People v. Illinois Commerce Commission

Illinois Official Reports

Supreme Court

People ex rel. Madigan v. Illinois Commerce Comm’n,

2015 IL 116005

Caption in Supreme THE PEOPLE ex rel. LISA MADIGAN et al., Appellants, v.

Court: ILLINOIS COMMERCE COMMISSION et al., Appellees.

Docket No. 116005

Filed January 23, 2015

Held The Illinois Commerce Commission did not abuse its discretion in

(Note: This syllabus allowing to become permanent a four-year pilot program for a

constitutes no part of the volume-balancing-adjustment rider imposing “revenue decoupling”

opinion of the court but on natural gas utility customers, thereby stabilizing both utility

has been prepared by the revenues and customer bills.

Reporter of Decisions

for the convenience of

the reader.)

Decision Under Appeal from the Appellate Court for the Second District; heard in that

Review court on a petition for review of orders of the Illinois Commerce

Commission.

Judgment Affirmed.

Counsel on Lisa Madigan, Attorney General, of Springfield (Carolyn E. Shapiro,

Appeal Solicitor General, and Brett E. Legner and Karen L. Lusson, Assistant

Attorneys General, of Chicago, of counsel), for the People.

Julie Soderna, of Citizens Utility Board, of Chicago, for appellant

Citizens Utility Board.

Foley & Lardner LLP (Theodore T. Eidukas, of Chicago, and Bradley

D. Jackson, of Madison, Wisconsin), John P. Ratnaswamy and Carla

Scarsella, of Rooney Rippie & Ratnaswamy LLP, and M. Gavin

McCarty and Mary Klyasheff, all of Chicago, for appellees Peoples

Gas Light and Coke Company and North Shore Gas Company.

John P. Kelliher, Special Assistant Attorney General, of Chicago, for

appellee Illinois Commerce Commission.

John E. Rooney and Anne W. Mitchell, of Rooney Rippie &

Ratnaswamy LLP, of Chicago, for amicus curiae Northern Illinois

Gas Company.

Whitt Sturtevant LLP (Albert D. Sturtevant, of Chicago, Andrew J.

Campbell, of Columbus, Ohio) and Edward C. Fitzhenry, of St. Louis,

Missouri, for amicus curiae Ameren Illinois Company.

Gerard T. Fox, of Chicago, and Kevin Belford and Michael Murray, of

Washington, D.C., for amicus curiae American Gas Association.

Justices JUSTICE THEIS delivered the judgment of the court, with opinion.

Chief Justice Garman and Justices Freeman, Thomas, Kilbride,

Karmeier, and Burke concurred in the judgment and opinion.

OPINION

¶1 Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company

(North Shore Gas) serve millions of residential and commercial customers in the Chicagoland

area. The companies not only sell natural gas, but also deliver it through their lines. Thus, the

companies’ operating costs include the costs of the gas itself and the costs of the gas

distribution. This case involves distribution costs, and a ratemaking proceeding that resulted in

a change as to how the companies recover those costs.

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¶2 The central issue is whether the Illinois Commerce Commission (Commission) abused its

discretion when it approved a volume-balancing-adjustment rider, or Rider VBA, which

imposed so-called “revenue decoupling” on the companies’ customers. In 2008, the

Commission approved a similar rider as a four-year pilot program. In 2012, the Commission

approved the rider on a permanent basis. The Attorney General and the Citizens Utility Board

(CUB) challenged that decision, and the appellate court affirmed it. 2013 IL App (2d) 120243.

¶3 For the reasons that follow, we agree with the appellate court and likewise affirm the

Commission’s decision.

¶4 BACKGROUND

¶5 The Public Utilities Act (Act) opens with a statement of intent:

“The General Assembly finds that the health, welfare and prosperity of all Illinois

citizens require the provision of adequate, efficient, reliable, environmentally safe and

least-cost public utility services at prices which accurately reflect the long-term cost of

such services and which are equitable to all citizens. It is therefore declared to be the

policy of the State that public utilities shall continue to be regulated effectively and

comprehensively.” 220 ILCS 5/1-102 (West 2010).

One of the stated goals of such regulation is efficiency, or “the provision of reliable energy

services at the least possible cost to the citizens of the State.” 220 ILCS 5/1-102(a) (West

2010).

¶6 The Act creates the Illinois Commerce Commission, the administrative agency responsible

for setting rates that public utilities may charge their customers. 220 ILCS 5/2-101 (West

2010); People ex rel. Hartigan v. Illinois Commerce Comm’n, 148 Ill. 2d 348, 366 (1992).

Under the Act, all rates and charges by public utilities, as well as all rules and regulations

pertaining to those charges, must be “just and reasonable.” 220 ILCS 5/9-101 (West 2010). A

public utility may not alter its rates and charges, unless it provides notice to the Commission

and the public by, inter alia, filing with the Commission a new “schedule” describing any

proposed changes. 220 ILCS 5/9-201(a) (West 2010). When the Commission receives a new

schedule, it may conduct “a hearing concerning the propriety” of the changes, and the changes

are suspended for some time pending the outcome of that hearing. 220 ILCS 5/9-201(b) (West

2010). The Act further provides:

“(c) If the Commission enters upon a hearing concerning the propriety of any

proposed rate or other charge, classification, contract, practice, rule or regulation, the

Commission shall establish the rates or other charges, classifications, contracts,

practices, rules or regulations proposed, in whole or in part, or others in lieu thereof,

which it shall find to be just and reasonable. In such hearing, the burden of proof to

establish the justness and reasonableness of the proposed rates or other charges,

classifications, contracts, practices, rules or regulations, in whole and in part, shall be

upon the utility. *** No rate or other charge, classification, contract, practice, rule or

regulation shall be found just and reasonable unless it is consistent with Sections of this

Article.” 220 ILCS 5/9-201(c) (West 2010).

¶7 In establishing rates, the Commission initially must determine the utility’s “revenue

requirement.” Business & Professional People for the Public Interest v. Illinois Commerce

Comm’n (BPI II), 146 Ill. 2d 175, 195 (1991). The Act acknowledges “utilities are allowed a

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sufficient return on investment so as to enable them to attract capital in financial markets at

competitive rates,” and it authorizes public utility rates for various services that “accurately

reflect the cost of delivering those services and allow utilities to recover the total costs

prudently and reasonably incurred.” 220 ILCS 5/1-102(a)(iii), (iv) (West 2010). As we have

explained:

“A public utility is entitled to recover in its rates certain operating costs. A public utility

is also entitled to earn a return on its rate base, or the amount of its invested capital; the

return is the product of the allowed rate of return and rate base. The sum of those

amounts—operating costs and return on rate base—is known as the company’s revenue

requirement. The components of the ratemaking determination may be expressed in

‘the classic ratemaking formula R (revenue requirement) = C (operating costs) + Ir

(invested capital or rate base times rate of return on capital).’ [Citation.] The same

formula is used by the Commission in ratemaking determinations for Illinois.” Citizens

Utilities Co. of Illinois v. Illinois Commerce Comm’n, 124 Ill. 2d 195, 200-01 (1988).

¶8 In the context of natural gas, the “C” in that equation, operating costs, includes distribution

costs. To some extent, those costs are fixed. Utility companies incur them regardless of the

volume of gas that they deliver because they must be prepared to provide adequate, reliable,

and safe service. Traditionally, however, volume has played a major role in setting gas rates,

and companies have recovered part of their distribution costs through “volumetric distribution

charges” based on statistical forecasts of the amount of gas their customers will use. The

forecasts, in turn, rest upon several variables, some of which are wildly unpredictable like the

weather. Consequently, gas companies have recovered more than their fixed distribution costs

when demand for gas has been high, and less than that when it has been low.

¶9 In 2007, Peoples Gas and North Shore Gas petitioned the Commission to approve Rider

VBA. “A rider is a cost recovery method. It generally alters an otherwise applicable rate and

recovers a specific cost under particular circumstances. *** [A rider] often include[s] a

reconciliation formula, designed to match revenue recovery with actual costs.” Citizens Utility

Board v. Illinois Commerce Comm’n, 166 Ill. 2d 111, 133 (1995); see Central Illinois Light

Co. v. Illinois Commerce Comm’n, 255 Ill. App. 3d 876, 883 (1993). Rider VBA was designed

with not only revenue recovery, but also revenue disgorgement, in mind. That is, Rider VBA

prevents under-recovery of fixed distribution costs, as well as over-recovery of them, by

“decoupling” the revenue for those costs that the companies receive from the volume of gas

that they deliver. Revenue decoupling essentially maintains a utility company’s revenue at or

around the revenue requirement. If actual revenues dip below a level set by the Commission

due to decreased delivery volume, the company issues customers a surcharge for the

difference. If revenues tick above that level due to increased delivery volume, the company

issues customers a credit. See Sandy Glatt & Myka Dunkle, Natural Gas Revenue Decoupling

Regulation: Impacts on Industry (U.S. Dep’t of Energy July 2010). That approach removes

forecasts, and the inevitable inaccuracies that accompany them, from the calculation of costs

and ensures that the company recovers its revenue requirement. Revenue decoupling is not a

new approach to ratemaking, but it has garnered increased attention from utilities and

regulators, particularly in states concerned with greenhouse gas emissions, because it removes

incentives for utilities to deemphasize energy efficiency and to spur demand. Id.

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¶ 10 The Commission held a hearing on the companies’ petition and issued a 320-page order on

February 5, 2008, in which it approved Rider VBA as a four-year pilot program with monthly

adjustments. See In re North Shore Gas Co., 2008 WL 631214. The Attorney General filed an

appeal from the Commission’s decision.1 While that appeal was pending, and time on the pilot

program was waning, the companies petitioned to make Rider VBA permanent. The

Commission held another hearing and issued a 239-page order on January 12, 2012, in which it

approved Rider VBA on a permanent basis.2 In its order, the Commission set out the positions

of the companies, its own staff, and the Attorney General. It then set out its analysis and

conclusions. The Commission initially noted that under the pilot program the companies

issued refunds totaling more than $28 million. That program was intended to address “the

reality of fixed costs against a backdrop of a diminishing customer base and resulting revenue

losses as well as revenue losses attributable to the implementation of aggressive energy

efficiency programs.”

¶ 11 According to the Commission, there were several reasons to make Rider VBA permanent.

First, it is “a symmetrical and transparent formula for collecting the approved distribution

revenue requirements—not more or less—from customers if the Commission chooses not to

provide fully for recovery of fixed costs through fixed charges.” Second, Rider VBA reduces

reliance on forecasts, which the Commission called “inevitably incorrect each year” and “only

correct on average.” Relatedly, Rider VBA protects customers if utilities choose a forecast that

underestimates sales volumes and yields a higher rate that unjustifiably boosts their revenues

and profits. With Rider VBA, such a forecast will not increase profits because any

over-collection would be refunded.

¶ 12 The Commission also discussed energy efficiency, noting that was not the sole, or even the

main reason to approve the pilot program. Its rationale, instead, was “multi-faceted” and

focused on all the benefits offered by revenue decoupling. Decoupling corrects for so-called

“load changes,” or changes in the volume of natural gas coursing through a utility’s lines.

Energy efficiency initiatives, including section 8-104 of the Act (220 ILCS 5/8-104 (West

2010)), may result in a diminished load. “Decoupling,” observed the Commission, “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 [companies].”

¶ 13 The Commission stated that the pilot program operated as expected, stabilizing the

companies’ revenues, while ensuring that customers neither over- nor under-paid the approved

revenue requirements. The Commission voiced its support for “increased recovery of fixed

costs through fixed charges,” but settled on decoupling rather than another alternative rate

design. The Commission concluded “there has been a compelling and sufficient showing that a

permanent Rider VBA is reasonable and justified.”

¶ 14 The Attorney General and CUB filed applications for rehearing. CUB challenged,

inter alia, the Commission’s decision to approve Rider VBA on two grounds. CUB asserted

1

When Rider VBA became permanent, the parties asked the appellate court to dismiss that appeal

as moot. That motion was granted. See People ex rel. Madigan v. Illinois Commerce Comm’n,

No. 2-11-0380 (2012) (minute order).

2

The Commission also awarded Peoples Gas an 11% increase in its revenue requirement and North

Shore Gas a 2.5% increase in its revenue requirement. That portion of the Commission’s order is not

before us in this appeal.

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that the rider was unnecessary because the conditions that justified the pilot program, including

higher gas prices and mandated energy efficiency programs that were predicted to lower both

demand and delivery volume, no longer exist. CUB further asserted the rider violated a rule

developed in case law from this court against so-called single-issue ratemaking. The Attorney

General also challenged the Commission’s decision on two grounds. Like CUB, the Attorney

General asserted that the rider violates the rule against single-issue ratemaking. The Attorney

General also asserted that Rider VBA was inconsistent with the regulatory framework

established in the Act. See 220 ILCS 5/9-201 (West 2010). Neither the Attorney General nor

CUB contended that Rider VBA constituted impermissible retroactive ratemaking. The

Commission rejected their arguments, and they sought review by the appellate court. See 220

ILCS 5/10-201(a) (West 2010).

¶ 15 The appellate court affirmed. 2013 IL App (2d) 120243. The Attorney General and CUB

generally challenged the validity of Rider VBA, contending that it violates prohibitions against

retroactive and single-issue ratemaking. Regarding retroactive ratemaking, the appellate court

initially rejected a forfeiture argument raised by the Commission and the companies. Id. ¶ 21.

The court acknowledged that the Attorney General and CUB failed to raise that issue in their

applications for rehearing before the Commission, as required by section 10-113(a) of the Act

(220 ILCS 5/10-113(a) (West 2010)) to obtain judicial review of an agency decision, but

excused that omission because the issue was addressed by the Commission in its 2008 order

and because “forfeiture is a limitation on the parties and not on the jurisdiction of [the] court.”

2013 IL App (2d) 120243, ¶ 21. On the merits, the court noted that although rates based on

revenue decoupling differ from traditional rates, the legal principles governing them, including

the rule against retroactive ratemaking, remain the same. Id. ¶ 24. That is, once the

Commission approves a ratemaking plan, it cannot later modify that plan to correct an error. Id.

According to the appellate court, the Commission did not correct any error when it approved

Rider VBA. Id. “Rather, the Commission approved a design, which involved fixed and

reasonable amounts of revenues for the [companies] 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.” Id. Thus, the rider did not constitute retroactive

ratemaking. Id.

¶ 16 Regarding single-issue ratemaking, the appellate court stated that Commonwealth Edison

Co. v. Illinois Commerce Comm’n, 405 Ill. App. 3d 389, 411 (2010), held that riders are by

nature methods of single-issue ratemaking, so they are unlawful absent a showing of

exceptional circumstances. 2013 IL App (2d) 120243, ¶ 27 (citing A. Finkl & Sons Co. v.

Illinois Commerce Comm’n, 250 Ill. App. 3d 317, 327 (1993)). The appellate court, however,

reemphasized that revenue decoupling is a different rate design from traditional ratemaking, so

Rider VBA is unlike the riders discussed in Commonwealth Edison. Id. ¶ 28. The appellate

court declined “to categorically find that Rider VBA is a method of single-issue ratemaking”

because it does not isolate or provide for the recovery of any specific cost. Id. Instead, the rider

accounts for only those costs approved by the Commission as part of its calculation of the

revenue requirements. Id. The appellate court continued:

“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

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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.” Id. ¶ 29.

Thus, it did not constitute single-issue ratemaking. Id. ¶ 30.

¶ 17 We allowed a petition for leave to appeal from the Attorney General and CUB. Ill. S. Ct.

R. 315(a) (eff. July 1, 2013). We also allowed Ameren Illinois Company, American Gas

Association, and Northern Illinois Gas Company leave to file separate amicus curiae briefs in

support of the Commission and the companies. Ill. S. Ct. R. 345 (eff. Sept. 20, 2010).

¶ 18 ANALYSIS

¶ 19 In this appeal, the Attorney General and CUB raise what they indicate is a sole broad issue:

“whether Rider VBA is lawful.” They contend it is not for three reasons. First, they argue that

Rider VBA departs from “principles of rate-of-return regulation,” specifically the principle

that a just and reasonable rate under the Act provides only an opportunity for, and not a

guarantee of, a profit. Second, they argue that Rider VBA constitutes impermissible

single-issue ratemaking. Third, they argue that Rider VBA constitutes impermissible

retroactive ratemaking. Before we address these arguments, we must address another argument

that bears on them all, the proper standard of review.

¶ 20 The Act governs the Commission (see People ex rel. Hartigan v. Illinois Commerce

Comm’n, 148 Ill. 2d 348, 366-67 (1992)), but it also governs the courts, and their review of the

Commission’s decisions. Section 10-201(e)(iv) of the Act provides:

“(iv) The court shall reverse a Commission rule, regulation, order or decision, in

whole or in part, if it finds that:

A. The 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 rule, regulation, order or decision; or

B. The rule, regulation, order or decision is without the jurisdiction of the

Commission; or

C. The rule, regulation, order or decision is in violation of the State or federal

constitution or laws; or

D. The proceedings or manner by which the Commission considered and

decided its rule, regulation, 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).

See Citizens Utility Board v. Illinois Commerce Comm’n, 166 Ill. 2d 111, 120-21 (1995).

¶ 21 Here, the Attorney General and CUB do not contend that the Commission lacked

jurisdiction or violated their constitutional or statutory rights. They also do not argue that the

Commission failed to support its decision with substantial evidence. The sole issue before us,

then, is simply whether that decision violated the Act.

¶ 22 Section 10-201(d) of the Act states that any decision by the Commission is “prima facie

reasonable” (220 ILCS 5/10-201(d) (West 2010)), so a party challenging such a decision bears

the burden of proof to show it is unreasonable. Thus, in an appeal like this one, our authority is

deferential by statute, but it is also by nature. Simply put, we are judges, not utility regulators.

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Though we are free to disagree with the Commission on what the Act means (Business &

Professional People for the Public Interest v. Illinois Commerce Comm’n (BPI I), 136 Ill. 2d

192, 204 (1989)), we remain hesitant to disregard how the Commission applies it (see Illinois

Consolidated Telephone Co. v. Illinois Commerce Comm’n, 95 Ill. 2d 142, 152 (1983)). The

Commission’s interpretation of the Act is accorded deference because administrative agencies

enjoy wide latitude in effectuating their statutory functions. Commonwealth Edison Co. v.

Illinois Commerce Comm’n, 398 Ill. App. 3d 510, 514 (2009) (quoting Illinois Consolidated

Telephone Co. v. Illinois Commerce Comm’n, 95 Ill. 2d 142, 152 (1983));

Alhambra-Grantfork Telephone Co. v. Illinois Commerce Comm’n, 358 Ill. App. 3d 818, 821

(2005); cf. Church v. State, 164 Ill. 2d 153, 161-62 (1995) (“Where the legislature expressly or

implicitly delegates to an agency the authority to clarify and define a specific statutory

provision, administrative interpretations of such statutory provisions should be given

substantial weight unless they are arbitrary, capricious, or manifestly contrary to the statute.”).

¶ 23 Deference to the Commission is “especially appropriate in the area of fixing rates.”

Iowa-Illinois Gas & Electric Co. v. Illinois Commerce Comm’n, 19 Ill. 2d 436, 442 (1960);

accord United Cities Gas Co. v. Illinois Commerce Comm’n, 163 Ill. 2d 1, 12 (1994). As we

recognized in Villages of Milford v. Illinois Commerce Comm’n, 20 Ill. 2d 556, 561 (1960),

“the determination of rates is not a matter of formulas but one of sound business judgment,”

which the General Assembly has entrusted to the Commission, and not to the courts. See Cerro

Copper Products v. Illinois Commerce Comm’n, 83 Ill. 2d 364, 371 (1980); City of Chicago v.

Illinois Commerce Comm’n, 281 Ill. App. 3d 617, 622 (1996) (“Matters of rate regulation are

of legislative character and courts should not interfere with the functions and authority of the

Commission so long as its order demonstrates sound and lawful analysis.”). A rate is more than

a number; it is also a design. The Commission’s decision in a rate case does not involve simply

what utilities may charge their customers, but how they do so. See generally City of Chicago v.

Illinois Commerce Comm’n, 13 Ill. 2d 607, 611 (1958) (“the statutory authority to approve rate

schedules embraces more than the authority to approve rates fixed in terms of dollars and

cents”). And that decision depends largely upon the Commission’s experience and expertise in

its field. See Central Illinois Public Service Co. v. Illinois Commerce Comm’n, 243 Ill. App.

3d 421, 445 (1993) (“Because of its complexity and need to apply informed judgment, rate

design is uniquely a matter for the Commission’s discretion.”).

¶ 24 Accordingly, the Attorney General and CUB, as appellants, face an uphill battle to

overturn the Commission’s 2012 order. Recognizing this, they insist that our review should be

nondeferential. They acknowledge that we have held the Commission has discretion to

approve riders (see City of Chicago, 13 Ill. 2d at 614), but they assert the Commission may

exercise that discretion only in “exceptional circumstances” (Commonwealth Edison, 405 Ill.

App. 3d at 411). They add that where the Commission drastically departs from past practice by

violating the Act or its own rules, its decision is entitled to less deference. See BPI I, 136 Ill. 2d

at 228. They go further, concluding that, because the sole issue here is whether Rider VBA

complies with the Act, and that issue involves statutory construction, the Commission’s

decision is entitled to no deference at all.

¶ 25 We reject these various points. The reference to “exceptional circumstances” in

Commonwealth Edison has no tether to our case law, and even that court frankly recognized

that “the Commission has the power to authorize a rider in a proper case and such authorization

will not be reversed absent an abuse of discretion.” Commonwealth Edison, 405 Ill. App. 3d at

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411. Additionally, “only where the Commission departs from its usual rules of decision to

reach a different, unexplained result in a single case, thus depriving a party of equal treatment

before the Commission, will its decision be entitled to less deference on review.” (Internal

quotation marks omitted.) Abbott Laboratories, Inc. v. Illinois Commerce Comm’n, 289 Ill.

App. 3d 705, 715 (1997). The Commission drastically departed from past practice in BPI I by

disregarding the so-called “test-year rule” contained in the Act and its accompanying

regulations. Here, however, there was nothing in the process of approving Rider VBA that

violated the Act or any regulations. Finally, the sole issue here does not involve statutory

construction. We are not asked to interpret the Act, but rather to judge whether the

Commission, in determining that Rider VBA was part of a just and reasonable rate, abused its

discretion. On that point, as we have stated, the Commission is entitled to substantial

deference. We turn to the main arguments raised by the Attorney General and CUB.

¶ 26 1. Rate-of-Return Principles

¶ 27 The Attorney General and CUB first argue that the Commission’s decision was contrary to

what they call “rate-of-return principles” memorialized in the Act. They assert that Rider

VBA, in its attempt to make under-recovery of the companies’ revenue requirements less

likely, “alters the nature of utility rate-of-return regulation and the concept of ‘just and

reasonable rates’ under the Act.” They contend that a just and reasonable rate does not provide

a utility with a guarantee of net revenue. See Federal Power Comm’n v. Hope Natural Gas

Co., 320 U.S. 591, 603 (1944). Rather, such a rate provides the utility with an opportunity for

necessary revenue, if properly managed. See Bluefield Waterworks & Improvement Co. v.

Public Service Comm’n, 262 U.S. 679, 693 (1923).

¶ 28 According to the Attorney General and CUB, a just and reasonable rate under the Act

should approximate the rate that would result in a free market. See Illinois Power Co. v. Illinois

Commerce Comm’n, 339 Ill. App. 3d 425, 434 (2003) (quoting State Public Utilities Comm’n

ex rel. City of Springfield v. Springfield Gas & Electric Co., 291 Ill. 209, 218 (1919)). Rider

VBA purportedly undermines that approach because it insures a certain level of revenue for the

companies, and “includes an assumed profit level,” thereby removing any incentive to operate

efficiently. They note that if the companies feel that the revenue requirement is insufficient,

they can always file a petition for a rate increase under the Act. See 220 ILCS 5/9-201 (West

2010).

¶ 29 We reject this argument for two reasons. The Attorney General and CUB misperceive the

purpose of a revenue requirement, and of Rider VBA. Certainly, as the Attorney General and

CUB note, the Commission must design and set “just and reasonable” rates for “least-cost

public utility services.” 220 ILCS 5/1-102 (West 2010). It does this under the rate-of-return

principles at the core of the Act, which do attempt to duplicate competition. See also National

Rural Telecom Ass’n v. Federal Communications Comm’n, 988 F.2d 174, 178 (D.C. Cir. 1993)

(“As one virtue of perfect competition is that it drives prices down to cost, rate-of-return

regulation seems on its face a promising way to regulate natural monopolies, in principle

roughly duplicating the benefits of competition.”).

¶ 30 Those principles factor both a recovery of prudent and reasonable costs and a return on

equity into the equation used to determine the revenue requirement. See 220 ILCS

5/1-102(a)(iii), (iv) (West 2010); Illinois Bell Telephone Co. v. Illinois Commerce Comm’n,

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203 Ill. App. 3d 424, 428 (1990) (“The traditional method of setting rates *** begins with the

threshold determination of what constitutes a reasonable return on equity (ROE) for the utility;

rates are then set at levels designed to produce the target ROE.”). If the revenue requirement is

“the amount the company is permitted to recover from its customers in the rates it charges”

(Citizens Utilities, 124 Ill. 2d at 201), the company is entitled to that return. So a rate design

that allows a utility company to recover its revenue requirement does not guarantee a profit any

more than the revenue requirement itself does.

¶ 31 Further, and more importantly, the Attorney General and CUB conflate the two steps of the

ratemaking process. As the companies explain in their brief, the Commission first determines a

utility company’s revenue requirement, which includes fixed costs and a reasonable return on

equity, then designs a rate that allows the company to recover that revenue from its customers

as accurately as possible. See Governor’s Office of Consumer Services v. Illinois Commerce

Comm’n, 220 Ill. App. 3d 68, 72 (1991); Amax Zinc Co. v. Illinois Commerce Comm’n, 124 Ill.

App. 3d 4, 11 (1984). Here, there is no dispute over the Commission’s calculation of the

revenue requirement. There is only a dispute over the Commission’s choice of the mechanism

by which the companies recover that figure. And, to repeat, that decision is entitled to

substantial deference.

¶ 32 The Commission stated that Rider VBA is a “symmetrical and transparent formula” that,

like all rate designs, seeks to accurately collect the revenue requirement. Rider VBA does not

ensure net profits or even net revenue; it ensures recovery of the revenue requirement, as

determined by the Commission and not challenged by the Attorney General and CUB. Before

Rider VBA, the companies recovered their fixed distribution costs through volumetric charges,

which meant that the revenue they collected from those charges was either higher or lower than

the revenue requirement, depending on how much gas that their customers used. Such a rate

design created perverse incentives for the companies to increase demand or under-forecast

usage. The former is contrary to section 8-104(a) of the Act. See 220 ILCS 5/8-104(a) (West

2010). The latter is contrary to the Act’s goal of least-cost rates. See 220 ILCS 5/1-102(a)

(West 2010). Rider VBA accepts the revenue requirement and offers a way for the companies

to recover it—no more or less—via the annual true-up calculation. See 2013 IL App (2d)

120243, ¶ 15 (“revenue decoupling allows a rate to fluctuate around a fixed level of

revenues”). Under this rider, the amount of revenue that the company can recover is capped,

regardless of its actual costs. If those costs increase beyond the amounts used to calculate the

revenue requirement, the companies’ profits will decrease. Rider VBA does not allow them to

earn more than that to which they are already entitled. It does, however, encourage them to

manage their business effectively, so the revenue requirement not only covers their costs, but

also ultimately provides a reasonable return.

¶ 33 Accordingly, as the Commission noted, the rider was intended to benefit both the

companies and their customers. The rider helps the companies bridge the increasingly

problematic disconnect between their fixed costs and their revenue losses due to a diminishing

customer base and aggressive energy efficiency programs. It also guards the customers against

the negative effects of inevitably incorrect forecasting. Decoupling stabilizes both utility

revenues and customer bills. The Commission called its rationale “appropriately

multi-faceted.” See Cerro Copper, 83 Ill. 2d at 371 (noting that in designing a rate, “[m]any

and complex factors must be considered”). Its decision to approve the rider as “reasonable and

justified” was an exercise of sound business judgment, reached after a four-year pilot program

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that operated as expected and after a deliberative ratemaking process, in which the views of the

companies, the Attorney General and CUB, and its own staff were voiced and considered. The

Commission concluded that there was a “compelling and sufficient showing” that Rider VBA

was “reasonable and justified.” Implicit in that ruling is a belief that the rider comported with

the Act and rate-of-return principles. We cannot say that the Commission abused its discretion

in approving it.3

¶ 34 2. Single-Issue Ratemaking

¶ 35 The Attorney General and CUB next argue that the Commission’s decision to approve

Rider VBA violates the rule against single-issue ratemaking. The Attorney General and CUB

insist that riders, which provide direct recovery of unique costs, are a method of single-issue

ratemaking, and, consequently, they are impermissible absent a showing of exceptional

circumstances.

¶ 36 The rule against single-issue ratemaking is not expressly a part of the Act itself, but instead

a creation of our case law. The rule emanates from the revenue formula that we mentioned

earlier and:

“recognizes that the revenue formula is designed to determine the revenue requirement

based on the aggregate costs and demand of the utility. Therefore, it would be improper

to consider changes to components of the revenue requirement in isolation. Oftentimes

a change in one item of the revenue formula is offset by a corresponding change in

another component of the formula.” (Emphasis omitted.) BPI II, 146 Ill. 2d at 244.

Accord Commonwealth Edison, 405 Ill. App. 3d at 410 (“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.)). The rule requires that the Commission must examine all the elements of the revenue

formula to determine their interaction and the impact any change in one element will have on

the utility’s revenue requirement. Citizens Utility Board, 166 Ill. 2d at 138. Consideration of

only one item risks understatement or overstatement of the revenue requirement. Id. at 137;

City of Chicago v. Illinois Commerce Comm’n, 281 Ill. App. 3d 617, 628-29 (1996) (“single

issue ratemaking is prohibited because of the danger of ignoring some item which might have

an impact on the overall revenue requirement”). Stated differently, an increase in one set of

costs cannot alone support a rate increase.

¶ 37 The rule, however, does not apply “except in the context of a complete base rate

proceeding,” where the Commission must balance costs against other, potentially offsetting

changes in a utility’s ledger. Citizens Utility Board, 166 Ill. 2d at 137; see

Archer-Daniels-Midland Co. v. Illinois Commerce Comm’n, 184 Ill. 2d 391, 401 (1998). And

the rule does not circumscribe the Commission’s power to approve recovery of such a cost

through a rider when a utility faces unexpected or fluctuating expenses that are difficult to

forecast. Citizens Utility Board, 166 Ill. 2d at 138; see also City of Chicago, 13 Ill. 2d at 614.

3

We note that Illinois is not an outlier on revenue decoupling. According to amicus American Gas,

there are currently 46 natural gas companies in 21 states, serving 28 million customers, that operate

under a rate design involving decoupling.

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¶ 38 Here, the Attorney General and CUB largely ignore our statements in Citizens Utility

Board, and rely instead upon those of the appellate court in Commonwealth Edison. There, the

court stated, “Because a rider is a method of single-issue ratemaking, by nature, it is not

allowed absent a showing of exceptional circumstances.” Commonwealth Edison, 405 Ill. App.

3d at 411. The appellate court cited A. Finkl & Sons Co. v. Illinois Commerce Comm’n, 250 Ill.

App. 3d 317, 326 (1993), but that case did not raise the level of scrutiny applied to riders, much

less limit the Commission’s authority to approve them to instances where exceptional

circumstances justify them. Indeed, A. Finkl is consistent with Citizens Utility Board because it

noted that “[r]iders are useful in alleviating the burden imposed upon a utility in meeting ***

volatile *** expenses.” (Emphasis omitted.) Id. at 327; see Central Illinois, 255 Ill. App. 3d at

885 (“we do not read Finkl as holding that the Commission does not have the authority to allow

recovery of costs through riders”).

¶ 39 Further, in Citizens Utility Board, we did not label riders as methods of single-issue

ratemaking. To the contrary, we indicated that they operate differently. Rather than isolating

and controlling “a single-expense item” in the revenue formula, a rider “merely facilitates

direct recovery of a particular cost, without direct impact on the utility’s rate of return.”

Citizens Utility Board, 166 Ill. 2d at 137-38; see also City of Chicago, 281 Ill. App. 3d at 629

(stating that the rider was “a reallocation which did not have any impact whatsoever on [the]

overall revenue requirement”).

¶ 40 The Attorney General and CUB characterize Rider VBA’s sole purpose as a way to alter

the companies’ “actual rate of return.” They are incorrect. A utility company’s revenue

requirement is the sum of its operating costs and its return on equity or rate base. See Citizens

Utilities, 124 Ill. 2d at 200-01. Its return on rate base is the product of its rate base and its

allowed rate of return. Id. And its rate of return is set by the Commission at the initial step of

the ratemaking process, determining the revenue requirement. Rider VBA has no effect on the

companies’ rate of return, just like it has no effect on their revenue requirement. As we have

stated, Rider VBA accepts the revenue requirement and provides a mechanism to recover it

accurately. If the rider has no impact on the revenue requirement, it poses no risk of distorting

the ratemaking process. Accordingly, we hold that Rider VBA does not constitute single-issue

ratemaking and the Commission did not abuse its discretion in approving it.

¶ 41 3. Retroactive Ratemaking

¶ 42 Finally, the Attorney General and CUB argue that Rider VBA constituted impermissible

retroactive ratemaking. Like the rule against single-issue ratemaking, the rule against

retroactive ratemaking is a judicial gloss on the Act. See Citizens Utilities, 124 Ill. 2d at 207

(“The prohibition of retroactive ratemaking is derived from the overall scheme of the Act and

the role of the Commission in the ratemaking process.”). Because rates operate only

prospectively (Hartigan, 148 Ill. 2d at 396 (citing Mandel Brothers, Inc. v. Chicago Tunnel

Terminal Co., 2 Ill. 2d 205, 210 (1954)), we have long held that the Commission may not later

correct a rate through a refund or surcharge (BPI I, 136 Ill. 2d at 209).

¶ 43 The Commission and the companies respond that because neither the Attorney General nor

CUB raised this issue in their applications for rehearing before the Commission, they forfeited

review of the issue. We agree.

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¶ 44 Under section 10-113(a) of the Act, “No person or corporation in any appeal shall urge or

rely upon any grounds not set forth in [an] application for a rehearing before the Commission.”

220 ILCS 5/10-113(a) (West 2010). The language of that statute is quite plain: A party to an

appeal from a Commission decision may not raise an issue or objection that was not expressly

raised in an application for rehearing before the Commission. See Citizens Utilities, 124 Ill. 2d

at 203-04; Independent Voters of Illinois v. Illinois Commerce Comm’n, 117 Ill. 2d 90, 101

(1987) (holding that an issue not raised before the Commission as a ground for rehearing was

waived). The purpose of that requirement is to inform the Commission and opposing parties of

putative legal and factual errors. Citizens Utility Board, 166 Ill. 2d at 135.

¶ 45 Neither the Attorney General nor CUB urged or relied upon the prohibition against

retroactive ratemaking in their applications for rehearing below. The Attorney General and

CUB ask us to excuse this omission because the Attorney General raised that issue in the

application for rehearing in the 2008 case. That is insufficient. Just as section 10-113(a) does

not allow a party to an appeal to raise issues by implication (see id. at 136), or to substitute a

general allegation for a specific one (see City of Granite City v. Illinois Commerce Comm’n,

407 Ill. 245, 250 (1950)), it also does not contemplate bootstrapping issues into a current

appeal if they were raised at some point in an earlier and separate case.

¶ 46 The appellate court chose to address this argument, noting that forfeiture is a limitation on

the parties, and not its own jurisdiction. The appellate court, however, has jurisdiction to

review administrative decisions only as provided by statute. Ill. Const. 1970, art. VI, § 6; Town

& Country Utilities, Inc. v. Illinois Pollution Control Board, 225 Ill. 2d 103, 121-22 (2007).

This special statutory jurisdiction is limited to the language of the Act conferring it.

Collinsville Community Unit School District No. 10 v. Regional Board of School Trustees, 218

Ill. 2d 175, 182 (2006) (quoting Fredman Brothers Furniture Co. v. Department of Revenue,

109 Ill. 2d 202, 210 (1985)). Parties seeking to invoke such jurisdiction must strictly comply

with the Act. ESG Watts, Inc. v. Pollution Control Board, 191 Ill. 2d 26, 30 (2000); see also

Lockett v. Chicago Police Board, 133 Ill. 2d 349, 353 (1990) (“Since the Administrative

Review Law is a departure from common law, the procedures it establishes must be strictly

adhered to in order to justify its application.”). Because the Attorney General and CUB did not

comply with section 10-113(a) of the Act with respect to their retroactive ratemaking

argument, they forfeited review of the Commission’s decision on that ground. We therefore

vacate the appellate court’s holding as to retroactive ratemaking.

¶ 47 CONCLUSION

¶ 48 For the reasons that we have stated, we affirm the appellate court’s decision confirming the

Commission’s decision to approve Rider VBA on a permanent basis.

¶ 49 Affirmed.

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