales than expected, customers
receive a credit from the utility for the difference; if actual revenues are below the fixed level
due to a smaller volume of sales than expected, the utility issues a customer surcharge for the
difference. Thus, a utility’s revenues are decoupled from its volume of sales because its
revenues are fixed as sales fluctuate. In other words, revenue decoupling is a regulatory
mechanism that separates a utility’s revenues from its level of sales by ensuring that the
utility earns a reasonable and fixed level of revenues, even as sales fluctuate. See Sandy Glatt
& Myka Dunkle, United States Department of Energy, Natural Gas Revenue Decoupling
Regulation: Impacts on Industry (July 2010).
¶ 15 We, therefore, have two primary concepts. First, a traditional rate case uses a forecast of
sales to set a rate, whereas revenue decoupling uses actual sales to set a rate. Because actual
sales can be known only after the fact, revenue decoupling calculates an adjustment at a later
date (called a “true-up calculation”). Second, a traditional rate case allows revenues to
fluctuate around a fixed rate, whereas revenue decoupling allows a rate to fluctuate around
a fixed level of revenues.
¶ 16 Decoupling was first introduced in 1978 in California to relieve the natural gas utilities
of reduced revenues. To date, more than half of the states use or are considering natural gas
revenue decoupling legislation. Each state and utility implements decoupling differently;
however, the most common features used are as follows: both surcharges and credits issued;
adjustments calculated and issued separately for different customer classes; adjustments
based on the difference between actual and authorized revenues on a revenue-per-customer
basis; a separate adjustment mechanism for weather; adjustments calculated annually; or
surcharges and credits shown as a separate tariff page on a customer’s bill.
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¶ 17 In 2007, the Public Utility Commission of Ohio implemented revenue decoupling for
Vectren Ohio. However, a few years later, the policy was replaced with another type of rate
design called a straight fixed-variable (SFV) mechanism. See Ohio Consumers’ Counsel v.
Public Utilities Comm’n of Ohio, 127 Ohio St. 3d 524, 2010-Ohio-6239, 941 N.E.2d 757.
An SFV mechanism is a nonvolumetric rate design that charges a flat monthly fee regardless
of the volume of gas delivered. In the present case, the Commission considered, and then
rejected, the SFV design in favor of Rider VBA.
¶ 18 Revenue decoupling has its advantages and disadvantages, and the Commission in the
present case took evidence from the parties, which is reflected in detail in its 2008 and 2012
decisions. As it pertains to customers and utilities, revenue decoupling offers reduced
volatility in the utility’s revenues and in customers’ bills; it provides more equity between
customers and the utility because decoupling is based on actual revenues rather than
estimates, thereby helping to remove the zero-sum game between customers and the utility;
and significant energy conservation has the potential to cause a gradual decline in gas
commodity prices as the overall demand is reduced. Disadvantages include customers’ lack
of understanding how decoupling serves their long-term interests when they experience
surcharges in the short term; the delays in surcharges and credits on bills can dilute
customers’ perceived risk reduction from fluctuating energy bills; and volatility in utility
revenues can be perceived as being in the rate payers’ best interest–in other words, rate
payers should benefit when weather is mild or they adopt energy conservation measures. As
stated earlier, the Commission’s 2012 findings and conclusions explained that Rider VBA
was beneficial because, inter alia, it was “a symmetrical and transparent formula for
collecting the approved distribution revenue requirement”; it would reduce reliance on
forecasting, which was predictive and “inevitably incorrect”; and it would influence the
utility companies to pursue fewer rate cases, because Rider VBA would make underrecovery
of their revenue requirement less likely.
¶ 19 As noted, more than half of the states use or are considering natural gas revenue
decoupling regulations. See Ralph Cavanagh, Report: “Decoupling” Is Transforming the
Utility Industry, Switchboard, Natural Resources Defense Council Staff Blog,
http://switchboard.nrdc.org/blogs/rcavanagh/report_decoupling_is_transform.html (last
visited Mar. 14, 2013). Moreover, nearly every state has implemented some form of
adjustment clauses or riders for its various utilities. For example, in April 2007, the New
York State Public Service Commission determined that utility revenue decoupling
mechanisms were needed, and it requested proposals to implement such regulations. See In
re the Investigation of Potential Gas Delivery Rate Disincentives Against the Promotion of
Energy Efficiency, Renewable Technologies and Distributed Generation, Case No. 06-G-
0746.
¶ 20 Turning to the merits, petitioners first argue that Rider VBA violates the prohibition
against retroactive ratemaking. Petitioners explain that all businesses must predict customer
demand for their products; this is “fundamental to establishing price and thus fundamental
to establishing just and reasonable rates that mimic market incentives.” Petitioners claim that,
under Rider VBA, “if customer gas usage differs from test-year projections, the Utilities add
a monthly surcharge or credit to customer bills the following year to eliminate any deficiency
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or surplus from the initial charge.” Petitioners conclude that the surcharge or credit
customers receive during the recovery period constitutes retroactive ratemaking.
¶ 21 Initially, the Utilities and the Commission (collectively, respondents) counter that
petitioners’ argument is forfeited because “nowhere in these documents *** did either the
Attorney General or CUB raise a retroactive ratemaking argument before the Commission.”
First, we note that forfeiture is a limitation on the parties and not on the jurisdiction of this
court. See Central Illinois Light Co. v. Home Insurance Co., 213 Ill. 2d 141, 152 (2004).
Second, the Commission’s 2008 decision included a discussion of its staff’s view of Rider
VBA. See In re North Shore Gas Co., 2008 WL 631214, at *116 (“According to Staff, Rider
VBA takes the revenues that the rates approved in a base rate proceeding were intended to
recover (which includes the Company’s authorized return on rate base), and provides a
surcharge if those rates produced insufficient revenues or a credit if those rates produced
surplus revenues. In Staff’s view, this is clearly contrary to the rule against retroactive
ratemaking.”). Third, the Commission rejected the argument. In re North Shore Gas Co.,
2008 WL 631214, at *133. Fourth, the Commission’s 2012 order reflected the Attorney
General’s position that “Revenue Decoupling is Illegal Under Illinois Law” and addressed
the “over- or under-recovery” of “costs being refunded or recovered through monthly
adjustments.” Despite the lack of the descriptive term “retroactive ratemaking,” we believe
that the argument was sufficiently raised to withstand forfeiture. For these reasons and in the
interest of preserving a sound and uniform body of precedent, we choose to address
petitioners’ argument.
¶ 22 In Mandel Brothers, Inc. v. Chicago Tunnel Terminal Co., 2 Ill. 2d 205 (1954), our
supreme court first enunciated the rule against retroactive ratemaking. It determined that rates
approved by the Commission as just and reasonable could not be “excessive or unjustly
discriminatory” for the purposes of awarding reparations even if those rates were later
reversed by a reviewing court. Id. at 208. The court’s holding was based on the Act’s
requirement that a utility charge rates approved by the Commission throughout the appellate
process unless the reviewing court stayed or suspended the new rates. Id. at 211. The court
reasoned that, because the utility was required to charge rates set by the Commission, these
rates could not be deemed to be excessive as a basis of a claim for reparations. Id. at 212.
The court’s holding was subsequently reaffirmed in Independent Voters of Illinois v. Illinois
Commerce Comm’n, 117 Ill. 2d 90 (1987), Citizens Utilities Co. of Illinois, 124 Ill. 2d 195,
and People ex rel. Hartigan v. Illinois Commerce Comm’n, 148 Ill. 2d 348 (1992).
¶ 23 The supreme court later described the concept of retroactive ratemaking: “Once the
Commission establishes rates, the Act does not permit refunds if the established rates are too
high, or surcharges if the rates are too low.” Business & Professional People for the Public
Interest v. Illinois Commerce Comm’n, 146 Ill. 2d 175, 243 (1991) (BPI II) (citing Business
& Professional People for the Public Interest v. Illinois Commerce Comm’n, 136 Ill. 2d 192,
209 (1989) (BPI I)). The rule against retroactive ratemaking is consistent with the
prospective nature of the Commission’s ratemaking function and promotes stability in the
ratemaking process. Id.¶ 24 Although revenue decoupling is a different rate design from traditional ratemaking, the
legal principles remain the same, i.e., once the Commission approves a ratemaking plan, it
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cannot later modify that plan to correct an error. In the present case, the Commission
approved Rider VBA, which included a ratemaking plan of revenue decoupling. In approving
Rider VBA, the Commission has not acted to correct any error. Rather, the Commission
approved a design, which involved fixed and reasonable amounts of revenues for the Utilities
and which involved a later true-up calculation based on actual sales. This two-tiered design
was approved only once by the Commission and was not later modified. The Utilities’
proposal of revenue decoupling through Rider VBA and the Commission’s approval of it has
not created a surcharge to compensate for low rates. Rider VBA provides the Utilities with
a fixed level of revenue, not based on sales, that the Commission determined was just and
reasonable. See 220 ILCS 5/9-101 (West 2010). This rate methodology was approved by the
Commission and not added retroactively to cure a mistake. Accordingly, we conclude that
the Commission’s acceptance and adoption of revenue decoupling does not constitute
retroactive ratemaking.
¶ 25 Next, petitioners argue that Rider VBA violates the prohibition against single-issue
ratemaking. Petitioners assert that the rider is an “automatic adjustment” to existing rates that
can change a rate without requiring the utility to delay recovery until it files a general rate
case, thus distorting the ratemaking process. Petitioners argue that the sole purpose of Rider
VBA is “to alter the Utilities’ actual rate of return so that it matches forecasts from the test
year.” Petitioners continue, “[w]hen the Utilities’ residential and small business revenues
decline due to reduced gas usage, Rider VBA provides a monthly surcharge to improve the
Utilities’ bottom line” and “[w]hen income exceeds expectations, Rider VBA imposes a
refund to reduce profits to those justified by test year projections.” Petitioners conclude that,
under Rider VBA, “consumer rates and company profits fluctuate based on a single strand
in the overall revenue requirement, which is exactly what the rule against single[-]issue
ratemaking seeks to prevent.”
¶ 26 “The rule against single-issue ratemaking makes it improper to consider in isolation
changes in particular portions of a utility’s revenue requirement.” ComEd, 405 Ill. App. 3d
at 410 (citing BPI II, 146 Ill. 2d at 244). “The rule ensures that the utility’s revenue
requirement is based on the utility’s aggregate costs and the demand on the utility, rather than
on certain specific costs related to a component of its operation.” (Emphasis omitted.) Id.“Often a change in one item of the revenue-requirement formula is offset by a corresponding
change in another component of the formula. For instance, certain expenses for one aspect
of a utility’s business may be offset by savings in another area, thus removing the need for
greater revenue.” Id. “If rates are increased based solely on one factor, the ratemaking
structure becomes distorted because there is no consideration of the changes to the other
elements of the revenue formula, such as the operational savings from the improvements.”
Id. “Single-issue ratemaking is prohibited because it considers changes in isolation, thereby
ignoring potentially offsetting considerations and risking understatement or overstatement
of the overall revenue requirement.” Id. at 411 (citing Citizens Utility Board, 166 Ill. 2d at
137).
¶ 27 In ComEd, this court recognized that because a rider, by nature, was a method of single-
issue ratemaking, it was not allowed absent a showing of exceptional circumstances. Id. at
415 (citing A. Finkl & Sons Co. v. Illinois Commerce Comm’n, 250 Ill. App. 3d 317, 327
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(1993)). After analyzing prior decisions, this court gleaned a guiding principle for testing a
rider’s validity:
“[T]he Commission has discretion to approve a utility’s proposed rider mechanism to
recover a particular cost if (1) the cost is imposed upon the utility by an external
circumstance over which the utility has no control and (2) the cost does not affect the
utility’s revenue requirement. In other words, a rider is appropriate only if the utility
cannot influence the cost [citation] and the expense is a pass-through item that does not
change other expenses or increase income [citation].” Id. at 414 (citing Citizens Utility
Board, 166 Ill. 2d at 138).
¶ 28 Again, because revenue decoupling is a different rate design from traditional ratemaking,
none of the cases that the parties cite is analogous to the present case. Therefore, Rider VBA
is unlike other riders discussed generally in ComEd; that is, we decline to categorically find
that Rider VBA is a method of single-issue ratemaking. Rider VBA does not provide for the
recovery of any specific cost and it does not isolate any particular cost. Cf. id. at 409-15
(rejecting as single-issue ratemaking ComEd’s proposed Rider SMP, a “ ‘system
modernization project’ ” charge to customers, to immediately recoup the costs of
modernizing its delivery system toward a “ ‘smart grid’ ”). Petitioners’ conclusion that
“consumer rates and company profits fluctuate based on a single strand in the overall revenue
requirement” is inaccurate because, as we stated earlier, revenue decoupling is a rate design
that a public utility commission uses to delink a utility’s revenues from its sales, thereby
fixing the utility’s revenues. By approving Rider VBA in the present case, the Commission
has determined the reasonable and fixed level of revenue for the Utilities, no matter how
much or how little natural gas their customers use. Under Rider VBA, the Utilities’ profits
are part of the fixed revenue components that the Commission approved. Finally, unlike the
types of riders discussed in ComEd, Rider VBA takes into account only those costs
associated with the fixed revenue requirements that the Commission approved. Because
Rider VBA is distinct from the types of riders discussed in ComEd, it is therefore not subject
to ComEd’s requirements to establish its validity. See id. at 414.
¶ 29 The Utilities invested significant resources into the critical infrastructure necessary to
distribute natural gas to customers’ homes and businesses. This investment was approved
long ago by the Commission. We conclude that the revenue decoupling mechanism known
as Rider VBA was approved by the Commission to guarantee that the Utilities recoup the
costs for the infrastructure in which they prudently invested, not to ensure profits but to
satisfy the distribution needs of their customers.
¶ 30 We hold that Rider VBA did not violate either the rule against retroactive ratemaking or
the rule against single-issue ratemaking. We further hold that the findings of the Commission
were supported by substantial evidence. See 220 ILCS 5/10-201(e)(iv) (West 2010).
Therefore, for the foregoing reasons, we affirm the order of the Commission.
¶ 31 Affirmed.
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